SUMMARY OF OPERATING RESULTS

Analysis of Selected Items from Our Income Statement


                                                 For the Three Months Ended
                                     April 5,      March 30,         Percent Change
                                       2009           2008         Increase (Decrease)
                                 (in millions except per
                                     share amounts)
  Net Sales                          $ 1,236.0     $  1,160.3                  6.5 %
  Cost of Sales                          795.8          783.9                  1.5 %
  Gross Profit                           440.2          376.4                 16.9 %
  Gross Margin                           35.6%          32.4%
  SM&A Expense                           274.5          249.9                  9.8 %
  SM&A Expense as a percent of sales     22.2%          21.5%
  Business Realignment Charge, net        12.8            4.1                214.3 %
  EBIT                                   152.9          122.4                 24.9 %
  EBIT Margin                            12.4%          10.6%
  Interest Expense, net                   23.9           24.4                (2.0) %
  Provision for Income Taxes              53.1           34.8                 52.8 %
  Effective Income Tax Rate              41.2%          35.5%
  Net Income                         $    75.9     $     63.2                 20.0 %
  Net Income Per Share-Diluted       $     .33     $      .28                 17.9 %

Results of Operations - First Quarter 2009 vs. First Quarter 2008

Price Increases

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 eleven percent increase on our instant consumable, multi-pack and packaged candy lines. These changes approximated a ten percent increase over the entire domestic product line.

In January 2008, we announced an increase in the wholesale prices of our domestic confectionery line, effective immediately. This price increase 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 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.

We implemented these pricing actions to help partially offset increases in input costs, including raw materials, fuel, utilities and transportation.

Net Sales

Net sales for the first quarter of 2009 increased over the comparable period of 2008 principally due to favorable price realization from price increases and increased sales for our international businesses. These increases were offset somewhat by the impact of foreign currency exchange rates and sales volume decreases reflecting the impact of pricing elasticity.

Key Marketplace Metrics

Consumer takeaway decreased 6.7% during the first quarter of 2009 compared with the same period of 2008. However, the first quarter of 2008 benefited from an early Easter season. Excluding the impact of Easter sales, consumer takeaway increased 7.4% during the period. 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.

Cost of Sales and Gross Margin

The cost of sales increase was primarily associated with significantly higher input costs, principally ingredient and energy costs, offset somewhat by improved supply chain productivity and the impact of the sales volume decreases. The cost of sales increase was substantially offset by lower business realignment charges included in cost of sales of $4.1 million in the first quarter of 2009 compared with $25.2 million in the first quarter of 2008.

Approximately two-thirds of the gross margin increase was attributable to the impact of reduced costs for business realignment initiatives recorded in 2009 compared with 2008. The remainder of the gross margin increase in the first quarter of 2009 compared with the first quarter of 2008 resulted from improved net price realization and improved margins for our international businesses. These increases were substantially offset primarily by higher input costs for raw materials and energy.

Selling, Marketing and Administrative

Selling, marketing and administrative expenses were higher due to increases in employee benefits expense, primarily pension expense, and higher incentive compensation and selling expenses. Increased advertising expenses, offset slightly by lower consumer promotions expense, also contributed to the increase.

Expenses of $2.1 million related to our business realignment initiatives were included in selling, marketing and administrative expenses in the first quarter of 2009 compared with $1.4 million in the first quarter of 2008.

Business Realignment Initiatives

Business realignment charges of $12.8 million were recorded in the first quarter of 2009. The charges were primarily related to plant closure expenses, employee separation and severance expenses and fixed asset impairments. Business realignment charges of $4.1 million were recorded in the first quarter of 2008 associated with the 2007 business realignment initiatives. The charges were primarily associated with fixed asset impairments, plant closure expenses, and employee separation and contract termination costs, partially offset by gains on the sale of fixed assets.

Income Before Interest and Income Taxes and EBIT Margin

EBIT increased in the first quarter of 2009 compared with the first quarter of 2008 as a result of higher gross profit, partially offset by higher selling, marketing and administrative expenses. Net pre-tax business realignment charges of $19.0 million were recorded in the first quarter of 2009 compared with $30.7 million recorded in the first quarter of 2008, a decrease of $11.7 million.

EBIT margin increased from 10.6% for the first quarter of 2008 to 12.4% for the first quarter of 2009. The impact of net business realignment charges in 2009 reduced EBIT margin by 1.5 percentage points and in the first quarter of 2008, reduced EBIT margin by 2.6 percentage points. The remainder of the increase was the result of the higher gross margin, partially offset by higher selling, marketing and administrative expense as a percentage of sales.

Interest Expense, Net

Net interest expense was lower in the first quarter of 2009 than the comparable period of 2008 primarily reflecting lower commercial paper borrowings and lower interest rates, offset marginally by lower capitalized interest in 2009 as compared with 2008.

Income Taxes and Effective Tax Rate

Our effective income tax rate was 41.2% for the first quarter of 2009. The impact of tax rates associated with business realignment and impairment charges recorded during the quarter reduced the effective income tax rate by 0.7 percentage points. The higher effective rate in the first quarter of 2009 resulted primarily from the accounting associated with certain tax events during the quarter. We expect our income tax rate for the full year 2009 to be 36.2%, 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 quarter of 2009 was reduced by $10.1 million, or $0.05 per share-diluted, and was reduced by $20.7 million, or $0.09 per share-diluted, in the first quarter of 2008 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 quarter of 2009 increased $0.01 as compared with the first quarter of 2008.

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 three months of 2009, cash and cash equivalents increased by $33.8 million.

Cash provided from operations was sufficient to fund the repayment of short-term debt of $125.3 million, dividend payments of $65.7 million, capital additions and capitalized software expenditures of $37.5 million, a business acquisition of $15.2 million and the repurchase of Common Stock for $9.3 million.

Cash provided by changes in other assets and liabilities was $9.5 million for the first three months of 2009 compared with cash used of $92.7 million for the same period of 2008. The change in the amount of cash provided from (used by) other assets and liabilities from 2008 to 2009 primarily reflected the effect of hedging transactions, the timing of payments associated with selling and marketing programs, the impact of certain commodity transactions, as well as the impact of business realignment initiatives.

In March 2009, the Company completed the acquisition of the Van Houten Singapore consumer business. The acquisition from Barry Callebaut, AG provides the Company with an exclusive license of the Van Houten brand name and related trademarks in Asia and the Middle East for the retail and duty free distribution channels. The purchase price for the acquisition of Van Houten Singapore and the licensing agreement was approximately $15.2 million.

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 and related equipment under the global supply chain transformation program were $0.1 million in the first quarter of 2009 and $44.3 million in the first quarter of 2008.

A receivable of approximately $14.3 million was included in prepaid expenses and other current assets as of April 5, 2009 and $14.5 million as of December 31, 2008 related to the recovery of damages from a product recall and temporary plant closure in Canada. The decrease primarily resulted from 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 $45.8 million during the first three months of 2009 versus $45.3 million for the comparable period of 2008. Income taxes paid were $16.7 million during the first three months of 2009 versus $5.8 million for the comparable period of 2008. The increase in taxes paid in 2009 was primarily related to a higher payment for 2008 income taxes.

The ratio of current assets to current liabilities was 1.1:1.0 as of April 5, 2009 and December 31, 2008. The capitalization ratio (total short-term and long-term debt as a percent of stockholders' equity, short-term and long-term debt) decreased to 83% as of April 5, 2009 from 85% as of December 31, 2008.

Generally, our short-term borrowings are in the form of commercial paper or bank loans with an original maturity of three months or less. Our five-year unsecured revolving credit agreement expires in December 2012. The credit limit is $1.1 billion with an option to borrow an additional $400 million with the concurrence of the lenders.

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 2008 Annual Report on Form 10-K for information concerning the key risks to achieving future performance goals.

For 2009, we continue to expect net sales growth of two to three percent from our pricing actions and core brand sales growth. We expect unit sales volume to decline due to the elasticity effects of price increases implemented during 2008 which will result in higher everyday and promoted prices for consumers. The impact of the declines in unit sales volume is expected to be more than offset by price realization. We expect growth in net sales substantially driven by net price realization, offset somewhat by the impact of unfavorable foreign currency exchange rates.

We continue to expect our commodity cost basket to increase significantly in 2009 compared with 2008. The total increase could be lower than the previous estimate of $175 million if current market prices, particularly for dairy products, continue through the remainder of the year. The decline in the financial markets in 2008 significantly reduced the fair value of our pension plan assets which is expected to result in an increase in 2009 pension expense of approximately $70 million. Despite these increases we plan to continue to invest in our core brands in the U.S. and key international markets to build on our momentum. Specifically, advertising expense is expected to increase by 20 to 25 percent in 2009. These cost increases will be more than offset by higher net pricing, savings from the global supply chain transformation program and on-going operating productivity improvement. We continue to expect an increase in earnings per share-diluted in 2009, excluding business realignment charges; however, due to the significant commodity and pension costs increases, higher levels of core brand investment spending and current macroeconomic conditions, we expect growth in earnings per share-diluted to be at a rate below our long-term objective of six to eight percent.

For 2009, we expect total pre-tax business realignment and impairment charges for our global supply chain transformation program, including the increase in the scope of the program and non-cash pension settlement charges, to be in the range of $85 million to $120 million, or $0.24 to $0.33 per share-diluted.

Outlook for Global Supply Chain Transformation Program

We now expect total pre-tax charges and non-recurring project implementation costs for the global supply chain transformation program of $615 million to $665 million, including estimated pension settlement charges in 2009 and 2010. This includes pension settlement charges recorded in 2007 and 2008 as required in accordance with FASB Statement of Financial Accounting Standards No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (as amended) ("SFAS No. 88"). Pension settlement charges are non-cash charges for the Company. Such charges accelerate the recognition of pension expense related to actuarial gains and losses resulting from interest rate changes and differences in actual versus assumed returns on pension assets. The Company normally amortizes actuarial gains and losses over a period of about 13 years.

The global supply chain transformation program charges recorded in 2007 and 2008 have included pension settlement charges of approximately $24.6 million as employees leaving the Company under the program have been withdrawing lump sums from the defined benefit pension plans. In addition to these charges, incremental SFAS No. 88 pension settlement charges of $40 million to $65 million were added to the GSCT program estimates based upon the current trends of employee withdrawals, with $40 million to $50 million projected for 2009.

Safe Harbor Statement

We are subject to changing economic, competitive, regulatory and technological conditions, risks and uncertainties because of the nature of our operations. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we note the following factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions that we have discussed directly or implied in this report. Many of the forward-looking statements contained in this report may be identified by the use of words such as "intend," "believe," "expect," "anticipate," "should," "planned," "projected," "estimated," and "potential," among others.

The factors that could cause our actual results to differ materially from the results projected in our forward-looking statements include, but are not limited to the following:

· Issues or concerns related to the quality and safety of our products, ingredients or packaging could cause a product recall and/or result in harm to the Company's reputation, negatively impacting our operating results;

· Increases in raw material and energy costs could affect future financial results;

· Price increases may not be sufficient to offset cost increases and maintain profitability;

· Market demand for new and existing products could decline;

· Increased marketplace competition could hurt our business;

· Changes in governmental laws and regulations could increase our costs and liabilities or impact demand for our products;

· Political, economic, and/or financial market conditions in the United States and abroad could negatively impact our financial results;

· International operations could fluctuate unexpectedly and adversely impact our business;

· Future developments related to the investigation by government regulators of alleged pricing practices by members of the confectionery industry could impact our reputation, the regulatory environment under which we operate, and our operating results;

· Pension costs or funding requirements could increase at a higher than anticipated rate;

· Annual savings from initiatives to transform our supply chain and advance our value-enhancing strategy may be less than we expect;

· Implementation of our global supply chain transformation program may not occur within the anticipated timeframe and/or may exceed our cost estimates; and

· Such other matters as discussed in our Annual Report on Form 10-K for 2008.