Description of the Company

We manufacture and market packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products. We have operations in more than 70 countries and sell our products in approximately 150 countries.

Executive Summary

This executive summary provides significant highlights of the Discussion and Analysis that follows.

• Net revenues decreased 5.7% to $9.8 billion in the third quarter of 2009 and decreased 6.0% to $29.4 billion in the first nine months of 2009 as compared to the same periods in the prior year.

• Diluted EPS decreased 39.6% to $0.55 in the third quarter of 2009 and decreased 11.9% to $1.56 in the first nine months of 2009 as compared to the same periods in the prior year.

• Diluted EPS from continuing operations increased 61.8% in the third quarter of 2009 and increased 36.8% in the first nine months of 2009 as compared to the same periods in the prior year.

• On August 4, 2008, we completed the split-off of the Post cereals business. Accordingly, the prior period results of the Postcereals business were reflected as discontinued operations on the condensed consolidated statement of earnings.

• Our $5.0 billion share repurchase authority expired on March 30, 2009. Prior to the expiration, we repurchased 130.9 million shares for $4.3 billion under the program. We have not repurchased any shares in 2009.

Discussion and Analysis

Items Affecting Comparability of Financial Results

Divestitures

Post Cereals Split-off:

On August 4, 2008, we completed the split-off of the Post cereals business into Ralcorp Holdings, Inc., after an exchange with our shareholders. Accordingly, the prior period results of the Post cereals business were reflected as discontinued operations on the condensed consolidated statement of earnings.

Summary results of operations for the Post cereals business for the three and nine months ended September 30, 2008 were as follows:

                                               For the Three        For the Nine
                                               Months Ended         Months Ended
                                               September 30,        September 30,
                                                   2008                 2008
                                                   (in millions; as revised)

     Net revenues                             $            90      $           666


     (Loss) / earnings before income taxes                 (7 )                189
     Benefit / (provision) for income taxes                 3                  (70 )
     Gain on discontinued operations,
     net of income taxes                                  849                  849

     Earnings and gain from discontinued
     operations, net of income taxes          $           845      $           968

Other Divestitures:

In September 2009, we reached an agreement to divest a snack bars operation in the U.S. The transaction is subject to customary closing conditions, including regulatory approvals, and we expect it to close in the fourth quarter of 2009 at a small gain.

During the first nine months of 2009, we received $6 million in proceeds and recorded pre-tax losses of $17 million, or $0.01 per diluted share, on the divestitures of a juice operation in Brazil and a plant in Spain.

During the first nine months of 2008, we recorded pre-tax losses of $93 million, or $0.04 per diluted share, primarily related to the divestitures of several operations in Spain. In aggregate, we received $38 million in net proceeds from divestitures, which included $38 million of disbursements made for transaction fees related to the split-off of the Post cereals business. Separately, we divested a biscuit operation in Spain and a trademark in Hungary that we previously acquired as part of the acquisition of the global LU biscuit business of Groupe Danone S.A. ("LU Biscuit"). Accordingly, we reflected the impacts as adjustments to the purchase price allocations.

The operating results of these divestitures were not material to our financial statements in any of the periods presented, neither individually nor in the aggregate.

Restructuring Costs

2004 - 2008 Restructuring Program:

In 2008, we completed our five-year restructuring program (the "Restructuring Program"). The Restructuring Program's objectives were to leverage our global scale, realign and lower our cost structure, and optimize capacity. As part of the Restructuring Program, we:

• incurred $3.0 billion in pre-tax charges reflecting asset disposals, severance and implementation costs;

• announced the closure of 35 facilities and announced the elimination of approximately 18,800 positions;

• will use cash to pay for $2.0 billion of the $3.0 billion in charges; and

• anticipate reaching cumulative, annualized savings of $1.4 billion for the total program.

In the second quarter of 2009, we sold a plant in Spain that we previously announced we would close under our Restructuring Program. Accordingly, we reversed $35 million in Restructuring Program charges, primarily related to severance (resulting in a favorable impact to diluted EPS of $0.02), and recorded a $17 million loss on the divestiture of the plant (resulting in an unfavorable impact to diluted EPS of $0.01) in the second quarter of 2009. The reversal of the Restructuring Program costs, which affected the segment operating income of the Kraft Foods Europe segment, was recorded within asset impairment and exit costs. We incurred charges under the Restructuring Program of $90 million, or $0.04 per diluted share, during the three months and $309 million, or $0.14 per diluted share, during the nine months ended September 30, 2008. Since the inception of the Restructuring Program, we have paid cash for $1.6 billion of the $2.0 billion in expected cash payments, including $123 million paid in the first nine months of 2009. At September 30, 2009, we had an accrual of $366 million, and we had eliminated approximately 16,500 positions under the Restructuring Program.

Under the Restructuring Program, we recorded asset impairment and exit costs of $68 million during the three months and $251 million during nine months ended September 30, 2008. We recorded implementation costs of $22 million during the three months and $58 million during the nine months ended September 30, 2008 within cost of sales and marketing, administration and research costs. Implementation costs are directly attributable to exit costs; however, they do not qualify for treatment under guidance related to accounting for costs associated with exit or disposal activities. These costs primarily included the discontinuation of less profitable product lines, incremental expenses related to the closure of facilities, the Electronic Data Systems transition and the reorganization of our European operations. Management believes the disclosure of implementation charges provides readers of our financial statements greater transparency to the total costs of our Restructuring Program.

Asset Impairment Charges

In October 2008, we divested a Nordic and Baltic snacks operation. We recorded an asset impairment charge of $55 million, or $0.03 per diluted share, in the third quarter of 2008 in connection with the anticipated divestiture. This charge primarily included the write-off of associated goodwill of $34 million and property, plant and equipment of $16 million, and was recorded within asset impairment and exit costs.

Our effective tax rate was 24.6% for the third quarter of 2009 and 29.9% for the first nine months of 2009. Our third quarter 2009 effective tax rate included net tax benefits of $143 million, primarily due to an agreement we reached with the IRS on specific matters, settlements with various foreign and state tax authorities, and the expiration of the statute of limitations in various jurisdictions. For the first nine months of 2009, our effective tax rate included net tax benefits of $205 million primarily due to an agreement we reached with the IRS on specific matters, settlements with various foreign and state tax authorities, and the expiration of the statute of limitations in various jurisdictions.

Our effective tax rate was 28.3% for the third quarter of 2008 and 32.3% for the first nine months of 2008. Our effective tax rate included net tax benefits of $23 million in the third quarter of 2008, primarily related to the impact of a return-to-provision adjustment and a reconciliation of our inventory of deferred tax items that resulted in a write-down of our net deferred tax liabilities. For the first nine months of 2008, our effective tax rate included net tax benefits of $102 million, primarily related to the tax impact from the divestitures of several operations in Spain, the resolution of state tax audits and the resolution of outstanding items in our international operations.