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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended May 31, 2003

OR

For the transition period from              to             

Commission File Number 1-11165

INTERSTATE BAKERIES CORPORATION

(Exact name of registrant as specified in its charter)

(816) 502-4000

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  x  No  ¨

The aggregate market value of the 35,092,242 shares of voting stock of the registrant held by non-affiliates, computed by reference to the $10.16 closing price of such stock on August 1, 2003 was $356,537,179. The aggregate market value of the 35,276,835 shares of voting stock of the registrant held by non-affiliates, computed by reference to the $25.05 closing price of such stock on November 15, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, was $883,684,717.

There were 44,804,515 shares of common stock, $0.01 par value per share, outstanding as of August 1, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our Definitive Proxy Statement for the 2003 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A are incorporated by reference into Part II (Item 5) and Part III (Items 10, 11, 12, 13 and 14) of this report.

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INDEX

Forward-Looking Statements

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FORWARD-LOOKING STATEMENTS

Some information contained in or incorporated by reference into this Annual Report on Form 10-K may be forward-looking statements within the meaning of federal securities laws. These forward-looking statements are not historical in nature and include statements relating to, among other things: strategic initiatives, including Program SOAR; advertising support and brand building; availability of raw materials, packaging, fuels and utilities; the costs associated with our business, including commodities, energy and employee costs; operating and financial benefits from our portfolio of brands, geographic diversity and distribution system; compliance with government regulations; revenues generated by our business, including the changing purchasing patterns of consumers and our ability to maintain market share; profitability; our cash needs, including capital expenditures, dividends, debt repayment and operating and capital lease commitments; the future payment of dividends; compliance with our senior credit facility covenants; outcome of legal proceedings to which we are or may become a party and general economic conditions. These forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from such statements. Factors that could cause actual results to differ materially include, but are not limited to, increased costs or delays in Program SOAR or other problems related thereto; actions of competitors, including pricing policy and promotional spending; the availability and costs of raw materials, packaging, fuels and utilities, and the ability to recover these costs in the pricing of products; the effectiveness of hedging activities; increased pension, health care, workers’ compensation and other employee costs; the effectiveness of advertising and marketing spending; the availability of capital on acceptable terms; changes in general economic and business conditions (including in the bread and sweet goods markets); changes in consumer tastes or eating habits; any inability to protect our intellectual property rights; further consolidation in the food retail industry; future product recalls or safety concerns; expenditures necessary to carry out cost-saving initiatives and savings derived from these initiatives; changes in our business strategies; bankruptcy filings by customers; costs associated with environmental compliance and remediation; actions of governmental entities, including regulatory requirements; increased costs and uncertainties related to periodic renegotiation of union contracts; changes in our relationship with employees and the unions that represent them; the outcome of legal proceedings to which we are or may become a party, including the securities class actions filed after our February 11, 2003 press release; business disruption from terrorist acts, our nation’s response to such acts and acts of war; and other factors. These statements speak only as of the date of this Annual Report on Form 10-K, and we disclaim any intention or obligation to update or revise any forward-looking statements to reflect new information, future events or developments or otherwise, except as required by law. All subsequent written and oral forward-looking statements attributable to us and persons acting on our behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this Annual Report on Form 10-K. See “Business – Trends, Risks and Uncertainties.”

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PART I

ITEM 1. BUSINESS

General

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

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

We operate 58 bakeries and approximately 1,250 thrift stores and employ more than 34,000 people. We distribute our products in markets representing approximately 90% of the United States population. Our sales force delivers products directly from more than 1,000 distribution centers on approximately 9,300 delivery routes to more than 200,000 food outlets and stores.

We or our predecessors have baked and distributed fresh baked bread and sweet goods since 1927. We have grown to our present size primarily through acquisitions of other baking businesses. In 1998, we acquired the assets of J.J. Nissen Baking Companies, My Bread Baking Co. operation in New Bedford, Massachusetts, and the Drake’s Baking Company. In conjunction, we acquired such brand names as “Devil Dogs^®,” “Ring Dings^®,” “Yodels^®” and “Yankee Doodles^®.” Our acquisitions throughout the years have allowed us to increase scale, expand our product and brand portfolio and broaden our geographic presence.

Products and Brands

We produce, market, distribute and sell white breads, variety breads, crusty breads, reduced calorie breads, English muffins, croutons, rolls and buns under a number of well-known national brand names, including “Wonder^®,” “Home Pride^®,” “Bread du Jour^®,” “Mrs. Cubbison’s^®” and “Marie Callender’s^®,” and regional brand names, including “Beefsteak^®,” “Brown’s Classic^®,” “Bunny^®,” “Buttermaid^®,” “Butternut^®,” “Colombo^®,” “Cotton’s^® Holsum,” “Country Kitchen^®,” “Di Carlo^®,” “Eddy’s^®,” “Emperor Norton^®,” “Grandma Emilie’s^®,” “Holsum^®,” “J.J. Nissen^®,” “Merita^®,” “Millbrook Farms^®,” “Parisian^®,” “Roman Meal^®,” “Sunbeam^®,” “Sun-Maid^®,” “Sweetheart^®,” “Toscano^®” and “Weber’s^®.” Our snack cakes, donuts, sweet rolls, snack pies, breakfast pastries, variety cakes, large cakes and shortcakes are also sold under a number of well-known national and regional brand names, including “Hostess^®,” “Drake’s^®” and “Dolly Madison^®.” Our various brands are positioned across a wide spectrum of consumer categories and price points.

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

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Marketing and Distribution

The majority of our bread sales are through national mass merchandisers and supermarkets, while our sweet goods are sold principally through national mass merchandisers, supermarkets and convenience stores. No single customer accounts for more than 10% of our net sales. Sweet goods sales tend to be somewhat seasonal, with historically weaker periods during summer months where hot weather prevails and during the winter holiday period, which we believe is attributable to altered consumption patterns during the holiday season. Sales of buns, rolls and shortcake products are historically higher in the spring and early summer months.

Our marketing and advertising campaigns are conducted through targeted television and radio advertising, coupons in newspapers and other printed media.

We distribute our products in markets representing approximately 90% of the United States population, with our strongest presence (as measured by sales, market share and number of facilities) in southern California, the Pacific northwest, the upper midwest, the northeast, the mountain states, the middle Atlantic states and Florida. With plants and distribution centers across the United States, we are located close to the major marketplaces enabling efficient delivery and superior customer service. We do not keep a backlog of inventory for the majority of our fresh bakery products, as they are generally promptly distributed to our customers after being produced.

Our fresh bakery products are delivered from our network of 58 bakeries to our more than 1,000 distribution centers. The products are then delivered primarily to national mass merchandisers, supermarkets and convenience stores by our sales force on our approximate 9,300 delivery routes. In accordance with industry practice, we repurchase dated and damaged products from most of our customers. Dated bread products are delivered to our approximately 1,250 thrift stores for retail sale. Thrift store sales represented approximately 13% of our net sales during the 52-week period ended May 31, 2003.

Sources and Availability of Raw Materials

The ingredients of bread and sweet goods, principally flour, yeast, sweeteners and edible oils, are readily available from numerous sources. Cocoa, an ingredient in some sweet goods, generally is available from limited sources. We are currently using a sole supplier for the ingredient used to produce fresh bread products under our extended shelf life program. We do not have a long-term supply contract with this supplier; however, we believe this is in our best interest because of rapidly changing technology in this area. We have identified alternative sources to produce this ingredient as well as alternative ingredients that we believe could produce the same results for our extended shelf life program. We utilize commodity hedging derivatives, including exchange traded futures and options on wheat, corn, soybean oil and certain fuels, to reduce our exposure to commodity price movements for future ingredient and energy needs. The terms of such instruments, and the hedging transactions to which they relate, generally do not exceed one year. We also purchase other major commodity requirements through advance purchase contracts, generally not longer than one year in duration, to lock in prices for raw materials. The balance of our commodity needs are purchased on the spot markets. Through our program of central purchasing of baking ingredients and packaging materials, we believe we are able to utilize our national presence to obtain competitive prices.

The prices for raw materials are dependent on a number of factors including the weather, crop production, transportation and processing costs, government regulation and policies and worldwide market supply of, and demand for, such commodities. Although commodity prices have been volatile and may continue to be volatile, historically we have attempted to recover the majority of our commodity cost increases through a combination of increasing prices, switching to a higher-margin revenue mix and obtaining additional operating efficiencies. However, under certain economic situations, including those experienced recently, price increases on our products have negatively impacted volume trends.

Employees

We employ more than 34,000 people. Approximately 80% of our employees are covered by one of our approximately 550 union contracts. Most of our unionized workers are members of either the International Brotherhood of Teamsters or the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union. Our union contracts are typically renegotiated once every three to five years. None of the individual collective bargaining agreements is material to our consolidated operations. However, because our union groups are concentrated in the two organizations listed, contract negotiations with any local unit can involve the threat of strike by other union members at other IBC facilities.

We believe that relations with our union and nonunion employees are generally good.

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Competition

We face intense competition in all of our markets from large national bakeries, smaller regional operators, small retail bakeries, supermarket chains with their own bakeries, grocery stores with their own in-store bakery departments or private label products and diversified food companies. Competition is based on product quality, price, brand recognition and loyalty, effective promotional activities, access to retail outlets and sufficient shelf space and the ability to identify and satisfy emerging consumer preferences. Customer service, including responsiveness to delivery needs and maintenance of fully stocked shelves, is also an important competitive factor and is central to the competition for retail shelf space among bread and sweet goods distributors. Sara Lee Corporation, George Weston Limited, Flowers Foods, Inc. and Grupo Bimbo, S.A. are our largest bread competitors, each marketing bread products under various brand names. George Weston Limited, Grupo Bimbo, S.A., McKee Foods Corporation, Tasty Baking Company and Krispy Kreme Doughnuts, Inc. are our largest competitors with respect to sweet goods sales. From time to time we experience price pressure in certain of our markets as a result of competitors’ promotional pricing practices. However, we believe that our geographic diversity helps to limit the effect of regionally-based competition.

Governmental Regulation; Environmental Matters

Our operations are subject to regulation by various federal, state and local government entities and agencies. As a baker of fresh baked bread and sweet goods, our operations are subject to stringent quality, labeling and food supply protection standards, including the Federal Food and Drug Act and Bioterrorism Act of 2002. Our bakery operations and delivery fleet are subject to various federal, state and local environmental laws and workplace regulations, including the Occupational Safety and Health Act, the Fair Labor Standards Act, the Clean Air Act and the Clean Water Act. We believe that our current legal and environmental compliance programs adequately address our responsibilities under such laws and regulations and that we are in substantial compliance with such laws and regulations.

We have underground storage tanks at various locations throughout the United States that are subject to federal and state regulations establishing minimum standards for these tanks and, where necessary, remediation of associated contamination. On some parcels of owned real property, we discovered that underground storage tanks containing gasoline or diesel fuel had leaked and contaminated the adjacent soil. Typically, the discovery of these leaks and of the resulting soil contamination was made in connection with the sale of a property or the removal of an underground storage tank. When we discover that a leaking tank has contaminated a site, we take appropriate steps to clean up or remediate the site. On some sites, this process continues to the present time. In addition, the Environmental Protection Agency (EPA) has made inquiries into the refrigerant handling practices of companies in our industry. One of these companies entered into a negotiated settlement with the EPA and made a substantial settlement payment. We have received a request for information from the EPA relating to our handling of regulated refrigerants, which we use in equipment in our bakeries for a number of purposes, including to cool the dough during the production process. In January 2002, the EPA offered a partnership program to members of the baking industry pursuant to which individual companies can elect to participate. Because we had previously received a request for information from the EPA, we were excluded from the program, which was recently modified to expand time frames and provide greater incentive for participation. We believe we should be allowed to participate in, and receive the benefits of, the program, and we plan to pursue this issue with the EPA. The EPA has not assessed any fines relating to our practices to date; however, the EPA may do so in the future. The EPA has recently announced a settlement with another member of our industry. If the EPA were to assess a fine against us in connection with our handling of these regulated refrigerants, we would vigorously challenge any such assessment. We also have received notices from the EPA, state agencies, and/or private parties seeking contribution, that we have been identified as a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) arising out of the alleged disposal of hazardous substances at certain disposal sites on properties owned or controlled by others. Because liability under CERCLA may be imposed retroactively without regard to fault, we may be required to share in the cleanup cost with respect to six “Superfund” sites. Our ultimate liability in connection with these sites may depend on many factors including the volume and types of materials contributed to the site, the number of other PRPs and their financial viability and the remediation methods and technology to be used.

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

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Availability of Reports; Website Access

Our Internet address is http://www.interstatebakeriescorp.com. Under the heading “SEC Filings” on our website, we provide a hyperlink to the 10kWizard.com website. Through that hyperlink, we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC).

Trends, Risks and Uncertainties

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

Problems related to Program SOAR could adversely affect financial condition and operations.

We are involved in a major, company-wide project that we refer to as Program SOAR, an acronym for Systems Optimization And Re-engineering, that is focusing on re-engineering our business processes in an effort to increase efficiency and on rationalizing our investment in production, distribution and administrative functionality to reduce the ongoing cost of supporting this infrastructure. Direct costs of the three-year program are expected to be approximately $55,000,000 with the majority of these costs related to software and hardware acquisition and consulting fees. Additional costs are anticipated as we identify and implement strategies that are designed to provide future savings. The costs associated with Program SOAR may exceed our estimates and may adversely impact our financial condition. We hope to achieve positive cumulative cash flow from the program by the end of fiscal 2005; however, there can be no assurance that this will be achieved. In addition, operations may be disrupted during the implementation of Program SOAR and we may encounter unforeseen problems with the reorganization, which could adversely affect our operations and financial results.

Competition could adversely impact operating results.

The baking industry is highly competitive. Some of our competitors are part of a larger affiliated group and could have greater financial resources than us. From time to time, we experience price pressure in certain of our markets as a result of our competitors’ promotional pricing practices. Increased competition could result in reduced sales, margins, profits and market share. See “Business - Competition.”

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

The principal raw materials, including flour, yeast, sweeteners, cocoa and edible oils, used to bake our fresh bread and sweet goods and the paper, films and plastics used to package our products are subject to substantial price fluctuations. Commodity prices have been volatile and may continue to be volatile. Any substantial increase in the prices of raw materials may have an adverse impact on our profitability. We enter into contracts to be performed in the future, generally with a term of one year or less, to purchase raw materials at fixed prices to protect us against price increases. These contracts could cause us to pay higher prices for raw materials than are available in the spot markets. Our bakeries and other facilities also use natural gas, propane and electricity to operate. Our distribution operations use gasoline and diesel fuel to deliver our products. Substantial future increases in prices for, or shortages of, these fuels or electricity could have a material adverse effect on our operations and financial results. See “Business - Sources and Availability of Raw Materials.”

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

Pension, health care and workers’ compensation costs have been increasing and may continue to increase. Any substantial increase in pension, health care or workers’ compensation costs may have an adverse impact on our profitability. In addition, a shortage of qualified employees or a substantial increase in the cost of qualified employees could have a material adverse effect on our operations and financial results.

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

We believe that maintaining our brands is an important aspect of our efforts to attract and expand our consumer base. We intend to spend increasing amounts of money on, and devote greater resources to advertising, marketing and other brand-

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building efforts to preserve and enhance consumer awareness of our brands. We may not be able to successfully maintain or enhance consumer awareness of our brands and, even if we are successful in our branding efforts, such efforts may not be cost-effective. If we are unable to maintain or enhance consumer awareness of our brands in a cost effective manner, our business, operating results and financial condition would be harmed.

The terms of our indebtedness impose significant restrictions on our business.

The agreement governing our senior secured credit facility contains various covenants that limit our ability to, among other things, incur or become liable in respect of additional indebtedness; create or suffer to exist certain liens; enter into business combinations or asset sale transactions; make restricted payments, including dividends over a specified amount; make investments; enter into transactions with affiliates; and enter into new businesses.

These restrictions could limit our ability to obtain future financing, sell assets, make acquisitions or needed capital expenditures, withstand a future downturn in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise. Our senior secured credit facility also requires us to maintain specified financial ratios. Our ability to meet future financial ratios can be affected by events beyond our control, such as general economic conditions. Our failure to maintain any applicable financial ratios would prevent us from borrowing additional amounts under our senior secured credit facility and could result in a default under that facility, which could cause the indebtedness outstanding under the facility to become immediately due and payable. If we were unable to repay those amounts, the lenders under our senior secured credit facility could initiate a bankruptcy proceeding or liquidation proceeding or proceed against the collateral granted to them to secure that indebtedness. If the lenders under our senior secured credit facility were to accelerate the repayment of outstanding borrowings, we might not have sufficient assets to repay our indebtedness.

In addition, if we amend our debt agreements, we may incur additional debt fees and higher interest rates.

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

The willingness of consumers to purchase premium branded food products depends in part on national and local economic conditions. In periods of economic downturns or uncertainty, consumers may purchase more private label or other lower priced products. If this were to happen, our sales volume of higher margin branded products and our profitability could suffer accordingly.

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

Our success depends in part on our ability to anticipate the tastes and dietary habits of consumers and to offer products that appeal to their preferences. Consumer preferences change, and our failure to anticipate, identify or react to these changes could result in reduced demand for our products, which could in turn cause our financial and operating results to suffer.

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

We regard our copyrights, patents, trademarks, trade secrets and similar intellectual property as important to our success. The efforts we have taken to protect our proprietary rights may not be sufficient or effective. In the event that any of our proprietary information is misappropriated, our business could be seriously harmed. For example, if we are unable to protect our trademarks from unauthorized use, our brand image may be harmed. Other parties may take actions that could impair the value of our proprietary rights or the reputation of our products. Any impairment of our brand image could cause our stock price to decline. Also, we may not be able to timely detect unauthorized use of our intellectual property and take appropriate steps to enforce our rights. In the event we are unable to enforce our intellectual property rights, our business could be adversely affected. In addition, protecting our intellectual property and other proprietary rights can be expensive. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and consequently harm our operating results.

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

As supermarket chains continue to consolidate and as mass merchants gain scale, our larger customers may seek more favorable terms for their purchases of our products, including increased spending on promotional programs. Sales to our larger customers on terms less favorable than our current terms could have an adverse effect on our profitability.

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Future product recalls or safety concerns could adversely impact business and financial results.

We may be required to recall certain of our products should they be mislabeled, contaminated or damaged. We also may become involved in lawsuits and legal proceedings if it is alleged that the consumption of any of our products causes injury, illness or death. A product recall or an adverse result in any such litigation could have a material adverse effect on our operating and financial results.

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

A number of our brand names are owned, and products are produced and sold under these brand names, by third parties outside the United States. Product recalls or adverse publicity about the safety and quality of these products could discourage consumers from buying our products, which could have a negative effect on our business and financial results.

Government regulation could adversely impact operations.

Our operations and properties are subject to regulation by various federal, state and local government entities and agencies. Future compliance with or violation of such regulations, and future regulation by various federal, state and local government entities and agencies, which could become more stringent, may have a material adverse effect on our operations and financial results. For example, we are subject to federal, state and local environmental laws. We may incur significant costs complying with both existing and future environmental laws and regulations. In particular, we are subject to regulation by the Occupational Safety and Health Administration and the EPA. We are unable to predict whether any agency will adopt any regulations that would have a material adverse effect on our operations.

Although we believe that our safety procedures for complying with environmental laws and regulations are adequate, the risk of accidental contamination or injury cannot be eliminated completely. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our insurance. We may not be able to maintain insurance on acceptable terms, if at all. We could be required to incur significant costs to comply with current or future environmental laws and regulations.

In addition, we could also be subject to litigation arising out of government regulations, which could have a material adverse effect on our operations and financial results. See “Business - Governmental Regulation; Environmental Matters.”

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

Our operations could be adversely affected by our failure to reach agreement with labor unions representing our employees. In recent years, we have experienced work stoppages at a number of our bakeries, some of which have had an adverse impact on our operations. Our operations also could be adversely affected by terms of collective bargaining agreements that prevent us from competing effectively. See “Business - Employees.”

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ITEM 2. PROPERTIES

Bakeries

We own and operate 58 bakeries in the following locations:

During fiscal 2003, we completed the conversion of our facility in Henderson, Nevada to a bakery. We also completed upgrades to our Orlando, Florida; Tulsa, Oklahoma and Birmingham, Alabama bakeries.

Other Properties

We operate more than 1,000 distribution centers and approximately 1,250 thrift stores which are located throughout our distribution area. Generally, each thrift store is between 500 and 2,000 square feet in size. Most of the stores are located at our distribution centers, with the remainder located along our distribution routes. The majority of our distribution centers and thrift stores are leased facilities.

ITEM 3. LEGAL PROCEEDINGS

In February and March 2003, seven putative class actions were brought against us and certain of our current or former officers and directors in the United States District Court for the Western District of Missouri. The lead case is known as Smith, et al. v. Interstate Bakeries Corp., et al., No. 4:03-CV-00142 FJG (W.D. Mo.). Most of the complaints were brought on behalf of putative classes of shareholders who purchased or sold IBC stock between September 17, 2002 and December 17, 2002. One complaint, however, is brought on behalf of a putative class beginning in April 2002 and several complaints seek to include shareholders who purchased or sold stock through February 11, 2003. The complaints generally allege that certain of our press releases, SEC filings and other public statements prior to a February 11, 2003 press release reducing our guidance contained misrepresentations regarding our financial condition. The complaints further allege that certain officers and directors improperly sold IBC shares at artificially inflated prices during the class period. The cases seek compensatory damages (including interest), disgorgement of allegedly improper gains from insider stock sales, costs and expenses and any other relief deemed proper by the court. The seven cases have been assigned to a single judge, and we have agreed with the

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plaintiffs that the cases should be consolidated. The Court, however, has not yet acted to implement the parties’ agreement. We have not yet been required to file answers to the complaints. The litigation is in its preliminary stages and the amount of potential loss, if any, cannot reasonably be estimated.

In June 2003 a purported shareholder derivative lawsuit was filed in Missouri state court against certain current and former officers and directors of IBC, seeking damages and other relief. In the case, which is captioned Miller v. Coffey, et al., No. 03-CV-216141 (Cir. Ct., Jackson Cty.), plaintiffs allege that the defendants in this action breached their fiduciary duties to IBC by using material non-public information about IBC to sell IBC stock at prices higher than they could have obtained had the market been aware of the material non-public information. Our board of directors previously had received a shareholder derivative demand from the plaintiffs in the June 2003 derivative lawsuit, requesting legal action by us against certain officers and directors of IBC. In response, the board of directors has appointed a Special Review Committee to evaluate the demand and to report to the board. That review is ongoing.

The New York Stock Exchange has notified us that its Market Trading Analysis Department is reviewing transactions in the common stock of IBC occurring prior to our February 11, 2003 reduction in guidance. We have responded to the Exchange’s requests for information and expect to cooperate fully in that inquiry.

In November 1996 certain of our route sales representatives (RSRs) brought a class action on behalf of RSRs in the State of Washington, alleging that we had failed to pay required overtime wages under state law. The case is captioned Santa Rosa, et al. v. Interstate Brands Corp., No. 51574-8-1 (D.Wa.). The class in the case covers RSRs in the State of Washington who worked for us during all or part of the general period from November 1993 through the date of the settlement. The plaintiffs seek unpaid wages, with interest, and other relief deemed proper by the court. During the third quarter, we tentatively settled this class action with the plaintiffs for approximately $6,100,000, subject to notice to the class and final court approval. On July 25, 2003, the court approved the settlement. There is, however, a 30-day period for appeal. We have established reserves that will sufficiently cover the anticipated costs of the settlement. We also have negotiated and put into effect a new union contract with the RSRs in the State of Washington that we expect to address this issue. We have asked the State of Washington’s Department of Industry and Labor to review and approve the contract’s provision relating to overtime pay.

We are aware of two additional wage and hour cases in New Jersey that have been brought under state law, one of which has been brought on behalf of a putative class of RSRs. The case involving the putative class is captioned Ruzicka, et al. v. Interstate Brands Corp., et al., No. 03-CV 2846 (FLW) (Sup. Ct., Ocean City, N.J.), and the other case is captioned McCourt, et al. v. Interstate Brands Corp., No. 1-03-CV-00220 (FLW) (D.N.J.). We are also aware of an additional wage and hour case brought on behalf of a putative class of bakery production supervisors under federal law, captioned Anugweje v. Interstate Brands Corp., 2:03 CV 00385 (WGB) (D.N.J.). These cases are in their preliminary stages. We are evaluating these cases and the amount of potential loss, if any, cannot reasonably be estimated.

On July 17, 2002, we were served with a state court complaint which is now pending in the United States District Court for the Northern District of Illinois, captioned Anael, et al. v. Interstate Brands Corporation and Interstate Bakeries Corporation, Case No. 2C 5192, filed by one employee and one former employee. This complaint arises, in part, from our removal of insulation alleged to have contained asbestos at one of our bakeries in January 1998. We have also been a defendant in other civil actions arising out of the situation described above. Of the civil actions, those remaining are Anael v. Interstate Brands Corporation, Case No. 00 C 6765, filed October 3, 2000, pending in the United States District Court, Northern District of Illinois; and a purported class action suit captioned Dennis Gianopolous, et al. v. Interstate Brands Corporation and Interstate Bakeries Corporation, Case No. 98 C 1073, filed February 2, 1998, pending in the Circuit Court of Cook County Illinois. These civil actions seek unspecified monetary damages, funds for medical monitoring and, in one case, damages under the Racketeer Influenced and Corrupt Organizations Act. In addition, related to the same facts, in 1998, the office of the U.S. Attorney for the Northern District of Illinois in a joint investigation with Illinois officials began investigating the possibility of criminal violations of the Clean Air Act. The government closed the joint investigation without returning any indictments. In addition, the State of Illinois filed a civil complaint against us alleging the insulation removal violated various provisions of the Illinois Environmental Protection Act. This case was voluntarily dismissed; however, the State has recently sought to refile it pending settlement negotiations. In none of the foregoing cases has any court or governmental body made any factual finding of liability or violation of environmental regulations. Based upon our own investigation, including assistance from third party consultants, we believe that all of these matters are without merit. The amount of potential loss, if any, cannot reasonably be estimated.

We have received a request for information from the EPA relating to our handling of regulated refrigerants, which we use in equipment in our bakeries for a number of purposes, including to cool the dough during the production process. See “Business - Governmental Regulation; Environmental Matters.” The amount of potential loss, if any, cannot reasonably be estimated.

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On June 11, 2003 the South Coast Air Quality Management District in California issued a Notice of Violation alleging that we had failed to operate catalytic oxidizers on bakery emissions at our Pomona, California facility in accordance with the conditions of that facility’s Clean Air Act Title V Permit. Among other things, that permit requires that the operating temperatures of the catalytic oxidizers be at least 550 degrees Fahrenheit. Under the South Coast Air Quality Management District rules, violations of permit conditions are subject to penalties of up to $1,000 per day, for each day of violation. The Notice of Violation alleges we were in violation of the permit for approximately 838 days from September 1999 through June 2003. We are in the preliminary stage of investigating the alleged violation of the permit conditions and are unable to reasonably estimate what the potential cost of any penalties or demands relating to the Notice of Violation ultimately may be.

We currently are undergoing a multi-state abandoned property examination. We have provided and will continue to provide information requested by the states’ representatives. No assessments related to this examination have been received at this point in time. We believe the ultimate outcome of this examination will not have a material adverse impact on our financial position or net income.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is listed on the New York Stock Exchange and is traded under the symbol “IBC.” The table below presents the range of high and low closing sales prices of our common stock by quarter for each fiscal quarter in fiscal 2003 and 2002, as well as the dividends paid on our stock in each such quarter:

Stock Price

As of August 1, 2003, we had issued and outstanding 44,804,515 shares of our common stock, which were held of record by 2,335 persons (excluding account holders in our 1991 Employee Stock Purchase Plan).

Our board of directors has no present plan to discontinue or reduce the payment of quarterly dividends. However, if cash flow from operations is not sufficient to allow for payment of additional common stock dividends in fiscal 2004, such dividends may be discontinued. Any payment of quarterly dividends ultimately will depend upon such factors as our financial condition, results of operations and current and anticipated cash needs, including capital requirements.

Our senior secured credit agreement limits the aggregate amount of payments we can make relating to the payment of cash dividends on common stock and common stock repurchases. The amount of this aggregate limit varies over time and is equal to $100,000,000 plus 50% of consolidated net income for the period beginning on June 3, 2001 and ending on the last day of the most recent fiscal quarter for which financial statements have been delivered to the lenders pursuant to the senior secured credit facilities agreement. The one-time purchase of 7,348,154 shares of our common stock on April 25, 2002 was specifically allowed by the senior secured credit agreement and was not subject to, and did not count against, this aggregate

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limit. At May 31, 2003, we had the availability under our senior secured credit facilities agreement for up to $121,100,000 of additional payments of cash dividends on common stock and common stock repurchases subject to compliance with the other covenants.

Certain information required by this Item is incorporated herein by reference to the information under the “Equity Compensation Plan Information” caption in our definitive Proxy Statement for the 2003 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.

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ITEM 6. SELECTED FINANCIAL DATA

INTERSTATE BAKERIES CORPORATION

FIVE-YEAR SUMMARY OF FINANCIAL DATA

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

OVERVIEW

Interstate Bakeries Corporation is the largest wholesale baker and distributor of fresh baked bread and sweet goods in the United States, producing, marketing, distributing and selling a wide range of breads, rolls, croutons, snack cakes, donuts, sweet rolls and related products. Our various brands are positioned across a wide spectrum of consumer categories and price points. We operate 58 bakeries and approximately 1,250 thrift stores located in strategic markets throughout the United States. Our sales force delivers baked goods from our more than 1,000 distribution centers to more than 200,000 food outlets and stores on approximately 9,300 delivery routes.

Our net sales are affected by various factors, including our marketing programs, competitors’ activities and consumer preferences. See “Business – Trends, Risks and Uncertainties.” We recognize sales, net of estimated credits for dated and damaged products, when our products are delivered to our customers.

Our cost of products sold consists of employee costs, ingredients, packaging, energy and other production costs. The primary ingredients used in producing our products are flour, yeast, sweeteners, edible oils and the ingredients used to produce our extended shelf life products. See “Business – Trends, Risks and Uncertainties.”

Our selling, delivery and administrative expenses include the employee costs and transportation costs of delivering our product to our customers; the employee costs, occupancy and other selling costs of our thrift stores; the costs of marketing our products and other general sales and administrative costs not directly related to production. See “Business – Trends, Risks and Uncertainties.”

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

SIGNIFICANT EVENTS IN FISCAL 2003

Fiscal 2003 was a challenging year for us. We saw volume declines in both branded cake and branded bread sales. We also experienced increased costs on numerous fronts, most notably health care and commodities, primarily sweeteners, cocoa, edible oils and natural gas. See “Results of Operations” regarding the impact of these items on our fiscal 2003 operating results.

In response to these trends, we commenced a major, company-wide project internally referred to as Program SOAR, an acronym for Systems Optimization And Re-engineering. This program was instituted to focus on re-engineering our business processes to increase efficiency and on rationalizing our investment in production, distribution and administrative functionality to reduce the ongoing cost of supporting this infrastructure. See “Cash Resources and Liquidity” regarding future costs and savings from Program SOAR.

During fiscal 2003, we initiated plans to restructure certain of our operations by closing five bakeries and 96 thrift stores. We expect to incur additional restructuring charges in an as yet unknown amount in fiscal 2004 in connection with these activities. Also, as we continue to evaluate opportunities to reduce our manufacturing and distribution cost structures under our Program SOAR initiative, we may incur additional restructuring charges in future periods. See “Cash Resources and Liquidity” regarding future savings from these restructurings.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our significant accounting policies are discussed in Note 1 to our consolidated financial statements. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes. These estimates and assumptions are evaluated on an on-going basis and are based upon many factors, including historical experience, consultation with outside professionals, such as actuaries, and management’s judgment. Actual results could differ from any estimates made and results could be materially different if different assumptions or conditions were to prevail.

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

Reserves for self-insurance and postretirement benefits. We retain various levels of insurance risks related to active employee health care costs, workers’ compensation claims, liability insurance claims and postretirement health care costs. Many of our workers’ compensation and liability losses are covered under conventional insurance programs with high deductible limits. We are self-insured, with some stop-loss protection, for other losses and for health care costs. We also actively pursue programs intended to effectively manage the incidence of workplace injuries. Reserves for reported but unpaid losses, as well as incurred but not reported losses, related to our retained risks are calculated based upon loss development factors, as well as other assumptions considered by management, including assumptions provided by our external insurance brokers, consultants and actuaries. The factors and assumptions used are subject to change based upon historical experience, as well as changes in expected cost trends, particularly health care, as well as discount rates and other factors.

The reserves, including both the current and long-term portions, recorded by us for these liabilities amounted to $253,873,000 and $212,604,000 at May 31, 2003 and June 1, 2002, respectively. The increase in these reserves from fiscal 2002 to 2003 was attributable in large part to changes in experience factors and expected cost trends related primarily to health care costs.

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

We assess the net realizable value of our long-lived assets whenever events occur which indicate that the carrying value of an asset may be impaired. The assessment involves comparing the asset’s estimated fair value to its carrying value, with the impairment loss measured as the amount by which the carrying value exceeds the fair value of the asset. Goodwill and other intangible assets with indefinite lives, principally trademarks and trade names acquired in business acquisitions, are no longer amortized due to our adoption of Statement of Financial Accounting Standards (SFAS) No. 142 during the first quarter of fiscal 2002. In addition, during fiscal 2003 we have performed impairment tests of goodwill and other intangible assets with indefinite useful lives and determined that no impairments existed. In accordance with SFAS No. 142, we must assess our goodwill and other intangibles with indefinite useful lives for impairment at least annually.

Long-lived assets recorded in our consolidated financial statements at May 31, 2003, include $853,473,000 of net property and equipment, $215,346,000 of goodwill and $180,464,000 of other intangible assets with indefinite lives, while amounts of $845,005,000, $215,346,000 and $176,044,000, respectively, were recorded at June 1, 2002.

Derivative instruments. We use derivative instruments, including exchange traded futures and options on wheat, corn, soybean oil and certain fuels and forward purchase contracts on many ingredient, packaging and energy needs, to manage the price and supply risks associated with these commodities. When possible, we establish hedging positions that qualify for hedge accounting treatment. However, we may from time-to-time enter into contracts for economic reasons which do not qualify for hedge accounting treatments or market conditions may occur which render our hedging strategies ineffective and thus not qualified for further hedge accounting treatment. If either of these scenarios occur, the related hedged positions must be marked-to-market as of the end of each quarter in which the positions exist. As the commodities underlying our hedges can experience significant price fluctuations, any requirement to marked-to-market the related hedged positions could result in significant volatility in our costs of products sold and delivery costs recorded in our consolidated statements of income.

Restructuring charges. Costs associated with any plan to reorganize our operational infrastructure are generally identified and reported as other charges in our consolidated statements of income. These reorganizing efforts include the closure of a bakery; the partial shut down of a bakery’s production; the closing of distribution and thrift store operations; relocation of bakery equipment, production or distribution to another facility; centralization of work effort and other organizational changes. Costs associated with restructurings are expensed when the related liability is incurred. Management judgments are made with regard to the incurrence of restructure-related liabilities, as well as impairment of long-term assets as described above.

We incurred restructuring charges during fiscal 2003 and 2002 and anticipate additional such charges in future years.

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NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In October 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement, which supersedes SFAS No. 121 and was adopted by us at the beginning of fiscal 2003, provides revised guidance regarding the recognition and measurement of impairment losses related to certain long-lived assets and discontinued operations.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds both SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt” and SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” In so doing, SFAS No. 145 eliminates the requirement that gains and losses from the extinguishment of debt be classified as an extraordinary item, unless the criteria in Accounting Principles Board Opinion, or APB, No. 30 are met. SFAS No. 145 also amends SFAS No. 13, “Accounting for Leases” to require that certain lease modifications that have economic effects similar to sale-leaseback transactions are accounted for in the same manner as sale-leaseback transactions and amends other existing authoritative pronouncements to make various technical corrections. The provisions of SFAS No. 145 related to the amendment of SFAS No. 13 were effective for us for transactions occurring after May 15, 2002, while all other provisions of SFAS No. 145 were adopted by us effective with the beginning of fiscal 2003 on June 2, 2002. The adoption of the provisions of this statement had no impact on our financial position or net income.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, and was effective for us for exit or disposal activities initiated after the beginning of the second quarter of fiscal 2003, the date of our adoption of this statement.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation clarifies disclosures required to be made by a guarantor in its interim and annual financial statements about obligations under certain of its issued guarantees. In addition, the interpretation clarifies that a guarantor is required to recognize, at the inception of certain types of guarantees, a liability for the fair value of the obligation undertaken in issuing these guarantees. The recognition and measurement provisions of this interpretation are applicable to guarantees issued or modified after December 31, 2002, and the disclosure requirements were effective for our third quarter fiscal 2003 consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation.” The provisions of this statement are effective for interim and annual financial statements for periods beginning after December 15, 2002. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Also, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We continue to apply APB No. 25 recognition and measurement principles, but have complied with the new disclosure requirements of this statement.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” which requires that the fair value of a liability for an asset retirement obligation be recognized when it is incurred. The related asset retirement costs are capitalized as part of the long-lived asset’s carrying value. SFAS No. 143 will be effective for us during fiscal 2004. We currently are assessing the impact which the adoption of this statement will have on our consolidated financial statements, but we do not expect the impact to be material.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 will be effective for us during fiscal 2004. We currently are assessing the impact which the adoption of this statement will have on our consolidated financial statements, but we do not expect the impact to be material.

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In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. We currently are assessing the impact which the adoption of this statement will have on our consolidated financial statements, but we do not expect the impact to be material.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 revises the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS No. 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and is otherwise effective for us at the beginning of the first interim period beginning after June 15, 2003. We currently are assessing the impact which the adoption of this statement will have on our consolidated financial statements, but we do not expect the impact to be material.

RESULTS OF OPERATIONS

The following table sets forth, for fiscal years 2003, 2002 and 2001, the relative percentages that certain income and expense items bear to net sales:

Fiscal 2003 Compared to Fiscal 2002

Net sales. Net sales for the 52 weeks ended May 31, 2003, were $3,525,780,000, a decrease of $5,843,000, or 0.2%, from net sales of $3,531,623,000 for the 52 weeks ended June 1, 2002. The decline in net sales in fiscal 2003 reflected a unit volume decline of approximately 1.6%, partially offset by price increases of less than 1.0% compared to fiscal 2002.

Gross profit. Gross profit was $1,791,286,000, or 50.8% of net sales, for fiscal 2003, down from $1,856,119,000, or 52.6% of net sales, in fiscal 2002. Our fiscal 2003 gross profit margins were negatively impacted by higher ingredient costs, including cocoa, sweeteners, edible oils and the ingredient costs associated with producing our extended shelf life products. The increase in ingredient costs accounted for 0.9% of our gross profit decline as a percent of net sales for fiscal 2003. In addition, higher employee costs for health care, pension benefits and workers’ compensation claims accounted for 0.7% of the gross profit decline as a percent of net sales for fiscal 2003. The remaining variances for fiscal 2003 were composed of items that represented 0.1% or less of net sales.

Selling, delivery and administrative expenses. Selling, delivery and administrative expenses were $1,599,340,000, representing 45.4% of net sales, for fiscal 2003, up somewhat from fiscal 2002’s selling, delivery and administrative expenses of $1,587,719,000, or 44.9% of net sales. Higher costs for employee benefits, principally health care and pension, and workers’ compensation claims, were responsible for 0.7% of the increase as a percent of net sales for fiscal 2003. Partially offsetting these increases was a 0.2% reduction on a percent of net sales basis in advertising expense for fiscal 2003. The remaining variances for fiscal 2003 were composed of items that represented 0.1% or less of net sales.

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Other charges. During fiscal 2003, we incurred restructuring charges of $9,910,000 related to closures of five bakeries and 96 thrift stores and restructurings of several other bakeries. Approximately $7,710,000 represents severance and other cash costs and $2,200,000 represents impairment of bakery machinery and equipment. As part of various initiatives intended to reduce our manufacturing and distribution cost structures, the completion of our new bakery in Henderson, Nevada, as well as improvements to several other facilities, allowed us to close less efficient operations.

The severance charge for fiscal 2003 is associated with the involuntary employee separation of approximately 550 employees. As of May 31, 2003, 475 employee separations had been completed. We anticipate employee separations to be completed by the end of the second quarter of fiscal 2004. See the “Cash Resources and Liquidity” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding future expected restructuring charges.

Also, in fiscal 2003, other charges included an October 1, 2002 fully vested common stock award of $3,591,000 to our former Chief Executive Officer.

Other charges of $25,700,000 incurred in fiscal 2002 related to the closure of a bakery and the settlement of employment discrimination litigation.

Operating income. Operating income for fiscal 2003 was $83,268,000, or 2.4% of net sales, down from the prior year’s operating income of $147,357,000, or 4.2% of net sales. As mentioned above, we incurred $13,501,000 in other charges in fiscal 2003. We incurred other charges of $25,700,000 in fiscal 2002.

Interest expense. Interest expense for fiscal 2003 was $40,262,000, up $2,996,000 from interest expense in fiscal 2002 of $37,266,000. The impact on interest expense of slightly higher borrowing levels during fiscal 2003 was offset by the impact of slightly lower interest rates. In addition, during fiscal 2003, we reclassified $3,872,000 to interest expense from other comprehensive loss resulting from the amendment of some of our interest rate swap agreements (see Note 3 to our consolidated financial statements).

Income tax expense. The effective income tax rates were 36.3% and 36.8% for fiscal 2003 and fiscal 2002, respectively.

Net income. Net income for fiscal 2003 was $27,450,000, or $0.61 per diluted share, compared to net income of $69,789,000, or $1.36 per diluted share in fiscal 2002. Included in the fiscal 2003 results were restructuring charges of $0.14 per diluted share and other charges amounting to $0.05 per diluted share. Included in the fiscal 2002 results were other charges amounting to $0.31 per diluted share.

Fiscal 2002 Compared to Fiscal 2001

Net sales. Net sales for the 52 weeks ended June 1, 2002, were $3,531,623,000, an increase of $56,980,000, or 1.6%, over net sales of $3,474,643,000 for the 52 weeks ended June 2, 2001. Improved unit volume during the latter half of fiscal 2002 accounted for approximately 1.1% of this increase, while slightly higher selling prices for fiscal 2002 accounted for approximately 0.5% of the increase.

Gross profit. Gross profit was $1,856,119,000, or 52.6% of net sales, for fiscal 2002, up from $1,822,125,000, or 52.4% of net sales, in fiscal 2001. Our gross profit margins were favorably impacted by savings from producing less product because of higher customer sell-through percentages of our products, as well as operational efficiencies and somewhat lower energy costs. The need to produce less product is a result of our new extended shelf life, or ESL, program. Partially offsetting the favorable impact of these items were higher ingredient costs, due in part to the ESL program, and employee benefits, principally health care and pension costs. These items were less than 0.1% of net sales.

Selling, delivery and administrative expenses. Selling, delivery and administrative expenses were $1,587,719,000, representing 44.9% of net sales, for fiscal 2002, up slightly from fiscal 2001’s selling, delivery and administrative expenses of $1,564,923,000, or 45.0% of net sales. This slight improvement as a percentage of net sales reflects the favorable impact of a reduced number of delivery routes resulting from our ESL program and lower energy costs of 0.3% as a percent of net sales, offset by higher employee benefit costs of 0.3% as a percent of net sales.

Other charges. Other charges of $25,700,000 in fiscal 2002 relate to the closure of a bakery and the settlement of employment discrimination litigation.

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Depreciation and amortization. Depreciation and amortization was $95,343,000 for fiscal 2002, down $14,756,000 from $110,099,000 in fiscal 2001. The primary reason for this decrease was our adoption on June 3, 2001 of SFAS No. 142, which eliminated the amortization of purchased goodwill and other intangibles with indefinite useful lives. For further information regarding the impact of this accounting change, see Note 8 to our consolidated financial statements.

Operating income. Based upon the above factors, operating income for fiscal 2002 was $147,357,000, or 4.2% of net sales, compared to fiscal 2001’s operating income of $147,103,000, or 4.2% of net sales. As mentioned above, we incurred $25,700,000 in other charges in fiscal 2002.

Interest expense. Interest expense for fiscal 2002 was $37,266,000, decreasing $9,820,000 from interest expense in fiscal 2001 of $47,086,000. This decline reflects lower borrowing levels throughout most of fiscal 2002, as well as somewhat lower interest rates.

Income tax expense. The effective income tax rates were 36.8% and 39.2% for fiscal 2002 and fiscal 2001, respectively. The rate for fiscal 2001 included 2.4% related to nondeductible intangibles amortization. We did not amortize these intangibles during fiscal 2002, due to our adoption of SFAS No. 142 in the first quarter.

Net income. Net income for fiscal 2002 was $69,789,000, or $1.36 per diluted share, compared to net income of $61,125,000, or $1.13 per diluted share in fiscal 2001. Included in the fiscal 2002 results were other charges amounting to $0.31 per diluted share. The effect on fiscal 2001 net income relating to the adoption of SFAS No. 142 during fiscal 2002, as discussed above, was $0.20 per diluted share.

CASH RESOURCES AND LIQUIDITY

Cash from operating activities for fiscal 2003 was $156,419,000, down $43,304,000 from cash generated in fiscal 2002 of $199,723,000. This decrease was primarily attributable to lower net income. Cash from operating activities, along with proceeds from stock option exercises, was used to fund capital expenditures of $98,849,000, purchase software of $7,487,000, pay common stock dividends of $12,539,000 and reduce debt outstanding by $47,596,000.

Our planned cash needs for fiscal 2004 include approximately $219,029,000, consisting of $53,813,000 of required debt repayments, $2,446,000 of obligations under capital leases, $60,270,000 of obligations under operating leases, $12,500,000 of common stock dividends and $90,000,000 of capital expenditures, including those related to Program SOAR. We believe cash from ongoing operations, along with our borrowing capacity under our credit facilities, will be sufficient to fund our currently anticipated cash needs through fiscal 2004. If we are not able to fund our requirements through cash flow from operations, we may seek additional sources of financing. In either case, additional sources of financing may not be available when needed or may not be available on acceptable terms. In addition, we may purchase up to 7,400,000 shares under our stock repurchase program, previously approved by the board of directors.

As previously announced, our board of directors declared a common stock dividend of $0.07 per share on August 1, 2003 to shareholders on record as of July 15, 2003. However, if cash flow from operations is not sufficient to allow for payment of additional common stock dividends in fiscal 2004, such dividends may be discontinued.

We have commenced a major, company-wide project that we refer to as Program SOAR, an acronym for Systems Optimization And Re-engineering. This program will focus on re-engineering our business processes to increase efficiency and on rationalizing our investment in production, distribution and administrative functionality to reduce the ongoing cost of supporting this infrastructure.

An operating team has been assigned to focus on nine initiatives that have been identified as major areas for profit improvement. The operating team is being supported by a national consulting firm with significant experience in these types of programs in the baking and food industry. The initial phase of this comprehensive review of operational processes has just been completed. In conjunction with Program SOAR, we have undertaken a comprehensive review of all aspects of our operations at two of our underperforming bakeries. This review is expected to result in an improvement in profitability at these two locations in fiscal 2004 through a concentrated emphasis on identifying efficiencies in the day-to-day production and sales work flow processes and retraining personnel in proper execution. We hope to utilize this information from this effort as a roadmap to instituting more efficient processes at other locations. Direct costs of the three-year program are expected to be approximately $55,000,000, with the majority of these costs related to software and hardware acquisition and consulting fees. Approximately $9,600,000 was spent on this program in fiscal 2003. We estimate pre-tax savings, after related Program SOAR expenses, for fiscal 2004 to be approximately $5,000,000 to $10,000,000 (approximately $3,000,000 to $6,000,000, net of income taxes). As part of the program, additional costs are anticipated as we identify and implement

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strategies which are expected to provide future savings. We hope to achieve positive cumulative cash flow from this program by the end of fiscal 2005. However, there can be no assurance that this will be achieved.

During fiscal 2003, we restructured certain of our operations by closing five bakeries and 96 thrift stores. The remaining $3,253,000 of unpaid cash costs at May 31, 2003 related to these restructurings are expected to be paid by the second quarter of fiscal 2004, but we expect to incur additional restructuring charges during fiscal 2004 in connection with these restructurings. In addition, as we continue to evaluate opportunities to reduce our manufacturing and distribution cost structures, we may incur additional restructuring charges in future periods.

As a result of the fiscal 2003 restructurings, we estimate pre-tax annual savings to be approximately $10,000,000 to $12,000,000 (approximately $6,000,000 to $7,500,000, net of income taxes). Cost of products sold is anticipated to decline between $6,550,000 and $8,000,000, selling, delivery and administrative costs are expected to decline between $3,000,000 and $3,550,000 and approximately $450,000 will be non-cash savings related to depreciation expense. Future savings are difficult to estimate and could change depending on market conditions, consolidation difficulties or other factors.

On April 21, 2003, we amended certain financial covenants on our senior secured credit facilities. While we were in compliance with all covenant requirements, our performance had raised the possibility that these requirements might not be satisfied going forward. Therefore, we worked with our lenders to amend the credit facilities to provide added flexibility. As part of our covenants, we are required to satisfy certain ratios related to interest coverage and leverage and maintain a minimum net worth. We have amended the interest coverage and leverage requirements for the next six quarters, or through the first quarter of fiscal 2005. At that time, the covenant requirements will revert to the original requirements. As a result of this amendment and a lowered senior security rating by a rating agency on April 22, 2003, we expect additional annual pre-tax interest expense of approximately $4,900,000. However, fiscal 2004 will reflect a favorable impact on interest expense compared to fiscal 2003 due to amounts reclassified from accumulated other comprehensive income (OCI) to interest expense during fiscal 2003 related to accumulated losses on amended swap agreements (see Note 3 to our consolidated financial statements). This year-over-year impact is expected to offset a substantial portion of the increased interest expense as discussed above.

We amended and extended some of our interest rate swap agreements during the first quarter of fiscal 2003. Based upon current debt ratings, our current interest rate swap agreements fix interest rates on $440,000,000 in variable rate debt to fixed rates ranging from 4.97% to 7.41% with termination dates ranging from April 2004 to August 2004.

We have seen costs for some of our principal commodities, primarily sweeteners, cocoa, edible oils and natural gas, rise sharply during the past year and we cannot be assured that these costs will return to more historical levels in the near future. We currently have coverage on the majority of our major commodities through the second quarter of fiscal 2004 at costs exceeding those experienced in the prior fiscal year. Given current market conditions, as well as our current hedged positions, we could have a significant year-over-year increase in commodity costs.

We have historically attempted to offset cost increases with selling price increases and operational efficiencies but in fiscal 2003 increasing our selling prices generally had a negative impact on volume. Given current economic conditions, we believe that price increases may also negatively impact volume in fiscal 2004. If we are not successful in offsetting cost increases with pricing and efficiencies, such cost increases could have an adverse effect on our financial results.

In addition, during fiscal 2003 we saw increases in employee benefit costs, primarily health care and pension, and workers’ compensation costs. We see no indications given current market conditions to suggest that these costs will not continue to rise in fiscal 2004.

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The following is a summary of certain of our contractual obligations as of May 31, 2003 and the anticipated impact these obligations will have on future cash flows:

OFF-BALANCE SHEET FINANCING

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks relative to commodity price fluctuations and interest rate changes. We actively manage these risks through the use of forward purchase contracts and derivative financial instruments. As a matter of policy, we use derivative financial instruments only for hedging purposes, and the use of derivatives for trading and speculative purposes is prohibited.

Commodity prices. Commodities we use in the production of our products are subject to wide price fluctuations, depending upon factors such as weather, crop production, worldwide market supply and demand and government regulation. To reduce the risk associated with commodity price fluctuations, primarily for wheat, corn, sweeteners, soybean oil and certain fuels, we sometimes enter into forward purchase contracts and commodity futures and options in order to fix prices for future periods. A sensitivity analysis was prepared and, based upon our commodity-related derivatives positions as of May 31, 2003, an assumed 10% adverse change in commodity prices would not have a material effect on our fair values, future earnings or cash flows.

Interest rates. We enter into interest rate swap agreements to manage the interest rate risk associated with variable rate debt instruments. Based upon current debt ratings, our current interest rate swap agreements fix interest rates on $440,000,000 in variable rate debt to fixed rates ranging from 4.97% to 7.41% with termination dates ranging from April 2004 to August 2004. Based upon a sensitivity analysis at May 31, 2003, an assumed 10% adverse change in interest rates would not have a material impact on our fair values, future earnings or cash flows.

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INDEX TO FINANCIAL STATEMENTS

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INTERSTATE BAKERIES CORPORATION

CONSOLIDATED BALANCE SHEETS

See accompanying notes.

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INTERSTATE BAKERIES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes.

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INTERSTATE BAKERIES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

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INTERSTATE BAKERIES CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Per Share Data)