UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549








FORM
10-Q





(Mark
One)




x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the thirteen weeks ended June 27,
2009




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




For the transition period from _______to _______








Commission
File Number 1-5084





TASTY
BAKING COMPANY


(Exact
name of Company as specified in its charter)








Pennsylvania
            
            23-1145880(State of
      Incorporation)
            
            (IRS Employer
      Identification Number)







Navy
Yard Corporate Center, Three Crescent Drive, Suite 200, Philadelphia,
Pennsylvania  19112


(Address
of principal executive offices including Zip Code)





215-221-8500


(Company's
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


YES x  NO o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


YES o  NO o





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






Large
      accelerated filer
                    o
                    Accelerated
      filer
                    oNon-accelerated
      filer
                    o
                    Smaller
      reporting company
                    x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


YES o  NO x





There were
8,577,285 shares of Common Stock outstanding as of July 31, 2009.









TASTY
BAKING COMPANY AND SUBSIDIARIES
 
 
 INDEX
 
 
 PART
      I.
                                                                                                                                  FINANCIAL
      INFORMATIONItem 1.
                                                                                                                                  Financial Statements (Unaudited)Condensed Consolidated Statements of
      OperationsThirteen and twenty-six weeks ended June 27, 2009 and June
      28, 2008
                                                                                                                                  3Condensed Consolidated Statements of Cash
      FlowsTwenty-six weeks ended June 27, 2009 and June 28,
      2008
                                                                                                                                  4Condensed Consolidated Balance SheetsJune 27,
      2009 and December 27, 2008
                                                                                                                                  5Notes to Condensed Consolidated Financial
      Statements
                                                                                                                                  6-20Item 2.
                                                                                                                                  Management's Discussion and Analysis of
      FinancialCondition and Results of Operations
                                                                                                                                  21-26Item 3.
                                                                                                                                  Quantitative and Qualitative Disclosure about Market
      Risk
                                                                                                                                  27Item 4.
                                                                                                                                  Controls and Procedures
                                                                                                                                  27PART
      II.
                                                                                                                                  OTHER
      INFORMATIONItem 4.
                                                                                                                                  Submission of Matters to a Vote of Security
      Holders
                                                                                                                                  28Item 5.
                                                                                                                                  Other Information
                                                                                                                                  28Item 6.
                                                                                                                                  Exhibits
                                                                                                                                  28Signature
                                                                                                                                  
                                                                                                                                  29
  
  -2-


Part
I. FINANCIAL
INFORMATION


Item
1.           Financial
Statements
  TASTY
BAKING COMPANY AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (000’s,
except per share amounts)


For
      the Thirteen Weeks Ended
                                                                
                                                                
                                                                For
      the Twenty-six Weeks EndedJune
      27, 2009
                                                                
                                                                
                                                                June
      28, 2008
                                                                
                                                                
                                                                June
      27, 2009
                                                                
                                                                
                                                                June
      28, 2008Gross
      sales
                                                                
                                                                $
                                                                78,532
                                                                
                                                                
                                                                $
                                                                72,180
                                                                
                                                                
                                                                $
                                                                155,461
                                                                
                                                                
                                                                $
                                                                141,473Less
      discounts and allowances
                                                                
                                                                
                                                                (31,575
                                                                )
                                                                
                                                                
                                                                (27,586
                                                                )
                                                                
                                                                
                                                                (62,341
                                                                )
                                                                
                                                                
                                                                (54,058
                                                                )Net
      sales
                                                                
                                                                
                                                                46,957
                                                                
                                                                
                                                                
                                                                44,594
                                                                
                                                                
                                                                
                                                                93,120
                                                                
                                                                
                                                                
                                                                87,415Costs
      and expenses:Cost
      of sales, exclusive of depreciation shown below
                                                                
                                                                
                                                                27,451
                                                                
                                                                
                                                                
                                                                29,192
                                                                
                                                                
                                                                
                                                                57,372
                                                                
                                                                
                                                                
                                                                57,986Depreciation
                                                                
                                                                
                                                                3,320
                                                                
                                                                
                                                                
                                                                3,069
                                                                
                                                                
                                                                
                                                                6,559
                                                                
                                                                
                                                                
                                                                6,099Selling,
      general and administrative
                                                                
                                                                
                                                                12,376
                                                                
                                                                
                                                                
                                                                11,993
                                                                
                                                                
                                                                
                                                                25,071
                                                                
                                                                
                                                                
                                                                24,004Interest
      expense
                                                                
                                                                
                                                                545
                                                                
                                                                
                                                                
                                                                508
                                                                
                                                                
                                                                
                                                                1,150
                                                                
                                                                
                                                                
                                                                964Other
      income, net
                                                                
                                                                
                                                                (175
                                                                )
                                                                
                                                                
                                                                (193
                                                                )
                                                                
                                                                
                                                                (383
                                                                )
                                                                
                                                                
                                                                (392
                                                                )43,517
                                                                
                                                                
                                                                
                                                                44,569
                                                                
                                                                
                                                                
                                                                89,769
                                                                
                                                                
                                                                
                                                                88,661Income
      (loss) before provision forincome
      taxes
                                                                
                                                                
                                                                3,440
                                                                
                                                                
                                                                
                                                                25
                                                                
                                                                
                                                                
                                                                3,351
                                                                
                                                                
                                                                
                                                                (1,246
                                                                )Provision
      for income taxes
                                                                
                                                                
                                                                1,095
                                                                
                                                                
                                                                
                                                                (50
                                                                )
                                                                
                                                                
                                                                1,077
                                                                
                                                                
                                                                
                                                                (362
                                                                )Net
      income (loss)
                                                                
                                                                $
                                                                2,345
                                                                
                                                                
                                                                $
                                                                75
                                                                
                                                                
                                                                $
                                                                2,274
                                                                
                                                                
                                                                $
                                                                (884
                                                                )Average
      common shares outstanding:Basic
                                                                
                                                                
                                                                8,062
                                                                
                                                                
                                                                
                                                                8,043
                                                                
                                                                
                                                                
                                                                8,060
                                                                
                                                                
                                                                
                                                                8,041Diluted
                                                                
                                                                
                                                                8,062
                                                                
                                                                
                                                                
                                                                8,043
                                                                
                                                                
                                                                
                                                                8,060
                                                                
                                                                
                                                                
                                                                8,041Per
      share of common stock:Net
      income (loss):Basic
                                                                
                                                                $
                                                                0.27
                                                                
                                                                
                                                                $
                                                                0.01
                                                                
                                                                
                                                                $
                                                                0.27
                                                                
                                                                
                                                                $
                                                                (0.11
                                                                )Diluted
                                                                
                                                                $
                                                                0.27
                                                                
                                                                
                                                                $
                                                                0.01
                                                                
                                                                
                                                                $
                                                                0.27
                                                                
                                                                
                                                                $
                                                                (0.11
                                                                )Cash
      dividend
                                                                
                                                                $
                                                                0.05
                                                                
                                                                
                                                                $
                                                                0.05
                                                                
                                                                
                                                                $
                                                                0.10
                                                                
                                                                
                                                                $
                                                                0.10




The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.


-3-


TASTY
BAKING COMPANY AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
 (Unaudited)
 (000’s)
  For
      the Twenty-six Weeks EndedJune
      27, 2009
                                                                                            
                                                                                            
                                                                                            June
      28, 2008Cash
      flows from (used for) operating activitiesNet
      income (loss)
                                                                                            
                                                                                            $
                                                                                            2,274
                                                                                            
                                                                                            
                                                                                            $
                                                                                            (884
                                                                                            )Adjustments
      to reconcile net income (loss) to netcash
      provided by operating activities:Depreciation
                                                                                            
                                                                                            
                                                                                            6,559
                                                                                            
                                                                                            
                                                                                            
                                                                                            6,099Amortization
                                                                                            
                                                                                            
                                                                                            183
                                                                                            
                                                                                            
                                                                                            
                                                                                            188Asset
      retirement obligation interest
                                                                                            
                                                                                            
                                                                                            195
                                                                                            
                                                                                            
                                                                                            
                                                                                            184Defined
      benefit pension expense
                                                                                            
                                                                                            
                                                                                            626
                                                                                            
                                                                                            
                                                                                            
                                                                                            (188
                                                                                            )Pension
      contributions
                                                                                            
                                                                                            
                                                                                            (1,211
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (640
                                                                                            )(Increase)
      decrease deferred taxes
                                                                                            
                                                                                            
                                                                                            1,407
                                                                                            
                                                                                            
                                                                                            
                                                                                            (623
                                                                                            )Post
      retirement medical
                                                                                            
                                                                                            
                                                                                            (4,027
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (851
                                                                                            )Other
                                                                                            
                                                                                            
                                                                                            1,931
                                                                                            
                                                                                            
                                                                                            
                                                                                            (234
                                                                                            )Changes
      in assets and liabilities:Increase
      in receivables
                                                                                            
                                                                                            
                                                                                            (321
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (1,554
                                                                                            )(Increase)
      decrease in inventories
                                                                                            
                                                                                            
                                                                                            (204
                                                                                            )
                                                                                            
                                                                                            
                                                                                            272Decrease
      (increase) in prepayments, deferred taxes and other
                                                                                            
                                                                                            
                                                                                            520
                                                                                            
                                                                                            
                                                                                            
                                                                                            (1,407
                                                                                            )Increase
      in accrued taxes
                                                                                            
                                                                                            
                                                                                            (432
                                                                                            )
                                                                                            
                                                                                            
                                                                                            79Decrease
      in accounts payable, accrued payroll and other current
    liabilities
                                                                                            
                                                                                            
                                                                                            (527
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (1,531
                                                                                            )Net
      cash from (used for) operating activities
                                                                                            
                                                                                            
                                                                                            6,973
                                                                                            
                                                                                            
                                                                                            
                                                                                            (1,090
                                                                                            )Cash
      flows from (used for) investing activitiesPurchase
      of property, plant and equipment
                                                                                            
                                                                                            
                                                                                            (29,654
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (13,609
                                                                                            )Independent
      sales distributor loan repayments
                                                                                            
                                                                                            
                                                                                            1,361
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,502Loans
      to independent sales distributors
                                                                                            
                                                                                            
                                                                                            (1,270
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (1,660
                                                                                            )Other
                                                                                            
                                                                                            
                                                                                            (166
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (46
                                                                                            )Net
      cash used for investing activities
                                                                                            
                                                                                            
                                                                                            (29,729
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (13,813
                                                                                            )Cash
      flows from (used for) financing activitiesDividends
      paid
                                                                                            
                                                                                            
                                                                                            (850
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (829
                                                                                            )Increase
      in long-term debt
                                                                                            
                                                                                            
                                                                                            78,132
                                                                                            
                                                                                            
                                                                                            
                                                                                            62,027Payment
      on long-term debt
                                                                                            
                                                                                            
                                                                                            (54,859
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (49,155
                                                                                            )Net
      increase in cash overdraft
                                                                                            
                                                                                            
                                                                                            369
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,832Net
      cash from financing activities
                                                                                            
                                                                                            
                                                                                            22,792
                                                                                            
                                                                                            
                                                                                            
                                                                                            14,875Net
      increase in cash and cash equivalents
                                                                                            
                                                                                            
                                                                                            36
                                                                                            
                                                                                            
                                                                                            
                                                                                            (28
                                                                                            )Cash
      and cash equivalents, beginning of year
                                                                                            
                                                                                            
                                                                                            58
                                                                                            
                                                                                            
                                                                                            
                                                                                            57Cash
      and cash equivalents, end of period
                                                                                            
                                                                                            $
                                                                                            94
                                                                                            
                                                                                            
                                                                                            $
                                                                                            29Supplemental
      cash flow informationNon-cash
      capital expenditures
                                                                                            
                                                                                            $
                                                                                            2,150
                                                                                            
                                                                                            
                                                                                            $
                                                                                            -
  The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
  -4-


TASTY
BAKING COMPANY AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (000’s)




June
      27, 2009
                                                            
                                                            
                                                            December
      27, 2008AssetsCurrent
      assets:Cash
      and cash equivalents
                                                            
                                                            $
                                                            94
                                                            
                                                            
                                                            $
                                                            58Receivables,
      less allowance of$3,334 and
      $2,862, respectively
                                                            
                                                            
                                                            21,865
                                                            
                                                            
                                                            
                                                            21,519Inventories
                                                            
                                                            
                                                            7,394
                                                            
                                                            
                                                            
                                                            7,190Deferred
      income taxes
                                                            
                                                            
                                                            2,707
                                                            
                                                            
                                                            
                                                            2,707Prepayments
      and other
                                                            
                                                            
                                                            2,929
                                                            
                                                            
                                                            
                                                            3,200Total
      current assets
                                                            
                                                            
                                                            34,989
                                                            
                                                            
                                                            
                                                            34,674Property,
      plant and equipment:Land
                                                            
                                                            
                                                            1,433
                                                            
                                                            
                                                            
                                                            1,433Buildings
      and improvements
                                                            
                                                            
                                                            54,554
                                                            
                                                            
                                                            
                                                            52,052Machinery
      and equipment
                                                            
                                                            
                                                            136,102
                                                            
                                                            
                                                            
                                                            132,609Construction
      in progress
                                                            
                                                            
                                                            62,515
                                                            
                                                            
                                                            
                                                            37,412254,604
                                                            
                                                            
                                                            
                                                            223,506Less
      accumulated depreciation and amortization
                                                            
                                                            
                                                            131,399
                                                            
                                                            
                                                            
                                                            125,218123,205
                                                            
                                                            
                                                            
                                                            98,288Other
      assets:Long-term
      receivables from independent sales distributors
                                                            
                                                            
                                                            9,701
                                                            
                                                            
                                                            
                                                            9,817Deferred
      income taxes
                                                            
                                                            
                                                            12,644
                                                            
                                                            
                                                            
                                                            13,088Miscellaneous
                                                            
                                                            
                                                            3,161
                                                            
                                                            
                                                            
                                                            3,33025,506
                                                            
                                                            
                                                            
                                                            26,235Total
      Assets
                                                            
                                                            $
                                                            183,700
                                                            
                                                            
                                                            $
                                                            159,197LiabilitiesCurrent
      liabilities:Accounts
      payable
                                                            
                                                            $
                                                            8,748
                                                            
                                                            
                                                            $
                                                            7,641Accrued
      payroll and employee benefits
                                                            
                                                            
                                                            6,175
                                                            
                                                            
                                                            
                                                            5,182Cash
      overdraft
                                                            
                                                            
                                                            3,139
                                                            
                                                            
                                                            
                                                            2,770Current
      obligations under capital leases
                                                            
                                                            
                                                            902
                                                            
                                                            
                                                            
                                                            720Notes
      payable, banks and current portion of long-term debt
                                                            
                                                            
                                                            1,000
                                                            
                                                            
                                                            
                                                            1,000Reserve
      for restructure
                                                            
                                                            
                                                            1,652
                                                            
                                                            
                                                            
                                                            -Other
      current liabilities
                                                            
                                                            
                                                            5,467
                                                            
                                                            
                                                            
                                                            6,419Total
      current liabilities
                                                            
                                                            
                                                            27,083
                                                            
                                                            
                                                            
                                                            23,732Accrued
      pension
                                                            
                                                            
                                                            27,901
                                                            
                                                            
                                                            
                                                            27,921Asset
      retirement obligation
                                                            
                                                            
                                                            7,244
                                                            
                                                            
                                                            
                                                            7,050Long-term
      debt
                                                            
                                                            
                                                            80,093
                                                            
                                                            
                                                            
                                                            57,194Long-term
      obligations under capital leases, less current portion
                                                            
                                                            
                                                            1,391
                                                            
                                                            
                                                            
                                                            1,199Postretirement
      benefits other than pensions
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2,226Reserve
      for restructure
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            1,652Other
      non-current liabilities
                                                            
                                                            
                                                            6,620
                                                            
                                                            
                                                            
                                                            5,256Total
      liabilities
                                                            
                                                            
                                                            150,332
                                                            
                                                            
                                                            
                                                            126,230Shareholders'
      equityAccumulated
      other comprehensive income (loss)
                                                            
                                                            
                                                            (6,949
                                                            )
                                                            
                                                            
                                                            (5,599
                                                            )Capital
      in excess of par value of stock
                                                            
                                                            
                                                            28,386
                                                            
                                                            
                                                            
                                                            28,699Common
      stock, par value $0.50 per share, and entitled to one
                                                            
                                                            
                                                            4,558
                                                            
                                                            
                                                            
                                                            4,558vote
      per share: Authorized 30,000 shares, issued 9,116 shares, outstanding
      8,579 sharesRetained
      earnings
                                                            
                                                            
                                                            18,077
                                                            
                                                            
                                                            
                                                            16,653Treasury
      stock, at cost
                                                            
                                                            
                                                            (10,704
                                                            )
                                                            
                                                            
                                                            (11,344
                                                            )Total
      shareholders' equity
                                                            
                                                            
                                                            33,368
                                                            
                                                            
                                                            
                                                            32,967Total
      Liabilities and Shareholders' Equity
                                                            
                                                            $
                                                            183,700
                                                            
                                                            
                                                            $
                                                            159,197
  The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
  -5-




Notes to
Condensed Consolidated Financial Statements
 All
disclosures are pre-tax, unless otherwise noted.
 
 1.      Summary
of Significant Accounting Policies
 
 Nature
of the Business
 Tasty
Baking Company (the “Company”) is a leading producer of sweet baked goods and
one of the nation’s oldest and largest independent baking companies, in
operation since 1914.  It has two manufacturing facilities, one in
Philadelphia, PA, and a second in Oxford, PA.
 
 Fiscal
Year
 The
Company and its subsidiaries operate on a 52-53 week fiscal year, ending on the
last Saturday of December.  Fiscal year 2009 is a 52-week
year.  Fiscal year 2008 was a 52-week year.
 
 Basis
of Presentation
 The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries.  All intercompany accounts and transactions have
been eliminated.
 
 The
condensed consolidated financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission.  Certain information and footnote disclosures
normally included in financial statements, prepared in accordance with generally
accepted accounting principles in the United States of America (“GAAP”), have
been condensed or omitted pursuant to such rules and
regulations.  In the opinion of the Company, the accompanying
unaudited condensed consolidated interim financial statements reflect all
adjustments, consisting of only normal recurring items, which are necessary for
a fair presentation of the results of operations for the periods shown. 
The results of operations for such periods are not necessarily indicative of the
results expected for the full year or for any future period.
 
 Use of
Estimates
 The
preparation of condensed consolidated financial statements in conformity with
GAAP requires management to make estimates, judgments and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities.  On an on-going
basis, the Company evaluates its estimates, including those related to customer
sales, discounts and allowances, long-lived asset impairment, indefinite-lived
asset impairment, pension and postretirement plan assumptions, workers’
compensation expense and income taxes.  Actual results may differ from
these estimates.
 
 Concentration of
Credit
 The
Company has, in the normal course of business, exposure to concentrations of
credit risk with respect to trade receivables.  Ongoing credit
evaluations of customers’ financial conditions are performed and, generally, no
collateral is required.  The Company maintains reserves for potential
credit losses and such losses, in the aggregate, have not exceeded management’s
expectations.
 
 Revenue
Recognition
 Revenue is
recognized when title and risk of loss pass, which is upon receipt of goods by
the independent sales distributors, retailers or third-party
distributors.  For route sales, the Company sells to independent sales
distributors who, in turn, sell to retailers.  Revenue from sales to
independent sales distributors is recognized upon receipt of the product by the
distributor.  For sales made directly to a customer or a third-party
distributor, revenue is recognized upon receipt of the products by the retailer
or third-party distributor.
 
 Sale
of Routes
 Sales
distribution routes are primarily owned by independent sales distributors who
purchase the exclusive right to sell and distribute Tastykake® products in
defined geographic territories.  When the Company sells routes to
independent sales distributors, it recognizes a gain or loss on the
sale.  Routes sold by the Company are either existing routes that the
Company has previously purchased from an independent sales distributor or newly
established routes in new geographic areas.  Any gain or loss recorded
by the Company is based on the difference between the sales price and the
carrying value of the route.  The Company recognizes gains or losses
on sales of routes when all material services or conditions related to the sale
have been substantially performed or satisfied by the Company.  In
most cases, the Company will finance a portion of the purchase price with
interest bearing notes, which are required to be repaid in
full.  Interest rates on the notes are based on Treasury or LIBOR
yields plus a spread.  The Company has no obligation to repurchase a
route but may choose to do so to facilitate a change in route
ownership.
  -6-




Sales
distribution routes owned by the Company are considered to have an indefinite
life and are reviewed for impairment at least annually or whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.  Any potential impairment is recognized when the fair
value of the route is less than its net carrying value. As of June 27, 2009 and
December 27, 2008, the net carrying values of sales distribution routes owned by
the Company were $2.0 million and $1.9 million, respectively.
 
 Cash
and Cash Equivalents
 The
Company considers all investments with an original maturity of three months or
less on their acquisition date to be cash equivalents.  Cash
overdrafts are recorded within current liabilities.  Cash flows
associated with cash overdrafts are classified as financing
activities.
 
 Inventory
Valuation
 Inventories,
which include material, labor and manufacturing overhead, are stated at the
lower of cost or market, cost being determined using the first-in, first-out
(“FIFO”) method.  Inventory balances for raw materials, work in
progress and finished goods are regularly analyzed and provisions for excess and
obsolete inventory are recorded, as necessary, based on the forecast of product
demand and production requirements.
 
 Property
and Depreciation
 Property,
plant and equipment are recorded at cost.  Depreciation is computed
using the straight-line method over the estimated useful lives of the assets or
the applicable lease term, when appropriate.  Buildings and
improvements, machinery and equipment, and vehicles are depreciated over
thirty-nine years, seven to fifteen years, and five to ten years, respectively,
except where a shorter useful life is necessitated by the Company’s decision to
relocate its Philadelphia operations.  Spare parts are capitalized as
part of machinery and equipment and are expensed as utilized or capitalized as
part of the relevant fixed asset.  Spare parts are valued using a
moving average method and are reviewed for potential obsolescence on a regular
basis.  Reserves are established for all spare parts that are no
longer usable and have no fair market value.  Capitalized computer
hardware and software is depreciated over five years.
 
 Costs of
major additions, replacements and betterments are capitalized, while maintenance
and repairs, which do not improve or extend the life of the respective assets,
are expensed as incurred.  For significant projects, the Company
capitalizes interest and labor costs associated with the construction and
installation of plant and equipment and significant information technology
development projects.
 
 In
accordance with Financial Accounting Standards Board (“FASB”) Statement No.144,
Accounting for the Impairment
or Disposal of Long-Lived Assets(“FAS
144”), long-lived assets are reviewed for impairment at least annually or
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable.  In instances where the carrying amount may
not be recoverable, the review for potential impairment utilizes estimates and
assumptions of future cash flows directly related to the asset.  For
assets where there is no plan for future use, the review for impairment includes
estimates and assumptions of the fair value of the asset, which is based on the
best information available.  These assets are recorded at the lower of
their book value or fair value.
 
 The
Company has a conditional asset retirement obligation related to asbestos in its
Philadelphia manufacturing facility.  As a result of the Company’s
decision to relocate its Philadelphia operations, it was able to estimate a
settlement date for the asset retirement obligation and in accordance with FASB
Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations, recorded an obligation of $6.6 million which was
the present value of the future obligation.  This obligation will
continue to accrete to the full value of the future obligation over the
remaining period until settlement of the obligation which is expected to occur
in June 2010, while the capitalized asset retirement cost is depreciated through
December 2044, the remaining useful life of the Philadelphia manufacturing
facility.  During the thirteen and twenty-six weeks ended June 27,
2009, the Company recorded $0.1 million and $0.2 million in interest associated
with the asset retirement obligation, respectively.  Also, during the
thirteen and twenty-six weeks ended June 28, 2008, the Company recorded $0.1
million and $0.2 million in interest associated with the asset retirement
obligation, respectively.   As of June 27, 2009 and December 27,
2008, the asset retirement obligation totaled $7.2 million and $7.0 million,
respectively.
 
 Grants
 The
Company receives grants from various government agencies for employee training
purposes.  Expenses for the training are recognized in the Company’s
statements of operations at the time the training takes place.  When
the proper approvals are given and funds are received from the government
agencies, the Company records an offset to the training expense already
recognized.
  -7-




In 2007,
in connection with the decision to relocate its Philadelphia manufacturing
operations, the Company received a $0.6 million grant from the Department of
Community and Economic Development of the Commonwealth of Pennsylvania
(“DCED”).  The opportunity grant has certain spending, job retention
and nondiscrimination conditions with which the Company must
comply.  The Company accounted for this grant under the deferred
income approach and will amortize the deferred income over the same period as
the useful life of the asset acquired with the grant.  The asset
acquired with the grant is expected to be placed into service when the new
manufacturing facility becomes fully operational in 2010.
 
 In 2006,
in conjunction with The Reinvestment Funds, Allegheny West Foundation and the
DCED, the Company activated Project Fresh Start (the “Project”).  The
Project is an entrepreneurial development program that provides an opportunity
for qualified minority entrepreneurs to purchase routes from independent sales
distributors.  The source of grant monies for this program is the
DCED.  The grants are used by minority applicants to partially fund
their purchase of an independent sales distribution route.
 
 Because
the Project’s grant funds merely pass through the Company in its role as an
intermediary, the Company records an offsetting asset and liability for the
total amount of grants as they relate to the Project.  There is no
statements of operations impact related to the establishment of, or subsequent
change to, the asset and liability amounts.
 
 Marketing
Costs
 The
Company expenses marketing costs, which include advertising and consumer
promotions, as incurred or as required by Statement of Position 93-7, Reporting on Advertising
Costs.  Marketing costs are included as a part of selling,
general and administrative expense.
 
 Computer
Software Costs
 The
Company capitalizes certain costs, such as software coding, installation and
testing that are incurred to purchase or create and implement internal use
computer software in accordance with Statement of Position 98-1, Accounting for Costs of Computer
Software Development or Obtained for Internal Use.  The
majority of the Company’s capitalized software relates to the implementation of
the enterprise resource planning and handheld computer systems.
 
 Freight,
Shipping and Handling Costs
 Outbound
freight, shipping and handling costs are included as a part of selling, general
and administrative expense.  Inbound freight, shipping and handling
costs are capitalized with inventory and expensed with cost of
sales.
 
 Pension
Plan
 The
Company’s funding policy for the pension plan is to contribute amounts
deductible for federal income tax purposes plus such additional amounts, if any,
as the Company’s actuarial consultants advise to be
appropriate.  Effective January 1, 2008, the Company was required to
make quarterly contributions under the Pension Protection Act of
2006.  The Company will make four quarterly contributions in 2009
totaling $2.4 million.  As of June 27, 2009, the Company had made two
of the four required contributions.  In 1987 the Company elected to
immediately recognize all gains and losses in excess of the pension corridor,
which is equal to the greater of ten percent of the accumulated pension benefit
obligation or ten percent of the market-related value of plan
assets.
 
 The
Company accrues normal periodic pension expense or income during the year based
upon certain assumptions and estimates.  These estimates and
assumptions include discount rate, rate of return on plan assets, compensation
increases, mortality and employee turnover.  In addition, the rate of
return on plan assets is directly related to changes in the equity and credit
markets, which can be and have been volatile.  The use of estimates
and assumptions, market volatility and the Company’s election to immediately
recognize all gains and losses in excess of its pension corridor in the current
year may cause the Company to experience significant changes in its pension
expense or income from year to year.  Expense or income that falls
outside the corridor is recognized only in the fourth quarter of each
year.
 
 In
accordance with FASB Statement No. 158, Employers’ Accounting for
Defined Benefit Pension and
Other Postretirement Plans, the Company maintains a liability on its
balance sheet equal to the under-funded status of its defined benefit and other
postretirement benefit plans.
 
 Accounting
for Derivative Instruments
 The
Company has entered into certain variable-to-fixed interest rate swap contracts
and foreign currency forward contracts denominated in Australian Dollars (“AUD”)
to hedge against fluctuations in interest rates and foreign currency exchange
rates, respectively.  The Company accounts for derivative instruments
in accordance with FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities(“FAS 133”) and FASB Statement No.
161, Disclosures about
Derivative Instruments and Hedging Activities ─ An Amendment of FASB Statement
No. 133.
  -8-




Treasury
Stock
 Treasury
stock is recorded at cost.  Cost is determined by the FIFO
method.
 
 Accounting
for Income Taxes
 The
Company accounts for income taxes under the asset and liability method, in
accordance with FASB Statement No. 109, Accounting for Income
Taxes.  Deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates in effect when the
differences are expected to be recovered or settled.
 
 Net
Income Per Common Share
 Net income
per common share is presented as basic and diluted earnings per
share.  Net income per common share – basic represents the earnings
for the period available to each share of common stock outstanding during the
reporting period.  Net income per common share – diluted represents
the amount of earnings for the period available to each share of common stock
outstanding during the reporting period and to each share that would have been
outstanding assuming the issuance of common shares for all dilutive potential
common shares outstanding during the reporting period.  For the
thirteen and twenty-six weeks ended June 27, 2009 options to purchase common
stock totaling 317,075 and 317,200, respectively, were not included in the
calculation of net income per common share – diluted since the exercise price
per share exceeded the actual price per share during the periods
presented.  For the thirteen and twenty-six weeks ended June 28, 2008
options to purchase common stock totaling 437,446 and 438,421, respectively,
were not included in the calculation of net income per common share – diluted
since the exercise price per share exceeded the actual price per share during
the periods presented.
 Thirteen
      Weeks Ended
                                  
                                  
                                  
                                  Twenty-six
      Weeks EndedJune
      27, 2009
                                  
                                  
                                  
                                  June
      28, 2008
                                  
                                  
                                  
                                  June
      27, 2009
                                  
                                  
                                  
                                  June
      28, 2008Income
      (Loss)
                                  
                                  
                                  Shares
                                  
                                  
                                  
                                  Income
      (Loss)
                                  
                                  
                                  Shares
                                  
                                  
                                  
                                  Income
      (Loss)
                                  
                                  
                                  Shares
                                  
                                  
                                  
                                  Income
      (Loss)
                                  
                                  
                                  SharesNet
      income (loss)
                                  
                                  $
                                  2,345
                                  
                                  
                                  
                                  
                                  
                                  $
                                  75
                                  
                                  
                                  
                                  
                                  
                                  $
                                  2,274
                                  
                                  
                                  
                                  
                                  
                                  $
                                  (884
                                  )Less:Income
      attributable to participating securities
                                  
                                  
                                  (145
                                  )
                                  
                                  
                                  
                                  
                                  
                                  (14
                                  )
                                  
                                  
                                  
                                  
                                  
                                  (128
                                  )
                                  
                                  
                                  
                                  
                                  
                                  (25
                                  )Net
      income (loss) available for common shareholders
                                  
                                  $
                                  2,200
                                  
                                  
                                  
                                  
                                  
                                  $
                                  61
                                  
                                  
                                  
                                  
                                  
                                  $
                                  2,146
                                  
                                  
                                  
                                  
                                  
                                  $
                                  (909
                                  )Net
      income (loss) per common share - basic
                                  
                                  
                                  0.27
                                  
                                  
                                  
                                  8,062
                                  
                                  
                                  
                                  0.01
                                  
                                  
                                  
                                  8,043
                                  
                                  
                                  
                                  0.27
                                  
                                  
                                  
                                  8,060
                                  
                                  
                                  
                                  (0.11
                                  )
                                  
                                  
                                  8,041Net
      income (loss) per common share - diluted
                                  
                                  
                                  0.27
                                  
                                  
                                  
                                  8,062
                                  
                                  
                                  
                                  0.01
                                  
                                  
                                  
                                  8,043
                                  
                                  
                                  
                                  0.27
                                  
                                  
                                  
                                  8,060
                                  
                                  
                                  
                                  (0.11
                                  )
                                  
                                  
                                  8,041
   The
Company has determined that the calculation of net income per common share –
basic includes all securities that are also required by the net income per
common share – diluted calculation, and therefore are the same for all periods
presented.
 
 Share-based
Compensation
 The
Company accounts for share-based compensation in accordance with FASB Statement
No. 123(R), Share-Based
Payment (“FAS 123(R)”).  Share-based compensation expense
recognized during the current period is based on the value of the portion of
share-based payment awards that is ultimately expected to vest.  The
total value of compensation expense for restricted stock is equal to the closing
market price of Tasty Baking Company shares on the date of grant.  FAS
123(R) requires forfeitures to be estimated at the time of grant in order to
estimate the amount of share-based awards that will ultimately
vest.  The forfeiture rate is based on the Company’s historical
forfeiture experience.  The Company calculated its historical pool of
windfall tax benefits.
 
 Recent
Accounting Statements
 In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2,
Effective Date of FASB
Statement No. 157.  This FSP
permits a delay in the effective date of FAS 157 to fiscal years beginning
after November 15, 2008, for nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in
the  financial statements on a recurring basis (at least annually).
The delay was intended to allow the Board and constituents additional time to
consider the effect of various implementation issues that had arisen from the
application of FAS 157.  The FASB also issued FSP FAS 157-1,
Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13(“FAS 157-1”), to exclude SFAS 13, Accounting for Leases, and
its related interpretive accounting pronouncements from the scope of
FAS 157 in February 2008.  The Company adopted the provisions of
FSP FAS 157-1 and FSP FAS 157-2 in the quarter ended March 28,
2009.  The required provisions did not have a material impact on the
Company’s condensed consolidated financial statements.
  -9-




In
December 2007, the FASB issued Statement No. 141 (Revised 2007), Business Combinations
(“FAS 141(R)”). FAS 141(R) significantly changes the accounting for
business combinations in a number of areas including the treatment of contingent
consideration, acquired contingencies, transaction costs, in-process research
and development and restructuring costs.  In addition, under
FAS 141(R), changes in an acquired entity's deferred tax assets and
uncertain tax positions after the measurement period impact income tax
expense.  FAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning after December 15,
2008.  Earlier adoption was prohibited.  The Company adopted
FAS 141 (R) in the quarter ended March 28, 2009.  The adoption did not
have a material impact on the Company’s condensed consolidated financial
statements.
 
 In
December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB
No. 51 (“FAS 160”), which establishes new accounting and
reporting standards for the noncontrolling interest in a subsidiary, changes in
a parent's ownership interest in a subsidiary and the deconsolidation of a
subsidiary. FAS 160 is effective for fiscal years beginning after
December 15, 2008.  Earlier adoption was
prohibited.  The Company adopted FAS 160 for the quarter ended March
28, 2009.  The adoption did not have a material impact on the
Company’s condensed consolidated financial statements.
 
 In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging
Activities—An Amendment of FASB Statement No. 133(“FAS
161”).  FAS 161 applies to all derivative instruments and related
hedged items accounted for under FAS 133, Accounting for Derivative
Instruments and Hedging
Activities.  It requires entities to provide greater
transparency about (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are accounted for
under FAS 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
results of operations, and cash flows. FAS 161 is effective for fiscal years and
interim periods beginning after November 15, 2008.  The Company
adopted FAS 161 in the quarter ended March 28, 2009.  Because FAS 161
applies only to financial statement disclosures, the adoption did not have a
material impact on the Company’s condensed consolidated financial
statements.
 
 In June
2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(“FSP 03-6-1”), which classifies unvested share-based payment awards that
contain non-forfeitable rights to dividends or dividend equivalents as
participating securities and requires them to be included in the computation of
earnings per share pursuant to the two-class method described in SFAS No. 128,
Earnings per
Share.  FSP 03-6-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those years and requires all prior period earnings per share data presented to
be adjusted retrospectively.  The Company adopted FSP 03-6-1 for the
quarter ended March 28, 2009.  For the thirteen and twenty-six weeks
ended June 27, 2009, the adoption of the required provisions resulted in a
reduction in earnings per share – basic and earnings per share – diluted of
approximately 2 cents and 1 cent, respectively.
 
 In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial
Instruments(“FAS 107-1 and APB 28-1”).  This FSP requires
disclosure about fair value of financial instruments for interim reporting
periods and annual financial statements of publicly traded companies.  FAS
107-1 and APB 28-1 is effective for interim reporting periods ending after June
15, 2009.  The Company adopted FAS 107-1 and APB 28-1 in the quarter ended
June 27, 2009.  Because FAS 107-1 and APB 18-1 applies only to
financial statement disclosures, the adoption did not have a material impact on
the Company’s condensed consolidated financial statements.
 
 In April
2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly(“FAS 157-4”).  This FSP provides additional guidance for estimating
fair value in accordance with FASB Statement No. 157 when the volume and level
of activity for the asset or liability have significantly decreased and provides
guidance on identifying circumstances that indicate a transaction is not
orderly.  FAS 157-4 is effective for interim reporting periods ending after
June 15, 2009.  The Company adopted FAS 157-4 in the quarter ended June 27,
2009.  The adoption did not have a material impact on the Company’s
condensed consolidated financial statements.
  -10-




In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments(“FAS 115-2 and FAS 124-2”).  This
FSP provides a framework to perform an other-than-temporary impairment analysis,
in compliance with GAAP, which determines whether the holder of an investment in
a debt or equity security, for which changes in fair value are not regularly
recognized in earnings, should recognize a loss in earnings when the investment
is impaired.  Additionally this FSP amends the other-than-temporary
impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements.  
FAS 115-2 is effective for interim reporting periods ending after June 15,
2009.  The Company adopted FAS 115-2 and FAS 124-2 in the quarter ended
June 27, 2009.  The adoption did not have a material impact on the
Company’s condensed consolidated financial statements.
 
 In May
2009, the FASB issued Statement No. 165, Subsequent Events (“FAS
165”), which establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued.  In particular, FAS 165
provides guidance on the period after the balance sheet date and the
circumstances under which management should evaluate events or transactions that
may occur for potential recognition or disclosure in the financial
statements.  FAS 165 also requires certain disclosures about events or
transactions occurring after the balance sheet date.  FAS 165 is
effective for interim and annual reporting periods ending after June 15,
2009. The Company adopted the provisions of FAS 165 in the second quarter
ending June 27, 2009.  The adoption did not have a material impact on
the condensed consolidated financial statements.
  In June
2009, the FASB issued Statement No. 166, Accounting for Transfers of
Financial Assets - an amendment of FASB Statement No. 140 (“FAS 166”),
which amends the existing guidance on transfers of financial
assets.   The amendments include: (1) eliminating the qualifying
special-purpose entity concept, (2) a new unit of account definition that must
be met for transfers of portions of financial assets to be eligible for sale
accounting, (3) clarifications and changes to the derecognition criteria for a
transfer to be accounted for as a sale, (4) a change to the amount of recognized
gain or loss on a transfer of financial assets accounted for as a sale when
beneficial interests are received by the transferor, and (5) extensive new
disclosures. FAS 166 is effective for new transfers of financial assets
occurring on or after January 1, 2010.  The adoption of FAS 166 is not
expected to have a material impact on the Company’s condensed consolidated
financial statements; however, it could impact future transactions entered into
by the Company.
  In June
2009, the FASB issued Statement No. 167, Amendments toFASB Interpretation No. 46(R)(“FAS 167”), amending the consolidation guidance for variable-interest
entities under FIN 46(R), Consolidation of Variable Interest
Entitiesan interpretation of ARB No.
51. The amendments include: (1) the elimination of the exemption for
qualifying special purpose entities, (2) a new approach for determining who
should consolidate a variable-interest entity, and (3) changes to when it is
necessary to reassess who should consolidate a variable-interest
entity.  FAS 167 is effective January 1, 2010. The Company is
currently evaluating the impact of this standard on the condensed consolidated
financial statements.
  InJune 2009, the FASB issued
Statement No. 168, The
FASB Accounting Standards Codification (Codification) and the
Hierarchy of
GAAP (“FAS 168”), which replaces SFAS No. 162, The Hierarchy of GAAP and
establishes the Codification as the single source of authoritative U.S. GAAP
recognized by the FASB to be applied by nongovernmental entities.  SEC
rules and interpretive releases are also sources of authoritative GAAP for SEC
registrants.  FAS 168 modifies the GAAP hierarchy to include only two
levels of GAAP: authoritative and nonauthoritative.  SFAS 168 is effective
for interim and annual periods ending after September 15, 2009.  As
FAS 168 is not intended to change or alter existing GAAP, it will not
impact the Company’s condensed consolidated financial statements.  The
Company will adjust historical GAAP references in its third quarter 2009 Form
10-Q to reflect accounting guidance references included in the
Codification.
 
 2.      New
Facilities
 
 In May
2007, the Company announced that as part of its comprehensive operational review
of strategic manufacturing alternatives, it entered into an agreement to
relocate its Philadelphia operations to the Philadelphia Navy
Yard.  The bakery lease agreement provides for a 26-year lease for a
345,500 square foot bakery, warehouse and distribution center located on
approximately 25 acres.  Construction of the facility is underway and
is expected to be substantially complete by the end of 2009.  The
Company expects the new facility to be fully operational in 2010.  The
lease provides for no rent payments in the first year of
occupancy.  Rental payments increase from $3.5 million in the second
year of occupancy to $7.2 million in the final year of the lease.  In
accordance with FASB Statement No. 13, Accounting for Leases(“FAS13”),
the Company will recognize the rental expenses associated with the operating
lease on a straight-line basis over the term of the agreement.
  -11-




As part of
this initiative, the Company also entered into a 16-year agreement for $9.5
million in financing at a fixed rate of 8.54% to be used for leasehold
improvements.  This agreement provides for no principal or interest
payments in the first year of occupancy and then requires equal monthly payments
of principal and interest aggregating to $1.2 million annually over the
remainder of the term.
 
 The
Company also entered into an agreement to relocate its corporate headquarters to
the Philadelphia Navy Yard.  This lease agreement provides for
approximately 36,000 square feet of office space.  Construction of the
office space is complete and during April 2009, the Company relocated its
corporate headquarters to the Philadelphia Navy Yard.  The office
lease term, which commenced in April 2009, will end at the same time as the new
bakery lease.  The office lease provides for no rent payments during
the first six months of occupancy.  Rental payments increase from
approximately $0.9 million in the second year of occupancy to approximately $1.5
million in the final year of the lease.  In accordance with FAS 13,
the Company will recognize the rental expenses associated with the agreement on
a straight-line basis over the term of the agreement.
 
 In
connection with these agreements, the Company provided a $1.1 million letter of
credit, which increased to $8.1 million in the beginning of 2009.  The
outstanding amount of the letter of credit will be reduced starting in 2026 and
will be eliminated by the end of the lease term.  As of June 27, 2009,
the outstanding letter of credit under this arrangement totaled $8.1
million.
 
 In
connection with these agreements and the related construction of the new
facilities, the Company provided an additional $0.5 million letter of credit,
which increased to $5.6 million in the first quarter of 2009.  The
outstanding amount of the letter of credit will be eliminated in December
2009.  As of June 27, 2009, the outstanding letter of credit under
this arrangement totaled $5.2 million.
 
 In
addition to the facility leases, the Company is purchasing high-tech, modern
baking equipment.  This equipment is designed to increase product
development flexibility and efficiency, while maintaining existing taste and
quality standards.  The investment for this project, in addition to
any costs associated with the agreements described above, is projected to be
approximately $75.0 million through 2010.  In September 2007, the
Company closed on a multi-bank credit facility and low-interest development
loans provided in part by the Commonwealth of Pennsylvania and the Philadelphia
Industrial Development Corporation (“PIDC”) to finance this investment and
refinance the Company’s existing revolving credit facilities, as well as to
provide for financial flexibility in running the ongoing operations and working
capital needs.
 
 The
Company accounts for disposal and exit activities in accordance with FASB
Statement No. 146, Accounting
for Costs Associated with Exit or Disposal Activities (“FAS 146”) and FAS
144.  To date, the Company has not incurred any material obligations
related to one-time termination benefits, contract termination costs or other
associated costs as described in FAS 146.
 
 The
Company has evaluated the long-lived assets utilized in its Philadelphia
operations for potential impairment or held-for-sale classification in
accordance with FAS 144.  The estimated fair value of the asset groups
continues to exceed the carrying amount of such asset groups, and as such,
neither the assets to be relocated nor the assets to be left in place at the
Philadelphia operations have suffered impairment.  The Company
anticipates that certain long-lived assets utilized in the Philadelphia
operations will not be relocated to the new facilities or sold as a result of
the relocation.  The remaining useful lives of these assets are
consistent with the time remaining until the completion of the relocation of the
Company’s operations.
 
 The Company expects to eliminate
approximately 215 positions in connection with the relocation of its
Philadelphia operations.  While the Company hopes to achieve this
result through normal attrition and the reduction of contract labor, it is
probable that the Company will incur obligations related to postemployment
benefits accounted for under FASB Statement No. 112,Employers'
Accounting for Postemployment Benefits,an amendment of FASB
Statements No. 5 and 43.  The Company has a reserve
of $1.7 million for estimated future obligations related to postemployment
benefits associated with the relocation of the Company’s Philadelphia operations
as of June 27, 2009 and December 27, 2008.
  -12-




3.      Inventories




Inventories
      are classified as follows (in thousands):June
      27,
                                                              
                                                              
                                                              December
      27,2009
                                                              
                                                              
                                                              2008Finished
      goods
                                                              
                                                              $
                                                              2,793
                                                              
                                                              
                                                              $
                                                              2,275Work
      in progress
                                                              
                                                              
                                                              109
                                                              
                                                              
                                                              
                                                              109Raw
      materials and supplies
                                                              
                                                              
                                                              4,492
                                                              
                                                              
                                                              
                                                              4,806$
                                                              7,394
                                                              
                                                              
                                                              $
                                                              7,190
 The
inventory balance has been reduced by reserves for obsolete and slow-moving
inventories totaling $43 thousand as of June 27, 2009.  At December
27, 2008, there were no reserves established for obsolete and slow-moving
inventories.
 4.      Credit
Facilities
 
 In
September 2007, the Company entered into a 5 year, $100.0 million secured credit
facility with 4 banks (the “Bank Credit Facility”), consisting of a $55.0
million fixed asset line of credit, a $35.0 million working capital revolver and
a $10.0 million low-interest loan from the agent bank with the Commonwealth of
Pennsylvania.  The Bank Credit Facility is secured by a blanket lien
on the Company’s assets and contains various non-financial and financial
covenants, including a fixed charge coverage covenant, a maximum operating
leverage ratio covenant, a minimum liquidity ratio covenant and minimum level of
earnings before interest, taxes, depreciation and amortization (“EBITDA”)
covenant.  Interest rates for the fixed asset line of credit and
working capital revolver are indexed to LIBOR and include a spread above that
index from 125 to 325 basis points based upon the Company’s ratio of debt to
EBITDA.  The fixed asset line of credit and the working capital
revolver include commitment fees from 20 to 50 basis points based upon the
Company’s ratio of debt to EBITDA.  The $10.0 million low-interest
loan bears interest at a fixed rate of 5.5% per annum.  In October
2008, the Company amended its Bank Credit Facility to provide for additional
flexibility and to change certain financial covenants, including the minimum
EBITDA requirement as of December 27, 2008 and the maximum operating leverage
ratio as of September 27, 2008 and December 27, 2008 which was necessary to
eliminate an instance of non-compliance.  As of June 27, 2009 and
December 27, 2008, the outstanding balances under the Bank Credit Facility were
$59.1 million and $45.2 million, respectively.
 
 In
September 2007, the Company entered into a 10 year, $12.0 million secured credit
agreement with the PIDC Local Development Corporation (“PIDC Credit
Facility”).  This credit facility bears interest at a blended fixed
rate of 4.5% per annum, participates in the blanket lien on the Company’s assets
and contains customary representations and warranties as well as customary
affirmative and negative covenants essentially similar to those in the Bank
Credit Facility, as amended in October 2008.  Negative covenants
include, among others, limitations on incurrence of liens and secured
indebtedness by the Company, other than in connection with the Bank Credit
Facility and the MELF Loan 1 and the MELF Loan 2, as defined
below.  As of June 27, 2009 and December 27, 2008, the outstanding
balances under the PIDC Credit Facility were $12.0 million and $3.0 million,
respectively.
 
 In
September 2007, the Company entered into a 10 year, $5.0 million Machinery and
Equipment Loan Fund secured loan with the Commonwealth of Pennsylvania (“MELF
Loan 1”).  This loan bears interest at a fixed rate of 5.0% per annum
and contains customary representations and warranties as well as customary
affirmative and negative covenants similar to those in the Bank Credit Facility,
as amended in October 2008.  Negative covenants include, among others,
limitations on incurrence of liens and secured indebtedness by the Company,
other than in connection with the Bank Credit Facility and the PIDC Credit
Facility.  In September 2008, the Company entered into a second 10
year, $5.0 million Machinery and Equipment Loan Fund secured loan with the
Commonwealth of Pennsylvania (“MELF Loan 2”).  The terms and
conditions of MELF Loan 2 are substantially the same as MELF Loan
1.  As of June 27, 2009 and December 27, 2008, the aggregate
outstanding balance under the MELF Loan 1 and MELF Loan 2 was $10.0
million.
 
 As of June
27, 2009, the Company was in compliance with the various non-financial and
financial covenants associated with the Bank Credit Facility, the PIDC Credit
Facility, the MELF Loan 1 and the MELF Loan 2.
 
 In
September 2007, the Company entered into an agreement which governs the shared
collateral positions under the Bank Credit Facility, the PIDC Credit Facility,
the MELF Loan 1 and the MELF Loan 2 (the “Intercreditor Agreement”), and
establishes the priorities and procedures that each lender has in enforcing the
terms and conditions of each of their respective agreements.  The
Intercreditor Agreement permits the group of banks and their agent bank in the
Bank Credit Facility to have the initial responsibility to enforce the terms and
conditions of the various credit agreements, subject to certain specific
limitations, and allows such bank group to negotiate amendments and waivers on
behalf of all lenders, subject to the approval of each lender.
  -13-




The
Company has used and expects to continue to utilize proceeds from the Bank
Credit Facility, the PIDC Credit Facility, the MELF Loan 1 and the MELF Loan 2
to finance the Company’s move of its corporate headquarters to the Philadelphia
Navy Yard and its planned move of its Philadelphia manufacturing facility to new
facilities currently under construction at the Philadelphia Navy Yard, along
with working capital needs.
 
 5.      Derivative
Instruments
 
 In order
to hedge a portion of the Company’s exposure to changes in interest rates on
debt incurred under its Bank Credit Facility, the Company enters into
variable-to-fixed interest rate swap contracts to fix the interest rates on a
portion of its variable interest rate debt.  These contracts are
accounted for as cash flow hedges in accordance with FAS 133. Accordingly, these
derivatives are marked to market and the resulting gains or losses are recorded
in other comprehensive income as an offset to the related hedged asset or
liability.  The actual interest expense incurred, inclusive of the
effect of the hedge in the current period, is recorded in the statements of
operations.
 
 In January
2008, the Company entered into an $8.5 million notional value interest rate swap
contract that increases to $35.0 million by April 2010 with a fixed LIBOR rate
of 3.835% that expires on September 5, 2012.  As of June 27, 2009, the
notional value of the swap was $8.5 million.  The LIBOR rates were
subject to an additional credit spread ranging from 125 basis points to 325
basis points and were equal to 325 basis points as of June 27,
2009.  The cumulative change in the fair market value of the
derivative instrument is reflected as a liability totaling $1.6 million and $1.8
million as of June 27, 2009 and December 27, 2008, respectively.
 
 In May
2008, the Company entered into an $8.0 million notional value interest rate swap
with a fixed LIBOR rate of 2.97% that expires on May 1, 2011.  The
LIBOR rates were subject to an additional credit spread ranging from 125 basis
points to 325 basis points and were equal to 325 basis points as of June 27,
2009.  The cumulative change in the fair market value of the
derivative instrument is reflected as a liability totaling $0.3 million as of
June 27, 2009 and December 27, 2008.
 
 As part of
the construction of its new manufacturing facility, the Company entered into
firm commitments to acquire machinery and equipment denominated in a foreign
currency.  In order to hedge the exposure resulting from changes in
foreign currency rates, the Company entered into foreign currency forward
contracts denominated in Australian Dollars (“AUD”).  These contracts
are accounted for as foreign currency fair value hedges in accordance with FAS
133.  Accordingly, the changes in fair value of both the firm
commitments and the derivative instruments are recorded currently in the
statements of operations, with the corresponding asset and liability recorded on
the balance sheets.
 
 As of June
27, 2009 and December 27, 2008, the notional principle of outstanding foreign
currency forward contracts designated as hedges was 1.5 million AUD ($1.2
million USD) and 5.3 million AUD ($3.6 million USD), respectively.
 
 The
Company holds foreign currency forward contracts, which were originally entered
into to hedge the risk of foreign currency fluctuations associated with
commitments denominated in AUD; however, during the twenty-six weeks ended June
27, 2009 certain of these forward contracts were determined to be no longer
designated as hedging instruments.
  -14-




The
following table provides the location and amounts of gains and losses associated
with the Company’s derivative instruments (in thousands):




Thirteen Weeks
      Ended
                                          
                                          
                                          Twenty-six
      Weeks EndedIncome
      Statement
                                          
                                          June
      27,
                                          
                                          
                                          June
      28,
                                          
                                          
                                          June
      27,
                                          
                                          
                                          June
      28,Location
                                          
                                          2009
                                          
                                          
                                          2008
                                          
                                          
                                          2009
                                          
                                          
                                          2008Cash Flow HedgesInterest
      Rate SwapsNet
      gain (loss) recognized in accumulated other comprehensive
      income
                                          
                                          
                                          $
                                          367
                                          
                                          
                                          $
                                          1,049
                                          
                                          
                                          $
                                          210
                                          
                                          
                                          $
                                          727Net
      gain (loss) reclassified from accumulated other comprehensive income to
      interest expense
                                          Interest
      expense
                                          
                                          
                                          (108
                                          )
                                          
                                          
                                          (75
                                          )
                                          
                                          
                                          (206
                                          )
                                          
                                          
                                          (83
                                          )Fair Value HedgesForeign
      currency forward contractsNet
      gain (loss) recognized in other income, net
                                          Other
      income, net
                                          
                                          
                                          142
                                          
                                          
                                          
                                          248
                                          
                                          
                                          
                                          603
                                          
                                          
                                          
                                          389




Foreign
currency fair value hedges are entered into against foreign currency
fluctuations of firm commitments.  Amounts recognized in interest
expense associated with these fair value hedges is fully offset by foreign
currency fluctuations of the firm commitments also recognized as other income,
net.
 
 In
addition to the derivative instruments described above, the Company has entered
into foreign currency forward contracts that are not designated as hedging
activities.  These forward contracts do not have any impact on net
income as the Company has entered into equal and offsetting buy and sell
contracts and changes in fair value are fully offsetting within the other
income, net line of the statements of operations.
 
 Derivative
instruments accounted for in accordance with FAS 133 are reflected in the
condensed consolidated balance sheets as follows (in thousands):
  June
      27,
                            
                            
                            December
      27,Balance
      Sheet Location
                            
                            2009
                            
                            
                            2008Hedging
      derivative instrumentsInterest
      rate swaps
                            Other
      non-current liabilities
                            
                            $
                            (1,879
                            )
                            
                            $
                            (2,089
                            )Foreign
      currency hedges
                            Prepayments
      and other
                            
                            
                            18
                            
                            
                            
                            —Foreign
      currency hedges
                            Other
      current liabilities
                            
                            
                            —
                            
                            
                            
                            (382
                            )Foreign
      currency hedges
                            Other
      non-current liabilities
                            
                            
                            —
                            
                            
                            
                            (203
                            )Non-hedging
      derivative instrumentsForeign
      currency forward contracts
                            Other
      current liabilities
                            
                            
                            (401
                            )
                            
                            
                            —




Counterparties
to the foreign currency forward contracts and interest rate swaps are primarily
major banking institutions with credit ratings of investment grade or better and
no collateral is required.  There are no significant risk
concentrations.  The Company believes the risk of incurring losses on
derivative contracts related to credit risk is remote.
 
 6.      Fair
Value Measurements
 
 The
Company discloses certain fair value measurements in accordance with FASB
Statement No. 157, Fair Value
Measurements (“FAS 157”).  FAS 157 establishes a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value
as follows:
  Level
      1.
                
                Observable
      inputs such as quoted prices in active markets for identical assets or
      liabilities;Level
      2.
                
                Inputs,
      other than quoted prices included within Level 1, that are observable
      either directly or indirectly; andLevel
      3.
                
                Unobservable
      inputs in which there is little or no market data, which require the
      reporting entity to develop its own
assumptions.






-15-




The
following table presents assets / (liabilities) measured at fair value on a
recurring basis at June 27, 2009 (in thousands):
 
 Fair
      Value Measurement UsingDescription
                                  
                                  Balance
      as of June 27, 2009
                                  
                                  
                                  Quoted
      Prices in Active Markets for Identical Assets (Level
1)
                                  
                                  
                                  Significant
      Other Observable Inputs (Level 2)
                                  
                                  
                                  Significant
      Unobservable Inputs (Level 3)Financial
      instruments owned:Interest
      rate swaps
                                  
                                  $
                                  (1,879
                                  )
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  (1,879
                                  )
                                  
                                  $
                                  —Foreign
      currency forward contracts
                                  
                                  
                                  (401
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (401
                                  )
                                  
                                  
                                  —Foreign
      currency hedges
                                  
                                  
                                  18
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  18
                                  
                                  
                                  
                                  —Total
      financial instruments owned
                                  
                                  $
                                  (2,262
                                  )
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  (2,262
                                  )
                                  
                                  $
                                  —
 
 The
following table presents assets / (liabilities) measured at fair value on a
recurring basis at December 27, 2008 (in thousands):
 
 Fair
      Value Measurement UsingDescription
                      
                      Balance
      as of December 27, 2008
                      
                      
                      Quoted
      Prices in Active Markets for Identical Assets (Level
1)
                      
                      
                      Significant
      Other Observable Inputs (Level 2)
                      
                      
                      Significant
      Unobservable Inputs (Level 3)Financial
      instruments owned:Interest
      rate swaps
                      
                      $
                      (2,089
                      )
                      
                      $
                      —
                      
                      
                      $
                      (2,089
                      )
                      
                      $
                      —Foreign
      currency hedges
                      
                      
                      (585
                      )
                      
                      
                      —
                      
                      
                      
                      (585
                      )
                      
                      
                      —Total
      financial instruments owned
                      
                      $
                      (2,674
                      )
                      
                      $
                      —
                      
                      
                      $
                      (2,674
                      )
                      
                      $
                      —
 
 As of June
27, 2009 and December 27, 2008, the carrying values of cash and cash
equivalents, accounts receivable, accounts payable and other current liabilities
are representative of fair value due to the short-term nature of the
instruments.  The Company’s carrying value of long-term debt
approximates fair value.
 
 7.      Defined
Benefit Retirement Plans
 
 The
Company maintains a partially funded noncontributory Defined Benefit Retirement
Plan (the “DB Plan”) providing retirement benefits.  Benefits under
this DB Plan are generally based on the employees’ years of service and
compensation during the years preceding retirement.  The Company
amended the DB Plan to freeze benefit accruals effective March 26,
2005.   The Company maintains a DB Supplemental Executive
Retirement Plan (“SERP”) for key employees designated by the Board of Directors
(the “Board”), however, there are no current employees earning benefits under
this plan.  See Note 8 for more information.  The Company
also maintains a frozen unfunded Retirement Plan for Directors (the “DB Director
Plan”).  The benefit amount is the annual cash retainer in the year of
retirement, but not less than $16 thousand for Directors serving on December 31,
1993.
 
 Effective
February 15, 2007, benefit accruals under the DB Director Plan were frozen for
current directors and future directors were precluded from participating in the
plan.  Participants are credited for service under the DB Director
Plan after February 15, 2007 solely for vesting purposes.  On February
15, 2007, the Board approved a Deferred Stock Unit Plan (the “DSU
Plan”).  The DSU Plan provides that for each fiscal quarter, the
Company will credit deferred stock units (“DSUs”) to the director’s account
equivalent in value to $4 thousand on the last day of such quarter, provided
that he or she is a director on the last day of such
quarter.  Directors will be entitled to be paid in shares upon
termination of Board service provided the director has at least five years of
continuous service on the Board.  The shares may be paid out in a lump
sum or at the director’s election, over a period of five years.
  -16-




The
components of the DB Plan, DB SERP, and DB Director Plan’s costs are summarized
as follows (in thousands):
  Thirteen Weeks
      Ended
                                                                                
                                                                                
                                                                                Twenty-six
      Weeks EndedJune
      27,
                                                                                
                                                                                
                                                                                June
      28,
                                                                                
                                                                                
                                                                                June
      27,
                                                                                
                                                                                
                                                                                June
      28,2009
                                                                                
                                                                                
                                                                                2008
                                                                                
                                                                                
                                                                                2009
                                                                                
                                                                                
                                                                                2008Service
      cost
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -Interest
      cost
                                                                                
                                                                                
                                                                                1,272
                                                                                
                                                                                
                                                                                
                                                                                1,271
                                                                                
                                                                                
                                                                                
                                                                                2,519
                                                                                
                                                                                
                                                                                
                                                                                2,505Expected
      return on plan assets
                                                                                
                                                                                
                                                                                (952
                                                                                )
                                                                                
                                                                                
                                                                                (1,235
                                                                                )
                                                                                
                                                                                
                                                                                (1,911
                                                                                )
                                                                                
                                                                                
                                                                                (2,536
                                                                                )Amortization
      of prior service cost
                                                                                
                                                                                
                                                                                (4
                                                                                )
                                                                                
                                                                                
                                                                                (4
                                                                                )
                                                                                
                                                                                
                                                                                (8
                                                                                )
                                                                                
                                                                                
                                                                                (8
                                                                                )Actuarial
      loss recognition
                                                                                
                                                                                
                                                                                13
                                                                                
                                                                                
                                                                                
                                                                                16
                                                                                
                                                                                
                                                                                
                                                                                26
                                                                                
                                                                                
                                                                                
                                                                                32Net
      DB pension amount charged / (credited) to income
                                                                                
                                                                                $
                                                                                329
                                                                                
                                                                                
                                                                                $
                                                                                48
                                                                                
                                                                                
                                                                                $
                                                                                626
                                                                                
                                                                                
                                                                                $
                                                                                (7
                                                                                )
 
 The
Company made cash contributions totaling $0.6 million and $1.2 million to the
frozen DB Plan for the thirteen and twenty-six weeks ended June 27, 2009,
respectively, in accordance with the Pension Protection Act of
2006.  During 2009, the Company will make aggregate minimum required
cash contributions to the DB Plan in four quarterly installments totaling $2.4
million.
 8.      Defined
Contribution Retirement Plans
 
 The
Company maintains the Tasty Baking Company 401(k) and Company Funded Retirement
Plan (the “DC Retirement Plan”) which has two separate benefits.  The
first benefit in the Retirement Plan is a funded Defined Contribution Retirement
Plan (the “DC Plan”), which is offered in lieu of the benefits previously
provided in the now frozen DB Plan. Under the DC Plan, the Company makes weekly
cash contributions into individual accounts for all eligible
employees.  These contributions are based on employees’ point values
which are the sum of age and years of service as of January 1 each
year.  All employees receive contributions that range from 2.0% to
5.0% of covered compensation relative to their point
totals.  Employees at March 27, 2005, who had 20 years of service or
10 years of service and 60 points, received an additional “grandfathered”
contribution between 1.5% and 3.5% of salary.  The “grandfathered”
contribution percentage is paid weekly with the regular contribution until those
covered employees retire or separate from the Company.  These
“grandfathered” contributions are being made to compensate older employees for
the shorter earnings period that their accounts will have to appreciate in value
relative to their normal retirement dates.
 
 The second
benefit in the DC Retirement Plan is a 401(k) Plan.  Under the 401(k)
Plan, all participants receive a Company match of 50.0% of their elective
deferrals that do not exceed 4.0% of their covered compensation as defined in
the 401(k) Plan.  Effective June 27, 2009, the Company suspended the
Company’s 401(k) matching contribution for the remainder of fiscal 2009 for all
employees who participate in the program.
 
 The
Company also maintains an unfunded defined contribution SERP (“DC SERP”) for one
eligible active employee.
 
 The
components of the defined contribution retirement plans included in the
Company’s statements of operations are summarized as follows (in
thousands):
  Thirteen Weeks
      Ended
                                                                                          
                                                                                          
                                                                                          Twenty-six
      Weeks EndedJune
      27,
                                                                                          
                                                                                          
                                                                                          June
      28,
                                                                                          
                                                                                          
                                                                                          June
      27,
                                                                                          
                                                                                          
                                                                                          June
      28,2009
                                                                                          
                                                                                          
                                                                                          2008
                                                                                          
                                                                                          
                                                                                          2009
                                                                                          
                                                                                          
                                                                                          2008DC
      plan
                                                                                          
                                                                                          $
                                                                                          431
                                                                                          
                                                                                          
                                                                                          $
                                                                                          322
                                                                                          
                                                                                          
                                                                                          $
                                                                                          874
                                                                                          
                                                                                          
                                                                                          $
                                                                                          804DC
      SERP
                                                                                          
                                                                                          
                                                                                          72
                                                                                          
                                                                                          
                                                                                          
                                                                                          96
                                                                                          
                                                                                          
                                                                                          
                                                                                          144
                                                                                          
                                                                                          
                                                                                          
                                                                                          193Net
      defined contribution retirement plan amountcharged
      to income
                                                                                          
                                                                                          $
                                                                                          503
                                                                                          
                                                                                          
                                                                                          $
                                                                                          418
                                                                                          
                                                                                          
                                                                                          $
                                                                                          1,018
                                                                                          
                                                                                          
                                                                                          $
                                                                                          997
 
 9.      Postretirement
Benefits Other than Pensions
 
 In
addition to providing pension benefits, the Company has historically provided
certain unfunded health care and life insurance programs for substantially all
retired employees, or Other Postretirement Benefits (“OPEB”).  These
benefits have been provided through contracts with insurance companies and
health service providers.
  -17-




With the
implementation of Medicare Part D in January 2006, the Company stopped providing
medical benefits for most of its post-65 retirees and began requiring incumbent
retirees to pay age-based rates for life insurance benefits in excess of $20
thousand.  Since January 2006, the Company provided subsidized medical
benefits for its retirees and their dependents who had not yet reached age
65.  In December 2008, the Company made the decision to terminate its
retiree medical benefit plan, which offered medical insurance to pre-65 retirees
at a subsidized rate.  The decision to terminate the plan was made
prior to December 27, 2008 and the Company set the benefits’ cessation date as
December 1, 2009.
 
 Life
insurance for individuals retiring before January 1, 2006 was capped at $20
thousand of coverage.  Incumbent retirees who purchase coverage in
excess of $20 thousand and all new retirees after January 1, 2006 paid age based
rates for their life insurance benefit for which the Company incurs no
liability.  In June 2009, the Company made a decision to cease
providing life insurance benefits for its retirees and terminated the
plan.  The associated plan amendment and curtailment resulted in the
Company recording approximately $3.7 million in income in the second quarter of
2009.  Approximately $2.2 million of the $3.7 million was recorded as
a reduction in cost of sales, with the remainder of approximately $1.5 million
recorded as an offset to selling, general and administrative
expenses.
 
 The
components of net postretirement benefit are summarized as follows (in
thousands):
 Thirteen Weeks
      Ended
                                                                                                                    
                                                                                                                    
                                                                                                                    Twenty-six
      Weeks EndedJune
      27,
                                                                                                                    
                                                                                                                    
                                                                                                                    June
      28,
                                                                                                                    
                                                                                                                    
                                                                                                                    June
      27,
                                                                                                                    
                                                                                                                    
                                                                                                                    June
      28,2009
                                                                                                                    
                                                                                                                    
                                                                                                                    2008
                                                                                                                    
                                                                                                                    
                                                                                                                    2009
                                                                                                                    
                                                                                                                    
                                                                                                                    2008Service
      Cost
                                                                                                                    
                                                                                                                    $
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    90
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    181Interest
      Cost
                                                                                                                    
                                                                                                                    
                                                                                                                    42
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    116
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    85
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    232Amortization
      of unrecognized prior service cost (benefit)
                                                                                                                    
                                                                                                                    
                                                                                                                    (199
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (457
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (398
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    (915
                                                                                                                    )Amortization
      of unrecognized gain
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -Curtailment
      benefit
                                                                                                                    
                                                                                                                    
                                                                                                                    (3,717
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    (3,717
                                                                                                                    )
                                                                                                                    
                                                                                                                    
                                                                                                                    -Total
      OPEB net postretirement benefit
                                                                                                                    
                                                                                                                    $
                                                                                                                    (3,874
                                                                                                                    )
                                                                                                                    
                                                                                                                    $
                                                                                                                    (251
                                                                                                                    )
                                                                                                                    
                                                                                                                    $
                                                                                                                    (4,030
                                                                                                                    )
                                                                                                                    
                                                                                                                    $
                                                                                                                    (502
                                                                                                                    )
 Payments
made in connection with the OPEB plans totaled $0.3 million and $0.3 million,
for the twenty-six weeks ended June 27, 2009 and June 28, 2008,
respectively.
 10.           Stock
Compensation
 
 The
Company maintains a 2006 Long-Term Incentive Plan (the “2006
Plan”).  The aggregate number of shares available for grant under the
2006 Plan is 120,600 shares of the Company’s common stock as of June 27,
2009.
 
 The 2006
Plan authorizes the Compensation Committee (the “Committee”) of the Board to
grant awards of stock options, stock appreciation rights, unrestricted stock,
restricted stock (“RSA”) (including performance restricted stock) and
performance shares to employees, directors and consultants or advisors of the
Company.  The option price is determined by the Committee and, in the
case of incentive stock options, will be no less than the fair market value of
the shares on the date of grant.  Options lapse at the earlier of the
expiration of the option term specified by the Committee (not more than ten
years in the case of incentive stock options) or three months following the date
on which employment with the Company terminates.
 
 The
Company also maintains a 2003 Long-Term Incentive Plan (the “2003
Plan”).  The aggregate number of shares available for grant under the
2003 Plan is 37,710 as of June 27, 2009.  The terms and conditions of
the 2003 plan are generally the same as the 2006 Plan.  A notable
difference is that the 2003 Plan can only award shares to employees and
directors of the Company.  The Company also has options and RSAs
outstanding under the 1994 and the 1997 Long-Term Incentive Plans.
 
 Notwithstanding
the vesting and termination provisions described above, the Company entered into
Change of Control Agreements and Employment Agreements with certain executive
officers, whereby upon a change of control, the shares granted as RSAs vest and
any restrictions on outstanding stock options lapse
immediately.  Additionally, under the terms of those agreements,
shares granted as RSAs may vest after termination of employment in certain
circumstances.
  -18-




Stock
options as of June 27, 2009, are summarized as follows:
  Shares
      (000’s)
                                                  
                                                  
                                                  Weighted
      AverageExercise Price
                                                  
                                                  
                                                  Weighted
      AverageRemaining ContractualTerm
                                                  
                                                  
                                                  Aggregate
      IntrinsicValue (000s)Outstanding
      at December 27, 2008
                                                  
                                                  
                                                  322
                                                  
                                                  
                                                  $
                                                  10.38Granted
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Forfeited
                                                  
                                                  
                                                  (5
                                                  )
                                                  
                                                  
                                                  11.50Exercised
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Outstanding
      at March 28, 2009
                                                  
                                                  
                                                  317
                                                  
                                                  
                                                  $
                                                  10.36
                                                  
                                                  
                                                  
                                                  4.12
                                                  
                                                  
                                                  $
                                                  765Granted
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Forfeited
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Exercised
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Outstanding
      at June 27, 2009
                                                  
                                                  
                                                  317
                                                  
                                                  
                                                  $
                                                  10.36
                                                  
                                                  
                                                  
                                                  3.88
                                                  
                                                  
                                                  $
                                                  765Options
      exercisable at March 28, 2009
                                                  
                                                  
                                                  317
                                                  
                                                  
                                                  $
                                                  10.36
                                                  
                                                  
                                                  
                                                  4.12
                                                  
                                                  
                                                  $
                                                  765Options
      exercisable at June 27, 2009
                                                  
                                                  
                                                  317
                                                  
                                                  
                                                  $
                                                  10.36
                                                  
                                                  
                                                  
                                                  3.88
                                                  
                                                  
                                                  $
                                                  765
 
 As of June
27, 2009, there was no unrecognized compensation related to nonvested stock
options, as all options were fully vested.  For the thirteen weeks
ended June 27, 2009, there were no options granted and there was no cash
received from option exercises.  There was no compensation expense
recognized in the condensed consolidated statements of operations for stock
options in the thirteen and twenty-six weeks ended June 27, 2009 or June 28,
2008.
 
 The
Company recognizes expense for restricted stock using the straight-line method
over the requisite service period.  A summary of the restricted stock
as of June 27, 2009, is presented below:
 Shares
      (000’s)
                                        
                                        
                                        Weighted
      Average Fair ValueNonvested
      at December 27, 2008
                                        
                                        
                                        417
                                        
                                        
                                        $
                                        6.07Granted
                                        
                                        
                                        100
                                        
                                        
                                        
                                        4.08Forfeited
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Exercised
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Nonvested
      at June 27, 2009
                                        
                                        
                                        517
                                        
                                        
                                        $
                                        5.69
 
 As of June
27, 2009, there was $1.7 million of unrecognized compensation cost related to
nonvested restricted stock which is expected to be recognized over a weighted
average period of approximately 2.42 years.
 
 11.           Income
Taxes
 
 The
Company’s effective tax rate was 31.8% and (200.0%) for the thirteen weeks ended
June 27, 2009 and June 28, 2008, respectively, and 32.1% and 29.0% for the
twenty-six weeks ended June 27, 2009 and June 28, 2008, respectively. The
Company’s effective tax rate differs from the composite federal and state
statutory tax rate due to certain expenses which are not deductible for income
tax purposes and non-recurring discrete items.  Non-deductible expense
items and discrete items tend to increase the effective tax rate when pre-tax
income is reported and tend to decrease the effective tax rate when a pre-tax
loss is reported.  During the quarter ended June 27, 2009, the Company
favorably settled a state tax matter that resulted in discrete tax benefits of
approximately $454 thousand, which reduced the Company’s effective tax rate for
the periods presented.  For the thirteen and twenty-six weeks ended
June 28, 2008, the Company recorded $0.1 million in non-recurring discrete
expense items related to the write-off of charitable contribution
carryforwards.
  -19-




12.           Accumulated
Other Comprehensive Income (Loss)
 
  Total
comprehensive income (loss), net of taxes, includes the following (in
thousands):
  Thirteen Weeks
      Ended
                                        
                                        
                                        Twenty-six
      Weeks EndedJune
      27,2009
                                        
                                        
                                        June
      28, 2008
                                        
                                        
                                        June
      27, 2009
                                        
                                        
                                        June
      28, 2008Net
      income / (loss)
                                        
                                        $
                                        2,345
                                        
                                        
                                        
                                        75
                                        
                                        
                                        $
                                        2,274
                                        
                                        
                                        $
                                        (884
                                        )Other
      comprehensive income / (loss)Pension
      plan
                                        
                                        
                                        (500
                                        )
                                        
                                        
                                        (57
                                        )
                                        
                                        
                                        (494
                                        )
                                        
                                        
                                        (50
                                        )Other
      postretirement benefits
                                        
                                        
                                        (749
                                        )
                                        
                                        
                                        (275
                                        )
                                        
                                        
                                        (1,001
                                        )
                                        
                                        
                                        (549
                                        )Change
      in unrealized gainon
      derivative instruments
                                        
                                        
                                        220
                                        
                                        
                                        
                                        629
                                        
                                        
                                        
                                        145
                                        
                                        
                                        
                                        436Total
      other comprehensive income / (loss)
                                        
                                        
                                        (1,029
                                        )
                                        
                                        
                                        297
                                        
                                        
                                        
                                        (1,350
                                        )
                                        
                                        
                                        (163
                                        )Total
      comprehensive income / (loss)
                                        
                                        $
                                        1,316
                                        
                                        
                                        
                                        372
                                        
                                        
                                        $
                                        924
                                        
                                        
                                        $
                                        (1,047
                                        )
  The
following table summarizes the components of accumulated other comprehensive
(loss) net of tax (in thousands):
  June 27,
      2009
                                    
                                    
                                    December 27,
      2008Pension
      plan
                                    
                                    $
                                    (5,821
                                    )
                                    
                                    $
                                    (5,327
                                    )Other
      postretirement benefits
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,001Unrealized
      (loss) on derivative instruments
                                    
                                    
                                    (1,128
                                    )
                                    
                                    
                                    (1,273
                                    )Total
      accumulated other comprehensive (loss)
                                    
                                    $
                                    (6,949
                                    )
                                    
                                    $
                                    (5,599
                                    )
  13.          
Subsequent Events
 
 
 The
Company has evaluated any potential subsequent events through August 3, 2009,
which coincides with the date the financial statements were filed with the
Securities and Exchange Commission.  The Company did not identify any
subsequent events requiring accounting or disclosure.
  -20-




Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operation
  All
disclosures are pre-tax, unless otherwise noted.
 
 Results of
Operations
 
 For
the Thirteen Weeks ended June 27, 2009 and June 28, 2008
 
 Overview
 Net income
for the second quarter of 2009 was $2.3 million or $0.27 per fully-diluted
share, compared to net income of $0.1 million or $0.01 per fully-diluted share,
in the second quarter of 2008.  Net income in the second quarter of
2009 included the impact of the Company’s decision to terminate its
postretirement life insurance plan which resulted in income of approximately
$2.1 million after-tax.  Additionally, net income for the second
quarter of 2009 and 2008 included $0.8 million, or approximately $0.10 per
common share, of accelerated depreciation, after-tax, resulting from the change
in the estimated useful lives of certain assets at the Company’s Philadelphia
operations in the second quarter of fiscal 2007.  The change in
estimated useful lives resulted from the Company’s plans to move from its
present facilities.
 
 Sales
 Gross
sales increased 8.8% in the second quarter of 2009 on a volume increase of 3.0%
compared to the same period in the prior year.  Net sales in the second
quarter of 2009 increased 5.3% versus the comparable period in 2008 driven by a
4.9% increase in Non-Route net sales and a 5.4% increase in Route net
sales.  Route net sales benefited from higher selling prices and increased
sales volumes, particularly for the Company’s Family Pack
products.  Non-Route net sales increased due to higher sales volumes
with direct retail customers and the impact of higher selling prices in the
second quarter of 2009 as compared to the same period of the prior
year.
 
 Cost
of Sales
 Cost of
sales, excluding depreciation, for the second quarter of 2009 decreased 6.0% or
$1.7 million on a unit volume increase of 3.0%.  The decrease in cost of
sales was driven by $2.2 million in benefit recorded in connection with the
Company’s termination of its postretirement life insurance plan in the second
quarter of 2009 as well as a $0.8 million decline in costs for key ingredients
and packaging as compared to the second quarter of the prior year.  These
benefits were partially offset by the costs associated with the increase in
sales volumes combined with an increase in employee related costs, including
pension expense, as compared to the prior year period.
 
 During the
second quarter of 2009, the Company terminated its postretirement life insurance
plan.  As a result of this plan termination, the Company recorded
approximately $3.7 million in income in the second quarter of 2009.
Approximately $2.2 million or 60% of this benefit was recorded in cost of sales,
with the remainder recorded as a component of selling, general and
administrative expense.
 
 Depreciation
 Depreciation
expense increased $0.2 million to $3.3 million in the second quarter of fiscal
2009 from $3.1 million in the second quarter of fiscal 2008.  Included
in depreciation expense for the second quarter of both fiscal 2009 and 2008 is
approximately $1.3 million of depreciation related to the change in the useful
lives of certain assets at the Company’s Philadelphia operations which will not
be relocated to the new facility.  The Company expects depreciation
resulting from the change in useful lives to remain at approximately $1.3
million quarterly through 2010, when the new facility is expected to be fully
operational.
 
 Gross
Margin
 Gross
margin increased 6.8 percentage points to 34.5% of net sales in the second
quarter of 2009 from 27.7% of net sales in the second quarter of 2008. 
Approximately 4.7 percentage points of the gross margin improvement was
attributable to the benefit from the termination of the Company’s postretirement
life insurance plan.  In addition, approximately 2.3 percentage points
of improvement resulted from higher product net selling prices while reductions
in ingredient and packaging costs accounting for 1.6 percentage points of gross
margin improvement.  Partially offsetting these improvements were the
impact of higher depreciation expense and other employee related
costs.
 
 Selling,
General and Administrative Expenses
 Selling,
general and administrative expense in the second quarter of 2009 increased $0.4
million versus the comparable period in 2008.  This increase was mainly
attributable to $1.0 million in higher employee related costs, resulting from
increases in accrued incentive compensation, equity based compensation and
pension related expenses.  Also, contributing to the increase in selling,
general and administrative expenses versus the prior year was $0.3 million in
non-cash rental expense associated with the new corporate office space at the
Philadelphia Navy Yard and a $0.3 million increase in bad debt expense. 
These higher costs were only partially offset by an approximate $1.5 million
benefit resulting from the termination of the Company’s postretirement life
insurance plan in the second quarter of 2009.  When measured as a
percentage of net sales, selling, general and administrative expenses declined
to 26.4% of net sales in the second quarter of 2009 compared to 26.9% in the
second quarter of 2008.
  -21-
 
 Interest
Expense
 Interest
expense remained relatively constant at $0.5 million for the second quarter of
both 2009 and 2008.  The Company is exposed to market risk relative to
its interest expense as certain of its notes payable and long-term debt have
floating interest rates that vary with the conditions of the credit
market.
 
 Other
Income, Net
 Other
income, net, remained relatively constant at $0.2 million for the second quarter
of both 2009 and 2008.
 
 Taxes
 The
effective income tax rate for state and federal taxes was 31.8% and (200.0%) for
the thirteen weeks ended June 27, 2009 and June 28, 2008,
respectively.  During the second quarter of 2009, the Company
favorably settled a state tax matter that resulted in discrete tax benefits of
approximately $454 thousand which served to reduce the Company’s effective
income tax rate from 45.0% to 31.8%.  For the second quarter of 2008,
the Company recorded $0.1 million, in non-recurring discrete expense items
related to the write-off of charitable contribution carryforwards.
 
 For
the Twenty-six Weeks ended June 27, 2009 and June 28, 2008
 
 Overview
 Net
income, for the twenty-six weeks ended June 27, 2009 was $2.3 million or $0.27
per fully-diluted share compared to a net loss of $0.9 million or $0.11 per
fully-diluted share for the comparable period in 2008.  Net income for
the twenty-six weeks ended June 27, 2009 included the impact of the Company’s
decision to terminate its postretirement life insurance plan which resulted in
approximately $2.1 million of income after-tax.  Additionally, net
income for 2009 and 2008 was net of $1.6 million, or approximately $0.20 per
common share, of accelerated depreciation, after-tax, resulting from the change
in the estimated useful lives of certain assets at the Company’s Philadelphia
operations in the second quarter of fiscal 2007.  The change in
estimated useful lives resulted from the Company’s plans to move from its
present facilities.
 
 Sales
 Gross
sales increased 9.9% in the twenty-six weeks ended June 27, 2009 compared to the
same period in 2008 on a volume increase of 2.7%.  Net sales in the first
twenty-six weeks of 2009 increased 6.5% compared to the prior year period. 
This growth was driven by a 7.3% increase in Route net sales, which benefited
from balanced growth across all major product categories, and increased selling
prices versus the same period a year ago.  Non-Route net sales grew 4.1% in
the twenty-six weeks ended June 27, 2009 compared to the same period in the
prior year driven primarily by increased sales volume to direct retailers as
well as the impact from higher selling prices.
 
 Cost
of Sales
 Cost of
sales for the twenty-six weeks ended June 27, 2009 declined 1.1% or $0.6 million
on a volume increase of 2.7% compared to the same period of 2008.  This
decline in the cost of sales was driven by approximately $2.2 million benefit
recorded in connection with the Company’s termination of its postretirement life
insurance plan in the second quarter of 2009 as well as a $0.7 million decline
in costs for key ingredients and packaging.  These benefits were
largely offset by higher costs associated with the increase in sales volumes in
addition to an increase in other fixed and variable manufacturing expenses as
compared to the prior year period.
 
 During the
second quarter of 2009, the Company terminated its postretirement life insurance
plan.  As a result of this plan termination, the Company recorded
approximately $3.7 million in income in the second quarter of 2009.
Approximately $2.2 million or 60% of this benefit was recorded in cost of sales,
with the remainder recorded as a component of selling, general and
administrative expense.
  -22-
 
 Depreciation
 Depreciation
expense increased $0.5 million to $6.6 million in the first half of fiscal 2009
from $6.1 million in the first half of fiscal 2008.  Included in
depreciation expense for the first half of both fiscal 2009 and 2008 is
approximately $2.6 million of depreciation related to the change in the useful
lives of certain assets at the Company’s Philadelphia operations which will not
be relocated to the new facility.  The Company expects incremental
depreciation resulting from the change in useful lives to remain at
approximately $5.2 million annually through June 2010, when the new facility is
expected to be fully operational.
 
 Gross
Margin
 Gross
margin increased 4.6 percentage points to 31.3% of net sales during the first
twenty-six weeks of 2009 compared to the same period in 2008. 
Approximately 2.4 percentage points of this gross margin improvement was driven
by the benefit from the termination of the Company’s postretirement life
insurance plan.  In addition, approximately 3.3 percentage points of
gross margin improvement was attributable to higher product net selling
prices.  Partially offsetting these improvements were higher
depreciation expense as well as increased other fixed and variable manufacturing
costs.
 
 Selling,
General and Administrative Expenses
 Selling,
general and administrative expense for the twenty-six weeks ended June 27, 2009
increased $1.1 million.  The largest driver of this increase was
approximately $1.7 million in higher employee related costs resulting from
increases in accrued incentive compensation, equity based compensation and
pension related expenses.  Other drivers of the increase were $0.3 million
in non-cash rental expense associated with the new corporate office space at the
Philadelphia Navy Yard and a $0.4 million increase in bad debt expense. 
These increases were partially offset by a benefit of approximately $1.5 million
due to the termination of the Company’s postretirement life insurance plan in
the second quarter of 2009.  Selling, general and administrative expenses
declined to 26.9% of net sales in the twenty-six weeks ended June 27, 2009 from
27.5% of net sales during the same period in 2008.
 
 Interest
Expense
 Interest
expense increased by $0.2 million to $1.2 million for the twenty-six weeks ended
June 27, 2009 from $1.0 million for the comparable period in 2008, primarily due
to increased interest expense associated with borrowings related to expenditures
for the Company’s new manufacturing facility.   The Company is
exposed to market risk relative to its interest expense as certain of its notes
payable and long-term debt have floating interest rates that vary with the
conditions of the credit market.
 
 Other
Income, Net
 Other
income, net, remained relatively constant at $0.4 million for the twenty-six
weeks ended June 27, 2009 compared to the same period in 2008.
 
 Taxes
 The
effective income tax rate was 32.1% and 29.0% for the twenty-six weeks ended
June 27, 2009 and June 28, 2008, respectively.  During the twenty-six
weeks ended June 27, 2009, the Company favorably settled a state tax matter that
resulted in discrete tax benefits of approximately $454 thousand which served to
reduce the Company’s effective income tax rate from 45.7% to
32.1%.  For the twenty-six weeks ended June 27, 2008, the Company
recorded $0.1 million in non-recurring discrete expense items related to the
write-off of charitable contribution carryforwards.
 
 Liquidity
and Capital Resources
 
 Current
assets as of June 27, 2009 were $35.0 million compared to $34.7 million as of
December 27, 2008, and current liabilities as of June 27, 2009 were $27.1
million compared to $23.7 million as of December 27, 2008.   The
$3.4 million increase in current liabilities was primarily due to the
reclassification of the restructuring reserve related to post employment
benefits associated with the relocation of the Company’s Philadelphia
operations, totaling $1.7 million from non-current liabilities.  In
addition, current liabilities increased as a result of an increase of $1.0
million in accrued employee related costs and an increase in accounts payable of
$1.1 million resulting primarily from obligations related to the construction of
the Company’s new manufacturing and distribution facility.
 
 During
2009, the Company expects to make payments on its long-term debt and capital
lease obligations incurred in connection with the Company’s new manufacturing
and distribution facility of approximately $1.8 million.  During the
twenty-six weeks ended June 27, 2009, the Company made payments on long-term
debt and capital lease obligations of approximately $0.9 million.  In
addition, during fiscal 2009 the Company is required, under the Pension
Protection Act of 2006, to make $2.4 million in quarterly cash contributions of
$0.6 million each to the DB Plan.  The Company has made cash
contributions totaling $1.2 million to the frozen DB Plan during the twenty-six
weeks ended June 27, 2009.
  -23-
 
 In May
2007, the Company announced that as part of its comprehensive operational review
of strategic manufacturing alternatives, it entered into an agreement to
relocate its Philadelphia operations to the Philadelphia Navy
Yard.  The bakery lease agreement provides for a 26-year lease for a
345,500 square foot bakery, warehouse and distribution center located on
approximately 25 acres.  Construction of the facility is underway and
is expected to be substantially complete by the end of 2009.  The
Company expects the new facility to be fully operational in 2010.  The
lease provides for no rent payments in the first year of
occupancy.  Rental payments increase from $3.5 million in the second
year of occupancy to $7.2 million in the final year of the lease.  In
accordance with FASB Statement No. 13, Accounting for Leases(“FAS13”),
the Company will recognize the rental expenses associated with
the operating lease on a straight-line basis over the term of the
agreement.
 
 As part of
this initiative, the Company also entered into a 16-year agreement for $9.5
million in financing at a fixed rate of 8.54% to be used for leasehold
improvements.  This agreement provides for no principal or interest
payments in the first year of occupancy and then requires equal monthly payments
of principal and interest aggregating to $1.2 million annually over the
remainder of the term.
 
 The
Company also entered into an agreement to relocate its corporate headquarters to
the Philadelphia Navy Yard.  This lease agreement provides for
approximately 36,000 square feet of office space.  Construction of the
office space is complete and during April 2009, the Company relocated its
corporate headquarters to the Philadelphia Navy Yard.  The lease,
which commenced in April 2009, will end at the same time as the new bakery
lease.  The lease provides for no rent payments in the first six
months of occupancy.  Rental payments increase from approximately $0.9
million in the second year of occupancy to approximately $1.5 million in the
final year of the lease.  In accordance with FAS 13, the Company will
recognize the rental expenses associated with the agreement on a straight-line
basis over the term of the agreement.
 
 In
connection with these agreements, the Company provided a $1.1 million letter of
credit, which increased to $8.1 million in the beginning of 2009.  The
outstanding amount of the letter of credit will be reduced starting in 2026 and
will be eliminated by the end of the lease term.  As of June 27, 2009,
the outstanding letter of credit under this arrangement totaled $8.1
million.
 
 In
connection with these agreements and the related construction of the new
facilities, the Company provided an additional $0.5 million letter of credit,
which increased to $5.6 million in the first quarter of 2009.  The
outstanding amount of the letter of credit will be eliminated in August
2009.  As of June 27, 2009, the outstanding letter of credit under
this arrangement totaled $5.2 million.
 
 In
addition to the facility leases, the Company is purchasing high-tech, modern
baking equipment.  This equipment is designed to increase product
development flexibility and efficiency, while maintaining existing taste and
quality standards.  The investment for this project, in addition to
any costs associated with the agreements described above, is projected to be
approximately $75.0 million through 2010.  In September 2007, the
Company closed on a multi-bank credit facility and low-interest development
loans provided in part by the Commonwealth of Pennsylvania and the Philadelphia
Industrial Development Corporation to finance this investment and refinance the
Company’s existing revolving credit facilities, as well as to provide for
financial flexibility in running the ongoing operations and working capital
needs.
 
 Cash
and Cash Equivalents
 
 Historically,
the Company has been able to generate sufficient amounts of cash from
operations.  Bank borrowings are used to supplement cash flow from
operations during periods of cyclical shortages.  The Company
maintains a Bank Credit Facility, a PIDC Credit Facility, a MELF Loan 1 and a
MELF Loan 2, as defined below, and utilizes certain capital and operating
leases.
 
 Cash
overdrafts are recorded within current liabilities.  Cash flows
associated with cash overdrafts are classified as financing
activities.
 
 In
September 2007, the Company entered into a 5 year, $100.0 million secured credit
facility with 4 banks (the “Bank Credit Facility”), consisting of a $55.0
million fixed asset line of credit, a $35.0 million working capital revolver and
a $10.0 million low-interest loan from the agent bank with the Commonwealth of
Pennsylvania.  The Bank Credit Facility is secured by a blanket lien
on the Company’s assets and contains various non-financial and financial
covenants, including a fixed charge coverage covenant, a maximum operating
leverage ratio covenant, a minimum liquidity ratio covenant and minimum level of
earnings before interest, taxes, depreciation and amortization (“EBITDA”)
covenant.  Interest rates for the fixed asset line of credit and
working capital revolver are indexed to LIBOR and include a spread above that
index from 125 to 325 basis points based upon the Company’s ratio of debt to
EBITDA.  The fixed asset line of credit and the working capital
revolver include commitment fees from 20 to 50 basis points based upon the
Company’s ratio of debt to EBITDA.  The $10.0 million low-interest
loan bears interest at a fixed rate of 5.5% per annum.  In October
2008, the Company amended its Bank Credit Facility to provide for additional
flexibility and to change certain financial covenants, including the minimum
EBITDA requirement as of December 27, 2008 and the maximum operating leverage
ratio as of September 27, 2008 and December 27, 2008 which was necessary to
eliminate an instance of non-compliance.
  -24-
 
 In
September 2007, the Company entered into a 10 year, $12.0 million secured credit
agreement with the PIDC Local Development Corporation (“PIDC Credit
Facility”).  This credit facility bears interest at a blended fixed
rate of 4.5% per annum, participates in the blanket lien on the Company’s assets
and contains customary representations and warranties as well as customary
affirmative and negative covenants essentially similar to those in the Bank
Credit Facility, as amended in October 2008.  Negative covenants
include, among others, limitations on incurrence of liens and secured
indebtedness by the Company and/or its subsidiaries, other than in connection
with the Bank Credit Facility and the MELF Loan 1 and the MELF Loan 2, as
defined below.
 
 In
September 2007, the Company entered into a 10 year, $5.0 million Machinery and
Equipment Loan Fund secured loan with the Commonwealth of Pennsylvania (“MELF
Loan 1”).  This loan bears interest at a fixed rate of 5.0% per annum
and contains customary representations and warranties as well as customary
affirmative and negative covenants similar to those in the Bank Credit Facility,
as amended in October 2008.  Negative covenants include, among others,
limitations on incurrence of liens and secured indebtedness by the Company,
other than in connection with the Bank Credit Facility and the PIDC Credit
Facility. In September 2008, the Company entered into a second 10 year, $5.0
million Machinery and Equipment Loan Fund secured loan with the Commonwealth of
Pennsylvania (“MELF Loan 2”).  The terms and conditions of MELF Loan 2
are substantially the same as MELF Loan 1.  The Company borrowed $5.0
million under MELF Loan 2 in October 2008.
 
 As of June
27, 2009, the Company was in compliance with the various non-financial and
financial covenants included in the Bank Credit Facility, the PIDC Credit
Facility, the MELF Loan 1 and the MELF Loan 2.
 
 In
September 2007, the Company entered into an agreement which governs the shared
collateral positions under the Bank Credit Facility, the PIDC Credit Facility,
the MELF Loan 1 and the MELF Loan 2 (the “Intercreditor Agreement”), and
establishes the priorities and procedures that each lender has in enforcing the
terms and conditions of each of their respective agreements.  The
Intercreditor Agreement permits the group of banks and their agent bank in the
Bank Credit Facility to have the initial responsibility to enforce the terms and
conditions of the various credit agreements, subject to certain specific
limitations, and allows such bank group to negotiate amendments and waivers on
behalf of all lenders, subject to the approval of each lender.
 
 In order
to hedge a portion of the Company’s exposure to changes in interest rates on
debt associated with the Company’s new manufacturing facilities, the Company
entered into certain variable-to-fixed interest rate swap contracts to fix the
interest rates on a portion of its variable interest rate debt.  In
January 2008, the Company entered into an $8.5 million notional value interest
rate swap contract that increases to $35.0 million by April 2010 with a fixed
LIBOR rate of 3.835% that expires on September 5, 2012.  As of June
27, 2009, the notional value of the swap was $8.5 million.  The LIBOR
rates were subject to an additional credit spread which could range from 125
basis points to 325 basis points and was equal to 325 basis points as of June
27, 2009.  The Company records as an asset or liability the cumulative
change in the fair market value of the derivative instrument, and as of June 27,
2009, the Company recorded a liability of $1.6 million.
 
 In May
2008, the Company entered into an $8.0 million notional value interest rate swap
with a fixed LIBOR rate of 2.97% that expires on May 1, 2011.  The
LIBOR rates are subject to an additional credit spread which could range from
125 basis points to 325 basis points and was equal to 325 basis points as of
June 27, 2009.  The Company records, as an asset or liability, the
cumulative change in the fair market value of the derivative instrument, and as
of June 27, 2009, the Company recorded a liability of $0.3 million.
 
 Net cash
used for investing activities for the twenty-six weeks ended June 27, 2009
totaled $29.7 million, primarily due to capital expenditures related to
investments in the Company’s new manufacturing and distribution
facility.
 
 Net cash
from financing activities for the twenty-six weeks ended June 27, 2009 totaled
$22.8 million, which included a $23.3 million increase in long-term debt
primarily due to financing the Company’s new manufacturing and distribution
facility.
 
 The
Company currently anticipates that for the foreseeable future cash flow from
operations, along with the continued availability under the Bank Credit
Facility, the PIDC Credit Facility, the MELF Loan 1 and the MELF Loan 2 will
provide sufficient cash to meet operating and financing
requirements.
  -25-
 
 New
Accounting Pronouncements
 
 Refer to
Note 1 of the Notes to condensed consolidated financial statements, included
herein, for a discussion of new accountingpronouncements.
 
 Critical
Accounting Policies and Estimates
  Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
based on the condensed consolidated financial statements and accompanying notes
that have been prepared in conformity with GAAP. The preparation of such
condensed consolidated financial statements 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.
  Included
in the Company’s Annual Report on Form 10-K for fiscal 2008 (“2008 Form 10-K”)
are the significant accounting policies of the Company, which are described in
Note 1 to the consolidated financial statements, and the critical accounting
estimates, which are described in the Management’s Discussion and Analysis of
Financial Condition and Results of Operations in the 2008 Form
10-K.  Information concerning the Company’s implementation and impact
of new accounting standards is included in Note 1 of the condensed consolidated
financial statements included herein.  Otherwise, there were no
changes in the Company’s critical accounting policies and estimates in the
second quarter of 2009 which had a material impact on the Company’s financial
condition, change in financial condition, liquidity or results of
operations.
 
 Forward-Looking
Statements
 
 Statements
contained in this Quarterly Report on Form 10-Q, including but not limited to
those under the heading  “Management’s Discussion and Analysis,”
contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, and are subject to the safe harbor
created by that Act.  Such forward-looking statements are based upon
assumptions by management, as of the date of this Report, including assumptions
about risks and uncertainties faced by the Company.  These
forward-looking statements can be identified by the use of words such as
"anticipate,'' "believe,'' "could,'' "estimate,'' "expect,'' "intend,'' "may,''
"plan,'' "predict,'' "project,'' "should,'' "would,'' "is likely to,'' or "is
expected to'' and other similar terms.  They may include comments
about relocating operations and the funding thereof, legal proceedings,
competition within the baking industry, concentration of customers, commodity
prices, consumer preferences, long-term receivables, inability to develop brand
recognition in the Company’s expanded markets, production and inventory
concerns, employee productivity, availability of capital, fluctuation in
interest rates, pension expense and related assumptions, changes in long-term
corporate bond rates or asset returns that could affect the pension corridor
expense or income, governmental regulations, protection of the Company’s
intellectual property and trade secrets and other statements contained herein
that are not historical facts.
 
 Because
such forward-looking statements involve risks and uncertainties, various factors
could cause actual results to differ materially from those expressed or implied
by such forward-looking statements, including, but not limited to, changes in
general economic or business conditions nationally and in the Company’s primary
markets, the availability of capital upon terms acceptable to the Company, the
availability and pricing of raw materials, the level of demand for the Company’s
products, the outcome of legal proceedings to which the Company is or may become
a party, the actions of competitors within the packaged food industry, changes
in consumer tastes or eating habits, the success of business strategies
implemented by the Company to meet future challenges, the costs to lease and
fit-out a new facility and relocate thereto, the costs and availability of
capital to fund improvements or new facilities and equipment, the retention of
key employees, and the ability to develop and market in a timely and efficient
manner new products which are accepted by consumers.  If any of our
assumptions prove incorrect or should unanticipated circumstances arise, our
actual results could differ materially from those anticipated by such
forward-looking statements.  The differences could be caused by a
number of factors or combination of factors, including, but not limited to,
those factors described in the Company’s 2008 Form 10-K, “Item 1A, Risk
Factors.”  There can be no assurance that the new manufacturing
facility described herein will be successful.  The Company undertakes
no obligation to publicly revise or update such forward-looking statements,
except as required by law.  Readers are advised, however, to consult
any further public disclosures by the Company (such as in the Company’s filings
with the SEC or in Company press releases) on related subjects.
  -26-
 
 Item 3. Quantitative and Qualitative
Disclosures about Market Risk
 
 Not
required for smaller reporting companies.
 
 Item
4.            Controls and
Procedures
 
 (a) Evaluation of Disclosure Controls
and Procedures
 
 The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company’s reports filed or
submitted pursuant to the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and
forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure at a reasonable assurance
level that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure.
 
 Management
of the Company, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of the Company’s
disclosure controls and procedures (as defined in the Exchange Act Rule
13a-15(e)) as of June 27, 2009.  Based upon the evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of June 27,
2009.
  (b)
Changes in Internal Control over Financial Reporting
 During the
thirteen weeks ended June 27, 2009, there have been no changes in the Company’s
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
  -27-




TASTY
BAKING COMPANY AND SUBSIDIARIES
 
 PART
II.  OTHER INFORMATION
 
 Item 4.Submission of Matters to a
Vote of Security Holders
 
 (a)
              The
      Company’s annual meeting of shareholders was held on May 11,
      2009.
 
 (b)
              The
      directors elected at the meeting
were:
  For
                                  
                                  
                                  Withheld
                                  
                                  
                                  AbstainRonald
      J. Kozich
                                  
                                  
                                  6,981,771
                                  
                                  
                                  
                                  127,088
                                  
                                  
                                  
                                  -James
      E. Ksansnak
                                  
                                  
                                  6,973,228
                                  
                                  
                                  
                                  135,631
                                  
                                  
                                  
                                  -Charles
      P. Pizzi
                                  
                                  
                                  6,969,329
                                  
                                  
                                  
                                  139,530
                                  
                                  
                                  
                                  -
 
 Other
      directors whose terms of office continued after the meeting were as
      follows:  Mark G. Conish, James C. Hellauer, James E. Nevels,
      Mark T. Timbie, Judith M. von Seldeneck and David J.
  West.
 
 (c)
              Other
      matters voted upon at the meeting and the results of the votes were as
      follows:
  BrokerFor
                                      
                                      
                                      Against
                                      
                                      
                                      Abstain
                                      
                                      
                                      Non-VotesRatification
      of PricewaterhouseCoopers LLP asindependent
      registered public accounting firmfor
      the fiscal year ending December 26, 2009
                                      
                                      
                                      7,049,281
                                      
                                      
                                      
                                      50,415
                                      
                                      
                                      
                                      9,163
                                      
                                      
                                      
                                      -
 
 Item 5.      Other Information
  On May 16,
2009, approximately 60 maintenance employees in the Philadelphia manufacturing
facility ratified a labor agreement, effective June 1, 2009, which did not have
a material impact on the financial results of the Company.
  Item 6.Exhibits
  (a) Exhibits:
 Exhibit 31
(a) – Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
 
 Exhibit 31
(b) – Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
 
 Exhibit
32      – Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
  -28-
  TASTY
BAKING COMPANY AND SUBSIDIARIES
 
 SIGNATURE
 
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
   TASTY BAKING COMPANY(Company)August 3,
      2009
                                    /s/ Paul D. Ridder(Date)
                                    PAUL
      D. RIDDERSENIOR
      VICE PRESIDENTANDCHIEF
      FINANCIAL OFFICER(Principal
      Financial andAccounting
      Officer)







-29-