UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 27, 2008

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

KELLOGG COMPANY

State of Incorporation—Delaware		IRS Employer Identification No.38-0710690

One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599

Registrant’s telephone number: 269-961-2000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Common Stock outstanding as of October 24, 2008 — 381,699,945 shares

 

 

KELLOGG COMPANY

INDEX

		Page
PART I — Financial Information
Item 1:
Financial Statements
Consolidated Balance Sheet — September 27, 2008 and December 29, 2007		2
Consolidated Statement of Earnings — quarters and year-to-date periods ended September 27, 2008 and September 29, 2007		3
Consolidated Statement of Cash Flows — year-to-date periods ended September 27, 2008 and September 29, 2007		4
Notes to Consolidated Financial Statements		5-19
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations		20-28
Item 3:
Quantitative and Qualitative Disclosures about Market Risk		29
Item 4:
Controls and Procedures		29
PART II — Other Information
Item 1A:
Risk Factors		30
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 6:
Exhibits		30
Signatures		31
Exhibit Index		32
Rule 13a-14(e)/15d-14(a) Certification from A. D. David Mackay
Rule 13a-14(e)/15d-14(a) Certification from John A. Bryant
Section 1350 Certification from A. D. David Mackay
Section 1350 Certification from John A. Bryant

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements.

Kellogg Company and Subsidiaries

CONSOLIDATED BALANCE SHEET
(millions, except per share data)

		September 27,				December 29,
		2008				2007
		(unaudited)				*
Current assets
Cash and cash equivalents		$	684			$	524
Accounts receivable, net			1,243				1,011
Inventories:
Raw materials and supplies			236				234
Finished goods and materials in process			671				690
Deferred income taxes			145				103
Other prepaid assets			128				140
Total current assets			3,107				2,702
Property, net of accumulated depreciation of $4,432 and $4,313			3,067				2,990
Goodwill			3,652				3,515
Other intangibles, net of accumulated amortization of $42 and $41			1,449				1,450
Pension			511				481
Other assets			252				259
Total assets		$	12,038			$	11,397
Current liabilities
Current maturities of long-term debt		$	2			$	466
Notes payable			1,539				1,489
Accounts payable			1,134				1,081
Accrued advertising and promotion			417				378
Accrued income taxes			30				—
Accrued salaries and wages			262				316
Other current liabilities			388				314
Total current liabilities			3,772				4,044
Long-term debt			4,008				3,270
Deferred income taxes			708				647
Other liabilities			931				910
Shareholders’ equity
Common stock, $.25 par value			105				105
Capital in excess of par value			424				388
Retained earnings			4,790				4,217
Treasury stock, at cost			(1,812	)			(1,357	)
Accumulated other comprehensive income (loss)			(888	)			(827	)
Total shareholders’ equity			2,619				2,526
Total liabilities and shareholders’ equity		$	12,038			$	11,397

*		Condensed from audited financial statements.

Refer to Notes to Consolidated Financial Statements.

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
(millions, except per share data)

		Quarter ended								Year-to-date period ended
		September 27,				September 29,				September 27,				September 29,
(Results are unaudited)		2008				2007				2008				2007
Net sales		$	3,288			$	3,004			$	9,889			$	8,982
Cost of goods sold			1,885				1,662				5,678				4,999
Selling, general and administrative expense			870				850				2,603				2,474
Operating profit			533				492				1,608				1,509
Interest expense			71				79				230				233
Other income (expense), net			13				3				(6	)			5
Earnings before income taxes			475				416				1,372				1,281
Income taxes			133				111				403				354
Net earnings		$	342			$	305			$	969			$	927
Net earnings per share:
Basic		$	.90			$	.77			$	2.54			$	2.34
Diluted		$	.89			$	.76			$	2.51			$	2.31
Dividends per share		$	.3400			$	.3100			$	.9600			$	.8920
Average shares outstanding:
Basic			380				395				382				397
Diluted			384				399				385				401
Actual shares outstanding at period end											381				394

Refer to Notes to Consolidated Financial Statements.

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)

		Year-to-date period ended
		September 27,				September 29,
(unaudited)		2008				2007
Operating activities
Net earnings		$	969			$	927
Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization			274				275
Deferred income taxes			(12	)			(114	)
Other (a)			122				138
Postretirement benefit plan contributions			(60	)			(42	)
Changes in operating assets and liabilities:
Trade receivables			(182	)			(210	)
Inventories			33				(11	)
Accounts payable			31				103
Accrued income taxes			27				22
Accrued interest expense			53				47
Accrued and prepaid advertising, promotion and trade allowances			35				95
Accrued salaries and wages			(62	)			(42	)
Exit plan-related reserves			(4	)			(3	)
All other current assets and liabilities			(36	)			68
Net cash provided by operating activities			1,188				1,253
Investing activities
Additions to properties			(295	)			(292	)
Acquisitions of business, net of cash acquired			(212	)			—
Other			11				(4	)
Net cash used in investing activities			(496	)			(296	)
Financing activities
Net issuances of notes payable			48				566
Issuances of long-term debt			756				—
Reductions of long-term debt			(466	)			(730	)
Issuances of common stock			155				141
Common stock repurchases			(650	)			(417	)
Cash dividends			(365	)			(354	)
Other			14				8
Net cash used in financing activities			(508	)			(786	)
Effect of exchange rate changes on cash			(24	)			(6	)
Increase in cash and cash equivalents			160				165
Cash and cash equivalents at beginning of period			524				411
Cash and cash equivalents at end of period		$	684			$	576

(a)		Consists principally of non-cash expense accruals for employee compensation and benefit obligations.

Refer to Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements
for the quarter and year-to-date periods ended September 27, 2008 (unaudited)

Note 1 Accounting policies

Basis of presentation

The unaudited interim financial information included in this report reflects normal recurring adjustments that management believes are necessary for a fair statement of the results of operations, financial position, and cash flows for the periods presented. This interim information should be read in conjunction with the financial statements and accompanying notes contained on pages 34 to 57 of the Company’s 2007 Annual Report on Form 10-K.

The condensed balance sheet data at December 29, 2007 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the quarterly and year-to-date periods ended September 27, 2008 are not necessarily indicative of the results to be expected for other interim periods or the full year.

The Company’s fiscal year normally ends on the Saturday closest to December 31 and as a result, a 53^rd week is added approximately every sixth year. The Company’s 2008 fiscal year will end on January 3, 2009, and include a 53^rd week. While quarters normally consist of 13-week periods, the fourth quarter of fiscal 2008 will include a 14^th week.

The accounting policies used in preparing these financial statements are the same as those applied in the prior year, except that the Company adopted a portion of the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 157 “Fair Value Measurements” as of the beginning of its 2008 fiscal year. Adoption of the SFAS No. 157 provisions as of the beginning of the 2008 fiscal year did not have an impact on the measurement of the Company’s financial assets and liabilities but resulted in additional disclosures contained in Note 11 herein.

New accounting pronouncements

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” an amendment of SFAS No. 133. SFAS No. 161 requires companies to disclose their objectives and strategies for using derivative instruments, whether or not their derivatives are designated as hedging instruments. The new pronouncement requires disclosure of the fair value of derivative instruments by primary underlying risk exposures (e.g. interest rate, credit, foreign exchange rate, combination of interest rate and foreign exchange rate, or overall price). It also requires detailed disclosures about the income statement impact of derivative instruments by designation as fair-value hedges, cash-flow hedges, or hedges of the foreign-currency exposure of a net investment in a foreign operation. SFAS No. 161 requires disclosure of information that will enable financial statement users to understand the level of derivative activity entered into by the company (e.g., total number of interest-rate swaps or total notional or quantity or percentage of forecasted commodity purchases that are being hedged). The principles of SFAS No. 161 may be applied on a prospective basis and are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early application is encouraged. For the Company, SFAS No. 161 will be effective at the beginning of its 2009 fiscal year and will result in additional disclosures in notes to the Company’s consolidated financial statements.

In February 2008, the FASB issued Staff Position (FSP) FAS-157-2, which delays by one year, the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities. We plan to adopt SFAS No. 157 for non-financial assets and non-financial liabilities as of the beginning of our 2009 fiscal year. Adoption will result in additional disclosures in notes to the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. SFAS No. 141(R) and SFAS No. 160 will be adopted by the Company at the beginning of its 2009 fiscal year. Because SFAS No. 141(R) is applied prospectively, the effect of adoption on the Company’s financial statements will depend primarily on specific transactions completed after 2008. The impact of adoption of SFAS No. 160 will depend on the materiality of any non-controlling interests that arise from future transactions. Further information on these accounting pronouncements is located on page 37 of the Company’s 2007 Annual Report on Form 10-K.

Note 2 Acquisitions and goodwill and other intangible assets

Acquisitions

The Company made acquisitions during the year-to-date period ended September 27, 2008 in order to expand its presence geographically and increase manufacturing capacity. During the quarter ended September 27, 2008, acquisitions included Specialty Cereals, IndyBake Products/Brownie Products and a controlling interest in Navigable Foods. In addition, in the first quarter of 2008, the Company acquired United Bakers.

Assets, liabilities, and results of the acquired businesses have been included in the Company’s consolidated financial statements since the date of acquisition; such amounts were insignificant to the Company’s consolidated financial position and results of operations.

In addition, the pro forma effect of these acquisitions on the Company’s results of operations, as though these business combinations had been completed at the beginning of either 2008 or 2007, would have been immaterial when considered individually or in the aggregate.

Specialty Cereals

In September 2008, the Company acquired Specialty Cereals of Sydney, Australia for $37 million, including transaction fees. The purchase price is subject to certain post-closing adjustments. Specialty Cereals manufactures and distributes natural ready-to-eat cereals.

To date, the Company paid $37 million cash in connection with the transaction, including approximately $5 million to the seller’s lenders to settle debt of the acquired entity. Assets acquired consisted primarily of property, plant and equipment of $19 million and goodwill of $18 million (which will not be deductible for income tax purposes). These amounts represent the preliminary allocation of purchase price and are subject to revision when appraisals are finalized, which will occur during the fourth quarter of 2008.

IndyBake Products/Brownie Products

In August 2008, the Company acquired certain assets and liabilities of the business of IndyBake Products and Brownie Products (collectively, “IndyBake”), located in Indiana and Illinois, for $42 million, including transaction fees. The purchase price is subject to certain post-closing adjustments. IndyBake, a contract manufacturing business that produces cracker, cookie and frozen dough products, had been a partner to Kellogg for many years as a snacks contract manufacturer.

To date, the Company paid $41 million cash in connection with the transaction, including approximately $8 million to the seller’s lenders to settle debt of the acquired entity. Assets acquired consisted primarily of property, plant and equipment of $12 million and goodwill of $23 million (which will be deductible for income tax purposes). These amounts represent the preliminary allocation of purchase price and are subject to revision when appraisals are finalized, which will occur during the fourth quarter of 2008.

Navigable Foods

In June 2008, the Company acquired a majority interest in the business of Zhenghang Food Company Ltd. (“Navigable Foods”) for $35 million (net of cash received), including transaction fees. The purchase price is subject to certain post-closing adjustments. Navigable Foods is a manufacturer of cookies and crackers in the northern and northeastern regions of China, with approximately 1,800 employees, two manufacturing facilities and a sales and distribution network.

During the year-to-date period ended September 27, 2008, the Company paid a total of $29 million in connection with the acquisition, including approximately $22 million to lenders and other third parties to settle debt and other obligations of the acquired entity. The purchase price payable at September 29, 2008 amounted to $6 million and was recorded on the Company’s Consolidated Balance Sheet in other liabilities. Assets acquired consisted primarily of property, plant and equipment of $23 million and goodwill of $18 million (which will be deductible for income tax purposes). The purchase price allocation is substantially complete.

The Company recorded minority interest of $6 million in connection with the acquisition, and obtained the option to purchase the minority interest beginning June 30, 2011. The minority interest holder also obtained the option to cause the Company to purchase its remaining interest. The options, which have similar terms, include an exercise price that is expected to approximate fair value on the date of exercise.

United Bakers

In January 2008, subsidiaries of the Company acquired substantially all of the equity interests in OJSC Kreker (doing business as “United Bakers”) and consolidated subsidiaries. The Company is in the process of acquiring the remaining minority interests through tender offers. United Bakers is a leading producer of cereal, cookie, and cracker products in Russia, with approximately 4,000 employees, six manufacturing facilities, and a broad distribution network.

The Company paid $110 million cash (net of $5 million cash acquired), including approximately $67 million to settle debt and other assumed obligations of the acquired entities. Of the total cash paid, $5 million was spent in 2007 for transaction fees and advances. The remaining amount of $105 million has been classified as an investing activity cash outflow in the Company’s Consolidated Statement of Cash Flows for the period ended September 27, 2008. The Company expects to incur approximately $3 million in additional purchase price payments for transactional costs and the acquisition of the remaining minority interests.

In addition, the purchase agreement between the Company and the seller provides for the payment of a currently undeterminable amount of contingent consideration at the end of three years, which will be calculated based on the growth of sales and earnings before income taxes, depreciation and amortization. Such payment would be recognized as additional purchase price when the contingency is resolved.

As of September 27, 2008 the purchase price allocation for United Bakers was as follows:

(millions)		asset/(liability)
Cash		$	5
Property, net			60
Goodwill (a)			77
Working capital, net (b)			(11	)
Long-term debt			(3	)
Deferred income taxes			(8	)
Other			(5	)
Total		$	115

(a)		Goodwill is not expected to be tax deductible.
(b)		Inventory, receivables and other current assets less current liabilities.

Goodwill and other intangible assets

Intangible assets subject to amortization

(millions)		Gross carrying amount									Accumulated amortization
		September 27,				December 29,				September 27,				December 29,
		2008				2007				2008				2007
Trademarks		$	19			$	19			$	14			$	13
Other			29				29				28				28
Total		$	48			$	48			$	42			$	41

For intangible assets in the preceding table, amortization was less than $1 million for each of the current and prior year-to-date periods. The currently estimated aggregate amortization expense for full-year 2008 and each of the four succeeding fiscal years is approximately $1 million per year and less than $1 million for the fifth succeeding fiscal year.

Intangible assets not subject to amortization

(millions)		Total carrying amount
		September 27,				December 29,
		2008				2007
Trademarks		$	1,443			$	1,443

Changes in the carrying amount of goodwill for the year-to-date period ended September 27, 2008 are presented in the following table.

The purchase accounting amounts in the table below were related to minor opening balance sheet adjustments for our November 2007 acquisitions of Bear Naked and certain assets and liabilities of Wholesome & Hearty Food Company. During the first quarter of 2008, the Company acquired United Bakers, a cookie and cracker company in Russia and recorded $77 million of goodwill. In the third quarter of 2008, the Company acquired Specialty Cereals, Navigable Foods and certain assets and liabilities of IndyBake and recorded goodwill of $59 million. Certain of the Company’s goodwill balances are subject to foreign currency translation adjustments. Fluctuations in exchange rates contributed to the change in goodwill balance for the period.

Carrying amount of goodwill

(millions)		North America				Europe				Latin America				Asia Pacific (a)				Consolidated
December 29, 2007		$	3,513			$	—			$	—			$	2			$	3,515
Purchase accounting adjustments			1				—				—				—				1
Acquisitions			23				77				—				36				136
Currency translation adjustment			—				(1	)			—				1				—
September 27, 2008		$	3,537			$	76			$	0			$	39			$	3,652

(a)		Includes Australia, Asia and South Africa.

Note 3 Exit or disposal plans

The Company views its continued spending on cost-reduction initiatives as part of its ongoing operating principles to provide greater visibility in achieving our long-term profit growth targets. Initiatives undertaken are currently expected to recover cash implementation costs within a five-year period of completion. Each cost-reduction initiative is normally up to three years in duration. Upon completion (or as each major stage is completed in the case of multi-year programs), the project begins to deliver cash savings and/or reduced depreciation.

Ongoing initiatives

The Company currently has two ongoing initiatives: the European manufacturing optimization plan (Manchester, England) and the reorganization of production processes to reflect changing market dynamics (Valls, Spain and Bremen, Germany). Total costs associated with these ongoing initiatives were $3 million and $2 million during the quarterly periods ended September 27, 2008 and September 29, 2007, respectively; on a year-to-date basis the costs for 2008 and 2007 amounted to $14 million and $14 million respectively. These costs were recorded in cost of goods sold and were attributable to the Europe operating segment.

The Company commenced the multi-year European manufacturing optimization plan in 2006 to improve utilization of its facility in Manchester, England and to better align production in Europe. Based on forecasted foreign exchange rates, the Company currently expects to incur approximately $55 million in total project costs. Of the $55 million in total project costs, $50 million has been incurred to date, of which $21 million represented costs related to employee severance. Refer to page 39 of the Company’s 2007 Annual Report on Form 10-K for further information on this initiative.

The following tables present quarter and year-to-date project costs for the European manufacturing optimization plan. There were no exit cost reserves for this project at September 27, 2008 and December 29, 2007.

		Project costs
		Quarter ended								Year-to-date period ended
(millions)		September 27, 2008				September 29, 2007				September 27, 2008				September 29, 2007
Employee severance		$	—			$	—			$	3			$	7
Other cash costs (a)			1				2				2				4
Asset write-offs (b)			—				—				(4	)			3
Retirement benefits (c)			—				—				2				—
Total		$	1			$	2			$	3			$	14

(a)		Primarily includes expenditures for equipment removal and relocation, and temporary contracted services to facilitate employee transitions.
(b)		Net of gain on the sale of assets previously written down to estimated fair market value less cost to sell.
(c)		Pension plan curtailment losses and special termination benefits recognized under SFAS No. 88 “Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.”

The Company commenced the reorganization of certain production processes at the Company’s plants in Valls, Spain and Bremen, Germany in October 2007. Based on forecasted foreign exchange rates, the Company expects to incur approximately $20 million of total project costs, comprised of asset write-offs, employee separation benefits and other cash costs. Of the $20 million in total project costs, $15 million has been incurred to date, of which $6 million represented costs related to employee severance. This initiative is expected to be completed by the end of 2008. Refer to page 40 of the Company’s 2007 Annual Report on Form 10-K for further information on this initiative.

The following tables present quarter and year-to-date project costs for the reorganization of production processes at the Company’s plants in Valls, Spain and Bremen, Germany, along with a reconciliation of employee severance reserves for this initiative.

		Project costs
						Year-to-date period ended
		Quarter ended				September 27,
(millions)		September 27, 2008				2008
Employee severance		$	—			$	4
Asset write-offs			2				6
Other cash costs (a)			—				1
Total		$	2			$	11

(a)		Primarily includes expenditures for equipment removal and relocation, and legal and consulting fees to facilitate employee transitions.

		Employee severance
(millions)		reserves
December 29, 2007		$	2
Accruals			4
Payments			(5	)
September 27, 2008		$	1

2007 initiative

Selling, general, and administrative expense for the quarter and year-to-date periods ended September 29, 2007, included total exit plan-related charges of $28 million and $66 million, respectively. These costs were recorded in the Company’s North America operating segment and related to the reorganization of the Company’s direct store-door delivery (DSD) operations in the southeastern United States. This initiative has been completed.

Note 4 Other income (expense), net

Other income (expense), net includes non-operating items such as interest income, charitable donations, foreign exchange gains and losses and costs related to commodity options. The Company recognized a net foreign exchange gain of $9 million for the quarter, and a net foreign exchange loss of $4 million for the year-to-date period ended September 27, 2008, as compared to losses of $3 million and $10 million, respectively, for the quarter and year-to-date periods ended September 29, 2007. Income recognized for premiums on commodity options was $1 million for the quarter, and expense of $9 million for the year-to-date period ended September 27, 2008, as compared to expense of $4 million and $5 million for the quarter and year-to-date periods ended September 29, 2007, respectively. Interest income for the quarter and year-to-date periods ended September 27, 2008 was $5 million and $15 million, respectively. Interest income for the quarter and year-to-date periods ended September 29, 2007 was $6 million and $15 million, respectively.

Note 5 Equity

Earnings per share

Basic net earnings per share is determined by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted net earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares are comprised principally of employee stock options issued by the Company, and to a lesser extent, certain contingently issuable performance shares. Basic net earnings per share is reconciled to diluted net earnings per share in the following table. The total number of anti-dilutive potential common shares excluded from the reconciliation totaled .3 million and 1.9 million shares for the quarter and year-to-date periods ended September 27, 2008, as compared to .2 million and .7 million shares for the quarter and year-to-date periods ended September 29, 2007.

Quarter						Average				Net
(millions, except		Net				shares				earnings
per share data)		earnings				outstanding				per share
2008
Basic		$	342				380			$	.90
Dilutive potential common shares			—				4				(.01	)
Diluted		$	342				384			$	.89
2007
Basic		$	305				395			$	.77
Dilutive potential common shares			—				4				(.01	)
Diluted		$	305				399			$	.76

Year-to-date						Average				Net
(millions, except		Net				shares				earnings
per share data)		earnings				outstanding				per share
2008
Basic		$	969				382			$	2.54
Dilutive potential common shares			—				3				(.03	)
Diluted		$	969				385			$	2.51
2007
Basic		$	927				397			$	2.34
Dilutive potential common shares			—				4				(.03	)
Diluted		$	927				401			$	2.31

During the year-to-date period ended September 27, 2008, the Company issued 1 million shares to employees and directors under various benefit plans and stock purchase programs, as further discussed in Note 8. To offset these issuances and for general corporate purposes, the Company’s Board of Directors authorized management to repurchase up to $650 million of the Company’s common stock during 2008. In connection with this authorization, during the year-to-date period ended September 27, 2008, the Company spent $650 million to repurchase approximately 13 million shares. On July 25, 2008, the Board approved an additional stock repurchase of up to $500 million of the Company’s common stock.

Comprehensive income

Comprehensive income includes net earnings and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income for all periods presented consists of foreign currency translation adjustments pursuant to SFAS No. 52 “Foreign Currency Translation”, fair value adjustments associated with cash flow hedges pursuant to SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”, and adjustments for net experience losses and prior service cost pursuant to SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

The Company’s benefit plan-related net experience losses and prior service cost decreased by $24 million during the quarter ended September 27, 2008 due to foreign currency remeasurement. Additionally, for the year-to-date period ended September 27, 2008, the Company recorded a net decrease to its defined benefit pension and postretirement plan obligations of $1 million, comprised of $31 million increase for census-related valuation update and $32 million decrease for foreign currency remeasurement.

During the third quarter of 2007, the Company recorded an increase to its defined benefit pension and postretirement plan obligations of $10 million due to foreign currency remeasurement. Additionally, for the year-to-date period ended September 29, 2007, the Company recorded a net increase to its defined benefit pension and postretirement plan obligations of $49 million, comprised of $26 million for census-related valuation update and $23 million for foreign currency remeasurement.

Quarter

		Pre-tax				Tax (expense)				After-tax
(millions)		amount				or benefit				amount
2008
Net earnings										$	342
Other comprehensive income:
Foreign currency translation adjustments			(160	)			—				(160	)
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges			(103	)			36				(67	)
Reclassification to net earnings			(4	)			1				(3	)
Postretirement and postemployment benefits:
Amounts arising during the period:
Net experience loss			22				(7	)			15
Prior service cost			2				(1	)			1
Reclassification to net earnings:
Net experience loss			11				(4	)			7
Prior service cost			3				(1	)			2
			(229	)			24				(205	)
Total comprehensive income										$	137

		Pre-tax				Tax (expense)				After-tax
(millions)		amount				or benefit				amount
2007
Net earnings										$	305
Other comprehensive income:
Foreign currency translation adjustments			11				—				11
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges			5				(2	)			3
Reclassification to net earnings			(3	)			1				(2	)
Postretirement and postemployment benefits:
Amounts arising during the period:
Net experience loss			(9	)			(3	)			(12	)
Prior service cost			(1	)			—				(1	)
Reclassification to net earnings:
Net experience loss			23				(8	)			15
Prior service cost			3				(1	)			2
			29				(13	)			16
Total comprehensive income										$	321

Year-to-date

		Pre-tax				Tax (expense)				After-tax
(millions)		amount				or benefit				amount
2008
Net earnings										$	969
Other comprehensive income:
Foreign currency translation adjustments			(77	)			—				(77	)
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges			(13	)			4				(9	)
Reclassification to net earnings			(7	)			2				(5	)
Postretirement and postemployment benefits:
Amounts arising during the period:
Net experience loss			(4	)			2				(2	)
Prior service cost			5				(2	)			3
Reclassification to net earnings:
Net experience loss			35				(12	)			23
Prior service cost			9				(3	)			6
			(52	)			(9	)			(61	)
Total comprehensive income										$	908

		Pre-tax				Tax (expense)				After-tax
(millions)		amount				or benefit				amount
2007
Net earnings										$	927
Other comprehensive income:
Foreign currency translation adjustments			38				—				38
Cash flow hedges:
Unrealized gain (loss) on cash flow hedges			22				(8	)			14
Reclassification to net earnings			(2	)			1				(1	)
Postretirement and postemployment benefits:
Amounts arising during the period:
Net experience loss			(47	)			10				(37	)
Prior service cost			(2	)			—				(2	)
Reclassification to net earnings:
Net experience loss			68				(23	)			45
Prior service cost			8				(3	)			5
			85				(23	)			62
Total comprehensive income										$	989

Accumulated other comprehensive income (loss) as of September 27, 2008 and December 29, 2007 consisted of the following:

		September 27,				December 29,
(millions)		2008				2007
Foreign currency translation adjustments		$	(482	)		$	(405	)
Cash flow hedges — unrealized net loss			(20	)			(6	)
Postretirement and postemployment benefits:
Net experience loss			(341	)			(362	)
Prior service cost			(45	)			(54	)
Total accumulated other comprehensive income (loss)		$	(888	)		$	(827	)

Note 6 Leases and other commitments

Refer to disclosures contained on page 43 of our 2007 Annual Report on Form 10-K. There have been no material changes in our leases and other commitments since December 29, 2007.

Note 7 Debt

On March 6, 2008, the Company issued $750 million of five-year 4.25% fixed rate U.S. Dollar Notes, using the proceeds from these Notes to retire a portion of its U.S. commercial paper. These Notes were issued under an existing shelf registration statement. The Notes contain customary covenants that limit the ability of the Company and its restricted subsidiaries (as defined) to incur certain liens or enter into certain sale and lease-back transactions, as well as a change of control provision.

In conjunction with the March 2008 debt issuance, the Company entered into interest rate swaps with notional amounts totaling $750 million, which effectively converted this debt from a fixed rate to a floating rate obligation for the duration of the five-year term. These derivative instruments, which were designated as fair value hedges of the debt obligation, resulted in an effective interest rate of 3.711% as of September 27, 2008. At September 27, 2008, Other Liabilities of $19 million have been recorded to reflect the fair value of interest rate swaps, offset by a decrease in the fair value of the related Long-Term Debt on the Company’s Consolidated Balance Sheet.

In December 2005, the Company redeemed $35 million of a $500 million, five-year 2.875% fixed rate U.S. Dollar Notes that were originally issued in June 2003. The Company repaid the remainder of the Notes in June 2008.

As of September 27, 2008, Notes Payable included commercial paper outstanding in the amount of $1,474 million.

Refer to pages 43-44 of the Company’s 2007 Annual Report on Form 10-K for comparable information as of December 29, 2007.

Note 8 Stock compensation

The Company uses various equity-based compensation programs to provide long-term performance incentives for its global workforce. Currently, these incentives consist principally of stock options, and to a lesser extent, executive performance shares and restricted stock grants. Additionally, the Company awards stock options and restricted stock to its non-employee directors. These awards are administered through several plans, as described on pages 44 to 47 of the Company’s 2007 Annual Report on Form 10-K.

The Company classifies pre-tax stock compensation expense in selling, general, and administrative expense principally within its corporate operations. For further information on the Company’s stock compensation accounting methods, refer to page 35 of the Company’s 2007 Annual Report on Form 10-K.

For the periods presented, compensation expense for all types of equity-based programs and the related income tax benefit recognized are as follows:

		Quarter ended								Year-to-date period ended
(millions)		September 27, 2008				September 29, 2007				September 27, 2008				September 29, 2007
Pre-tax compensation expense		$	13			$	18			$	66			$	65
Related income tax benefit		$	4			$	6			$	23			$	23

Pre-tax compensation expense for the year-to-date period ended September 27, 2008 included $4 million of expense related to the modification of certain stock options to eliminate the accelerated ownership feature (“AOF”) and $13 million representing cash compensation to holders of modified stock options to replace the value of the AOF, which is discussed in the following section, “Stock options”.

As of September 27, 2008, total stock-based compensation cost related to non-vested awards not yet recognized was approximately $36 million and the weighted-average period over which this amount is expected to be recognized was approximately 1.3 years.

Stock options

Effective April 25, 2008, the Company eliminated the AOF from all outstanding stock options. Stock options that contained the AOF feature included the vested pre-2004 option awards and all reload options. Reload options are the stock options awarded to eligible employees and directors to replace previously owned Company stock used by those individuals to pay the exercise price, including related employment taxes, of vested pre-2004 options awards containing the AOF. The reload options were immediately vested with an expiration date which was the same as the original option grant. Apart from removing the AOF, the stock options were not otherwise affected. Holders of the stock options received cash compensation to replace the value of the AOF.

The Company accounted for the elimination of the AOF as a modification in accordance with SFAS No. 123(R), “Share-Based Payment,” which required the Company to record a modification charge equal to the difference between the value of the modified stock options on the date of modification and their values immediately prior to modification. Since the modified stock options were 100% vested and had relatively short remaining contractual terms of one to five years, the Company used a Black-Scholes model to value the awards for the purpose of calculating the modification charge. The total fair value of the modified stock options increased by $4 million due to an increase in the expected term.

As a result of this action, pre-tax compensation expense for the year-to-date period ended September 27, 2008 included $4 million of expense related to the modification of stock options and $13 million representing cash compensation paid to holders of the stock options to replace the value of the AOF. Approximately 900 employees were holders of the modified stock options.

During the year-to-date periods ended September 27, 2008 and September 29, 2007, the Company granted non-qualified stock options to eligible employees and outside directors as presented in the following activity tables. Terms of these grants and the Company’s methods for determining grant-date fair value of the awards were consistent with that described on page 46 of the Company’s 2007 Annual Report on Form 10-K.

Year-to-date period ended September 27, 2008:

										Weighted-
						Weighted-				average				Aggregate
						average				remaining				intrinsic
Employee and director		Shares				exercise				contractual				value
stock options		(millions)				price				term (yrs.)				(millions)
Outstanding, beginning of period			26			$	44
Granted			5				51
Exercised			(4	)			42
Forfeitures and expirations			—				—
Outstanding, end of period			27			$	45				5.9			$	308
Exercisable, end of period			21			$	44				5.1			$	273

Year-to-date period ended September 29, 2007:

										Weighted-
						Weighted-				average				Aggregate
						average				remaining				intrinsic
Employee and director		Shares				exercise				contractual				value
stock options		(millions)				price				term (yrs.)				(millions)
Outstanding, beginning of period			27			$	41
Granted			7				51
Exercised			(7	)			41
Forfeitures and expirations			—				—
Outstanding, end of period			27			$	44				6.2			$	263
Exercisable, end of period			21			$	42				5.3			$	246

The weighted-average fair value of options granted was $7.90 per share for the year-to-date period ended September 27, 2008 and $7.27 per share for the year-to-date period ended September 29, 2007. The fair value was estimated using the following assumptions:

Weighted-

Weighted-

Weighted-

average

average risk-

average expected

expected term

free interest

Dividend

volatility

(years)

rate

yield

Grants within the year-to-date period ended September 27, 2008

20.74

%

4.08

2.66

%

2.40

%

The total intrinsic value of options exercised was $41 million for the year-to-date period ended September 27, 2008 and $75 million for the year-to-date period ended September 29, 2007.

Performance shares

In the first quarter of 2008, the Company granted performance shares to a limited number of senior executive-level employees, which entitle these employees to receive a specified number of shares of the Company’s common stock on the vesting date, provided cumulative three-year internal operating profit growth targets are achieved.

The 2008 target grant currently corresponds to approximately 188 thousand shares, with a grant-date fair value of $47 per share. The actual number of shares issued on the vesting date could range from zero to 200% of target, depending on actual performance achieved. For information on similar performance share awards in 2006 and 2007, refer to page 47 of the Company’s 2007 Annual Report on Form 10-K. Based on the market price of the Company’s common stock at September 27, 2008, the maximum future value that could be awarded to employees on the vesting date is (in millions): 2008 award-$21; 2007 award-$21; and 2006 award-$28. The 2005 performance share award, payable in stock, was settled at 200% of target in February 2008 for a total dollar equivalent of $28 million.

Note 9 Employee benefits

The Company sponsors a number of U.S. and foreign pension, other nonpension postretirement and postemployment plans to provide various benefits for its employees. These plans are described on pages 47 to 51 of the Company’s 2007 Annual Report on Form 10-K. Components of Company plan benefit expense for the periods presented are included in the tables below.

Pension

		Quarter ended								Year-to-date period ended
(millions)		September 27, 2008				September 29, 2007				September 27, 2008				September 29, 2007
Service cost		$	21			$	23			$	65			$	71
Interest cost			50				47				151				139
Expected return on plan assets			(76	)			(71	)			(230	)			(209	)
Amortization of unrecognized prior service cost			3				5				9				10
Recognized net loss			9				16				27				48
Curtailment and special termination benefits			1				—				8				—
Total pension expense — Company plans		$	8			$	20			$	30			$	59

Other nonpension postretirement

		Quarter ended								Year-to-date period ended
(millions)		September 27, 2008				September 29, 2007				September 27, 2008				September 29, 2007
Service cost		$	4			$	6			$	13			$	14
Interest cost			17				17				50				51
Expected return on plan assets			(16	)			(15	)			(48	)			(45	)
Amortization of unrecognized prior service cost			—				(2	)			—				(2	)
Recognized net loss			1				6				5				18
Postretirement benefit expense		$	6			$	12			$	20			$	36

Postemployment

		Quarter ended								Year-to-date period ended
(millions)		September 27, 2008				September 29, 2007				September 27, 2008				September 29, 2007
Service cost		$	2			$	2			$	4			$	4
Interest cost			1				—				3				2
Recognized net loss			1				1				3				2
Postemployment benefit expense		$	4			$	3			$	10			$	8

Management currently plans to contribute approximately $50 million to its defined benefit pension plans and $15 million to its retiree health and welfare benefit plans during 2008, for a total of $65 million. During 2007, the Company contributed approximately $84 million to defined benefit pension plans and $12 million to retiree health and welfare benefit plans, for a total of $96 million. Recent adverse conditions in the equity markets have caused the actual rate of return on the pension and postretirement plan assets to be significantly below the Company’s assumed long-term rate of return of 8.9%. As a result, the Company is reevaluating the funding levels for the remainder of 2008 and the full-year 2008 contributions may exceed the original projection of $65 million.

Note 10 Income taxes

Effective income tax rate

The consolidated effective income tax rate was approximately 28% for the quarter ended September 27, 2008, as compared to 27% for the comparable quarter of 2007. The third quarter 2008 provision for income taxes was positively impacted by various individually insignificant provision-to-return adjustments. The third quarter 2007 effective income tax rate was positively impacted by statutory rate reductions as discussed on page 52 of the Company’s 2007 Annual Report on Form 10-K.

For the year-to-date period ended September 27, 2008, the consolidated effective income tax rate was 29%, as compared to 28% for the comparable prior year-to-date period.

Uncertain tax positions

The Company adopted Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN No. 48) as of the beginning of its 2007 fiscal year. This interpretation clarifies what criteria must be met prior to recognition of the financial statement benefit, in accordance with SFAS No. 109, “Accounting for Income Taxes,” of a position taken in a tax return. See page 53 in the Company’s 2007 Annual Report on Form 10-K for further information regarding FIN No. 48.

The Company files income taxes in the U.S. federal jurisdiction, and in various state, local and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal examinations by the Internal Revenue Service for years prior to 2006. During the first quarter of 2007, the IRS commenced an examination of the Company’s 2004 and 2005 U.S. federal income tax returns. A Revenue Agents Report (RAR) was issued in October, 2008 with no un-agreed issues. During the second quarter of 2008, the Company entered into the IRS’ Compliance Assurance Program (“CAP”) for the 2008 tax year. The IRS will also be performing a focused review of the 2006 and 2007 tax years which is anticipated to be completed in 2009.

As of September 27, 2008, the Company has classified approximately $20 million of unrecognized tax benefits as a current liability, representing several individually insignificant income tax positions under examination in various jurisdictions. Management’s estimate of reasonably possible changes in unrecognized tax benefits during the next twelve months is comprised of the aforementioned current liability balance expected to be settled within one year, offset by approximately $20 million of projected additions related primarily to ongoing intercompany transfer pricing activity. Management is currently unaware of any issues under review that could result in significant additional payments, accruals, or other material deviation in this estimate.

Following is a reconciliation of the Company’s total gross unrecognized tax benefits for the year-to-date period ended September 27, 2008. Approximately $122 million of this total represents the amount that, if recognized, would affect the Company’s effective income tax rate in future periods. This amount differs from the gross unrecognized tax benefits presented in the table due to the decrease in U.S. federal income taxes which would occur upon recognition of the state tax benefits included therein.

(millions)
December 29, 2007		$	169
Tax positions related to current year:
Additions			23
Reductions			—
Tax positions related to prior years:
Additions			1
Reductions			(45	)
Settlements			(3	)
September 27, 2008		$	145

The current portion of the Company’s unrecognized tax benefits is presented in the balance sheet within accrued income taxes and the amount expected to be settled after one year is recorded in other noncurrent liabilities.

The Company classifies income tax-related interest and penalties as interest expense and selling, general, and administrative expense, respectively. For the year-to-date period ended September 27, 2008, the Company recognized expense of $4 million for tax related interest and had approximately $35 million accrued at September 27, 2008.

Note 11 Fair value measurements

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” in order to establish a single definition of fair value and a framework for measuring fair value that is intended to result in increased consistency and comparability in fair value measurements. Certain provisions of the standard were effective for the Company at the beginning of its 2008 fiscal year. Adoption of SFAS No. 157 provisions as of the beginning of the 2008 fiscal year did not have an impact on the measurement of the Company’s financial assets and liabilities but resulted in additional disclosures contained herein.

In February 2008, the FASB issued Staff Position (FSP) FAS-157-2, which delayed by one year the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The delay pertains to items including, but not limited to, non-financial assets and non-financial liabilities initially measured at fair value

in a business combination, reporting units measured at fair value in the first step of evaluating goodwill for impairment under SFAS No. 142 “Goodwill and Other Intangible Assets”, indefinite-lived intangible assets measured at fair value for impairment assessment under SFAS No. 142, and long-lived assets measured at fair value for impairment assessment under SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company plans to adopt the remaining provisions of SFAS No. 157 as of the beginning of its 2009 fiscal year. Balance sheet items carried at fair value on a non-recurring basis (to which SFAS No. 157 will apply in 2009) consist of assets held for sale and exit liabilities.

As required by SFAS No. 157, the Company has categorized its financial assets and liabilities into a three-level fair value hierarchy, based on the nature of the inputs used in determining fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that are included in each category at September 27, 2008.

Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market. For the Company, level 1 financial assets and liabilities consist primarily of commodity derivative contracts.

Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 financial assets and liabilities for the Company consist of interest rate swaps and over-the-counter commodity and currency contracts.

The Company’s calculation of the fair value of interest rate swaps is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve. Commodity derivatives are valued using an income approach based on the commodity index prices less the contract rate multiplied by the notional amount. Foreign currency contracts are valued using an income approach based on forward rates less the contract rate multiplied by the notional amount.

Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The Company does not have any level 3 financial assets or liabilities.

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 27, 2008:

(millions)		Level 1				Level 2				Level 3				Total
Assets:
Derivatives (recorded in Other Receivables)		$	6			$	8			$	—			$	14
Derivatives (recorded in Other Assets)			—				16				—				16
Total Assets		$	6			$	24			$	—			$	30
Liabilities:
Derivatives (recorded in Other Current Liabilities)		$	—			$	(23	)		$	—			$	(23	)

Note 12 Operating segments

Kellogg Company is the world’s leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles, and veggie foods. Kellogg products are manufactured and marketed globally. Principal markets for these products include the United States and United Kingdom. The Company currently manages its operations in four geographic operating segments, comprised of North America and the three International operating segments of Europe, Latin America, and Asia Pacific.

		Quarter ended								Year-to-date period ended
(millions)		September 27,				September 29,				September 27,				September 29,
(Results are unaudited)		2008				2007				2008				2007
Net sales
North America		$	2,156			$	1,960			$	6,431			$	5,942
Europe			666				604				2,089				1,801
Latin America			277				270				813				752
Asia Pacific (a)			189				170				556				487
Consolidated		$	3,288			$	3,004			$	9,889			$	8,982
Segment operating profit
North America		$	380			$	333			$	1,163			$	1,059
Europe			113				110				347				345
Latin America			61				66				166				168
Asia Pacific (a)			26				18				79				65
Corporate			(47	)			(35	)			(147	)			(128	)
Consolidated		$	533			$	492			$	1,608			$	1,509

(a)		Includes Australia, Asia and South Africa.

KELLOGG COMPANY

PART I — FINANCIAL INFORMATION

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

Results of operations

Overview

Kellogg Company is the world’s leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles, and veggie foods. Kellogg products are manufactured and marketed globally. Principal markets for these products include the United States and United Kingdom. We currently manage our operations in four geographic operating segments, comprised of North America and the three International operating segments of Europe, Latin America, and Asia Pacific.

Our long-term annual growth targets are low single-digit (1 to 3%) for internal net sales, mid single-digit (4 to 6%) for internal operating profit and high single-digit (7 to 9%) for diluted net earnings per share. (Our measure of internal growth rates excludes the impact of changes in foreign currency exchange rates, and if applicable, acquisitions, dispositions, and shipping day differences.) For 2008, we expect to exceed our internal net sales growth target and achieve mid single-digit (4 to 6%) growth. We expect the higher-than-targeted net sales growth to come principally from previously announced pricing initiatives, improved product mix and continued innovation. We expect to meet our operating profit and net earnings per share growth targets. We believe our continued strong financial performance provides momentum for achieving these growth targets for the full year. The foreign exchange market has become volatile in the fourth quarter of 2008. From time to time we may manage our exposure by entering into foreign currency contracts to reduce volatility in the translation of foreign currency earnings to U.S. dollars.

For full-year 2009 we expect internal net sales and operating profit to grow at mid single-digits (4 to 6%). The higher-than-targeted net sales growth will be achieved by building on our 2008 strategy including improved product mix and innovation. Volatility in the foreign exchange market makes it difficult to forecast reported net earnings per share. While non-U.S. Dollar operating profit represents 40-45% of our consolidated operating profit, 50-60% of our net income is non-U.S. Dollar denominated. This difference is because virtually all interest expense is incurred in the U.S. and we are subject to lower tax rates outside the United States. As a result, movements in foreign exchange rates against the U.S. Dollar can have a significant impact on our reported earnings per share. Excluding the impact of foreign exchange, we are confident in our ability to deliver high single-digit earnings per share growth for 2009.

For the year-to-date period ended September 27, 2008, we reported consolidated net sales growth of 10% with internal growth of 6%. Consolidated operating profit increased 7% on internal growth of 6%. Diluted net earnings per share were $2.51, as compared to $2.31 in the comparable prior year period. Similarly for the third quarter of 2008, we reported consolidated net sales growth of 9% with internal growth of 7%. Consolidated operating profit increased 9% both on an as reported and internal basis. Diluted net earnings per share grew 17% from $.76 in the third quarter of 2007 to $.89 in the current period.

Net sales and operating profit

The following table provides an analysis of net sales and operating profit performance for the third quarter of 2008 versus 2007:

		North								Latin				Asia Pacific
(dollars in millions)		America				Europe				America				(a)				Corporate				Consolidated
2008 net sales		$	2,156			$	666			$	277			$	189			$	—			$	3,288
2007 net sales		$	1,960			$	604			$	270			$	170			$	—			$	3,004
% change — 2008 vs. 2007:
Volume (tonnage) (b)			4.4	%			-1.5	%			-8.1	%			7.4	%			—				2.3	%
Pricing/mix			4.7	%			4.4	%			6.7	%			2.2	%			—				4.6	%
Subtotal — internal business			9.1	%			2.9	%			-1.4	%			9.6	%			—				6.9	%
Acquisitions (c)			.9	%			5.7	%			—				3.7	%			—				2.0	%
Foreign currency impact			—				1.6	%			4.1	%			-1.5	%			—				0.6	%
Total change			10.0	%			10.2	%			2.7	%			11.8	%			—				9.5	%

		North								Latin				Asia Pacific
(dollars in millions)		America				Europe				America				(a)				Corporate				Consolidated
2008 operating profit		$	380			$	113			$	61			$	26			$	(47	)		$	533
2007 operating profit		$	333			$	110			$	66			$	18			$	(35	)		$	492
% change — 2008 vs. 2007:
Internal business			14.7	%			2.9	%			-10.2	%			54.6	%			-35.8	%			8.6	%
Acquisitions (c)			-.4	%			2.0	%			—				-6.0	%			—				0.0	%
Foreign currency impact			-.1	%			-2.0	%			3.9	%			-1.6	%			—				0.0	%
Total change			14.2	%			2.9	%			-6.3	%			47.0	%			-35.8	%			8.6	%

(a)		Includes Australia, Asia and South Africa.
(b)		We measure the volume impact (tonnage) on revenues based on the stated weight of our product shipments.
(c)		Impact of results for the quarterly period ended September 27, 2008 from the acquisitions of United Bakers, Bear Naked, Specialty Cereals, Navigable Foods and certain assets and liabilities of the Wholesome & Hearty Foods Company and IndyBake Products.

Our strong consolidated net sales performance for the third quarter of 2008 was driven by our North America business with increases in both volume and price/mix for the quarter. Successful innovation, brand-building (advertising and consumer promotion) investment, as well as our recent price increases continued to drive the growth. Also contributing to our growth are our acquisitions including Bear Naked and the acquisition of certain assets and liabilities from the Wholesome & Hearty Foods Company which were completed in 2007. For further information on our 2008 acquisitions, refer to Note 2 within Notes to Consolidated Financial Statements, which is included herein under Part I, Item 2. Management has estimated that the pro forma effect on the Company’s results of operations, as though these business combinations had been completed at the beginning of 2007, would have been immaterial. The growth in North America was partially offset by soft top-line growth in Europe and Latin America which are being impacted by the global economic slow down.

For the quarter, our North America operating segment reported strong, internal net sales growth of 9%, with each major product group contributing as follows: retail cereal +7%; retail snacks (cookies, crackers, cereal bars, toaster pastries, and fruit snacks) +10%; frozen and specialty channels (frozen foods, food service and vending) +12%. The broad based growth was driven by volume growth, strong price realization and successful innovations. Retail cereal performed well with strong results from our core brands such as Mini-Wheats, Raisin Bran Crunch and Corn Pops and innovations such as Special K Cinnamon Pecan and Mini-Wheats Blueberry Muffin. Kashi’s strong performance was lead by Go Lean Crunch Honey Almond Flax and Organic Promise. Our growth in snacks is driven from growth in volume, our previously announced price increases, and successful innovations such as Townhouse Flipsides. Core brands such as Cheez-It, Nutri-Grain and Chips Deluxe are performing well. In the quarter, our “Right Bites” 100 calorie cookie and cracker packs saw strong growth. Our frozen and specialty channels grew both volume and net sales realization with the specialty channel building upon the cereal and snacks innovation. Frozen realized strong sales due to innovations such as Bake Shop Swirlz as well as buying ahead of a previously announced price increase.

Our International operating segments collectively reported internal net sales growth of approximately 3%. Europe benefited from strong growth in the UK which was partially offset by softness in other markets impacted by the economic slow down. In Latin America, Mexico has been particularly impacted by economic weakness. Asia Pacific’s performance was strong in the third quarter led by growth from Australia and South Africa.

For the quarter, our consolidated operating profit increased 9% both on a reported basis and on an internal basis. This growth was driven by strong price realization that offset higher commodity costs as well as productivity initiatives. Third quarter operating profit also benefited from lower incremental exit-plan related charges as compared to the third quarter of 2007. As discussed in the “Exit or disposal plans” section herein, this quarter’s operating profit included $3 million of exit-plan related charges as compared to $30 million recorded in the third quarter of 2007. The net incremental impact on the operating segments is (in millions): North America-$28 (all within selling, general and administrative expense) and Europe-($1) (all within cost of goods sold).

Internal operating profit for our North America operating segment was strong due to lower exit costs; and increased sales, driven by price increases and innovation partially offset by higher commodity costs. Europe’s internal operating profit increased due to increased prices which offset higher commodity costs and selective investment of advertising and promotion spend by concentrating on the most effective means. Latin America’s operating profit decreased due to soft top line growth, increased commodity costs as well as import restrictions placed by the Venezuelan government. Internal operating profit growth in Asia Pacific was driven by its strong net sales performance.

The following tables provide analysis of our net sales and operating profit performance for the year-to-date periods of 2008 as compared to 2007. The year-to-date net sales performance was similar to the quarter with growth driven by increased price/mix realized in North America. We are experiencing slowing growth in Latin America and Europe due to global economic conditions. Reported operating profit for the year-to-date period was up versus prior year due to sales growth and lower exit costs and other cost reduction initiatives, offset by increased commodity and fuel costs.

		North								Latin				Asia Pacific
(dollars in millions)		America				Europe				America				(a)				Corporate				Consolidated
2008 net sales		$	6,431			$	2,089			$	813			$	556			$	—			$	9,889
2007 net sales		$	5,942			$	1,801			$	752			$	487			$	—			$	8,982
% change — 2008 vs. 2007:
Volume (tonnage) (b)			2.0	%			0.7	%			-3.2	%			6.9	%			—				1.5	%
Pricing/mix			4.8	%			3.6	%			7.1	%			1.0	%			—				4.6	%
Subtotal — internal business			6.8	%			4.3	%			3.9	%			7.9	%			—				6.1	%
Acquisitions (c)			.9	%			5.3	%			—				1.3	%			—				1.7	%
Foreign currency impact			.5	%			6.4	%			4.3	%			5.0	%			—				2.3	%
Total change			8.2	%			16.0	%			8.2	%			14.2	%			—				10.1	%

		North								Latin				Asia Pacific
(dollars in millions)		America				Europe				America				(a)				Corporate				Consolidated
2008 operating profit		$	1,163			$	347			$	166			$	79			$	(147	)		$	1,608
2007 operating profit		$	1,059			$	345			$	168			$	65			$	(128	)		$	1,509
% change — 2008 vs. 2007:
Internal business			9.8	%			-.7	%			-5.2	%			17.2	%			-14.8	%			5.6	%
Acquisitions (c)			-.7	%			-.8	%			—				-1.7	%			—				-0.8	%
Foreign currency impact			.7	%			2.3	%			4.0	%			6.6	%			—				1.8	%
Total change			9.8	%			0.8	%			-1.2	%			22.1	%			-14.8	%			6.6	%