SUMMARY OF OPERATING RESULTS

Analysis of Selected Items from Our Income Statement


                         For the Three Months Ended                   For the Nine Months Ended
                                                  Percent                                      Percent
                                                   Change                                       Change
                 September 28,   September 30,    Increase    September 28,   September 30,    Increase
                     2008            2007        (Decrease)       2008            2007        (Decrease)
                                         (in thousands except per share amounts)
Net Sales            $ 1,489.6       $ 1,399.5         6.4%       $ 3,755.4       $ 3,604.5         4.2%
Cost of Sales            988.4           928.9         6.4%         2,495.2         2,390.4         4.4%
Gross Profit             501.2           470.6         6.5%         1,260.2         1,214.1         3.8%
Gross Margin             33.6%           33.6%                        33.6%           33.7%
SM&A Expense             272.4           229.8        18.5%           789.0           663.1        19.0%
SM&A Expense as
a
percent of sales         18.3%           16.4%                        21.0%           18.4%
Business
Realignment
     Charge, net           8.9           112.0      (92.1)%            34.7           219.3      (84.2)%
EBIT                     219.9           128.8        70.8%           436.5           331.7        31.6%
EBIT Margin              14.8%            9.2%                        11.6%            9.2%
Interest                  24.9            33.1      (24.6)%            72.9            90.5      (19.5)%
Expense, net
Provision for             70.5            32.9       114.1%           134.3            81.4        65.2%
Income Taxes
Effective Income
Tax Rate                 36.1%           34.4%                        36.9%           33.7%
Net Income            $  124.5        $   62.8        98.4%        $  229.3        $  159.8        43.5%
Net Income Per
Share-Diluted         $   0.54        $   0.27       100.0%        $   1.00        $   0.69        44.9%

Results of Operations - Third Quarter 2008 vs. Third Quarter 2007

U.S. Price Increases

In April 2007, we announced an increase of approximately four percent to five percent in the wholesale prices of our domestic confectionery line, effective immediately. The price increase applied to our standard bar, king-size bar, 6-pack and vending lines. These products represent approximately one-third of our U.S. confectionery portfolio.

In January 2008, we announced an increase in the wholesale prices of our domestic confectionery line, effective immediately. This price increase also applied to our standard bar, king-size bar, 6-pack and vending lines and represented a weighted average increase of approximately thirteen percent on these items. These price changes approximated a three percent price increase over our entire domestic product line.

In August 2008, we announced an increase in wholesale prices across the United States, Puerto Rico and export chocolate and sugar confectionery lines. This price increase was effective immediately, and represented a weighted average 11 percent increase on our instant consumable, multi-pack and packaged candy lines. These changes approximated a 10 percent increase over the entire domestic product line. We implemented these pricing actions to help partially offset significant increases in input costs, including raw materials, packaging, fuel, utilities and transportation.

Usually there is a time lag between the effective date of list price increases and the impact of the price increases on net sales. The impact of price increases is often delayed because the Company honors previous commitments to planned consumer and customer promotions and merchandising events subsequent to the effective date of the price increases. In addition, promotional allowances may be increased for certain products subsequent to the effective date, delaying or partially offsetting the impact of price increases on net sales.

Net Sales

Net sales for the third quarter of 2008 were higher than the comparable period of 2007 primarily due to favorable price realization and sales volume increases. An increase of approximately 2% was attributable to sales volume increases associated with the timing of shipments for the buy-in related to price increases announced in August 2008. Increases in core brand sales volume in the United States were substantially offset by volume decreases for snack and refreshment

Key Marketplace Metrics

Consumer takeaway increased 4.0% during the third quarter of 2008 compared with the same period of 2007. Consumer takeaway is provided for channels of distribution accounting for approximately 80% of our U.S. confectionery retail business. These channels of distribution include food, drug, mass merchandisers, including Wal-Mart Stores, Inc., and convenience stores.

Market share in measured channels declined by 0.1 share points during the third quarter of 2008. The change in market share is provided for measured channels which include sales in the food, drug, convenience store and mass merchandiser classes of trade, excluding sales of Wal-Mart Stores, Inc.

Cost of Sales and Gross Margin

Cost of sales in the third quarter of 2008 was higher than 2007 primarily due to increased input and energy costs. Higher costs associated with sales volume increases also contributed to the cost of sales increase, partially offset by supply chain productivity. Business realignment charges of $20.0 million were included in cost of sales in the third quarter of 2008 compared with $37.5 million in the third quarter of 2007.

Gross margin was flat compared with the same period of 2007. A gross margin decline resulting from higher input and energy costs was only partially offset by favorable price realization and supply chain productivity. This decline in gross margin was offset by the impact of lower costs associated with business realignment initiatives in 2008 compared with 2007.

Selling, Marketing and Administrative

Selling, marketing and administrative expenses increased primarily as a result of administrative and selling expenses and higher advertising and consumer promotion expenses. Higher administrative and selling costs were principally associated with employee-related expenses reflecting increased levels of retail coverage in the United States, the expansion of our international businesses and incentive compensation. Incentive compensation costs increased in 2008 as compared to 2007 because of the impact of reduced performance expectations in the third quarter of 2007. Higher advertising and consumer promotion expenses related to increased core brand support also contributed to the increase. Expenses of $2.2 million related to our 2007 business realignment initiatives were included in selling, marketing and administrative expense for the third quarter of 2008 compared with $2.4 million recorded in the third quarter of 2007.

Business Realignment Initiatives

Business realignment charges of $8.9 million were recorded in the third quarter of 2008 associated with the 2007 business realignment initiatives. The charges were primarily associated with employee separation, fixed asset impairment and plant closure expenses. Business realignment charges of $112.0 million were recorded in the third quarter of 2007 primarily associated with employee separation costs.

Income Before Interest and Income Taxes and EBIT Margin

EBIT increased substantially in the third quarter of 2008 compared with the third quarter of 2007 as a result of lower net business realignment charges. Excluding the impact of business realignment charges, the increase in gross profit was more than offset by higher selling, marketing and administrative expenses. Net pre-tax business realignment charges of $31.0 million were recorded in the third quarter of 2008 compared with $151.9 million recorded in the third quarter of 2007, a decrease of $120.9 million.

EBIT margin increased from 9.2% for the third quarter of 2007 to 14.8% for the third quarter of 2008. The impact of net business realignment charges in 2008 compared with the third quarter of 2007, increased EBIT margin by 8.9%. A decrease of 3.3% resulted from the lower gross margin and higher selling, marketing and administrative expense as a percentage of sales.

Interest Expense, Net

Net interest expense was lower in the third quarter of 2008 than the comparable period of 2007 primarily reflecting lower interest rates and lower average debt balances in 2008 compared with 2007.

Income Taxes and Effective Tax Rate

Our effective income tax rate was 36.1% for the third quarter of 2008. The impact of tax rates associated with business realignment and impairment charges recorded during the quarter increased the effective income tax rate by 0.6 percentage points.

Net Income and Net Income Per Share

Net income in the third quarter of 2008 was reduced by $21.3 million, or $0.10 per share-diluted, and in the third quarter of 2007 was reduced by $94.4 million, or $0.41 per share-diluted, as a result of net charges associated with our business realignment initiatives. After considering the impact of business realignment charges in each period, earnings per share-diluted in the third quarter of 2008 decreased $0.04 as compared with the third quarter of 2007.

Results of Operations - First Nine Months 2008 vs. First Nine Months 2007

Net Sales

The increase in net sales was attributable to favorable price realization from list price increases, substantially offset by sales volume decreases primarily in the United States. Sales volume increases from Godrej Hershey Ltd. and our other international businesses, increased sales from new products, the impact of the buy-in related to price increases announced in August and a favorable foreign currency exchange rate also contributed to the sales increase. The acquisition of Godrej Hershey Ltd. incrementally increased net sales by $37.2 million, or 1.0%.

Key Marketplace Metrics

Consumer takeaway increased 2.3% during the first nine months of 2008. Consumer takeaway is provided for channels of distribution accounting for approximately 80% of our U.S. confectionery retail business. These channels of distribution include food, drug, mass merchandisers, including Wal-Mart Stores, Inc., and convenience stores.

Market share in measured channels declined by 0.6 share points during the first nine months of 2008. The change in market share is provided for measured channels which include sales in the food, drug, convenience store and mass merchandiser classes of trade, excluding sales of Wal-Mart Stores, Inc.

Cost of Sales and Gross Margin

The cost of sales increase in the first nine months of 2008 compared with 2007 was primarily associated with higher input and energy costs. Contributing to the increase was the Godrej Hershey Ltd. acquisition, offset slightly by favorable supply chain productivity. Lower business realignment charges included in cost of sales in 2008 compared with 2007 also partially offset cost of sales increases. Business realignment charges of $60.1 million were included in cost of sales in the first nine months of 2008, compared with $88.6 million in the prior year.

The gross margin decline was related to higher input and energy costs, partially offset by favorable price realization, and improved supply chain productivity. The gross margin decline was substantially offset by lower business realignment charges recorded in 2008 compared with 2007.

Selling, Marketing and Administrative

Selling, marketing and administrative expenses increased primarily as a result of administrative and selling expenses and higher advertising and consumer promotion expenses. Higher administrative and selling costs were principally associated with employee-related expenses including higher incentive compensation expense, expansion of our international businesses, including Godrej Hershey Ltd., and increased levels of retail coverage primarily in the United States. Expenses of $6.1 million related to our 2007 business realignment initiatives were included in selling, marketing and administrative expenses in 2008 compared with $8.7 million in 2007.

Business Realignment Initiatives

Business realignment charges of $34.7 million were recorded in the first nine months of 2008 compared with $219.3 million in the same period of 2007. The charges in 2008 were primarily related to fixed asset impairment and plant closure expenses, in addition to employee separation costs, offset partially by gains on sales of fixed assets. Business realignment charges recorded in 2007 primarily related to employee separation costs, fixed asset impairments and the closure of manufacturing facilities, along with the termination of certain contracts.

Income Before Interest and Income Taxes and EBIT Margin

EBIT increased in the first nine months of 2008 compared with the first nine months of 2007 as a result of lower net business realignment charges associated with our business realignment initiatives. Net pre-tax business realignment charges of $101.0 million were recorded in the first nine months of 2008 compared with $316.7 million recorded in the first nine months of 2007, a decrease of $215.7 million. The increase in EBIT resulting from lower business realignment charges was substantially offset by higher selling, marketing and administrative expenses.

EBIT margin increased from 9.2% for the first nine months of 2007 to 11.6% for the first nine months of 2008. Lower net business realignment charges in 2008 improved EBIT margin by 6.1 percentage points. This impact was substantially offset by higher selling, marketing and administrative expense as a percentage of sales, along with a lower gross margin.

Interest Expense, Net

Net interest expense was lower in the first nine months of 2008 than the comparable period of 2007 primarily due to lower interest rates in the first nine months of 2008 as compared with the same period of 2007.

Income Taxes and Effective Tax Rate

Our effective income tax rate was 36.9% for the first nine months of 2008 and was increased by 0.8 percentage points as a result of the effective tax rate associated with business realignment charges recorded during the first nine months. We expect our effective income tax rate for the full year 2008 to be 36.0%, excluding the impact of tax benefits associated with business realignment charges during the year.

Net Income and Net Income Per Share

Net income in the first nine months of 2008 was reduced by $67.4 million, or $0.30 per share-diluted, and in the first nine months of 2007 was reduced by $197.9 million, or $0.85 per share-diluted, as a result of net charges associated with our business realignment initiatives. After considering the impact of business realignment charges in each period, earnings per share-diluted in the first nine months of 2008 decreased $0.24 as compared with the first nine months of 2007.

Liquidity and Capital Resources

Historically, our major source of financing has been cash generated from operations. Domestic seasonal working capital needs, which typically peak during the summer months, generally have been met by issuing commercial paper. Commercial paper may also be issued from time to time to finance ongoing business transactions such as the repayment of long-term debt, business acquisitions and for other general corporate purposes. During the first nine months of 2008, cash and cash equivalents increased by $6.4 million.

Global capital and credit markets, including the commercial paper markets, have recently experienced increased volatility and disruption. Despite this volatility and disruption, we have continued to have full access to the commercial paper market and to generate operating cash flow sufficient to meet our financing needs. We believe that our operating cash flow, together with our unsecured revolving credit agreement, lines of credit and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future, although there can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not impair our ability to access these markets on commercially acceptable terms.

Cash provided from operations, long-term borrowings, and proceeds from the sale of property, plant and equipment were sufficient to fund the repayment of short-term debt of $137.6 million, dividend payments of $197.2 million, and capital additions and capitalized software expenditures of $211.1 million.

Cash used by other assets and liabilities was $193.3 million for the first nine months of 2008 compared with cash used of $181.4 million for the same period of 2007. The increase in the amount of cash used by other assets and liabilities from 2007 to 2008 primarily reflected the impact of business realignment initiatives and the timing of payments for employee benefits.

During the first quarter of 2008, Hershey do Brasil entered into a cooperative agreement with Bauducco. We received cash of $2.0 million from Bauducco and recorded an intangible asset of $13.7 million related to the agreement. We will maintain a 51% controlling interest in Hershey do Brasil.

Proceeds from the sale of manufacturing and distribution facilities under the global supply chain transformation program were $77.2 million in the first nine months of 2008.

A receivable of approximately $17.0 million was included in prepaid expenses and other current assets as of September 28, 2008 and $17.7 million as of December 31, 2007 related to the recovery of damages from a product recall and temporary plant closure in Canada. The decrease primarily resulted from foreign currency exchange rate fluctuations. The product recall during the fourth quarter of 2006 was caused by a contaminated ingredient purchased from an outside supplier with whom we have filed a claim for damages and are currently in litigation.

Interest paid was $87.7 million during the first nine months of 2008 versus $116.0 million for the comparable period of 2007. The decrease in interest paid resulted primarily from the lower interest rate environment. Income taxes paid were $116.0 million during the first nine months of 2008 versus $145.2 million for the comparable period of 2007. The decrease in taxes paid in 2008 was primarily related to the impact of lower annualized taxable income in 2008.

The ratio of current assets to current liabilities increased to 1.1:1.0 as of September 28, 2008 from 0.9:1.0 as of December 31, 2007. The capitalization ratio (total short-term and long-term debt as a percent of stockholders' equity, short-term and long-term debt) was 78% as of September 28, 2008 and December 31, 2007.

Generally, our short-term borrowings are in the form of commercial paper or bank loans with an original maturity of three months or less. In December 2006, we entered into a five-year credit agreement establishing an unsecured revolving credit facility to borrow up to $1.1 billion with the option to increase borrowings by an additional $400 million with the concurrence of the lenders. During the fourth quarter of 2007, the lenders approved a one-year extension to the term of this agreement in accordance with our option under the agreement. We may use these funds for general corporate purposes.

In August 2007, we entered into an unsecured revolving short-term credit agreement to borrow up to an additional $300 million because we believed at the time that seasonal working capital needs, share repurchases and other business activities would cause our borrowings to exceed the $1.1 billion borrowing limit available under our five-year credit agreement. We used the funds borrowed under this new agreement for general corporate purposes, including commercial paper backstop. Although the new agreement was scheduled to expire in August 2008, we elected to terminate it in June 2008 because we determined that we no longer needed the additional borrowing capacity provided by the agreement.

In March 2008, the Company issued $250 million of 5.0% Notes due April 1, 2013 under the WKSI Registration Statement. The net proceeds of this debt issuance were used to repay a portion of the Company's outstanding indebtedness under its short-term commercial paper program.

Outlook

The outlook section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially. Refer to the Safe Harbor Statement below as well as Risk Factors and other information contained in our 2007 Annual Report on Form 10-K for information concerning the key risks to achieving future performance goals.

During the second quarter of 2008, we announced a new consumer-driven business model with a comprehensive approach to deliver sustainable growth over the coming years. Our financial targets include long-term consolidated net sales growth targets in the three to five percent range and increases in earnings per share-diluted, excluding items affecting comparability, at an annual rate of six to eight percent. Items affecting comparability include business realignment and impairment charges and credits, gains or losses on the sale of certain businesses, and certain other items. For more information on items affecting comparability refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2007 Annual Report on Form 10-K.

Our net sales growth will primarily leverage our core portfolio of brands in the United States. We expect to deliver focused, disciplined innovation by improving our price-value equation through package and product upgrades and merchandising improvements resulting in increased price realization. We also expect growth from our international businesses primarily in faster-growing emerging markets.

Increases in earnings per share-diluted, excluding items affecting comparability, will be realized through aggressive productivity improvements and increased price realization, as we face continued commodity market volatility over the next several years. We expect to continue our strong investment both in brand building and in emerging markets.

Our current business environment is characterized by significantly higher commodity costs and increased competitive activity. For the full year 2008, we expect increases in input costs versus 2007 of approximately $110 million, reducing gross margin by over 200 basis points, substantially offset by improved price realization. We will also incur higher costs for increased investment in brand support and selling capabilities in the United States, while we are taking steps to enhance product innovation across our portfolio. We will continue to invest in key international markets, particularly China and India.

To offset higher input costs, we have increased the wholesale prices of our domestic confectionery line and are implementing aggressive productivity and cost savings initiatives in addition to those already underway as part of our global supply chain transformation program. During 2008, we announced two increases in the wholesale prices of our products, however, the impact of these increases on net sales will not be fully realized until early 2009 because the Company has honored previous commitments to planned consumer and customer promotions and merchandising events subsequent to the effective date of the price increases. Price increases and productivity improvements will only partly offset input cost increases and expenses associated with investment spending plans, resulting in lower EBIT and EPS, excluding items affecting comparability.

We expect consolidated net sales to grow 3% to 4% in 2008. We have introduced Hershey's Bliss™ and Starbucks® branded chocolates and Reese's Clusters packaged candy this year to more fully participate in the premium and trade-up segments of the chocolate category in the United States. For the remainder of the Americas, we expect increases in net sales from our businesses in Canada, Mexico, and Brazil, along with incremental sales from the Godrej Hershey Ltd. acquisition.

For 2008, we expect total pre-tax business realignment and impairment charges for our global supply chain transformation program and restructuring our business in Brazil to be in the range of $135 million to $145 million, excluding possible increases in pension settlement charges discussed below. We expect costs of approximately $80 million to be included in cost of sales, primarily for accelerated depreciation, and approximately $10 million to be included in selling, marketing and administrative expenses for project management and start-up costs. The remainder of these costs will be included in business realignment and impairment charges. Total charges associated with our business realignment initiatives in 2008 are expected to reduce earnings per share-diluted by $0.39 to $0.42.

As a result of higher input costs and increased investment in trade and consumer promotional programs and advertising, along with investment in our international businesses, we expect EBIT to decrease in 2008, excluding the impact of business realignment and impairment charges. We expect EBIT margin to decline due to investments in advertising, selling capabilities and building infrastructure for our international businesses.

Business realignment and impairment charges associated with our global supply chain transformation program and the restructuring of our business in Brazil will reduce net income and earnings per share-diluted in 2008. Excluding the impact of these business realignment initiatives, net income is expected to decline reflecting the increased investments in our businesses. As a result, earnings per share-diluted, excluding items affecting comparability, is expected to be towards the lower end of the $1.85 to $1.90 range for 2008.

A reconciliation of GAAP and non-GAAP items to the Company's earnings per share-diluted outlook is as follows:

                                                                         2008

Expected EPS-diluted in accordance with GAAP                          $1.43-1.51
Total business realignment and impairment charges                     $0.39-0.42

We believe that the disclosure of non-GAAP expected EPS-diluted excluding items affecting comparability provides investors with a better comparison of expected year-to-year operating results.