To Our Shareholders

Net product sales in 2008 were $492 million compared to $493 million in 2007. We had another strong Halloween selling season and many of our core brands delivered good sales results.

Net earnings in 2008 were $39 million compared to $52 million in 2007. Commodity costs have increased quite dramatically over the past two years and continue to adversely impact our operating results.

Profits were also affected by a $3.3 million after-tax charge for the write-down to market value of a security that was originally purchased with an insured AAA rating, but the Company has concluded is now impaired. This was partially offset by $2.2 million of favorable adjustments relating to state and foreign income taxes.

The Company has taken selective price increases, where feasible, to help restore its profitability while maintaining its competitive value in the market place. At the same time, we remain true to several key financial principles that have guided the Company for many years. Some of these are enumerated on the facing page. In regard to current market conditions and their impact on the Company’s operating results, we particularly focus on those principles that speak to financial conservatism, reinvestment in the business and a long-term perspective. We believe that these principles have served the Company and its shareholders well in the past and we remain committed to them.

Financial Highlights

	December 31,
	2008		2007
	(in thousands except per share data)
Net Product Sales	$	492,051	$	492,742
Net Earnings	38,777		51,625

Working Capital	128,727		141,754
Net Property, Plant and Equipment	217,628		201,401
Shareholders’ Equity	634,770		638,230

Average Shares Outstanding*	55,157		56,585
Per Share Items*
Net Earnings	$	0.70	$	0.91
Cash Dividends Paid	.32		.32

*Adjusted for stock dividends.

Other highlights of 2008 include:

· Cash dividends were paid for the sixty-sixth consecutive year.

· Our forty-fourth consecutive 3% stock dividend was distributed.

· $34 million was reinvested in capital expenditures.

· 888,900 shares of common stock were repurchased in the open market for an aggregate price of $21 million.

· All of these actions were accomplished using internally generated funds, and the Company remains essentially debt free.

We ended 2008 with $129 million of cash and investments, net of interest bearing debt. This financial strength will enable the Company to continue to distribute dividends, repurchase stock, reinvest in operating assets and in our brands, develop new products and consider business acquisition opportunities as they may arise. We are active in each of these aspects of our business.

Sales and Marketing

We face intense competition in the confectionery industry. Retailers are highly selective as to the products they carry and consumers choose from a broad array of appealing products. Our competitive advantage lies in our many well-known brands that offer high volume sales and profits for retailers and great brands at attractive values for consumers. In 2008 we continued stressing these advantages to both our customers and to the ultimate consumers.

Halloween remained our largest selling period. The most significant trade classes, in terms of sales volume, including mass merchandisers, drug chains, warehouse clubs, grocery and dollar stores were the primary focus of our promotional efforts.

Packaged goods have remained highly successful in these outlets. These include large assortments of our most popular items. We have also seen growth in our “theater box” line and many items in this category sold well again in 2008 across a broad variety of trade classes either as straight goods or in combo packs, shippers and floor displays.

Line extensions and other new products generated incremental sales and added to the excitement of our product portfolio. One of the most notable of these is the re-introduction of the Tootsie Pop Drop.

Tootsie Pop Drops

Tootsie Pop Drops are hard candy tablets in five delicious flavors. Like their famous namesake, they have a real Tootsie Roll center. They are perfect for consumers who enjoy Tootsie Pops but either seek a smaller, bite-sized treat or, perhaps, seek an authentic Tootsie Pop experience but without the stick.

Many consumers will recall Pop Drops from the 1970’s when “roll candy” had a significant market niche. Over the years we often heard from Tootsie fans who clamored for this popular item to be reintroduced. Well, we listened, and during 2008 their calls were answered with the re-launch of Tootsie Pop Drops.

They are packaged in a foil pouch that maintains product freshness and with graphics that strongly evoke the Tootsie Pop brand identity. The new pouch also meshes well with current market formats and price points. Tootsie Pop Drops are a delicious addition to our product line and were relaunched in a different form to meet the ever-changing trends and product formats in our industry.

Dubble Bubble Mini Tubs

Dubble Bubble Mini Tubs is another product format that achieved success in 2008. These are colorful plastic tubs that contain 2.6 ounces of market leading Dubble Bubble gum. Resealable Mini Tubs were especially popular in the dollar store, mass merchandiser and drug classes of trade and are perfect for party favors, gift giving or for anyone who wants to chew like a big leaguer.

Dubble Bubble Halloween Combo Bag

Our Halloween line-up was augmented by a new combo bag of novelty Dubble Bubble gumballs with bright, vibrant, and fun graphics that make it a hit at trick-or-treating time. With an assortment of individually wrapped gumballs, including Slime Balls with a lime “slime” center, Pumpkin Seedlings filled with candy “seeds,” Count Blacula, oozing with a cherry “blood” center and Horror Eyes, the bubble gum that looks back at you, this spook-tacular gumball mix appeals to kids of all ages!

Tootsie Flag Midgees

In the Tootsie Roll line, our perennial candy favorite, Midgees, were introduced in a thematic red, white and blue “Flag” bag that commemorates the celebration of summer. The metalized foil packaging maintains these sweet treats at peak freshness and the bold graphics pop off the shelf like fireworks! Flag Midgees are perfect for passing out to patriotic snackers during holiday parades or any occasion—that is, if the family doesn’t get to them first!

Blow Pop Minis Snack Size

Blow Pop Minis, bite-sized candy tablets, each with a real Blow Pop bubble gum center, were added to our seasonal offerings for Halloween and Christmas in snack-sized pouches. Now this popular and portable confection is perfect for trick or treaters or as stocking stuffers!

Holiday Sugar Babies

Holiday Sugar Babies were another seasonal addition to our line, this one in a festive holiday-themed theater box format. These are luscious caramel Sugar Babies in festive red, white and green candy shells.

Andes Peppermint Crunch

The Andes 4.67 ounce box line was expanded with addition of Peppermint Crunch in 2008. This popular flavor addition was carried by outlets in the mass merchandiser, drug and grocery classes and sold through quickly in the fall season.

Advertising and Public Relations

We promoted the “How Many Licks?” theme through cable television ads as well as through a

national $50,000 sweepstakes featured on our website and prominently announced on millions of product packages. Although contest winners may be certain that they have unlocked the mystery of this age-old “How Many Licks” riddle, in truth “the world may never know!”

Additionally, several of our products were highlighted in special interest programs on cable television. Segments on the Food Network’s Unwrapped program included “Lolipop-alooza” which featured Tootsie Pops and Sugar Daddies, “Movie Munchies” which featured Dots, “On a Roll” which included Tootsie Rolls, “Pops” which featured Blow Pops and “Delicious Duos” which included Andes Mints.

These, along with other previous cable programs, are quite popular with viewing audiences and are often repeated, generating extensive and recurring exposure for our brands.

The Company’s listing in the Domini 400 Index and in several other social investment oriented indexes maintained by KLD Research and Analytics, Inc. was reaffirmed in 2008. Inclusion in these indexes gives recognition to our leadership in the areas of environmental, corporate and social responsibility.

Supply Chain

The Company is committed to being the low cost producer in the categories in which it competes. To achieve this goal we continually upgrade facilities, equipment and business systems to add capacity, increase efficiency or improve quality. Capital expenditures were $34 million in 2008, the majority of which was incurred for these purposes.

2008 was the second year of a multi-year, company-wide upgrade to our enterprise resource planning (ERP) software. The implementation process entails a “bottom-up” review of our business processes and information flow. It is truly a company-wide endeavor, touching every discipline.

Also during 2008 we completed a logistics study in order to determine the most cost effective patterns to get finished goods from production facilities to the customer. We periodically perform these reviews in response to our evolving product/ customer matrix. As a result of this review, we acquired a warehousing property and are in the process of preparing it to become the hub for the eastern United States portion of our distribution network. We believe this will both reduce cost and shorten delivery times.

We also invested in a number of significant projects to upgrade packaging lines in our facilities. In planning and designing these projects we are careful to build in flexibility that will enable the Company to react to future changes in packaging or product assortments. This flexibility adds significant cost to these projects but is imperative if we are to meet the future demands of an evolving market place.

Purchasing

As we reported last year, prices of many commodities that we use have risen to historically high levels. Although we take measures such as competitive bidding, hedging and forward purchase contracts to mitigate commodity cost increases to the greatest possible extent, we have not been able to offset the full impact of these rising costs.

We have seen some signs of moderating costs as a result of deteriorating world economic conditions. However, this was subsequent to the majority of our 2008 purchases which are made during the spring and summer months for Halloween production.

International

We manufacture and sell products in Mexico under the Tutsi trademark. We also sell Tootsie products along with most of our other domestic brands in the Canadian market. Many of these are exported as well, to more than 50 countries in Europe, Asia, and South and Central America.

Sales and profits in Mexico were about even with 2007, while Canada declined slightly. Commodity cost increases related to products sold in both of these markets were essentially offset by price increases.

Export sales declined during 2008 due to the relative strength of the U.S. dollar, which increased the relative cost of our products in foreign markets. This also limited our ability to recover commodity cost increases, so profitability of our export sales declined during 2008.

We continue to believe that our well-known brands offer a compelling and broad assortment that will appeal to consumers in a variety of international markets in the long run. Accordingly, we continue to actively cultivate these opportunities.

In Appreciation

We wish to thank our many loyal employees, customers, suppliers, sales brokers, and domestic as well as foreign distributors for their efforts during 2008. We also thank our fellow shareholders for their support over the years.

Excellence and dedication is required at all levels of the Company to meet today’s business challenges. We are committed to that as well as preparing the Company to succeed tomorrow and beyond.

Melvin J. Gordon
Chairman of the Board and
Chief Executive Officer

Ellen R. Gordon
President and
Chief Operating Officer

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

(in thousands except per share, percentage and ratio figures)

FINANCIAL REVIEW

This financial review discusses the Company’s financial condition, results of operations, liquidity and capital resources, significant accounting policies and estimates, new accounting pronouncements, market risks and other matters. It should be read in conjunction with the Consolidated Financial Statements and related footnotes that follow this discussion.

FINANCIAL CONDITION

The Company’s overall financial position remains very strong as a result of its 2008 net earnings and related cash flows provided by operating activities.

During 2008, the Company’s cash flows from operating activities aggregated $57,042 which includes $16,050 of cash transferred into a voluntary employee benefit association (VEBA) trust, controlled by the Company, as further discussed below. The Company used its cash flows as well as other sources to pay cash dividends of $17,557, repurchase and retire $21,109 of its outstanding shares, and make capital expenditures of $34,355. The Company’s net working capital of $128,727 remained strong at December 31, 2008 although it decreased from $141,754 at December 31, 2007.

As of December 31, 2008, the Company’s aggregate cash, cash equivalents and investments, including all long-term investments in marketable securities, was $136,680 compared to $164,906 at December 31, 2007, a decrease of $28,226. The 2008 amount reflects a $5,140 write-down to market value of an auction rate security and a decline in the market value of trading securities of $7,334. The Company invests in trading securities only to hedge its deferred compensation liabilities, as further discussed herein and in Note 7 to the financial statements.

Shareholders’ equity decreased from $638,230 at December 31, 2007 to $634,770 as of December 31, 2008, principally reflecting 2008 net earnings of $38,777 less cash dividends and share repurchases of $17,557 and $21,109, respectively.

The Company has a relatively straight-forward financial structure and has historically maintained a conservative financial position. Except for an immaterial amount of operating leases, the Company has no special financing arrangements or “off-balance sheet” special purpose entities. Cash flows from operations plus maturities of short term investments are expected to be adequate to meet the Company’s overall financing needs, including capital expenditures, in 2009. Occasionally, the Company considers possible acquisitions, and if the Company were to pursue and complete such an acquisition, that could result in bank borrowings.

Results of Operations

2008 vs. 2007

Net product sales were $492,051 in 2008 compared to $492,742 in 2007, a decrease of $691 or 0.1%. Although 2008 domestic sales increased by 0.5%, the reported consolidated net sales reflect declines in sales outside of the U.S., including the effects of a stronger U.S. dollar, which offset these domestic sales increases.

Product cost of goods sold were $333,314 in 2008 compared to $327,695 in 2007, an increase of $5,619 or 1.7%. This increase reflects a $1,877 decrease in deferred compensation expense principally resulting from the decline in the market value of investments in trading securities relating to compensation deferred in previous years. Adjusting for the aforementioned, product cost of goods sold as a percentage of net sales increased from 64.5% in 2007 to 68.1% in 2008, an increase of 3.6% as a percent of sales. This increase principally reflects significant cost increases in major ingredients, as well as increased labor and fringe benefits, including health insurance benefits, the adverse effects of foreign currency exchange rates on products manufactured in Canada and principally sold in the United States, and generally higher plant overhead costs, including higher energy costs. In 2008, increases in ingredient costs approximated $9,300, however, the Company benefited from an approximate $1,200 decrease in overall packaging material costs. The Company generally experienced significant cost increases in substantially all of its major ingredients, including sugar, corn syrup, vegetable oils, dextrose, cocoa, chocolate and gum base inputs. The adverse impact of changes in Canadian exchange rates as discussed above approximated $900 in 2008.

Due to the seasonal nature of the Company’s business and corresponding variations in product mix, gross margins have historically been lower in the second half of the year, and second half of 2008 and 2007 were consistent with this trend.

Selling, marketing and administrative expenses were $95,254 in 2008 compared to $97,821 in 2007, a decrease of $2,567 or 2.6%. This decrease reflects a $5,457 decrease in

deferred compensation expense principally resulting from the decline in the market value of investments in trading securities relating to compensation deferred in previous years. Adjusting for the aforementioned, selling, marketing and administrative expenses increased by $2,890 or 3.0%, and as a percent of net product sales increased from 19.9% of net product sales in 2007 to 20.5% of product sales in 2008. These expenses include $45,570 and $41,775 of freight, delivery and warehousing and distribution expenses in 2008 and 2007, respectively. Freight, delivery and warehousing and distribution expenses increased from 8.5% of net product sales in 2007 to 9.3% of net product sales in 2008, primarily due to higher energy input costs including higher freight fuel surcharges.

Earnings from operations were $66,527 in 2008 compared to $70,852 in 2007, a decrease of $4,325 or 6.1%. Earnings from operations includes changes in deferred compensation liabilities relating to corresponding changes in the market value of trading securities that hedge these liabilities as discussed above. Adjusting for the aforementioned, operating earnings were $59,193 and $72,850 in 2008 and 2007, respectively, a decrease of $13,657 or 18.7%. This decrease principally reflects the decrease in gross profit resulting from higher input costs, principally ingredients and freight and delivery, as discussed above.

The Company believes that the carrying values of its trademarks and goodwill have indefinite lives as they are expected to generate cash flows indefinitely. Goodwill and indefinite-lived intangible assets are assessed at least annually for impairment as of December 31 or whenever events or circumstances indicate that the carrying values may not be recoverable from future cash flows. The fair values of reporting units and indefinite lived intangible assets are primarily assessed using the present value of estimated future cash flows.

Management believes that all assumptions used for the impairment tests above are consistent with those utilized by market participants performing similar valuations. No impairments were recorded in either 2008 or 2007. However, holding all other assumptions constant at the test date, a 100 basis point increase in the discount rate or a 100 basis point decrease in the royalty rate would reduce the fair value of one of our tradenames by approximately 13% and 7%, respectively, indicating potential impairment of approximately $15,000 and $7,000, respectively.

Other income (expense), net, was $(10,618) in 2008 compared to $6,315 in 2007, a decrease of $16,933. This decrease principally reflects a $5,140 write-down to market value of an investment security and $9,332 relating to changes in the fair value of trading securities investments during 2008 used to hedge deferred compensation liabilities, both of which are discussed below.

As of December 31, 2008, the Company’s long term investments include $8,410 ($13,550 original cost) of Jefferson County Alabama Sewer Revenue Refunding Warrants originally purchased with an AAA rating. This is an auction rate security (ARS) that is classified as an available for sale security. Due to adverse events related to Jefferson County and its bond insurance carrier, Financial Guaranty Insurance Company (FGIC), as well as events in the credit markets, the auctions for this ARS failed throughout 2008. As such, the Company estimated the fair value of this ARS utilizing a valuation model with Level 3 inputs as of December 31, 2008 under SFAS 157 “Fair Value Measurements.” This valuation model considered, among other items, the credit risk of the collateral underlying the ARS, the credit risk of the bond insurer, interest rates, and the amount and timing of expected future cash flows including assumptions about the market expectation of the next successful auction.

During the fourth quarter 2008, the Company determined that the market decline in fair value of its Jefferson County ARS became other than temporary, as defined, and recorded an after-tax impairment charge of $3,328 ($5,140 pre-tax charge). Previous to fourth quarter 2008, the Company concluded that the decline in market value was temporary, as defined, and recorded declines in the market value to accumulated other comprehensive income. Notwithstanding, the Company continues to receive all contractual interest payments on its ARS on a timely basis, there has been no default, it is insured by FGIC, and the Company has the intent and ability to hold this ARS until recovery assuming that it occurs in a reasonable number of years.

The Company has classified this ARS as non-current and has included it in long-term Investments at December 31, 2008 because the Company believes that the current financial conditions of Jefferson County and FGIC, as well as the conditions in the auction rate securities market, may take more than twelve months to resolve. Future decreases in the fair value of this ARS could also be classified as other than temporary and result in additional charges to earnings.

Other income (expense), net includes the results of the company’s trading securities which hedge the company’s deferred compensation liabilities. The income (expense) on such trading securities was $(7,334) and $1,998 in 2008 and 2007, respectively; such income or (expense) was substantially offset

by a like amount of (expense) or income in aggregate product cost of goods sold and selling, marketing, and administrative expenses in the respective years. The 2008 (expense) of $(7,334) principally reflects the market declines in the equity markets in 2008.

Other income (expense), net also includes the results of the Company’s 50% interest in a joint venture, accounted for under the equity method, which was a loss of $(477) in 2008 compared to income of $182 in 2007.

The consolidated effective tax rate was 30.6% and 33.1% in 2008 and 2007, respectively. The decrease in the effective tax rate principally reflects approximately $1,400 of reduction in tax positions resulting from the effective settlement of a state income tax audit, and approximately $700 relating to changes in foreign income tax expense due to the favorable effects of certain tax treaty provisions between the U.S. and Canada. In addition, the 2007 effective tax rate was adversely impacted by $1,040 relating to the adoption of FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48). During 2008 and 2007, the Company recorded $3,218 and $3,145 of valuation allowances, respectively, relating to foreign subsidiary tax loss carry-forwards to reduce the future income tax benefits to amounts expected to be realized.

Net earnings were $38,777 in 2008 compared to $51,625 in 2007, and earnings per share were $.70 and $.91 in 2008 and 2007, respectively, a decrease of $.21 or 23%. 2008 results were adversely affected by higher input costs, primarily relating to ingredients and freight and delivery, as well as the items discussed above in Other income (expense), net. Earnings per share did benefit from the reduction in average shares outstanding resulting from common stock purchases in the open market by the Company. Average shares outstanding decreased from 56,585 in 2007 to 55,157 in 2008.

The Company has taken actions and implemented programs, including selected price increases as well as cost reduction programs, with the objective of recovering some of these higher input costs. However, these actions have not allowed the Company to recover all of these increases in ingredient and other input costs in 2008.

2007 vs. 2006

Net product sales were $492,742 in 2007 compared to $495,990 in 2006, a decrease of $3,248 or 1%. This decline principally reflects the conclusion of a contract to manufacture product under a private label for a third party, which accounted for approximately $2,200 in net product sales in 2006, and a non-recurring sale of certain inventory in the amount of approximately $1,000 to a new foreign distributor in the first quarter of 2006.

Product cost of goods sold as a percentage of net sales increased from 62.8% in 2006 to 66.5% in 2007. This increase principally reflects significant cost increases in major ingredients, as well as increases in packaging materials, and labor and fringe benefits, including health insurance. In 2007, increases in ingredient and packaging costs approximated $10,500 and $1,500 respectively. The Company generally experienced significant cost increases in substantially all of its major ingredients. In addition, the adverse effects of foreign currency exchange on products manufactured in Canada are estimated to have been $1,800 in 2007.

Selling, marketing and administrative expenses were $97,821 in 2007 compared to $101,032 in 2006, a decrease of $3,211 or 3%. This decrease principally reflects the Company’s cost reduction efforts as well as lower expenses that directly relate to 1% sales decline. Prior year 2006 operating expenses also reflect approximately $1,500 of additional marketing expenses associated with the transition to new pack sizes and government mandated labeling changes. Additionally, higher freight, delivery and warehousing expenses, principally relating to higher energy and fuel costs, adversely impacted 2007 operating expenses compared to 2006.

Selling, marketing and administrative expenses as a percent of net product sales favorably decreased from 20.4% of net product sales in 2006 to 19.9% of net product sales in 2007. These expenses include $41,775 and $40,353 of freight, warehousing and distribution expenses in 2007 and 2006, respectively. Freight, warehousing and distribution expenses increased from 8.1% of net product sales in 2006 to 8.5% of net product sales in 2007, primarily reflecting higher energy input costs and increased warehousing expenses in 2007.

Earnings from operations were $70,852 in 2007 compared to $87,529 in 2006, a decrease of $16,677 or 19.1%. This decrease principally reflects the decrease in gross profit resulting from higher input costs, principally ingredients, as discussed above.

Other income, net, was $6,315 in 2007 compared to $7,186 in 2006, a decrease of $871. This is due to a decline in income from the Company’s 50% interest in a joint venture, accounted for under the equity method, from $921 in 2006 to $182 in 2007.

The consolidated effective tax rate was 33.1% and 30.7% in 2007 and 2006, respectively. This increase in the effective tax rate principally reflects higher foreign income tax expense in 2007. During 2007 and 2006, the Company recorded $3,145 and $3,481 of valuation allowances, respectively, relating to foreign subsidiary tax loss carry-forwards to reduce the future income tax benefits to amounts expected to be realized.

Net earnings were $51,625 in 2007 compared to $65,919 in 2006, and earnings per share were $.91 and $1.15 in 2007 and 2006, respectively, a decrease of $.24 or 21%. 2007 results were adversely affected by lower sales and higher input costs, primarily relating to ingredients, as discussed above. Earnings per share did benefit from the reduction in average shares outstanding resulting from common stock purchases in the open market by the Company. Average shares outstanding decreased from 57,405 in 2006 to 56,585 in 2007.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows from operating activities were $57,042, $90,064 and $55,656 in 2008, 2007 and 2006, respectively. The $33,022 decrease in cash flows from operating activities from 2007 to 2008 principally reflects a decrease of $12,848 in net income in 2008 compared to 2007, and the Company’s investment in a voluntary employee association trust (VEBA) of $16,050 which is controlled solely by the Company as discussed herein. 2008 cash provided by operating activities principally benefited from an $8,642 increase in taxes payable and deferred and a $3,394 increase in postretirement health care and life insurance benefits. However, a $2,385 decrease in deferred compensation and other liabilities negatively impacted 2008 cash flows from operating activities.

During 2008, the Company contributed $16,050 to a VEBA trust to fund the estimated future costs of certain employee health, welfare and other benefits. The Company will use the funds, as well as future earnings, in this VEBA trust to pay for the actual cost of such benefits during 2009 through 2011.

Cash flows from investing activities reflect capital expenditures of $34,355, $14,767 and $39,207 in 2008, 2007 and 2006 respectively. 2008 capital expenditures reflect $12,400 relating to the purchase of real estate that the Company will utilize as a distribution center in 2009, and $4,755 relating to computer systems and related implementation. In addition, during 2008 the Company capitalized $918 of internal costs relating to the system implementation discussed above. In 2006, capital expenditures reflect $25,241 relating to investment of the proceeds of a sale of surplus real estate in like-kind real estate.

Cash flows from financing activities reflect the repayment of bank loans of $32,001 in 2006. The Company had no bank borrowing or repayments in 2007 or 2008, and had no outstanding bank borrowings as of December 31, 2007 or 2008.

Financing activities also include common stock repurchases and retirements of $21,109, $27,300, $30,694 in 2008, 2007 and 2006, respectively. Cash dividends of $17,557, $17,542, and $17,264 were paid in 2008, 2007 and 2006, respectively.

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

Preparation of the Company’s financial statements involves judgments and estimates due to uncertainties affecting the application of accounting policies, and the likelihood that different amounts would be reported under different conditions or using different assumptions. The Company bases its estimates on historical experience and other assumptions, as discussed herein, that it believes are reasonable. If actual amounts are ultimately different from previous estimates, the revisions are included in the Company’s results of operations for the period in which the actual amounts become known. The Company’s significant accounting policies are discussed in Note 1 to the financial statements.

Following is a summary and discussion of the more significant accounting policies which management believes to have a significant impact on the Company’s operating results, financial position, cash flows and footnote disclosure.

Revenue recognition

Revenue, net of applicable provisions for discounts, returns, allowances, and certain advertising and promotional costs, is recognized when products are delivered to customers based on a customer purchase order, and collectibility is reasonably assured. The accounting for such promotional costs is discussed under “Customer incentive programs, advertising and marketing” below.

Provisions for bad debts are recorded as selling, marketing and administrative expenses. Such provisions have generally not exceeded 0.2% of net sales for 2008, 2007 and 2006 and, accordingly, have not been significant to the Company’s financial position or results of operations.

Intangible assets

The Company’s intangible assets consist primarily of acquired trademarks and related goodwill. In

accordance with SFAS No. 142, goodwill and other indefinite lived assets are not amortized, but are instead subjected to annual testing for impairment unless certain triggering events or circumstances are noted. The Company performs its annual impairment testing as of December 31.

This determination is made by comparing the carrying value of the asset with its estimated fair value, which is calculated using estimates including discounted projected future cash flows. These projected future cash flows are dependent on a number of factors including the execution of business plans, achievement of projected sales, including but not limited to future price increases, projected operating margins, and projected capital expenditures. Such operating results are also dependent upon future ingredient and packaging material costs, exchange rates for products manufactured or sold in foreign countries, operational efficiencies, cost savings initiatives, and competitive factors. Although the majority of the Company’s trademarks relate to well established brands with a long history of consumer acceptance, projected cash flows are inherently uncertain. A change in the assumptions underlying the impairment analysis, including but not limited to a reduction in projected cash flows, the use of a different discount rate to discount future cash flows or a different royalty rate applied to the Company’s trademarks, could cause impairment in the future.

Customer incentive programs, advertising and marketing

Advertising and marketing costs are recorded in the period to which such costs relate. The Company does not defer the recognition of any amounts on its consolidated balance sheet with respect to such costs. Customer incentives and other promotional costs are recorded at the time of sale based upon incentive program terms and historical utilization statistics, which are generally consistent from year to year.

The liabilities associated with these programs are reviewed quarterly and adjusted if utilization rates differ from management’s original estimates. Such adjustments have not historically been material to the Company’s operating results.

Split dollar officer life insurance

The Company provides split dollar life insurance benefits to certain executive officers and records an asset equal to the cumulative premiums paid. The Company will fully recover these premiums in future years under the terms of the plan. The Company retains a collateral assignment of the cash surrender values and policy death benefits payable to insure recovery of these premiums.

Valuation of long-lived assets

Long-lived assets, primarily property, plant and equipment, are reviewed for impairment as events or changes in business circumstances occur indicating that the carrying value of the asset may not be recoverable. The estimated cash flows produced by the asset or asset groups are compared to the asset carrying value to determine whether impairment exists. Such estimates involve considerable management judgment and are based upon assumptions about expected future operating performance. As a result, actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance, and economic conditions. The Company has recorded no such impairments in the years presented.

Income taxes

Deferred income taxes are recognized for future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. The Company records valuation allowances in situations where the realization of deferred tax assets is not more likely than not. The Company, along with third-party tax advisors, periodically reviews assumptions and estimates of the Company’s probable tax obligations using informed judgment and historical experience.

Valuation of investments

Investments, primarily municipal bonds and mutual funds, are reviewed for impairment at each reporting period by comparing the carrying value to the fair market value. The Company recorded an other than temporary impairment related to its Jefferson County ARS during 2008 as described above and in Note 10. No such impairment was recorded in any of the other years presented.

Other matters

In the opinion of management, other than contracts for foreign currency forwards and raw materials, including currency and commodity hedges and outstanding purchase orders for packaging, ingredients, supplies, and operational services, all entered into in the ordinary course of business, the Company does not have any significant contractual obligations or future commitments. The Company’s outstanding contractual commitments as of December 31, 2008, all of which are generally normal and recurring in nature, are summarized in the chart on page 12.

RECENT ACCOUNTING PROCOUNCEMENTS

SFAS No. 157, “Fair Value Measurements” (SFAS 157)

In September 2006, the FASB issued SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. The Company has adopted the provisions of SFAS 157 as of January 1, 2008, for financial instruments. Although the adoption of SFAS 157 did not materially impact its financial condition, results of operations, or cash flow, the Company is now required to provide additional disclosures as part of its financial statements.

SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, inputs defined as quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date; Level 2 inputs defined as inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

FASB Staff Position SFAS 157-2, “Effective Date of FASB Statement No. 157” (FSP FAS 157-2)

In February 2008, the FASB issued FSP FAS 157-2. FSP FAS 157-2 delays the effective date for SFAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The non-financial assets and non-financial liabilities for which the Company has not applied the fair value provisions of SFAS 157 include long lived assets, goodwill and other intangible assets. The effective date for application of SFAS 157 to non-financial assets and non-financial liabilities will be fiscal and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of adopting SFAS 157 for non-financial assets and non-financial liabilities on its financial statements.

FASB Staff Position SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP FAS 157-3)

In October 2008, the FASB issued FSP FAS 157-3 which clarifies the application of SFAS 157 in a market that is not active. The Company has considered this guidance when determining the fair value of its financial assets as of December 31, 2008.

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities- including an amendment to FASB Statement No. 115,” (SFAS 159)

In February 2007, the FASB issued SFAS No. 159, which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 became effective beginning with our first quarter of 2008. The Company has chosen not to apply the fair value option under SFAS 159 for any of its financial instruments.

SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161)

In March 2008, the FASB issued SFAS 161 which requires enhanced disclosures for derivative and hedging activities. SFAS 161 will become effective beginning with our first quarter of 2009. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

SFAS No. 141(R),” Business Combinations,” (SFAS 141(R)), and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160)

In December 2007, FASB issued SFAS 141(R) and SFAS 160. These statements aim to improve, simplify and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. These statements are effective for fiscal years beginning after December 15, 2008. SFAS 141(R) will have a impact on the manner in which the Company accounts for future acquisitions beginning in the fiscal year 2009. Significant changes include the capitalization of in-process research and development (IPR&D), expensing of acquisition related restructuring actions and transaction related costs and the recognition of contingent purchase price consideration at fair value at the acquisition date. In addition, changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period will be recognized in earnings rather than as an adjustment to the cost of acquisition. This accounting treatment for taxes is applicable to acquisitions that occurred both prior and subsequent to the adoption of SFAS 141(R).

EITF Issue 08-07: “Accounting for Defensive Intangible Assets” (EITF 08-07)

used in research and development activities. This issue is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of this standard on its consolidated financial statements

MARKET RISKS

The Company is exposed to market risks related to commodity prices, interest rates, investments in marketable securities, equity price and foreign exchange.

The Company’s ability to forecast the direction and scope of changes to its major input costs is currently impacted by significant volatility in crude oil, corn, soybean, sugar and cocoa markets. The prices of these commodities are influenced by increasing global demand, changes in farm policy, including mandates for bio-fuels, and fluctuations in the U.S. dollar relative to dollar-denominated commodities in world markets. The Company believes that its competitors face the same or similar challenges.

In order to address the impact of rising input and other costs, the Company periodically reviews each item in its product portfolio to ascertain if price increases, weight declines (indirect price increases) or other actions may be taken. These reviews include an evaluation of the risk factors relating to market place acceptance of such changes and their potential effect on future sales volumes. In addition, the estimated cost of packaging modifications associated with weight changes is evaluated.

The Company also maintains ongoing cost reduction programs whereby cost savings initiatives are encouraged and progress monitored. The Company is not able to accurately predict the outcome of these cost savings initiatives and their effects on its future results.

Commodities

Commodity price risks relate to ingredients, primarily sugar, cocoa, chocolate, corn syrup, dextrose, vegetable oils, milk, whey and gum base ingredients. The Company believes its competitors face similar risks, and the industry has historically adjusted prices to compensate for adverse fluctuations in commodity costs. The Company, as well as competitors in the confectionery industry, have taken actions, including price increases and selective product weight declines (indirect price increases) to mitigate rising input costs for ingredients, energy, freight and delivery. Although management seeks to substantially recover cost increases over the long term, there is risk that price increases and weight declines cannot be fully passed on to customers and, to the extent they are passed on, they could adversely affect customer and consumer acceptance and resulting sales volume.

The Company utilizes commodity futures contracts as well as annual supply agreements to hedge anticipated purchases of certain ingredients, including sugar, in order to mitigate commodity cost fluctuation. The Company also purchases forward foreign exchange contracts to hedge its costs of manufacturing certain products in Canada for sale and distribution in the United States, and periodically purchase equipment or raw materials from foreign suppliers. Such commodity future and currency forward contracts are cash flow hedges and are effective as hedges as defined by Statement of Financial Accounting Standards (SFAS 133), “Accounting for Derivative Instruments and Hedging Activities.” The unrealized gains and losses on such contracts are deferred as a component of accumulated other comprehensive earnings (loss) and are recognized as a component of product cost of goods sold when the related inventory is sold.

The potential change in fair value of commodity and foreign currency derivative instruments held by the Company at December 31, 2008, assuming a 10% change in the underlying contract price, was $1,850. This analysis only includes commodity and foreign currency derivative instruments and, therefore, does not consider the offsetting effect of changes in the price of the underlying commodity or foreign currency. This amount is not significant compared with the net earnings and shareholders’ equity of the Company.

Interest rates

Interest rate risks primarily relate to the Company’s investments in tax exempt marketable securities, including auction rate securities (ARS), with maturities or auction dates of generally up to three years.

The majority of the Company’s investments have historically been held to maturity or to auction date, which limits the Company’s exposure to interest rate fluctuations. The accompanying chart summarizes the maturities of the Company’s investments in debt securities at December 31, 2008.

Less than 1 year	$	17,955
1 - 2 years	8,405
2 - 3 years	6,943
Over 3 years	8,410

Total	$	41,713

The Company had no outstanding debt at December 31, 2008 or 2007 other than $7,500 in an industrial revenue bond in which interest rates reset each week based on the current market rate. Therefore, the Company does not believe that it has significant interest rate risk with respect to its interest bearing debt.

Investment in marketable securities

As stated above, the Company invests primarily in tax exempt marketable securities, including ARS, with maturities or auction dates generally up to three years. The Company utilizes professional money managers and maintains investment policy guidelines which emphasize quality and liquidity in order to minimize the potential loss exposures that could result in the event of a default or other adverse event, including failed auctions.

However, given recent events in the municipal bond and ARS markets, including failed auctions, the Company continues to monitor these investments and markets, as well as its investment policies. Nonetheless, the financial markets seem to be experiencing unprecedented events, and future outcomes are less predictable than in the past.

Equity price

Equity price risk relates to the Company’s investments in mutual funds which are principally used to fund and hedge the Company’s deferred compensation liabilities. At December 31, 2008, the Company has investments in mutual funds, classified as trading securities, of $26,001. Any change in the fair value of these trading securities would be completely offset by a corresponding change in the respective hedged deferred compensation liability.

Foreign currency exchange

Foreign currency exchange risk principally relates to the Company’s foreign operations in Canada and Mexico, as well as periodic purchase commitments of machinery and equipment from foreign sources.

Certain of the Company’s Canadian manufacturing costs, including local payroll and a portion of its packaging, ingredients and supplies are sourced in Canadian dollars. The Company purchases Canadian forward contracts to receive Canadian dollars at a specified date in the future and uses its Canadian dollar collections on Canadian sales as a partial hedge of its overall Canadian manufacturing obligations sourced in Canadian dollars. The Company also periodically purchases and holds Canadian dollars to facilitate the risk management of these currency changes.

From time to time the Company may use forward foreign exchange contracts and derivative instruments to mitigate its exposure to foreign exchange risks, as well as those related to firm commitments to purchase equipment from foreign vendors. As of December 31, 2008 the Company held foreign exchange forward contracts with a fair value of $309.

RISK FACTORS

The Company’s operations and financial results are subject to a number of risks and uncertainties that could adversely affect the Company’s operating results and financial condition. Significant risk factors, without limitation, that could impact the Company are the following: (i) significant competitive activity, including advertising, promotional and price competition, and changes in consumer demand for the Company’s products; (ii) fluctuations in the cost and availability of various ingredients and packaging materials; (iii) inherent risks in the marketplace, including uncertainties about trade and consumer acceptance and seasonal events such as Halloween; (iv) the effect of acquisitions on the Company’s results of operations and financial condition (v) the effect of changes in foreign currencies on the Company’s foreign subsidiaries operating results, and the effect of the Canadian dollar on products manufactured in Canada and marketed and sold in the United States in U.S. dollars; (vi) the Company’s reliance on third-party

Open Contractual Commitments as of December 31, 2008

Payable in	Total		Less than 1 year		1 to 3 Years		3 to 5 Years		More than 5 Years
Commodity hedges	$	556	$	556	$	—	$	—	$	—
Foreign currency hedges	17,940		14,417		3,523		—		—
Purchase obligations	28,430		28,430		—		—		—
Interest bearing debt	7,500		—		—		—		7,500
Operating leases	4,479		1,215		1,741		801		722
Total	$	58,905	$	44,618	$	5,264	$	801	$	8,222

Note: the above amounts exclude deferred income tax liabilities of $43,977, liabilities for uncertain tax positions of $19,412, postretirement health care and life insurance benefits of $15,468 and deferred compensation and other liabilities of $32,344 because the timing of payments relating to these items cannot be reasonably determined.

CONSOLIDATED STATEMENTS OF
Financial Position
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES (in thousands)

	December 31,
	2008		2007
*Assets*
CURRENT ASSETS:
Cash and cash equivalents	$	68,908	$	57,606
Investments	17,963		41,307
Accounts receivable trade, less allowances of $1,923 and $2,287	31,213		32,371
Other receivables	2,983		2,913
Inventories:
Finished goods and work-in-process	34,862		37,031
Raw materials and supplies	20,722		20,371
Prepaid expenses	11,328		6,551
Deferred income taxes	—		1,576
Total current assets	187,979		199,726
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land	19,307		19,398
Buildings	89,077		88,225
Machinery and equipment	279,100		265,359
Construction in progress	20,701		4,711
	408,185		377,693
Less—Accumulated depreciation	190,557		176,292
Net property, plant and equipment	217,628		201,401
OTHER ASSETS:
Goodwill	73,237		73,237
Trademarks	189,024		189,024
Investments	49,809		65,993
Split dollar officer life insurance	74,808		74,944
Prepaid expenses	10,333		—
Investment in joint venture	9,274		8,400
Total other assets	406,485		411,598
Total assets	$	812,092	$	812,725

(The accompanying notes are an integral part of these statements.)

	December 31,
(in thousands except per share data)	2008			2007
*Liabilities and Shareholders’ Equity*
CURRENT LIABILITIES:
Accounts payable	$	13,885		$	11,572
Dividends payable	4,401			4,344
Accrued liabilities	40,335			42,056
Deferred income taxes	631			—
Total current liabilities	59,252			57,972
NONCURRENT LIABILITIES:
Deferred income taxes	43,346			35,940
Postretirement health care and life insurance benefits	15,468			13,214
Industrial development bonds	7,500			7,500
Liability for uncertain tax positions	19,412			20,056
Deferred compensation and other liabilities	32,344			39,813
Total noncurrent liabilities	118,070			116,523
SHAREHOLDERS’ EQUITY:
Common stock, $.69-4/9 par value—120,000 shares authorized—35,658 and 35,404, respectively, issued	24,762			24,586
Class B common stock, $.69-4/9 par value—40,000 shares authorized—19,357 and 18,892, respectively, issued	13,442			13,120
Capital in excess of par value	470,927			457,491
Retained earnings, per accompanying statement	142,872			156,752
Accumulated other comprehensive loss	(15,241		)	(11,727		)
Treasury stock (at cost)—65 shares and 63 shares, respectively	(1,992		)	(1,992		)
Total shareholders’ equity	634,770			638,230
Total liabilities and shareholders’ equity	$	812,092		$	812,725

CONSOLIDATED STATEMENTS OF
Earnings, Comprehensive Earnings and Retained Earnings
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES (in thousands except per share data)

	For the year ended December 31,
	2008			2007			2006
Net product sales	$	492,051		$	492,742		$	495,990
Rental and royalty revenue	3,965			4,975			5,150
Total revenue	496,016			497,717			501,140
Product cost of goods sold	333,314			327,695			311,267
Rental and royalty cost	921			1,349			1,312
Total costs	334,235			329,044			312,579
Product gross margin	158,737			165,047			184,723
Rental and royalty gross margin	3,044			3,626			3,838
Total gross margin	161,781			168,673			188,561
Selling, marketing and administrative expenses	95,254			97,821			101,032
Earnings from operations	66,527			70,852			87,529
Other income (expense), net	(10,618		)	6,315			7,186
Earnings before income taxes	55,909			77,167			94,715
Provision for income taxes	17,132			25,542			28,796
Net earnings	$	38,777		$	51,625		$	65,919

Net earnings	$	38,777		$	51,625		$	65,919
Other comprehensive earnings (loss)	(3,514		)	810			(3,697		)
Comprehensive earnings	$	35,263		$	52,435		$	62,222

Retained earnings at beginning of year	$	156,752		$	169,233		$	164,236
Net earnings	38,777			51,625			65,919
Cash dividends ($.32, $.32 and $.32 per share, respectively)	(17,492		)	(17,421		)	(17,170		)
Stock dividends	(35,165		)	(46,685		)	(43,694		)
Cumulative effect of SAB 108	—			—			(58		)
Retained earnings at end of year	$	142,872		$	156,752		$	169,233
Earnings per share	$	0.70		$	0.91		$	1.15
Average common and class B common shares outstanding	55,157			56,585			57,405

(The accompanying notes are an integral part of these statements.)

CONSOLIDATED STATEMENTS OF
Cash Flows
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES (in thousands)

	For the year ended December 31,
	2008			2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	38,777		$	51,625		$	65,919
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation	17,036			15,859			15,816
Excess of (earnings) loss from joint venture over dividends received	477			—			(921		)
Return on investment in joint venture	—			1,419			—
Other than temporary impairment of investment	5,140			—			—
Amortization of marketable securities	396			521			909
Purchase of trading securities	(491		)	(84		)	(749		)
Changes in operating assets and liabilities:
Accounts receivable	(261		)	2,591			(4,368		)
Other receivables	(33		)	7			(4,125		)
Inventories	1,352			6,506			(8,451		)
Prepaid expenses and other assets	(15,139		)	283			(1,912		)
Accounts payable and accrued liabilities	967			(3,234		)	(3,688		)
Income taxes payable and deferred	8,642			13,481			(3,984		)
Postretirement health care and life insurance benefits	3,394			1,272			971
Deferred compensation and other liabilities	(2,385		)	(12		)	382
Other	(830		)	(170		)	(143		)
Net cash provided by operating activities	57,042			90,064			55,656
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real estate and other assets	—			434			1,343
Decrease in restricted cash	—			—			22,330
Return of investment in joint venture	—			1,206			—
Capital expenditures	(34,355		)	(14,767		)	(39,207		)
Purchase of available for sale securities	(33,977		)	(59,132		)	(35,663		)
Sale and maturity of available for sale securities	61,258			28,914			62,223
Net cash provided by (used in) investing activities	(7,074		)	(43,345		)	11,026
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank loan	—			—			(32,001		)
Shares repurchased and retired	(21,109		)	(27,300		)	(30,694		)
Dividends paid in cash	(17,557		)	(17,542		)	(17,264		)
Net cash used in financing activities	(38,666		)	(44,842		)	(79,959		)
Increase (decrease) in cash and cash equivalents	11,302			1,877			(13,277		)
Cash and cash equivalents at beginning of year	57,606			55,729			69,006
Cash and cash equivalents at end of year	$	68,908		$	57,606		$	55,729
Supplemental cash flow information:
Income taxes paid	$	12,728		$	11,343		$	29,780
Interest paid	$	252		$	537		$	733
Stock dividend issued	$	35,042		$	46,520		$	43,563

(The accompanying notes are an integral part of these statements.)

Notes to Consolidated Financial Statements ($ in thousands except per share data)

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES:

Basis of consolidation:

The consolidated financial statements include the accounts of Tootsie Roll Industries, Inc. and its wholly-owned subsidiaries (the Company), which are primarily engaged in the manufacture and sale of candy products. All significant intercompany transactions have been eliminated.

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

Revenue recognition:

Products are sold to customers based on accepted purchase orders which include quantity, sales price and other relevant terms of sale. Revenue, net of applicable provisions for discounts, returns, allowances, and certain advertising and promotional costs, is recognized when products are delivered to customers and collectibility is reasonably assured. Shipping and handling costs of $45,570, $41,775 and $40,353 in 2008, 2007 and 2006, respectively, are included in selling, marketing and administrative expenses. Accounts receivable are unsecured. Revenues from a major customer aggregated approximately 23.5%, 22.4% and 23.7% of net product sales during the years ended December 31, 2008, 2007 and 2006, respectively.

Cash and cash equivalents:

The Company considers cash investments with an original maturity of three months or less to be cash equivalents.

Restricted cash represents the net proceeds received from the sale of surplus real estate in 2005 which was held by a third party intermediary and earmarked for reinvestment in like-kind real estate as provided under U.S. Internal Revenue Code Section 1031. During 2006, the Company reinvested such restricted cash in like-kind real estate.

Investments:

Investments consist of various marketable securities with maturities of generally up to three years. The Company classifies debt and equity securities as either available for sale or trading. Available for sale are not actively traded and are carried at fair value. Unrealized gains and losses on these securities are excluded from earnings and are reported as a separate component of shareholders’ equity, net of applicable taxes, until realized. Trading securities relate to deferred compensation arrangements and are carried at fair value. The Company invests in trading securities to hedge changes in its deferred compensation liabilities.

The Company regularly reviews its investments to determine whether a decline in fair value below the cost basis is other than temporary. If the decline in fair value is judged to be other than temporary, the cost basis of the security is written down to fair value and the amount of the write-down is included in other income (expense).

Hedging activities:

From time to time, the Company enters into futures contracts. Commodity futures are intended and effective as hedges of market price risks associated with the anticipated purchase of certain raw materials (primarily sugar). Foreign currency contracts are intended and effective as hedges of the Company’s exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany product and third-party purchases of raw materials denominated in foreign currency. To qualify as a hedge, the Company evaluates a variety of characteristics of these transactions, including the probability that the anticipated transaction will occur. If the anticipated transaction were not to occur, the gain or loss would then be recognized in current earnings. The Company does not engage in trading or other speculative use of derivative instruments. The Company does assume the risk that counter parties may not be able to meet the terms of their contracts. The Company does not expect any losses as a result of counter party defaults.

The Company’s futures contracts are being accounted for as cash flow hedges and are recorded on the balance sheet at fair value. Changes therein are recorded in other comprehensive earnings and are reclassified to earnings in the periods in which earnings are affected by the hedged item. Substantially all amounts reported in accumulated other comprehensive earnings (loss) are expected to be reclassified to cost of goods sold.

Inventories:

Inventories are stated at cost, not to exceed market. The cost of substantially all of the Company’s inventories ($53,557 and $54,367 at December 31, 2008 and 2007, respectively) has been determined by the last-in, first-out (LIFO) method. The excess of current cost over LIFO cost of inventories approximates $12,432 and $11,284 at December 31, 2008 and 2007, respectively. The cost of certain foreign inventories ($2,027 and $3,036 at December 31, 2008 and 2007, respectively) has been determined by the first-in, first-out (FIFO) method. Rebates, discounts and other cash consideration received from a vendor related to inventory purchases is reflected as a reduction in the cost of the related inventory item, and is therefore reflected in cost of sales when the related inventory item is sold.

Property, plant and equipment:

Depreciation is computed for financial reporting purposes by use of the straight-line method based on useful lives of 20 to 35 years for buildings and 5 to 20 years for machinery and equipment. Depreciation expense was $17,036, $15,859, and $15,816 in 2008, 2007 and 2006, respectively.

Carrying value of long-lived assets:

The Company reviews long-lived assets to determine if there are events or circumstances indicating that the amount of the asset reflected in the Company’s balance sheet may not be recoverable. When such indicators are present, the Company compares the carrying value of the long-lived asset, or asset group, to the future undiscounted cash flows of the underlying assets to determine if an impairment exists. If applicable, an impairment charge would be recorded to write down the carrying value to its fair value. The determination of fair value involves the use of estimates of future cash flows that involve considerable management judgment and are based upon assumptions about expected future operating performance. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance, and economic conditions. No impairment charges were recorded by the Company during 2008, 2007 or 2006.

Postretirement health care and life insurance benefits:

The Company provides certain postretirement health care and life insurance benefits. The cost of these postretirement benefits is accrued during employees’ working careers. The Company also provides split dollar life insurance benefits to certain executive officers. The Company records an asset equal to the cumulative insurance premiums that will be recovered upon the death of a covered employee(s) or earlier under the terms of the plan. Split dollar premiums paid were $1,586, and $3,002, in 2007 and 2006, respectively. No premiums were paid in 2008.

Goodwill and intangible assets:

The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” In accordance with this statement, goodwill and intangible assets with indefinite lives are not amortized, but rather tested for impairment at least annually. All trademarks have been assessed by management to have indefinite lives because they are expected to generate cash flows indefinitely. The Company has completed its annual impairment testing of its goodwill and trademarks at December 31 of each of the years presented, and no impairments were recorded.

This determination is made by comparing the carrying value of the asset with its estimated fair value, which is calculated using estimates including discounted projected future cash flows. Goodwill and indefinite-lived intangible assets are subjected to annual testing for impairment unless certain triggering events or circumstances are noted.

Income taxes:

Deferred income taxes are recorded and recognized for future tax effects of temporary differences between financial and income tax reporting. The Company records valuation allowances in situations where the realization of deferred tax assets is not likely. Federal income taxes are provided on the portion of income of foreign subsidiaries that is expected to be remitted to the U.S. and become taxable, but not on the portion that is considered to be permanently invested in the foreign subsidiary.

Foreign currency translation:

The Company has determined the functional currency for each foreign subsidiary. The U.S. dollar is used as the functional currency where a substantial portion of the subsidiary’s business is indexed to the U.S. dollar or where its manufactured products are principally sold in the U.S. All other foreign subsidiaries use the local currency as their functional currency. Where the U.S. dollar is used as the functional currency, foreign currency translation adjustments are recorded as a charge or credit to other income in the statement of earnings. Where the foreign currency is used as the functional currency, translation adjustments are recorded as a separate component of comprehensive earnings (loss).

Joint venture:

The Company’s 50% interest in two companies is accounted for using the equity method. The Company records an increase in its investment in the joint venture to the extent of its share of the joint venture’s earnings, and reduces its investment to the extent of losses and dividends received. Dividends of $861, and $1,946 were paid in 2007, and 2006, respectively, by the joint venture. No dividend was paid in 2008. The $1,946 dividend declared in 2006 was not received by the Company until after December 31, 2006; this amount was included in other receivables at December 31, 2006.

Comprehensive earnings:

Comprehensive earnings includes net earnings, foreign currency translation adjustments and unrealized gains/losses on commodity and foreign currency hedging contracts, available for sale securities and certain postretirement benefit obligations.

Earnings per share:

A dual presentation of basic and diluted earnings per share is not required due to the lack of potentially dilutive securities under the Company’s simple capital structure. Therefore, all earnings per share amounts represent basic earnings per share.

The Class B Common Stock has essentially the same rights as Common Stock, except that each share of Class B Common Stock has ten votes per share (compared to one vote per share of Common Stock), is not traded on any exchange, is restricted as to transfer and is convertible on a share-for-share basis, at any time and at no cost to the holders, into shares of Common Stock which are traded on the New York Stock Exchange.

Use of estimates:

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported. Estimates are used when accounting for sales discounts, allowances and incentives, product liabilities, income taxes, depreciation, amortization, employee benefits, contingencies and intangible asset and liability valuations. For instance, in determining annual pension and post-employment benefit costs, the Company estimates the rate of return on plan assets, and the cost of future health care benefits. Actual results may or may not differ from those estimates.

Recent accounting pronouncements:

SFAS No. 157, “Fair Value Measurements” (SFAS 157)

FASB Staff Position SFAS 157-2, “Effective Date of FASB Statement No. 157” (FSP FAS 157-2)

FASB Staff Position SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP FAS 157-3)

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities- including an amendment to FASB Statement No. 115,” (SFAS 159)

In February 2007, the FASB issued SFAS No. 159, which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 became effective

beginning with our first quarter of 2008. The Company has chosen not to apply the fair value option under SFAS 159 for any of its financial instruments.

SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161)

SFAS No. 141(R), “Business Combinations,” (SFAS 141(R)) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160)

EITF Issue 08-07: “Accounting for Defensive Intangible Assets” (EITF 08-07).

EITF 08-07 applies to acquired intangible assets in situations in which an entity does not intend to actively use the asset, but intends to hold the asset to prevent others from obtaining access to the asset, except for intangible assets that are used in research and development activities. This issue is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

NOTE 2—ACCRUED LIABILITIES:

Accrued liabilities are comprised of the following:

	December 31,
	2008		2007
Compensation	$	11,028	$	12,072
Other employee benefits	2,552		2,843
Taxes, other than income	1,755		1,802
Advertising and promotions	17,345		17,808
Other	7,655		7,531
	$	40,335	$	42,056

NOTE 3—INDUSTRIAL DEVELOPMENT BONDS:

Industrial development bonds are due in 2027. The average floating interest rate was 2.6% and 3.8% in 2008 and 2007, respectively.

NOTE 4—INCOME TAXES:

The domestic and foreign components of pretax income are as follows:

	2008		2007		2006
Domestic	$	50,313	$	69,250	$	81,514
Foreign	5,596		7,917		13,201
	$	55,909	$	77,167	$	94,715

The provision for income taxes is comprised of the following:

	2008		2007			2006
Current:
Federal	$	6,856	$	21,785		$	14,358
Foreign	502		(702		)	944
State	355		737			1,050
	7,713		21,820			16,352
Deferred:
Federal	8,733		2,671			10,962
Foreign	264		918			1,196
State	422		133			286
	9,419		3,722			12,444
	$	17,132	$	25,542		$	28,796

Significant components of the Company’s net deferred tax liability at year end were as follows:

	December 31,
	2008			2007
Deferred tax assets:
Accrued customer promotions	$	4,299		$	4,765
Deferred compensation	9,788			9,993
Post retirement benefits	5,447			4,658
Reserve for uncollectible accounts	459			560
Other accrued expenses	6,608			7,275
Foreign subsidiary tax loss carry forward	6,068			5,922
Tax credit carry forward	2,540			3,651
Unrealized capital loss	1,799			—
Inventory reserves	1,918			2,154
Other	1,622			1,485
	40,548			40,463
Valuation reserve	(8,506		)	(7,556		)
Total deferred tax assets	$	32,042		$	32,907
Deferred tax liabilities:
Depreciation	$	23,696		$	23,143
Deductible goodwill and trademarks	25,292			25,050
Accrued export company commissions	4,313			4,100
Employee benefit plans	5,614			777
Inventory reserves	4,381			4,262
Prepaid insurance	392			430
Accounts receivable	914			914
Deferred gain on sale of real estate	7,972			7,972
Other	3,445			623
Total deferred tax liabilities	$	76,019		$	67,271
Net deferred tax liability	$	43,977		$	34,364

At December 31, 2008, the tax benefits of foreign subsidiary tax loss carry forwards expiring by year are as follows: $1,175 in 2011, $528 in 2015, $559 in 2026 and $3,806 in 2027. A valuation allowance has been established for these tax loss carry forwards to reduce the future income tax benefits to amounts expected to be realized.

Also at December 31, 2008, the amounts of the income tax credit carry forwards expiring by year are as follows: $145 in 2009, $288 in 2010, $332 in 2011, $319 in 2012, $271 in 2013, $48 in 2014, $724 in 2015 and $413 in 2016. A valuation allowance has been established for these carry forward credits to reduce the future income tax benefits to amounts expected to be realized.

The effective income tax rate differs from the statutory rate as follows:

	2008		2007		2006
U.S. statutory rate	35.0	%	35.0	%	35.0	%
State income taxes, net	1.0		0.9		0.9
Exempt municipal bond interest	(1.9	)	(1.4	)	(0.8	)
Foreign tax rates	(0.7	)	(1.6	)	(2.8	)
Qualified domestic production activities deduction	(1.4	)	(1.9	)	(0.8	)
Tax credits receivable	(1.3	)	—		—
Reserve for uncertain tax benefits	0.6		1.3		—
Other, net	(0.7	)	0.8		(0.8	)
Effective income tax rate	30.6	%	33.1	%	30.7	%

The Company has not provided for U.S. federal or foreign withholding taxes on $3,445 and $4,743 of foreign subsidiaries’ undistributed earnings as of December 31, 2008 and December 31, 2007, respectively, because such earnings are considered to be permanently reinvested. It is not practicable to determine the amount of income taxes that would be payable upon remittance of the undistributed earnings.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) effective January 1, 2007. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes on the Consolidated Statement of Earnings.

At December 31, 2008 and 2007, the Company had unrecognized tax benefits of $15,138 and $15,867, respectively. Included in this balance is $7,727 and $7,622, respectively, of unrecognized tax benefits that, if recognized, would favorably affect the annual effective income tax rate. As of December 31, 2008 and 2007, $4,274 and $4,189, respectively, of interest and penalties were included in the Liability for Uncertain Tax Positions.

A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:

	2008			2007
Unrecognized tax benefits at January 1,	$	15,867		$	14,987
Increases in tax positions for the current year	1,404			1,895
Reductions in tax positions for lapse of statute of limitations	(1,225		)	(1,015		)
Reductions in tax positions for effective settlements	(908		)	—
Unrecognized tax benefits at December 31,	$	15,138		$	15,867

The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company remains subject to examination by U.S. federal and state and foreign tax authorities for the years 2005 through 2007. With few exceptions, the Company is no longer subject to examinations by tax authorities for the year 2004 and prior.

The Company is not currently subject to a U.S. federal income tax examination. The Company’s Canadian subsidiary is currently subject to examination by the Canada Revenue Agency for tax years 2005 and 2006. The Company is unable to determine the outcome of the examination at this time. In addition, the Company is currently subject to various state tax examinations. One of those state examinations has been effectively settled and the corresponding liability for unrecognized tax benefits has been reduced. Although the Company is unable to determine the ultimate outcome of the ongoing examinations, the Company believes that its liability for uncertain tax positions relating to these jurisdictions for such years is adequate.

Beginning in 2008, statutory income tax rates in Canada will be reduced five percentage points with the final rate adjustment coming in 2012. Accordingly, the Company’s Canadian subsidiary has revalued its deferred tax assets and liabilities based on the rate in effect for the year the differences are expected to reverse.

NOTE 5—SHARE CAPITAL AND CAPITAL IN EXCESS OF PAR VALUE:

	Common Stock					Class B Common Stock					Treasury Stock					Capital in excess of par
	Shares		Amount			Shares		Amount			Shares		Amount			value
	(000’s)					(000’s)					(000’s)
Balance at January 1, 2006	35,255		$	24,483		18,000		$	12,500		(60	)	$	(1,992	)	$	426,125
Issuance of 3% stock dividend	1,048		727			539		375			(2	)	—			42,461
Conversion of Class B common shares to common shares	149		104			(149	)	(104		)	—		—			—
Purchase and retirement of common shares	(1,088	)	(756		)	—		—			—		—			(29,938		)
Balance at December 31, 2006	35,364		24,558			18,390		12,771			(62	)	(1,992		)	438,648
Issuance of 3% stock dividend	1,056		733			550		383			(1	)	—			45,404
Conversion of Class B common shares to common shares	48		34			(48	)	(34		)	—		—			—
Purchase and retirement of common shares	(1,064	)	(739		)	—		—			—		—			(26,561		)
Balance at December 31, 2007	35,404		24,586			18,892		13,120			(63	)	(1,992		)	457,491
Issuance of 3% stock dividend	1,043		724			565		391			(2	)	—			33,927
Conversion of Class B common shares to common shares	100		69			(100	)	(69		)	—		—			—
Purchase and retirement of common shares	(889	)	(617		)	—		—			—		—			(20,491		)
Balance at December 31, 2008	35,658		$	24,762		19,357		$	13,442		(65	)	$	(1,992	)	$	470,927

Average shares outstanding and all per share amounts included in the financial statements and notes thereto have been adjusted retroactively to reflect annual three percent stock dividends.

While the Company does not have a formal or publicly announced stock repurchase program, the Company’s board of directors periodically authorizes a dollar amount for share repurchases.

Based upon this policy, shares were purchased and retired as follows:

Year	Total Number Of Shares Purchased (000’s)	Average Price Paid Per Share
2008	889	$	23.71
2007	1,064	$	25.61
2006	1,088	$	28.17

NOTE 6—OTHER INCOME (EXPENSE), NET:

Other income (expense), net is comprised of the following:

	2008			2007			2006
Interest and dividend income	$	3,451		$	3,497		$	2,615
Gains (losses) on trading securities relating to deferred compensation plans	(7,334		)	1,998			2,540
Interest expense	(378		)	(535		)	(726		)
Joint venture income (loss)	(477		)	182			921
Foreign exchange gains (losses)	(963		)	656			453
Other than temporary impairment of ARS (see Note 10)	(5,140		)	—			—
Capital gains	88			228			678
Insurance recovery	—			128			300
Miscellaneous, net	135			161			405
	$	(10,618	)	$	6,315		$	7,186

NOTE 7—EMPLOYEE BENEFIT PLANS:

Pension plans:

The Company sponsors defined contribution pension plans covering certain nonunion employees with over one year of credited service. The Company’s policy is to fund pension costs accrued. Total pension expense for 2008, 2007 and 2006 was $3,944, $3,589 and $3,364, respectively. The Company also maintains certain profit sharing and retirement savings-investment plans. Company contributions in 2008, 2007 and 2006 to these plans were $1,003, $873 and $916, respectively.

The Company also contributes to a multi-employer defined benefit pension plan for its union employees in the U.S. Such contributions aggregated $1,392, $1,257 and $1,084 in 2008, 2007 and 2006, respectively. Although the Company has been advised that the plan is currently in an underfunded status, the relative position of each employer associated with the multi-employer plan with respect to the actuarial present value of benefits and net plan assets is not determinable by the Company.

Deferred compensation:

The Company sponsors three deferred compensation plans for selected executives and other employees: (i) the Excess Benefit Plan, which restores retirement benefits lost due to IRS limitations on contributions to tax-qualified plans, (ii) the Supplemental Savings Plan, which allows eligible employees to defer the receipt of eligible compensation until designated future dates and (iii) the Career Achievement Plan, which provides a deferred annual incentive award to selected executives. Participants in these plans earn a return on amounts due them based on several investment options, which mirror returns on underlying investments (primarily mutual funds). The Company hedges its obligations under the plans by investing in the actual underlying investments. These investments are classified as trading securities and are carried at fair value. At December 31, 2008 and 2007, these investments totaled $26,001 and $32,843, respectively. All gains and losses in these investments are equally offset by corresponding gains and losses in the Company’s deferred compensation liabilities.

Postretirement health care and life insurance benefit plans:

The Company provides certain postretirement health care and life insurance benefits for corporate office and management employees. Employees become eligible for these benefits based upon their age and service and if they agree to contribute a portion of the cost. The Company has the right to modify or terminate these benefits. The Company does not fund postretirement health care and life insurance benefits in advance of payments for benefit claims.

The Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158) as of December 31, 2006. SFAS 158 requires that employers recognize on a prospective basis the funded status of their defined benefit pension and other postretirement plans on their consolidated balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost. The effect of the adoption of SFAS 158 on the Company’s consolidated statement of financial position at December 31, 2006 was an increase of $1,325 in the non-current liability for postretirement health care and life insurance benefits and an $893 increase in accumulated other comprehensive loss (net of tax effect of $432).

Amounts recognized in accumulated other comprehensive loss (pre-tax) at December 31, 2008 are as follows:

Prior service credit	$	(1,002	)
Net actuarial loss	2,826
Net amount recognized in accumulated other comprehensive loss	$	1,824

The estimated actuarial loss and prior service credit to be amortized from accumulated other comprehensive income into net periodic benefit cost during 2009 are $265 and $(125), respectively.

The changes in the accumulated postretirement benefit obligation at December 31, 2008 and 2007 consist of the following:

	December 31,
	2008			2007
Benefit obligation, beginning of year	$	13,214		$	12,582
Service cost	646			667
Interest cost	740			694
Actuarial (gain)/loss	1,172			(550		)
Benefits paid	(304		)	(179		)
Benefit obligation, end of year	$	15,468		$	13,214

Net periodic postretirement benefit cost included the following components:

	2008		2007		2006
Service cost—benefits attributed to service during the period	$	646	$	667	$	524
Interest cost on the accumulated postretirement benefit obligation	740		694		539
Net amortization	33		90		(84		)
Net periodic postretirement benefit cost	$	1,419	$	1,451	$	979

For measurement purposes, the 2009 annual rate of increase in the per capita cost of covered health care benefits was assumed to be 7.0% for pre-age 65 retirees, 8.5% for post-age 65 retirees and 10.0% for prescription drugs; these rates were assumed to decrease gradually to 5.0% for 2014 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. The discount rate used in determining the accumulated postretirement benefit obligation was 5.6%, 5.7% and 5.6% at December 31, 2008, 2007 and 2006, respectively.

Increasing or decreasing the health care trend rates by one percentage point in each year would have the following effect on:

	1% Increase		1% Decrease
Postretirement benefit obligation	$	2,158	$	(1,780	)
Total of service and interest cost components	$	228	$	(185	)

The Company estimates future benefit payments will be $486, $582, $623, $710 and $801 in 2009 through 2013, respectively, and a total of $5,487 in 2014 through 2018. The future benefit payments are net of the annual Medicare Part D subsidy of approximately $1,203 beginning in 2009.

NOTE 8—COMMITMENTS:

Rental expense aggregated $1,133, $1,090 and $1,132 in 2008, 2007 and 2006, respectively.

Future operating lease commitments are not significant.

NOTE 9—SEGMENT AND GEOGRAPHIC INFORMATION:

The Company operates as a single reportable segment encompassing the manufacture and sale of confectionery products. Its principal manufacturing operations are located in the United States and Canada, and its principal market is the United States. The Company also manufactures and sells confectionery products in Mexico, and exports products to Canada as well as to over 50 countries worldwide.

The following geographic data include net product sales summarized on the basis of the customer location and long-lived assets based on their physical location.

	2008		2007		2006
Net Product Sales:
United States	$	448,268	$	445,820	$	450,591
Foreign	43,783		46,922		45,399
	$	492,051	$	492,742	$	495,990
Long-lived assets:
United States	$	307,249	$	296,277	$	282,490
Foreign	54,603		54,461		55,014
	$	361,852	$	350,738	$	337,504

NOTE 10—DISCLOSURES ABOUT THE FAIR VALUE AND CARRYING AMOUNT OF FINANCIAL INSTRUMENTS:

The Company’s financial assets are carried at fair value which is measured on a recurring basis and adjusted each time a financial statement is prepared. In determining fair value of financial assets, the Company uses various prescribed techniques. The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded and other characteristics particular to the instrument. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.

The Company assesses the inputs used to measure fair value using a three-tier hierarchy, as prescribed under SFAS 157. The hierarchy indicates the extent to which inputs used in measuring fair value are observable in the market. Level 1 inputs include quoted prices for identical instruments and are the most observable. Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity rates and yield curves. Level 3 inputs are not observable in the market and include management’s own judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the table below.

As of December 31, 2008, the Company held certain financial assets that are required to be measured at fair value on a recurring basis. These included derivative hedging instruments related to the purchase of certain raw materials, investments in trading securities and available for sale securities, including auction rate securities (ARS), and investments associated with a foreign benefit plan, which were deemed immaterial for further discussion. The Company’s available for sale and trading securities principally consist of municipal bonds and mutual funds that are publicly traded.

The following table presents information about the Company’s financial assets measured at fair value as of December 31, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

	Estimated Fair Value December 31, 2008 and Input Levels Used
	Total Fair Value		Level 1		Level 2		Level 3
Cash and equivalents	$	68,908	$	68,908	$	—	$	—
Auction rate security (ARS)	8,410		—		—		8,410
Available for sale securities excluding ARS	33,361		—		33,361		—
Commodity derivatives	349		349		—		—
Trading securities	26,001		26,001		—		—
Total assets measured at fair value	$	137,029	$	95,258	$	33,361	$	8,410

As of December 31, 2008, the Company had investments in auction rate securities (ARS) reported at a fair value of $8,410 after recording a $5,140 other than temporary impairment against $13,550 par value. The other than temporary impairment has been recorded in other income (expense), net in fiscal 2008. As of December 31, 2008, this ARS was determined to be other than temporarily impaired due to the duration and severity of the decline in fair value. The Company estimated the fair value of this ARS utilizing a valuation model with Level 3 inputs as of December 31, 2008. This valuation model considered, among other items, the credit risk of the collateral underlying the ARS, the credit risk of the bond insurer, interest rates and the amount and timing of expected future cash flows including the Company’s assumption about the market expectation of the next successful auction.

The Company classified this ARS as non-current and has included it in long term investments on the Consolidated Statements of Financial Position at December 31, 2008 because the Company believes that the current condition of the ARS market may take more than twelve months to improve.

Based on market conditions, the Company changed its valuation methodology for ARS to a discounted cash flow analysis during the first quarter of 2008. Accordingly, these securities changed from Level 2 to Level 3 within SFAS 157’s hierarchy since the Company’s initial adoption of SFAS 157 on January 1, 2008.

The following table presents additional information about the Company’s financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2008:

Balance at January 1, 2008	$	—
Transfers to Level 3	27,250
Other than temporary impairment loss	(5,140		)
Sales, net	(13,700		)
Balance at December 31, 2008	$	8,410

Available for sale securities which utilize Level 2 inputs consist primarily of municipal bonds, which are valued based on quoted market prices or alternative pricing sources with reasonable levels of price transparency.

The $7,500 carrying amount of the Company’s industrial revenue development bonds at December 31, 2008 approximates its estimated fair value as the bonds have a floating interest rate.

At December 31, 2008 and December 31, 2007, the Company did not have a material amount of unrealized gains or losses recorded in accumulated other comprehensive loss on the Consolidated Statements of Financial Position related to its available for sale investments.

NOTE 11—COMPREHENSIVE INCOME:

The following table sets forth information with respect to accumulated other comprehensive income (loss):

	Foreign			Unrealized Gain (Loss) on									Accumulated
	Currency Translation Adjustment			Investments			Derivatives			Postretirement and Pension Benefits			Other Comprehensive Earnings (Loss)
Balance at January 1, 2006	$	(10,928	)	$	116		$	2,865		$	—		$	(7,947	)
Unrealized gains (losses)	(296		)	263			880			—			847
(Gains) losses reclassified to net earnings	—			(684		)	(5,856		)	—			(6,540		)
Tax effect	—			156			1,840			—			1,996
Net of tax amount	(296		)	(265		)	(3,136		)	—			(3,697		)
Adoption of SFAS 158 (Note 7)	—			—			—			(893		)	(893		)
Balance at December 31, 2006	(11,224		)	(149		)	(271		)	(893		)	(12,537		)
Unrealized gains (losses)	(272		)	469			(462		)	588			323
(Gains) losses reclassified to net earnings	—			(61		)	1,202			—			1,141
Tax effect	—			(151		)	(273		)	(230		)	(654		)
Net of tax amount	(272		)	257			467			358			810
Balance at December 31, 2007	(11,496		)	108			196			(535		)	(11,727		)
Unrealized gains (losses)	(2,296		)	(4,923		)	504			(1,484		)	(8,199		)
(Gains) losses reclassified to net earnings	—			5,055			(467		)	—			4,588
Tax effect	(500		)	(49		)	(13		)	659			97
Net of tax amount	(2,796		)	83			24			(825		)	(3,514		)
Balance at December 31, 2008	$	(14,292	)	$	191		$	220		$	(1,360	)	$	(15,241	)

NOTE 12—GAIN ON SALE OF REAL ESTATE:

During 2005, the Company sold surplus real estate and realized a pre-tax gain of $21,840. During 2006, the Company invested the net proceeds of $22,330 in new real estate investments in compliance with U.S. Internal Revenue Code (IRC) Section 1031 resulting in the deferral of income tax payable on such gain.

NOTE 13—SEC STAFF ACCOUNTING BULLETIN NO. 108:

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). Traditionally, there have been two widely-recognized methods for quantifying the effects of financial statement misstatements: the “roll-over” method and the “iron curtain” method. Prior to its application of the guidance in SAB 108, the Company used the “roll-over” method for quantifying financial statement misstatements, which focused primarily on the impact of a misstatement on the income statement (and net earnings), including the reversing effects, if any, of prior year misstatements. SAB 108 which permitted companies to initially apply its provisions by recording the cumulative effect of any misstatements as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. The Company previously evaluated these items under the “roll-over” method and concluded they were quantitatively and qualitatively immaterial, individually and in the aggregate. The following table, and accompanying footnotes, summarizes the effects of applying the guidance in SAB 108:

	Period in which the Misstatement Originated
	Cumulative									Adjustment
	Prior to									Recorded as of
	January 1,			Year Ended December 31,						January 1,
	2004			2004			2005			2006
Current assets (1)	$	3,252		$	—		$	—		$	3,252
Noncurrent assets (2)	2,184			(464		)	1,446			3,166
Current liabilities (3)	(1,625		)	(242		)	—			(1,867		)
Noncurrent liabilities (4)	(2,280		)	—			(2,329		)	(4,609		)
Impact on net income (5)	$	1,531		$	(706	)	$	(883	)
Net decrease to retained earnings (6)										$	(58	)

(1) Primarily includes adjustments to (a) inventory relating to the calculation of a valuation reserve of $333 and (b) accounts receivable for the classification of estimated collectible accounts on the balance sheet which were previously classified as an offset to an accrued liability of $2,635.

(2) Primarily includes adjustments to (a) property, plant and equipment for a computational correction relating to depreciation expense over several prior years of $1,500, the timing of the recognition of a loss associated with the abandonment and disposal of certain machinery and equipment of ($464), and the timing of the recognition of a minor asset retirement obligation of $1,446 which is partially offset by the related liability discussed in Note 4 (c) below, and (b) other assets relating to the carrying value of cumulative split-dollar life insurance premiums paid by the Company of $587.

(3) Primarily includes adjustments to (a) accounts payable relating to certain estimated liabilities recorded during various acquisition purchase accounting transactions which were not subsequently adjusted for the lower actual amounts paid of $940, (b) accrued liabilities resulting from higher estimates which were not subsequently adjusted to lower actual amounts of $809, and the classification on the balance sheet of estimated collectible accounts of ($2,635) as described in Note 1(b) above, and (c) income taxes payable and deferred to reflect the income tax impact of recording the items described herein of ($981).

(4) Primarily includes adjustments to (a) employee benefit obligations relating to the unintentional misapplication of certain technical GAAP requirements surrounding the establishment of employee disability obligations of $1,575, and of the timing of the recognition of liabilities relating to employee severance obligations of ($1,982), each of which are substantially offsetting, (b) deferred income tax liabilities for computational differences relating to the calculation and reconciliation of deferred tax liabilities of ($2,059), and (c) other long term liabilities relating to the timing of the recognition of a minor asset retirement obligation of ($2,143).

(5) Represents the net after-tax effect for the indicated periods resulting from the above-described items.

(6) Represents the net after tax impact on retained earnings as of January 1, 2006 to record the initial application of SAB 108.

Quarterly Financial Data (Unaudited)

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

	(Thousands of dollars except per share data)
	First		Second		Third		Fourth		Total
2008
Net product sales	$	90,341	$	101,591	$	184,687	$	115,432	$	492,051
Product gross margin	29,712		32,850		59,293		36,882		158,737
Net earnings	6,453		7,246		19,715		5,363		38,777
Net earnings per share	.12		.13		.36		.10		.70

2007
Net product sales	$	92,914	$	101,901	182,917		115,010		492,742
Product gross margin	33,178		34,425		60,659		36,785		165,047
Net earnings	9,811		10,226		23,432		8,156		51,625
Net earnings per share	.17		.18		.41		.15		.91

2006
Net product sales	$	103,822	$	94,944	$	186,403	$	110,821	$	495,990
Product gross margin	39,074		38,166		70,042		37,441		184,723
Net earnings	12,362		12,858		28,969		11,730		65,919
Net earnings per share	.21		.22		.51		.21		1.15

Net earnings per share is based upon average outstanding shares as adjusted for 3% stock dividends issued during the second quarter of each year. The sum of the per share amounts may not equal annual amounts due to rounding.

2008-2007 QUARTERLY SUMMARY OF TOOTSIE ROLL INDUSTRIES, INC. STOCK PRICE AND DIVIDENDS PER SHARE

STOCK PRICES*

	2008				2007
	High		Low		High		Low
1st Qtr	$	26.33	$	21.80	$	32.69	$	28.19
2nd Qtr	$	27.26	$	23.27	$	30.50	$	27.65
3rd Qtr	$	31.35	$	23.67	$	30.85	$	25.03
4th Qtr	$	28.88	$	21.45	$	27.44	$	23.55

*NYSE - Closing Price

Estimated Number of shareholders at February 2009:
Common Stock		18,000
Class B Common Stock		5,000

DIVIDENDS

	2008		2007
1st Qtr	$	.08	$	.08
2nd Qtr	$	.08	$	.08
3rd Qtr	$	.08	$	.08
4th Qtr	$	.08	$	.08

NOTE: In addition to the above cash dividends, a 3% stock dividend was issued on April 10, 2008 and April 12, 2007. Cash dividends are not restated to reflect 3% stock dividends.

Five Year Summary of Earnings and Financial Highlights

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

	(Thousands of dollars except per share, percentage and ratio figures)
(See Management’s Comments starting on page 5)	2008			2007			2006			2005			2004

Sales and Earnings Data (2)
Net product sales	$	492,051		$	492,742		$	495,990		$	487,739		$	420,110
Product gross margin	158,737			165,047			184,723			188,056			174,539
Interest expense	378			535			726			2,537			912
Provision for income taxes	17,132			25,542			28,796			36,425			30,514
Net earnings	38,777			51,625			65,919			77,227			64,174
% of net product sales	7.9		%	10.5		%	13.3		%	15.8		%	15.3		%
% of shareholders’ equity	6.1		%	8.1		%	10.5		%	12.5		%	11.3		%

Per Common Share Data (1)
Net earnings	$	.70		$	.91		$	1.15		$	1.32		$	1.09
Cash dividends declared	.32			.32			.32			.29			.27
Stock dividends	3		%	3		%	3		%	3		%	3		%

Additional Financial Data
Working capital	$	128,727		$	141,754		$	128,706		$	132,940		$	110,376
Net cash provided by operating activities	57,042			90,064			55,656			82,524			76,228
Net cash provided by (used in) investing activities	(7,074		)	(43,345		)	11,026			21,872			(164,039		)
Net cash provided by (used in) financing activities	(38,666		)	(44,842		)	(79,959		)	(92,379		)	60,716
Property, plant & equipment additions	34,355			14,767			39,207			14,690			17,948
Net property, plant & equipment	217,628			201,401			202,898			178,760			178,750
Total assets	812,092			812,725			791,639			813,696			811,753
Long term debt	7,500			7,500			7,500			7,500			93,167
Shareholders’ equity	634,770			638,230			630,681			617,405			570,179
Average shares outstanding (1)	55,157			56,585			57,405			58,338			58,716

(1) Adjusted for annual 3% stock dividends.

(2) Certain reclassifications have been made to prior year numbers to conform to current year presentation.

Board of Directors

Melvin J. Gordon(1)	Chairman of the Board and Chief Executive Officer

Ellen R. Gordon(1)	President and Chief Operating Officer

Barre A. Seibert(2)(3)	Retired First Vice President, Washington Mutual Bank

Lana Jane Lewis-Brent(2)(3)	President, Paul Brent Designer, Inc., an art publishing, design and licensing company

Richard P. Bergeman(2)(3)	Retired Senior Vice President, Bestfoods

(1) Executive Committee

(2) Audit Committee

(3) Compensation Committee

Officers

Melvin J. Gordon	Chairman of the Board and Chief Executive Officer

Ellen R. Gordon	President and Chief Operating Officer

G. Howard Ember, Jr.	Vice President, Finance & Chief Financial Officer

John W. Newlin, Jr.	Vice President, Manufacturing

Thomas E. Corr	Vice President, Marketing & Sales

John P. Majors	Vice President, Physical Distribution

Barry P. Bowen	Treasurer & Assistant Secretary

Richard F. Berezewski	Controller

Offices, Plants

Executive Offices	7401 S. Cicero Ave. Chicago, Illinois 60629 www.tootsie.com

Plants	Illinois Tennessee Massachusetts Wisconsin Concord, Ontario Mexico City, Mexico

Foreign Sales Offices	Mexico City, Mexico Concord, Ontario

Subsidiaries

Andes Candies L.P.	Tootsie Roll Company, Inc.
Andes Manufacturing LLC	Tootsie Roll Industries, LLC
Andes Services LLC	Tootsie Roll Management, Inc
C.C.L.P., INC.	Tootsie Roll Mfg., LLC
C.G.P., INC.	Tootsie Roll of Canada, ULC
Cambridge Brands Manufacturing, Inc.	Tootsie Roll Worldwide, Ltd.
Cambridge Brands Services, Inc.	Tootsie Rolls—Latin America
Cambridge Brands, Inc.	TRI de Latinoamerica S.A. de C.V.
Cella’s Confections, Inc.	TRI Finance, Inc.
Charms LLC	TRI International Inc.
Concord (GP) Inc.	TRI Investments LLC
Concord Brands, ULC	TRI Sales Co.
Concord Canada Holdings ULC	TRI Sales Finance LLC
Concord Confections Holdings USA, Inc.	TRI-Mass, Inc.
Concord Partners LP	Tutsi S.A. de C.V.
JT Company, Inc.	World Trade & Marketing Ltd.
The Sweets Mix Company, Inc.

Other Information

Stock Exchange	New York Stock Exchange, Inc. (Since 1922)

Stock Identification	Ticker Symbol: TR CUSIP No. 890516 10-7

Stock Transfer Agent and Stock Registrar	American Stock Transfer and Trust Company Operations Center 6201 15th Avenue Brooklyn, NY 11219 1-800-710-0932 www.amstock.com

Independent Registered Public Accounting Firm	PricewaterhouseCoopers LLP One North Wacker Chicago, IL 60606

General Counsel	Becker Ross, LLP 317 Madison Avenue New York, NY 10017

Annual Meeting	May 4, 2009 Mutual Building, Room 1200 909 East Main Street Richmond, VA 23219