Executive Summary
From an earnings perspective, 2008 was a year impacted significantly by higher input costs. For the first three quarters of 2008, we earned $0.32 per share as compared to $0.72 in same period of 2007. Significant escalations in ingredient costs, fuel rates, utility costs and unfavorable foreign exchange rates far outpaced sales price increases to our customers. During the fourth quarter, we were able to restore our operating profit margin and earn $0.24 per share compared to $0.03 in the fourth quarter of 2007 and $0.19 in the fourth quarter of 2006. These results were achieved despite a $1.2 million pre-tax charge for a change in our employee vacation policy and costs associated with the Archway acquisition of $0.8 million, including $0.4 million in payments to former Archway employees. In total, these items decreased earnings per share during the fourth quarter of 2008 by $0.04.
From an operational perspective, we continued to focus on the following priorities in order to develop a foundation for profitable growth:
1. Organizational development and effectiveness in order to align our organization to achieve our goals;

2. Operational efficiencies in our DSD operations, supply chain process, and information technology systems;

3. Focused growth in core channels and product lines while we simplify our business and create new platforms for growth.

To that end, we have continued to focus on our priorities as we transform Lance into a leader within our niche snack food categories. Our transformation is focused on delivering key goals including delivering accelerated sales growth, widening our profit margins, improving return on capital and driving growth in our earnings per share.
During 2008, our accomplishments included:
• Two acquisitions - The acquisition of Brent & Sam's, Inc. and substantially all of the assets of Archway Cookies, LLC:

o Brent & Sam's was acquired in March of 2008, added approximately $15 million in revenue in 2008 and expanded our premium private brand product offerings to our customers.

o The Archway assets were acquired in December of 2008. The acquisition of the Archway brand provides a strong brand with a long history of quality home-style cookies that we believe we can grow through product innovation and improved customer service through our DSD and distributor network. The Archway facility also provides additional production capacity. In addition, based on the location of the facility we plan to improve our supply chain operations efficiency through a centralized location to service our customers in the Midwest and Northeast.

• Continued DSD organizational improvements:

o We continued to realign our DSD sales organization by rationalizing our customer stops based on profitability and operating efficiency needed to service our customers. During 2008, we increased the weekly net revenue per route by 11%.

o We have also implemented improved processes in our DSD organization to improve the efficiency of the time it takes to service our customers at each stop.

• We continued to focus on sales growth:

o Revenue from both Lance brand home-pack products and Cape Cod Potato Chip products increased more than 10% over last year.

o Private brand revenue increased approximately 26%, of which approximately 7% was the result of the acquisition of Brent & Sam's.

o During 2008, we introduced a mainstream private brand line of products that is a more premium product than our value line private brands and provides consumers additional options from traditional branded products.

o We increased our focus on innovation to provide a constant stream of new product introductions for our customers.

• We continued to build a foundation for growth:

o We continued to improve our supply chain efficiency by consolidating our Canadian operations from three plants to two and increased the volume of products transported per mile through the use of larger trailers, which minimized the effect of increases in diesel fuel rates.

o In 2008, we implemented a portion of our ERP solution and expect to have the ERP system implemented at all locations by the end of 2009.

We believe the cost increases that eroded earnings per share in the first three quarters of 2008 are behind us and we are well positioned for continued growth in 2009. We plan additional spending for advertising in 2009 in order to support future sales growth of our branded products. In addition, we plan to increase new product introductions and expand product innovation to provide our consumers with additional snack food offerings.
During January 2009, there was a recall of products containing peanuts, peanut butter paste and peanut butter purchased from Peanut Corp. of America (PCA) due to potential salmonella contamination. No products bearing the Lance brand were included in this recall as we internally source our peanuts and peanut butter. In 2008, we purchased Brent and Sam's, Inc. who historically purchased product from PCA and voluntarily recalled a limited number of private brand cookie products related to this concern, but we do not expect this to have a material impact on our results of operations. Brent and Sam's now sources its peanut butter through Lance.
Critical Accounting Estimates
Preparing the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We believe the following estimates and assumptions to be critical accounting estimates. These assumptions and estimates may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and may have a material impact on the financial condition or operating performance. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
Our policy on revenue recognition varies based on the types of products sold and the distribution method. We recognize operating revenue when title and risk of loss passes to our customers. Allowances for sales returns, stale products, promotions and discounts are also recorded as reductions of revenue in the consolidated financial statements.

Revenue for products sold through our DSD system is recognized when the product is delivered to the retailer. Our sales representative creates the invoice at time of delivery using a handheld computer. The invoice is transmitted electronically each day and sales revenue is recognized. Customers purchasing products through the DSD system have the right to return product if it is not sold by the expiration date on the product label. We have recorded an estimated allowance for product that might be returned as a reduction to revenue. We estimate the number of days until product is sold through the customer's location and the percent of sales returns using historical information. This information is reviewed on a quarterly basis for significant changes and updated no less than annually.
Revenue for products shipped directly to the customer from our warehouse is recognized based on the shipping terms listed on the shipping documentation. Products shipped with terms FOB-shipping point are recognized as revenue at the time the shipment leaves our warehouses. Products shipped with terms FOB-destination are recognized as revenue based on the anticipated receipt date by the customer.
We record certain reductions to revenue for promotional allowances. There are several different types of promotional allowances such as off-invoice allowances, rebates and shelf space allowances. An off-invoice allowance is a reduction of the sales price that is directly deducted from the invoice amount. We record the amount of the deduction as a reduction to revenue when the transaction occurs. Rebates are offered to customers based on the quantity of product purchased over a period of time. Based on the nature of these allowances, the exact amount of the rebate is not known at the time the product is sold to the customer. An estimate of the expected rebate amount is recorded as a reduction to revenue and an accrued liability at the time the sale is recorded. The accrued liability is monitored throughout the period covered by the promotion. The accrual is based on historical information and the progress of the customer against the target amount. Shelf space allowances are capitalized and amortized over the lesser of the life of the agreement or three years and recorded as a reduction to revenue. Capitalized shelf space allowances are evaluated for impairment on an ongoing basis.
We also record certain allowances for coupon redemptions, scan-back promotions and other promotional activities as a reduction to revenue. The accrued liability is monitored throughout the period covered by the coupon or promotion. Total allowances for sales returns, rebates, coupons, scan-backs and other promotional activities included in current liabilities on the consolidated balance sheets increased from $4.0 million at the end of 2007 to $5.2 million at the end of 2008 due to a more aggressive marketing effort to drive sales growth. Allowance for Doubtful Accounts
The determination of the allowance for doubtful accounts is based on management's estimate of uncollectible accounts receivables. We record a general reserve based on analysis of historical data and the aging of accounts receivable. In addition, management records specific reserves for receivable balances that are considered at higher risk due to known facts regarding the customer. The assumptions for this determination are regularly reviewed to ensure that business conditions or other circumstances are consistent with the assumptions. Allowances for doubtful accounts increased from $0.5 million at the end of 2007 to $0.9 million at the end of 2008 due to current economic conditions resulting in slower payments from some customers, higher accounts receivable, and increased specific reserves for customers with higher risks. The recent instability in the U.S. economy may weaken the ability of our customers to perform under contractual obligations or in the normal course of business, which may expose us to additional bad debt expense related to bankruptcies among our customers.

Self-Insurance Reserves
We maintain reserves for the self-funded portions of employee medical insurance and for post-retirement healthcare benefits. The employer's portion of employee and retiree medical claims is limited by stop-loss insurance coverage each year to $0.3 million per person. In addition, we maintain insurance reserves for the self-funded portions of workers' compensation, auto, product and general liability insurance. Self-insured accruals are based on claims filed and estimated claims incurred but not reported based on historical claims trends. For casualty insurance obligations, we maintain self-insurance reserves for workers' compensation and auto liability for individual losses up to $0.5 million. In addition, general and product liability claims are self-funded for individual losses up to $0.1 million. We evaluate input from a third-party actuary in the estimation of the casualty insurance obligation on an annual basis. In determining the ultimate loss and reserve requirements, we use various actuarial assumptions including compensation trends, healthcare cost trends and discount rates. We also use historical information for claims frequency and severity in order to establish loss development factors. The estimate of loss reserves ranged from $11.7 million to $14.9 million in 2008. In 2007, the estimate of loss reserves ranged from $13.3 million to 16.8 million. Consistent with prior periods, the 75th percentile of this range represents our best estimate of the ultimate outstanding casualty liability. We used a 4.5% discount rate on the estimated claims liability in 2008 and 2007 based on projected investment returns over the estimated future payout period.
Impairment Analysis of Goodwill and Other Indefinite-Lived Intangible Assets The annual impairment analysis of goodwill and other indefinite-lived intangible assets requires us to project future financial performance, including revenue and profit growth, fixed asset and working capital investments, income tax rates and cost of capital. These projections rely upon historical performance, anticipated market conditions and forward-looking business plans. The analysis of goodwill and other indefinite-lived intangible assets as of December 27, 2008 assumes combined average annual revenue growth of approximately 3.5% during the valuation period. We also use a combination of internal and external data to develop the weighted-average cost of capital. Significant investments in fixed assets and working capital to support this growth are estimated and factored into the analysis. If the forecasted revenue growth is not achieved, the required investments in fixed assets and working capital could be reduced. Even with the excess fair value over carrying value, significant changes in assumptions or changes in conditions could result in a goodwill impairment charge in the future.
Depreciation and Impairment of Fixed Assets Depreciation of fixed assets is computed using the straight-line method over the lives of the assets. The lives used in computing depreciation are based on estimates of the period over which the assets will provide economic benefits. Estimated lives are based on historical experience, maintenance practices, technological changes and future business plans. Depreciation expense was $32.0 million, $29.3 million, and 26.8 million during 2008, 2007, and 2006, respectively. Changes in these estimated lives and increases in capital expenditures could significantly affect depreciation expense in the future. Fixed assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Recoverability of fixed assets is evaluated by comparing the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If this comparison indicates that an asset's carrying amount is not recoverable, an impairment loss is recognized, and the adjusted carrying amount is depreciated over the asset's remaining useful life.

Assets that are to be disposed of by sale are recognized in the financial statements at the lower of carrying amount or fair value, less cost to sell, and are not depreciated once they are classified as held for sale. In order for an asset to be classified as held for sale, the asset must be actively marketed, available for immediate sale and meet certain other specified criteria. Equity Incentive Expense
Determining the fair value of share-based awards at the grant date requires judgment, including estimating the expected term, expected stock price volatility, risk-free interest rate, and expected dividends. Judgment is required in estimating the amount of share-based awards that are expected to be forfeited before vesting. In addition, our long-term equity incentive plans require assumptions and projections of future operating results and financial metrics. Actual results may differ from these assumptions and projections, which could have a material impact on our financial results. Provision for Income Taxes
We estimate valuation allowances on deferred tax assets for the portions that we do not believe will be fully utilized based on projected earnings and usage. Our effective tax rate is based on the level and mix of income of our separate legal entities, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. Significant judgment is required in evaluating tax positions that affect the annual tax rate. Unrecognized tax benefits for uncertain tax positions are established when, despite the fact that the tax return positions are supportable, we believe these positions may be challenged and the results are uncertain. We adjust these liabilities in light of changing facts and circumstances, such as the progress of a tax audit. New Accounting Standards
See Note 1 to the consolidated financial statements included in Item 8 for a summary of new accounting standards.

Results of Operations

                                                                                                                Favorable/
2008 Compared to 2007 (in millions)                  2008                           2007                       (Unfavorable)

Revenue                                     $ 852.4         100.0 %        $ 762.7         100.0 %        $  89.7          11.8 %
Cost of sales                                 531.5          62.4 %          444.5          58.3 %          (87.0 )       (19.6 %)

Gross margin                                  320.9          37.6 %          318.2          41.7 %            2.7           0.8 %
Selling, general and administrative           291.7          34.2 %          277.3          36.4 %          (14.4 )        (5.2 %)
Other (income)/expense, net                    (0.9 )        (0.1 %)           2.4           0.3 %            3.3            nm

Earnings before interest and taxes             30.1           3.5 %           38.5           5.0 %           (8.4 )       (21.8 )%
Interest expense, net                           3.0           0.4 %            2.2           0.3 %           (0.8 )       (36.4 %)
Income tax expense                              9.4           1.1 %           12.5           1.6 %            3.1          24.8 %

Net income from continuing operations          17.7           2.1 %           23.8           3.1 %           (6.1 )       (25.6 )%

nm = not meaningful.

Revenue from continuing operations for the year ended December 27, 2008 increased $89.7 million or 11.8% compared to the year ended December 29, 2007. Branded sales represented 60% of total revenue in 2008 as compared to 63% in 2007, and non-branded sales represented 40% of total revenue and 37% of total revenue for 2008 and 2007, respectively. Non-branded sales consist of private brand and contract manufacturing revenue. In 2008, private brand represented 30% of total revenue and contract manufacturing sales represented 10% of total revenue. In 2007, private brand sales represented 27% of total revenue and contract manufacturing sales were 10% of total revenue.
Branded revenue increased $33.2 million or 6.9% compared to 2007. Price increases accounted for approximately two-thirds of the growth in revenue and the remainder of the growth was the result of increased volume. Branded revenue was favorably impacted by double-digit growth in sales of Lance® home pack sandwich crackers and Cape Cod® potato chips, predominantly from sales to grocery/mass merchandisers. This growth was significantly offset by double digit declines in up-and-down the street revenue and DSD food service revenue as a result of implementing our DSD distribution strategy to improve profitability by servicing customers with larger drop sizes and making our sales routes more efficient.
Our DSD system generated approximately 72% of the branded revenue in 2008 and 74% in 2007. The remainder consisted of branded revenue from distributors and direct shipments to customers.
Non-branded revenue increased $56.6 million or 20%. Price increases represented approximately 13% of the revenue growth, the addition of Brent & Sam's product offerings represented approximately 5% of the revenue growth. Approximately 2% of the non-branded revenue growth was due to higher sales volume, which was unfavorably impacted by volume declines in sales to certain contract manufacturing customers and the loss of private brand sandwich cracker revenue from our largest customer driven by their decision to discontinue the product. Cost of sales increased $87.0 million principally due to the impact of significantly increased ingredient costs, principally flour and vegetable oil of $55.9 million, higher utility rates, principally natural gas of $3.5 million, higher compensation and vacation expense of $2.9 million, increased packaging costs of $2.2 million, manufacturing inefficiencies due to the consolidation of our Canadian facilities and start-up costs related to the acquisition of the Archway facility as well as the impact of increased volume sold. Gross margin as a percentage of revenue decreased from 41.7% to 37.6%. The decrease in gross margin was the result of the increases in costs as described above, unfavorable product mix due to a higher proportion of non-branded products sales, partially offset by unit price increases for both branded and non-branded products.

Selling, general and administrative expenses increased $14.4 million as compared to 2007. Increased expenses include higher salaries, wages, employee commissions, vacation and incentives of $9.9 million, increased cost to deliver products due to higher gasoline and diesel rates of $3.0 million, and increased depreciation and amortization of $2.0 million due to new sales route trucks, larger and more efficient over-the-road trailers and the implementation of our ERP system. Also, there were increases in information technology software and hardware maintenance costs of $1.6 million, higher third-party brokerage costs of $1.1 million due to increased revenue and $1.1 million of increased costs associated with market research regarding new and existing products as well as other net increases of $0.6 million. Offsetting these increases in expenses were reductions in advertising expenditures of $2.9 million and lower casualty claims costs of $2.0 million.
During 2008, other income consisted primarily of $0.9 million of foreign currency transaction gains due to the favorable impact of exchange rates during the fourth quarter. Conversely, other expense during 2007 was the result of $1.3 million of foreign currency transaction losses from unfavorable exchange rates and write-offs of $1.1 million of previously capitalized information technology that was replaced by the new ERP system.
Net interest expense increased $0.8 million primarily due to higher average debt than 2007 resulting from acquisitions made during 2008, offset slightly by lower weighted average interest rates.
Our effective income tax rate was 34.6% in 2008 as compared to 34.4% in 2007. The increase in the income tax rate was due primarily to unfavorable changes in permanent book-tax differences partially offset by reductions in long-term tax contingencies.

                                                                                                                  Favorable/
2007 Compared to 2006 (in millions)                  2007                           2006                        (Unfavorable)

Revenue                                     $ 762.7         100.0 %        $ 730.1         100.0 %        $  32.6              4.5 %
Cost of sales                                 444.5          58.3 %          415.6          56.9 %          (28.9 )           (7.0 %)

Gross margin                                  318.2          41.7 %          314.5          43.1 %            3.7              1.2 %
Selling, general and administrative           277.3          36.4 %          283.0          38.8 %            5.7              2.0 %
Other expense/(income), net                     2.4           0.3 %            0.2             -             (2.2 )       (1,100.0 %)

Earnings before interest and taxes             38.5           5.0 %           31.3           4.3 %            7.2             23.0 %
Interest expense, net                           2.2           0.3 %            3.1           0.4 %            0.9             29.0 %
Income tax expense                             12.5           1.6 %            9.8           1.3 %           (2.7 )          (27.6 %)

Net income from continuing operations          23.8           3.1 %           18.4           2.5 %            5.4             29.3 %

Revenue from continuing operations for the year ended December 29, 2007 increased $32.6 million or 4.5% compared to the year ended December 30, 2006. Branded sales represented 63% of total revenue in 2007 as compared to 64% in 2006, and non-branded sales represented 37% of total revenue and 36% of total revenue for 2007 and 2006, respectively. Non-branded sales consists of private brand and contract manufacturing revenue. In 2007, private brand sales . . .