Second Quarter Results

For the second quarter of fiscal 2008, we reported diluted earnings per share of $1.14, up 5.6 percent from $1.08 per share earned in the same period last year. Net earnings were $390.5 million in the quarter, up 1.3 percent from $385.4 million last year. Net sales grew 6.8 percent to $3.7 billion and total segment operating profit of $716.1 million was consistent with the second quarter of fiscal 2007. (See page 32 for a discussion of this measure not defined by generally accepted accounting principles (GAAP)).

Net sales growth during the second quarter of fiscal 2008 was the result of 5.6 points of growth from net price realization and product mix and 1.4 points of favorable foreign currency exchange, offset by 0.2 points of decreased combined segment volume. During the second quarter of fiscal 2008, volume was essentially flat as growth in the International operating segment was offset by declines in Bakeries and Foodservice including the effects of product lines divested in fiscal 2007, and U.S. Retail. On November 1, 2007, we voluntarily recalled all pepperoni varieties of Totino’s and Jeno’s frozen pizzas (sold primarily in our U.S. Retail operating segment) manufactured on or before October 30, 2007 due to potential contamination. The pizza recall did not significantly impact our net sales in the second quarter.

(a) Measured in tons based on the stated weight of our product shipments.

Cost of sales increased $185.2 million from the second quarter of fiscal 2007 to $2,372.2 million. Higher input costs and changes in mix increased cost of sales by $178.8 million. We recorded $32.8 million of mark-to-market net gains on our commodity derivatives in the second quarter of fiscal 2008, pursuant to our policy described in Note 6 on page 9, $15.1 million of which will mitigate future input cost inflation. We also recorded $17.3 million of accelerated depreciation on long-lived assets associated with our previously announced restructuring action at our plant in Trenton, Ontario. In addition, we incurred $19.0 million of costs, including product write offs, logistics, and other costs, related to the voluntary frozen pizza recall.

Selling, general, and administrative (SG&A) expenses were up $35.8 million in the second quarter of fiscal 2008 versus the same period in fiscal 2007. The increase in SG&A was primarily driven by a 10.5 percent increase in consumer marketing expense. SG&A expenses as a percent of net sales in fiscal 2008 decreased 20 basis points from fiscal 2007 to 17.3 percent.

21

Table of Contents

Restructuring, impairment, and other exit costs (income) were $2.8 million of expense for the second quarter of fiscal 2008 and $1.1 million of income for the same period of fiscal 2007, comprised of the following:

During the second quarter of fiscal 2008, we approved a plan to transfer Old El Paso production from our Poplar, Wisconsin facility to other plants and close the Poplar facility. This action to improve capacity utilization and reduce costs affects 113 employees at the Poplar facility, and resulted in a charge of $2.7 million consisting entirely of employee severance. We anticipate this project will be completed by January 31, 2009.

Net interest expense for the second quarter of fiscal 2008 totaled $115.9 million, a $5.4 million increase from the same period of fiscal 2007. Average interest bearing instruments increased $539.6 million leading to an $8.2 million increase in net interest expense, while average interest rates decreased 20 basis points generating a $2.8 million decrease in net interest expense. Average debt balances increased to fund higher share repurchases in anticipation of our issuance of shares to settle the forward contract with Lehman Brothers.

The effective tax rate for the second quarter of fiscal 2008 was 36.5 percent compared to 35.9 percent for the second quarter of fiscal 2007. The 0.6 percentage point increase in the effective tax rate is primarily due to a 1.8 percent reduction in the estimated value of tax credits and a 0.5 percent increase in the state tax rate which were partially offset by a 0.7 percent reduction of deferred taxes caused by a law change in Michigan, a 0.4 percent decrease related to additional domestic deductions, a 0.3 percent reduction related to additional foreign tax credits and 0.3 percent of miscellaneous other items.

After-tax earnings from joint ventures increased $4.2 million from the second quarter of fiscal 2007, to $27.6 million. Net sales for Cereal Partners Worldwide (CPW) increased 21.4 percent driven by higher volume, including 5 points of favorable foreign exchange. Net sales for our Häagen-Dazs ice cream joint ventures in Asia grew 3.6 percent as an increase in sales volume was partially offset by unfavorable foreign exchange. 8^th Continent, our soy products joint venture, recorded a 15.4 percent net sales decrease in the second quarter of fiscal 2008.

Average diluted shares outstanding decreased by 15.0 million in the second quarter of fiscal 2008, from the same period a year ago due primarily to the repurchase of 29.3 million shares of our common stock since the end of the second quarter of fiscal 2007. This was partially offset by the issuance of 14.3 million shares to settle the forward contract with Lehman Brothers, the issuance of shares upon stock option exercises, the issuance of annual stock awards, and the vesting of restricted stock units.

Net sales for the fourth quarter of 2007 increased 7 percent to $3.1 billion, driven by 5 percent unit volume growth. Segment operating profits of $492 million matched prior year levels despite higher input costs and a 16 percent increase in consumer marketing expense in the quarter. Net earnings grew 1 percent to $224 million. These results included restructuring and impairment expenses discussed below in the sections titled Joint Ventures and Corporate Items. Fourth-quarter diluted earnings per share rose 2 percent to 62 cents.

Net sales for the fourth quarter of 2006 grew 5 percent to $2.8 billion, driven by a 3 percent unit volume increase. Segment operating profits rose 5 percent for the 13-week period to $493 million. Fourth quarter net earnings in 2006 benefited from a favorable tax adjustment (discussed below in the section titled Corporate Items) that reduced the effective tax rate for the period to 31.4 percent, compared to 35.3 percent through the first nine months. The period also included restructuring expenses (discussed below in the sections titled Joint Ventures and Corporate Items). Net earnings of $222 million and diluted EPS of 61 cents were significantly below prior-year results that included the gain from divestitures.

Fourth Quarter Results