KELLOGG COMPANY TWO THOUSAND AND EIGHT ANNUAL REPORT WHAT MAKES ® ™ At Kellogg Company, we have: • For more than a century, Kellogg Company has been dedicated to producing great-tasting, high-quality, nutritious foods that consumers around the world know and love. With 2008 sales of nearly $13 billion, Kellogg Company is the world’s leading producer of cereal, as well as a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, frozen waffles and vegetarian foods. We market more than 1,500 products in over 180 countries, and our brands include such trusted names as Kellogg’s, Keebler, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Rice Krispies, Morningstar Farms, Famous Amos, Special K, All-Bran, Frosted Mini-Wheats, Club, Kashi, Bear Naked, Just Right, Vector, Guardian, Optivita, Choco Trésor, Frosties, Sucrilhos, Vive, Muslix and Zucaritas. Kellogg products are manufactured in 19 countries around the world. We enter 2009 with a rich heritage of success and a steadfast commit- ment to continuing to deliver sustainable and dependable growth in the future. TWO 2008 ANNUAL REPORT A commitment ™ to sustainable and dependable GROWTH ™ 2008 FINANciaL HigHLigHTS / DELIVERING STRONG RESULTS (dollars in millions, except per share data) 2008 Change 2007 Change 2006 Change Net sales $ 12,822 9% $ 11,776 8% $ 10,907 7% Gross profit as a % of net sales 41.9 % (2.1 pts) 44.0 % (0.2 pts) 44.2 % (0.7 pts) Operating profit 1,953 5% 1,868 6% 1,766 1% Net earnings 1,148 4% 1,103 10% 1,004 2% Net earnings per share Basic 3.01 8% 2.79 10% 2.53 6% Diluted 2.99 8% 2.76 10% 2.51 6%(b) Cash flow (net cash provided by operating activities, reduced by capital expenditure)(a) 806 (22%) 1,031 8% 957 24% Dividends per share $ 1.30 8% $ 1.20 5% $ 1.14 8% (a) Cash flow is defined as net cash provided by operating activities, reduced by capital expenditures. The Company uses this non-GAAP financial measure to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities and share repurchase. Refer to Management’s Discussion and Analysis within Form 10-K for reconciliation to the comparable GAAP measure. (b) Comparable 2006 earnings per share growth of 11% excludes $65 million ($42 million after tax or $0.11 per share) of costs attributable to the Company’s adoption of a new accounting standard that required the expensing of stock options. ™ ™ ™ Kellogg Company’s 2008 performance demonstrates the fundamental strength of our business model and our capacity to produce sustainable growth even in volatile conditions. FELLOW KELLOGG SHAREOWNERS: Guided by our K Values, Kellogg employees continued to successfully execute our focused strategy and business model in 2008. As a result, we delivered our seventh consecutive year of growth, despite facing one of the toughest economic environments in decades. In fact, we either met or exceeded all of our sustainable growth targets: • We posted a 5 percent increase in internal net sales, outperforming our long-term target of low single-digit growth. • We delivered a 4 percent increase in internal operating profit, meeting our long- term target of mid single-digit growth. • We generated earnings per share of $2.99, up 8 percent from $2.76 in 2007, solidly meeting our long-term target of high single-digit growth on a currency- neutral basis. We produced these results by continuing to drive our focused strategy: to win in cereal and expand snacks. During 2008, we met all of our internal sales targets and produced strong, broad-based performance. Our Ready-to-eat cereal business delivered mid single- digit growth, our Snacks business posted high single-digit growth, and our Frozen business also delivered high single-digit growth. Our Foodservice business grew at an impressive mid single-digit rate despite fewer consumers dining out of home due to the weak economy. In addition, we continued to expand our geographic reach through acquisitions in Russia and China, and strengthened our business through acquisitions in two of our core markets, the U.S. and Australia. We also continued to invest in growth opportunities through strong innovation. Despite difficult economic conditions, we remained true to our Sustainable Growth and Manage for Cash operating principles and delivered another year of growth. Consistent with our Sustainable Growth principle, we drove gross profit dollar growth through price increases, innovation of higher margin products, and implementation of cost-savings initiatives. We invested in innovation and advertising, and delivered price and mix growth. We also continued to implement our Manage for Cash operating principle. Over the past five years, the combination of our strong earnings, disciplined approach to capital GROW INTERNAL GROW GROSS INCREASE RETURN ON GROW NET NET SALES PROFIT INVESTED CAPITAL EARNINGS Our operating principles of Sustainable Growth Sustainable Manage PRICE/MIX Growth OVERHEAD and Manage for Cash DISCIPLINE For Cash (V2V) IMPROVE keep us focused on the FINANCIAL DISCIPLINED CORE FLEXIBILITY WORKING CAPITAL right metrics. INNOVATION ADVERTISING EFFECTIVENESS AND EFFICIENCY PRIORITIZE CAPITAL EXPENDITURE FELLOW KELLOGG SHAREOWNERS: CONTINUED expenditure and sound working capital management drove strong cash flow, giving us the financial flexibility to return cash to our share owners, fund our retirement plans and continue to invest for sustainable and dependable growth. During 2008, we increased our dividend by 10 percent, and we returned more than $1 billion in cash to shareowners through dividends and share repurchases. Another important element of our business model is to set realistic growth targets. This encourages our employees to make decisions that support the long-term health of our business. Furthermore, in addition to maintaining an unwavering commitment to brand building and innovation, we keep a constant watch on cost control and savings initiatives, including a multi-year focus on productivity programs and investments that require up-front costs. By remaining true to our proven business model in 2008, we set the stage for continued sustainable and dependable growth into the future. DRIVING AdVERTISING EFFICIENCY Building great brands is the heart and soul of our business, and we are committed to continuing to fund promising marketing and advertising programs that help us accom- plish this. In addition, we believe we can increase our advertising effectiveness and consumer impressions by generating efficiencies from our more than $1 billion annual advertising expenditure. We are aggressively embracing digital media, which affords an efficient, cost-effective way to target specific audiences, providing an excellent platform for developing our brands. We have already tapped the Internet to gain significant brand development traction for Special K, Frosted Flakes, Apple Jacks, Kashi, Rice Krispies, Morningstar Farms and Pop-Tarts. In addition, we are successfully building relationships with moms around the world through Kelloggs.com and KelloggNutrition.com. Our strength in brand building allows us to successfully drive new business opportunities that expand our portfolio and reach more consumers. STRENGTHENING OUR PLATFORM FOR FUTURE GROWTH In late 2007 and 2008, we made several acquisitions that gave us strong growth platforms in promising markets. All of the companies we acquired were established players in categories that respond well to brand building. GROW INTERNAL GROW GROSS INCREASE RETURN ON GROW NET NET SALES PROFIT INVESTED CAPITAL EARNINGS Sustainable Manage PRICE/MIX OVERHEAD Growth DISCIPLINE For Cash (V2V) IMPROVE FINANCIAL DISCIPLINED CORE FLEXIBILITY WORKING CAPITAL INNOVATION ADVERTISING EFFECTIVENESS AND EFFICIENCY PRIORITIZE CAPITAL EXPENDITURE • In Russia, we purchased United Bakers, gaining manufacturing and distribution capabilities in cookies, crackers and cereal. • In China, we purchased Navigable Foods, an established biscuit manufacturer. • In Australia, we purchased Specialty Cereals Pty. Limited, a natural foods company. • In the U.S., we made several acquisitions, including Bear Naked, Inc. and its granolas and trail mixes; the assets of IndyBake Products LLC and Brownie Products Co., including two snacks manufacturing facilities; and the trademarks and recipes of Mother’s Cake & Cookie Co., a regional brand with a loyal consumer following in the western U.S. We also reinforced our commitment to corporate responsibility by publishing our first global Corporate Responsibility Report. This report provides an overview of Kellogg Company’s deep commitment to preserving the environment, improving our market- place and our workplace, and making positive contributions to the global community. The credit for these and all of our 2008 accomplishments belongs to our employees, whose passion for our business and commitment to our K Values is the core of our culture at Kellogg. We’d like to thank every member of the Kellogg family for their loyalty, hard work and dedication. FUELING PRODUCTIVITY Driving strong and consistent cost efficiency is fundamental to our ability to deliver sustainable and dependable growth. During 2008, we invested $0.14 of earnings per share into up-front costs for savings initiatives. We regularly make such investments, and we account for them as a part of our normal operations. In addition, we continually identify new cost-saving programs. We have targeted efficiencies that will deliver $1 billion of annual cost savings