UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

(Mark one)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2008ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                        to


Commission file number 001-32596

REDDY ICE HOLDINGS, INC.(Exact name of registrant as specified in its charter)

DELAWARE(State or other jurisdiction of
incorporation or organization)

56-2381368(I.R.S. Employer Identification No.)8750 N. CENTRAL EXPRESSWAY, SUITE 1800
DALLAS, TEXAS 75231(Address of principal executive offices)

(214) 526-6740(Registrant'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 Exchange Act 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 ý No o

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

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

The number of shares of registrant's common stock outstanding as of August 6, 2008 was 22,029,995.



---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2008
TABLE OF CONTENTS

PagePART IFINANCIAL INFORMATIONItem 1.

Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 (unaudited)


2Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007 (unaudited)


3Condensed Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2008 (unaudited)


4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (unaudited)


5Notes to the Condensed Consolidated Financial Statements


6Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations


21Item 3.

Quantitative and Qualitative Disclosures about Market Risk


38Item 4.

Controls and Procedures


39PART IIOTHER INFORMATIONItem 1.

Legal Proceedings


40Item 1A.

Risk Factors


42Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds


44Item 3.

Defaults Upon Senior Securities


44Item 4.

Submission of Matters to a Vote of Security Holders


44Item 5.

Other Information


45Item 6.

Exhibits


45SIGNATURES


46INDEX TO EXHIBITS


47


1

---





PART IFINANCIAL INFORMATION

Item 1.    Financial Statements

REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

June 30,
2008

December 31,
2007(in thousands,
except share amounts)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
24,222

$
17,183Accounts receivable, net


49,517


27,268Inventories, parts and supplies


14,245


10,709Prepaid expenses and other current assets


3,196


3,434Deferred tax assets


2,257


2,382Total current assets


93,437


60,976RESTRICTED CASH AND CASH EQUIVALENTS


4,578


17,262PROPERTY AND EQUIPMENT, net


218,808


220,673GOODWILL


229,173


226,591OTHER INTANGIBLES, net


79,704


81,744OTHER ASSETS


261


314TOTAL

$
625,961

$
607,560LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Current portion of long-term obligations

$


$
20Revolving credit facility


16,000


Accounts payable


22,834


16,371Accrued expenses


18,352


18,294Dividends payable


9,253


9,240Total current liabilities


66,439


43,925LONG-TERM OBLIGATIONS


385,495


378,238DEFERRED TAXES AND OTHER LIABILITIES, net


48,966


45,415COMMITMENTS AND CONTINGENCIES (Note 12)





STOCKHOLDERS' EQUITY:Common stock: $0.01 par value; 75,000,000 shares authorized; 22,029,995 and 21,999,995 shares issued and outstanding at June 30, 2008 and December 31, 2007,
respectively


220


220Additional paid-in capital


222,396


220,679Accumulated deficit


(96,197
)

(80,052
)Accumulated other comprehensive loss


(1,358
)

(865
)Total stockholders' equity


125,061


139,982TOTAL

$
625,961

$
607,560


See
notes to condensed consolidated financial statements.

2

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended June 30,

Six Months Ended June 30,2008

2007

2008

2007(in thousands, except per share amounts)Revenues

$
102,687

$
103,612

$
145,722

$
149,049Cost of sales (excluding depreciation)


62,497


60,958


99,785


97,681Depreciation expense related to cost of sales


5,297


4,920


10,447


9,769Gross profit


34,893


37,734


35,490


41,599Operating expenses


12,054


10,906


22,891


21,278Depreciation and amortization expense


1,656


1,511


3,297


2,973Cost of antitrust investigations and related litigation (Note 12)


4,615





5,802


Transaction costs related to merger agreement (Note 1)


138





949


Loss on dispositions of assets


244


135


240


258Gain on property insurance settlement


(1,036
)




(1,036
)

Income from operations


17,222


25,182


3,347


17,090Interest expense


(7,934
)

(8,048
)

(15,830
)

(15,581
)Interest income


181


118


464


334Gain on termination of merger agreement (Note 1)








17,000


Income before income taxes


9,469


17,252


4,981


1,843Income tax expense


(3,811
)

(6,800
)

(2,634
)

(1,361
)Income from continuing operations


5,658


10,452


2,347


482Income (loss) from discontinued operations, net of tax (Note 3)





169





(69
)Net income

$
5,658

$
10,621

$
2,347

$
413Basic net income per share:Income from continuing operations

$
0.26

$
0.48

$
0.11

$
0.02Income (loss) from discontinued operations





0.01





Net income

$
0.26

$
0.49

$
0.11

$
0.02Weighted average common shares outstanding


22,000


21,717


22,000


21,702Diluted net income per share:Income from continuing operations

$
0.26

$
0.47

$
0.11

$
0.02Income (loss) from discontinued operations





0.01





Net income

$
0.26

$
0.48

$
0.11

$
0.02Weighted average common shares outstanding


22,012


21,957


22,024


21,936Cash dividends declared per share

$
0.42

$
0.42

$
0.84

$
0.82


See
notes to condensed consolidated financial statements.

3

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)

Common StockAccumulated
Other
Comprehensive
IncomeNumber
of
Shares

Par
Value

Additional
Paid-In
Capital

Retained
Earnings
(Deficit)

Total(in thousands)Balance at January 1, 2008


22,000

$
220

$
220,679

$
(80,052
)
$
(865
)
$
139,982Compensation expense related to stock-based awards








1,717








1,717Cash dividends declared











(18,492
)




(18,492
)Issuance of restricted stock


30














Comprehensive income:Net income











2,347





2,347Change in fair value of derivative














(493
)

(493
)Total comprehensive income

















1,854Balance at June 30, 2008


22,030

$
220

$
222,396

$
(96,197
)
$
(1,358
)
$
125,061


See
notes to condensed consolidated financial statements.

4

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended
June 30,2008

2007(in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
2,347

$
413Adjustments to reconcile net income to net cash provided by operating activities (excluding working capital from acquisitions):Depreciation and amortization expense


13,744


13,365Amortization of debt issue costs and debt discount


7,986


7,279Loss on dispositions of assets


240


258Gain on property insurance settlement


(1,036
)

Stock-based compensation expense


1,717


2,217Deferred taxes


2,147


972Change in assets and liabilities, net of the effects of acquisitions:Accounts receivable, inventory and prepaid expenses


(25,848
)

(26,152
)Accounts payable, accrued expenses and other


6,462


(285
)Net cash provided by (used in) operating activities


7,759


(1,933
)CASH FLOWS FROM INVESTING ACTIVITIES:Property and equipment additions


(10,134
)

(11,007
)Proceeds from dispositions of property and equipment


1,467


766Cost of acquisitions


(3,750
)

(18,797
)Proceeds from property insurance settlement


1,496


Decrease in restricted cash and cash equivalents


12,684


Collection of note receivable


16


13Net cash provided by (used in) investing activities


1,779


(29,025
)CASH FLOWS FROM FINANCING ACTIVITIES:Cash dividends paid


(18,479
)

(17,654
)Borrowings under the credit facility, net


16,000


21,200Repayment of long-term obligations


(20
)

(27
)Net cash provided by (used in) financing activities


(2,499
)

3,519NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


7,039


(27,439
)CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD


17,183


39,434CASH AND CASH EQUIVALENTS, END OF PERIOD

$
24,222

$
11,995SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash payments for interest

$
8,244

$
8,263Cash receipts of interest income

$
474

$
455Cash paid for income taxes

$
678

$
15Borrowings under the credit facility

$
43,300

$
42,000Repayments on the credit facility

$
(27,300
)
$
(20,800
)Cash dividends declared, not paid

$
9,253

$
9,268Decrease in fair value of derivative

$
(493
)
$
(936
)Additions to property and equipment included in accounts payable

$
1,320

$
5,458


See notes to condensed consolidated financial statements.

5

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

1.    General

The condensed consolidated financial statements of Reddy Ice Holdings, Inc. included herein are unaudited; however, the balance sheet as of December 31, 2007 has been
derived from the audited financial statements for that date. These financial statements have been prepared by the Company pursuant to the applicable rules and regulations of the Securities and
Exchange Commission ("SEC"). Under the SEC's regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted. All significant intercompany balances and transactions have been eliminated upon consolidation, and all adjustments
which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods covered have been made and are of a normal
and recurring nature. The financial statements included herein should be read in conjunction with the consolidated financial statements and the related notes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 2007. Operating results for the six months ended June 30, 2008 are not necessarily indicative of the results to be
achieved for the full year.

Reddy
Ice Holdings, Inc. ("Reddy Holdings"), and its wholly-owned subsidiary, Reddy Ice Corporation ("Reddy Corp."), referred to collectively as the "Company", manufacture and
distribute packaged ice products. The Company is the largest manufacturer of packaged ice products in the United States and serves approximately 82,000 customer locations in 31 states and the District
of Columbia.

On
July 2, 2007, the Company announced that it had entered into an Agreement and Plan of Merger, dated as of July 2, 2007 (the "Merger Agreement"), by and among Reddy Ice
Holdings, Inc. and certain affiliates of GSO Capital Partners LP ("GSO"). The Merger Agreement provided for the acquisition of the Company's outstanding common stock for a cash purchase
price of $31.25 per share. The Company's stockholders approved the transaction at a special stockholder meeting on October 12, 2007.

On
January 31, 2008, the Company reached an agreement with affiliates of GSO to terminate the Merger Agreement. A settlement agreement (the "Settlement Agreement") was entered
into which released all parties from any claims related to the contemplated acquisition and provided for a $21 million termination fee to be paid by GSO. The Company agreed to pay up to
$4 million of fees and expenses incurred by GSO and its third-party consultants in connection with the transaction. The Company received a net payment of $17 million on
February 5, 2008. During the three and six months ended June 30, 2008, the Company incurred $0.1 million and $0.9 million, respectively, of other expenses in connection
with the transaction and the related stockholder litigation (see Note 12).

2.    New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements". SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value estimates. Adoption of this
standard on January 1, 2008 had no impact on the Company's results of operations and financial position.

6

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

2.    New Accounting Pronouncements (Continued)

In
February 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 157-2 which delayed the effective date of SFAS No. 157 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, to fiscal years beginning after November 15, 2008.
The Company elected to defer the adoption of SFAS No. 157 for its nonfinancial assets and nonfinancial liabilities until January 1, 2009.

The
following tables present the assets and liabilities as of June 30, 2008 that are measured at fair value on a recurring basis and are categorized using the fair value
hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

Fair
Value

Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)(in millions)AssetsnoneLiabilitiesinterest rate hedge

$
2.3




$
2.3





The
interest rate hedge was valued using the income approach to calculate the present value of the future cash flows expected to be paid under the interest rate hedge.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an Amendment of FASB Statement No. 115".
SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective
is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Adoption of this standard on January 1, 2008 had no
impact on the Company's results of operations and financial position as it elected not to remeasure any of its financial assets or liabilities at fair value.

On
June 14, 2007, the FASB reached consensus on EITF Issue No. 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards". EITF
No. 06-11 requires that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified
nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase to additional paid-in capital. The amount recognized in
additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on
share-based payment awards. EITF No. 06-11 is effective for fiscal years beginning on or after December 15, 2007. Adoption of this standard on January 1, 2008 had no
impact on the Company's results of operations and financial position.

In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations". SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business
combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. SFAS No. 141(R)
significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent

7

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

2.    New Accounting Pronouncements (Continued)

consideration,
preacquisition contingencies, transaction costs and restructuring costs. In addition, under SFAS No. 141(R), changes in an acquired entity's deferred tax assets and uncertain tax
positions after the measurement period will impact income tax expense. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. The Company is currently
evaluating the impact that this standard may have on its results of operations and financial position.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities". SFAS No. 161 will require enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations
and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and
interim periods beginning after November 15, 2008. Adoption of this standard on January 1, 2009 is not expected to have any impact on the Company's results of operations and financial
position.

In
April 2008, the FASB issued FSP No. FAS 142-3, "Determination of the Useful Life of Intangible Assets". This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible Assets". FSP No.
FAS 142-3 is effective for fiscal years beginning on or after December 15, 2008 and will applied only to intangible assets acquired after the effective date. The Company is
currently evaluating the impact that this standard may have on its results of operations and financial position.

In
June 2008, the FASB issued FSP No. EITF 06-3-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities". This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share ("EPS") under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, "Earnings per Share". FSP No.
EITF 06-3-1 is effective for fiscal years beginning on or after December 15, 2008. All prior period EPS data presented after adoption is to be adjusted
retrospectively to conform with the provisions of FSP No. EITF 06-3-1. Adoption of this standard is not expected to have any impact on the Company's results of
operations or financial position.

3.    Discontinued Operations

The Company sold its bottled water business and substantially all of its cold storage business on August 31, 2007 and September 7, 2007, respectively, for total gross cash
proceeds of $20.3 million. These businesses comprised substantially all of the Company's non-ice business segment. The results of

8

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

3.    Discontinued Operations (Continued)

these
businesses are presented as "Discontinued Operations" in the consolidated statements of operations. Further information related to these discontinued operations is as follows:

Three Months Ended
June 30,

Six Months Ended
June 30,2008

2007

2008

2007(in thousands)Revenues of discontinued operations

$


$
2,373

$


$
3,964Income (loss) from discontinued operations before tax

$


$
286

$


$
(110
)Income tax benefit (expense)





(117
)




41Net income (loss) from discontinued operations

$


$
169

$


$
(69
)


The
Company's Senior Credit Facilities require that the net proceeds from the sale of the discontinued operations be used either to repay the outstanding term loan or to make
acquisitions and/or capital expenditures within twelve months of the receipt of such proceeds (see Note 7). Accordingly, the remaining, unutilized net proceeds from the sales are reported as
"Restricted Cash and Cash Equivalents" in the consolidated balance sheet.

4.    Acquisitions

During the six months ended June 30, 2008, the Company purchased six ice companies. Including direct acquisition costs, the total acquisition consideration was
$3.8 million. The total purchase price was allocated to the acquired assets and assumed liabilities based upon estimates of their respective fair values as of the respective closing dates using
valuations and other studies. The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition (dollars in millions):

Total assets acquired

$
1.2Total liabilities assumed


(0.5
)Net assets acquired

$
0.7


The
excess of $3.1 million of the aggregate purchase price over the net assets acquired was allocated to goodwill ($1.9 million) and other intangible assets
($1.2 million). Other intangible assets are comprised of customer lists, which are being amortized on a straight line basis over useful lives of 11 to 30 years.

During
2007, the Company purchased twenty ice companies for total acquisition consideration of $26.8 million. The results of operations of the 2007 and 2008 acquisitions are
included in the Company's consolidated results of operations from the date of each acquisition, which ranged from January 2, 2007 to December 28, 2007 and from February 29, 2008
to April 19, 2008.

The
following unaudited pro forma information presents the Company's consolidated results of operations (i) for the three and six months ended June 30, 2008 as if the 2008
acquisitions had all

9

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

4.    Acquisitions (Continued)

occurred
on January 1, 2008 and (ii) for the three and six months ended June 30, 2007 as if the 2008 and 2007 acquisitions had all occurred on January 1, 2007:

Three Months Ended
June 30,

Six Months Ended
June 30,2008

2007

2008

2007(in thousands, except per share amounts)Pro forma revenues

$
102,717

$
106,933

$
146,025

$
154,025Pro forma net income


5,656


10,520


2,314


367Pro forma basic net income per share


0.26


0.48


0.11


0.02Pro forma diluted net income per share


0.26


0.48


0.11


0.02


5.    Inventories, Parts and Supplies

Inventories consist of raw materials and finished goods. Raw materials are composed of ice packaging material. Finished goods consist of packaged ice. Parts and supplies consist of spare
parts for production equipment and ice merchandisers and miscellaneous supplies. Inventories, parts and supplies are valued at the lower of cost or market and include overhead allocations. Cost is
determined using the first-in, first-out and average cost methods.

June 30,
2008

December 31,
2007(in thousands)Raw materials

$
7,895

$
5,308Finished goods


3,162


2,484Parts and supplies


3,188


2,917Total

$
14,245

$
10,709


6.    Accrued Expenses

June 30,
2008

December 31,
2007(in thousands)Accrued compensation and employee benefits, including payroll taxes and workers compensation insurance

$
4,481

$
5,405Accrued interest


3,012


3,779Accrued utilities


2,622


1,681Accrued property, sales and other taxes and unrecognized tax benefits


4,414


3,131Other accrued insurance


1,972


1,717Other


1,851


2,581Total

$
18,352

$
18,294


10

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

7.    Revolving Credit Facility and Long-Term Obligations

101/2% Senior Discount Notes.On October 27, 2004, Reddy Holdings issued $151 million at maturity of
101/2%Senior Discount Notes due 2012 (the "Discount Notes") in a private placement offering. The Discount Notes were subsequently
registered with the SEC, effective August 26, 2005. Each Discount Note had an initial accreted value of $663.33 per $1,000 principal amount at maturity. The accreted value of each Discount Note
will increase from the date of issuance until November 1, 2008 at a rate of 101/2% per annum such that the accreted value will equal the stated principal amount at maturity on
November 1, 2008. Thereafter, cash interest will accrue and be payable semi-annually at a rate of 101/2% per annum.

The
Discount Notes are unsecured obligations of Reddy Holdings and are:



The
Discount Notes include customary covenants that restrict, among other things, Reddy Holdings' ability to incur additional debt or issue certain preferred stock, pay dividends or
redeem, repurchase or retire its capital stock or subordinated indebtedness, make certain investments, create liens, enter into arrangements that restrict dividends from its subsidiary, merge or sell
all or substantially all of its assets or enter into various transactions with affiliates. From and after November 1, 2008, Reddy Holdings may redeem any or all of the Discount Notes by paying
a redemption premium, which is initially 5.25% of the principal amount at maturity of the notes and declines annually to 0% for the period commencing on November 1, 2010 and thereafter. If
Reddy Holdings experiences a change of control, Reddy Holdings will be required to make an offer to repurchase the Discount Notes at a price equal to 101% of their accreted value, plus accrued and
unpaid interest, if any, to the date of purchase. Reddy Holdings may also be required to make an offer to purchase the senior discount notes with proceeds of asset sales, including the proceeds of the
sale of the Company's non-ice businesses, that are not reinvested in the Company's business or used to repay other indebtedness.

Senior Credit Facilities.On August 12, 2005, the Company amended and restated its credit facilities with a syndicate of banks, financial institutions and
other entities as lenders, including Credit Suisse, Cayman Islands Branch, as Administrative Agent, CIBC World Markets Corp., Bear Stearns Corporate Lending Inc. and Lehman Commercial
Paper, Inc. (the "Credit Facilities"). The Credit Facilities provide for a $60 million revolving credit facility (the "Revolving Credit Facility") and a $240 million term loan
(the "Term Loan"). The Credit Facilities are obligations of Reddy Corp. The Revolving Credit Facility and Term Loan mature on August 12, 2010 and August 12, 2012, respectively.

11

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

7.    Revolving Credit Facility and Long-Term Obligations (Continued)

At
June 30, 2008, the Company had $36.9 million of availability under the Revolving Credit Facility, which was net of an outstanding balance of $16.0 million and
standby letters of credit of $7.1 million. The standby letters of credit are used primarily to secure certain insurance obligations.

Principal
balances outstanding under the Credit Facility bear interest per annum, at the Company's option, at the sum of the base rate plus 0.75% or LIBOR plus 1.75%. The base rate is
defined as the greater of the prime rate (as announced from time to time by the Administrative Agent) or the federal funds rate plus 0.5%. At June 30, 2008, the weighted average interest rate
of borrowings outstanding under the Credit Facility was 4.4%. Interest on base rate loans is payable on the last day of each quarter. Interest on LIBOR loans is payable upon maturity of the LIBOR loan
or on the last day of the quarter if the term of the LIBOR loan exceeds 90 days. The Company also pays a quarterly fee on the average availability under the revolving credit facility at an
annual rate of 0.5%.

The
Revolving Credit Facility and Term Loan do not require any scheduled principal payments prior to their stated maturity dates. Subject to certain conditions, mandatory repayments of
the Revolving Credit Facility and Term Loan (and if the Term Loan is no longer outstanding, mandatory commitment reductions of the Revolving Credit Facility) are required to be made with portions of
the proceeds from (1) asset sales, (2) the issuance of debt securities and (3) insurance and condemnation awards, subject to various exceptions (see Note 3). In the event
of a change in control, as defined in the Credit Facilities, an event of default will occur under the Credit Facilities. Under the Credit Facilities, Reddy Corp. may only pay dividends to Reddy
Holdings if Reddy Corp.'s leverage ratio for the most recently ended fiscal quarter is less than or equal to 3.75 to 1.0. In addition, the Credit Facilities preclude Reddy Corp. from declaring any
dividends if an event of default under the Credit Facilities has occurred and is continuing. In particular, it will be an event of default if Reddy Corp.'s leverage ratio exceeds 4.0 to 1.0 or Reddy
Corp.'s interest coverage ratio is less than 3.25 to 1.0.

The
Credit Facilities contain financial covenants, which include the maintenance of certain financial ratios, as defined in the Credit Facilities, and are collateralized by substantially
all of the Company's assets and the capital stock of its subsidiary. Reddy Holdings guarantees the Credit Facilities and such guarantee is secured by the capital stock of Reddy Corp. At
June 30, 2008, Reddy Corp. was in compliance with these covenants.

Interest Rate Hedging Agreement.Effective September 12, 2005, the Company entered into an interest rate hedging agreement (the "Hedge") to fix the interest
rate on a portion of its Term Loan. The Hedge has a term of three years and ten months and an initial notional balance of $220 million. The notional balance decreases by $20 million on
October 12 of each of the next three years, beginning on October 12, 2006. As of June 30, 2008, the notional balance was $180 million. The Company pays a fixed rate of
4.431% on the notional balance outstanding and receives an amount equal to 3-month LIBOR. Any net payable or receivable amount is settled quarterly. If the Company had been required to
settle the Hedge as of June 30, 2008, it would have paid $2.3 million. In accordance with hedge accounting rules, the fair value of the Hedge is included in the caption "Deferred Taxes
and Other Liabilities, net" in the consolidated balance sheet. Changes in the fair value of the Hedge are recorded as "Other Comprehensive Loss" in the consolidated statement of stockholders' equity.
The Company is exposed to risk of loss in the event of non-performance by the counterparty to the Hedge. The Company does not anticipate non-performance by the counterparty,
however recent dislocations in the credit markets have resulted in greater uncertainty regarding counterparty performance.

12

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

7.    Revolving Credit Facility and Long-Term Obligations (Continued)

At
June 30, 2008 and December 31, 2007, long-term obligations consisted of the following:

June 30,
2008

December 31,
2007(in thousands)Credit FacilityTerm Loan

$
240,000

$
240,000101/2% Senior Discount Notes


150,500


150,500Less: Unamortized debt discount on 101/2% Senior Discount Notes


(5,005
)

(12,262
)Other





20Total long-term obligations


385,495


378,258Less: Current maturities





20Long-term obligations, net

$
385,495

$
378,238


8.    Capital Stock

Common Stock.Reddy Holdings is authorized to issue up to 75,000,000 shares of common stock, par value $0.01 per share. Holders of Reddy Holdings' common stock are
entitled to one vote per share on all matters to be voted on by stockholders and are entitled to receive dividends, if any, as may be declared from time to time by the Board of Directors of Reddy
Holdings. Upon any liquidation or dissolution of Reddy Holdings, the holders of common stock are entitled, subject to any preferential rights of the holders of preferred stock, to receive a pro rata
share of all of the assets remaining available for distribution to stockholders after payment of all liabilities.

Since
August 1, 2005, the board of directors of Reddy Holdings has declared the following dividends on the Company's common stock:

Declaration Date

Record Date

Dividend
Payable Date

Dividend
Per share

Total
DividendAugust 11, 2005

September 30, 2005

October 17, 2005

$0.20788

$4.5 millionDecember 15, 2005

December 30, 2005

January 17, 2006

$0.38250

$8.3 millionMarch 15, 2006

March 31, 2006

April 17, 2006

$0.38250

$8.3 millionJune 15, 2006

June 30, 2006

July 17, 2006

$0.40000

$8.7 millionSeptember 15, 2006

September 29, 2006

October 16, 2006

$0.40000

$8.8 millionDecember 15, 2006

December 29, 2006

January 16, 2007

$0.40000

$8.8 millionMarch 15, 2007

March 30, 2007

April 16, 2007

$0.40000

$8.8 millionJune 15, 2007

June 29, 2007

July 16, 2007

$0.42000

$9.3 millionSeptember 15, 2007

September 28, 2007

October 15, 2007

$0.42000

$9.2 millionDecember 15, 2007

December 31, 2007

January 15, 2008

$0.42000

$9.2 millionMarch 15, 2008

March 31, 2008

April 15, 2008

$0.42000

$9.2 millionJune 15, 2008

June 30, 2008

July 15, 2008

$0.42000

$9.3 million


Preferred Stock.Reddy Holdings is authorized to issue up to 25,000,000 shares of $0.01 par value preferred stock, all of which is currently undesignated and
unissued.

13

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

9.    Employee Benefit Plans

2005 Equity Incentive Plan.On August 8, 2005, the board of directors and stockholders of Reddy Holdings approved the Reddy Ice Holdings, Inc.
Long-Term Incentive and Share Award Plan (the "2005 Equity Incentive Plan"). Under the 2005 Equity Incentive Plan, up to 750,000 shares of common stock may be issued to employees,
directors and certain third parties in connection with various incentive awards, including stock options, restricted shares and restricted share units. On October 18, 2005, Reddy Holdings filed
a Registration Statement on Form S-8 with the SEC to cover the reoffer and resale of up to 750,000 shares of Reddy Holdings' common stock that Reddy Holdings may issue in the future
to participants in the 2005 Equity Incentive Plan. On May 17, 2007, the Company's stockholders approved amendments to the 2005 Equity Incentive Plan that, among other things, increased the
maximum number of shares of common stock available for issuance to 1,250,000. On May 6, 2008, Reddy Holdings filed a Registration Statement on Form S-8 with the SEC to cover
the reoffer and resale of the additional 500,000 shares of Reddy Holdings' common stock that Reddy Holdings may issue in the future to participants in the 2005 Equity Incentive Plan as a result of the
amendments approved on May 17, 2007.

On
November 3, 2005, 9,300 unrestricted common shares were granted to certain employees under the 2005 Equity Incentive Plan. During 2007, 2006 and 2005, the Company granted
14,625, 30,025 and 692,000 restricted share units ("RSUs"), respectively, to certain employees and independent directors. During the six months ended June 30, 2008, certain employees were
granted 124,300 RSUs and 30,000 shares of restricted stock. Each RSU provides for the grant of one share of unrestricted common stock on the date that the vesting terms of each RSU is satisfied. The
restricted shares will vest in June 2009 on the anniversary date of the grant, assuming the recipient remains employed with the Company through that date.

Generally,
with respect to RSU's granted in 2005, fifty percent of each award of RSUs (the "Time-vested RSUs") will vest in four equal annual installments beginning on
August 12, 2006 and continuing on August 12 of each of the following three years, provided the recipient remains employed with the Company through such vesting dates. The remaining fifty
percent of each award of RSUs (the "Performance-vested RSUs") will vest in four equal annual installments beginning on August 12, 2006 and continuing on August 12 of each of the
following three years, provided the recipient remains employed with the Company through such vesting dates and the applicable performance condition for the applicable vesting period is met. For awards
made from 2006 to 2008, fifty percent of each award is Time-vested RSUs and fifty percent is Performance-vested RSUs. None of the awards are subject to vesting later than August 12,
2009, with the exception of 90,000 of the RSUs granted in 2008, which are subject to vesting not later than August 12, 2011. Each component vests on the same date and manner as described above,
except the proportion eligible to vest in each year has been adjusted based on the actual grant date. The performance condition for each vesting period will be based on the Company's earned
distributable cash per share (as defined in the related restricted share unit agreement) for such vesting period, with the exception of 90,000 of the RSUs granted in 2008. The performance targets for
these RSUs have not yet been set by the Company's Compensation Committee. Each vesting period will begin on July 1 and end on June 30 of the subsequent year. All RSUs will immediately
vest in full, and shares will be distributed, at the time of a Change in Control (as defined in the 2005 Equity Incentive Plan). If in any performance period the performance condition for a subsequent
performance period is achieved, Performance-vested RSUs will be entitled to dividend equivalent rights in the subsequent performance period equal to the dividends which would be payable on the shares
of

14

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

9.    Employee Benefit Plans (Continued)

common
stock represented by the RSUs subject to vesting in that period. Payments of such dividend equivalents will be made in cash to the holders of RSUs at the time of actual dividend payments and
will not be subject to vesting. Time-vested RSUs will not be entitled to dividend equivalent rights.

Based
on the Company's financial results for the vesting period ended June 30, 2006, the performance condition for the Performance-vested RSUs eligible for vesting on
August 12, 2006 was met. As a result of the performance targets for the remaining three vesting periods being met as of June 30, 2006, the holders of unvested Performance-based RSUs were
entitled to dividend equivalent payments for the period from July 1, 2006 to June 30, 2007. During the three and six months ended June 30, 2007, dividend equivalent payments
declared totaled $0.1 million and $0.2 million, respectively.

Based
on the Company's financial results for the vesting period ended June 30, 2007, the performance condition for the Performance-vested RSUs eligible for vesting on
August 12, 2007 was met. The performance targets for the remaining two vesting periods were not met as of June 30, 2007. Therefore, the holders of unvested Performance-based RSUs were
not entitled to any dividend equivalent payments related to dividends declared during the period from July 1, 2007 to June 30, 2008.

Based
on the Company's financial results for the vesting period ended June 30, 2008, the performance condition for the Performance-vested RSUs eligible for vesting on
August 12, 2008 was not met. In accordance with the terms of the grants, such unvested Performance-vested RSUs will carry-forward
and be eligible for vesting on August 12, 2009. Holders of unvested Performance-based RSUs will not be entitled to any dividend equivalent payments related to dividends declared during the
period from July 1, 2008 to June 30, 2009.

Total
compensation expense associated with the 2005 Equity Incentive Plan was $0.9 million during the three months ended June 30, 2008 and 2007 and $1.7 million
during the six months ended June 30, 2008 and 2007, respectively. Such compensation expense was recorded in "Operating Expenses" in the consolidated statements of operations. As of
June 30, 2008, approximately 436,000 shares were reserved for issuance and approximately 411,000 shares were available for grant under the 2005 Equity Incentive Plan.

2003 Stock Option Plan.During 2003, the board of directors approved the Reddy Ice Holdings, Inc. 2003 Stock Option Plan (the "2003 Stock Option Plan") that
reserved for issuance 1,555,150 shares of common stock, subject to adjustment under certain circumstances. This plan provided for the granting of incentive awards in the form of stock options to
directors, officers and employees of the Company or its subsidiary and affiliates at the discretion of the Compensation Committee of the Board of Directors. On August 12, 2005, all outstanding
options under the 2003 Stock Option Plan were exercised in exchange for restricted shares. The final vesting of such restricted shares occurred on July 1, 2007. On July 23, 2007, the
Board of Directors terminated the 2003 Stock Option Plan. Compensation expense associated with the 2003 Stock Option Plan was $0.3 million and $0.5 million during the three and six
months ended June 30, 2007, respectively. Such compensation expense was recorded in "Operating Expenses" in the consolidated statements of operations.

15

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

10.    Earnings Per Share

The computation of net income per share is based on net income (loss) divided by the weighted average number of shares outstanding. All shares outstanding for the three and six months
ended June 30, 2008 and 2007 were included in the computation of diluted earnings per share.

Three Months Ended
June 30,

Six Months Ended
June 30,2008

2007

2008

2007(in thousands, except per share amounts)Earnings for basic and diluted computation:Income from continuing operations

$
5,658

$
10,452

$
2,347

$
482Income (loss) from discontinued operations





169





(69
)Net income

$
5,658

$
10,621

$
2,347

$
413Basic earnings per share:Weighted average common shares outstanding


22,000


21,717


22,000


21,702Income from continuing operations

$
0.26

$
0.48

$
0.11

$
0.02Income (loss) from discontinued operations





0.01





Net income

$
0.26

$
0.49

$
0.11

$
0.02Diluted earnings per share:Weighted average common shares outstanding


22,000


21,717


22,000


21,702Shares issuable from assumed conversion of restricted stock and restricted stock units


12


240


24


234Weighted average common shares outstanding, as adjusted


22,012


21,957


22,024


21,936Income from continuing operations

$
0.26

$
0.47

$
0.11

$
0.02Income (loss) from discontinued operations





0.01





Net income

$
0.26

$
0.48

$
0.11

$
0.02


11.    Income Taxes

The Company's effective tax rate differs from the federal statutory income tax rate of 35% due to state income taxes, the adjustment of deferred taxes related to a prior acquisition, and
the effect of permanent differences, primarily the non-deductible portion of the interest expense recognized on the Discount Notes.

In
connection with the vesting of restricted stock on January 16, 2007, the Company realized an excess tax benefit of $3.8 million during the three months ended
March 31, 2007. Because the Company is not currently making cash payments for income taxes due to its net operating loss ("NOL") carryforwards, such excess benefit has not been
recognized in the Company's financial statements and is being reported as a "suspended NOL carryforward" in the footnotes to the consolidated financial statements in accordance with SFAS
No. 123(R).

16

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

11.    Income Taxes (Continued)

On January 1, 2007, the Company adopted FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxesan Interpretation of FASB
Statement No. 109." FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under
FIN 48, the tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities. The
determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant
information.

Upon
adoption, the Company recorded increases to other current liabilities, noncurrent liabilities, and its retained deficit balance at December 31, 2006 of $2.6 million,
$1.1 million and $1.8 million, respectively, a $1.1 million increase in federal deferred tax benefits related to unrecognized tax positions, and a $0.8 million
reclassification of amounts previously reserved at December 31, 2006. The amount of gross unrecognized tax benefits at January 1, 2007 was $3.7 million.

Interest
and penalties related to income tax liabilities are included in income tax expense. The balance of accrued interest and penalties recorded on the balance sheet as part of the
Company's FIN 48 liability at June 30, 2008 and 2007 was approximately $1.3 million and $1.2 million, respectively. The total amount of interest and penalties, net of
federal benefit, recognized in the statement of operations for the three months ended June 30, 2008 and 2007 was $0.03 million and $0.03 million, respectively, and
$0.05 million and $0.06 million in the six months ended June 30, 2008 and 2007, respectively.

As
a result of NOL carryforwards, the Company's federal statute of limitations remains open for all years since 1990 with no years currently under examination by the Internal Revenue
Service, and U.S. state jurisdictions are generally open to examination for the tax year 1997 and beyond. The Company is undergoing routine tax audits in certain U.S. state jurisdictions covering
multiple years. The Company is not aware of any material proposed income tax adjustments and expects the completion of the audits in the near term. A $2.3 million reduction of the
$3.5 million total unrecognized tax benefit is possible in the next 12 months as a result of the settlement of certain current tax audits and other potential settlements with U.S. state
taxing authorities.

12.    Commitments and Contingencies

In order to secure a long-term supply of plastic bags at favorable prices, the Company entered into a supply agreement with a plastic bag manufacturer (the "Bag Supply
Agreement") in which it committed to purchase 250 million bags per twelve-month period beginning March 1, 2008. The Bag Supply Agreement expires on March 1, 2013.



In March 2008, the Company and certain of its employees, including members of its management, received subpoenas issued by a federal
grand jury in the Eastern District of Michigan seeking documents and information in connection with an investigation by the Antitrust Division of the United States Department of Justice ("DOJ") into
possible antitrust violations in the packaged ice industry. In addition, on March 5, 2008, federal officials executed a search warrant at the Company's corporate

17

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

12.    Commitments and Contingencies (Continued)

office
in Dallas, Texas. The search warrant and subpoenas that the Company and its employees received are part of a broader industry inquiry by the DOJ; at least one other packaged ice manufacturer
has also received such a subpoena, and The Home City Ice Company has entered a guilty plea regarding a conspiracy to allocate customers and territories in southeastern Michigan and the Detroit,
Michigan metropolitan area.

On
March 25, 2008, the Company was served by the Office of the Attorney General of the State of Florida with an antitrust civil investigative demand (the "Florida CID") requesting
the production of documents and information relating to an investigation of agreements in restraint of trade and/or price-fixing with respect to the pricing or market allocation of packaged ice. On
June 11, 2008, the Company
received a civil investigative demand from the Office of the Attorney General of the State of Arizona (the "Arizona CID"). All of the documents and information requested by the Arizona CID are
included in the Florida CID and the Arizona CID states that it will be satisfied by the production of information which has been and will be provided to Florida in response to the Florida CID. The
Company has been advised that the Florida CID and the Arizona CID were issued as part of a multi-state antitrust investigation of the packaged ice industry and that the Attorneys General of 19 states
and the District of Columbia are participating in the multi-state investigation. The Company believes the states' investigation is related to the ongoing investigation of the packaged ice industry by
the Antitrust Division of the DOJ. The Company may in the future receive additional civil investigative demands or similar information requests from other states participating in the multi-state
investigation or conducting their own investigations.

The
Company is cooperating with the authorities in these investigations and expects to continue to make available documents and other information in response to the subpoena and the
civil investigative demands. At this time the Company is unable to predict the outcome of these investigations or any potential effect they may have on the Company, its employees or operations.

On
March 6, 2008, the Company's Board of Directors formed a special committee of independent directors to conduct an internal investigation of these matters. The special committee
has retained counsel to assist in its investigation. The investigation is ongoing and the outcome of the investigation is unknown. The Company and its employees are cooperating in the special
committee's investigation.

Following
the announcement that the DOJ's Antitrust Division had instituted an investigation of the packaged ice industry, a number of lawsuits, including putative class action lawsuits,
have been instituted in various federal courts in multiple jurisdictions alleging violations of the federal antitrust laws and related claims and seeking damages and injunctive relief. On
June 5, 2008, the Judicial Panel on Multidistrict Litigation issued an Order that the majority of the civil actions then pending in federal courts be transferred and consolidated for pretrial
proceedings in the United States District Court for the Eastern District of Michigan. Since that time, additional cases have been ordered transferred to that court and the Company anticipates that the
remaining putative class actions pending in federal courts will also be transferred to that court for consolidated pretrial proceedings. Plaintiffs in several of the actions have agreed to extend the
Company's deadline to respond to the subject complaints until 45 days after the filing of a consolidated amended complaint in the multidistrict proceedings. The Company and the other defendants
are attempting to obtain similar extensions from plaintiffs in the remaining actions.

18

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

12.    Commitments and Contingencies (Continued)

In
addition to the putative class action lawsuits filed in federal court, at least one putative class action lawsuit has been filed in state court alleging violations of state antitrust
laws and related claims and seeking damages and injunctive relief, and at least one direct action lawsuit has been filed in federal
court alleging, among other things, violations of the federal antitrust laws and related claims and seeking damages. The Company intends to vigorously defend the pending lawsuits. At this time, the
Company is unable to predict the outcome of these lawsuits or any potential effect they may have on the Company or its operations.



On July 3, 2007, a stockholder derivative complaint was filed on the Company's behalf in the 199th Judicial District
Court of Collin County, Texas, Cause No. 199-02240-07, naming as defendants, among others, the members of the Company's board of directors and GSO Capital
Partners LP ("GSO"). The Company was also named as a nominal defendant. On August 9, 2007, the complaint was amended by the plaintiff, purporting to state a class action claim on behalf
of the Company's stockholders. The amended complaint alleged, among other things, that the Company's directors breached their fiduciary duties in connection with the proposed merger transaction
between the Company and affiliates of GSO by approving a transaction that would purportedly provide certain of the Company's stockholders and directors with preferential treatment at the expense of
its other stockholders and would not maximize stockholder value. A second amended complaint was filed on September 10, 2007 containing similar allegations and also setting forth various alleged
omissions from the disclosures provided by the Company in its preliminary proxy statement relating to the special meeting of its stockholders to adopt the merger agreement. All defendants have served
answers to the second amended complaint.

On
September 27, 2007, the plaintiff filed a motion seeking a temporary restraining order to enjoin the special meeting of the Company's stockholders to adopt the merger
agreement. The Company and the other defendants opposed the motion and vigorously disputed the plaintiff's assertions. A hearing on the motion was scheduled for October 3, 2007. On that date,
the Company and the other parties reached an agreement in principle to settle the action in return for the Company providing certain supplemental disclosures in advance of the special meeting of the
Company's stockholders. The defendants also agreed that, if the settlement was approved by the Court and consummated in accordance with its terms, the Company would pay plaintiff's attorneys' fees and
expenses in an amount awarded by the Court but not to exceed $325,000 in the aggregate. The defendants denied, and continue to deny, all allegations of wrongdoing and agreed to the settlement solely
to avoid the burden and expense of further litigation and to eliminate any possibility of a delay to the special meeting as a result of the litigation. The proposed settlement was expressly subject to
consummation of the merger transaction, among other conditions.

On
January 31, 2008, the Company announced that the merger agreement had been terminated. As a result, the proposed settlement will not be consummated. On March 28, 2008,
the defendants filed a motion seeking dismissal of the action on the ground that all of plaintiff's claims were rendered moot by the termination of the merger agreement. Plaintiff did not respond to
that motion. Instead, on May 19, 2008, plaintiff filed a second amended petition in which it dropped all of its claims in the first

19

---



REDDY ICE HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 and 2007

12.    Commitments and Contingencies (Continued)

action
other than a claim for attorneys' fees related to the proposed settlement. The defendants have previously answered plaintiff's petition and asserted general denials.

Separately,
on July 3, 2008, plaintiff's attorneys filed a fee application seeking a fee of $495,000 for the "benefit" allegedly conferred on the Company's stockholders by the
prosecution of the action and the supplemental disclosures that were disseminated pursuant to the proposed settlement. The Company and the other defendants intend to defend themselves vigorously
against plaintiff's claims and fee application if the action continues.

On
February 13, 2008, the alleged stockholder that is plaintiff in the litigation described above, filed a second action styled as a putative stockholder derivative action on the
Company's behalf, also in the 199th Judicial District Court of Collin County, Texas. The complaint names the members of the Company's board of directors as defendants. In the complaint, the
plaintiff claims that the directors breached their fiduciary duties and committed waste by "causing the Company" to enter into the Settlement Agreement dated January 31, 2008 with certain
affiliates of GSO relating to the termination of the merger agreement. As a result of the termination of the merger agreement, the Company was paid $21 million by the GSO affiliates. Under the
Settlement Agreement, the Company reimbursed the GSO affiliates $4 million for certain expenses incurred in connection with the proposed merger transaction. The complaint seeks injunctive
relief against the $4 million payment to the GSO affiliates, an order directing the defendants to reimburse the Company to the extent any such payment has been made, and plaintiff's costs and
attorneys' fees in bringing the action.

On
March 28, 2008, the defendants filed a motion to dismiss the petition and the Company and the defendants also served and filed answers to the petition. The directors' motion
argues that plaintiff failed to make a pre-suit demand on the board of directors before instituting the action and failed to allege facts showing that such a demand would have been futile.
The motion also argues that plaintiff has failed to state a claim against the directors under the business judgment rule and that plaintiff's claims for money damages are barred by the exculpatory
provision of Reddy Ice's certificate of incorporation. The plaintiff has not yet responded to the motion and the court has not yet established a date for a hearing on the defendants' motion. The
defendants intend to defend themselves vigorously against plaintiff's claims.



The Company is also involved in various other claims, lawsuits and proceedings arising in the ordinary course of business. There are
uncertainties inherent in the ultimate outcome of such matters and it is difficult to determine the ultimate costs that the Company may incur. The Company believes the resolution of such other
ordinary course uncertainties and the incurrence of such costs will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.

20

---





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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
condensed consolidated financial statements and the related notes and other information included elsewhere in this Form 10-Q and our Annual Report on Form 10-K
for the year ended December 31, 2007, previously filed with the Securities and Exchange Commission ("SEC").

Reddy
Ice Holdings, Inc. ("Reddy Holdings"), and its wholly-owned subsidiary, Reddy Ice Corporation ("Reddy Corp."), manufacture and distribute packaged ice products. The Company
is the largest manufacturer of packaged ice products in the United States and serves approximately 82,000 customer locations in 31 states and the District of Columbia.

On
July 2, 2007, we announced that we had entered into an Agreement and Plan of Merger, dated as of July 2, 2007 (the "Merger Agreement"), by and among Reddy Holdings and
certain affiliates of GSO Capital Partners LP ("GSO"). The Merger Agreement provided for the acquisition of our outstanding common stock for a cash purchase price of $31.25 per share. Our
stockholders approved the transaction at a special stockholder meeting on October 12, 2007.

On
January 31, 2008, we reached an agreement with affiliates of GSO to terminate the Merger Agreement. A settlement agreement (the "Settlement Agreement") was entered into which
released all parties from any claims related to the contemplated acquisition and provided for a $21 million
termination fee to be paid by GSO. We agreed to pay up to $4 million of fees and expenses incurred by GSO and its third-party consultants in connection with the transaction. We received a net
payment of $17 million on February 5, 2008.

At
June 30, 2008, we owned or operated 61 ice manufacturing facilities, 65 distribution centers, approximately 79,000 merchandisers (cold storage units installed at customer
locations) and approximately 3,000 Ice Factories. As of the same date, we had an aggregate daily ice manufacturing capacity of approximately 18,000 tons.

Uncertainty of Forward Looking Statements and Information

Other than statements of historical facts, statements made in this Form 10-Q, statements made by us in periodic
press releases, oral statements made by our management to analysts and stockholders and statements made in the course of presentations about our company constitute "forward-looking statements"
intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. We believe the expectations reflected in such forward-looking statements are
accurate. However, we cannot assure you that such expectations will occur. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from future results expressed or implied by the forward-looking statements. Factors you should consider that could cause these
differences are:



21

---





You
should not unduly rely on these forward-looking statements, as they speak only as of the date of this report. Except as required by law, we are not obligated to publicly release any
revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events. Important factors that
could cause our actual results to differ materially from our expectations are discussed elsewhere in this report.

General

Overview.We are the largest manufacturer and distributor of packaged ice in the United States and currently serve approximately 82,000 customer locations in 31
states and the District of Columbia. Our business consists of:



We
sold our bottled water business and substantially all of our cold storage business on August 31, 2007 and September 7, 2007, respectively, for total gross cash proceeds
of $20.3 million. These businesses comprised substantially all of our non-ice operations.

Seasonality.The packaged ice business is highly seasonal, characterized by peak demand during the warmer months of May through September, with an extended peak
selling season in the southern United States. Approximately 68%, 70% and 70% of our annual revenues occurred during the second and third calendar quarters in each of 2007, 2006 and 2005. As a result
of seasonal revenue declines and a less than proportional decline in expenses during the first and fourth quarters, we typically experience lower margins resulting in losses during these periods.

Revenues.Our revenues primarily represent sales of packaged ice and packaged ice bags for use in our Ice Factory equipment. There is no right of return with
respect to these products or services. A

22

---



portion
of our revenues also represents fees earned under management agreements for Ice Factories located outside our primary territories that are recognized as earned under contract terms.

Cost of Sales (Excluding Depreciation).Our cost of sales (excluding depreciation) consists of costs related to the manufacture and distribution of our products,
including, in particular:



Depreciation Expense Related to Cost of Sales and Depreciation and Amortization Expense.Depreciation and amortization are divided into two line items:
depreciation expense related to cost of sales and depreciation and amortization expense. Depreciation expense related to cost of sales consists of depreciation expense for our production and
distribution equipment. Depreciation and amortization expense consists of depreciation and amortization expense for our selling, general and administrative functions.

Operating Expenses.Our operating expenses are costs associated with selling, general and administrative functions. These costs include executive officers'
compensation, office and administrative salaries, insurance, legal and other professional services and costs associated with leasing office space. Labor costs, including associated payroll taxes and
benefit costs but excluding non-cash stock-based compensation expense, included in operating expenses represented approximately 8% and 7% of revenues in the six months ended
June 30, 2008 and 2007, respectively.

Cost of Antitrust Investigations and Related Litigation.Costs related to the current antitrust investigations and related litigation are composed primarily of
legal fees, document collection costs and the fees of other experts and consultants.

Facilities.At June 30, 2008, we owned or operated 61 ice manufacturing facilities, 65 distribution centers, approximately 79,000 merchandisers (cold
storage units installed at customer locations) and approximately 3,000 Ice Factories. As of the same date, we had an aggregate daily ice manufacturing capacity of approximately 18,000 tons.

23

---



Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Three Months Ended June 30,

Change from Last Year2008

2007

Dollars

%(in thousands)Revenues

$
102,687

$
103,612

$
(925
)

(0.9
)Cost of sales (excluding depreciation)


62,497


60,958


1,539


2.5Depreciation expense related to cost of sales


5,297


4,920


377


7.7Gross profit


34,893


37,734


(2,841
)

(7.5
)Operating expenses


12,054


10,906


1,148


10.5Depreciation and amortization expense


1,656


1,511


145


9.6Cost of antitrust investigations and related litigation


4,615





4,615


Transaction costs related to merger agreement


138





138


Loss on dispositions of assets


244


135


109


80.7Gain on property insurance settlement


(1,036
)




(1,036
)

Income from operations


17,222


25,182


(7,960
)

(31.6
)Interest expense, net


(7,753
)

(7,930
)

177


2.2Income before income taxes


9,469


17,252


(7,783
)

(45.1
)Income tax expense


(3,811
)

(6,800
)

2,989


44.0Income from continuing operations

$
5,658

$
10,452

$
(4,794
)

(45.9
)


Revenues:Revenues decreased $0.9 million from the three months ended June 30, 2007 to the three months ended June 30, 2008. This decrease is
primarily due to reduced volume sales related to the effect of various economic trends on our customers and the end users of our products, partially offset by higher average sales prices of
approximately 2% to 2.5%, slightly better weather conditions, primarily in the month of June, and the effects of acquisitions completed in 2007 and to-date in 2008.

Cost of Sales (Excluding Depreciation):Cost of sales (excluding depreciation) increased $1.5 million from the three months ended June 30, 2007 to
the three months ended June 30, 2008. This increase in cost of sales is primarily due to significant increases in the price of fuel, moderate increases in the prices of plastic bags and
electricity related to higher market prices for energy and additional fixed costs associated with acquired operations. Partially offsetting these increases was the effect of reduced volume sales.

Labor
costs, including associated payroll taxes and benefit costs (including health insurance), accounted for approximately 22% of revenues in the three months ended June 30, 2008
and 2007. Cost of plastic bags represented approximately 7% of revenues in the three months ended June 30, 2008 and 2007. Fuel expenses represented approximately 6% and 4% of revenues in the
three months ended June 30, 2008 and 2007, respectively. Expenses for independent third party distribution services represented approximately 6% of revenues in the three months ended
June 30, 2008 and 2007. Electricity expense represented approximately 5% of revenues in the three months ended June 30, 2008 and 2007.

Depreciation Expense Related to Cost of Sales:Depreciation expense related to cost of sales increased $0.4 million due to new production and distribution
equipment placed in service in 2007 and 2008 as a result of capital expenditures and the acquisition of ice companies, partially offset by dispositions.

24

---



Operating Expenses:Operating expenses increased $1.1 million from the three months ended June 30, 2007 to the three months ended June 30,
2008. This increase is primarily due to a $0.6 million increase in labor and benefits, a $0.3 million increase in professional services and a $0.1 million increase in bad debt
expense. The increase in labor costs is related to annual wage increases, increased headcount due to acquisitions and the hiring of a new chief executive officer in June 2008. Professional service
expenses in the three months ended June 30, 2008 included $0.2 million of costs related to an executive search firm.

Depreciation and Amortization:Depreciation and amortization increased $0.1 million from the three months ended June 30, 2007 to the three months
ended June 30, 2008. This increase is primarily due to additional amortization expense associated with the intangible assets recorded in connection with the acquisitions completed in 2007 and
the six months ended June 30, 2008.

Costs of Antitrust Investigation and Related Litigation:During the three months ended June 30, 2008, legal fees and other expenses totaling
$4.6 million were incurred in connection with the antitrust investigations being conducted by the Antitrust Division of the United States Department of Justice and various state attorneys
general and the related litigation.

Transaction Costs Related to Merger Agreement:During the three months ended June 30, 2008, professional service expenses totaling $0.1 million were
incurred in connection with the stockholder litigation associated with the terminated transaction with GSO.

Gain on Property Insurance Settlement:During the three months ended June 30, 2008, a property insurance claim related to fire damage at one our
manufacturing facilities was settled, which resulted in a gain of $1.0 million.

Interest Expense, net:Net interest expense decreased $0.2 million from the three months ended June 30, 2007 to the three months ended
June 30, 2008. This decrease was primarily due lower interest rates on the revolving credit facility and the unhedged portion of our term loan and higher cash balances earning interest income,
partially offset by scheduled increases in the non-cash interest expense associated with our 101/2% senior discount notes.

25

---



Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Six Months Ended June 30,

Change from Last Year2008

2007

Dollars

%(in thousands)Revenues

$
145,722

$
149,049

$
(3,327
)

(2.2
)Cost of sales (excluding depreciation)


99,785


97,681


2,104


2.2Depreciation expense related to cost of sales


10,447


9,769


678


6.9Gross profit


35,490


41,599


(6,109
)

(14.7
)Operating expenses


22,891


21,278


1,613


7.6Depreciation and amortization expense


3,297


2,973


324


10.9Cost of antitrust investigations and related litigation


5,802





5,802


Transaction costs related to merger agreement


949





949


Loss on dispositions of assets


240


258


(18
)

(7.0
)Gain on property insurance settlement


(1,036
)




(1,036
)

Income from operations


3,347


17,090


(13,743
)

(80.4
)Interest expense, net


(15,366
)

(15,247
)

(119
)

(0.8
)Gain on termination of merger agreement


17,000





17,000


Income before income taxes


4,981


1,843


3,138


170.3Income tax expense


(2,634
)

(1,361
)

(1,273
)

(93.5
)Income from continuing operations

$
2,347

$
482

$
1,865


386.9


Revenues:Revenues decreased $3.3 million from the six months ended June 30, 2007 to the six months ended June 30, 2008. This decrease is
primarily due to reduced volume sales related to the effect of various economic trends on our customers and the end users of our products, partially offset by higher average sales prices of
approximately 2.3% to 2.7%, slightly better weather conditions, primarily in the month of June, and the effects of acquisitions completed in 2007 and to-date in 2008.

Cost of Sales (Excluding Depreciation):Cost of sales (excluding depreciation) increased $2.1 million from the six months ended June 30, 2007 to the
six months ended June 30, 2008. This increase in cost of sales is primarily due to significant increases in the price of fuel, moderate increases in the prices of plastic bags and electricity
related to higher market prices for energy and additional fixed costs associated with acquired operations. Partially offsetting these increases was the effect of reduced volume sales.

Labor
costs, including associated payroll taxes and benefit costs (including health insurance), accounted for approximately 26% and 25% of revenues in the six months ended
June 30, 2008 and 2007, respectively. Cost of plastic bags represented approximately 7% of revenues in the six months ended June 30, 2008 and 2007. Fuel expenses represented
approximately 6% and 4% of revenues in the six months ended June 30, 2008 and 2007, respectively. Expenses for independent third party distribution services represented approximately 6% of
revenues in the six months ended June 30, 2008 and 2007. Electricity expense represented approximately 6% of revenues in six months ended June 30, 2008 and 2007.

Depreciation Expense Related to Cost of Sales:Depreciation expense related to cost of sales increased $0.7 million due to new production and distribution
equipment placed in service in 2007 and 2008 as a result of capital expenditures and the acquisition of ice companies, partially offset by dispositions.

26

---



Operating Expenses:Operating expenses increased $1.6 million from the six months ended June 30, 2007 to the six months ended June 30, 2008.
This increase is primarily due to a $0.8 million increase in labor and benefits, a $0.5 million increase in professional services, a $0.2 million increase in insurance costs and a
$0.1 million increase in bad debt expense. The increase in labor costs is related to annual wage increases, increased headcount due to acquisitions and the hiring of a new chief executive
officer in June 2008. Professional service expenses in the three months ended June 30, 2008 included $0.5 million of costs related to potential acquisitions that were not completed and
fees related to an executive search firm.

Depreciation and Amortization:Depreciation and amortization increased $0.3 million from the six months ended June 30, 2007 to the six months ended
June 30, 2008. This increase is primarily due to additional amortization expense associated with the intangible assets recorded in connection with the acquisitions completed in 2007 and the six
month months ended June 30, 2008.

Costs of Antitrust Investigation and Related Litigation:During the six months ended June 30, 2008, legal fees and other expenses totaling
$5.8 million were incurred in connection with the antitrust investigations being conducted by the Antitrust Division of the United States Department of Justice and various state attorneys
general and the related litigation.

Transaction Costs Related to Merger Agreement:During the six months ended June 30, 2008, professional service expenses totaling $0.9 million were
incurred in connection with the termination of the transaction with GSO and the related stockholder litigation.

Gain on Property Insurance Settlement:During the six months ended June 30, 2008, a property insurance claim related to fire damage at one our manufacturing
facilities was settled, which resulted in a gain of $1.0 million.

Interest Expense, net:Net interest expense increased $0.1 million from the six months ended June 30, 2007 to the six months ended June 30,
2008. This increase was primarily due to scheduled increases in the non-cash interest expense associated with our 101/2% senior discount notes and higher average balances on
our revolving credit facility, partially offset by lower interest rates on the revolving credit facility and the unhedged portion of our term loan and higher cash balances earning interest income.

Gain on Termination of Merger Agreement:During the six months ended June 30, 2008, the merger agreement with affiliates of GSO was terminated, which
resulted in a $21 million termination fee being paid by GSO. Offsetting this fee was $4 million of fees and expenses incurred by GSO and its third-party consultants in connection with
the transaction that we agreed to pay. We received a net payment of $17 million from GSO on February 5, 2008.

Liquidity and Capital Resources

We intend to fund our ongoing capital and working capital requirements as well as debt service, including our internal growth and
acquisitions, through a combination of cash flows from operations and borrowings under our credit facilities.

We
generate cash from the sale of packaged ice through traditional delivery methods, by which we manufacture, package and store ice at a central facility and transport it to our
customers' retail locations when needed, and through Ice Factories, which manufacture, package and store ice in our customers' retail locations. Our primary uses of cash are (a) cost of sales,
(b) operating expenses, (c) debt service, (d) dividends on our common stock, (e) capital expenditures related to replacing and modernizing the capital equipment in our
traditional ice plants and acquiring and installing additional Ice Factories and (f) acquisitions. We may also be required to use substantial amounts of cash to pay expenses relating to the
ongoing investigations by the Antitrust Division of the United States

27

---



Department
of Justice and various state attorneys general and related litigation. See Part II, Item 1. Legal Proceedings. Historically, we have financed our capital and working capital
requirements, including our acquisitions, through a combination of cash flows from operations, borrowings under our revolving credit facilities and operating leases.

Our
ability to generate cash from our operations is subject to weather, general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
As a result, we cannot assure you that our business will generate cash flow from operations in amounts sufficient to enable us to service our debt and to fund our other liquidity needs. If we do not
have sufficient liquidity, we will have to take actions such as reducing or delaying the payment of dividends to our common stockholders, strategic acquisitions, investments and joint ventures or
selling assets, restructuring or refinancing our debt or seeking additional equity capital. We cannot assure you that any of these remedies could, if necessary, be affected on commercially reasonable
terms, or at all. In addition, the terms of existing or future debt instruments, including the terms of the credit agreement governing our credit facilities and the indenture governing our senior
discount notes, may restrict us from adopting some of these alternatives.

During
the six months ended June 30, 2008, capital expenditures totaled $10.1 million. As we have consolidated acquisitions into the existing company infrastructure, we
have identified non-core and excess assets which can be disposed of. From time to time, we also dispose of other assets which are no longer useful in our operations. As a result of
dispositions of these non-core and excess assets, we realized proceeds of approximately $1.5 million in the six months ended June 30, 2008. As a result, our net capital
expenditures in the six months ended June 30, 2008 were $8.6 million.

We
sold our bottled water business and substantially all of our cold storage business on August 31, 2007 and September 7, 2007, respectively, for total gross cash proceeds
of $20.3 million. These businesses comprised substantially all of our non-ice business. Our credit facilities require that the net proceeds from the sale of the discontinued
operations be used either to repay our outstanding term loan or to make acquisitions and/or capital expenditures within twelve months of the receipt of such proceeds. Accordingly, the remaining,
unutilized net proceeds from the sale are reported as "Restricted Cash and Cash Equivalents" in the consolidated balance sheet. During the six months ended June 30, 2008, we utilized
$12.7 million of these net proceeds to fund capital expenditures and acquisitions.

In
the six months ended June 30, 2008, we completed the acquisitions of six ice companies for a total cash purchase price of approximately $3.8 million, including direct
acquisition costs of $0.1 million. We will continue to evaluate acquisition opportunities as part of our ongoing acquisition strategy.

Cash Flows for the Six Months Ended June 30, 2008 and 2007

Net cash provided by operating activities was $7.8 million during the six months ended June 30, 2008. Operating
activities used cash of $1.9 million in the six months ended June 30, 2007. The increase in cash provided by operating activities of $9.7 million was primarily the result of the
$17.0 million gain on the termination of the merger agreement with GSO realized in the six months ended June 30, 2008, offset by $6.8 million of costs related to the antitrust
investigations and related litigation and termination of the GSO transaction.

Net
cash provided by investing activities was $1.8 million in the six months ended June 30, 2008 versus cash used in investing activities of $29.0 million in the six
months ended June 30, 2007. The increase in cash provided by investing activities of $30.8 million is primarily due to (i) a $15.0 million reduction in the cost of
acquisitions of ice companies, (ii) the release of $12.7 million of Restricted Cash and Cash Equivalents as a result of the utilization of the net proceeds from the sale of our bottled
water and cold storage businesses sold in 2007 to fund current capital expenditures and

28

---



acquisitions,
(iii) a $1.6 million reduction in net capital expenditures and (iv) the receipt of $1.5 million from our property insurer to settle a claim for fire damage
that one our plants sustained in 2007.

Financing
activities used net cash of $2.5 million in the six months ended June 30, 2008 and provided net cash of $3.5 million in the six months ended
June 30, 2007. This decrease in cash provided by financing activities of $6.0 million is due to a $5.2 million decrease in net borrowings on our revolving credit facility and a
$0.8 million increase in cash dividends paid to our common stockholders.

Long-term Debt and Other Obligations

Overview.At June 30, 2008, we had approximately $401.5 million of total debt outstanding as follows:



Senior Discount Notes.On October 27, 2004, Reddy Holdings issued $151.0 million in aggregate principal amount at maturity of 101/2%
senior discount notes due 2012 in a private placement offering. Each senior discount note had an initial accreted value of $663.33 per $1,000 principal amount at maturity. The accreted value of each
senior discount note increases from the date of issuance until November 1, 2008 at a rate of 101/2% per annum such that the accreted value will equal the stated principal amount
at maturity on November 1, 2008. Thereafter, cash interest will accrue and be payable semi-annually at a rate of 101/2% per annum. The senior discount notes are
unsecured obligations of Reddy Holdings and are:



The
senior discount notes include customary covenants that restrict, among other things, the ability to incur additional debt or issue certain preferred stock, pay dividends or redeem,
repurchase or retire our
capital stock or subordinated indebtedness, make certain investments, incur liens, enter into arrangements that restrict dividends from our subsidiary, merge or sell all or substantially all of the
assets or enter into various transactions with affiliates. From and after November 1, 2008, we may redeem any or all of the senior discount notes by paying a redemption premium which is
initially 5.25% of the principal amount at maturity of the notes, and will decline annually to zero commencing on November 1, 2010. If we experience a change of control we will be required to
make an offer to repurchase the senior discount notes at a price equal to 101% of their accreted value, plus accrued and unpaid interest, if any, to the date of purchase. We may also be required to
make an offer to purchase the senior discount notes with proceeds of asset sales that are not reinvested in our business or used to repay other indebtedness, including the proceeds of the sales of our
bottled water and cold storage businesses. We registered the senior discount notes with the SEC pursuant to a registration statement that was declared effective on August 26, 2005.

29

---



The
indenture governing our senior discount notes restricts the amount of dividends, distributions and other restricted payments we may pay. Under the indenture, we are restricted from
paying dividends on our common stock unless, at the time of such payment:



The
consolidated coverage ratio under the indenture governing our senior discount notes means the ratio of our EBITDA for the most recent four fiscal quarters to our consolidated
interest expense for such four quarter period. "EBITDA" under the indenture governing our senior discount notes is defined as the sum of our consolidated net income plus our income tax expense, our
interest expense,
our depreciation and amortization expense, unrealized non-cash gains or losses or non-cash charges in respect of hedging obligations required to be taken under generally
accepted accounting principles, unrealized foreign currency translation gains or losses and all other non-cash charges, except to the extent representing an accrual or reserve for a future
cash expenditure). "Consolidated net income" under the indenture governing our senior discount notes is defined as net income of Reddy Holdings and its restricted subsidiary: plus or minus cash
dividends received on investments or equity in net losses of persons other than the restricted subsidiary, respectively; provided that the following are not included in consolidated net income:
(i) net income or loss of the subsidiary acquired in pooling of interests transactions for any period prior to the date of their acquisition, (ii) any net income of the subsidiary
restricted in the payment of a dividend (other than certain permitted restrictions, including those under our credit facilities), (iii) gains or losses from non-ordinary course
asset sales, (iv) extraordinary gains or losses, (v) the cumulative effect of changes in accounting principles, (vi) non-recurring fees and expenses and write offs of
deferred financing costs related to the financing transactions in connection with the 2003 merger of Cube Acquisition Corp. and Packaged Ice, Inc. and, (vii) any fees, charges, costs or
expenses relating to our initial public offering and the related transactions and paid in cash, to the extent deducted in the determination of consolidated net income. "Consolidated interest expense"
under the indenture governing our senior discount notes is defined as total interest expense plus, to the extent not included in total interest expense, (i) interest expense attributable to
capital leases, (ii) amortization of debt discount and issuance costs, (iii) capitalized interest, (iv) non-cash interest expense, (v) fees on letters of
credit, (vi) net payments pursuant to hedging obligations, (vii) dividends accrued on certain disqualified stock (viii) interest incurred in connection with investments in
discontinued operations, (ix) interest on guaranteed indebtedness and (x) cash contributions to employee stock ownership plans to the extent they are used to pay interest or fees on
indebtedness incurred by such plans. We are generally required to calculate our consolidated coverage ratio on a pro forma basis to give effect to incurrences and repayments of indebtedness as well as
acquisitions and dispositions.

The
buildup amount equals 50% of our consolidated net income accrued during the period (treated as one accounting period) from July 1, 2003 to the end of the most recent fiscal
quarter for which internal financial statements are available (or, if such consolidated net income is a deficit, minus 100% of such deficit), plus, the net cash proceeds of the issuance of capital
stock, subject to certain exceptions, and any cash capital contribution received by us from our stockholders in each case after August 15, 2003 plus the amount by which our indebtedness is
reduced on our balance sheet as a result of the conversion or exchange of such indebtedness for our capital stock, plus the net reduction in certain restricted investments made by us, less the amount
of certain restricted payments we make from time to time, including, among other things, the payment of cash dividends.

30

---



In addition, regardless of whether we could make any restricted payments under the buildup amount provision referred to above, we may (1) make dividend payments at any time in an
aggregate amount of up to $15.0 million if no default has occurred and is continuing under the indenture and (2) following our initial public offering, pay dividends on our capital stock
of up to 6.0% per year of the cash proceeds (net of underwriters' fees, discounts, commissions or other expenses paid by us) received by us from all such public equity offerings subject to specified
conditions. Accordingly, we are able to pay approximately $7.0 million annually in dividends under this 6.0% provision. However, the amount of dividend payments permitted under this 6.0%
provision will correspondingly reduce the amount we would otherwise have available to us under the buildup amount for restricted payments, including dividends.

Credit Facilities.On August 12, 2005, Reddy Ice Group, Inc., our wholly-owned subsidiary, entered into new credit facilities in an aggregate
principal amount of $300 million with a syndicate of banks, financial institutions and other entities as lenders, including Credit Suisse, Cayman Islands Branch, as Administrative Agent,
CIBC World Markets Corp., Bear Stearns Corporate Lending Inc. and Lehman Commercial Paper, Inc. The credit facilities provided for a seven-year term loan in the amount
of $240.0 million and a five-year revolving credit facility in the amount of $60.0 million. Proceeds of the term loan were used to repay our prior senior credit facility.

On
January 1, 2007, Reddy Group merged with its wholly-owned subsidiary, Reddy Ice Corporation, with Reddy Corp. being the surviving entity. The credit facilities were amended on
that date to allow the merger and to provide for the assumption of the Credit Facilities by Reddy Corp.

At
June 30, 2008, we had $36.9 million of availability under the revolving credit facility, which was net of an outstanding balance of $16.0 million and standby
letters of credit of $7.1 million. The standby letters of credit are used primarily to secure certain insurance obligations. At this time, we do not anticipate any significant changes in our
standby letters of credit until late in the fourth quarter of 2008, at which time a portion of the collateral related to earlier policy years is expected to be released.

Principal
balances outstanding under the revolving credit facility bear interest per annum, at our option, at the sum of the base rate plus 0.75% or LIBOR plus 1.75%. The base rate is
defined as the greater of the prime rate (as announced from time to time by the Administrative Agent) or the federal funds rate plus 0.5%. At June 30, 2008, the weighted average interest rate
of borrowings outstanding under the credit facilities was 4.4%. Interest on base rate loans is payable on the last day of each quarter. Interest on LIBOR loans is payable upon maturity of the LIBOR
loan or on the last day of the quarter if the LIBOR loan exceeds 90 days. Reddy Corp. pays a quarterly fee on the average availability under the revolving credit facility based on an annual
rate of 0.5% except as described below.

In
addition, our credit facilities will allow us to incur up to an additional $80.0 million of incremental term loans under our credit facilities, subject to certain conditions.
No lenders have committed to provide the incremental term loans. In the event that we incur incremental term loans that mature on or before the one year anniversary of the final maturity of the
existing term loans and that bear interest with margins higher than the margin applicable to any term loans outstanding under our credit facilities, the margins applicable to the existing term loans
will be increased to equal the margins applicable to the incremental term loans. In the event that we incur incremental term loans that mature after the one-year anniversary of the final
maturity of the existing term loans and that bear interest with margins more than 0.25% higher than the margins applicable to any term loans outstanding under our credit facilities, the margins
applicable to the existing term loans will be increased to equal the margins applicable to the incremental term loans, less 0.25%.

Our
credit facilities do not require any scheduled principal payments prior to the stated maturity dates. Subject to certain conditions, mandatory repayments of the revolving credit
facility and term loan (and if the term loan is no longer outstanding, mandatory commitment reductions of the revolving

31

---



credit
facility) are required to be made with portions of the proceeds from (1) asset sales, (2) the issuance of debt securities and (3) insurance and condemnation awards, subject
to various exceptions. In the event of a change in control, as defined in the credit facilities, an event of default will occur under the credit facilities. Under our credit facilities, Reddy Corp.
may only pay dividends to Reddy Holdings if Reddy Corp.'s total leverage ratio for the most recently ended fiscal quarter is less than or equal to 3.75 to 1.0. In addition, the credit facilities
preclude Reddy Corp. from declaring any dividends if an event of default under the credit facilities has occurred and is continuing. In particular, it will be an event of default if Reddy Corp.'s
leverage ratio exceeds 4.0 to 1.0 or Reddy Corp.'s interest coverage ratio is less than 3.25 to 1.0.

Our
credit facilities contain financial covenants, which include the maintenance of certain financial ratios, as defined in the credit facilities, and are collateralized by substantially
all of Reddy Corp.'s assets. Reddy Holdings guarantees Reddy Corp.'s credit facilities and such guarantee is secured by a pledge of the capital stock of Reddy Corp. At June 30, 2008, Reddy
Corp. was in compliance with these covenants.

Under
the restricted payments covenant in our credit facilities, we generally are restricted from paying dividends to our stockholders from funds received from Reddy Corp., and Reddy
Corp. is prohibited from paying dividends and otherwise transferring assets to Reddy Holdings. Reddy Corp. is permitted to pay certain limited dividends to Reddy Holdings, the proceeds of which must
be used to maintain Reddy Holdings' corporate existence. In addition, the covenant includes an exception for paying dividends in an amount not greater than our Cumulative Distributable Cash for the
period (taken as one accounting period) from July 1, 2005 to the end of our most recently-ended fiscal quarter for which a covenant compliance certificate under our credit facilities has been
delivered to the lenders.

"Cumulative
Distributable Cash" is defined under our credit facilities as:

(a)   $10,000,000,
plus

(b)   "Available
Cash" for the period (taken as one accounting period) from July 1, 2005 to the end of our most recently-ended fiscal quarter for which a covenant
compliance certificate under our credit facilities has been delivered to the lenders, plus

(c)   the
amount of any net cash proceeds received by Reddy Holdings from issuances of shares of Reddy Holdings capital stock after the closing of our initial public offering
to the extent we have contributed such proceeds to Reddy Corp., less

(d)   (i)
the amount of payments made by Reddy Corp. to Reddy Holdings to fund dividend payments on, or repurchases of, Reddy Holdings capital stock or to pay cash interest
expense on, or redeem or repurchase, Reddy Holdings notes, and (ii) amounts used to make restricted investments, less

(e)   to
the extent occurring after the end of the most recently ended reference period and until taken into account in determining Available Cash for the fiscal quarter in
which such event has occurred, (i) cash payments for acquisitions (except to the extent funded with indebtedness or proceeds of asset sales or casualty events) and (ii) mandatory
repayment of loans under our credit facilities (other than under the revolving credit facility) during a dividend suspension period.

"Available
Cash" for any fiscal quarter is defined under our credit facilities as:

(a)   Adjusted
EBITDA for such fiscal quarter, plus,

(b)   to
the extent not included in net income used to calculate for any fiscal quarter such Adjusted EBITDA, the cash amount realized in respect of extraordinary,
non-recurring or unusual gains, and less

(c)   (i)
to the extent included in net income used to calculate for any fiscal quarter such Adjusted EBITDA, the amount of our cash interest expense, our cash tax expense,
the cash cost of any

32

---



extraordinary,
nonrecurring or unusual losses, cash payments on account of non-cash losses or non-cash charges, (ii) capital expenditures (except to the extent funded
with indebtedness (other than the revolving credit facility) or proceeds of asset sales or casualty events), (iii) cash payments for acquisitions (except to the extent funded with indebtedness
or proceeds of asset sales or casualty events) and (iv) payments and prepayments of the principal amount of indebtedness (other than payments and prepayments of the revolving credit facility)
other than to the extent funded with indebtedness (other than indebtedness under our revolving credit facility).

"Adjusted
EBITDA" is defined under our credit facilities to be the sum of:

(a)   net
income of Reddy Corp., plus

(b)   to
the extent deducted in determining net income, the sum of (i) amounts attributable to depreciation and amortization, (ii) income tax expense,
(iii) interest expense, (iv) any other non-cash charges (less non-cash income) for which no cash reserves (or receivables) have been or will be set aside (or
created) including non-cash compensation expenses, (v) any loss from the extinguishment of indebtedness, (vi) any fees paid prior to the closing date of our initial public
offering in respect of the monitoring agreement, (vii) transaction adjustments (as defined in our credit facilities and including the fees and expenses incurred in connection with our initial
public offering and the related transactions), (viii) all fees and expenses incurred in connection with permitted acquisitions to the extent accounted for as expenses, (ix) for the four
fiscal quarters ending after September 30, 2004, an amount equal to the sum of (x) the special transaction payments paid to certain members of management and certain directors in
connection with the issuance of the senior discount notes not to exceed $1.3 million plus (y) an amount not to exceed $4.0 million for other expenses incurred in connection with
the issuance of the senior discount notes and the related amendment to our credit facilities which was in effect at the time of the senior discount notes offering.

Under
Reddy Corp.'s credit facilities, Reddy Corp. may only pay dividends to us to make dividend payments on our common stock if Reddy Corp.'s total leverage ratio for the most recently
ended fiscal quarter for which a covenant compliance certificate has been delivered is less than or equal to 3.75 to 1.0. If at the end of any fiscal quarter, Reddy Corp.'s leverage ratio is greater
than 3.75 to 1.0, and therefore Reddy Corp. is not permitted to pay dividends, Reddy Corp. will be required by Reddy
Corp.'s credit facilities to apply 50% of Reddy Corp.'s Available Cash generated during each such quarter to make a mandatory prepayment of the loans under Reddy Corp.'s credit facilities.

In
addition, we and Reddy Corp. will be precluded from paying any dividends if an event of default under Reddy Corp.'s credit facilities has occurred and is continuing. In particular, it
will be an event of default if Reddy Corp.'s total leverage ratio exceeds 4.0 to 1.0 or Reddy Corp.'s interest coverage ratio is less than 3.25 to 1.0. At June 30, 2008 Reddy Holdings had
$19.8 million of cash on hand that was not subject to any restrictions under our credit facilities.

The
following table presents Adjusted EBITDA on a pro forma basis after giving effect to the adjustments permitted under the description of the definition of Adjusted EBITDA set forth
above. Adjusted EBITDA is different from EBITDA that is derived solely from GAAP components. Adjusted EBITDA should not be construed as an alternative to net income, cash flows from operations or net
cash from operating or investing activities as defined by GAAP, and it is not necessarily indicative of cash available to fund our cash needs as determined in accordance with GAAP. In addition, not
all companies use identical calculations, and this presentation may not be comparable to similarly titled

33

---



measures
of other companies. A reconciliation of net income to EBITDA and Adjusted EBITDA follows the table.

Twelve
Months Ended
June 30, 2008(in thousands)Pro forma adjusted EBITDA

$
76,220Total leverage ratio


3.4 : 1.0Interest coverage ratio


4.9 : 1.0


The
following table sets forth a reconciliation of net income to EBITDA and Adjusted EBITDA:

Twelve
Months Ended
June 30, 2008(in thousands)Net income

$
12,277Depreciation expense related to cost of sales


20,738Depreciation and amortization expense


6,568Interest expense


31,556Interest income


(982
)Income tax expense


9,245EBITDA


79,402Other non-cash charges:Stock-based compensation expense


3,379Loss on dispositions of assets


1,708Impairments of assets


1,440Gain on sale of discontinued operations


(1,407
)Gain on property insurance settlement


(1,036
)Reddy Holdings items:Cost of antitrust investigations and related litigation(a)


5,802Transaction costs related to merger agreement(a)


3,405Gain on termination of merger agreement(a)


(17,000
)Adjusted EBITDA

$
75,693Disposition adjustments(b)


(506
)Adjusted EBITDA from continuing operations


75,187Acquisition adjustments(c)


1,017Elimination of lease expense(d)


16Pro forma adjusted EBITDA

$
76,220






34

---





Interest Rate Hedging Agreement

Effective September 12, 2005, we entered into an interest rate hedging agreement (the "Hedge") to fix the interest rate on a
portion of our term loan facility. The Hedge has a term of three years and ten months and an initial notional balance of $220 million. The notional balance decreases by $20 million on
October 12 of each of the following three years, beginning on October 12, 2006. As of June 30, 2008, the notional balance was $180 million. We pay a fixed rate of 4.431% on
the notional balance outstanding and receive an amount equal to 3-month LIBOR. Any net payable or receivable amount is settled quarterly. If we had been required to settle the Hedge as of
June 30, 2008, we would have paid $2.3 million. In accordance with hedge accounting rules, the fair value of the Hedge is included in the caption "Deferred Taxes and Other Liabilities,
net" in the consolidated balance sheet. Changes in the fair value of the Hedge are recorded as "Other Comprehensive Loss" in the consolidated statement of stockholders' equity. No gain or loss was
recognized in any period presented in the consolidated statement of operations. We are exposed to risk of loss in the event of non-performance by the counterparty to the Hedge. We do not
anticipate non-performance by the counterparty, however recent dislocations in the credit markets have resulted in greater uncertainty regarding counterparty performance.

Liquidity Outlook.Due to the seasonal nature of our business, we record the majority of our revenues and profits during the months of May through September. The
majority of the cash generated from those operations is received between July and November. We have used the excess cash generated from our 2007 selling season to fund our operations during the winter
months, as well as capital expenditures, acquisitions and dividends to our common stockholders.

We
estimate that our capital expenditures for 2008 will be approximately $17 million to $19 million, which will primarily be used to maintain and expand our traditional ice
operations. There can be no assurance that our capital expenditures will not exceed this estimate. In the normal course of our business, we dispose of obsolete, worn-out and unneeded
assets. As a result of dispositions of excess assets, we estimate that we will generate proceeds of approximately $2 million to $4 million in 2008 for net capital expenditures of
approximately $13 million to $17 million. The net proceeds from the sale of our bottled water and cold storage businesses are restricted pursuant to the terms our credit facilities for
the purposes of repayment of term loans, acquisitions or capital expenditures. It is currently our intention to utilize the net proceeds from those sales primarily to fund
capital expenditures prior to September 7, 2008 in order to maximize Available Cash under our credit facilities.

As
of August 6, 2008, we had approximately $18.8 million of cash on hand at Reddy Holdings, approximately $1.6 million and $0.7 million of restricted and
unrestricted cash, respectively, at Reddy Corp. and approximately $41.7 million of availability under our revolving credit facility, which reflected an outstanding balance of
$11.2 million and outstanding standby letters of credit of $7.1 million. Based

35

---



on
our expected level of operations, we believe that cash flows from operations, together with available borrowings under our revolving credit facility and cash balances currently on hand, will be
adequate to meet our future liquidity needs for at least the next twelve months.

As
noted previously, we record the majority of our sales and profits during the months of May through September and the majority of the cash generated from those operations is received
in July through November. During those months in 2008, subject to our cash requirements in connection with the antitrust investigations and related litigation, we expect to repay all amounts borrowed
under our revolving credit facility in the spring, fund dividends on our common stock, fund current capital expenditures and debt service and build up cash balances. As noted earlier in the discussion
of our senior discount notes (see "Senior Discount Notes"), interest expense on those notes becomes payable in cash on a semi-annually basis beginning May 1, 2009. The
annual cash obligation for this interest is $15.8 million. Expenses in connection with the antitrust investigations and related litigation may require the use of cash on hand at Reddy Holdings,
additional borrowings under our revolving credit facility or extend the time required to repay the currently outstanding balance of the revolving credit facility. We are evaluating our insurance
coverage with regards to these costs and are working to maximize any potential reimbursements.

Through
August 4, 2008, we have completed six acquisitions with an aggregate acquisition cost of approximately $3.8 million. The Company is continuing to evaluate
acquisition opportunities as part of our ongoing acquisition strategy. If were to complete additional acquisitions, additional borrowings under our revolving credit facility may be required.

Recently Adopted Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 157, "Fair Value Measurements". SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value estimates. Adoption of this standard on January 1, 2008 had no impact on our results of operations and financial position.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an Amendment of FASB Statement No. 115".
SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective
is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Adoption of this standard on January 1, 2008 had no
impact on our results of operations and financial position as we elected not to remeasure any of our financial assets or liabilities at fair value.

On
June 14, 2007, the FASB reached consensus on EITF Issue No. 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards". EITF
No. 06-11 requires that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified
nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase to additional paid-in capital. The amount recognized in
additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on
share-based payment awards. EITF No. 06-11 is effective for fiscal years beginning on or after December 15, 2007. Adoption of this standard on January 1, 2008 had no
impact on our results of operations and financial position.

36

---





New Accounting Pronouncements

In February 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 157-2, "Effective Date of FASB Statement
No. 157", which delayed the effective date of SFAS No. 157 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, to fiscal years beginning after November 15, 2008. We elected to defer the adoption of SFAS No. 157 for our nonfinancial assets and
nonfinancial liabilities until January 1, 2009.

In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations". SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business
combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. SFAS No. 141(R)
significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and
restructuring costs. In addition, under SFAS No. 141(R), changes in an acquired entity's deferred tax assets and uncertain tax positions after the measurement period will impact income tax
expense. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. We are currently evaluating the impact that this standard may have on our results of
operations and financial position.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities". SFAS No. 161 will require enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations
and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and
interim periods beginning after November 15, 2008. Adoption of this standard on January 1, 2009 is not expected to have any impact on our results of operations and financial position.

In
April 2008, the FASB issued FSP No. FAS 142-3, "Determination of the Useful Life of Intangible Assets". This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible Assets". FSP No.
FAS 142-3 is effective for fiscal years beginning on or after December 15, 2008 and will applied only to intangible assets acquired after the effective date. We are currently
evaluating the impact that this standard may have on our results of operations and financial position.

In
June 2008, the FASB issued FSP No. EITF 06-3-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities". This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share ("EPS") under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, "Earnings per Share". FSP No.
EITF 06-3-1 is effective for fiscal years beginning on or after December 15, 2008. All prior period EPS data presented after adoption is to be adjusted
retrospectively to conform with the provisions of FSP No. EITF 06-3-1. Adoption of this standard is not expected to have any impact on our results of operations or
financial position.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

37

---



General Economic Trends and Seasonality

Our results of operations are generally affected by the economic trends in our market area. We believe end users of our products use
packaged ice in many applications, including recreational activities, the construction industry, agriculture and special events. Weakness in the
national economy combined with other factors including inflation, interest rate fluctuations, increases in fuel and other energy costs, labor and healthcare costs and the availability of financing,
may negatively impact consumer confidence and the business prospects of our commercial customers. If consumer activities associated with the use of our products decline or the business activities of
our commercial customers decrease, our revenues and sales volumes may decline.

Our
results to date have not been significantly impacted by inflation, other than costs directly related to energy prices, such as fuel, plastic bags and electricity. If we continue to
experience high inflation in these costs, or inflationary pressures begin to have significant effects on other cost categories, we may not be able to pass on all of these higher costs to our customers
in the short term. We do believe that we will be able to pass on higher costs to our customers over longer periods of time, however there can be no assurance that we will be successful in such
efforts.

The
ice business is highly seasonal, with the bulk of demand coming in the warmer spring and summer months. Accordingly, we experience seasonal fluctuations in our net sales and
profitability. We make a disproportionate amount of our sales in the second and third calendar quarters. We also typically have net income in these same periods, whereas we typically experience net
loss in the first and fourth calendar quarters. We believe that approximately two-thirds of our revenues will occur during the second and third calendar quarters when the weather
conditions are generally warmer and demand is greater, while less than one-third of our revenues will occur during the first and fourth calendar quarters when the weather is generally
cooler. This belief is consistent with historical trends. As a result of seasonal revenue declines and the lack of proportional corresponding expense decreases, we will most likely experience lower
profit margins and even losses during the first and fourth calendar quarters. In addition, because our operating results depend significantly on sales during our peak season, our quarterly results of
operations may fluctuate significantly as a result of adverse weather during this peak selling period if the weather is unusually cool or rainy on a more national or regional basis.

Item 3.    Quantitative and Qualitative Disclosures About Market Risks

Market risk generally represents the risk that losses may occur in the value of financial instruments as a result of movements in
interest rates, foreign currency exchange rates and commodity prices. Our main market risk category is interest rate risk.

We
are exposed to some market risk due to the floating interest rates under our senior credit facilities. Principal balances outstanding under the term loan and the revolving credit
facility bear interest, at our option, at the London Inter-Bank Offered Rate ("LIBOR") plus 1.75% or the prime rate (as announced from time to time by the administrative agent) plus 0.75%.

Effective
September 12, 2005, we entered into an interest rate hedging agreement (the "Hedge") to fix the interest rate on a portion of the term loan outstanding under the senior
credit facility. See "Liquidity and Capital ResourcesInterest Rate Hedging Agreement".

As
of June 30, 2008, our credit facilities had an outstanding principal balance of $256.0 million at a weighted average interest rate of 4.4% per annum. At June 30,
2008, the 30-day LIBOR rate was 2.6%. Including the effect of the Hedge, the weighted average interest rate of balances outstanding under the credit facilities was 5.7%. If LIBOR were to
increase by 1% from that level, the annual increase in interest expense, given our principal balances at June 30, 2008 and the effect of the Hedge, would be approximately $0.8 million.

38

---



Item 4.    Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of June 30, 2008 to ensure that information relating to us and our consolidated subsidiary required to be disclosed in
our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussions regarding required disclosure. It should
be noted, however, that the design of any system of controls is limited in its ability to detect errors, and there can be no assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote. There has been no change in our internal control over financial reporting during the quarter ended June 30, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.

39

---



PART IIOTHER INFORMATION

Item 1.    Legal Proceedings



In March 2008, we and certain of our employees, including members of our management, received subpoenas issued by a federal grand jury
in the Eastern District of Michigan seeking documents and information in connection with an investigation by the Antitrust Division of the United States Department of Justice ("DOJ") into possible
antitrust violations in the packaged ice industry. In addition, on March 5, 2008, federal officials executed a search warrant at our corporate office in Dallas, Texas. The search warrant and
subpoenas we and our employees received are part of a broader industry inquiry by the DOJ; at least one other packaged ice manufacturer has also received such a subpoena, and The Home City Ice Company
has entered a guilty plea regarding a conspiracy to allocate customers and territories in southeastern Michigan and the Detroit, Michigan metropolitan area.

On
March 25, 2008, we were served by the Office of the Attorney General of the State of Florida with an antitrust civil investigative demand (the "Florida CID") requesting the
production of documents and information relating to an investigation of agreements in restraint of trade and/or price-fixing with respect to the pricing or market allocation of packaged ice. On
June 11, 2008, we received a civil investigative demand from the Office of the Attorney General of the State of Arizona (the "Arizona CID"). All of the documents and information requested by
the Arizona CID are included in the Florida CID and the Arizona CID states that it will be satisfied by the production of information which has been and will be provided to Florida in response to the
Florida CID. We have been advised that the Florida CID and the Arizona CID were issued as part of a multi-state antitrust investigation of the packaged ice industry and that the Attorneys General of
19 states and the District of Columbia are participating in the multi-state investigation. We believe the states' investigation is related to the ongoing investigation of the packaged ice industry by
the Antitrust Division of the DOJ. We may in the future receive additional civil investigative demands or similar information requests from other states participating in the multi-state investigation
or conducting their own investigations.

We
are cooperating with the authorities in these investigations and expect to continue to make available documents and other information in response to the subpoena and the civil
investigative demands. At this time we are unable to predict the outcome of these investigations or any potential effect they may have on us, our employees or our operations.

On
March 6, 2008, our Board of Directors formed a special committee of independent directors to conduct an internal investigation of these matters. The special committee has
retained counsel to assist in its investigation. The investigation is ongoing and the outcome of the investigation is unknown. We and our employees are cooperating in the special committee's
investigation.

Following
the announcement that the DOJ's Antitrust Division had instituted an investigation of the packaged ice industry, a number of lawsuits, including putative class action lawsuits,
have been instituted in various federal courts in multiple jurisdictions alleging violations of the federal antitrust laws and related claims and seeking damages and injunctive relief. On
June 5, 2008, the Judicial Panel on Multidistrict Litigation issued an Order that the majority of the civil actions then pending in federal courts be transferred and consolidated for pretrial
proceedings in the United States District Court for the Eastern District of Michigan. Since that time, additional cases have been ordered transferred to that court and we anticipate that the remaining
putative class actions pending in federal courts will also be transferred to that court for consolidated pretrial proceedings. Plaintiffs in several of the actions have agreed to extend our deadline
to respond to the subject complaints until 45 days after the filing of a consolidated amended complaint in the multidistrict proceedings. We and the other defendants are attempting to obtain
similar extensions from plaintiffs in the remaining actions. In addition to the

40

---



putative
class action lawsuits filed in federal court, at least one putative class action lawsuit has been filed in state court, alleging violations of state antitrust laws and related claims and
seeking damages and injunctive relief, and at least one direct action lawsuit has been filed in federal court alleging, among other things, violations of the federal antitrust laws and related claims
and seeking damages. We intend to vigorously defend the pending lawsuits. At this time, we are unable to predict the outcome of these lawsuits or any potential effect they may have on us or our
operations.



On July 3, 2007, a stockholder derivative complaint was filed on our behalf in the 199th Judicial District Court of
Collin County, Texas, Cause No. 199-02240-07, naming as defendants, among others, the members of our board of directors and GSO Capital Partners LP ("GSO"). We
were also named as a nominal defendant. On August 9, 2007, the complaint was amended by the plaintiff, purporting to state a class action claim on behalf of our stockholders. The amended
complaint alleged, among other things, that our directors breached their fiduciary duties in connection with the proposed merger transaction
between us and affiliates of GSO by approving a transaction that would purportedly provide certain of our stockholders and directors with preferential treatment at the expense of our other
stockholders and would not maximize stockholder value. A second amended complaint was filed on September 10, 2007 containing similar allegations and also setting forth various alleged omissions
from the disclosures provided by us in our preliminary proxy statement relating to the special meeting of our stockholders to adopt the merger agreement. All defendants have served answers to the
second amended complaint.

On
September 27, 2007, the plaintiff filed a motion seeking a temporary restraining order to enjoin the special meeting of our stockholders to adopt the merger agreement. We and
the other defendants opposed the motion and vigorously disputed the plaintiff's assertions. A hearing on the motion was scheduled for October 3, 2007. On that date, we and the other parties
reached an agreement in principle to settle the action in return for our providing certain supplemental disclosures in advance of the special meeting of our stockholders. The defendants also agreed
that, if the settlement was approved by the Court and consummated in accordance with its terms, we would pay plaintiff's attorneys' fees and expenses in an amount awarded by the Court but not to
exceed $325,000 in the aggregate. The defendants denied, and continue to deny, all allegations of wrongdoing and agreed to the settlement solely to avoid the burden and expense of further litigation
and to eliminate any possibility of a delay to the special meeting as a result of the litigation. The proposed settlement was expressly subject to consummation of the merger transaction, among other
conditions.

On
January 31, 2008, we announced that the merger agreement had been terminated. As a result, the proposed settlement will not be consummated. On March 28, 2008, the
defendants filed a motion seeking dismissal of the action on the ground that all of plaintiff's claims were rendered moot by the termination of the merger agreement. Plaintiff did not respond to that
motion. Instead, on May 19, 2008, plaintiff filed a second amended petition in which it dropped all of its claims in the first action other than a claim for attorneys' fees related to the
proposed settlement. The defendants have previously answered plaintiff's petition and asserted general denials.

Separately,
on July 3, 2008, plaintiff's attorneys filed a fee application seeking a fee of $495,000 for the "benefit" allegedly conferred on our stockholders by the prosecution
of the action and the supplemental disclosures that were disseminated pursuant to the proposed settlement. We and the other defendants intend to defend ourselves vigorously against plaintiff's claims
if the action continues.

On
February 13, 2008, the alleged stockholder that is plaintiff in the litigation described above, filed a second action styled as a putative stockholder derivative action on our
behalf, also in the 199th Judicial District Court of Collin County, Texas. The complaint names the members of our board of directors as defendants. In the complaint, the plaintiff claims that
the directors breached their

41

---



fiduciary
duties and committed waste by "causing the Company" to enter into the Settlement Agreement dated January 31, 2008 with certain affiliates of GSO relating to the termination of the
merger agreement. As a result of the termination of the merger agreement, we were paid $21 million by the GSO affiliates. Under the Settlement Agreement, we have reimbursed the GSO affiliates
$4 million for certain expenses incurred in connection with the proposed merger transaction. The complaint seeks injunctive relief against the $4 million payment to the GSO affiliates,
an order directing the defendants to reimburse us to the extent any such payment has been made, and plaintiff's costs and attorneys' fees in bringing the action.

On
March 28, 2008, the defendants filed a motion to dismiss the petition and we and the defendants also served and filed answers to the petition. The directors' motion argues that
plaintiff failed to make a pre-suit demand on the board of directors before instituting the action and failed to allege facts showing that such a demand would have been futile. The motion
also argues that plaintiff has failed to state a claim against the directors under the business judgment rule and that plaintiff's claims for money damages are barred by the exculpatory provision of
Reddy Ice's certificate of incorporation. The plaintiff has not yet responded to the motion and the court has not yet established a date for a hearing on the defendants' motion. The defendants intend
to defend themselves vigorously against plaintiff's claims.



We are also involved in various other claims, lawsuits and proceedings arising in the ordinary course of business. There are
uncertainties inherent in the ultimate outcome of such matters and it is difficult to determine the ultimate costs that we may incur. We believe the resolution of such other ordinary course
uncertainties and the incurrence of such costs will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 1A.    Risk Factors

Except as set forth below, there have been no material changes to the factors described in our Annual Report on
Form 10-K for the year ended December 31, 2007.

Even if our board of directors desires to declare and pay dividends, we might not have cash in the future to pay dividends in the intended amounts or at all.

Our ability to pay dividends, and our board of directors' determination to maintain our current dividend policy, will depend on
numerous factors, including the following:



42

---





Our
actual cash available to pay dividends may not equal or exceed the amount necessary to pay dividends at any time. Over time, our capital and other cash needs will invariably be
subject to uncertainties, which could affect whether we pay dividends and the level of any dividends we may pay in the future. In addition, to the extent that we would seek to raise additional cash
from additional debt incurrence or equity security issuances, we cannot assure you that such financing will be available on reasonable terms or at all. Each of the factors listed above could
negatively affect our ability to pay dividends in accordance with our dividend policy or at all.

Litigation and investigations pending against us could materially impact our business and results of operations.

We are currently a party to various legal proceedings, claims, disputes, litigation and investigations. In particular, the Antitrust
Division of the United States Department of Justice ("DOJ") is currently conducting an investigation into possible antitrust violations in the packaged ice industry. In addition, various state
attorneys general are conducting a coordinated civil investigation into possible antitrust violations in the packaged ice industry. Numerous putative class actions have also been filed against us and
other packaged ice producers alleging violations of federal and state antitrust laws and related claims. A special committee of our board of directors is conducting an internal investigation of these
matters. Investigating these matters and responding to the government investigations and related litigation will involve substantial expense to us, which could have a material adverse impact on our
financial position and our results of operations. In addition, our financial results could be materially and adversely impacted by unfavorable outcomes in any of these or other pending or future
litigation or investigations. Our ability to maintain our dividend policy and comply with the covenants in our debt agreements may also be adversely affected by the costs of such investigations and
litigation as well as any unfavorable outcomes in these or other pending or future litigation or
investigations. There can be no assurances as to the outcome of any litigation or investigation and the outcome of any such litigation, investigations and other claims are subject to inherent
uncertainties. There exists the possibility of a material adverse impact on our financial position and our results of operations for the period in which the effect of an unfavorable final outcome
becomes probable and reasonably estimable.

If we are unable to attract and retain senior executives and other qualified employees, our business could be adversely affected.

Our success depends in part on our ability to attract, hire, train and retain qualified managerial, sales and marketing personnel.
Competition for these types of personnel is high. Our success also depends to a significant extent on the continued service and performance of our management team and, in particular, our senior
management. We may be unsuccessful in attracting and retaining the personnel we require to conduct our operations successfully. Although we successfully completed our search for a new Chief Executive
Officer in June 2008, we cannot assure you that we will be successful in attracting suitable candidates for other positions that are or may need to be filled. In particular, uncertainty related to the
ongoing antitrust investigations and related litigation may make attracting qualified personnel more difficult and may make it more difficult to retain our existing management team. In addition, we do
not carry "key man" life insurance. Our inability to successfully attract and retain qualified personnel or the loss of any member of our management team could impair our ability to execute our
business plan.

43

---



Our acquisitions may not be successfully integrated and could cause unexpected financial or operational difficulties; failure to make acquisitions may limit our growth.

From 2005 to August 4, 2008, we completed a total of 38 acquisitions. We anticipate that we will, from time to time, selectively
acquire additional businesses, assets or securities of companies that we believe would provide a strategic fit with our business. Acquisitions are accompanied by risks, such as potential exposure to
unknown liabilities of acquired companies and the possible loss of key employees and customers of the acquired business. Further, acquisitions are subject to risks associated with the difficulty and
expense of integrating the operations and personnel of the acquired companies, the potential disruption to our business and the diversion of management time and attention, any of which could increase
the costs of operating our business, negate the expected benefits of the acquisitions or result in the loss of customers.

We
are continuing to evaluate acquisition opportunities as part of our ongoing acquisition strategy. A substantial portion of the historical growth in our business has been as a result
of acquisitions. If the size and number of our future acquisitions decreases from our historical trend, our business may not grow as rapidly, or at all, as compared to historical periods.

Our revenues and sales volumes may be negatively impacted by macroeconomic factors outside of our control.

We believe end users of our products use packaged ice in many applications, including recreational activities, the construction
industry, agriculture and special events. In recent months, various segments of the United States economy, including housing and construction and the credit markets, have deteriorated. Our revenues
and sales volumes may decline as activity by commercial end users of our products declines. Weakness in the national economy combined with other factors including inflation, interest rate
fluctuations, increases in fuel and other energy costs and healthcare costs and the availability of financing, including mortgages and consumer credit, may negatively impact consumer confidence and
result in changes to consumer spending patterns. If consumer activities associated with the use of our products decline, our revenues and sales volumes may decline.

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

None.

Item 3.    Defaults Upon Senior Securities

None.

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

On May 28, 2008, we held our annual meeting of stockholders. At the annual meeting, the following matters were voted
upon:



44

---





A
total of 21,999,995 shares of the company's common stock, par value $0.01 per share, were entitled to vote at the meeting. Of these shares, 20,933,933 shares were represented in person
or by proxy at the meeting and voted as follows:



Votes For

Votes WithheldWilliam P. Brick


20,790,561


143,372Theodore J. Host


20,803,577


130,356Christopher S. Kiper


20,786,131


147,802Michael S. McGrath


20,797,433


136,500Michael H. Rauch


20,755,686


178,247Robert N. Verdecchio


20,831,482


102,451




Item 5.    Other Information

None.

Item 6.    Exhibits

See Index to Exhibits on page 47.

45

---



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

REDDY ICE HOLDINGS, INC.Date: August 7, 2008

By:

/s/GILBERT M. CASSAGNEGilbert M. Cassagne
Chief Executive OfficerDate: August 7, 2008

By:

/s/STEVEN J. JANUSEKSteven J. Janusek
Chief Financial and Accounting Officer


46

---



INDEX TO EXHIBITS

Exhibit No.

Description31.1

Rules 13a-14(a) and 15d-14(a) Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Rules 13a-14(a) and 15d-14(a) Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Section 1350 Certification of Chief Executive Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Section 1350 Certification of Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


---

47

---



QuickLinks