Overview

The Company franchises and operates McDonald's restaurants. Of the 31,677 restaurants in 118 countries at September 30, 2008, 21,183 are operated by franchisees (including 2,870 operated by developmental licensees), 3,855 are operated by affiliates (primarily in Japan) and 6,639 are operated by the Company. Under our conventional franchise arrangement, franchisees provide a portion of the required capital by initially investing in the equipment, signs, seating and dιcor of their restaurant businesses, and by reinvesting in the business over time. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. This ensures long-term occupancy rights, helps control related costs and improves alignment with franchisees. Under our developmental license arrangement, licensees provide capital for the entire business, including the real estate interest, while the Company generally has no capital invested.

We view ourselves primarily as a franchisor and continually review our restaurant ownership mix (that is, our mix among Company-operated, franchised - conventional or developmental license, and affiliated) to deliver a great customer experience and drive profitability. In most cases, franchising is the best way to achieve both goals. Although direct restaurant operation is more capital-intensive relative to franchising and results in lower restaurant margins as a percent of revenues, Company-operated restaurants are important to our success in both mature and developing markets. In our Company-operated restaurants, and in collaboration with our franchisees, we further develop and refine operating standards, marketing concepts and product and pricing strategies, so that only those that we believe are most beneficial are introduced Systemwide. In addition, we firmly believe that owning restaurants is paramount to being a credible franchisor and essential to providing Company personnel with restaurant operations experience. Our Company-operated business also helps to facilitate strategic changes in restaurant ownership.

Revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees and affiliates. These fees primarily include rent and/or royalties that are based on a percent of sales, with specified minimum rent payments, along with initial fees. Fees vary by type of site, amount of Company investment and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20-year terms.

The business is managed as distinct geographic segments. Significant reportable segments include the United States (U.S.), Europe, and Asia/Pacific, Middle East and Africa (APMEA). In addition, throughout this report we present "Other Countries & Corporate" that includes operations in Canada and Latin America, as well as Corporate activities. The U.S. and Europe segments account for nearly 35% and 45% of total revenues, respectively.

In second quarter 2008, the Company sold its minority ownership interest in U.K.-based Pret A Manger. In connection with the sale, the Company received cash proceeds of $229.4 million and recognized a nonoperating pretax gain of $160.1 million.

In August 2007, the Company sold its investment in Boston Market and as a result, Boston Market's results of operations and transaction gain have been reflected in discontinued operations. In connection with the sale, the Company received net proceeds of approximately $250 million and recorded a gain of $68.6 million after tax.

Strategic Direction and Financial Performance

Since implementing the customer-centered Plan to Win in 2003, the Company remains focused on being better, not just bigger. Our strategic alignment behind this plan has created better McDonald's experiences through the execution of multiple initiatives surrounding the five drivers of exceptional customer experiences - people, products, place, price and promotion. While our focus has remained the same, we have adapted our initiatives based on the changing needs and preferences of our customers. These initiatives have increased our consumer relevance and contributed to sales and guest counts worldwide increasing every year since 2003. In the third quarter and first nine months of 2008, our unwavering commitment to providing an outstanding restaurant experience to every customer, every time, drove comparable sales and guest count momentum along with profitability growth in every area of the world.

In the U.S., the business continues to increase sales and guest counts by featuring chicken products, core menu classics and value-based beverages that offer menu variety and everyday affordability that resonate with consumers. As a result, comparable sales increased 4.7% for the quarter and 3.7% for the nine months.

Europe generated strong top-line sales in virtually every market, posting a comparable sales increase of 8.2% for the quarter and 8.8% for the nine months. Alignment behind Europe's key priorities of enhancing local relevance, upgrading the customer and employee experience and building brand transparency continues to deliver robust results for the segment.

In APMEA, comparable sales increased 7.8% for the quarter and 8.6% for the nine months, reflecting broad-based strength across the segment. Throughout APMEA, the growth drivers of convenience, core menu extensions, breakfast, value and operations excellence are continuing to deliver results.

We remain committed to returning value to shareholders through share repurchases and dividends. For 2007 through 2009, the Company expects to return $15 billion to $17 billion to shareholders, subject to business and market conditions. In the third quarter 2008, we repurchased 16.9 million shares of McDonald's stock for $1.0 billion, bringing the total repurchases for the nine months of 2008 to 67.3 million shares or $3.8 billion. During the third quarter 2008, we paid a quarterly dividend of $0.375 per share or $417.6 million, bringing the total dividends paid for the nine months of 2008 to $1.3 billion. Also during the third quarter, the Company declared a fourth quarter 2008 dividend of $0.50 per share, reflecting an increase of 33% over the third quarter. For the full year 2007 and first nine months of 2008 combined, the Company returned $10.8 billion to shareholders.

We also continue to enhance the mix of franchised and Company-operated restaurants, including refranchising certain Company-operated restaurants and executing our developmental license strategy, to maximize long-term brand performance and returns. The Company expects to refranchise 1,000 to 1,500 Company-operated restaurants by the end of 2010, primarily in its major markets. In the first nine months of 2008, the Company refranchised about 425 restaurants.

In August 2007, the Company completed the sale of its businesses in Brazil, Argentina, Mexico, Puerto Rico, Venezuela and 13 other countries in Latin America and the Caribbean, which totaled 1,571 restaurants, to a developmental licensee organization. The Company refers to these markets as "Latam." Under the new ownership structure, the Company receives only royalties in these markets instead of a combination of Company-operated sales and franchised rents and royalties.

Operating Highlights Included:

• Global comparable sales increased 7.1% for the quarter and 6.8% for the nine months

• Growth in consolidated Company-operated and franchised restaurant margins continued for the quarter and nine months

• Net income per share from continuing operations was $1.05 for the quarter, a 27% increase (22% in constant currencies) and $2.89 for the nine months, a 33% increase (26% in constant currencies), after adjusting for the impact of the 2007 Latam transaction. Net income from continuing operations for the nine months 2008 includes a $0.09 per share benefit from the sale of the Company's interest in Pret A Manger.

• During the nine months, the Company repurchased $3.8 billion or 67.3 million shares of its stock and paid quarterly dividends totaling $1.3 billion

• Cash provided by operations increased $855.3 million, or 24%, to $4.4 billion for the nine months

Outlook

While the Company does not provide specific guidance on net income per share, the following information is provided to assist in forecasting the Company's future results.

• Changes in Systemwide sales are driven by comparable sales and net restaurant unit expansion. The Company expects net restaurant additions to add slightly more than 1 percentage point to 2008 Systemwide sales growth (in constant currencies), most of which will be due to the 503 net traditional restaurants added in 2007.

• The Company does not generally provide specific guidance on changes in comparable sales. However, as a perspective, assuming no change in cost structure, a 1 percentage point increase in U.S. comparable sales would increase annual net income per share by about 2.5 cents. Similarly, an increase of 1 percentage point in Europe's comparable sales would increase annual net income per share by about 2.5 cents.

• With about 75% of McDonald's grocery bill comprised of 10 different commodities, a basket of goods approach is the most comprehensive way to look at the Company's commodity costs. For the full year 2008, the total basket of goods is expected to rise about 7% in the U.S. and about 8% in Europe. Some volatility may be experienced between quarters in the normal course of business.

• The Company expects full-year 2008 selling, general & administrative expenses to decline, in constant currencies, although fluctuations may be experienced between the quarters.

• Based on current interest and foreign currency exchange rates, the Company expects interest expense in 2008 to increase approximately 30% compared with 2007, while 2008 interest income is expected to decrease about 30% compared with 2007. In first quarter 2008, the Company issued certain debt to take advantage of favorable market conditions to pre-fund a portion of its debt retired in third quarter 2008.

• A significant part of the Company's operating income is generated outside the U.S., and about 40% of its total debt is denominated in foreign currencies. Accordingly, earnings are affected by changes in foreign currency exchange rates, particularly the Euro and the British Pound. If the Euro and the British Pound both move 10% in the same direction compared with 2007, the Company's annual net income per share would change by about 8 cents to 9 cents.

• The Company expects the effective income tax rate for the full-year 2008 to be approximately 29% to 31%, although some volatility may be experienced between the quarters in the normal course of business.

• The Company expects capital expenditures for 2008 to be approximately $2 billion. About half of this amount will be reinvested in existing restaurants while the rest will primarily be used to open 1,000 restaurants (950 traditional and 50 satellites). The Company expects net additions of about 600 restaurants (700 net traditional additions and 100 net satellite closings). These restaurant numbers include new unit openings in affiliate and developmental license markets, such as Japan and those in Latin America, where the Company invests no capital.

• For 2007 through 2009, the Company expects to return $15 billion to $17 billion to shareholders through share repurchases and dividends, subject to business and market conditions. For the full year 2007 and first nine months of 2008 combined, the Company returned $10.8 billion to shareholders.

• The Company continually reviews its restaurant ownership structures to maximize cash flow and returns and to enhance local relevance. The Company expects to optimize its restaurant ownership mix by refranchising 1,000 to 1,500 Company-operated restaurants by the end of 2010, primarily in its major markets, and by continuing to utilize its developmental license strategy. In the first nine months of 2008, the Company refranchised about 425 restaurants, primarily in its major markets.

The Following Definitions Apply to These Terms as Used Throughout This Form 10-Q:

• Constant currency results exclude the effects of foreign currency translation and are calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results in constant currencies and bases certain incentive compensation plans on these results because they believe this better represents the Company's underlying business trends.

• Systemwide sales include sales at all restaurants, whether operated by the Company, by franchisees or by affiliates. While sales by franchisees and affiliates are not recorded as revenues by the Company, management believes the information is important in understanding the Company's financial performance because it is the basis on which the Company calculates and records franchised and affiliated revenues and is indicative of the financial health of our franchisee base.

• Comparable sales represent sales at all restaurants and comparable guest counts represent customer transactions at all restaurants, including those operated by the Company, franchisees and affiliates, in operation at least thirteen months including those temporarily closed. Comparable sales exclude the impact of currency translation. Some of the reasons restaurants may be temporarily closed include reimaging or remodeling, rebuilding, road construction and natural disasters. Management reviews the increase or decrease in comparable sales and comparable guest counts compared with the same period in the prior year to assess business trends.

CONSOLIDATED OPERATING RESULTS





Dollars in millions, except per share            Quarter Ended                     Nine Months Ended
data                                           September 30, 2008                 September 30, 2008
                                                          % Increase /                        % Increase /
                                           Amount          (Decrease)          Amount          (Decrease)
Revenues
Sales by Company-operated restaurants     $ 4,411.1                  3       $ 12,705.9                  2
Revenues from franchised and
affiliated restaurants                      1,856.2                 14          5,251.5                 16
Total revenues                              6,267.3                  6         17,957.4                  5
Operating costs and expenses
Company-operated restaurant expenses        3,587.2                  3         10,462.0                  1
Franchised restaurants - occupancy
expenses                                      316.9                 10            932.0                 10
Selling, general & administrative
expenses                                      582.1                  2          1,733.2                  2
Impairment and other charges, net                                  n/m              1.0                n/m
Other operating (income) expense, net         (42.6 )              (66 )         (111.5 )              n/m
Total operating costs and expenses          4,443.6                  2         13,016.7                (10 )
Operating income                            1,823.7                 20          4,940.7                 96
Interest expense                              131.6                 34            406.4                 37
Nonoperating (income) expense, net             (6.8 )               75            (66.5 )              (10 )
Gain on sale of investment                                                       (160.1 )              n/m
Income from continuing operations
before provision for income taxes           1,698.9                 17          4,760.9                n/m
Provision for income taxes                    507.6                 13          1,433.0                 17
Income from continuing operations           1,191.3                 19          3,327.9                n/m
Income from discontinued operations                                n/m                                 n/m
Net income                                $ 1,191.3                 11       $  3,327.9                n/m
Income per common share-basic:
Continuing operations                     $    1.07                 26       $     2.94                n/m
Discontinued operations                                            n/m                                 n/m
Net income                                $    1.07                 19       $     2.94                n/m
Income per common share-diluted:
Continuing operations                     $    1.05                 27       $     2.89                n/m
Discontinued operations                                            n/m                                 n/m
Net income                                $    1.05                 18       $     2.89                n/m

n/m Not meaningful

In addition to the reported consolidated operating results for the quarter and nine months ended September 30, 2007, consolidated results for these periods are presented throughout this report excluding the impact of the Latam transaction. Management believes the Latam transaction and the associated charge are not indicative of ongoing operations due to the size and scope of the transaction. Management believes that the adjusted results better reflect the underlying business trends relevant to the periods presented.

The following tables present reconciliations of the key consolidated operating results for the quarters and nine months ended September 30, 2008 and 2007 to the operating results excluding the net impact of the impairment charge from the Latam transaction.

                                                                                                                               Adjusted
                                                                                            2007                                 % Inc
                                                                                       Excluding                Currency       Excluding
                                                                    Latam                  Latam   Adjusted    Translation     Currency
Quarters ended September 30,                2008        2007*    Transaction*        Transaction    % Inc        Benefit      Translation
Revenues                              $  6,267.3   $  5,900.9                      $     5,900.9          6   $       204.8             3
Operating income (loss)                  1,823.7      1,524.8   $        (45.5 )         1,570.3         16            73.5            11
Income from continuing operations        1,191.3      1,003.7              3.9             999.8         19            44.7            15
Income from discontinued operations                      67.5                               67.5        n/m                           n/m
Net income                               1,191.3      1,071.2              3.9           1,067.3         12            44.7             7
Income per share from continuing
operations-diluted                          1.05         0.83                -              0.83         27            0.04            22
Income per share from discontinued
operations-diluted                                       0.06                               0.06        n/m                           n/m
Net income per share-diluted                1.05         0.89             0.01              0.88         19            0.04            15

                                                                                                                               Adjusted
                                                                                            2007                                 % Inc
                                                                                       Excluding                Currency       Excluding
                                                                    Latam                  Latam   Adjusted    Translation     Currency
Nine months ended September 30,             2008       2007**   Transaction**        Transaction    % Inc        Benefit      Translation
Revenues                              $ 17,957.4   $ 17,033.0                      $    17,033.0          5   $       925.2             -
Operating income (loss)                  4,940.7      2,524.4   $     (1,639.9 )         4,164.3         19           282.0            12
Income (loss) from continuing
operations                               3,327.9      1,061.8         (1,577.7 )         2,639.5         26           178.8            19
Income from discontinued operations                      60.1                               60.1        n/m                           n/m
Net income (loss)                        3,327.9      1,121.9         (1,577.7 )         2,699.6         23           178.8            17
Income (loss) per share from
continuing operations-diluted               2.89         0.87            (1.30 )            2.17         33            0.15            26
Income per share from discontinued
operations-diluted                                       0.05                               0.05        n/m                           n/m
Net income (loss) per share-diluted         2.89         0.92            (1.30 )            2.22         30            0.15            23

n/m Not meaningful

* Included impairment and other charges of $52.7 million, partly offset by a benefit of $7.2 million due to eliminating depreciation on the assets in Latam in mid-April 2007, and a tax benefit of $49.4 million.

** Included impairment and other charges of $1,664.6 million, partly offset by a benefit of $24.7 million due to eliminating depreciation on the assets in Latam in mid-April 2007, and a tax benefit of $62.2 million.

Net Income and Diluted Net Income per Common Share

For the third quarter and nine months ended September 2008, net income was $1,191.3 million and $3,327.9 million, respectively, and diluted net income per share was $1.05 and $2.89, respectively. Results for the nine months benefited by a $109.0 million or $0.09 per share after tax gain on the sale of the Company's minority interest in Pret A Manger.

For the third quarter 2007, net income was $1,071.2 million and diluted net income per share was $0.89. In August 2007, the Company sold its investment in Boston Market. As a result, Boston Market's results of operations and transaction gain are reflected as income from discontinued operations of $67.5 million or $0.06 per share. Income from continuing operations was $1,003.7 million or $0.83 per share. These results included a net benefit of $3.9 million related to the Company's sale of its business in Latam to a developmental licensee.

For the first nine months of 2007, net income was $1,121.9 million and diluted net income per share was $0.92, which included income from continuing operations of $1,061.8 million or $0.87 per share and $60.1 million or $0.05 per share of income from discontinued operations related to Boston Market. The 2007 results included $1,577.7 million or $1.30 per share of net expense related to the Latam transaction. This reflects an impairment charge of $1.32 per share, partly offset by a $0.02 per share benefit due to eliminating depreciation in mid-April 2007 on the assets in Latam. Excluding the impact of the Latam transaction, income from continuing operations was $2,639.5 million and diluted income per share from continuing operations was $2.17.

During the third quarter 2008, the Company repurchased 16.9 million shares of its stock for $1.0 billion, bringing the total repurchases for the nine months of 2008 to 67.3 million shares or $3.8 billion. During the third quarter 2008, the Company paid a quarterly dividend of $0.375 per share or $417.6 million, bringing the total dividends paid for the nine months of 2008 to $1.3 billion. The Company also declared a fourth quarter 2008 dividend of $0.50 per share, reflecting an increase of 33% over the third quarter.

Conversion of Certain Markets to Developmental License

In August 2007, the Company completed the sale of its businesses in Brazil, Argentina, Mexico, Puerto Rico, Venezuela and 13 other countries in Latin America and the Caribbean, which totaled 1,571 restaurants, to a developmental licensee organization. Under a developmental license, a local licensee owns the business, including the real estate, and uses his/her capital and local knowledge to build the McDonald's Brand and optimize sales and profitability over the long term. Under this arrangement, the Company collects a royalty, which varies by market, based on a percent of sales, but does not invest any capital. As a result of the Latam transaction, the Company receives only royalties in these markets instead of a combination of Company-operated sales and franchised rents and royalties.

The buyers of the Company's operations in Latam have entered into a 20-year master franchise agreement that requires the buyers, among other obligations, to pay monthly royalties commencing at a rate of approximately 5% of gross sales of the restaurants in these markets, substantially consistent with market rates for similar license arrangements.

Based on approval by the Company's Board of Directors on April 17, 2007, the Company concluded Latam was "held for sale" as of that date in accordance with the requirements of SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. As a result, the Company recorded an impairment charge of approximately $1.6 billion in the second quarter of 2007, substantially all of which was noncash. In the third quarter 2007, the Company recorded an additional $53 million of charges in connection with the transaction. The total charges for the nine months included the difference between the net book value of the Latam business and cash proceeds, less costs of disposal. This loss in value was primarily due to a historically difficult economic environment coupled with volatility experienced in many of the markets included in this transaction. The charges also included historical foreign currency translation losses recorded in shareholders' equity. The Company recorded a tax benefit of $62 million in connection with this transaction. The tax benefit was minimal for the nine months 2007 due to the Company's inability to utilize most of the capital losses generated by this transaction. As a result of meeting the "held for sale" criteria, the Company ceased recording depreciation expense with respect to Latam effective April 17, 2007. In connection with the sale, the Company agreed to indemnify the buyers for certain tax and other claims, certain of which are reflected as liabilities on McDonald's consolidated balance sheet, totaling $169.1 million at September 30, 2008 and $179.2 million at December 31, 2007. . . .