GENERAL

Uncle B's Bakery, Inc. is a commercial bakery whose "Uncle B's" and "Millspring" brands of fresh-tasting, never frozen bagels are displayed and sold through supermarket refrigerated dairy cases and supermarket bread aisles and deli departments. The Company's products, an alternative to frozen bagels, are currently available in approximately 11,000 supermarkets in 47 states, including locations in 38 of the top 52 food market territories in the United States. Six of the top ten grocery chains in the nation now carry the Company's products. The Company's packaging process permits Uncle B's bagels to be stocked by grocers for up to four months in the refrigerated dairy case and Millspring bagels up to twenty-one days in the bread aisle and deli department without appreciable loss of quality.

Uncle B's was formed by William T. Rose, Jr. in 1985 as a retail bagel bakery and restaurant. In 1987, the Company began experiencing demand for its bagels from supermarkets in the Ames, Iowa area. The Company closed its retail operations in early 1993 to focus exclusively on commercial baking. In 1989, Mr. Rose developed the Company's production and packaging process, and in 1992 the Company began the widespread distribution of its fresh-tasting, never frozen bagels. In 1996, the Company was the first in the industry to introduce a consumer friendly RESEALABLE ZIP STRIP bagel package.

PRODUCTS

The Company can produce a complete range of bagels for the retail and foodservice markets. The Company currently produces its fresh-tasting, never frozen bagels using its proprietary recipies and production processes for sale under two of its own brands, Uncle B's and Millspring, and produces bagels using other formulas for sale in private label programs with certain major retail chains. The Uncle B's product is the Company's refrigerated bagel with a four month shelf life provided by the Company's proprietary packaging process. The Millspring product is the Company's bread aisle/deli department bagel with a 21-day shelf life due to this proprietary process. The Company introduced in 1997, the Uncle B's "Bagel To Go" product, a single-serve bagel with or without condiments, for convenience stores and vending machines. The Bagel To Go product is currently in the initial stages of distribution.

The Company's branded bagels are not only packaged in a proprietary manner to retain the freshness and taste of a traditional, fresh, "water" bagel, but the Company also utilizes quality ingredients, production and baking processes to produce what management believes are the highest quality commercially baked bagels in the nation.

For private label customers in the foodservice (bake off) or bagel shop markets, the Company offers bagels in any form a customer desires - fresh, refrigerated, frozen unbaked, frozen partially baked ("par baked"), or frozen fully baked.

PRODUCT MARKET

The history of the bagel dates back to 1683, when a Viennese coffee shop owner created a roll in the shape of the King of Poland's stirrup in honor of the King's actions to end a siege by the Turks. Since 1683, the shape of bagels has evolved from a stirrup to a circle and the availability has evolved from coffee shops and bakeries to include supermarkets. The popularity of the bagel has been firmly established for many years on the United States East and West Coasts.

The Bakery Production & Marketing magazine reports that the bagel is now seen as an alternative to sandwich bread in addition to being a breakfast staple. Industry experts say the market for boiled bread is no where near the saturation point.

American Bagel Association put American bagel consumption at 26 bagels per person per year in 1996. Even though this was an increase from prior reports, the Company believes there is still room for significant growth.

Sales trends show a consumer preference for fresh and refrigerated bagels which are the markets targeted by the Company's refrigerated Uncle B's product and its fresh-tasting bread aisle/deli department Millspring product. The Company continues to be the market leader for refrigerated bagels with a reported 35.4% share of the market. The IRI report for the 52 weeks ended in July 1997 did not include sales of Uncle B's blueberry flavor and if included would have increased the Company's computed market share.

Management believes that the Company's future growth will be from (1) producing bagels for strategic alliances with foodservice companies, retail bagel shops, supermarkets and convenience stores; (2) growing sales of the Bagel-To-Go product in the convenience stores and vending machines; (3) increasing Uncle B's market penetration and same store market share within the markets currently served; and (4) expanding the distribution of Uncle B's refrigerated bagels into the remaining 14 of the top 52 food market territories within the United States. The degree of growth from these strategies and the manner in which they will be pursued will depend upon the opportunities for enhancing shareholder value.

SALES AND MARKETING

The Company sells its products to supermarket chains and independent wholesalers primarily through food brokers. The brokers, which are independent contractors, coordinate product promotions in their geographic areas and are compensated on a percentage of net sales. As of July 31, 1997, the Company had an active network of 64 food brokers.

The Company has four regional sales managers who provide assistance to the food brokers in the major markets served by Uncle B's in the eastern, southeastern, midwestern and western United States. Each of the managers has an extensive background and experience with large, national food companies. The Company's Executive Vice President provides direction and policy development for the Company's regional managers and food brokers.

The Company currently has accounts with supermarket chains selling one or both of the branded products in approximately 11,000 stores in 38 of the top 52 food market territories in the United States, which are:

Los Angeles Richmond New Haven/Hartford New York Baltimore Salt Lake City Chicago Syracuse Memphis Houston Tampa Nashville Philadelphia Seattle Orlando Dallas Phoenix Louisville Detroit Jacksonville Birmingham Washington DC Des Moines Albany Miami New Orleans Denver Boston Milwaukee Atlanta St. Louis San Antonio Raleigh/Durham Pittsburgh Kansas City Omaha Charlotte Portland The Company expects over time to expand its sales coverage to each of the 52 largest food market territories in the continental United States.

The Company's marketing strategy is to meet consumer demands in the refrigerated and bread aisle/deli department bagels along with foodservice segments of the bagel industry. The Company has positioned the Uncle B's and Millspring products as new brand categories (dairy case and bread aisle/deli bagels) in order to satisfy consumer preference and further develop brand name recognition. The refrigerated dairy case, bread aisle and deli departments are high volume areas of a grocery store which offer high visibility and facilitate impulse buying. The Company believes it is the only national bagel producer to provide the consumer with high quality, fresh-tasting, never frozen bagels. The Company's Uncle B's and Millspring logos are distinctive and are intended to promote sales, brand identity and name recognition.

The Company's other marketing techniques include display racks, billboards, point of purchase promotions, end of aisle bunkers, in-store banners, and similar in-store advertising. The Company employs in-store sampling and uses a special training manual to develop knowledgeable, well- trained product demonstrators. The Company also uses radio advertisements.

BAGEL PRODUCTION

Uncle B's production methods closely follow the traditional "water bagel" recipes and methods of production. The Company has custom designed its production line equipment to permit use of the traditional methods on a mass production scale.

Uncle B's bagels are prepared and baked using a proprietary, seven step process:

- Mixing high quality ingredients in a custom built mixer, which also kneads the dough.

- Cutting individual portions of dough and forming them into balls with a motion that simulates hand rolling. The dough is then allowed to "relax" for a few minutes before being machine formed into the recognizable bagel shape.

- Holding the bagels in a warm, humid environment that activates the yeast.

- Cooling the bagels in a holding cooler in a process calling "retarding." While this step is costly, it is necessary to produce a superior product with a distinctive, rich flavor. Most mass producing bagel companies skip this time consuming and capital intensive step.

- Boiling the bagels in water which results in the shiny crust and chewy texture which is characteristic of traditional "water" bagels. Some manufacturers use steam injunction ovens to eliminate the boiling step.

- Baking the bagel in a four-stage tunnel oven which duplicates the baking effect of stone hearths and results in an authentic, traditional, "water" bagel.

- Packing the bagels in heat sealed, tamper evident bags which are date-coded and kept in storage until shipment to supermarket warehouses. The bagels are never frozen. The Uncle B's product is kept in refrigerated storage until shipment, while the Millspring product is kept in unrefrigerated storage until shipment to the customer. The Company believes that all other nationally distributed bagel products are frozen at some point in the production or distribution process.

Eight varieties of Uncle B's bagels were available during fiscal year 1997: Plain, Onion, Honey Wheat, Cinnamon Raisin, Sourdough, Egg, Blueberry and Italian Herb. Millspring bagels are available in the same flavors, except Egg, Italian Herb, and Sourdough. Uncle B's and Millspring bagels, depending on flavor, contain on average 210 calories each. They contain approximately 9 grams of protein, 1.0 gram of fat, 44 grams of carbohydrates, and approximately 300 milligrams of sodium. The Company's bagels are currently available in a 15 ounce, five bagel package.

PRODUCTION AND PACKAGING PROCESS

The Company's production and packaging process gives Uncle B's bagels either a four month refrigerated or twenty-one day non-refrigerated shelf life without freezing. In the process, a modified atmosphere is sealed into a plastic package made to the Company's specifications. Management believes that the Company's production and packaging process is a significant improvement over other preservation techniques, including freezing.

A traditional, unfrozen bagel with no artificial preservatives has an expected shelf life of one to three days and, if refrigerated, of up to 10 days. The Company's product has a non-refrigerated shelf life in an unopened bag of approximately 21 days and a refrigerated shelf life of four months. Frozen bagels begin to deteriorate in 7 to 10 days after being placed in the refrigerator. Use of the Company's technology significantly reduces product returns. The Company protects its production and packaging process as a trade secret and has filed a patent application to protect its ownership of the packaging process as applied to bagels. See "Business - Patent and Trademarks."

The Company continues to explore enhancements in its production and packaging techniques in an effort to extend the shelf life and improve the taste of its products. The Company introduced in April 1996 a RESEALABLE ZIP STRIP bag which will ensure continued freshness and flavor to the customers. The Company also intends to introduce new bagel varieties when justified by market demand, and it continues to study new bakery products that can be marketed using its technology.

COMPETITION

Management believes that the Company is the first to offer, on a widespread basis, never frozen refrigerated and bread aisle/deli bagels with an extended shelf life. Management is not aware of any other never frozen bagel marketed from a supermarket dairy case, bread aisle or deli department of a supermarket on a national basis.

The Company's products compete primarily with frozen bagels, and with fresh bagels from supermarkets' in-store bakeries. Some frozen bagel producers have turned to the "slacked-out" approach whereby a frozen bagel is thawed prior to display and purchased by the consumer. The Company believes such thawed bagels are inferior in quality to the Company's never frozen bagels. The Company believes that the manufacturers of "slacked-out" bagel products are attempting to capture a portion of the Company's success without the quality product and packaging technology.

There are two major producers of bagels who have nationwide distribution: Lenders, a division of Kellogg, and Sara Lee Corporation. Sara Lee is reported to have test marketed fresh bagels in three areas. The Company believes that Lenders is distributing a frozen bagel that is thawed and sold either as a refrigerated or unrefrigerated bagel. The Company's bagels are competitive with these national brands in product weight and retail price. Additionally, management believes the Company's products are superior in terms of freshness and flavor due to the high quality production and proprietary packaging process. The remainder of the bagel market is fragmented in terms of brand names for the consumer.

KOSHER CERTIFICATION

The Company has received a "Circle U" designation from the Union of Orthodox Jewish Congregations of America. The "Circle U" is the highest level of Kosher certification and requires that the Company comply with specific manufacturing procedures and standards.

SUPPLIERS

The Company uses a number of suppliers for essential raw materials. It is not dependent on any one supplier for its food ingredients. Flour, the primary ingredient, is a commodity that fluctuates in price. The Company has a bulk flour storage facility and purchases flour by the ton on a fixed-price contract basis. Other ingredients are also purchased in bulk, on a competitive basis.

The Company has developed a new and improved higher quality bag with a RESEALABLE ZIP STRIP which can be supplied by different suppliers. The suppliers are believed to be capable of meeting the Company's anticipated demand for packaging material.

The Company purchased approximately $6.9 million of raw materials in fiscal 1997. The primary purchases in order of magnitude includes flour, bags and boxes.

DISTRIBUTION

The Company utilizes contract carriers with refrigerated trucks to distribute its Uncle B's and Millspring products directly to the supermarket warehouses. The warehouses then deliver the bagels to their stores. Uncle B's plant location in central Iowa, one-quarter mile off Interstate 35 and 50 miles north of Interstate 80, provides distribution efficiencies to all parts of the continental United States.

Distribution of the foodservice product is performed by the customer.

GOVERNMENT REGULATION

The Company is subject to licensing and regulation by various state and federal agencies, including those dealing with health, sanitation, environment, building, planning, safety and fire. These agencies include, but are not limited to, the Iowa Public Health Department, the Environmental Protection Agency, the Department of Labor, the Food and Drug Administration, the Consumer Product Safety Commission, and the Occupational Safety and Health Administration. The failure of the Company to comply with laws and regulations applicable to it could result in sanctions and penalties which could materially and adversely affect the Company's business.

Management does not believe that compliance with federal, state and local laws and regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have a material effect on the Company's capital expenditures, earnings or competitive position. However, the use of non-recyclable food packaging is receiving increased attention by various state governments. The Company's proprietary film packaging is not easily recyclable, and the Company could be materially adversely affected if jurisdictions including its major marketing areas adopted such regulations.

The Company's products currently comply with the Food and Drug Administration's ("FDA") manufacturing and labeling requirements. No assurance can be given that the FDA or other regulatory agencies will not enact new, or change existing, regulations that would adversely affect the Company.

PATENTS AND TRADEMARKS

The Company has applied for a patent covering its packaging technology invented by William T. Rose, Jr. and Dr. Ricardo Molins. Mr. Rose and Dr. Molins assigned their rights to the technology to the Company. The patent application discloses the invention of a refrigerated bagel which has an extended four month shelf life without freezing through the use, in combination, of a specially-designed package, a modified atmosphere and a bagel composite. The claims in the patent application have been refused by the patent examiner, and thus, it is possible that the patent will not be issued or, if issued, may be significantly reduced in scope. Consequently, there is no assurance that the patent application will result in the issuance of a patent or, if issued, will provide significant protection.

The Company also relies upon trade secret protection for its confidential and proprietary information. There is no assurance that others have not developed, or will not develop, substantially equivalent production and packaging techniques or otherwise gain access to the Company's trade secrets or technology, or that the Company can protect its trade secrets. The Company requires its employees, consultants, and advisors to execute confidentiality agreements upon the commencement of an employment or consulting relationship with the Company. Each agreement provides that all confidential information developed or made known during the course of the relationship will be kept confidential and not disclosed to any third parties except in specified circumstances. There can be no assurance, however, that these agreements will provide meaningful protection, or adequate remedies, for the Company's trade secrets in the event of unauthorized use of disclosure of such information.

The Company has filed and received a federal trademark registration for the wordmark "Uncle B's." The Company has also filed a trademark application for the Uncle B's logo, which has been approved for publication by the United States Patent and Trademark Office. The Company has filed an application with the U.S. Patent and Trademark for the mark "Millspring." This application is pending.

EMPLOYEES

In fiscal year 1997, the Company averaged 188 full-time employees, 34 of whom fill administrative, sales, and clerical positions, and 154 of whom are engaged in production and maintenance. As of September 30, 1997, the Company had 155 full-time employees. The Company implemented staff reductions in the third and fourth quarter of fiscal 1997 to reduce operating costs.

All employees are required to sign a Non Compete/Confidentially Agreement. There have been no management-labor disputes and the Company is not a party to any collective bargaining agreement. Employees receive Company provided health insurance and 401(K) benefits after a specified period of employment. The cost of this benefit is shared by both the employee and the Company. Employment contracts with Mr. William T. Rose, Jr. and Mr. William T. Rose, Sr. provide for such company-paid benefits. In addition, the Company has established a vacation and paid holiday policy. All employees receive stock options after one year of employment. Further, production and sales employees participate in monthly and quarterly gain-sharing programs.

PRODUCT LIABILITY

The Company maintains $1,000,000 of product liability coverage per event and $2,000,000 in the aggregate, with an additional $10,000,000 in umbrella coverage in either circumstance.