The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and capital resources of Ralcorp Holdings, Inc. This discussion should be read in conjunction with the financial statements under Item 8, especially the segment information in Note 18, and the "Cautionary Statement on Forward-Looking Statements" on page 2. The terms "we," "our," "Company," and "Ralcorp" as used herein refer to Ralcorp Holdings, Inc. and its consolidated subsidiaries. The terms "base business" and "base businesses" as used herein refer to businesses that were owned by Ralcorp (and therefore included in our operating results) for the duration of each of the periods being compared (i.e., excluding businesses acquired since the beginning of the prior fiscal year). We have included financial measures for our base businesses (such as sales growth excluding acquisitions) because they provide useful and comparable trend information regarding the results of those businesses without the effects of incremental results from recent acquisitions.

See Note 1 for a discussion regarding the recently issued accounting standards, including Statement of FASB Interpretation No. 48, Statement of Financial Accounting Standards (FAS) 157, FAS 158, FAS 159, FAS 141(R), FAS 161, FAS 162, and FASB Staff Position 142-3.

Consolidated

Fiscal 2008, like 2007 and 2006, was a challenging year as we continued to face intense raw materials cost pressures in most of our reporting segments. Nonetheless, total segment profit contribution was higher than last year as we continued to benefit from our acquisition strategy while experiencing base business sales growth in most categories. The following table summarizes key data (in millions of dollars, except for percentage data as indicated) for the past three years that we believe is important for you to consider as you read the consolidated results analysis discussions below. In addition, please refer to Note 18 for data regarding net sales and profit contribution by segment.

                                                        2008       2007       2006
 Net earnings                                           167.8       31.9       68.3
 Net sales                                            2,824.4    2,233.4    1,850.2
 Cost of products sold as a percentage of net sales      82.1%      81.5%      80.9%
 SG&A as a percentage of net sales                       11.6%      11.3%      12.2%
 Interest expense                                        54.6       42.3       28.1
 Gain (loss) on forward sale contracts                  111.8      (87.7)      (9.8)
 Gain on sale of securities                               7.1          -        2.6
 Post Foods transition and integration costs              7.9          -          -
 Post Foods inventory valuation adjustment               23.4          -          -
 Restructuring charges                                    1.7         .9         .1
 Effective income tax rate                               36.0%      24.6%      32.8%
 Equity in earnings of Vail Resorts, Inc.                21.7       13.6       10.8

Net Earnings Earnings have been positively impacted by business acquisitions, organic growth, improved earnings from our investment in Vail Resorts, Inc., and gains on the sale of some of our Vail shares, but negatively impacted by higher raw material and freight costs, restructuring and merger transition costs, and interest expense. In addition, non-cash gains and losses due to changes in the fair value of our Vail forward sale contracts caused large swings in net earnings over the past three years. More detailed discussion and analysis of these and other factors follows.

Net Sales Net sales grew $383.2 million (21%) from 2006 to 2007 and $591.0 million (26%) from 2007 to 2008. Most of the increases in net sales is attributable to the timing of business acquisitions. The following table shows the approximate amount of sales derived from recent acquisitions (in millions of dollars).

 Business Acquired       Reporting Segment        Acquisition Date     2008    2007    2006
    Post Foods       Cereal, Crackers & Cookies    August 4, 2008     $  181   $   -   $   -
 Bloomfield Bakers   Cereal, Crackers & Cookies    March 17, 2007        270     130       -
  Cottage Bakery       Frozen Bakery Products     November 11, 2006      133     108       -
    Parco Foods        Frozen Bakery Products     February 7, 2006         *      40      24
  Western Waffles      Frozen Bakery Products     November 15, 2005       92      82      67

* Due to the integration of the Parco Foods business into Ralcorp Frozen Bakery Products, separately identifiable sales data is not available for 2008.

Excluding sales from the fiscal 2006 and 2007 acquisitions, our net sales grew by 6% from 2006 to 2007, and excluding sales from the fiscal 2007 and 2008 acquisitions, our net sales grew by 12% from 2007 to 2008. This base business growth is attributable to both improved selling prices and overall volume gains. We further describe these and other factors affecting net sales in the segment discussions below.

Operating Expenses Cost of products sold as a percentage of net sales has been increasing as input costs rapidly increased, partially offset by the effects of related (but delayed) selling price increases. Key input costs include raw materials (ingredients and packaging) and freight (outbound rates and fuel surcharges). The following table shows the estimated year-over-year gross impacts (in millions) of the higher per unit costs (or rates) of these cost components by reportable segment.

                                             2008 vs 2007               2007 vs 2006
                                           Raw        Outbound        Raw        Outbound
                                        Materials     Freight      Materials     Freight
 Cereals, Crackers & Cookies           $     51.1    $     2.8    $     24.2    $    (2.5)
 Frozen Bakery Products                      40.0          4.7          14.8          (.4)
 Dressings, Syrups, Jellies & Sauces         43.1          1.7          15.9         (1.8)
 Snack Nuts & Candy                          19.7           .7          (7.5)          .2

                                       $    153.9    $     9.9    $     47.4    $    (4.5)

Cost of products sold was also affected by an inventory adjustment related to the acquisition of Post Foods. Finished goods inventory acquired in the acquisition was valued essentially as if Ralcorp were a distributor purchasing the inventory. This resulted in a one-time allocation of purchase price to acquired inventory which was $23.4 million higher than the historical manufacturing cost of the inventory. Post Foods' inventory value and cost of products sold were based on post-acquisition production costs for all product manufactured after the acquisition date. In 2008, all of the $23.4 million (non-cash) inventory valuation adjustment was recognized in cost of products sold, reducing net earnings by approximately $15.0 million after the related tax effect.

Selling, general, and administrative (SG&A) increased as a percentage of net sales primarily related to the acquisition of Post Foods. Due to the nature of Post Foods' branded business, higher advertising and promotion costs were incurred. Excluding Post Foods, SG&A as a percentage of net sales was down to 11.0% in 2008. This base business decrease was primarily the result of selling price increases and sales volume growth, partially offset by higher amortization of intangibles and increased expense from mark-to-market adjustments on deferred compensation liabilities.

Again, refer to the segment discussions below for other factors affecting cost of products sold and SG&A expenses. In addition, refer to our policy regarding cost of products sold in Note 1 because our gross profit percentages may not be comparable to those of other companies who report cost of products sold on a different basis.

Interest Expense, Net Net interest expense has increased primarily as a result of changing debt levels and interest rates, as well as increases in discount amortization related to our Vail forward sale contracts. Discount amortization was $8.7, $8.3, and $3.7 million in fiscal 2008, 2007, and 2006, respectively. Long-term debt rose from $422.0 million at the beginning of fiscal 2006 to $1,668.8 million at the end of fiscal 2008 due to borrowings used to fund the Cottage Bakery and Bloomfield Bakers acquisitions and debt assumed in the Post Foods acquisition. The weighted average interest rate on all of the Company's outstanding debt was 5.3% in 2008, 5.1% in 2007, and 4.8% in 2006. For more information about our long-term debt, see Note 13. For more information about the Vail forward sale contracts, see "Gain on Forward Sale Contracts" and "LIQUIDITY AND CAPITAL RESOURCES" below, as well as Note 6. Refer to Note 10 for information about our agreement to sell our trade accounts receivable on an ongoing basis, including amounts of related discounts reported in SG&A.

Gain/Loss on Forward Sale Contracts Net earnings were affected by non-cash gains and losses on forward sale contracts, executed November 22, 2005, April 19, 2006, and November 6, 2006, related to a total of 4,950,100 of our shares of Vail Resorts, Inc. The contracts include a collar on the Vail stock price and the prepayment of proceeds at a discount (whereby Ralcorp received a total of $140.0 million). Because Ralcorp accounts for its investment in Vail Resorts using the equity method, these contracts, which are intended to hedge the future sale of those shares, are not eligible for hedge accounting. Therefore, gains or losses on the contracts are immediately recognized in earnings. For more information on these contracts, see "LIQUIDITY AND CAPITAL RESOURCES" below, as well as Note 6.

Gain on Sale of Securities In March 2006, we sold 100,000 of our shares of Vail Resorts, Inc. common stock for a total of $3.8 million. The shares had a carrying value of $1.2 million, so the transaction resulted in a $2.6 million gain. In August and September 2008, we sold an additional 368,700 shares for a total of $13.7 million. The shares had a carrying value of $6.6 million, so the transaction resulted in a $7.1 million pre-tax gain.

Post Foods Transition and Integration Costs Ralcorp is incurring significant costs related to transitioning Post Foods into Ralcorp operations, including decoupling the cereal assets of Post Foods from those of other operations of Kraft Foods Inc. (the former owner), developing stand-alone Post Foods information systems, developing independent sales, logistics and purchasing functions for Post Foods, and other significant integration undertakings. While a portion of those costs are capitalized, the expense portion totaled $7.9 million in 2008.

Restructuring Charges In fiscal 2008, we closed our plant in Billerica, MA, and transferred the production to other facilities within the Snack Nuts & Candy segment. In addition to employee termination benefits for approximately 90 employees, charges for this project included a write-off of abandoned property. Annual cost savings from this project (net of certain increased costs and lost sales) are estimated to be approximately $4 million beginning in the fourth quarter of fiscal 2008.

In fiscal 2007, we closed our plant in Blue Island, IL, terminating 86 employees, and moved production to other facilities within the Frozen Bakery Products segment. In addition to employee termination benefits, charges for this project included costs to clean up the facility and a charge to write-off remaining inventories. Annual cost savings from this project (net of certain increased costs and lost sales) are estimated to be approximately $1 million.

For more information regarding these restructuring charges, see Note 3.

Income Taxes Our effective tax rate returned to a normal level in fiscal 2008. The effect of increases in our blended state tax rates was offset by the effect of the increase in the "Domestic Production Activities Deduction", a federal deduction of 6% (3% in 2007 and 2006) of the taxable income from our production activities in the U.S. (i.e., excluding equity method earnings and other gains or losses related to our investment in Vail Resorts, Inc., and excluding our Canadian operations). The 2007 and 2006 effective tax rates were reduced by the effect of approximately $1.9 million and $1.2 million, respectively, related to favorable resolutions of uncertain tax positions and adjustments to the related reserve. The rate in each of the past three years was also reduced by certain Canadian tax benefits. Note that all the tax adjustments discussed above had a greater effect on the rate in 2007 because pre-tax income was significantly reduced by the loss on forward sale contracts. See Note 4 for more information about income taxes.

Equity in Earnings of Vail Resorts, Inc. As noted previously, earnings from our investment in Vail Resorts (NYSE ticker: MTN) improved over the past three years. See Note 5 for more information about this equity investment.

Cereals, Crackers & Cookies

Because the Cereals, Crackers & Cookies segment consists of two of our divisions, we will discuss the year-over-year comparisons separately for fiscal 2008 versus 2007 and fiscal 2007 versus 2006 to improve readability. Volume changes, excluding sales of Bloomfield Bakers and Post Foods, are summarized in the following table (note that co-manufacturing was approximately 6% and 5% of total 2008 sales volume for Ralston Foods and Bremner, respectively):

                                              Sales Volume Change
                                                from Prior Year
                                              2008          2007
                Ralston Foods
                Ready-to-eat (RTE) cereal          9%           -1%
                Hot cereal                         3%            3%
                Snacks                             6%            5%
                Co-manufacturing                  67%           24%
                Other minor categories             7%           -5%
                Total                             10%            1%

                Bremner
                Crackers                          -5%           -8%
                Cookies                            1%            3%
                Co-manufacturing                 -34%           -9%
                Total                             -4%           -4%

Fiscal 2008 vs. Fiscal 2007

Net sales in the Cereals, Crackers & Cookies segment grew $414.8 million (44%) for fiscal 2008, primarily due to sales from Post Foods and the timing of the 2007 acquisition of Bloomfield Bakers. Excluding the incremental sales from the Post Foods and Bloomfield Bakers acquisitions (as shown on page 21), net sales in the segment grew 12%. This growth is attributable to higher prices in both divisions, raised in an effort to offset higher input costs, as well as higher volumes at Ralston Foods. At Ralston Foods, base business net sales were up 15% for the year as a result of improved pricing and higher volumes. Co-manufacturing at Ralston Foods generated approximately $15.4 million of the increase in net sales. At Bremner, the effects of price increases and a favorable product mix were partially offset by overall sales volume declines. The product mix shift to higher-priced items had an impact of approximately $8.7 million on Bremner's net sales.

The segment's profit contribution increased significantly as a result of acquisitions. Results from Post Foods added about $43.3 million (net of $2.2 million of amortization related to certain brands and customer relationships and $7.6 million of depreciation). In addition, the extra 24 weeks of results from Bloomfield Bakers added an estimated $9.2 million of profit. Excluding those acquisition timing impacts, profit contribution improved as the effects of selling price adjustments and cereal volume growth slightly exceeded the negative effects of higher raw material, production, and freight costs, and promotional expenses. Refer to the raw material and freight summary on page 21. The most notable raw material cost increases were in wheat and corn products, soybean oil, oats, and rice.

Fiscal 2007 vs. Fiscal 2006

Net sales in the Cereals, Crackers & Cookies segment grew $157.4 million (20%) for fiscal 2007. Excluding the incremental sales from the Bloomfield acquisition, net sales in the segment grew 4%. This growth is primarily attributable to higher prices, raised in an effort to offset increasing input costs. At Ralston Foods, base business net sales were up 6% for the year. RTE sales were helped by several new product introductions, accounting for approximately $8.5 million for the year, but that effect was partially offset by declines in sales of other products. Co-manufacturing at Ralston Foods generated approximately $10.3 million of the increase in net sales. At Bremner, overall sales volume declines were partially offset by the effects of price increases and a favorable product mix. Most of Bremner's volume shortfalls can be attributed to increased promotional activity by branded competitors, partially offset by incremental sales due to new product lines. Bremner's new product offerings added approximately $6.1 million of net sales, and the product mix shift to higher-priced items had an impact of approximately $5 million.

Results from the acquired Bloomfield business added about $10.2 million to the Cereals, Crackers & Cookies segment's profit contribution since acquisition in March (net of intangible asset amortization of $4.1 million). In the base businesses of the segment, the combined negative effects of higher raw material costs, lower overall volumes, and production cost increases were only partially offset by the favorable effects of increased selling prices and lower freight rates. The most notable cost increases were in wheat and corn products, oats, rice, sugar, and soybean oil.

Frozen Bakery Products

Net sales of the Frozen Bakery Products segment have grown from $442.8 million in 2006 to $619.6 million in 2007 (a 40% increase) and $711.8 million in 2008 (a 15% increase over 2007), largely as a result of acquisitions (as shown on page 21). However, base business sales grew about 12% for 2008 due to the effects of price increases and higher volumes. By sales channel, that sales growth came from a 14% increase in foodservice, a 9% increase in in-store bakery (ISB), and a 17% increase in retail. Comparing 2007 to 2006, base business sales grew about 9% as the result of an 11% increase in foodservice, a 6% increase in ISB, and an 8% increase in retail. Excluding sales of Cottage Bakery (and excluding Parco and Western Waffles in the 2007 to 2006 comparison), sales volumes by channel changed as follows:

                                            Sales Volume Change
                                              from Prior Year
                                            2008          2007
                  Foodservice                    2%           10%
                  In-store bakery (ISB)          2%            5%
                  Retail                        10%            6%
                  Total                          3%            7%

The segment's profit contribution was $50.6 million, $70.4 million, and $63.7 million in fiscal 2006, 2007, and 2008, respectively. Fiscal 2008 profit contribution was reduced by higher costs of raw materials and freight (as shown on page 21), an unfavorable change in product mix, and slightly higher warehousing costs. However, improved pricing and the incremental Cottage Bakery profit due to acquisition timing offset most of those negative effects. The raw materials cost impact primarily related to wheat flour, fats and oils. In addition, the segment's Canadian operations were hurt by the decline in the value of the U.S. dollar relative to the Canadian dollar in fiscal 2008. The change in the average exchange rate increased the U.S. dollar equivalent of the net Canadian dollar expenses by approximately $5.6 million, net of the effects of foreign currency hedging activities. Finally, the extra six weeks of results from Cottage Bakery added an estimated $2.5 million of profit for 2008. In 2007, the increase in profit contribution was due to results from Cottage Bakery (approximately $15.6 million) and the extra 20 weeks of results from Parco and the extra 7 weeks of results from Western Waffles (approximately $7 million combined). Profit contribution from the segment's base businesses was reduced in 2007 by significantly higher raw material costs, slightly higher manufacturing costs, and higher warehousing costs, slightly offset by the base business sales growth. The most significantly affected ingredients were wheat flour, eggs and dairy products, and soybean oil.

Dressings, Syrups, Jellies & Sauces

Our Dressings, Syrups, Jellies & Sauces segment's net sales rose 15% in 2008.
The segment realized improved pricing in both 2007 and 2008, and sales volumes
changed as follows:



                                                 Sales Volume Change
                                                   from Prior Year
                                                 2008          2007
              Table syrups                            8%            4%
              Preserves & jellies                     6%            5%
              Spoonable & pourable dressings         -1%           -3%
              Peanut butter                           9%           24%
              Other minor categories                  0%           -2%
              Total                                   4%            4%

For fiscal 2007, the increase in peanut butter sales volume was primarily due to a February recall of a competitor's products and amounted to approximately $15 million of additional net sales.

The segment's profit contribution also improved in 2008, as the effects of selling price and volume increases exceeded the effects of raw material cost and freight rate increases (shown on page 21). The raw material cost impacts came from peanuts, oils, corn sweeteners, containers, eggs, and fruits. For fiscal 2007 compared to 2006, the effects of selling price increases were slightly greater than the effects of raw material cost increases. Those net benefits were partially offset by higher production overhead costs and the effect of a $1.6 million property tax refund in 2006.

Snack Nuts & Candy

Net sales for the Snack Nuts & Candy segment increased 8% in fiscal 2008 and 6% in fiscal 2007. For 2008, the growth was primarily the result of improved pricing and increased sales volume attributable to increased distribution with certain existing customers and increased product promotions by some others, offset by reduced purchases by some customers as a result of the increased prices. In 2007, the growth was primarily the result of increased sales volume, as the effect of a shift toward higher-priced items was largely offset by an overall net decrease in selling prices. Volume changes were as follows:

                                             Sales Volume Change
                                               from Prior Year
                                             2008          2007
                  Nuts                            1%            5%
                  Candy                          -9%           -3%
                  Other minor categories         29%           93%
                  Total                           1%            5%

For fiscal 2008, the segment's profit contribution was lower by $8.6 million because of the effects of higher raw material costs and freight rates (shown on page 21). Price increases in this segment have trailed rapidly increasing costs. For fiscal 2007, the segment's profit contribution was up $4.7 million, as the effects of favorable raw material costs and volume were only partially offset by the effects of higher production costs, an unfavorable product mix, price decreases, and higher freight rates.

Historically, we have funded operating needs by generating positive cash flows through operations. We expect to continue generating operating cash flows through our mix of businesses and expect that short-term and long-term liquidity requirements will be met through a combination of operating cash flows and strategic use of borrowings under committed and uncommitted credit arrangements. We believe we have sufficient liquidity despite the current disruption of the capital and credit markets. As the national and world-wide financial crisis has worsened in recent months, we have continued to monitor closely events and the financial institutions associated with our credit facilities, including monitoring credit ratings and outlooks, capital raising and merger activity.

Capital resources remained strong at September 30, 2008, with total shareholders' equity of $2,411.5 million and a long-term debt to total capital (which is the total of long-term debt and total shareholders' equity) ratio of 41 percent, compared to corresponding figures for September 30, 2007, of $483.4 million and 61 percent. Working capital, excluding cash and cash equivalents, increased to $241.8 million at September 30, 2008, from $165.3 million at September 30, 2007, primarily as a result of the addition of Post Foods.

Operating Activities

Cash provided by operating activities was $132.0 million, $218.3 million, and $52.8 million in 2008, 2007, and 2006, respectively, affected most significantly by fluctuations in proceeds from our accounts receivable sale program. During fiscal 2008, 2007, and 2006, proceeds increased $4.2 million, increased $45.8 million, and decreased $49.0 million, respectively. This explains $94.8 million of the increase in cash from operating activities from 2006 to 2007 and $41.6 million of the decrease from 2007 to 2008. See "Off-Balance Sheet Financing" below for more information about the sale of receivables. In 2006, operating cash flows were reduced by contributions to our qualified pension plan of $25 million. No such contributions were made in 2007 or 2008. See Note 15 for more information about pension plans, including the funded status. Remaining changes are due to increased sales and fluctuations in other components of working capital, particularly the build up of receivables and payables related to Post Foods. No trade receivables or payables were acquired from Kraft Foods Inc. in the acquisition.

Investing Activities

Net cash paid for business acquisitions totaled $20.3 million in fiscal 2008 (Post Foods), $331.9 million in fiscal 2007 (Cottage Bakery, Bloomfield Bakers, and Pastries Plus), and $110.1 million in fiscal 2006 (Western Waffles and . . .