SUMMARY OF OPERATING RESULTS

Analysis of Selected Items from Our Income Statement


                                       For the Three Months Ended              For the Six Months Ended
                                                             Percent                                Percent
                                                              Change                                 Change
                                    July 5,     June 29,     Increase     July 5,     June 29,      Increase
                                     2009         2008      (Decrease)     2009         2008       (Decrease)
                                                    (in thousands except per share amounts)
Net Sales                          $ 1,171.2   $ 1,105.4          5.9%   $ 2,407.2    $ 2,265.8       6.2%
Cost of Sales                          717.9       722.9        (0.7)%     1,513.7      1,506.8       0.5%
Gross Profit                           453.3       382.5         18.5%       893.5        759.0      17.7%
Gross Margin                           38.7%        34.6%                    37.1%         33.5%
SM&A Expense                           298.7       266.6         12.0%       573.2        516.6      11.0%
SM&A Expense as a percent of sales     25.5%        24.1%                    23.8%         22.8%
Business Realignment Charges, net       37.9        21.8         74.0%        50.7         25.9      96.1%
EBIT                                   116.7        94.1         24.0%       269.6        216.5      24.5%
EBIT Margin                            10.0%         8.5%                    11.2%          9.6%
Interest Expense, net                   22.7        23.6        (3.7)%        46.6         48.0      (2.8)%
Provision for Income Taxes              22.7        29.0       (22.0)%        75.8         63.8      18.7%
Effective Income Tax Rate              24.1%        41.2%                    34.0%         37.9%
Net Income                          $   71.3    $   41.5        71.9%     $  147.2     $  104.7      40.6%
Net Income Per Share-Diluted        $    .31    $    .18        72.2%     $    .64     $    .46      39.1%

Results of Operations - Second Quarter 2009 vs. Second 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 offset increases in input costs, including raw materials, fuel, utilities and transportation, and to support increased investments in advertising and consumer-focused marketing programs.

Net Sales

Net sales for the second quarter of 2009 were higher than the comparable period of 2008 due to favorable price realization, offset somewhat by sales volume decreases primarily in the United States, reflecting the impact of pricing elasticity. Increased sales for our international businesses were more than offset by the impact of foreign currency exchange rates which reduced net sales by approximately 2.1%. The acquisition of the Van Houten Singapore business increased net sales by $2.9 million, or 0.3%.

Key Marketplace Metrics

Consumer takeaway increased 28.8% during the second quarter of 2009 compared with the same period of 2008 due to the timing of the Easter season. Excluding seasonal sales, consumer takeaway increased 5.4%. 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 increased by 0.5 share points during the second quarter of 2009. 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 decreased slightly in the second quarter of 2009 compared with the same period of 2008. The decrease was primarily due to lower sales volume, offset substantially by increased input and supply chain costs, principally reflecting higher pension expense and other overhead costs. Input costs were higher in the second quarter of 2009 versus 2008, primarily reflecting higher raw material and energy costs. Higher supply chain costs were offset somewhat by the impact of supply chain efficiencies and productivity, along with reduced costs for product obsolescence. Business realignment charges of $3.1 million were included in cost of sales in the second quarter of 2009 compared with $15.0 million in the second quarter of 2008.

The increase in gross margin in the second quarter of 2009 compared with the second quarter of 2008 was primarily due to favorable price realization, offset partially by increased supply chain costs and higher input costs. Approximately one-fourth of the gross margin increase was attributable to the impact of reduced costs for business realignment initiatives recorded in 2009 compared with 2008.

Selling, Marketing and Administrative

Higher selling, marketing and administrative costs were principally associated with higher incentive compensation, pension and other employee-related expenses. Increased advertising expense, offset somewhat by a reduction in consumer promotions, also contributed to the increase. Expenses of $1.7 million related to our business realignment initiatives were included in selling, marketing and administrative expenses in the second quarter of 2009 compared with $2.4 million in the second quarter of 2008.

Business Realignment Initiatives

Business realignment charges of $37.9 million were recorded in the second quarter of 2009 associated with the 2007 business realignment initiatives. The charges were primarily related to pension settlement losses, plant closure expenses and fixed asset disposals. Business realignment charges of $21.8 million were recorded in the second quarter of 2008 primarily associated with employee separation costs, pension settlement losses, contract termination costs, fixed asset disposals and plant closure expenses.

Income Before Interest and Income Taxes and EBIT Margin

EBIT increased in the second quarter of 2009 compared with the second quarter of 2008 as a result of higher gross profit, partially offset by increased selling, marketing and administrative expenses and higher business realignment charges. Net pre-tax business realignment charges of $42.7 million were recorded in the second quarter of 2009 compared with $39.3 million recorded in the second quarter of 2008.

EBIT margin increased from 8.5% for the second quarter of 2008 to 10.0% for the second quarter of 2009. The increase was attributable to the higher gross margin, partially offset by higher selling, marketing and administrative expense as a percentage of sales. The impact of net business realignment charges reduced EBIT margin by 3.6 percentage points in both 2009 and 2008.

Interest Expense, Net

Net interest expense was lower in the second quarter of 2009 than the comparable period of 2008 primarily reflecting lower interest rates and lower average debt balances, offset partially by a decrease in capitalized interest.

Income Taxes and Effective Tax Rate

Our effective income tax rate was 24.1% for the second quarter of 2009 compared with 41.2% for the same period of 2008. This decrease reflects the resolution of tax contingencies associated with the 2004, 2005 and 2006 tax years in the second quarter. The impact of tax rates associated with business realignment and impairment charges decreased the effective income tax rate by 4.2 percentage points in 2009 and increased the effective income tax rate by 2.2 percentage points in 2008.

Net Income and Net Income Per Share

Net income in the second quarter of 2009 was reduced by $26.7 million, or $0.12 per share-diluted, and was reduced by $25.5 million, or $0.11 per share-diluted, in the second 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 second quarter of 2009 increased $0.14, or 48.3% as compared with the second quarter of 2008.

Results of Operations - First Six Months 2009 vs. First Six Months 2008

Net Sales

The increase in net sales was attributable to favorable price realization from list price increases, offset somewhat by sales volume decreases, primarily in the United States. Sales volume increases for our international businesses were more than offset by the unfavorable impact of foreign currency exchange rates which reduced net sales by approximately 2.3%. The acquisition of Van Houten Singapore increased net sales by $4.0 million, or 0.2%, in the first six months of 2009.

Key Marketplace Metrics

Consumer takeaway increased 8.9% during the first six months of 2009 compared with the same period 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 improved by 0.5 share points during the first six months of 2009. 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 six months of 2009 compared with 2008 was primarily associated with higher input costs, particularly raw materials and energy, and increased supply chain costs. These increases were substantially offset by the impact of sales volume decreases, improved supply chain efficiencies and productivity, and lower product obsolescence costs. Lower business realignment charges included in cost of sales in 2009 compared with 2008 also substantially offset the cost of sales increases. Business realignment charges of $7.2 million were included in cost of sales in the first six months of 2009, compared with $40.2 million in the prior year.

The gross margin improvement resulted primarily from favorable price realization, offset partially by increased input and supply chain costs. Approximately one-third of the gross margin increase was attributable to the impact of business realignment initiatives recorded in 2009 compared with 2008.

Selling, Marketing and Administrative

Selling, marketing and administrative expenses increased primarily as a result of higher administrative and selling costs, principally associated with higher pension, incentive compensation and other employee-related expenses. An increase in advertising expense was partly offset by lower consumer promotions. Expenses of $3.8 million related to our 2007 business realignment initiatives were included in selling, marketing and administrative expenses in 2009 compared with $3.9 million in 2008.

Business Realignment Initiatives

Business realignment charges of $50.7 million were recorded in the first six months of 2009 compared with $25.9 million in the same period of 2008. The charges in 2009 were primarily related to pension settlement losses, plant

closure expenses, fixed asset impairments and employee separation costs. Business realignment charges recorded in 2008 primarily related to fixed asset impairments and plant closure expenses, in addition to employee separation costs, offset partially by gains on sales of fixed assets.

Income Before Interest and Income Taxes and EBIT Margin

EBIT increased in the first six months of 2009 compared with the first six months of 2008 principally as a result of higher gross profit, offset by increased selling, marketing and administrative expenses and increased business realignment charges. Net pre-tax business realignment charges of $61.7 million were recorded in the first six months of 2009 compared with $69.9 million recorded in the first six months of 2008, a decrease of $8.2 million.

EBIT margin increased from 9.6% for the first six months of 2008 to 11.2% for the first six months of 2009. The increase in EBIT margin was the result of the higher gross margin, partially offset by higher selling, marketing and administrative expense as a percentage of sales. The impact of net business realignment charges in the first six months of 2009 reduced EBIT margin by 2.6 percentage points and in the first six months of 2008 reduced EBIT margin by 3.0 percentage points.

Interest Expense, Net

Net interest expense was lower in the first six months of 2009 than the comparable period of 2008 primarily due to lower interest rates and lower average debt balances, partially offset by a decrease in capitalized interest.

Income Taxes and Effective Tax Rate

Our effective income tax rate was 34.0% for the first six months of 2009 and was decreased by 1.4 percentage points as a result of the effective tax rate associated with business realignment charges recorded during the first six months. We expect our effective income tax rate for the full year 2009 to be approximately 36.0%, excluding the impact of tax rates associated with business realignment charges during the year.

Net Income and Net Income Per Share

Net income in the first six months of 2009 was reduced by $36.8 million, or $0.17 per share-diluted, and was reduced by $46.2 million, or $0.20 per share-diluted, in the first six months 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 six months of 2009 increased $0.15 as compared with the first six months 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 six months of 2009, cash and cash equivalents decreased by $8.3 million.

Cash provided from operations was sufficient to fund the repayment of short-term debt of $237.4 million, dividend payments of $131.5 million, and capital additions and capitalized software expenditures of $73.8 million.

Net cash provided from operating activities was $446.2 million in 2009 and $320.1 million in 2008. The increase was primarily the result of higher net income and the change in cash used by other assets and liabilities which decreased to $34.3 million for the first six months of 2009 from $149.2 million for the same period of 2008. The decrease in the amount of cash used by other assets and liabilities from 2008 to 2009 primarily reflected the impact of business realignment initiatives, employee benefits and payroll, as well as the timing of payments associated with selling and marketing programs. Cash provided from working capital was $146.5 million in 2009 and $146.4 million in 2008.

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 $3.1 million in the first six months of 2009 and $76.9 million in the first six months of 2008.

A receivable of approximately $15.1 million was included in prepaid expenses and other current assets as of July 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 increase 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 $46.7 million during the first six months of 2009 versus $47.3 million for the comparable period of 2008. Income taxes paid were $109.2 million during the first six months of 2009 versus $95.0 million for the comparable period of 2008. The increase in taxes paid in 2009 was primarily related to the impact of higher annualized taxable income in 2009.

The ratio of current assets to current liabilities increased to 1.2:1.0 as of July 5, 2009 from 1.1:1.0 as of 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 79% as of July 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 now expect full year net sales growth to be within our three to five percent long-term objective from our pricing actions and core brand sales growth. We expect growth in net sales substantially driven by net price realization and our brand-building initiatives, offset somewhat by the impact of unfavorable foreign currency exchange rates. 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 decline in sales volume will be mitigated somewhat by our brand-building initiatives, as the impact of the declines in unit sales volume is expected to be more than offset by price realization.

We continue to expect our commodity cost basket to increase significantly in 2009 compared with 2008, although the total increase is expected to be less than our initial estimate of $175 million. We currently do not expect material price inflation for dairy products during 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 now expected to increase by 40 to 45 percent in 2009 and we expect to make further investments in category management and global go-to-market capabilities. 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; with growth in adjusted earnings per share-diluted to be slightly above 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 losses, 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 $640 million to $665 million, including estimated pension settlement losses in 2009 and

2010. This includes pension settlement losses 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 losses 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 included pension settlement losses of approximately $24.6 million as employees leaving the Company under the program have been withdrawing lump sums from the defined benefit pension plans. An additional $30.6 million in pension settlement losses were recorded in the first six months of 2009. In addition to these charges, incremental SFAS No. 88 pension settlement losses of $15 million to $34 million were added to the GSCT program estimates based upon the current trends of employee withdrawals, with $15 million to $20 million projected for 2009.

Subsequent Event

Arnold G. Langbo and Charles B. Strauss resigned from the Board of Directors of The Hershey Company effective August 10, 2009. Following a decision by the Board of Directors to establish a Finance and Risk Management Committee that also delegated to such Committee responsibilities with respect to reviewing and monitoring the Company's annual plan and certain strategic matters including but not limited to acquisitions and dispositions, Messrs. Langbo and Strauss decided to resign from the Board of Directors based on their views, expressed before the committee was established, that retaining responsibility for these matters with the Board of Directors as a whole was a better corporate governance structure for the Company.

Mr. Langbo served as chair of the Compensation and Executive Organization Committee of the Board of Directors and was a member of the Executive Committee of the Board at the time of his resignation. Mr. Strauss was chair of the Audit Committee of the Board of Directors and was a member of the Compensation and Executive Organization Committee and the Executive Committee of the Board at the time of his resignation. The Board of Directors has appointed Robert F. Cavanaugh, a current independent member of the Board, as chair of the Compensation and Executive Organization Committee and David L. Shedlarz, a current independent member of the Board, as chair of the Audit Committee. Pursuant to their appointments as chairs of Board committees, Messrs. Cavanaugh and Shedlarz will also become members of the Executive Committee.

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 or may result in sales volume declines associated with pricing elasticity;

· 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;

. . .