# Table	of	Contents

# UNITED	STATES	SECURITIES	AND	EXCHANGE	COMMISSION

# ANNUAL	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF	THE	SECURITIES	EXCHANGE	ACT	of	1934

For	the	Fiscal	Year	Ended	December	30,	2006

Commission	file	number	1-4171

# Kellogg	Company

(Exact	Name	of	Registrant	as	Specified	in	its	Charter)

Delaware

(State	of	Incorporation)

(I.R.S.	Employer	Identification	No.)

One	Kellogg	Square

(Address	of	Principal	Executive	Offices)

Securities	registered	pursuant	to	Section	12(b)	of	the	Securities	Act:

Title	of	each	class:

Name	of	each	exchange	on	which	registered:

# Common	Stock,	$.25	par	value	per	share New	York	Stock	Exchange

Securities	registered	pursuant	to	Section	12(g)	of	the	Securities	Act:	None

Indicate	by	a	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.		Yes	þ		No	o

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15	(d)	of	the	Securities	Exchange	Act	of	1934.		Yes	o		No	þ

Indicate	by	check	mark	whether	the	registrant:	(1)	has	filed	all	reports	required	to	be	filed	by	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934	during	the	preceding	12	months	(or	for	such shorter	period	that	the	registrant	was	required	to	file	such	reports),	and	(2)	has	been	subject	to	such	filing	requirements	for	the	past	90	days.		Yes	þ		No	o

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of	the	registrant's	knowledge	in	definitive proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to	this	Form	10-K.		o

Indicate	by	check	mark	whether	the	registrant	is	a	large	accelerated	filer,	an	accelerated	filer	or	a	non-accelerated	filer.	See	definition	of	"accelerated	filer"	and	"large	accelerated	filer"	in	Rule	12b-2	of the	Securities	Exchange	Act	of	1934.	(Check	one)

Indicate	by	check	mark	whether	the	registrant	is	a	shell	company	(as	defined	in	Rule	12b-2	of	the	Securities	Exchange	Act	of	1934).		Yes	o		No	þ

The	aggregate	market	value	of	the	common	stock	held	by	non-affiliates	of	the	registrant	(assuming	only	for	purposes	of	this	computation	that	the	W.K.	Kellogg	Foundation	Trust,	directors	and	executive officers	may	be	affiliates)	was	approximately	$14.5	billion,	as	determined	by	the	June	30,	2006,	closing	price	of	$48.43	for	one	share	of	common	stock,	as	reported	for	the	New	York	Stock	Exchange	— Composite	Transactions.

As	of	January	26,	2007,	397,969,170	shares	of	the	common	stock	of	the	registrant	were	issued	and	outstanding.

Parts	of	the	registrant's	Proxy	Statement	for	the	Annual	Meeting	of	Shareowners	to	be	held	on	April	27,	2007	are	incorporated	by	reference	into	Part	III	of	this	Report.

# PART	I

Item	1.	Business

Item	1A.	Risk	Factors

Item	1B.	Unresolved	Staff	Comments

Item	2.	Properties

Item	3.	Legal	Proceedings

Item	4.	Submission	of	Matters	to	a	Vote	of	Security	Holders

# PART	II

Item	5.	Market	for	the	Registrant's	Common	Stock,	Related	Stockholder	Matters	and	Issuer	Purchases	of	Equity	Securities

# Item	6.	Selected	Financial	Data

Item	7.	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations

Item	7A.	Quantitative	and	Qualitative	Disclosures	About	Market	Risk

Item	8.	Financial	Statements	and	Supplementary	Data

Item	9.	Changes	in	and	Disagreements	with	Accountants	on	Accounting	and	Financial	Disclosure

Item	9A.	Controls	and	Procedures

Item	9B.	Other	Information

PART	III

Item	10.	Directors,	Executive	Officers	and	Corporate	Governance

Item	11.	Executive	Compensation

Item	12.	Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder	Matters

Item	13.	Certain	Relationships	and	Related	Transactions,	and	Director	Independence

Item	14.	Principal	Accounting	Fees	and	Services

PART	IV

Item	15.	Exhibits,	Financial	Statement	Schedules

SIGNATURES

EXHIBIT	INDEX

Amended	and	Restated	Five-Year	Credit	Agreement	dated	as	of	November	10,	2006 364-Day	Credit	Agreement	dated	as	of	January	31,	2007 Form	of	Multicurrency	Global	Note	related	to	Euro-Commercial	Paper	Program 2003	Long-Term	Incentive	Plan,	as	amended	and	restated	as	of	December	8,	2006 Domestic	and	Foreign	Subsidiaries

Consent	of	Independent	Registered	Public	Accounting	Firm

# Powers	of	Attorney

Rule	13a-14(a)/15d-14(a)	Certification	by	A.D.	David	Mackay Rule	13a-14(a)/15d-14(a)	Certification	by	John	A.	Bryant Section	1350	Certification	of	A.D.	David	Mackay Section	1350	Certification	of	John	A.	Bryant

The	Company.		Kellogg	Company,	founded	in	1906	and	incorporated	in	Delaware	in	1922,	and	its	subsidiaries	are	engaged	in	the	manufacture	and	marketing	of	ready-to-eat	cereal	and convenience	foods.

The	address	of	the	principal	business	office	of	Kellogg	Company	is	One	Kellogg	Square,	P.O.	Box	3599,	Battle	Creek,	Michigan	49016-3599.	Unless	otherwise	specified	or	indicated	by	the context,	"Kellogg,"	"we,"	"us"	and	"our"	refer	to	Kellogg	Company,	its	divisions	and	subsidiaries.

Financial	Information	About	Segments.		Information	on	segments	is	located	in	Note	14	within	Notes	to	the	Consolidated	Financial	Statements	which	are	included	herein	under	Part	II, Item	8.

Principal	Products.		Our	principal	products	are	ready-to-eat	cereals	and	convenience	foods,	such	as	cookies,	crackers,	toaster	pastries,	cereal	bars,	fruit	snacks,	frozen	waffles	and	veggie foods.	These	products	were,	as	of	December	30,	2006,	manufactured	by	us	in	17	countries	and	marketed	in	more	than	180	countries.	Our	cereal	products	are	generally	marketed	under	the Kellogg's	name	and	are	sold	principally	to	the	grocery	trade	through	direct	sales	forces	for	resale	to	consumers.	We	use	broker	and	distribution	arrangements	for	certain	products.	We	also generally	use	these,	or	similar	arrangements,	in	less-developed	market	areas	or	in	those	market	areas	outside	of	our	focus.

We	also	market	cookies,	crackers,	and	other	convenience	foods,	under	brands	such	as	Kellogg's,	Keebler,	Cheez-It,	Murray,	Austin	and	Famous	Amos,	to	supermarkets	in	the	United States	through	a	direct	store-door	(DSD)	delivery	system,	although	other	distribution	methods	are	also	used.

Additional	information	pertaining	to	the	relative	sales	of	our	products	for	the	years	2004	through	2006	is	located	in	Note	14	within	Notes	to	the	Consolidated	Financial	Statements,	which	are included	herein	under	Part	II,	Item	8.

Raw	Materials.		Agricultural	commodities	are	the	principal	raw	materials	used	in	our	products.	Cartonboard,	corrugated,	and	plastic	are	the	principal	packaging	materials	used	by	us.	World supplies	and	prices	of	such	commodities	(which	include	such	packaging	materials)	are	constantly	monitored,	as	are	government	trade	policies.	The	cost	of	such	commodities	may	fluctuate widely	due	to	government	policy	and	regulation,	weather	conditions,	or	other	unforeseen	circumstances.	Continuous	efforts	are	made	to	maintain	and	improve	the	quality	and	supply	of	such commodities	for	purposes	of	our	short-term	and	long-term	requirements.

The	principal	ingredients	in	the	products	produced	by	us	in	the	United	States	include	corn	grits,	wheat	and	wheat	derivatives,	oats,	rice,	cocoa	and	chocolate,	soybeans	and	soybean derivatives,	various	fruits,	sweeteners,	flour,	shortening,	dairy	products,	eggs,	and	other	filling	ingredients,	which	are	obtained	from	various	sources.	Most	of	these	commodities	are	purchased principally	from	sources	in	the	United	States.

We	enter	into	long-term	contracts	for	the	commodities	described	in	this	section	and	purchase	these	items	on	the	open	market,	depending	on	our	view	of	possible	price	fluctuations,	supply levels,	and	our	relative	negotiating	power.	While	the	cost	of	some	of	these	commodities	has,	and	may	continue	to,	increase	over	time,	we	believe	that	we	will	be	able	to	purchase	an	adequate supply	of	these	items	as	needed.	As	further	discussed	herein	under	Part	II,	Item	7A,	we	also	use	commodity	futures	and	options	to	hedge	some	of	our	costs.

Raw	materials	and	packaging	needed	for	internationally	based	operations	are	available	in	adequate	supply	and	are	sometimes	imported	from	countries	other	than	those	where	used	in manufacturing.

Cereal	processing	ovens	at	major	domestic	and	international	facilities	are	regularly	fueled	by	natural	gas	or	propane,	which	are	obtained	from	local	utilities	or	other	local	suppliers.	Short-term standby	propane	storage	exists	at	several	plants	for	use	in	the	event	of	an	interruption	in	natural	gas	supplies.	Oil	may	also	be	used	to	fuel	certain	operations	at	various	plants	in	the	event	of natural	gas	shortages	or	when	its	use	presents	economic	advantages.	In	addition,	considerable	amounts	of	diesel	fuel	are	used	in	connection	with	the	distribution	of	our	products.	As	further discussed	herein	under	Part	II,	Item	7A,	beginning	in	2006,	we	have	used	over-the-counter	commodity	price	swaps	to	hedge	some	of	our	natural	gas	costs.

Trademarks	and	Technology.		Generally,	our	products	are	marketed	under	trademarks	we	own.	Our	principal	trademarks	are	our	housemarks,	brand	names,	slogans,	and	designs	related to	cereals	and	convenience	foods	manufactured	and	marketed	by	us,	and	we	also	grant	licenses	to	third	parties	to	use	these	marks	on	various	goods.	These	trademarks	include	Kellogg's	for cereals,	convenience	foods	and	our	other	products,	and	the	brand

names	of	certain	ready-to-eat	cereals,	including	All-Bran,	Apple	Jacks,	Bran	Buds,	Complete	Bran	Flakes,	Complete	Wheat	Flakes,	Cocoa	Krispies,	Cinnamon	Crunch	Crispix,	Corn Pops,	Cruncheroos,	Kellogg's	Corn	Flakes,	Cracklin'	Oat	Bran,	Crispix,	Froot	Loops,	Kellogg's	Frosted	Flakes,	Frosted	Mini-Wheats,	Frosted	Krispies,	Just	Right,	Kellogg's	Low Fat	Granola,	Mueslix,	Nutri-Grain,	Pops,	Product	19,	Kellogg's	Raisin	Bran,	Rice	Krispies,	Raisin	Bran	Crunch,	Smacks,	Smart	Start,	Special	K	and	Special	K	Red	Berries	in	the United	States	and	elsewhere;	Zucaritas,	Choco	Zucaritas,	Crusli	Sucrilhos,	Sucrilhos	Chocolate,	Sucrilhos	Banana,	Vector,	Musli,	Nutridia,	and	Choco	Krispis	for	cereals	in	Latin

America;	Vive	and	Vector	in	Canada;	Choco	Pops,	Chocos,	Frosties,	Muslix,	Fruit	'n'	Fibre,	Kellogg's	Crunchy	Nut	Corn	Flakes,	Kellogg's	Crunchy	Nut	Red	Corn	Flakes,	Honey

Loops,	Kellogg's	Extra,	Sustain,	Mueslix,	Country	Store,	Ricicles,	Smacks,	Start,	Smacks	Choco	Tresor,	Pops,	and	Optima	for	cereals	in	Europe;	and	Cerola,	Sultana	Bran,

Supercharged,	Chex,	Frosties,	Goldies,	Rice	Bubbles,	Nutri-Grain,	Kellogg's	Iron	Man	Food,	and	BeBig	for	cereals	in	Asia	and	Australia.	Additional	Company	trademarks	are	the names	of	certain	combinations	of	Kellogg's	ready-to-eat	cereals,	including	Fun	Pak,	Jumbo,	and	Variety.	Other	Company	brand	names	include	Kellogg's	Corn	Flake	Crumbs;	Croutettes for	herb	season	stuffing	mix;	All-Bran,	Choco	Krispis,	Froot	Loops,	Nutridia,	Kuadri-Krispis,	Zucaritas,	Special	K,	and	Crusli	for	cereal	bars,	Keloketas	for	cookies,	Komplete	for biscuits;	and	Kaos	for	snacks	in	Mexico	and	elsewhere	in	Latin	America;	Pop-Tarts	Pastry	Swirls	for	toaster	danish;	Pop-Tarts	and	Pop-Tarts	Snak-Stix	for	toaster	pastries;	Eggo,

Special	K,	Froot	Loops	and	Nutri-Grain	for	frozen	waffles	and	pancakes;	Rice	Krispies	Treats	for	baked	snacks	and	convenience	foods;	Nutri-Grain	cereal	bars,	Nutri-Grain	yogurt	bars,

All-Bran	bars,	Smart	Start	bars	and	Kellogg's	Crunch	bars	for	convenience	foods	in	the	United	States	and	elsewhere;	K-Time,	Rice	Bubbles,	Day	Dawn,	Be	Natural,	Sunibrite	and

LCMs	for	convenience	foods	in	Asia	and	Australia;	Nutri-Grain	Squares,	Nutri-Grain	Elevenses,	and	Rice	Krispies	Squares	for	convenience	foods	in	Europe;	Fruit	Winders	for	fruit snacks	in	the	United	Kingdom;	Kashi	and	GoLean	for	certain	cereals,	nutrition	bars,	and	mixes;	TLC	for	crackers;	Vector	for	meal	replacement	products;	and	Morningstar	Farms,	Loma Linda,	Natural	Touch,	and	Worthington	for	certain	meat	and	egg	alternatives.

We	also	market	convenience	foods	under	trademarks	and	tradenames	which	include	Keebler,	Cheez-It,	E.	L.	Fudge,	Murray,	Famous	Amos,	Austin,	Ready	Crust,	Chips	Deluxe,	Club,

Fudge	Shoppe,	Hi-Ho,	Sunshine,	Munch'Ems,	Right	Bites,	Sandies,	Soft	Batch,	Toasteds,	Town	House,	Vienna	Fingers,	Wheatables,	and	Zesta.	One	of	our	subsidiaries	is	also	the exclusive	licensee	of	the	Carr's	brand	name	in	the	United	States.

Our	trademarks	also	include	logos	and	depictions	of	certain	animated	characters	in	conjunction	with	our	products,	including	Snap!Crackle!Pop!	for	Cocoa	Krispies	and	Rice	Krispies cereals	and	Rice	Krispies	Treats	convenience	foods;	Tony	the	Tiger	for	Kellogg's	Frosted	Flakes,	Zucaritas,	Sucrilhos	and	Frosties	cereals	and	convenience	foods;	Ernie	Keebler	for cookies,	convenience	foods	and	other	products;	the	Hollow	Tree	logo	for	certain	convenience	foods;	Toucan	Sam	for	Froot	Loops;	Dig	'Em	for	Smacks;	Coco	the	Monkey	for	Coco Pops;	Cornelius	for	Kellogg's	Corn	Flakes;	Melvin	the	elephant	for	certain	cereal	and	convenience	foods;	Chocos	the	Bear	and	Kobi	the	Bear	for	certain	cereal	products.

The	slogans	The	Best	To	You	Each	Morning,	The	Original	and	Best	and	They're	Gr-r-reat!,	used	in	connection	with	our	ready-to-eat	cereals,	along	with	L'	Eggo	my	Eggo,	used	in connection	with	our	frozen	waffles	and	pancakes,	and	Elfin	Magic	used	in	connection	with	convenience	food	products	are	also	important	Kellogg	trademarks.

The	trademarks	listed	above,	among	others,	when	taken	as	a	whole,	are	important	to	our	business.	Certain	individual	trademarks	are	also	important	to	our	business.	Depending	on	the jurisdiction,	trademarks	are	generally	valid	as	long	as	they	are	in	use	and/or	their	registrations	are	properly	maintained	and	they	have	not	been	found	to	have	become	generic.	Registrations	of trademarks	can	also	generally	be	renewed	indefinitely	as	long	as	the	trademarks	are	in	use.

We	consider	that,	taken	as	a	whole,	the	rights	under	our	various	patents,	which	expire	from	time	to	time,	are	a	valuable	asset,	but	we	do	not	believe	that	our	businesses	are	materially dependent	on	any	single	patent	or	group	of	related	patents.	Our	activities	under	licenses	or	other	franchises	or	concessions	which	we	hold	are	similarly	a	valuable	asset,	but	are	not	believed to	be	material.

Seasonality.		Demand	for	our	products	has	generally	been	approximately	level	throughout	the	year,	although	some	of	our	convenience	foods	have	a	bias	for	stronger	demand	in	the	second half	of	the	year	due	to	events	and	holidays.	We	also	custom-bake	cookies	for	the	Girl	Scouts	of	the	U.S.A.,	which	are	principally	sold	in	the	first	quarter	of	the	year.

Working	Capital.		Although	terms	vary	around	the	world	and	by	business	types,	in	the	United	States	we	generally	have	required	payment	for	goods	sold	eleven	or	sixteen	days	subsequent to	the	date	of	invoice	as	2%	10/net	11	or	1%	15/net	16.	Receipts	from	goods	sold,	supplemented	as

required	by	borrowings,	provide	for	our	payment	of	dividends,	capital	expansion,	and	for	other	operating	expenses	and	working	capital	needs.

Customers.		Our	largest	customer,	Wal-Mart	Stores,	Inc.	and	its	affiliates,	accounted	for	approximately	18%	of	consolidated	net	sales	during	2006,	comprised	principally	of	sales	within	the United	States.	At	December	30,	2006,	approximately	14%	of	our	consolidated	receivables	balance	and	22%	of	our	U.S.	receivables	balance	was	comprised	of	amounts	owed	by	Wal-Mart Stores,	Inc.	and	its	affiliates.	During	2006,	our	top	five	customers,	collectively,	accounted	for	approximately	33%	of	our	consolidated	net	sales	and	approximately	42%	of	U.S.	net	sales.	There has	been	significant	worldwide	consolidation	in	the	grocery	industry	in	recent	years	and	we	believe	that	this	trend	is	likely	to	continue.	Although	the	loss	of	any	large	customer	for	an	extended length	of	time	could	negatively	impact	our	sales	and	profits,	we	do	not	anticipate	that	this	will	occur	to	a	significant	extent	due	to	the	consumer	demand	for	our	products	and	our	relationships with	our	customers.	Our	products	have	been	generally	sold	through	our	own	sales	forces	and	through	broker	and	distributor	arrangements,	and	have	been	generally	resold	to	consumers	in retail	stores,	restaurants,	and	other	food	service	establishments.

Backlog.		For	the	most	part,	orders	are	filled	within	a	few	days	of	receipt	and	are	subject	to	cancellation	at	any	time	prior	to	shipment.	The	backlog	of	any	unfilled	orders	at	December	30, 2006	and	December	31,	2005,	was	not	material	to	us.

Competition.		We	have	experienced,	and	expect	to	continue	to	experience,	intense	competition	for	sales	of	all	of	our	principal	products	in	our	major	product	categories,	both	domestically	and internationally.	Our	products	compete	with	advertised	and	branded	products	of	a	similar	nature	as	well	as	unadvertised	and	private	label	products,	which	are	typically	distributed	at	lower prices,	and	generally	with	other	food	products.	Principal	methods	and	factors	of	competition	include	new	product	introductions,	product	quality,	taste,	convenience,	nutritional	value,	price, advertising,	and	promotion.

Research	and	Development.		Research	to	support	and	expand	the	use	of	our	existing	products	and	to	develop	new	food	products	is	carried	on	at	the	W.K.	Kellogg	Institute	for	Food	and Nutrition	Research	in	Battle	Creek,	Michigan,	and	at	other	locations	around	the	world.	Our	expenditures	for	research	and	development	were	approximately	$190.6	million	in	2006, $181.0	million	in	2005	and	$148.9	million	in	2004.

Regulation.		Our	activities	in	the	United	States	are	subject	to	regulation	by	various	government	agencies,	including	the	Food	and	Drug	Administration,	Federal	Trade	Commission	and	the Departments	of	Agriculture,	Commerce	and	Labor,	as	well	as	voluntary	regulation	by	other	bodies.	Various	state	and	local	agencies	also	regulate	our	activities.	Other	agencies	and	bodies outside	of	the	United	States,	including	those	of	the	European	Union	and	various	countries,	states	and	municipalities,	also	regulate	our	activities.

Environmental	Matters.		Our	facilities	are	subject	to	various	U.S.	and	foreign	federal,	state,	and	local	laws	and	regulations	regarding	the	discharge	of	material	into	the	environment	and	the protection	of	the	environment	in	other	ways.	We	are	not	a	party	to	any	material	proceedings	arising	under	these	regulations.	We	believe	that	compliance	with	existing	environmental	laws	and regulations	will	not	materially	affect	our	consolidated	financial	condition	or	our	competitive	position.

Financial	Information	About	Geographic	Areas.		Information	on	geographic	areas	is	located	in	Note	14	within	Notes	to	the	Consolidated	Financial	Statements,	which	are	included	herein under	Part	II,	Item	8.

Executive	Officers.		The	names,	ages,	and	positions	of	our	executive	officers	(as	of	February	15,	2007)	are	listed	below	together	with	their	business	experience.	Executive	officers	are generally	elected	annually	by	the	Board	of	Directors	at	the	meeting	immediately	prior	to	the	Annual	Meeting	of	Shareowners.

# James	M.	Jenness

Chairman	of	the	Board		60

Mr.	Jenness	has	been	our	Chairman	since	February	2005	and	has	served	as	a	Kellogg	director	since	2000.	From	February	2005	until	December	2006,	he	also	served	as	our	Chief	Executive Officer.	He	was	Chief	Executive	Officer	of	Integrated	Merchandising	Systems,	LLC,	a	leader	in	outsource	management	of	retail	promotion	and	branded	merchandising	from	1997	to	December 2004.	He	is	also	a	director	of	Kimberly-Clark	Corporation.

# A.	D.	David	Mackay

President	and	Chief	Executive	Officer		51

Mr.	Mackay	became	our	President	and	Chief	Executive	Officer	on	December	31,	2006	and	has	served	as	a	Kellogg	director	since	February	2005.	Mr.	Mackay	joined	Kellogg	Australia	in	1985 and	held	several	positions	with	Kellogg	USA,	Kellogg	Australia	and	Kellogg	New	Zealand	before	leaving	Kellogg	in	1992.	He	rejoined	Kellogg	Australia	in	1998	as	managing

director	and	was	appointed	managing	director	of	Kellogg	United	Kingdom	and	Republic	of	Ireland	later	in	1998.	He	was	named	Senior	Vice	President	and	President,	Kellogg	USA	in	July	2000,

Executive	Vice	President	in	November	2000,	and	President	and	Chief	Operating	Officer	in	September	2003.	He	is	also	a	director	of	Fortune	Brands,	Inc.

# John	A.	Bryant

# Executive	Vice	President,

# Chief	Financial	Officer,	Kellogg	Company	and

# President,	Kellogg	International		41

Mr.	Bryant	joined	Kellogg	in	March	1998,	working	in	support	of	the	global	strategic	planning	process.	He	was	appointed	Senior	Vice	President	and	Chief	Financial	Officer,	Kellogg	USA,	in August	2000,	was	appointed	as	our	Chief	Financial	Officer	in	February	2002	and	was	appointed	Executive	Vice	President	later	in	2002.	He	also	assumed	responsibility	for	the	Natural	and Frozen	Foods	Division,	Kellogg	USA,	in	September	2003.	He	was	appointed	Executive	Vice	President	and	President,	Kellogg	International	in	June	2004	and	was	appointed	to	his	current position	in	December	2006.

# Jeffrey	W.	Montie

# Executive	Vice	President	and	President,

# Kellogg	North	America		45

Mr.	Montie	joined	Kellogg	Company	in	1987	as	a	brand	manager	in	the	U.S.	ready-to-eat	cereal	(RTEC)	business	and	held	assignments	in	Canada,	South	Africa	and	Germany,	and	then served	as	Vice	President,	Global	Innovation	for	Kellogg	Europe	before	being	promoted.	In	December	2000,	Mr.	Montie	was	promoted	to	President,	Morning	Foods	Division	of	Kellogg	USA and,	in	August	2002,	to	Senior	Vice	President,	Kellogg	Company.	Mr.	Montie	has	been	Executive	Vice	President	of	Kellogg	Company,	President	of	the	Morning	Foods	Division	of	Kellogg North	America	since	September	2003	and	President	of	Kellogg	North	America	since	June	2004.

# Donna	J.	Banks

# Senior	Vice	President,	Global	Supply	Chain		50

Dr.	Banks	joined	Kellogg	in	1983.	She	was	appointed	to	Senior	Vice	President,	Research	and	Development	in	1997,	to	Senior	Vice	President,	Global	Innovation	in	1999	and	to	Senior	Vice President,	Research,	Quality	and	Technology	in	2000.	She	was	appointed	to	her	current	position	in	June	2004.

# Celeste	Clark

# Senior	Vice	President,	Global	Nutrition	and

# Corporate	Affairs		53

Dr.	Clark	has	been	Kellogg's	Senior	Vice	President	of	Global	Nutrition	and	Corporate	Affairs	since	June	2006.	She	joined	Kellogg	in	1977	and	served	in	several	roles	of	increasing responsibility	before	being	appointed	to	Vice	President,	Worldwide	Nutrition	Marketing	in	1996	and	then	to	Senior	Vice	President,	Nutrition	and	Marketing	Communications,	Kellogg	USA	in 1999.	She	was	appointed	to	Vice	President,	Corporate	and	Scientific	Affairs	in	October	2002,	and	to	Senior	Vice	President,	Corporate	Affairs	in	August	2003.

# Gary	H.	Pilnick

# Senior	Vice	President,	General	Counsel,

# Corporate	Development	and	Secretary		42

Mr.	Pilnick	was	appointed	Senior	Vice	President,	General	Counsel	and	Secretary	in	August	2003	and	assumed	responsibility	for	Corporate	Development	in	June	2004.	He	joined	Kellogg	as Vice	President	—	Deputy	General	Counsel	and	Assistant	Secretary	in	September	2000	and	served	in	that	position	until	August	2003.	Before	joining	Kellogg,	he	served	as	Vice	President	and Chief	Counsel	of	Sara	Lee	Branded	Apparel	and	as	Vice	President	and	Chief	Counsel,	Corporate	Development	and	Finance	at	Sara	Lee	Corporation.

# Kathleen	Wilson-Thompson

# Senior	Vice	President,	Global	Human	Resources		49

Kathleen	Wilson-Thompson	has	been	Kellogg	Company's	Senior	Vice	President,	Global	Human	Resources	since	July	2005.	She	served	in	various	legal	roles	until	1995,	when	she	assumed the	role	of	Human	Resources	Manager	for	one	of	our	plants.	In	1998,	she	returned	to	the	legal	department	as	Corporate	Counsel,	and	was	promoted	to	Chief	Counsel,	Labor	and	Employment in	November	2001,	a	position	she	held	until	October	2003,	when	she	was	promoted	to	Vice	President,	Chief	Counsel,	U.S.	Businesses,	Labor	and	Employment.

# Alan	R.	Andrews

Vice	President	and	Corporate	Controller		51

Mr.	Andrews	joined	Kellogg	Company	in	1982.	He	served	in	various	financial	roles	before	relocating	to	China	as	general	manager	of	Kellogg	China	in	1993.	He	subsequently	served	in	several leadership	innovation	and	finance	roles	before	being	promoted	to	Vice	President,	International	Finance,	Kellogg	International	in	2000.	In	2002,	he	was	appointed	to	Assistant	Corporate Controller	and	assumed	his	current	position	in	June	2004.

Availability	of	Reports;	Website	Access;	Other	Information.		Our	internet	address	is	http://www.kelloggcompany.com.	Through	"Investor	Relations"	—	"Financials"	—	"SEC	Filings"	on our	home	page,	we	make	available	free	of	charge	our	proxy	statements,	our	annual	report	on	Form	10-K,	our	quarterly	reports	on	Form	10-Q,	our	current	reports	on	Form	8-K,	SEC	Forms	3, 4	and	5	and	any	amendments	to	those	reports	filed	or	furnished	pursuant	to	Section	13(a)	or	15(d)	of	the	Securities	Exchange	Act	of	1934	as	soon	as	reasonably	practicable	after	we electronically

file	such	material	with,	or	furnish	it	to,	the	Securities	and	Exchange	Commission.	Our	reports	filed	with	the	Securities	and	Exchange	Commission	are	also	made	available	to	read	and	copy	at the	SEC's	Public	Reference	Room	at	100	F	Street,	N.E.,	Washington,	D.C.	20549.	You	may	obtain	information	about	the	Public	Reference	Room	by	contacting	the	SEC	at	1-800-SEC-0330. Reports	filed	with	the	SEC	are	also	made	available	on	its	website	at	www.sec.gov.

Copies	of	the	Corporate	Governance	Guidelines,	the	Charters	of	the	Audit,	Compensation	and	Nominating	and	Governance	Committees	of	the	Board	of	Directors,	the	Code	of	Conduct	for Kellogg	Company	directors	and	Global	Code	of	Ethics	for	Kellogg	Company	employees	(including	the	chief	executive	officer,	chief	financial	officer	and	corporate	controller)	can	also	be	found on	the	Kellogg	Company	website.	Amendments	or	waivers	to	the	Global	Code	of	Ethics	applicable	to	the	chief	executive	officer,	chief	financial	officer	and	corporate	controller	can	also	be found	in	the	"Investor	Relations"	section	of	the	Kellogg	Company	website.	We	will	provide	copies	of	any	of	these	documents	to	any	Shareowner	upon	request.

Forward-Looking	Statements.		This	Report	contains	"forward-looking	statements"	with	projections	concerning,	among	other	things,	our	strategy,	financial	principles,	and	plans;	initiatives, improvements	and	growth;	sales,	gross	margins,	advertising,	promotion,	merchandising,	brand	building,	operating	profit,	and	earnings	per	share;	innovation;	investments;	capital	expenditure; asset	write-offs	and	expenditures	and	costs	related	to	productivity	or	efficiency	initiatives;	the	impact	of	accounting	changes	and	significant	accounting	estimates;	our	ability	to	meet	interest and	debt	principal	repayment	obligations;	minimum	contractual	obligations;	future	common	stock	repurchases	or	debt	reduction;	effective	income	tax	rate;	cash	flow	and	core	working	capital improvements;	interest	expense;	commodity	and	energy	prices;	and	employee	benefit	plan	costs	and	funding.	Forward-looking	statements	include	predictions	of	future	results	or	activities	and may	contain	the	words	"expect,"	"believe,"	"will,"	"will	deliver,"	"anticipate,"	"project,"	"should,"	or	words	or	phrases	of	similar	meaning.	For	example,	forward-looking	statements	are	found	in this	Item	1	and	in	several	sections	of	Management's	Discussion	and	Analysis.	Our	actual	results	or	activities	may	differ	materially	from	these	predictions.	Our	future	results	could	be	affected by	a	variety	of	factors,	including	the	impact	of	competitive	conditions;	the	effectiveness	of	pricing,	advertising,	and	promotional	programs;	the	success	of	innovation	and	new	product introductions;	the	recoverability	of	the	carrying	value	of	goodwill	and	other	intangibles;	the	success	of	productivity	improvements	and	business	transitions;	commodity	and	energy	prices,	and labor	costs;	the	availability	of	and	interest	rates	on	short-term	and	long-term	financing;	actual	market	performance	of	benefit	plan	trust	investments;	the	levels	of	spending	on	systems initiatives,	properties,	business	opportunities,	integration	of	acquired	businesses,	and	other	general	and	administrative	costs;	changes	in	consumer	behavior	and	preferences;	the	effect	of	U.S. and	foreign	economic	conditions	on	items	such	as	interest	rates,	statutory	tax	rates,	currency	conversion	and	availability;	legal	and	regulatory	factors;	business	disruption	or	other	losses	from war,	terrorist	acts,	or	political	unrest	and	the	risks	and	uncertainties	described	in	Item	1A	below.	Forward-looking	statements	speak	only	as	of	the	date	they	were	made,	and	we	undertake	no obligation	to	publicly	update	them.

In	addition	to	the	factors	discussed	elsewhere	in	this	Report,	the	following	risks	and	uncertainties	could	materially	adversely	affect	our	business,	financial	condition	and	results	of	operations. Additional	risks	and	uncertainties	not	presently	known	to	us	or	that	we	currently	deem	immaterial	also	may	impair	our	business	operations	and	financial	condition.

Our	performance	is	affected	by	general	economic	and	political	conditions	and	taxation	policies.

Our	results	in	the	past	have	been,	and	in	the	future	may	continue	to	be,	materially	affected	by	changes	in	general	economic	and	political	conditions	in	the	United	States	and	other	countries, including	the	interest	rate	environment	in	which	we	conduct	business,	the	financial	markets	through	which	we	access	capital	and	currency,	political	unrest	and	terrorist	acts	in	the	United States	or	other	countries	in	which	we	carry	on	business.

The	enactment	of	or	increases	in	tariffs,	including	value	added	tax,	or	other	changes	in	the	application	of	existing	taxes,	in	markets	in	which	we	are	currently	active	or	may	be	active	in	the future,	or	on	specific	products	that	we	sell	or	with	which	our	products	compete,	may	have	an	adverse	effect	on	our	business	or	on	our	results	of	operations.

# We	operate	in	the	highly	competitive	food	industry.

We	face	competition	across	our	product	lines,	including	ready-to-eat	cereals	and	convenience	foods,	from	other	companies	which	have	varying	abilities	to	withstand	changes	in	market conditions.	Some	of	our	competitors	have	substantial	financial,	marketing	and	other	resources,	and	competition	with	them	in	our	various	markets	and

product	lines	could	cause	us	to	reduce	prices,	increase	capital,	marketing	or	other	expenditures,	or	lose	category	share,	any	of	which	could	have	a	material	adverse	effect	on	our	business	and financial	results.	Category	share	and	growth	could	also	be	adversely	impacted	if	we	are	not	successful	in	introducing	new	products.

Our	consolidated	financial	results	and	demand	for	our	products	are	dependent	on	the	successful	development	of	new	products	and	processes.

There	are	a	number	of	trends	in	consumer	preferences	which	may	impact	us	and	the	industry	as	a	whole.	These	include	changing	consumer	dietary	trends	and	the	availability	of	substitute products.

Our	success	is	dependent	on	anticipating	changes	in	consumer	preferences	and	on	successful	new	product	and	process	development	and	product	relaunches	in	response	to	such	changes. We	aim	to	introduce	products	or	new	or	improved	production	processes	on	a	timely	basis	in	order	to	counteract	obsolescence	and	decreases	in	sales	of	existing	products.	While	we	devote significant	focus	to	the	development	of	new	products	and	to	the	research,	development	and	technology	process	functions	of	our	business,	we	may	not	be	successful	in	developing	new products	or	our	new	products	may	not	be	commercially	successful.	Our	future	results	and	our	ability	to	maintain	or	improve	our	competitive	position	will	depend	on	our	capacity	to	gauge	the direction	of	our	key	markets	and	upon	our	ability	to	successfully	identify,	develop,	manufacture,	market	and	sell	new	or	improved	products	in	these	changing	markets.

An	impairment	in	the	carrying	value	of	goodwill	or	other	acquired	intangible	could	negatively	affect	our	consolidated	operating	results	and	net	worth.

The	carrying	value	of	goodwill	represents	the	fair	value	of	acquired	businesses	in	excess	of	identifiable	assets	and	liabilities	as	of	the	acquisition	date.	The	carrying	value	of	other	intangibles represents	the	fair	value	of	trademarks,	trade	names,	and	other	acquired	intangibles	as	of	the	acquisition	date.	Goodwill	and	other	acquired	intangibles	expected	to	contribute	indefinitely	to	our cash	flows	are	not	amortized,	but	must	be	evaluated	by	management	at	least	annually	for	impairment.	If	carrying	value	exceeds	current	fair	value,	the	intangible	is	considered	impaired	and	is reduced	to	fair	value	via	a	charge	to	earnings.	Events	and	conditions	which	could	result	in	an	impairment	include	changes	in	the	industries	in	which	we	operate,	including	competition	and advances	in	technology;	a	significant	product	liability	or	intellectual	property	claim;	or	other	factors	leading	to	reduction	in	expected	sales	or	profitability.	Should	the	value	of	one	or	more	of	the acquired	intangibles	become	impaired,	our	consolidated	earnings	and	net	worth	may	be	materially	adversely	affected.

As	of	December	30,	2006,	the	carrying	value	of	intangible	assets	totaled	approximately	$4.87	billion,	of	which	$3.45	billion	was	goodwill	and	$1.42	billion	represented	trademarks,	tradenames, and	other	acquired	intangibles	compared	to	total	assets	of	$10.71	billion	and	shareholders'	equity	of	$2.07	billion.

# We	may	not	achieve	our	targeted	cost	savings	from	cost	reduction	initiatives.

Our	success	depends	in	part	on	our	ability	to	be	an	efficient	producer	in	a	highly	competitive	industry.	We	have	invested	a	significant	amount	in	capital	expenditures	to	improve	our	operational facilities.	Ongoing	operational	issues	are	likely	to	occur	when	carrying	out	major	production,	procurement,	or	logistical	changes	and	these,	as	well	as	any	failure	by	us	to	achieve	our	planned cost	savings,	could	have	a	material	adverse	effect	on	our	business	and	consolidated	financial	position	and	on	the	consolidated	results	of	our	operations	and	profitability.

# We	have	a	substantial	amount	of	indebtedness.

We	have	indebtedness	that	is	substantial	in	relation	to	our	shareholders'	equity.	As	of	December	30,	2006,	we	had	total	debt	of	approximately	$5.04	billion	and	shareholders'	equity	of $2.07	billion.

Our	substantial	indebtedness	could	have	important	consequences,	including:

•	the	ability	to	obtain	additional	financing	for	working	capital,	capital	expenditure	or	general	corporate	purposes	may	be	impaired,	particularly	if	the	ratings	assigned	to	our	debt	securities	by rating	organizations	were	revised	downward;

•	restricting	our	flexibility	in	responding	to	changing	market	conditions	or	making	us	more	vulnerable	in	the	event	of	a	general	downturn	in	economic	conditions	or	our	business;

•	 a	substantial	portion	of	the	cash	flow	from	operations	must	be	dedicated	to	the	payment	of	principal	and	interest	on	our	debt,	reducing	the	funds	available	to	us	for	other	purposes	including expansion	through	acquisitions,	marketing	spending	and	expansion	of	our	product	offerings;	and

•	 we	may	be	more	leveraged	than	some	of	our	competitors,	which	may	place	us	at	a	competitive	disadvantage.

Our	ability	to	make	scheduled	payments	or	to	refinance	our	obligations	with	respect	to	indebtedness	will	depend	on	our	financial	and	operating	performance,	which	in	turn,	is	subject

to	prevailing	economic	conditions,	the	availability	of,	and	interest	rates	on,	short-term	financing,	and	to	financial,	business	and	other	factors	beyond	our	control.

Our	results	may	be	materially	and	adversely	impacted	as	a	result	of	increases	in	the	price	of	raw	materials,	including	agricultural	commodities,	fuel	and	labor.

Agricultural	commodities,	including	corn,	wheat,	soybean	oil,	sugar	and	cocoa,	are	the	principal	raw	materials	used	in	our	products.	Cartonboard,	corrugated,	and	plastic	are	the	principal packaging	materials	used	by	us.	The	cost	of	such	commodities	may	fluctuate	widely	due	to	government	policy	and	regulation,	weather	conditions,	or	other	unforeseen	circumstances.	To	the extent	that	any	of	the	foregoing	factors	affect	the	prices	of	such	commodities	and	we	are	unable	to	increase	our	prices	or	adequately	hedge	against	such	changes	in	prices	in	a	manner	that offsets	such	changes,	the	results	of	our	operations	could	be	materially	and	adversely	affected.

Cereal	processing	ovens	at	major	domestic	and	international	facilities	are	regularly	fuelled	by	natural	gas	or	propane,	which	are	obtained	from	local	utilities	or	other	local	suppliers.	Short-term stand-by	propane	storage	exists	at	several	plants	for	use	in	case	of	interruption	in	natural	gas	supplies.	Oil	may	also	be	used	to	fuel	certain	operations	at	various	plants.	In	addition, considerable	amounts	of	diesel	fuel	are	used	in	connection	with	the	distribution	of	our	products.	The	cost	of	fuel	may	fluctuate	widely	due	to	economic	and	political	conditions,	government policy	and	regulation,	war,	or	other	unforeseen	circumstances	which	could	have	a	material	adverse	effect	on	our	consolidated	operating	results	or	financial	condition.

A	shortage	in	the	labor	pool	or	other	general	inflationary	pressures	or	changes	in	applicable	laws	and	regulations	could	increase	labor	cost,	which	could	have	a	material	adverse	effect	on	our consolidated	operating	results	or	financial	conditions.

Additionally,	our	labor	costs	include	the	cost	of	providing	benefits	for	employees.	We	sponsor	a	number	of	defined	benefit	plans	for	employees	in	the	United	States	and	various	foreign locations,	including	pension,	retiree	health	and	welfare,	active	health	care,	severance	and	other	postemployment	benefits.	We	also	participate	in	a	number	of	multiemployer	pension	plans	for certain	of	our	manufacturing	locations.	Our	major	pension	plans	and	U.S.	retiree	health	and	welfare	plans	are	funded	with	trust	assets	invested	in	a	globally	diversified	portfolio	of	equity securities	with	smaller	holdings	of	bonds,	real	estate	and	other	investments.	The	annual	cost	of	benefits	can	vary	significantly	from	year	to	year	and	is	materially	affected	by	such	factors	as changes	in	the	assumed	or	actual	rate	of	return	on	major	plan	assets,	a	change	in	the	weighted-average	discount	rate	used	to	measure	obligations,	the	rate	or	trend	of	health	care	cost inflation,	and	the	outcome	of	collectively-bargained	wage	and	benefit	agreements.

We	may	be	unable	to	maintain	our	profit	margins	in	the	face	of	a	consolidating	retail	environment.	In	addition,	the	loss	of	one	of	our	largest	customers	could negatively	impact	our	sales	and	profits.

Our	largest	customer,	Wal-Mart	Stores,	Inc.	and	its	affiliates,	accounted	for	approximately	18%	of	consolidated	net	sales	during	2006,	comprised	principally	of	sales	within	the	United	States. At	December	30,	2006,	approximately	14%	of	our	consolidated	receivables	balance	and	22%	of	our	U.S.	receivables	balance	was	comprised	of	amounts	owed	by	Wal-Mart	Stores,	Inc.	and	its affiliates.	During	2006,	our	top	five	customers,	collectively,	accounted	for	approximately	33%	of	our	consolidated	net	sales	and	approximately	42%	of	U.S.	net	sales.	As	the	retail	grocery	trade continues	to	consolidate	and	mass	marketers	become	larger,	our	large	retail	customers	may	seek	to	use	their	position	to	improve	their	profitability	through	improved	efficiency,	lower	pricing and	increased	promotional	programs.	If	we	are	unable	to	use	our	scale,	marketing	expertise,	product	innovation	and	category	leadership	positions	to	respond,	our	profitability	or	volume growth	could	be	negatively	affected.	The	loss	of	any	large	customer	for	an	extended	length	of	time	could	negatively	impact	our	sales	and	profits.

Our	intellectual	property	rights	are	valuable,	and	any	inability	to	protect	them	could	reduce	the	value	of	our	products	and	brands.

We	consider	our	intellectual	property	rights,	including	particularly	and	most	notably	our	trademarks,	but	also	including	patents,	trade	secrets,	copyrights	and	licensing	agreements,	to	be	a significant	and	valuable	aspect	of	our	business.	We	attempt	to	protect	our	intellectual	property	rights	through	a	combination	of	patent,	trademark,	copyright	and	trade	secret	laws,	as	well	as licensing	agreements,	third	party	nondisclosure	and	assignment	agreements	and	policing	of	third	party	misuses	of	our	intellectual	property.	Our	failure	to	obtain	or	adequately	protect	our trademarks,	products,	new	features	of	our	products,	or	our	technology,	or	any	change	in	law	or	other	changes	that	serve	to	lessen	or	remove	the	current	legal	protections	of	our	intellectual property,	may	diminish	our	competitiveness	and	could	materially	harm	our	business.

We	may	be	unaware	of	intellectual	property	rights	of	others	that	may	cover	some	of	our	technology,	brands	or	products.

Any	litigation	regarding	patents	or	other	intellectual	property	could	be	costly	and	time-consuming	and	could	divert	the	attention	of	our	management	and	key	personnel	from	our	business operations.	Third	party	claims	of	intellectual	property	infringement	might	also	require	us	to	enter	into	costly	license	agreements.	We	also	may	be	subject	to	significant	damages	or	injunctions against	development	and	sale	of	certain	products.

Changes	in	tax,	environmental	or	other	regulations	or	failure	to	comply	with	existing	licensing,	trade	and	other	regulations	and	laws	could	have	a	material	adverse effect	on	our	consolidated	financial	condition.

Our	activities,	both	in	and	outside	of	the	United	States,	are	subject	to	regulation	by	various	federal,	state,	provincial	and	local	laws,	regulations	and	government	agencies,	including	the U.S.	Food	and	Drug	Administration,	U.S.	Federal	Trade	Commission,	the	U.S.	Departments	of	Agriculture,	Commerce	and	Labor,	as	well	as	similar	and	other	authorities	of	the	European Union	and	various	state,	provincial	and	local	governments,	as	well	as	voluntary	regulation	by	other	bodies.	Various	state	and	local	agencies	also	regulate	our	activities.

The	manufacturing,	marketing	and	distribution	of	food	products	is	subject	to	governmental	regulation	that	is	becoming	increasingly	onerous.	Those	regulations	control	such	matters	as ingredients,	advertising,	relations	with	distributors	and	retailers,	health	and	safety	and	the	environment.	We	are	also	regulated	with	respect	to	matters	such	as	licensing	requirements,	trade and	pricing	practices,	tax	and	environmental	matters.	The	need	to	comply	with	new	or	revised	tax,	environmental	or	other	laws	or	regulations,	or	new	or	changed	interpretations	or enforcement	of	existing	laws	or	regulations,	may	have	a	material	adverse	effect	on	our	business	and	results	of	operations.

# Our	operations	face	significant	foreign	currency	exchange	rate	exposure	which	could	negatively	impact	our	operating	results.

We	hold	assets	and	incur	liabilities,	earn	revenue	and	pay	expenses	in	a	variety	of	currencies	other	than	the	U.S.	dollar,	primarily	the	British	Pound,	Euro,	Australian	dollar,	Canadian	dollar and	Mexican	peso.	Because	our	consolidated	financial	statements	are	presented	in	U.S.	dollars,	we	must	translate	our	assets,	liabilities,	revenue	and	expenses	into	U.S.	dollars	at	then- applicable	exchange	rates.	Consequently,	increases	and	decreases	in	the	value	of	the	U.S.	dollar	may	negatively	affect	the	value	of	these	items	in	our	consolidated	financial	statements,	even if	their	value	has	not	changed	in	their	original	currency.	To	the	extent	we	fail	to	manage	our	foreign	currency	exposure	adequately,	our	consolidated	results	of	operations	may	be	negatively affected.

If	our	food	products	become	adulterated	or	misbranded,	we	might	need	to	recall	those	items	and	may	experience	product	liability	if	consumers	are	injured	as	a	result.

We	may	need	to	recall	some	of	our	products	if	they	become	adulterated	or	misbranded.	We	may	also	be	liable	if	the	consumption	of	any	of	our	products	causes	injury.	A	widespread	product recall	could	result	in	significant	losses	due	to	the	costs	of	a	recall,	the	destruction	of	product	inventory,	and	lost	sales	due	to	the	unavailability	of	product	for	a	period	of	time.	We	could	also suffer	losses	from	a	significant	product	liability	judgment	against	us.	A	significant	product	recall	or	product	liability	case	could	also	result	in	a	loss	of	consumer	confidence	in	our	food	products, which	could	have	a	material	adverse	effect	on	our	business	results	and	the	value	of	our	brands.

None.

Our	corporate	headquarters	and	principal	research	and	development	facilities	are	located	in	Battle	Creek,	Michigan.

We	operated,	as	of	December	30,	2006,	manufacturing	plants	and	distribution	and	warehousing	facilities	totaling	more	than	28	million	square	feet	of	building	area	in	the	United	States	and other	countries.	Our	plants	have	been	designed	and	constructed	to	meet	our	specific	production	requirements,	and	we	periodically	invest	money	for	capital	and	technological	improvements.	At the	time	of	its	selection,	each	location	was	considered	to	be	favorable,	based	on	the	location	of	markets,	sources	of	raw	materials,	availability	of	suitable	labor,	transportation	facilities,	location of	our	other	plants	producing	similar	products,	and	other	factors.	Our	manufacturing	facilities	in	the	United	States	include	four	cereal	plants	and	warehouses	located	in	Battle	Creek,	Michigan; Lancaster,	Pennsylvania;	Memphis,	Tennessee;	and	Omaha,	Nebraska	and	other	plants	in	San	Jose,	California;	Atlanta,	Augusta,	Columbus,	and	Rome,	Georgia;	Chicago,	Illinois;	Kansas City,	Kansas;	Florence,	Louisville,	and	Pikeville,	Kentucky;	Grand	Rapids,	Michigan;	Blue	Anchor,	New	Jersey;	Cary	and	Charlotte,	North	Carolina;	Cincinnati,	Fremont,	and	Zanesville,	Ohio; Muncy,	Pennsylvania;	Rossville,	Tennessee	and	Allyn,	Washington.

Outside	the	United	States,	we	had,	as	of	December	30,	2006,	additional	manufacturing	locations,	some	with	warehousing	facilities,	in	Australia,	Brazil,	Canada,	Colombia,	Ecuador,

Germany,	Great	Britain,	Guatemala,	India,	Japan,	Mexico,	South	Africa,	South	Korea,	Spain,	Thailand,	and	Venezuela.

We	generally	own	our	principal	properties,	including	our	major	office	facilities,	although	some	manufacturing	facilities	are	leased,	and	no	owned	property	is	subject	to	any	major	lien	or	other encumbrance.	Distribution	facilities	(including	related	warehousing	facilities)	and	offices	of	non-plant	locations	typically	are	leased.	In	general,	we	consider	our	facilities,	taken	as	a	whole,	to	be suitable,	adequate,	and	of	sufficient	capacity	for	our	current	operations.

We	are	not	a	party	to	any	pending	legal	proceedings	which	could	reasonably	be	expected	to	have	a	material	adverse	effect	on	us	and	our	subsidiaries,	considered	on	a	consolidated	basis, nor	are	any	of	our	properties	or	subsidiaries	subject	to	any	such	proceedings.

Not	applicable.

Information	on	the	market	for	our	common	stock,	number	of	shareowners	and	dividends	is	located	in	Note	13	within	Notes	to	the	Consolidated	Financial	Statements,	which	are	included	herein under	Part	II,	Item	8.

The	following	table	provides	information	with	respect	to	acquisitions	by	us	of	our	shares	of	common	stock	during	the	quarter	ended	December	30,	2006.

# ISSUER	PURCHASES	OF	EQUITY	SECURITIES

| (millions,	except	per	share	data)<br>Period | (a)<br>Total	number	of<br>shares	purchased | (b)<br>Average	price<br>paid	per	share | (c)<br>Total	number	of	shares<br>purchased	as	part	of	publicly<br>announced	plans	or	programs | (d)<br>Approximate	dollar	value	of	shares<br>that	may	yet	be	purchased<br>under	the	plans	or	programs |
| :--- | :--- | :--- | :--- | :--- |
| Month\t#1:\t10/1/06-10/28/06 | .1 | $49.27 | .1 | $70.1 |
| Month\t#2:\t10/29/06-11/25/06 | 2.1 | $49.80 | 2.1 | $14.4 |
| Month\t#3:\t11/26/06-12/30/06 | .9 | $50.21 | .9 | — |
| Total\t(1) | 3.1 | $49.91 | 3.1 |  |

(1) Shares	included	in	the	preceding	table	were	purchased	as	part	of	publicly	announced	plans	or	programs,	as	follows:

a) Approximately	1.4	million	shares	were	purchased	during	the	fourth	quarter	of	2006	under	a	program	authorized	by	our	Board	of	Directors	to	repurchase	up	to	$650	million	of	Kellogg	common	stock	during	2006	for general	corporate	purposes	and	to	offset	issuances	for	employee	benefit	programs.	This	repurchase	program	was	publicly	announced	in	a	press	release	on	October	31,	2005.	On	December	8,	2006,	our	Board	of Directors	authorized	a	stock	repurchase	program	of	up	to	$650	million	for	2007,	which	was	publicly	announced	in	a	press	release	on	December	11,	2006.

b) Approximately	1.7	million	shares	were	purchased	during	the	fourth	quarter	of	2006	from	employees	and	directors	in	stock	swap	and	similar	transactions	pursuant	to	various	shareholder-approved	equity-based compensation	plans	described	in	Note	8	within	Notes	to	the	Consolidated	Financial	Statements,	which	are	included	herein	under	Part	II,	Item	8.

# Kellogg	Company	and	Subsidiaries

# Selected	Financial	Data

| (in	millions,	except	per	share	data	and	number	of	employees) | 2006 | 2005 | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Operating\ttrends |  |  |  |  |  |
| Net\tsales | $10,906.7 | $10,177.2 | $9,613.9 | $8,811.5 | $8,304.1 |
| Gross\tprofit\tas\ta\t%\tof\tnet\tsales | 44.2% | 44.9% | 44.9% | 44.4% | 45.0% |
| Depreciation | 351.2 | 390.3 | 399.0 | 359.8 | 346.9 |
| Amortization | 1.5 | 1.5 | 11.0 | 13.0 | 3.0 |
| Advertising\texpense | 915.9 | 857.7 | 806.2 | 698.9 | 588.7 |
| Research\tand\tdevelopment\texpense | 190.6 | 181.0 | 148.9 | 126.7 | 106.4 |
| Operating\tprofit | 1,765.8 | 1,750.3 | 1,681.1 | \t1,544.1 | \t1,508.1 |
| Operating\tprofit\tas\ta\t%\tof\tnet\tsales | 16.2% | 17.2% | 17.5% | 17.5% | 18.2% |
| Interest\texpense | 307.4 | 300.3 | 308.6 | 371.4 | 391.2 |
| Net\tearnings | 1,004.1 | 980.4 | 890.6 | 787.1 | 720.9 |
| Average\tshares\toutstanding: |  |  |  |  |  |
| Basic | 397.0 | 412.0 | 412.0 | 407.9 | 408.4 |
| Diluted | 400.4 | 415.6 | 416.4 | 410.5 | 411.5 |
| Net\tearnings\tper\tshare: |  |  |  |  |  |
| Basic | 2.53 | 2.38 | 2.16 | 1.93 | 1.77 |
| Diluted | 2.51 | 2.36 | 2.14 | 1.92 | 1.75 |
| Cash\tflow\ttrends |  |  |  |  |  |
| Net\tcash\tprovided\tby\toperating\tactivities | $1,410.5 | $1,143.3 | $1,229.0 | $1,171.0 | $999.9 |
| Capital\texpenditures | 453.1 | 374.2 | 278.6 | 247.2 | 253.5 |
| Net\tcash\tprovided\tby\toperating\tactivities\treduced\tby\tcapital\texpenditures\t(a) | $957.4 | $769.1 | $950.4 | $923.8 | $746.4 |
| Net\tcash\tused\tin\tinvesting\tactivities | (445.4) | (415.0) | (270.4) | (219.0) | (188.8) |
| Net\tcash\tused\tin\tfinancing\tactivities | (789.0) | (905.3) | (716.3) | (939.4) | (944.4) |
| Interest\tcoverage\tratio\t(b) | 6.9 | 7.1 | 6.8 | 5.1 | 4.8 |
| Capital\tstructure\ttrends |  |  |  |  |  |
| Total\tassets\t(c) | $10,714.0 | $10,574.5 | $10,561.9 | $9,914.2 | $9,990.8 |
| Property,\tnet | 2,815.6 | 2,648.4 | 2,715.1 | \t2,780.2 | \t2,840.2 |
| Short-term\tdebt | 1,991.3 | 1,194.7 | 1,029.2 | 898.9 | \t1,197.3 |
| Long-term\tdebt | 3,053.0 | 3,702.6 | 3,892.6 | \t4,265.4 | \t4,519.4 |
| Shareholders'\tequity\t(c) | 2,069.0 | 2,283.7 | 2,257.2 | \t1,443.2 | 895.1 |
| Share\tprice\ttrends |  |  |  |  |  |
| Stock\tprice\trange | $42-51 | $42-47 | $37-45 | $28-38 | $29-37 |
| Cash\tdividends\tper\tcommon\tshare | 1.137 | 1.060 | 1.010 | 1.010 | 1.010 |
| Number\tof\temployees | 25,856 | 25,606 | 25,171 | \t 25,250 | \t 25,676 |

(a) The	Company	uses	this	non-GAAP	financial	measure	to	focus	management	and	investors	on	the	amount	of	cash	available	for	debt	repayment,	dividend	distribution,	acquisition	opportunities,	and	share	repurchase,	which	is reconciled	above.

(b) Interest	coverage	ratio	is	calculated	based	on	earnings	before	interest	expense,	income	taxes,	depreciation,	and	amortization,	divided	by	interest	expense.

(c) The	Company	adopted	SFAS	No.	158	"Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans"	as	of	the	end	of	its	2006	fiscal	year.	The	standard	generally	requires	company	plan	sponsors	to reflect	the	net	over-	or	under-funded	position	of	a	defined	postretirement	benefit	plan	as	an	asset	or	liability	on	the	balance	sheet.	Accordingly,	the	2006	balances	associated	with	the	identified	captions	within	this	summary were	materially	affected	by	the	adoption	of	this	standard.	Refer	to	Note	1	for	further	information.

# 	Results	Of	Operations

# Overview

Kellogg	Company	is	the	world's	leading	producer	of	cereal	and	a	leading	producer	of	convenience	foods,	including	cookies,	crackers,	toaster	pastries,	cereal	bars,	fruit	snacks,	frozen waffles,	and	veggie	foods.	Kellogg	products	are	manufactured	and	marketed	globally.	We	currently	manage	our	operations	in	four	geographic	operating	segments,	comprised	of North	America	and	the	three	International	operating	segments	of	Europe,	Latin	America,	and	Asia	Pacific.	For	the	periods	presented,	the	Asia	Pacific	operating	segment	included Australia	and	Asian	markets.	Beginning	in	2007,	this	segment	will	also	include	South	Africa,	which	was	formerly	a	part	of	Europe.

We	manage	our	Company	for	sustainable	performance	defined	by	our	long-term	annual	growth	targets.	During	the	periods	presented,	these	targets	were	low	single-digit	for	internal net	sales,	mid	single-digit	for	internal	operating	profit,	and	high	single-digit	for	net	earnings	per	share,	which	we	met	or	exceeded	in	each	of	2004,	2005,	and	2006:

| (dollars	in	millions) |  | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- | :--- |
| Net\tsales |  | $10,906.7 | $10,177.2 | $9,613.9 |
| Net\tsales\tgrowth: | As\treported | 7.2% | 5.9% | 9.1% |
|  | Internal\t(a) | 6.8% | 6.4% | 5.0% |
| Operating\tprofit |  | $1,765.8 | $1,750.3 | $1,681.1 |
| Operating\tprofit\tgrowth: | As\treported\t(b) | .9% | 4.1% | 8.9% |
|  | Internal\t(a) | 4.3% | 5.2% | 4.5% |
| Diluted\tnet\tearnings\tper\tshare\t(EPS) | Diluted\tnet\tearnings\tper\tshare\t(EPS) | $2.51 | $2.36 | $2.14 |
| EPS\tgrowth\t(b) |  | 6% | 10% | 11% |

(a) Our	measure	of	"internal	growth"	excludes	the	impact	of	currency	and,	if	applicable,	acquisitions,	dispositions,	and	shipping	day	differences.	Specifically,	internal	net	sales	and	operating	profit	growth	for	2005 and	2004	exclude	the	impact	of	a	53rd	shipping	week	in	2004.	Internal	operating	profit	growth	for	2006	also	excludes	the	impact	of	adopting	SFAS	No.	123(R)	"Share-Based	Payment."	Accordingly,	internal operating	profit	growth	for	2006	is	a	non-GAAP	financial	measure,	which	is	further	discussed	and	reconciled	to	GAAP-basis	growth	on	pages	11	and	12.

(b) At	the	beginning	of	2006,	we	adopted	SFAS	No.	123(R)	"Share-Based	Payment,"	which	reduced	our	fiscal	2006	operating	profit	by	$65.4	million	($42.4	million	after	tax	or	$.11	per	share),	due	primarily	to recognition	of	compensation	expense	associated	with	employee	and	director	stock	option	grants.	Correspondingly,	our	reported	operating	profit	and	net	earnings	growth	for	2006	was	reduced	by	approximately 4%.	Diluted	net	earnings	per	share	growth	was	reduced	by	approximately	5%.	Refer	to	the	section	beginning	on	page	21	entitled	"Stock	compensation"	for	further	information	on	the	Company's	adoption	of SFAS	No.	123(R).

In	combination	with	an	attractive	dividend	yield,	we	believe	this	profitable	growth	has	and	will	continue	to	provide	a	strong	total	return	to	our	shareholders.	We	plan	to	continue	to achieve	this	sustainability	through	a	strategy	focused	on	growing	our	cereal	business,	expanding	our	snacks	business,	and	pursuing	selected	growth	opportunities.	We	support	our business	strategy	with	operating	principles	that	emphasize	profit-rich,	sustainable	sales	growth,	as	well	as	cash	flow	and	return	on	invested	capital.	We	believe	our	steady	earnings growth,	strong	cash	flow,	and	continued	investment	during	a	multi-year	period	of	significant	commodity	and	energy-driven	cost	inflation	demonstrates	the	strength	and	flexibility	of	our business	model.

# Net	sales	and	operating	profit

The	following	tables	provide	an	analysis	of	net	sales	and	operating	profit	performance	for	2006	versus	2005:

| (dollars	in	millions) | North<br>America | Europe | Latin<br>America | Asia<br>Pacific<br>(a) | Corporate | Consoli-<br>dated |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| 2006\tnet\tsales | $7,348.8 | $2,143.8 | $ 890.8 | $ 523.3 | $— | $10,906.7 |
| 2005\tnet\tsales | $6,807.8 | $2,013.6 | $ 822.2 | $ 533.6 | $— | $10,177.2 |
| %\tchange\t—\t2006\tvs.\t2005: |  |  |  |  |  |  |
| Volume\t(tonnage)\t(b) | 3.5% | 1.4% | 4.5% | \t−1.2% | — | 3.1% |
| Pricing/mix | 4.0% | 4.0% | 4.0% | .9% | — | 3.7% |
| Subtotal\t—\tinternal\tbusiness | 7.5% | 5.4% | 8.5% | −.3% | — | 6.8% |
| Foreign\tcurrency\timpact | .4% | 1.1% | −.2% | \t−1.6% | — | .4% |
| Total\tchange | 7.9% | 6.5% | 8.3% | \t−1.9% | — | 7.2% |

| (dollars	in	millions) | North<br>America | Europe | Latin<br>America | Asia<br>Pacific<br>(a) | Corporate | Consoli-<br>dated |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| 2006\toperating\tprofit | $1,340.5 | $334.1 | $ 220.1 | $76.9 | $(205.8) | $1,765.8 |
| 2005\toperating\tprofit | $1,251.5 | $330.7 | $ 202.8 | $86.0 | $(120.7) | $1,750.3 |
| %\tchange\t—\t2006\tvs.\t2005: |  |  |  |  |  |  |
| Internal\tbusiness | 6.5% | .7% | 9.3% | −8.7% | \t−16.2% | 4.3% |
| SFAS\tNo.\t123(R)\tadoption\timpact | — | — | — | — | \t−54.1% | −3.7% |
| Foreign\tcurrency\timpact | .6% | .3% | −.8% | −1.9% | — | .3% |
| Total\tchange | 7.1% | \t1.0% | 8.5% | \t−10.6% | \t−70.3% | .9% |

(a) Includes	Australia	and	Asia.

(b) We	measure	the	volume	impact	(tonnage)	on	revenues	based	on	the	stated	weight	of	our	product	shipments.

During	2006,	our	consolidated	net	sales	increased	7%,	with	strong	results	in	both	North	America	and	the	total	of	our	International	segments.	Internal	net	sales	also	grew	7%,	building on	a	6%	rate	of	internal	growth	during	2005.	Successful	innovation,	brand-building	(advertising	and	consumer	promotion)	investment,	and	in-store	execution	continued	to	drive	broad- based	sales	growth	across	each

of	our	enterprise-wide	product	groups.	In	fact,	we	achieved	growth	in	retail	cereal	sales	within	each	of	our	operating	segments.

For	2006,	our	North	America	operating	segment	reported	a	net	sales	increase	of	8%.	Internal	net	sales	growth	was	also	8%,	with	each	major	product	group	contributing	as	follows:	retail	cereal +3%;	retail	snacks	(cookies,	crackers,	toaster	pastries,	cereal	bars,	fruit	snacks)	+11%;	frozen	and	specialty	(food	service,	vending,	convenience,	drug	stores,	custom	manufacturing) channels	+8%.	The	significant	growth	achieved	by	our	North	America	snacks	business	represented	nearly	one-half	of	the	total	dollar	increase	in	consolidated	internal	net	sales	for	2006.	The 2006	growth	in	North	America	retail	cereal	sales	was	on	top	of	8%	growth	in	2005	and	represented	the	6th	consecutive	year	in	which	we've	increased	our	dollar	share	of	category	sales. Although	North	America	consumer	retail	cereal	consumption	remained	steady	throughout	2006,	our	shipment	revenues	declined	in	the	fourth	quarter	of	2006	by	approximately	2%	versus	the prior-year	period.	We	believe	this	decline	was	largely	attributable	to	year-end	retail	trade	inventory	adjustments,	which	brought	inventories	in	line	with	year-end	2005	levels	after	several successive	quarters	of	slight	inclines.

Our	International	operating	segments	collectively	achieved	net	sales	growth	of	approximately	6%	or	5%	on	an	internal	basis,	with	leading	dollar	contributions	from	our	UK,	France,	Mexico,	and Venezuela	business	units.	Internal	sales	of	our	Asia	Pacific	operating	segment	(which	represents	less	than	5%	of	our	consolidated	results)	were	approximately	even	with	the	prior	year,	as solid	growth	in	Australia	cereal	and	Asian	markets	was	offset	by	weak	performance	in	our	Australia	snack	business.

Consolidated	operating	profit	for	2006	grew	1%,	with	internal	operating	profit	up	4%	versus	2005.	As	discussed	on	page	11,	our	measure	of	internal	operating	profit	growth	is	consistent	with our	measure	of	internal	sales	growth,	except	that	during	2006,	internal	operating	profit	growth	also	excluded	the	impact	of	incremental	stock	compensation	expense	associated	with	our adoption	of	SFAS	No.	123(R).	We	used	this	non-GAAP	financial	measure	during	our	first	year	of	adopting	this	FASB	standard	in	order	to	assist	management	and	investors	in	assessing	the Company's	financial	operating	performance	against	comparative	periods,	which	did	not	include	stock	option-related	compensation	expense.	Accordingly,	corporate	selling,	general,	and administrative	(SGA)	expense	was	higher	and	operating	profit	was	lower	by	$65.4	million	for	2006,	reducing	consolidated	operating	profit	growth	by	approximately	four	percentage	points. Refer	to	the	section	beginning	on	page	21	entitled	"Stock	compensation"	for	further	information	on	the	Company's	adoption	of	SFAS	No.	123(R).

As	further	discussed	beginning	on	page	14,	our	measure	of	internal	operating	profit	growth	includes	up-front	costs	related	to	cost-reduction	initiatives.	Although	total	2006	up-front	costs	of $82	million	were	not	significantly	changed	from	the	2005	amount	of	$90	million,	a	year-over-year	shift	in	operating	segment	allocation	of	such	costs	affected	relative	segment	performance. The	2006	versus	2005	change	in	project	cost	allocation	was	a	$44	million	decline	in	North	America	(improving	2006	segment	operating	profit	performance	by	approximately	4%)	and	a $28	million	increase	in	Europe	(reducing	2006	segment	operating	profit	performance	by	approximately	8%).

Our	current-year	operating	profit	growth	was	affected	by	significant	cost	pressures	as	discussed	in	the	"Margin	performance"	section	beginning	on	page	13.	Expenditures	for	brand-building activities	increased	at	a	low	single-digit	rate;	this	rate	of	growth	incorporates	savings	reinvestment	from	our	recent	focus	on	media	buying	efficiencies	and	global	leverage	of	promotional campaigns.	Within	our	total	brand-building	metric,	advertising	expenditures	grew	at	a	high	single-digit	rate	for	2006,	which	is	a	dynamic	that	we	expect	to	continue	through	2007	due	to	a relatively	heavier	focus	on	promotional	efficiencies.	Consistent	with	our	long-term	commitment,	we	expect	to	return	to	higher	rates	of	growth	for	total	brand-building	expenditures,	beginning	in 2008.

|  |  |  |  | Asia |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (dollars\tin\tmillions) | North\nAmerica | Europe | Latin\nAmerica | Pacific\n(a) | Corporate | Consoli-\ndated |
| 2005\tnet\tsales | $6,807.8 | $2,013.6 | $ 822.2 | $ 533.6 | $— | $10,177.2 |
| 2004\tnet\tsales | $6,369.3 | $2,007.3 | $ 718.0 | $ 519.3 | $— | $9,613.9 |
| %\tchange\t—\t2005\tvs.\t2004: |  |  |  |  |  |  |
| Volume\t(tonnage)\t(b) | 5.6% | −.2% | 7.5% | .8% | — | 4.5% |
| Pricing/mix | 2.2% | 2.0% | 3.2% | .4% | — | 1.9% |
| Subtotal\t—\tinternal\tbusiness | 7.8% | 1.8% | \t10.7% | 1.2% | — | 6.4% |
| Shipping\tday\tdifferences\t(c) | −1.4% | −.9% | — | \t−1.0% | — | −1.1% |
| Foreign\tcurrency\timpact | .5% | −.6% | 3.8% | 2.6% | — | .6% |
| Total\tchange | 6.9% | .3% | \t14.5% | 2.8% | — | 5.9% |

(c) Impact	of	53rd	week	in	2004.	Refer	to	Note	1	within	Notes	to	Consolidated	Financial	Statements	for	further	information	on	our	fiscal	year	end.

|  |  |  |  | Asia |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (dollars\tin\tmillions) | North\nAmerica | Europe | Latin\nAmerica | Pacific\n(a) | Corporate | Consoli-\ndated |
| 2005\toperating\tprofit | $1,251.5 | $ 330.7 | $ 202.8 | $86.0 | $(120.7) | $1,750.3 |
| 2004\toperating\tprofit | $1,240.4 | $ 292.3 | $ 185.4 | $79.5 | $(116.5) | $1,681.1 |
| %\tchange\t—\t2005\tvs.\t2004: |  |  |  |  |  |  |
| Internal\tbusiness | 2.4% | \t14.9% | 6.6% | 7.4% | −4.1% | 5.2% |
| Shipping\tday\tdifferences\t(c) | −2.1% | \t−1.0% | — | \t−2.2% | .4% | −1.8% |
| Foreign\tcurrency\timpact | .6% | −.8% | 2.8% | 3.0% | — | .7% |
| Total\tchange | .9% | \t13.1% | 9.4% | 8.2% | −3.7% | 4.1% |

During	2005,	consolidated	net	sales	increased	nearly	6%.	Internal	net	sales	also	grew	approximately	6%,	which	was	on	top	of	5%	internal	sales	growth	in	2004.

For	2005,	successful	innovation	and	brand-building	investment	drove	strong	growth	across	our	North	American	business	units,	which	collectively	reported	a	7%	increase	in	net	sales	versus 2004.	Internal	net	sales	of	our	North	America	retail	cereal	business	increased	8%,	with	strong	performance	in	both	the	United	States	and	Canada.	Internal	net	sales	of	our	North	America	retail snacks	business	increased	7%	on	top	of	8%	growth	in	2004.	This	growth	was	attributable	principally	to	sales	of	fruit	snacks,	toaster	pastries,	cracker	products,	and	major	cookie	brands. Partially	offsetting	this	growth	was	the	impact	of	proactively	managing	discontinuation	of	marginal	cookie	innovations.	Internal	net	sales	of	our	North	America	frozen	and	specialty	channel businesses	collectively	increased	approximately	8%,	led	by	solid	contributions	from	our	Eggo®	frozen	foods	and	food	service	businesses.

In	2005,	our	International	operating	segments	collectively	achieved	net	sales	growth	of	nearly	4%	on	both	a	reported	and	internal	basis,	with	our	Latin	America	operating	segment	contributing approximately	two-thirds	of	the	total	dollar	increase.	Nevertheless,	we	achieved	our	long-term	annual	growth	targets	of	low	single-digit	for	internal	net	sales	in	our	Europe	and	Asia	Pacific operating	segments	due	primarily	to	solid	innovation	performance	in	southern	Europe	and	Asia.

Consolidated	operating	profit	increased	4%	during	2005,	with	our	Europe	operating	segment	contributing	approximately	one-half	of	the	total	dollar	increase.	This	disproportionate	contribution was	attributable	to	a	year-over-year	shift	in	segment	allocation	of	charges	from	cost-reduction	initiatives.	As	discussed	in	the	section	beginning	on	page	14,	the	2005	versus	2004	change	in project	cost	allocation	was	a	$65	million	decline	in	Europe	(improving	2005	segment	operating	profit	performance	by	approximately	22%)	and	a	$46	million	increase	in	North	America (reducing	2005	segment	operating	profit	performance	by	approximately	4%).

Internal	growth	in	consolidated	operating	profit	was	5%.	This	internal	growth	was	achieved	despite-double	digit	growth	in	brand-building	and	innovation	expenditures	and	significant	cost pressures	on	gross	margin,	as	discussed	in	the	following	section.	During	2005,	we	increased	our	consolidated	brand-building	(advertising	and	consumer	promotion)	expenditures	by	more than	11/2	times	the	rate	of	sales	growth.

Corporate	operating	profit	for	2004	included	a	charge	of	$9.5	million	related	to	CEO	transition	expenses,	which	arose	from	the	departure	of	Carlos	Gutierrez,	the	Company's	former	CEO, related	to	his	appointment	as	U.S.	Secretary	of	Commerce	in	early	2005.	The	total	charge	(net	of	forfeitures)	of	$9.5	million	was	comprised	principally	of	$3.7	million	for	special	pension termination	benefits	and	$5.5	million	for	accelerated	vesting	of	606,250	stock	options.	Segment	operating	profit	for	2004	included	intangibles	impairment	losses	of	$10.4	million,	comprised	of $7.9	million	to	write	off	the	carrying	value	of	a	contract-based	intangible	asset	in	North	America	and	$2.5	million	to	write	off	goodwill	in	Latin	America.

# Margin	performance

Margin	performance	is	presented	in	the	following	table.

|  | 2006 | 2005 | 2004 | 2006 | 2005 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Gross\tmargin | 44.2% | 44.9% | 44.9% | (.7) | — |
| SGA%\t(a) | \t−28.0% | \t−27.7% | \t−27.4% | (.3) | (.3) |
| Operating\tmargin | 16.2% | 17.2% | 17.5% | (1.0) | (.3) |

(a) Selling,	general,	and	administrative	expense	as	a	percentage	of	net	sales.

We	strive	for	gross	margin	expansion	to	reinvest	in	brand-building	and	innovation	expenditures.	Our	strategy	for	expanding	our	gross	margin	is	to	manage	external	cost	pressures	through product	pricing	and	mix	improvements,	productivity	savings,	and	technological	initiatives	to	reduce	the	cost	of	product	ingredients	and	packaging.

Our	gross	margin	performance	for	2005	and	2006	reflects	the	impact	of	significant	fuel,	energy,	and	commodity	price	inflation	experienced	throughout	most	of	that	time,	as	well	as	increased employee	benefit	costs.	In	the	aggregate,	these	input	cost	pressures	reduced	our	consolidated	gross	margin	by	approximately	150	basis	points	for	2006	and	60	basis	points	in	2005.	For 2006,	our	gross	margin	performance	was	also	unfavorably	impacted	by	incremental	logistics	and

innovation	start-up	costs	related	to	the	recent,	significant	sales	growth	within	our	North	America	operating	segment.

While	the	majority	of	the	inflationary	pressure	during	2005	and	2006	was	commodity	and	energy-driven,	employee	benefit	costs	(the	majority	of	which	are	recorded	in	cost	of	goods	sold)	also increased	during	that	time	period,	with	total	active	and	retired	employee	benefits	expense	reaching	approximately	$325	million	in	2006	versus	$290	million	in	2005	and	$260	million	in	2004. For	2007,	the	combined	effect	of	favorable	trust	asset	performance	and	rising	interest	rates	is	expected	to	have	a	moderating	effect	on	underlying	health	care	cost	inflation.	As	a	result,	we expect	2007	benefits	expense	to	be	approximately	even	with	the	2006	amount.

For	2007,	we	expect	this	inflationary	trend	to	continue,	with	input	cost	(fuel,	energy,	commodity,	and	benefits)	pressures	forecasted	to	exceed	realized	savings.	As	compared	to	2006	results, we	currently	expect	$110-$130	million	of	incremental	cost	inflation,	primarily	associated	with	the	prices	of	our	2007	ingredient	purchases.	Accordingly,	we	believe	our	2007	consolidated	gross margin	could	decline	by	up	to	50	basis	points.

In	addition	to	external	cost	pressures,	our	discretionary	investment	in	cost-reduction	initiatives	(refer	to	following	section)	has	created	variability	in	our	gross	margin	performance	during	the periods	presented.	Although	total	annual	program-related	charges	were	relatively	steady	over	the	past	several	years,	the	amount	recorded	in	cost	of	goods	sold	varied	by	year	(in	millions): 2006−$74;	2005−$90;	2004−$46.	Additionally,	cost	of	goods	sold	for	2005	includes	a	charge	of	approximately	$12	million,	related	to	a	lump-sum	payment	to	members	of	the	major	union representing	the	hourly	employees	at	our	U.S.	cereal	plants	for	ratification	of	a	wage	and	benefits	agreement	with	the	Company	covering	the	four-year	period	ended	October	2009.

For	2006,	both	our	SGA%	and	operating	margin	were	affected	by	our	fiscal	2006	adoption	of	SFAS	No.	123(R).	During	2006,	we	reported	incremental	stock	compensation	expense	of $65.4	million,	which	increased	our	SGA%	and	reduced	our	operating	margin	by	approximately	60	basis	points.	Refer	to	the	section	beginning	on	page	21	entitled	"Stock	compensation"	for further	information	on	this	subject.

# Cost-reduction	initiatives

We	view	our	continued	spending	on	cost-reduction	initiatives	as	part	of	our	ongoing	operating	principles	to	reinvest	earnings	so	as	to	provide	greater	reliability	in	meeting	long-term	growth targets.	Initiatives	undertaken	must	meet	certain	pay-back	and	internal	rate	of	return	(IRR)	targets.	We	currently	require	each	project	to	recover	total	cash	implementation	costs	within	a	five- year	period	of	completion	or	to	achieve	an	IRR	of	at	least	20%.	Each	cost-reduction	initiative	is	normally	one	to	three	years	in	duration.	Upon	completion	(or	as	each	major	stage	is	completed in	the	case	of	multi-year	programs),	the	project	begins	to	deliver	cash	savings	and/or	reduced	depreciation,	which	is	then	used	to	fund	new	initiatives.	To	implement	these	programs,	the Company	has	incurred	various	up-front	costs,	including	asset	write-offs,	exit	charges,	and	other	project	expenditures,	which	we	include	in	our	measure	and	discussion	of	operating	segment profitability	within	the	"Net	sales	and	operating	profit	"	section	beginning	on	page	11.

In	2006,	we	commenced	a	multi-year	European	manufacturing	optimization	plan	to	improve	utilization	of	our	facility	in	Manchester,	England	and	to	better	align	production	in	Europe.	Based	on forecasted	foreign	exchange	rates,	the	Company	currently	expects	to	incur	approximately	$60	million	in	total	up-front	costs	(including	those	already	incurred	in	2006),	comprised	of approximately	80%	cash	and	20%	non-cash	asset	write-offs,	to	complete	this	initiative.	The	cash	portion	of	the	total	up-front	costs	results	principally	from	our	plan	to	eliminate	approximately 220	hourly	and	salaried	positions	from	the	Manchester	facility	by	the	end	of	2008	through	voluntary	early	retirement	and	severance	programs.	For	2006,	we	incurred	approximately	$28	million of	total	up-front	costs	and	expect	to	incur	a	similar	amount	in	2007,	leaving	a	relatively	insignificant	amount	to	be	incurred	in	2008.	Cash	requirements	for	this	initiative	are	expected	to	exceed projected	cash	charges	by	approximately	$10	million	in	total	due	to	incremental	pension	trust	funding	requirements	of	early	retirements;	most	of	this	incremental	funding	occurred	in	2006.

Also	during	2006,	we	implemented	several	short-term	initiatives	to	enhance	the	productivity	and	efficiency	of	our	U.S.	cereal	manufacturing	network	and	streamlined	our	sales	distribution system	in	a	Latin	American	market.	In	2005,	we	undertook	an	initiative	to	consolidate	U.S.	snacks	bakery	capacity,	resulting	in	the	closure	and	sale	of	two	facilities	by	mid	2006.	Major initiatives	commenced	in	2004	were	the	global	rollout	of	the	SAP	information	technology	system,	reorganization	of	pan-European	operations,	consolidation	of	U.S.	veggie	foods	manufacturing operations,	and	relocation	of	our	U.S.	snacks	business	unit	to	Battle	Creek,	Michigan.	Except	for	the	aforementioned	European	manufacturing	optimization	plan,	our	other	initiatives	were substantially	complete	at	December	30,	2006.	Details	of	each	initiative	are	described	in	Note	3	within	Notes	to	Consolidated	Financial	Statements.

For	2006,	the	Company	recorded	total	program-related	charges	of	approximately	$82	million,	comprised	of	$20	million	of	asset	write-offs,	$30	million	for	severance	and	other	exit	costs, $9	million	for	other	cash	expenditures,	$4	million	for	a	multiemployer	pension	plan	withdrawal	liability,	and	$19	million	for	pension	and	other	postretirement	plan	curtailment	losses	and	special termination	benefits.	Approximately	$74	million	of	the	total	2006	charges	were	recorded	in	cost	of	goods	sold	within	operating	segment	results,	with	approximately	$8	million	recorded	in	SGA expense	within	corporate	results.	The	Company's	operating	segments	were	impacted	as	follows	(in	millions):	North	America−$46;	Europe−$28.

For	2005,	total	program-related	charges	were	approximately	$90	million,	comprised	of	$16	million	for	a	multiemployer	pension	plan	withdrawal	liability,	$44	million	of	asset	write-offs, $21	million	in	severance	and	other	exit	costs,	and	$9	million	for	other	cash	expenditures.	All	of	the	charges	were	recorded	in	cost	of	goods	sold	within	our	North	America	operating	segment.

For	2004,	total	program-related	charges	were	approximately	$109	million,	comprised	of	$41	million	in	asset	write-offs,	$1	million	for	special	pension	termination	benefits,	$15	million	in severance	and	other	exit	costs,	and	$52	million	in	other	cash	expenditures	such	as	relocation	and	consulting.	Approximately	$46	million	of	the	total	2004	charges	were	recorded	in	cost	of goods	sold,	with	approximately	$63	million	recorded	in	SGA	expense.	The	2004	charges	impacted	our	operating	segments	as	follows	(in	millions):	North	America−$44;	Europe−$65.

For	the	periods	presented,	cash	requirements	to	implement	these	programs	approximated	the	exit	costs	and	other	cash	charges	incurred	in	each	year,	except	for	approximately	$8	million	of incremental	pension	trust	funding	that	occurred	in	2006	in	connection	with	the	European	manufacturing	optimization	plan.	At	December	30,	2006,	the	Company's	remaining	cash commitments	to	complete	the	executed	programs	were	comprised	of:	1)	exit	cost	reserves	of	$14	million	expected	to	be	paid	out	in	2007;	2)	approximately	$25	million	of	projected	spending and	pension	trust	funding	during	2007	and	2008	associated	with	the	European	manufacturing	optimization	plan;	and	3)	an	estimated	multiemployer	pension	plan	withdrawal	liability	of $20	million,	which	will	not	be	finally	determined	until	2008	and	once	determined,	is	payable	to	the	pension	fund	over	a	20-year	maximum	period.	We	expect	these	cash	requirements	to	be funded	by	operating	cash	flow.

Our	2007	earnings	target	includes	total	projected	charges	related	to	in-progress	and	potential	cost-reduction	initiatives	of	approximately	$80	million	or	$.14	per	share.	Approximately	one-third of	this	total	is	allocated	to	the	European	manufacturing	optimization	plan.	However,	the	specific	cash	versus	non-cash	mix	or	cost	of	goods	sold	versus	SGA	expense	impact	of	the	remainder has	not	yet	been	determined.	Other	potential	initiatives	to	be	commenced	in	2007	are	still	in	the	planning	stages	and	individual	actions	will	be	announced	as	we	commit	to	these	discretionary investments.

# Interest	expense

As	illustrated	in	the	following	table,	annual	interest	expense	for	the	2004-2006	period	has	been	relatively	steady	at	approximately	$300	million	per	year,	which	reflects	a	stable	effective	interest rate	on	total	debt	and	a	relatively	constant	debt	balance	throughout	most	of	that	time.	Interest	income	(recorded	in	other	income)	has	trended	upward	from	approximately	$7	million	in	2004	to $11	million	in	2006,	resulting	in	net	interest	expense	of	approximately	$296	million	for	2006.	We	currently	expect	that	our	2007	net	interest	expense	will	approximate	the	2006	level.

|  | 2006 | 2005 | 2004 | 2006 | 2005 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Reported\tinterest\texpense\t(a) | $307.4 | $300.3 | $308.6 |  |  |
| Amounts\tcapitalized | 2.7 | 1.2 | .9 |  |  |
| Gross\tinterest\texpense | $310.1 | $301.5 | $309.5 | 2.9% | −2.6% |

(a) Reported	interest	expense	for	2005	and	2004	include	charges	of	approximately	$13	and	$4,	respectively,	related	to	the	early	redemption	of	long-term	debt.

# Other	income	(expense),	net

Other	income	(expense),	net	includes	non-operating	items	such	as	interest	income,	charitable	donations,	and	foreign	exchange	gains	and	losses.	Other	income	(expense),	net	for	the	periods presented	was	(in	millions):	2006−$13.2;	2005−($24.9);	2004−($6.6).	The	variability	in	other	income	(expense),	net,	among	years	reflects	the	timing	of	certain	significant	charges	explained	in the	following	paragraph	and	net	foreign	exchange	transaction	losses	included	therein	of	(in	millions):	2006−$2;	2005−$2;	2004−$15.

Other	expense	includes	charges	for	contributions	to	the	Kellogg's	Corporate	Citizenship	Fund,	a	private	trust	established	for	charitable	giving,	as	follows	(in	millions):	2006−$3;	2005−$16; 2004−$9.	Other	expense	for	2005	also	includes	a	charge	of	approximately	$7	million	to	reduce	the	carrying	value	of	a	corporate	commercial	facility	to	estimated	selling	value.	This	facility	was sold	in	August	2006.

# Income	taxes

Our	long-term	objective	is	to	achieve	a	consolidated	effective	income	tax	rate	of	approximately	31-32%.	In	comparison	to	a	U.S.	federal	statutory	income	tax	rate	of	35%,	we	pursue	planning initiatives	globally	in	order	to	move	toward	our	long-term	target.	Excluding	the	impact	of	discrete	adjustments,	our	sustainable	consolidated	effective	income	tax	rate	for	both	2006	and	2005 was	approximately	33%,	which	is	what	we	currently	expect	for	2007.	Our	reported	rates	of	approximately	32%	for	2006	and	31%	for	2005	were	lower	due	to	the	favorable	effect	of	various discrete	adjustments	such	as	audit	settlements,	statutory	rate	changes,	and	other	deferred	tax	liability	adjustments.	(Refer	to	Note	11	within	Notes	to	Consolidated	Financial	Statements	for further	information.)	Similarly,	our	2007	consolidated	effective	income	tax	rate	could	be	up	to	200	basis	points	lower	than	the	aforementioned	sustainable	rate	if	pending	uncertain	tax	matters, including	tax	positions	that	could	be	affected	by	planning	initiatives,	are	resolved	more	favorably	than	we	currently	expect.	We	expect	that	any	incremental	benefits	from	such	discrete	events would	be	invested	in	cost-reduction	initiatives	and	other	growth	opportunities.

The	consolidated	effective	income	tax	rate	for	2004	of	nearly	35%	was	higher	than	the	rates	for	2006	and	2005	primarily	because	this	period	preceded	the	final	reorganization	of	our	European operations	which	favorably	affected	the	country-weighting	impact	on	our	rate.	(Refer	to	Note	3	within	Notes	to	Consolidated	Financial	Statements	for	further	information	on	this	initiative.) Additionally,	the	2004	consolidated	effective	income	tax	rate	included	a	provision	of	approximately	$28	million	(net	of	related	foreign	tax	credits)	for	approximately	$1.1	billion	of	dividends	from foreign	subsidiaries	which	we	elected	to	repatriate	in	2005	under	the	American	Jobs	Creation	Act.	Finally,	2005	was	the	first	year	in	which	we	were	permitted	to	claim	a	phased-in	deduction from	U.S.	taxable	income	equal	to	a	stipulated	percentage	of	qualified	production	income	("QPI").

# 	Liquidity	and	Capital	Resources

Our	principal	source	of	liquidity	is	operating	cash	flows,	supplemented	by	borrowings	for	major	acquisitions	and	other	significant	transactions.	This	cash-generating	capability	is	one	of	our fundamental	strengths	and	provides	us	with	substantial	financial	flexibility	in	meeting	operating	and	investing	needs.	The	principal	source	of	our	operating	cash	flow	is	net	earnings,	meaning cash	receipts	from	the	sale	of	our	products,	net	of	costs	to	manufacture	and	market	our	products.	Our	cash	conversion	cycle	is	relatively	short;	although	receivable	collection	patterns	vary around	the	world,	in	the	United	States,	our	days	sales	outstanding	(DSO)	averaged	approximately	19	days	during	the	periods	presented.	As	a	result,	our	operating	cash	flow	should	generally reflect	our	net	earnings	performance	over	time,	although,	as	illustrated	in	the	following	schedule,	specific	results	for	any	particular	year	may	be	significantly	affected	by	the	level	of	benefit	plan contributions,	working	capital	movements	(operating	assets	and	liabilities)	and	other	factors.

| (dollars	in	millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Operating\tactivities |  |  |  |
| Net\tearnings | $1,004.1 | $980.4 | $890.6 |
| year-over-year\tchange | 2.4% | 10.1% |  |
| Items\tin\tnet\tearnings\tnot\trequiring\t(providing)\tcash: |  |  |  |
| Depreciation\tand\tamortization | 352.7 | 391.8 | 410.0 |
| Deferred\tincome\ttaxes | (43.7) | (59.2) | 57.7 |
| Other\t(a) | 235.2 | 199.3 | 104.5 |
| Net\tearnings\tafter\tnon-cash\titems | \t1,548.3 | \t1,512.3 | \t1,462.8 |
| year-over-year\tchange | 2.4% | 3.4% |  |
| Pension\tand\tother\tpostretirement\tbenefit\tplan\tcontributions | (99.3) | (397.3) | (204.0) |
| Changes\tin\toperating\tassets\tand\tliabilities: |  |  |  |
| Core\tworking\tcapital\t(b) | (137.2) | 45.4 | 46.0 |
| Other\tworking\tcapital | 98.7 | (17.1) | (75.8) |
| Total | (38.5) | 28.3 | (29.8) |
| Net\tcash\tprovided\tby\toperating\tactivities | $1,410.5 | $1,143.3 | $1,229.0 |
| year-over-year\tchange | 23.4% | −7.0% |  |

(a) Consists	principally	of	non-cash	expense	accruals	for	employee	compensation	and	benefit	obligations.

(b) Inventory	and	trade	receivables	less	trade	payables.

Our	operating	cash	flow	for	2006	was	approximately	$267	million	higher	than	2005,	due	primarily	to	lower	benefit	plan	contributions,	partially	offset	by	unfavorable	working	capital	movements. Correspondingly,	operating	cash	flow	for	2005	was	approximately	$86	million	lower	than	2004,	due	principally	to	a	significant	increase	in	benefit	plan	contributions.	The	decline	in	benefit	plan contributions	for	2006	reflects	the	improved	funded	position	of	our	major	benefit	plans	that	was	achieved	through	a	significant	amount	of	funding	in	the	2003-2005	period.

On	August	17,	2006,	the	Pension	Protection	Act	(PPA)	became	law	in	the	United	States.	The	PPA	revised	the	basis	and	methodology	for	determining	defined	benefit	plan	minimum	funding requirements	as	well	as	maximum	contributions	to	and	benefits	paid	from	tax-qualified	plans.	Most	of	these	provisions	are	first	applicable	to	our	U.S.	defined	benefit	pension	plans	in	2008	on	a phased-in	basis.	The	PPA	will	ultimately	require	us	to	make	additional	contributions	to	our	U.S.	plans.	However,	due	to	our	historical

funding	practices,	we	currently	believe	that	we	will	not	be	required	to	make	any	contributions	under	the	new	PPA	requirements	until	after	2012.	Accordingly,	we	do	not	expect	to	have significant	statutory	or	contractual	funding	requirements	for	our	major	retiree	benefit	plans	during	the	next	several	years,	with	total	2007	U.S.	and	foreign	plan	contributions	currently	estimated at	approximately	$54	million.	Actual	2007	contributions	could	exceed	our	current	projections,	as	influenced	by	our	decision	to	undertake	discretionary	funding	of	our	benefit	trusts	versus	other competing	investment	priorities,	future	changes	in	government	requirements,	renewals	of	union	contracts,	or	higher-than-expected	health	care	claims	experience.	Additionally,	our	projections concerning	timing	of	PPA	funding	requirements	are	subject	to	change	primarily	based	on	general	market	conditions	affecting	trust	asset	performance	and	our	future	decisions	regarding certain	elective	provisions	of	the	PPA.

In	comparison	to	2005,	the	unfavorable	movement	in	core	working	capital	during	2006	was	related	to	trade	payables	performance	and	higher	inventory	balances.	At	December	30,	2006,	our consolidated	trade	payables	balance	was	within	3%	of	the	balance	at	year-end	2005.	In	contrast,	our	trade	payables	balance	increased	approximately	22%	during	2005,	from	a	historically-low level	at	the	end	of	2004.	The	higher	inventory	balance	was	principally	related	to	higher	commodity	prices	for	our	raw	material	and	packaging	inventories	and	to	a	lesser	extent,	the	overall increase	in	the	average	number	of	weeks	of	inventory	on	hand.	Our	consolidated	inventory	balances	were	unfavorably	affected	by	U.S.	capacity	limitations	during	2006;	nevertheless,	our consolidated	inventory	balances	remain	at	industry-leading	levels.

Despite	the	unfavorable	movement	in	the	absolute	balance,	average	core	working	capital	continues	to	improve	as	a	percentage	of	net	sales.	For	the	trailing	fifty-two	weeks	ended December	30,	2006,	core	working	capital	was	6.8%	of	net	sales,	as	compared	to	7.0%	as	of	year-end	2005	and	7.3%	as	of	year-end	2004.	We	have	achieved	this	multi-year	reduction primarily	through	faster	collection	of	accounts	receivable	and	extension	of	terms	on	trade	payables.	Up	until	2006,	we	had	also	been	successful	in	implementing	logistics	improvements	to reduce	inventory	on	hand	while	continuing	to	meet	customer	requirements.	We	believe	the	opportunity	to	reduce	inventory	from	year-end	2006	levels	could	represent	a	source	of	operating cash	flow	during	2007.

For	2005,	the	net	favorable	movement	in	core	working	capital	was	related	to	the	aforementioned	increase	in	trade	payables,	partially	offset	by	an	unfavorable	movement	in	trade	receivables, which	returned	to	historical	levels	(in	relation	to	sales)	in	early	2005	from	lower	levels	at	the	end	of	2004.	We	believe	these	lower	levels	were	related	to	the	timing	of	our	53rd	week	over	the 2004	holiday	period,	which	impacted	the	core	working	capital	component	of	our	operating	cash	flow	throughout	2005.

As	presented	in	the	table	on	page	16,	other	working	capital	was	a	source	of	cash	in	2006	versus	a	use	of	cash	in	2005.	The	year-over-year	favorable	variance	of	approximately	$116	million was	attributable	to	several	factors	including	lower	debt-related	currency	swap	payments	in	2006	as	well	as	business-related	growth	in	accrued	compensation	and	promotional	liabilities.	The unfavorable	movement	in	other	working	capital	for	2004,	as	compared	to	succeeding	years,	primarily	relates	to	a	decrease	in	current	income	tax	liabilities	which	is	offset	in	the	deferred income	taxes	line	item.

Our	management	measure	of	cash	flow	is	defined	as	net	cash	provided	by	operating	activities	reduced	by	expenditures	for	property	additions.	We	use	this	non-GAAP	financial	measure	of cash	flow	to	focus	management	and	investors	on	the	amount	of	cash	available	for	debt	repayment,	dividend	distributions,	acquisition	opportunities,	and	share	repurchase.	Our	cash	flow	metric is	reconciled	to	the	most	comparable	GAAP	measure,	as	follows:

| (dollars	in	millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Net\tcash\tprovided\tby\toperating\tactivities | $1,410.5 | $1,143.3 | $1,229.0 |
| Additions\tto\tproperties | (453.1) | (374.2) | (278.6) |
| Cash\tflow | $957.4 | $769.1 | $950.4 |
| year-over-year\tchange | 24.5% | −19.1% |  |

Our	2006	and	2005	cash	flow	(as	defined)	performance	reflects	increased	spending	for	selected	capacity	expansions	to	accommodate	our	Company's	strong	sales	growth	over	the	past several	years.	This	increased	capital	spending	represented	4.2%	of	net	sales	in	2006	and	3.7%	of	net	sales	in	2005,	as	compared	to	2.9%	in	2004.	For	2007,	we	currently	expect	property expenditures	to	remain	at	approximately	4%	of	net	sales,	which	is	consistent	with	our	long-term	target	for	capital	spending.	This	forecast	includes	expenditures	associated	with	the construction	of	a	new	manufacturing	facility	in	Ontario,	Canada,	which	represents	approximately	15%	of	our	2007	capital	plan.	This	facility	is	being	constructed	to	satisfy	existing	capacity needs	in	our	North	America	business,	which	we	believe	will	partially	ease	certain	of	the	aforementioned	logistics	and	inventory	management	issues	which	we	encountered	during	2006.

For	2007,	we	are	targeting	cash	flow	of	$950-$1,025	million.	We	expect	to	achieve	our	target	principally	through	operating

profit	growth,	which	is	forecasted	to	offset	higher	levels	of	capital	spending	and	income	tax	payments	during	2007.

In	order	to	support	the	continued	growth	of	our	North	American	fruit	snacks	business,	we	completed	two	separate	business	acquisitions	during	2005	for	a	total	of	approximately	$50	million	in cash,	including	related	transaction	costs.	In	June	2005,	we	acquired	a	fruit	snacks	manufacturing	facility	and	related	assets	from	Kraft	Foods	Inc.	The	facility	is	located	in	Chicago,	Illinois	and employs	approximately	400	active	hourly	and	salaried	employees.	In	November	2005,	we	acquired	substantially	all	of	the	assets	and	certain	liabilities	of	a	Washington	State-based manufacturer	of	natural	and	organic	fruit	snacks.

For	2006,	our	Board	of	Directors	authorized	stock	repurchases	for	general	corporate	purposes	and	to	offset	issuances	for	employee	benefit	programs	of	up	to	$650	million,	which	we	spent	to repurchase	approximately	14.9	million	shares.	This	activity	consisted	principally	of	a	February	2006	private	transaction	with	the	W.K.	Kellogg	Foundation	Trust	("the	Trust")	to	repurchase approximately	12.8	million	shares	for	$550	million.	Pursuant	to	similar	Board	authorizations	applicable	to	those	years,	we	paid	$664	million	in	2005	to	repurchase	approximately	15.4	million shares	and	$298	million	in	2004	for	approximately	7.3	million	shares.	The	2005	activity	consisted	principally	of	a	November	2005	private	transaction	with	the	Trust	to	repurchase	approximately 9.4	million	shares	for	$400	million.	For	2007,	our	Board	of	Directors	has	authorized	a	stock	repurchase	program	of	up	to	$650	million.

In	July	2005,	we	redeemed	$723.4	million	of	long-term	debt,	representing	the	remaining	principal	balance	of	our	6.0%	U.S.	Dollar	Notes	due	April	2006.	In	October	2005,	we	repaid $200	million	of	maturing	4.875%	U.S.	Dollar	Notes.	In	December	2005,	we	redeemed	$35.4	million	of	U.S.	Dollar	Notes	due	June	2008.	These	payments	were	funded	principally	through issuance	of	U.S.	Dollar	short-term	debt.

During	November	2005,	subsidiaries	of	the	Company	issued	approximately	$930	million	of	foreign	currency-denominated	debt	in	offerings	outside	of	the	United	States,	consisting	of	Euro 550	million	of	floating	rate	notes	due	2007	(the	"Euro	Notes")	and	approximately	C$330	million	of	Canadian	commercial	paper.	These	debt	issuances	were	guaranteed	by	the	Company	and net	proceeds	were	used	primarily	for	the	payment	of	dividends	pursuant	to	the	American	Jobs	Creation	Act	and	the	purchase	of	stock	and	assets	of	other	direct	or	indirect	subsidiaries	of	the Company,	as	well	as	for	general	corporate	purposes.

To	utilize	excess	cash	and	reduce	financing	costs,	on	January	31,	2007,	we	announced	an	early	redemption	of	the	Euro	Notes,	effective	February	28,	2007.	To	partially	refinance	this redemption,	we	established	a	program	to	issue	euro-commercial	paper	notes	up	to	a	maximum	aggregate	amount	outstanding	at	any	time	of	$750	million	or	its	equivalent	in	alternative currencies.	The	notes	may	have	maturities	ranging	up	to	364	days	and	will	be	senior	unsecured	obligations	of	the	applicable	issuer,	with	subsidiary	issuances	guaranteed	by	the	Company.	In connection	with	these	financing	activities,	we	increased	our	short-term	lines	of	credit	from	$2.2	billion	at	December	30,	2006	to	approximately	$2.6	billion,	via	a	$400	million	unsecured 364-Day	Credit	Agreement	effective	January	31,	2007.	The	364-Day	Agreement	contains	customary	covenants,	warranties,	and	restrictions	similar	to	those	applicable	to	our	existing $2.0	billion	Five-Year	Credit	Agreement,	which	expires	in	2011.	These	facilities	are	available	for	general	corporate	purposes,	including	commercial	paper	back-up,	although	the	Company	does not	currently	anticipate	any	usage	under	the	facilities.	(Refer	to	Note	7	within	Notes	to	Consolidated	Financial	Statements	for	further	information	on	our	debt	issuances	and	credit	facilities.)

At	December	30,	2006,	our	total	debt	was	approximately	$5.0	billion,	approximately	even	with	the	balances	at	year-end	2005	and	2004.	During	2005,	we	increased	our	benefit	trust investments	through	plan	funding	by	approximately	13%,	reduced	the	Company's	common	stock	outstanding	through	repurchase	programs	by	approximately	4%,	and	implemented	a	mid-year increase	in	the	shareholder	dividend	level	of	approximately	10%.	Similarly,	during	2006,	we	further	reduced	our	common	stock	outstanding	through	repurchase	programs	by	approximately	4% and	implemented	a	mid-year	increase	in	the	shareholder	dividend	level	of	approximately	5%.	Primarily	due	to	the	prioritization	of	these	uses	of	cash	flow,	plus	the	aforementioned	need	to selectively	invest	in	production	capacity,	we	did	not	reduce	our	total	debt	balance	during	the	past	two	years,	but	remain	committed	to	net	debt	reduction	(total	debt	less	cash)	over	the	long term.	We	currently	expect	the	total	debt	balance	at	year-end	2007	to	be	slightly	higher	than	the	2006	year-end	level.

We	believe	that	we	will	be	able	to	meet	our	interest	and	principal	repayment	obligations	and	maintain	our	debt	covenants	for	the	foreseeable	future,	while	still	meeting	our	operational	needs, including	the	pursuit	of	selected	growth	opportunities,	through	our	strong	cash	flow,	our	program	of	issuing	short-term	debt,	and	maintaining	credit	facilities	on	a	global	basis.	Our	significant long-term	debt	issues	do	not

contain	acceleration	of	maturity	clauses	that	are	dependent	on	credit	ratings.	A	change	in	the	Company's	credit	ratings	could	limit	its	access	to	the	U.S.	short-term	debt	market	and/or increase	the	cost	of	refinancing	long-term	debt	in	the	future.	However,	even	under	these	circumstances,	we	would	continue	to	have	access	to	our	credit	facilities,	which	are	in	amounts sufficient	to	cover	our	outstanding	commercial	paper	balance,	which	was	$1.3	billion	at	December	30,	2006.	In	addition,	assuming	continuation	of	market	liquidity,	we	believe	it	would	be possible	to	term	out	certain	short-term	maturities	or	obtain	additional	credit	facilities	such	that	the	Company	could	further	extend	its	ability	to	meet	its	long-term	borrowing	obligations	through 2008.

# 	Off-balance	Sheet	Arrangements	and	Other	Obligations

# Off-balance	sheet	arrangements

Our	off-balance	sheet	arrangements	are	generally	limited	to	a	residual	value	guarantee	on	one	operating	lease	of	approximately	$13	million,	which	will	expire	in	July	2007,	and	guarantees	on loans	to	independent	contractors	for	their	purchase	of	DSD	route	franchises	up	to	$17	million.	We	record	the	estimated	fair	value	of	these	loan	guarantees	on	our	balance	sheet,	which	was insignificant	for	the	periods	presented.	Refer	to	Note	6	within	Notes	to	Consolidated	Financial	Statements	for	further	information.

# Contractual	obligations

The	following	table	summarizes	future	estimated	cash	payments	to	be	made	under	existing	contractual	obligations.	Further	information	on	debt	obligations	is	contained	in	Note	7	within	Notes to	Consolidated	Financial	Statements.	Further	information	on	lease	obligations	is	contained	in	Note	6.

| Contractual	obligations |  |  |  | Payments	due	by	period |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (millions) | Total | 2007 | 2008 | 2009 | 2010 | 2011 | 2012\tand\nbeyond |
| Long-term\tdebt: |  |  |  |  |  |  |  |
| Principal | $3,792.4 | $723.3 | $466.1 | $1.2 | $1.1 | $1,500.5 | $1,100.2 |
| Interest\t(a) | \t2,474.0 | 194.7 | \t187.8 | \t181.0 | \t181.0 | 131.5 | \t1,598.0 |
| Capital\tleases | 9.4 | 2.1 | 1.4 | 1.3 | 1.0 | .6 | 3.0 |
| Operating\tleases | 575.1 | 119.7 | \t103.4 | 85.9 | 67.7 | 49.8 | 148.6 |
| Purchase\tobligations\t(b) | 506.1 | 399.4 | 62.7 | 32.3 | 10.8 | .4 | .5 |
| Other\tlong-term\t(c) | 570.0 | 98.5 | 90.0 | 60.6 | 63.1 | 58.9 | 198.9 |
| Total | $7,927.0 | $1,537.7 | $911.4 | $362.3 | $324.7 | $1,741.7 | $3,049.2 |

(a) Includes	interest	payments	on	long-term	fixed	rate	debt.	As	of	December	30,	2006,	the	Company	did	not	have	any	long-term	variable	rate	debt	or	any	outstanding	interest	rate	derivative	financial	instruments.

(b) Purchase	obligations	consist	primarily	of	fixed	commitments	under	various	co-marketing	agreements	and	to	a	lesser	extent,	of	service	agreements,	and	contracts	for	future	delivery	of	commodities,	packaging	materials, and	equipment.	The	amounts	presented	in	the	table	do	not	include	items	already	recorded	in	accounts	payable	or	other	current	liabilities	at	year-end	2006,	nor	does	the	table	reflect	cash	flows	we	are	likely	to	incur based	on	our	plans,	but	are	not	obligated	to	incur.	Therefore,	it	should	be	noted	that	the	exclusion	of	these	items	from	the	table	could	be	a	limitation	in	assessing	our	total	future	cash	flows	under	contracts.

(c) Other	long-term	contractual	obligations	are	those	associated	with	noncurrent	liabilities	recorded	within	the	Consolidated	Balance	Sheet	at	year-end	2006	and	consist	principally	of	projected	commitments	under	deferred compensation	arrangements,	multiemployer	plans,	and	supplemental	employee	retirement	benefits.	The	table	also	includes	our	current	estimate	of	minimum	contributions	to	defined	benefit	pension	and	postretirement benefit	plans	through	2012	as	follows:	2007−$54;	2008−$49;	2009−$41;	2010−$42;	2011−$42;	2012−$43.

# 	Critical	Accounting	Policies	and

# 	Significant	Accounting	Estimates

Our	significant	accounting	policies	are	discussed	in	Note	1	within	Notes	to	Consolidated	Financial	Statements.	During	2006,	we	adopted	two	new	accounting	pronouncements	which	had	a significant	impact	on	our	Company's	financial	statements.	At	the	beginning	of	2006,	we	adopted	SFAS	No.	123(R)	"Share-Based	Payment,"	which	materially	reduced	our	fiscal	2006	results, due	primarily	to	the	first-time	recognition	of	compensation	expense	associated	with	employee	and	director	stock	option	grants.	This	topic	is	further	discussed	in	the	section	beginning	on page	21.

Secondly,	at	the	end	of	2006,	we	adopted	SFAS	No.	158	"Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans,"	which	required	us	to	reflect	the	net	over-	or under-funded	position	of	our	defined	postretirement	and	postemployment	benefit	plans	as	an	asset	or	liability	on	the	balance	sheet,	with	unrecognized	prior	service	cost	and	net	experience losses	recorded	in	shareholders'	equity.	Under	pre-existing	guidance,	these	unrecognized	amounts,	which	totaled	approximately	$890.8	million	at	December	30,	2006,	were	disclosed	only	in financial	statement	footnotes.	Accordingly,	the	after-tax	presentation	of	these	amounts	on	the	balance	sheet	reduced	consolidated	net	assets	and	shareholders'	equity	by	$591.9	million	at year-end	2006.	Nevertheless,	we	do	not	believe	this	impact	is	economically	significant	because	our	net	earnings,	cash	flow,	liquidity,	debt	covenants,	and	plan	funding	requirements	were	not affected	by	this	change	in	accounting	principle.	Refer	to	Note	1	within	Notes	to	Consolidated	Financial	Statements	for	further	information	on	SFAS	No.	158.	Refer	to	the	section	beginning	on page	22	for	information	on	our	process	for	estimating	benefit	obligations.

At	the	beginning	of	our	2007	fiscal	year,	we	adopted	FASB	Interpretation	No.	48	"Accounting	for	Uncertainty	in	Income

Taxes"	(FIN	No.	48),	which	affects	our	process	for	estimating	tax	benefits	and	liabilities,	as	further	discussed	in	the	"Income	taxes"	section	beginning	on	page	24.	The	initial	application	of FIN	No.	48	resulted	in	a	net	decrease	to	accrued	income	tax	and	related	interest	liabilities	of	approximately	$2	million,	with	an	offsetting	increase	to	retained	earnings.	Refer	to	Note	1	within Notes	to	Consolidated	Financial	Statements	for	further	information	on	FIN	No.	48.

In	September	2006,	the	FASB	issued	SFAS	No.	157	"Fair	Value	Measurements"	to	provide	enhanced	guidance	for	using	fair	value	to	measure	assets	and	liabilities.	The	standard	also expands	disclosure	requirements	for	assets	and	liabilities	measured	at	fair	value,	how	fair	value	is	determined,	and	the	effect	of	fair	value	measurements	on	earnings.	The	standard	applies whenever	other	authoritative	literature	requires	(or	permits)	certain	assets	or	liabilities	to	be	measured	at	fair	value,	but	does	not	expand	the	use	of	fair	value.	SFAS	No.	157	is	effective	for financial	statements	issued	for	fiscal	years	beginning	after	November	15,	2007,	and	interim	periods	within	those	years.	Early	adoption	is	permitted.	We	plan	to	adopt	SFAS	No.	157	in	the	first quarter	of	our	2008	fiscal	year.	For	the	Company,	balance	sheet	items	carried	at	fair	value	consist	primarily	of	derivatives	and	other	financial	instruments,	assets	held	for	sale,	exit	liabilities, and	the	trust	asset	component	of	net	benefit	plan	obligations.	Relevant	to	the	"Intangibles"	section	beginning	on	this	page,	we	also	use	fair	value	concepts	to	test	various	long-lived	assets	for impairment	and	to	initially	measure	assets	and	liabilities	acquired	in	a	business	combination.	We	are	currently	evaluating	the	impact	of	adoption	on	how	these	assets	and	liabilities	are	currently measured.

Our	critical	accounting	estimates,	which	require	significant	judgments	and	assumptions	likely	to	have	a	material	impact	on	our	financial	statements,	are	discussed	in	the	following	sections	on pages	20-25.

# Promotional	expenditures

Our	promotional	activities	are	conducted	either	through	the	retail	trade	or	directly	with	consumers	and	involve	in-store	displays	and	events;	feature	price	discounts	on	our	products;	consumer coupons,	contests,	and	loyalty	programs;	and	similar	activities.	The	costs	of	these	activities	are	generally	recognized	at	the	time	the	related	revenue	is	recorded,	which	normally	precedes	the actual	cash	expenditure.	The	recognition	of	these	costs	therefore	requires	management	judgment	regarding	the	volume	of	promotional	offers	that	will	be	redeemed	by	either	the	retail	trade	or consumer.	These	estimates	are	made	using	various	techniques	including	historical	data	on	performance	of	similar	promotional	programs.	Differences	between	estimated	expense	and	actual redemptions	are	normally	insignificant	and	recognized	as	a	change	in	management	estimate	in	a	subsequent	period.	On	a	full-year	basis,	these	subsequent	period	adjustments	have	rarely represented	in	excess	of	.4%	(.004)	of	our	Company's	net	sales.	However,	as	our	Company's	total	promotional	expenditures	(including	amounts	classified	as	a	revenue	reduction)	represented nearly	30%	of	2006	net	sales,	the	likelihood	exists	of	materially	different	reported	results	if	different	assumptions	or	conditions	were	to	prevail.

# Intangibles

We	follow	SFAS	No.	142	"Goodwill	and	Other	Intangible	Assets"	in	evaluating	impairment	of	intangibles.	We	perform	this	evaluation	at	least	annually	during	the	fourth	quarter	of	each	year	in conjunction	with	our	annual	budgeting	process.	Under	SFAS	No.	142,	goodwill	impairment	testing	first	requires	a	comparison	between	the	carrying	value	and	fair	value	of	a	reporting	unit	with associated	goodwill.	Carrying	value	is	based	on	the	assets	and	liabilities	associated	with	the	operations	of	that	reporting	unit,	which	often	requires	allocation	of	shared	or	corporate	items among	reporting	units.	The	fair	value	of	a	reporting	unit	is	based	primarily	on	our	assessment	of	profitability	multiples	likely	to	be	achieved	in	a	theoretical	sale	transaction.	Similarly, impairment	testing	of	other	intangible	assets	requires	a	comparison	of	carrying	value	to	fair	value	of	that	particular	asset.	Fair	values	of	non-goodwill	intangible	assets	are	based	primarily	on projections	of	future	cash	flows	to	be	generated	from	that	asset.	For	instance,	cash	flows	related	to	a	particular	trademark	would	be	based	on	a	projected	royalty	stream	attributable	to	branded product	sales.	These	estimates	are	made	using	various	inputs	including	historical	data,	current	and	anticipated	market	conditions,	management	plans,	and	market	comparables.	We periodically	engage	third-party	valuation	consultants	to	assist	in	this	process.

We	also	follow	SFAS	No.	142	in	evaluating	the	useful	life	over	which	a	non-goodwill	intangible	asset	is	expected	to	contribute	directly	or	indirectly	to	the	cash	flows	of	the	Company.	An intangible	asset	with	a	finite	useful	life	is	amortized;	an	intangible	asset	with	an	indefinite	useful	life	is	not	amortized,	but	is	evaluated	annually	for	impairment.	Reaching	a	determination	on useful	life	requires	significant	judgments	and	assumptions	regarding	the	future	effects	of	obsolescence,	demand,	competition,	other	economic	factors	(such	as	the	stability	of	the	industry, known	technological	advances,	legislative	action	that	results	in	an	uncertain	or	changing	regulatory	environment,	and	expected	changes	in

distribution	channels),	the	level	of	required	maintenance	expenditures,	and	the	expected	lives	of	other	related	groups	of	assets.

At	December	30,	2006,	intangible	assets,	net,	were	$4.9	billion,	consisting	primarily	of	goodwill	and	trademarks	associated	with	the	2001	acquisition	of	Keebler	Foods	Company.	Within	this total,	approximately	$1.4	billion	of	non-goodwill	intangible	assets	were	classified	as	indefinite-lived,	comprised	principally	of	Keebler	trademarks.	While	we	currently	believe	that	the	fair	value	of all	of	our	intangibles	exceeds	carrying	value	and	that	those	intangibles	so	classified	will	contribute	indefinitely	to	the	cash	flows	of	the	Company,	materially	different	assumptions	regarding future	performance	of	our	North	American	snacks	business	or	the	weighted-average	cost	of	capital	used	in	the	valuations	could	result	in	significant	impairment	losses	and/or	amortization expense.

# Stock	compensation

In	December	2004,	the	FASB	issued	SFAS	No.	123(R)	"Share-Based	Payment,"	which	generally	requires	public	companies	to	measure	the	cost	of	employee	services	received	in	exchange for	an	award	of	equity	instruments	based	on	the	grant-date	fair	value	and	to	recognize	this	cost	over	the	requisite	service	period.	We	adopted	SFAS	No.	123(R)	as	of	the	beginning	of	our	2006 fiscal	year,	using	the	modified	prospective	method.	Accordingly,	prior	years	were	not	restated,	but	our	2006	results	include	compensation	expense	associated	with	unvested	equity-based awards,	which	were	granted	prior	to	2006.	With	the	adoption	of	this	pronouncement,	stock-based	compensation	represents	a	critical	accounting	policy	of	the	Company,	which	is	further described	in	Note	1	within	Notes	to	the	Consolidated	Financial	Statements.

For	2006,	our	adoption	of	SFAS	No.	123(R)	has	resulted	in	an	increase	in	the	Company's	corporate	SGA	expense	and	a	corresponding	reduction	to	earnings	and	net	earnings	per	share,	due primarily	to	recognition	of	compensation	expense	associated	with	employee	and	director	stock	option	grants.	No	such	expense	was	recognized	under	our	previous	accounting	method	in	pre- 2006	periods;	however,	we	were	required	to	disclose	pro	forma	results	under	the	alternate	fair	value	method	prescribed	by	SFAS	No.	123	"Accounting	for	Stock-Based	Compensation."	Using reported	results	for	2006	and	pro	forma	results	for	2005,	the	comparable	impact	of	stock	compensation	expense	is	presented	in	the	following	table:

|  | Stock-based |  |  |
| :--- | :--- | :--- | :--- |
|  | compensation\texpense | compensation\texpense | Diluted\tEPS |
| (millions,\texcept\tper\tshare\tdata) | Pre-tax | Net\tof\ttax | impact |
| 2006: |  |  |  |
| As\treported\tcomparable | $30.3 | $19.3 | $.04 |
| SFAS\tNo.\t123(R)\tadoption\timpact | 65.4 | 42.4 | .11 |
| As\treported\ttotal | $95.7 | $61.7 | $.15 |
| 2005: |  |  |  |
| As\treported\tcomparable | $18.5 | $11.8 | $.03 |
| Pro\tforma\tincremental | 57.9 | 36.9 | .09 |
| Pro\tforma\ttotal | $76.4 | $48.7 | $.12 |

As	illustrated	in	the	preceding	table,	the	pro	forma	incremental	impact	of	stock	compensation	was	$.09	per	share	for	2005	versus	an	$.11	impact	of	adopting	SFAS	No.	123(R)	in	2006.	The $.02	year-over-year	increase	in	the	per-share	impact	is	due	principally	to	an	increase	in	the	number	of	options	granted	during	2006	and	a	lower	average	number	of	shares	outstanding	on which	the	calculation	is	based.	As	explained	in	the	following	paragraphs,	the	amount	of	stock	compensation	recognized	for	any	particular	year	is	highly	dependent	on	market	conditions	and other	factors	outside	of	our	control.	Based	on	historical	patterns	and	predicted	market	conditions	existing	at	December	30,	2006,	we	currently	expect	the	2007	earnings	per	share	impact	of stock	option	expense	to	be	within	the	range	of	actual	2005	and	2006	results.

Accounting	for	stock	compensation	under	SFAS	No.	123(R)	represents	a	critical	accounting	estimate,	which	requires	significant	judgments	and	assumptions	likely	to	have	a	material	impact	on our	financial	statements.	Due	to	the	need	to	determine	the	grant-date	fair	value	of	equity	instruments	that	have	not	yet	been	awarded,	the	actual	impact	on	future	results	will	depend,	in	part, on	actual	awards	during	any	reporting	period	and	various	market	factors	that	affect	the	fair	value	of	those	awards.	Additionally,	while	the	timing	and	volume	of	grants	associated	with	a particular	year's	long-term	incentive	compensation	are	within	our	control,	the	timing	and	volume	of	"reload"	option	grants	are	not.	Reload	options	are	awarded	to	eligible	employees	and directors	to	replace	previously-owned	Company	stock	used	by	those	individuals	to	pay	the	exercise	price,	including	related	employment	taxes,	of	vested	pre-2004	option	awards	containing this	accelerated	ownership	feature.	Under	SFAS	No.	123(R),	these	reload	options	result	in	additional	compensation	expense	in	the	year	of	grant	and	for	2006,	represented	approximately	one- third	of	the	Company's	total	stock	option	expense.	The

Company	has	not	granted	options	containing	an	accelerated	ownership	feature	since	2003;	however,	the	potential	requirement	to	award	reload	options	over	the	contractual	10-year	term	of the	original	grants	could	continue	to	significantly	impact	the	amount	of	our	stock-based	compensation	expense	for	a	number	of	years.

We	estimate	the	fair	value	of	each	stock	option	award	on	the	date	of	grant	using	a	lattice-based	option	valuation	model	for	annual	grants	and	a	Black-Scholes	model	for	reload	grants.	These models	require	us	to	make	predictive	assumptions	regarding	future	stock	price	volatility,	employee	exercise	behavior,	and	dividend	yield.	Our	methods	for	selecting	these	valuation assumptions	are	explained	in	Note	8	within	Notes	to	Consolidated	Financial	Statements.	In	particular,	our	estimate	of	stock	price	volatility	is	based	principally	on	historical	volatility	of	the options	granted,	and	to	a	lesser	extent,	on	implied	volatilities	from	traded	options	on	the	Company's	stock.	For	the	lattice-based	model,	historical	volatility	corresponds	to	the	10-year contractual	term	of	the	options	granted;	whereas,	for	the	Black-Scholes	model,	historical	volatility	corresponds	to	the	expected	term,	which	is	currently	2.5	years.	We	decided	to	rely	more heavily	on	historical	volatility	due	to	the	greater	availability	of	data	and	reliability	of	trends	over	longer	periods	of	time,	as	compared	to	the	terms	of	more	thinly-traded	options,	which	rarely extend	beyond	two	years.	At	year-end	2006,	historical	volatilities	using	weekly	price	observations	ranged	from	approximately	23%	for	10	years	to	12%	for	2.5	years.	In	comparison,	implied volatilities	averaged	approximately	16%	for	traded	options	with	terms	in	excess	of	six	months.	Based	on	this	data,	our	weighted-average	composite	volatility	assumption	for	purposes	of valuing	our	option	grants	during	2006	was	17.9%,	as	compared	to	22.0%	for	2005.	All	other	assumptions	held	constant,	a	one	percentage	point	increase	or	decrease	in	our	2006	volatility assumption	would	increase	or	decrease	the	grant-date	fair	value	of	our	2006	option	awards	by	approximately	4%.

To	the	extent	that	actual	outcomes	differ	from	our	assumptions,	we	are	not	required	to	true	up	grant-date	fair	value-based	expense	to	final	intrinsic	values.	However,	these	differences	can impact	the	classification	of	cash	tax	benefits	realized	upon	exercise	of	stock	options,	as	explained	in	the	following	two	paragraphs.	Furthermore,	as	historical	data	has	a	significant	bearing	on our	forward-looking	assumptions,	significant	variances	between	actual	and	predicted	experience	could	lead	to	prospective	revisions	in	our	assumptions,	which	could	then	significantly	impact the	year-over-year	comparability	of	stock-based	compensation	expense.

SFAS	No.	123(R)	also	provides	that	any	corporate	income	tax	benefit	realized	upon	exercise	or	vesting	of	an	award	in	excess	of	that	previously	recognized	in	earnings	(referred	to	as	a "windfall	tax	benefit")	will	be	presented	in	the	Consolidated	Statement	of	Cash	Flows	as	a	financing	(rather	than	an	operating)	cash	flow.	If	this	standard	had	been	adopted	in	2005,	operating cash	flow	would	have	been	lower	(and	financing	cash	flow	would	have	been	higher)	by	approximately	$20	million	as	a	result	of	this	provision.	For	2006,	the	corresponding	reduction	in operating	cash	flow	attributable	to	windfall	tax	benefits	classified	as	financing	cash	flow	was	$21.5	million.	The	actual	impact	on	future	years'	operating	cash	flow	will	depend,	in	part,	on	the volume	of	employee	stock	option	exercises	during	a	particular	year	and	the	relationship	between	the	exercise-date	market	value	of	the	underlying	stock	and	the	original	grant-date	fair	value previously	determined	for	financial	reporting	purposes.

For	balance	sheet	classification	purposes,	realized	windfall	tax	benefits	are	credited	to	capital	in	excess	of	par	value	within	the	Consolidated	Balance	Sheet.	Realized	shortfall	tax	benefits (amounts	which	are	less	than	that	previously	recognized	in	earnings)	are	first	offset	against	the	cumulative	balance	of	windfall	tax	benefits,	if	any,	and	then	charged	directly	to	income	tax expense,	potentially	resulting	in	volatility	in	our	consolidated	effective	income	tax	rate.	Under	the	transition	rules	for	adopting	SFAS	No.	123(R)	using	the	modified	prospective	method,	we were	permitted	to	calculate	a	cumulative	memo	balance	of	windfall	tax	benefits	from	post-1995	years	for	the	purpose	of	accounting	for	future	shortfall	tax	benefits.	We	completed	such	study prior	to	the	first	period	of	adoption	and	currently	have	sufficient	cumulative	memo	windfall	tax	benefits	to	absorb	projected	arising	shortfalls,	such	that	2007	earnings	are	not	currently	expected to	be	affected	by	this	provision.	However,	as	employee	stock	option	exercise	behavior	is	not	within	our	control,	the	likelihood	exists	of	materially	different	reported	results	if	different assumptions	or	conditions	were	to	prevail.

# Retirement	benefits

Our	Company	sponsors	a	number	of	U.S.	and	foreign	defined	benefit	employee	pension	plans	and	also	provides	retiree	health	care	and	other	welfare	benefits	in	the	United	States	and Canada.	Plan	funding	strategies	are	influenced	by	tax	regulations.	A	substantial	majority	of	plan	assets	are	invested	in	a	globally	diversified	portfolio	of	equity	securities	with	smaller	holdings	of debt	securities	and	other	investments.	We	follow	SFAS	No.	87	"Employers'	Accounting	for	Pensions"	and	SFAS	No.	106	"Employers'	Accounting	for	Postretirement	Benefits	Other	Than Pensions"	(as	amended	by	SFAS	No.	158,	effective	as	of	our	fiscal	year-end	2006)	for	the	measurement	and	recognition	of	obligations	and	expense	related	to	our	retiree	benefit	plans. Embodied	in	both	of	these	standards	is

the	concept	that	the	cost	of	benefits	provided	during	retirement	should	be	recognized	over	the	employees'	active	working	life.	Inherent	in	this	concept	is	the	requirement	to	use	various actuarial	assumptions	to	predict	and	measure	costs	and	obligations	many	years	prior	to	the	settlement	date.	Major	actuarial	assumptions	that	require	significant	management	judgment	and have	a	material	impact	on	the	measurement	of	our	consolidated	benefits	expense	and	accumulated	obligation	include	the	long-term	rates	of	return	on	plan	assets,	the	health	care	cost	trend rates,	and	the	interest	rates	used	to	discount	the	obligations	for	our	major	plans,	which	cover	employees	in	the	United	States,	United	Kingdom,	and	Canada.

To	conduct	our	annual	review	of	the	long-term	rate	of	return	on	plan	assets,	we	work	with	third-party	financial	consultants	to	model	expected	returns	over	a	20-year	investment	horizon	with respect	to	the	specific	investment	mix	of	each	of	our	major	plans.	The	return	assumptions	used	reflect	a	combination	of	rigorous	historical	performance	analysis	and	forward-looking	views	of the	financial	markets	including	consideration	of	current	yields	on	long-term	bonds,	price-earnings	ratios	of	the	major	stock	market	indices,	and	long-term	inflation.	Our	U.S.	plan	model, corresponding	to	approximately	70%	of	our	trust	assets	globally,	currently	incorporates	a	long-term	inflation	assumption	of	2.8%	and	an	active	management	premium	of	1%	(net	of	fees) validated	by	historical	analysis.	Although	we	review	our	expected	long-term	rates	of	return	annually,	our	benefit	trust	investment	performance	for	one	particular	year	does	not,	by	itself, significantly	influence	our	evaluation.	Our	expected	rates	of	return	are	generally	not	revised,	provided	these	rates	continue	to	fall	within	a	"more	likely	than	not"	corridor	of	between	the	25th	and 75th	percentile	of	expected	long-term	returns,	as	determined	by	our	modeling	process.	Our	assumed	rate	of	return	for	U.S.	plans	in	2006	of	8.9%	equated	to	approximately	the	50th	percentile expectation	of	our	2006	model.	Similar	methods	are	used	for	various	foreign	plans	with	invested	assets,	reflecting	local	economic	conditions.	Foreign	trust	investments	represent	approximately 30%	of	our	global	benefit	plan	assets.

Based	on	consolidated	benefit	plan	assets	at	December	30,	2006,	a	100	basis	point	reduction	in	the	assumed	rate	of	return	would	increase	2007	benefits	expense	by	approximately $42	million.	Correspondingly,	a	100	basis	point	shortfall	between	the	assumed	and	actual	rate	of	return	on	plan	assets	for	2007	would	result	in	a	similar	amount	of	arising	experience	loss.	Any arising	asset-related	experience	gain	or	loss	is	recognized	in	the	calculated	value	of	plan	assets	over	a	five-year	period.	Once	recognized,	experience	gains	and	losses	are	amortized	using	a declining-balance	method	over	the	average	remaining	service	period	of	active	plan	participants,	which	for	U.S.	plans	is	presently	about	13	years.	Under	this	recognition	method,	a	100	basis point	shortfall	in	actual	versus	assumed	performance	of	all	of	our	plan	assets	in	2007	would	reduce	pre-tax	earnings	by	approximately	$1	million	in	2008,	increasing	to	approximately	$7	million in	2012.	For	each	of	the	three	years	ending	December	30,	2006,	our	actual	return	on	plan	assets	exceeded	the	recognized	assumed	return	by	the	following	amounts	(in	millions): 2006−$257.1;	2005−$39.4;	2004−$95.6.

To	conduct	our	annual	review	of	health	care	cost	trend	rates,	we	work	with	third-party	financial	consultants	to	model	our	actual	claims	cost	data	over	a	five-year	historical	period,	including	an analysis	of	pre-65	versus	post-65	age	groups	and	other	important	demographic	components	of	our	covered	retiree	population.	This	data	is	adjusted	to	eliminate	the	impact	of	plan	changes and	other	factors	that	would	tend	to	distort	the	underlying	cost	inflation	trends.	Our	initial	health	care	cost	trend	rate	is	reviewed	annually	and	adjusted	as	necessary	to	remain	consistent	with recent	historical	experience	and	our	expectations	regarding	short-term	future	trends.	In	comparison	to	our	actual	five-year	compound	annual	claims	cost	growth	rate	of	approximately	8%,	our initial	trend	rate	for	2007	of	9.5%	reflects	the	expected	future	impact	of	faster-growing	claims	experience	for	certain	demographic	groups	within	our	total	employee	population.	Our	initial	rate	is trended	downward	by	1%	per	year,	until	the	ultimate	trend	rate	of	4.75%	is	reached.	The	ultimate	trend	rate	is	adjusted	annually,	as	necessary,	to	approximate	the	current	economic	view	on the	rate	of	long-term	inflation	plus	an	appropriate	health	care	cost	premium.	Based	on	consolidated	obligations	at	December	30,	2006,	a	100	basis	point	increase	in	the	assumed	health	care cost	trend	rates	would	increase	2007	benefits	expense	by	approximately	$18	million.	A	100	basis	point	excess	of	2007	actual	health	care	claims	cost	over	that	calculated	from	the	assumed trend	rate	would	result	in	an	arising	experience	loss	of	approximately	$9	million.	Any	arising	health	care	claims	cost-related	experience	gain	or	loss	is	recognized	in	the	calculated	amount	of claims	experience	over	a	four-year	period.	Once	recognized,	experience	gains	and	losses	are	amortized	using	a	straight-line	method	over	15	years,	resulting	in	at	least	the	minimum amortization	prescribed	by	SFAS	No.	106.	The	net	experience	gain	arising	from	recognition	of	2006	claims	experience	was	approximately	$6	million.

To	conduct	our	annual	review	of	discount	rates,	we	use	several	published	market	indices	with	appropriate	duration	weighting	to	assess	prevailing	rates	on	high	quality	debt	securities,	with	a primary	focus	on	the	Citigroup	Pension	Liability	Index®	for	our	U.S.	plans.	To	test	the	appropriateness	of	these	indices,	we	periodically	engage	third-party	financial	consultants	to	conduct	a matching	exercise	between	the	expected	settlement	cash	flows	of	our	plans	and	bond	maturities,	consisting	principally	of	AA-rated	(or	the	equivalent	in	foreign	jurisdictions)	non-callable issues	with	at	least	$25	million	principal	outstanding.	The	model	does	not	assume	any	reinvestment	rates	and	assumes	that	bond	investments	mature	just	in	time	to	pay	benefits	as	they become	due.	For	those	years	where	no	suitable	bonds	are	available,	the	portfolio	utilizes	a	linear	interpolation	approach	to	impute	a	hypothetical	bond	whose	maturity	matches	the	cash	flows required	in	those	years.	As	of	four	different	interim	dates	during	2005	and	2006,	this	matching	exercise	for	our	U.S.	plans	produced	a	discount	rate	within	+/−	15	basis	points	of	the	equivalent- dated	Citigroup	Pension	Liability	Index®.	The	measurement	dates	for	our	defined	benefit	plans	are	consistent	with	our	Company's	fiscal	year	end.	Thus,	we	select	discount	rates	to	measure our	benefit	obligations	that	are	consistent	with	market	indices	during	December	of	each	year.	Based	on	consolidated	obligations	at	December	30,	2006,	a	25	basis	point	decline	in	the weighted-average	discount	rate	used	for	benefit	plan	measurement	purposes	would	increase	2007	benefits	expense	by	approximately	$17	million.	All	obligation-related	experience	gains	and losses	are	amortized	using	a	straight-line	method	over	the	average	remaining	service	period	of	active	plan	participants.

Despite	the	previously-described	rigorous	policies	for	selecting	major	actuarial	assumptions,	we	periodically	experience	material	differences	between	assumed	and	actual	experience.	As	of December	30,	2006,	we	had	consolidated	unamortized	prior	service	cost	and	net	experience	losses	of	approximately	$.9	billion,	as	compared	to	approximately	$1.4	billion	at	December	31, 2005.	The	year-over-year	decline	in	net	unamortized	amounts	was	attributable	largely	to	trust	asset	performance	and	the	favorable	impact	of	rising	interest	rates	on	our	benefit	obligations.	Of the	total	unamortized	amounts	at	December	30,	2006,	approximately	80%	was	related	to	discount	rate	reductions,	with	the	remainder	primarily	related	to	net	unfavorable	health	care	claims cost	experience	(including	upward	revisions	in	the	assumed	trend	rate.)	For	2007,	we	currently	expect	total	amortization	of	prior	service	cost	and	net	experience	losses	to	be	approximately $25	million	lower	than	the	actual	2006	amount	of	approximately	$123	million.	As	discussed	on	page	14,	total	employee	benefits	expense	for	2007	is	expected	to	be	approximately	even	with the	2006	amount,	with	higher	active	health	care	claims	cost	and	postretirement	service	and	interest	cost	components	offsetting	the	lower	amortization	expense.

Assuming	actual	future	experience	is	consistent	with	our	current	assumptions,	annual	amortization	of	accumulated	prior	service	cost	and	net	experience	losses	during	each	of	the	next	several years	would	remain	approximately	level	with	the	2007	amount.

Our	consolidated	effective	income	tax	rate	is	influenced	by	tax	planning	opportunities	available	to	us	in	the	various	jurisdictions	in	which	we	operate.	Significant	judgment	is	required	in determining	our	effective	tax	rate	and	in	evaluating	our	tax	positions.	We	establish	reserves	when,	despite	our	belief	that	our	tax	return	positions	are	supportable,	we	believe	that	certain positions	are	likely	to	be	challenged	and	that	we	may	not	succeed.	We	adjust	these	reserves	in	light	of	changing	facts	and	circumstances,	such	as	the	progress	of	a	tax	audit.	Our	effective income	tax	rate	includes	the	impact	of	reserve	provisions	and	changes	to	reserves	that	we	consider	appropriate.	For	the	periods	presented,	our	income	tax	and	related	interest	reserves	have averaged	approximately	$150	million.	Reserve	adjustments	for	individual	issues	have	rarely	exceeded	1%	of	earnings	before	income	taxes	annually.	Nevertheless,	the	accumulation	of individually	insignificant	discrete	adjustments	throughout	a	particular	year	has	historically	impacted	our	consolidated	effective	income	tax	rate	by	up	to	200	basis	points.	As	discussed	on page	16,	for	2007,	we	believe	our	rate	could	be	up	to	200	basis	points	lower	if	pending	uncertain	tax	matters,	including	tax	positions	that	could	be	affected	by	planning	initiatives,	are	resolved more	favorably	than	we	currently	expect.

For	the	periods	presented,	our	policy	was	to	establish	reserves	that	reflected	the	probable	outcome	of	known	tax	contingencies.	Favorable	resolution	was	recognized	as	a	reduction	to	our effective	tax	rate	in	the	period	of	resolution.	As	compared	to	a	contingency	approach,	FIN	No.	48	(which	we	adopted	at	the	beginning	of	2007)	is

based	on	a	benefit	recognition	model,	which	we	believe	could	result	in	a	greater	amount	of	benefit	(and	a	lower	amount	of	reserve)	being	initially	recognized	in	certain	circumstances. Provided	that	the	tax	position	is	deemed	more	likely	than	not	of	being	sustained,	FIN	No.	48	permits	a	company	to	recognize	the	largest	amount	of	tax	benefit	that	is	greater	than	50	percent likely	of	being	ultimately	realized	upon	settlement.	The	tax	position	must	be	derecognized	when	it	is	no	longer	more	likely	than	not	of	being	sustained.	Despite	this	difference	in	conceptual approach,	we	do	not	currently	expect	the	adoption	of	FIN	No.	48	to	have	a	significant	impact	on	the	amount	of	benefits	recognized	in	connection	with	our	uncertain	tax	positions	during	2007. The	current	portion	of	our	tax	reserves	is	presented	in	the	balance	sheet	within	accrued	income	taxes	and	the	amount	expected	to	be	settled	after	one	year	is	recorded	in	other	noncurrent liabilities.	Significant	tax	reserve	adjustments	impacting	our	effective	tax	rate	would	be	separately	presented	in	the	rate	reconciliation	table	of	Note	11	within	Notes	to	Consolidated	Financial Statements.

# 	Future	Outlook

Our	2007	forecasted	consolidated	results	are	generally	based	on	our	long-term	annual	growth	targets	as	discussed	on	page	11,	although	we	currently	expect	our	internal	net	sales	could increase	as	much	as	four	percent,	slightly	exceeding	our	low	single-digit	growth	target.	We	expect	this	higher-than-targeted	growth	to	come	principally	from	continued	category	expansion	in Latin	America	and	strong	innovation	performance	in	North	America.	Despite	a	projected	decline	in	gross	margin	of	up	to	50	basis	points,	we	believe	the	higher-than-targeted	sales	growth	will support	mid	single-digit	consolidated	operating	profit	growth.	As	discussed	on	page	15,	net	interest	expense	for	2007	is	expected	to	be	approximately	even	with	2006	results	and	our consolidated	effective	income	tax	rate	could	be	lower	than	the	2006	rate	of	approximately	32%.	These	two	factors	are	expected	to	provide	leverage	for	purposes	of	achieving	our	target	of	high single-digit	growth	in	2007	net	earnings	per	share.	In	addition,	we	remain	committed	to	reinvesting	in	brand	building,	cost-reduction	initiatives,	and	other	growth	opportunities.	Lastly,	we expect	our	cash	flow	performance	to	remain	strong	and	are	currently	targeting	a	level	of	$950-$1,025	million	for	2007.

Our	Company	is	exposed	to	certain	market	risks,	which	exist	as	a	part	of	our	ongoing	business	operations.	We	use	derivative	financial	and	commodity	instruments,	where	appropriate,	to manage	these	risks.	As	a	matter	of	policy,	we	do	not	engage	in	trading	or	speculative	transactions.	Refer	to	Note	12	within	Notes	to	Consolidated	Financial	Statements	for	further	information on	our	accounting	policies	related	to	derivative	financial	and	commodity	instruments.

# Foreign	exchange	risk

Our	Company	is	exposed	to	fluctuations	in	foreign	currency	cash	flows	related	to	third-party	purchases,	intercompany	loans	and	product	shipments,	and	nonfunctional	currency	denominated third-party	debt.	Our	Company	is	also	exposed	to	fluctuations	in	the	value	of	foreign	currency	investments	in	subsidiaries	and	cash	flows	related	to	repatriation	of	these	investments. Additionally,	our	Company	is	exposed	to	volatility	in	the	translation	of	foreign	currency	earnings	to	U.S.	Dollars.	Primary	exposures	include	the	U.S.	Dollar	versus	the	British	Pound,	Euro, Australian	Dollar,	Canadian	Dollar,	and	Mexican	Peso,	and	in	the	case	of	inter-subsidiary	transactions,	the	British	Pound	versus	the	Euro.	We	assess	foreign	currency	risk	based	on transactional	cash	flows	and	translational	volatility	and	enter	into	forward	contracts,	options,	and	currency	swaps	to	reduce	fluctuations	in	net	long	or	short	currency	positions.	Forward contracts	and	options	are	generally	less	than	18	months	duration.	Currency	swap	agreements	are	established	in	conjunction	with	the	term	of	underlying	debt	issuances.

The	total	notional	amount	of	foreign	currency	derivative	instruments	at	year-end	2006	was	$455	million,	representing	a	settlement	obligation	of	$1	million.	The	total	notional	amount	of	foreign currency	derivative	instruments	at	year-end	2005	was	$467	million,	representing	a	settlement	obligation	of	$22	million.	All	of	these	derivatives	were	hedges	of	anticipated	transactions, translational	exposure,	or	existing	assets	or	liabilities,	and	mature	within	18	months.	Assuming	an	unfavorable	10%	change	in	year-end	exchange	rates,	the	settlement	obligation	would	have increased	by	approximately	$46	million	at	year-end	2006	and	$47	million	at	year-end	2005.	These	unfavorable	changes	would	generally	have	been	offset	by	favorable	changes	in	the	values	of the	underlying	exposures.

# Interest	rate	risk

Our	Company	is	exposed	to	interest	rate	volatility	with	regard	to	future	issuances	of	fixed	rate	debt	and	existing	and	future	issuances	of	variable	rate	debt.	Primary	exposures	include movements	in	U.S.	Treasury	rates,	London	Interbank	Offered	Rates	(LIBOR),	and	commercial	paper	rates.	We	periodically	use	interest	rate	swaps	and	forward	interest	rate	contracts	to reduce	interest	rate	volatility	and	funding	costs	associated	with	certain	debt	issues,	and	to	achieve	a	desired	proportion	of	variable	versus	fixed	rate	debt,	based	on	current	and	projected market	conditions.

Note	7	within	Notes	to	Consolidated	Financial	Statements	provides	information	on	our	significant	debt	issues.	There	were	no	interest	rate	derivatives	outstanding	at	year-end	2006	and	2005. Assuming	average	variable	rate	debt	levels	during	the	year,	a	one	percentage	point	increase	in	interest	rates	would	have	increased	interest	expense	by	approximately	$20	million	in	2006	and $9	million	in	2005.

# Price	risk

Our	Company	is	exposed	to	price	fluctuations	primarily	as	a	result	of	anticipated	purchases	of	raw	and	packaging	materials,	fuel,	and	energy.	Primary	exposures	include	corn,	wheat,	soybean oil,	sugar,	cocoa,	paperboard,	natural	gas,	and	diesel	fuel.	We	have	historically	used	the	combination	of	long-term	contracts	with	suppliers,	and

exchange-traded	futures	and	option	contracts	to	reduce	price	fluctuations	in	a	desired	percentage	of	forecasted	raw	material	purchases	over	a	duration	of	generally	less	than	18	months. During	2006,	we	entered	into	two	separate	10-year	over-the-counter	commodity	swap	transactions	to	reduce	fluctuations	in	the	price	of	natural	gas	used	principally	in	its	manufacturing processes.	The	notional	amount	of	the	swaps	totaled	approximately	$209	million,	which	currently	equates	to	approximately	50%	of	our	North	America	manufacturing	needs.

The	total	notional	amount	of	commodity	derivative	instruments	at	year-end	2006,	including	the	natural	gas	swaps,	was	$239	million,	representing	a	settlement	obligation	of	approximately $11	million.	Assuming	a	10%	decrease	in	year-end	commodity	prices,	the	settlement	obligation	would	increase	by	approximately	$17	million,	generally	offset	by	a	reduction	in	the	cost	of	the underlying	commodity	purchases.	The	total	notional	amount	of	commodity	derivative	instruments	at	year-end	2005	was	$22	million,	representing	a	settlement	receivable	of	approximately $1	million.	Assuming	a	10%	decrease	in	year-end	commodity	prices,	this	settlement	receivable	would	convert	to	an	obligation	of	approximately	$1	million,	generally	offset	by	a	reduction	in	the cost	of	the	underlying	material	purchases.

In	addition	to	the	derivative	commodity	instruments	discussed	above,	we	use	long-term	contracts	with	suppliers	to	manage	a	portion	of	the	price	exposure.	It	should	be	noted	that	the exclusion	of	these	positions	from	the	analysis	above	could	be	a	limitation	in	assessing	the	net	market	risk	of	our	Company.

# Consolidated	Statement	of	Earnings

| (millions,	except	per	share	data) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $10,906.7 | $10,177.2 | $9,613.9 |
| Cost\tof\tgoods\tsold | 6,081.5 | 5,611.6 | \t5,298.7 |
| Selling,\tgeneral,\tand\tadministrative\texpense | 3,059.4 | 2,815.3 | \t2,634.1 |
| Operating\tprofit | $1,765.8 | $1,750.3 | $1,681.1 |
| Interest\texpense | 307.4 | 300.3 | 308.6 |
| Other\tincome\t(expense),\tnet | 13.2 | (24.9) | (6.6) |
| Earnings\tbefore\tincome\ttaxes | 1,471.6 | 1,425.1 | \t1,365.9 |
| Income\ttaxes | 466.5 | 444.7 | 475.3 |
| Earnings\t(loss)\tfrom\tjoint\tventure | (1.0) | — | — |
| Net\tearnings | $1,004.1 | $980.4 | $890.6 |
| Per\tshare\tamounts: |  |  |  |
| Basic | $2.53 | $2.38 | $2.16 |
| Diluted | 2.51 | 2.36 | 2.14 |

Refer	to	Notes	to	Consolidated	Financial	Statements.

# Consolidated	Statement	of	Shareholders'	Equity

|  |  |  |  |  |  |  | Accumulated |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Capital\tin |  |  |  | other | Total | Total |
|  | Common\tstock | Common\tstock | excess\tof | Retained | Treasury\tstock | Treasury\tstock | comprehensive | shareholders' | comprehensive |
| (millions) | shares | amount | par\tvalue | earnings | shares | amount | income | equity | income |
| Balance,\tDecember\t27,\t2003 | \t415.5 | $103.8 | $24.5 | $2,247.7 | 5.8 | $(203.6) | $(729.2) | $1,443.2 | $911.3 |
| Common\tstock\trepurchases |  |  |  |  | 7.3 | \t(297.5) |  | (297.5) |  |
| Net\tearnings |  |  |  | 890.6 |  |  |  | 890.6 | 890.6 |
| Dividends |  |  |  | (417.6) |  |  |  | (417.6) |  |
| Other\tcomprehensive\tincome |  |  |  |  |  |  | 289.3 | 289.3 | 289.3 |
| Stock\toptions\texercised\tand\tother |  |  | (24.5) | (19.4) | \t(10.7) | 393.1 |  | 349.2 |  |
| Balance,\tJanuary\t1,\t2005 | \t415.5 | $103.8 | $— | $2,701.3 | 2.4 | $(108.0) | $(439.9) | $2,257.2 | $1,179.9 |
| Common\tstock\trepurchases |  |  |  |  | 15.4 | \t(664.2) |  | (664.2) |  |
| Net\tearnings |  |  |  | 980.4 |  |  |  | 980.4 | 980.4 |
| Dividends |  |  |  | (435.2) |  |  |  | (435.2) |  |
| Other\tcomprehensive\tincome |  |  |  |  |  |  | (136.2) | (136.2) | (136.2) |
| Stock\toptions\texercised\tand\tother | 3.0 | .8 | 58.9 | 19.6 | (4.7) | 202.4 |  | 281.7 |  |
| Balance,\tDecember\t31,\t2005 | \t418.5 | $104.6 | $58.9 | $3,266.1 | 13.1 | $(569.8) | $(576.1) | $2,283.7 | $844.2 |
| Revision\t(a) |  |  | 101.4 | (101.4) |  |  |  | — |  |
| Common\tstock\trepurchases |  |  |  |  | 14.9 | \t(649.8) |  | (649.8) |  |
| Net\tearnings |  |  |  | \t1,004.1 |  |  |  | 1,004.1 | 1,004.1 |
| Dividends |  |  |  | (449.9) |  |  |  | (449.9) |  |
| Other\tcomprehensive\tincome |  |  |  |  |  |  | 121.8 | 121.8 | 121.8 |
| Stock\tcompensation |  |  | 85.7 |  |  |  |  | 85.7 |  |
| Stock\toptions\texercised\tand\tother |  |  | 46.3 | (88.5) | (7.2) | 307.5 |  | 265.3 |  |
| Impact\tof\tadoption\tof\tSFAS\tNo.\t158\t(a) |  |  |  |  |  |  | (591.9) | (591.9) |  |
| Balance,\tDecember\t30,\t2006 | \t418.5 | $104.6 | $292.3 | $3,630.4 | 20.8 | $(912.1) | $(1,046.2) | $2,069.0 | $1,125.9 |

(a) Refer	to	Note	5	for	further	information	on	these	items.

# Consolidated	Balance	Sheet

| (millions,	except	share	data) | 2006 | 2005 |
| :--- | :--- | :--- |
| Current\tassets |  |  |
| Cash\tand\tcash\tequivalents | $410.6 | $219.1 |
| Accounts\treceivable,\tnet | 944.8 | 879.1 |
| Inventories | 823.9 | 717.0 |
| Other\tcurrent\tassets | 247.7 | 381.3 |
| Total\tcurrent\tassets | $2,427.0 | $2,196.5 |
| Property,\tnet | 2,815.6 | 2,648.4 |
| Other\tassets | 5,471.4 | 5,729.6 |
| Total\tassets | $10,714.0 | $10,574.5 |
| Current\tliabilities |  |  |
| Current\tmaturities\tof\tlong-term\tdebt | $723.3 | $83.6 |
| Notes\tpayable | 1,268.0 | 1,111.1 |
| Accounts\tpayable | 910.4 | 883.3 |
| Other\tcurrent\tliabilities | 1,118.5 | 1,084.8 |
| Total\tcurrent\tliabilities | $4,020.2 | $3,162.8 |
| Long-term\tdebt | 3,053.0 | 3,702.6 |
| Other\tliabilities | 1,571.8 | 1,425.4 |
| Shareholders'\tequity |  |  |
| Common\tstock,\t$.25\tpar\tvalue,\t1,000,000,000\tshares\tauthorized |  |  |
| Issued:\t418,515,339\tshares\tin\t2006\tand\t418,451,198\tshares\tin\t2005 | 104.6 | 104.6 |
| Capital\tin\texcess\tof\tpar\tvalue | 292.3 | 58.9 |
| Retained\tearnings | 3,630.4 | 3,266.1 |
| Treasury\tstock\tat\tcost: |  |  |
| 20,817,930\tshares\tin\t2006\tand\t13,121,446\tshares\tin\t2005 | (912.1) | (569.8) |
| Accumulated\tother\tcomprehensive\tincome\t(loss) | (1,046.2) | (576.1) |
| Total\tshareholders'\tequity | $2,069.0 | $2,283.7 |
| Total\tliabilities\tand\tshareholders'\tequity | $10,714.0 | $10,574.5 |

Refer	to	Notes	to	Consolidated	Financial	Statements.	In	particular,	refer	to	Note	15	for	supplemental	information	on	various	balance	sheet	captions	and	Note	1	for	details	on	the	impact	of adopting	SFAS	No.	158	"Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans."

# Consolidated	Statement	of	Cash	Flows

| (millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Operating\tactivities |  |  |  |
| Net\tearnings | $1,004.1 | $980.4 | $890.6 |
| Adjustments\tto\treconcile\tnet\tearnings\tto\toperating\tcash\tflows: |  |  |  |
| Depreciation\tand\tamortization | 352.7 | 391.8 | 410.0 |
| Deferred\tincome\ttaxes | (43.7) | (59.2) | 57.7 |
| Other\t(a) | 235.2 | 199.3 | 104.5 |
| Pension\tand\tother\tpostretirement\tbenefit\tplan\tcontributions | (99.3) | (397.3) | (204.0) |
| Changes\tin\toperating\tassets\tand\tliabilities | (38.5) | 28.3 | (29.8) |
| Net\tcash\tprovided\tby\toperating\tactivities | $1,410.5 | $ 1,143.3 | $1,229.0 |
| Investing\tactivities |  |  |  |
| Additions\tto\tproperties | $(453.1) | $(374.2) | $(278.6) |
| Acquisitions\tof\tbusinesses | \t— | (50.4) | — |
| Property\tdisposals | 9.4 | 9.8 | 7.9 |
| Investment\tin\tjoint\tventure\tand\tother | (1.7) | (.2) | .3 |
| Net\tcash\tused\tin\tinvesting\tactivities | $(445.4) | $(415.0) | $(270.4) |
| Financing\tactivities |  |  |  |
| Net\tincrease\t(reduction)\tof\tnotes\tpayable,\twith\tmaturities |  |  |  |
| less\tthan\tor\tequal\tto\t90\tdays | $(344.2) | $360.2 | $388.3 |
| Issuances\tof\tnotes\tpayable,\twith\tmaturities\tgreater\tthan\t90\tdays | \t1,065.4 | 42.6 | 142.3 |
| Reductions\tof\tnotes\tpayable,\twith\tmaturities\tgreater\tthan\t90\tdays | (565.2) | (42.3) | (141.7) |
| Issuances\tof\tlong-term\tdebt | \t— | 647.3 | 7.0 |
| Reductions\tof\tlong-term\tdebt | (84.7) | \t(1,041.3) | (682.2) |
| Issuances\tof\tcommon\tstock | 217.5 | 221.7 | 291.8 |
| Common\tstock\trepurchases | (649.8) | (664.2) | (297.5) |
| Cash\tdividends | (449.9) | (435.2) | (417.6) |
| Other | 21.9 | 5.9 | (6.7) |
| Net\tcash\tused\tin\tfinancing\tactivities | $(789.0) | $(905.3) | $(716.3) |
| Effect\tof\texchange\trate\tchanges\ton\tcash | 15.4 | (21.3) | 33.9 |
| Increase\t(decrease)\tin\tcash\tand\tcash\tequivalents | $191.5 | $(198.3) | $276.2 |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tyear | 219.1 | 417.4 | 141.2 |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | $410.6 | $219.1 | $417.4 |

# Note	1	Accounting	policies

# Basis	of	presentation

The	consolidated	financial	statements	include	the	accounts	of	Kellogg	Company	and	its	majority-owned	subsidiaries.	Intercompany	balances	and	transactions	are	eliminated.

The	Company's	fiscal	year	normally	ends	on	the	Saturday	closest	to	December	31	and	as	a	result,	a	53rd	week	is	added	approximately	every	sixth	year.	The	Company's	2006	and	2005	fiscal years	ended	on	December	30	and	December	31,	respectively.	The	Company's	2004	fiscal	year	ended	on	January	1,	2005,	and	included	a	53rd	week.

# Cash	and	cash	equivalents

Highly	liquid	temporary	investments	with	original	maturities	of	less	than	three	months	are	considered	to	be	cash	equivalents.	The	carrying	amount	approximates	fair	value.

# Accounts	receivable

Accounts	receivable	consist	principally	of	trade	receivables,	which	are	recorded	at	the	invoiced	amount,	net	of	allowances	for	doubtful	accounts	and	prompt	payment	discounts.	Trade receivables	generally	do	not	bear	interest.	Terms	and	collection	patterns	vary	around	the	world	and	by	channel.	In	the	United	States,	the	Company	generally	has	required	payment	for	goods sold	eleven	or	sixteen	days	subsequent	to	the	date	of	invoice	as	2%	10/net	11	or	1%	15/net	16,	and	days	sales	outstanding	(DSO)	has	averaged	approximately	19	days	during	the	periods presented.	The	allowance	for	doubtful	accounts	represents	management's	estimate	of	the	amount	of	probable	credit	losses	in	existing	accounts	receivable,	as	determined	from	a	review	of past	due	balances	and	other	specific	account	data.	Account	balances	are	written	off	against	the	allowance	when	management	determines	the	receivable	is	uncollectible.	The	Company	does not	have	any	off-balance	sheet	credit	exposure	related	to	its	customers.	Refer	to	Note	15	for	an	analysis	of	the	Company's	accounts	receivable	and	allowance	for	doubtful	account	balances during	the	periods	presented.

# Inventories

Inventories	are	valued	at	the	lower	of	cost	(principally	average)	or	market.

In	November	2004,	the	Financial	Accounting	Standards	Board	(FASB)	issued	Statement	of	Financial	Accounting	Standard	(SFAS)	No.	151	"Inventory	Costs"	to	converge	U.S.	GAAP principles	with	International	Accounting	Standards	on	inventory	valuation.	SFAS	No.	151	clarifies	that	abnormal	amounts	of	idle	facility	expense,	freight,	handling	costs,	and	spoilage	should be	recognized	as	period	charges,	rather	than	as	inventory	value.	This	standard	also	provides	that	fixed	production	overheads	should	be	allocated	to	units	of	production	based	on	the	normal capacity	of	production	facilities,	with	excess	overheads	being	recognized	as	period	charges.	The	provisions	of	this	standard	are	effective	for	inventory	costs	incurred	during	fiscal	years beginning	after	June	15,	2005,	with	earlier	application	permitted.	The	Company	adopted	this	standard	at	the	beginning	of	its	2006	fiscal	year.	The	Company's	pre-existing	accounting	policy for	inventory	valuation	was	generally	consistent	with	this	guidance.	Accordingly,	the	adoption	of	SFAS	No.	151	did	not	have	a	significant	impact	on	the	Company's	2006	financial	results.

# Property

The	Company's	property	consists	mainly	of	plant	and	equipment	used	for	manufacturing	activities.	These	assets	are	recorded	at	cost	and	depreciated	over	estimated	useful	lives	using straight-line	methods	for	financial	reporting	and	accelerated	methods,	where	permitted,	for	tax	reporting.	Major	property	categories	are	depreciated	over	various	periods	as	follows	(in	years): manufacturing	machinery	and	equipment	5-20;	computer	and	other	office	equipment	3-5;	building	components	15-30;	building	structures	50.	Cost	includes	an	amount	of	interest	associated with	significant	capital	projects.	Plant	and	equipment	are	reviewed	for	impairment	when	conditions	indicate	that	the	carrying	value	may	not	be	recoverable.	Such	conditions	include	an extended	period	of	idleness	or	a	plan	of	disposal.	Assets	to	be	abandoned	at	a	future	date	are	depreciated	over	the	remaining	period	of	use.	Assets	to	be	sold	are	written	down	to	realizable value	at	the	time	the	assets	are	being	actively	marketed	for	sale	and	the	disposal	is	expected	to	occur	within	one	year.	As	of	year-end	2005	and	2006,	the	carrying	value	of	assets	held	for	sale was	insignificant.

# Goodwill	and	other	intangible	assets

The	Company's	intangible	assets	consist	primarily	of	goodwill	and	major	trademarks	arising	from	the	2001	acquisition	of	Keebler	Foods	Company	("Keebler").	Management	expects	the Keebler	trademarks,	collectively,	to	contribute	indefinitely	to	the	cash	flows	of	the	Company.	Accordingly,	this	asset	has	been	classified	as	an	"indefinite-lived"	intangible	pursuant	to SFAS	No.	142	"Goodwill	and	Other	Intangible	Assets."	Under

this	standard,	goodwill	and	indefinite-lived	intangibles	are	not	amortized,	but	are	tested	at	least	annually	for	impairment.	Goodwill	impairment	testing	first	requires	a	comparison	between	the carrying	value	and	fair	value	of	a	"reporting	unit,"	which	for	the	Company	is	generally	equivalent	to	a	North	American	product	group	or	International	country	market.	If	carrying	value	exceeds fair	value,	goodwill	is	considered	impaired	and	is	reduced	to	the	implied	fair	value.	Impairment	testing	for	non-amortized	intangibles	requires	a	comparison	between	the	fair	value	and	carrying value	of	the	intangible	asset.	If	carrying	value	exceeds	fair	value,	the	intangible	is	considered	impaired	and	is	reduced	to	fair	value.	The	Company	uses	various	market	valuation	techniques	to determine	the	fair	value	of	intangible	assets	and	periodically	engages	third-party	valuation	consultants	for	this	purpose.	Refer	to	Note	2	for	further	information	on	goodwill	and	other	intangible assets.

# Revenue	recognition	and	measurement

The	Company	recognizes	sales	upon	delivery	of	its	products	to	customers	net	of	applicable	provisions	for	discounts,	returns,	allowances,	and	various	government	withholding	taxes. Methodologies	for	determining	these	provisions	are	dependent	on	local	customer	pricing	and	promotional	practices,	which	range	from	contractually	fixed	percentage	price	reductions	to reimbursement	based	on	actual	occurrence	or	performance.	Where	applicable,	future	reimbursements	are	estimated	based	on	a	combination	of	historical	patterns	and	future	expectations regarding	specific	in-market	product	performance.	The	Company	classifies	promotional	payments	to	its	customers,	the	cost	of	consumer	coupons,	and	other	cash	redemption	offers	in	net sales.	The	cost	of	promotional	package	inserts	are	recorded	in	cost	of	goods	sold.	Other	types	of	consumer	promotional	expenditures	are	normally	recorded	in	selling,	general,	and administrative	(SGA)	expense.

# Advertising

The	costs	of	advertising	are	generally	expensed	as	incurred	and	are	classified	within	SGA	expense.

# Research	and	development

The	costs	of	research	and	development	(R&D)	are	generally	expensed	as	incurred	and	are	classified	within	SGA	expense.	R&D	includes	expenditures	for	new	product	and	process	innovation, as	well	as	significant	technological	improvements	to	existing	products	and	processes.	Total	annual	expenditures	for	R&D	are	disclosed	in	Note	15	and	are	principally	comprised	of	internal salaries,	wages,	consulting,	and	supplies	attributable	to	time	spent	on	R&D	activities.	Other	costs	include	depreciation	and	maintenance	of	research	facilities	and	equipment,	including	assets at	manufacturing	locations	that	are	temporarily	engaged	in	pilot	plant	activities.

The	Company	uses	various	equity-based	compensation	programs	to	provide	long-term	performance	incentives	for	its	global	workforce.	Refer	to	Note	8	for	further	information	on	these programs	and	the	amount	of	compensation	expense	recognized	during	the	periods	presented.

In	December	2004,	the	FASB	issued	SFAS	No.	123(R)	"Share-Based	Payment,"	which	generally	requires	public	companies	to	measure	the	cost	of	employee	services	received	in	exchange for	an	award	of	equity	instruments	based	on	the	grant-date	fair	value	and	to	recognize	this	cost	over	the	requisite	service	period.	The	Company	adopted	SFAS	No.	123(R)	as	of	the	beginning of	its	2006	fiscal	year,	using	the	modified	prospective	method.	Accordingly,	prior	years	were	not	restated,	but	2006	results	include	compensation	expense	associated	with	unvested	equity- based	awards,	which	were	granted	prior	to	2006.

Prior	to	adoption	of	SFAS	No.	123(R),	the	Company	used	the	intrinsic	value	method	prescribed	by	Accounting	Principles	Board	Opinion	(APB)	No.	25	"Accounting	for	Stock	Issued	to Employees"	to	account	for	its	employee	stock	options	and	other	stock-based	compensation.	Under	this	method,	because	the	exercise	price	of	stock	options	granted	to	employees	and directors	equaled	the	market	price	of	the	underlying	stock	on	the	date	of	the	grant,	no	compensation	expense	was	recognized.	Expense	attributable	to	other	types	of	stock-based	awards	was generally	recognized	in	the	Company's	reported	results	under	APB	No.	25.

Certain	of	the	Company's	equity-based	compensation	plans	contain	provisions	that	accelerate	vesting	of	awards	upon	retirement,	disability,	or	death	of	eligible	employees	and	directors.	Prior to	adoption	of	SFAS	No.	123(R),	the	Company	generally	recognized	stock	compensation	expense	over	the	stated	vesting	period	of	the	award,	with	any	unamortized	expense	recognized immediately	if	an	acceleration	event	occurred.	SFAS	No.	123(R)	specifies	that	a	stock-based	award	is	considered	vested	for	expense	attribution	purposes	when	the	employee's	retention	of the	award	is	no	longer	contingent	on	providing	subsequent	service.	Accordingly,	beginning	in	2006,	the	Company	has	prospectively	revised	its	expense	attribution	method	so	that	the	related compensation	cost	is	recognized	immediately	for	awards	granted	to	retirement-eligible	individuals	or	over	the

period	from	the	grant	date	to	the	date	retirement	eligibility	is	achieved,	if	less	than	the	stated	vesting	period.

The	Company	classifies	pre-tax	stock	compensation	expense	principally	in	SGA	expense	within	its	corporate	operations.	Expense	attributable	to	awards	of	equity	instruments	is	accrued	in capital	in	excess	of	par	value	within	the	Consolidated	Balance	Sheet.

SFAS	No.	123(R)	also	provides	that	any	corporate	income	tax	benefit	realized	upon	exercise	or	vesting	of	an	award	in	excess	of	that	previously	recognized	in	earnings	(referred	to	as	a "windfall	tax	benefit")	will	be	presented	in	the	Consolidated	Statement	of	Cash	Flows	as	a	financing	(rather	than	an	operating)	cash	flow.	Realized	windfall	tax	benefits	are	credited	to	capital	in excess	of	par	value	in	the	Consolidated	Balance	Sheet.	Realized	shortfall	tax	benefits	(amounts	which	are	less	than	that	previously	recognized	in	earnings)	are	first	offset	against	the cumulative	balance	of	windfall	tax	benefits,	if	any,	and	then	charged	directly	to	income	tax	expense.	Under	the	transition	rules	for	adopting	SFAS	No.	123(R)	using	the	modified	prospective method,	the	Company	was	permitted	to	calculate	a	cumulative	memo	balance	of	windfall	tax	benefits	from	post-1995	years	for	the	purpose	of	accounting	for	future	shortfall	tax	benefits.	The Company	completed	such	study	prior	to	the	first	period	of	adoption	and	currently	has	sufficient	cumulative	memo	windfall	tax	benefits	to	absorb	arising	shortfalls,	such	that	earnings	were	not affected	in	2006.	Correspondingly,	the	Company	includes	the	impact	of	pro	forma	deferred	tax	assets	(i.e.,	the	"as	if"	windfall	or	shortfall)	for	purposes	of	determining	assumed	proceeds	in	the treasury	stock	calculation	of	diluted	earnings	per	share	under	SFAS	No.	128	"Earnings	Per	Share."

# Employee	postretirement	and	postemployment	benefits

The	Company	sponsors	a	number	of	U.S.	and	foreign	plans	to	provide	pension,	health	care,	and	other	welfare	benefits	to	retired	employees,	as	well	as	salary	continuance,	severance,	and long-term	disability	to	former	or	inactive	employees.	Refer	to	Notes	9	and	10	for	further	information	on	these	benefits	and	the	amount	of	expense	recognized	during	the	periods	presented.

In	order	to	improve	the	reporting	of	pension	and	other	postretirement	benefit	plans	in	the	financial	statements,	in	September	2006,	the	FASB	issued	SFAS	No.	158	"Employers'	Accounting	for Defined	Benefit	Pension	and	Other	Postretirement	Plans,"	which	is	effective	at	the	end	of	fiscal	years	ending	after	December	15,	2006.	Prior	periods	are	not	restated.	The	standard	generally requires	company	plan	sponsors	to	measure	the	net	over-	or	under-funded	position	of	a	defined	postretirement	benefit	plan	as	of	the	sponsor's	fiscal	year	end	and	to	display	that	position	as an	asset	or	liability	on	the	balance	sheet.	Any	unrecognized	prior	service	cost,	experience	gains/losses,	or	transition	obligation	are	reported	as	a	component	of	other	comprehensive	income, net	of	tax,	in	shareholders'	equity.	In	contrast,	under	pre-existing	guidance,	these	unrecognized	amounts	were	generally	disclosed	only	in	financial	statement	footnotes,	often	resulting	in	a disparity	between	plan	balance	sheet	positions	and	the	funded	status.	Furthermore,	plan	measurement	dates	could	occur	up	to	three	months	prior	to	year	end.

The	Company	adopted	SFAS	No.	158	as	of	the	end	of	its	2006	fiscal	year.	The	Company	had	previously	applied	postretirement	accounting	concepts	for	purposes	of	recognizing	its postemployment	benefit	obligations;	accordingly,	the	adoption	of	SFAS	No.	158	as	of	December	30,	2006,	affected	the	balance	sheet	display	of	both	the	Company's	postretirement	and postemployment	benefit	obligations,	as	follows:

| (millions) | Before<br>application<br>of	SFAS<br>No.	158	(a) | Adjustments | After<br>application<br>of	SFAS<br>No.	158 |
| :--- | :--- | :--- | :--- |
| Other\tassets: |  |  |  |
| Other\tintangibles\t—\tpension | $9.5 | $(9.5) | $— |
| Pension | 855.5 | (502.9) | 352.6 |
|  | $865.0 | $(512.4) | $352.6 |
| Total\tassets | $865.0 | $(512.4) | $352.6 |
| Other\tcurrent\tliabilities:\nPension,\tpostretirement,\tand\tpostemployment\tbenefits | 53.0 | (34.2) | 18.8 |
|  | $53.0 | $(34.2) | $18.8 |
| Other\tliabilities: |  |  |  |
| Pension,\tpostretirement,\tand\tpostemployment\tbenefits\t(a) | 287.2 | 412.6 | 699.8 |
| Deferred\tincome\ttaxes\t(b) | (6.8) | (298.9) | (305.7) |
|  | $280.4 | $113.7 | $394.1 |
| Total\tliabilities | $333.4 | $79.5 | $412.9 |
| Accumulated\tother\tcomprehensive\tincome\t(loss)\t(a) | $(12.2) | $(591.9) | $(604.1) |

(a) Includes	additional	minimum	pension	liability	adjustment	under	pre-existing	guidance	of	$28.5,	which	reduced	accumulated	other	comprehensive	income	by	$12.2	on	an	after-tax	basis.

(b) Represents	an	asset	component	of	deferred	tax	liabilities,	which	are	presented	on	a	net	basis	at	the	jurisdiction	level.

The	Company's	net	earnings,	cash	flow,	liquidity,	debt	covenants,	and	plan	funding	requirements	were	not	affected	by	this	change	in	accounting	principle.	The	Company	has	historically	used its	fiscal	year	end	as	the	measurement	date	for	its	company-sponsored	defined	benefit	plans.

# Recently	issued	pronouncements

# Uncertain	tax	positions

In	July	2006,	the	FASB	issued	Interpretation	No.	48	"Accounting	for	Uncertainty	in	Income	Taxes"	(FIN	No.	48)	to	clarify	what	criteria	must	be	met	prior	to	recognition	of	the	financial	statement benefit,	in	accordance	with	FASB	Statement	No.	109,	"Accounting	for	Income	Taxes,"	of	a	position	taken	in	a	tax	return.	The	provisions	of	the	final	interpretation	apply	broadly	to	all	tax positions	taken	by	an	enterprise,	including	the	decision	not	to	report	income	in	a	tax	return	or	the	decision	to	classify	a	transaction	as	tax	exempt.	The	prescribed	approach	is	based	on	a	two- step	benefit	recognition	model.	The	first	step	is	to	evaluate	the	tax	position	for	recognition	by	determining	if	the	weight	of	available	evidence	indicates	it	is	more	likely	than	not,	based	on	the technical	merits	and	without	consideration	of	detection	risk,	that	the	position	will	be	sustained	on	audit,	including	resolution	of	related	appeals	or	litigation	processes,	if	any.	The	second	step	is to	measure	the	appropriate	amount	of	the	benefit	to	recognize.	The	amount	of	benefit	to	recognize	is	measured	as	the	largest	amount	of	tax	benefit	that	is	greater	than	50	percent	likely	of being	ultimately	realized	upon	settlement.	The	tax	position	must	be	derecognized	when	it	is	no	longer	more	likely	than	not	of	being	sustained.	The	interpretation	also	provides	guidance	on recognition	and	classification	of	related	penalties	and	interest,	classification	of	liabilities,	and	disclosures	of	unrecognized	tax	benefits.	The	change	in	net	assets,	if	any,	as	a	result	of	applying the	provisions	of	this	interpretation	is	considered	a	change	in	accounting	principle	with	the	cumulative	effect	of	the	change	treated	as	an	offsetting	adjustment	to	the	opening	balance	of retained	earnings	in	the	period	of	transition.	The	final	interpretation	is	effective	for	the	first	annual	period	beginning	after	December	15,	2006,	with	earlier	application	encouraged.

The	Company	adopted	FIN	No.	48	as	of	the	beginning	of	its	2007	fiscal	year.	Prior	to	adoption,	the	Company's	pre-existing	policy	was	to	establish	reserves	for	uncertain	tax	positions	that reflected	the	probable	outcome	of	known	tax	contingencies.	As	compared	to	the	Company's	historical	approach,	the	application	of	FIN	No.	48	resulted	in	a	net	decrease	to	accrued	income	tax and	related	interest	liabilities	of	approximately	$2	million,	with	an	offsetting	increase	to	retained	earnings.

Interest	recognized	in	accordance	with	FIN	No.	48	may	be	classified	in	the	financial	statements	as	either	income	taxes	or	interest	expense,	based	on	the	accounting	policy	election	of	the enterprise.	Similarly,	penalties	may	be	classified	as	income	taxes	or	another	expense.	The	Company	has	historically	classified	income	tax-related	interest	and	penalties	as	interest	expense and	SGA	expense,	respectively,	and	will	continue	to	do	so	under	FIN	No.	48.

# Fair	value

In	September	2006,	the	FASB	issued	SFAS	No.	157	"Fair	Value	Measurements"	to	provide	enhanced	guidance	for	using	fair	value	to	measure	assets	and	liabilities.	The	standard	also expands	disclosure	requirements	for	assets	and	liabilities	measured	at	fair	value,	how	fair	value	is	determined,	and	the	effect	of	fair	value	measurements	on	earnings.	The	standard	applies whenever	other	authoritative	literature	requires	(or	permits)	certain	assets	or	liabilities	to	be	measured	at	fair	value,	but	does	not	expand	the	use	of	fair	value.	SFAS	No.	157	is	effective	for financial	statements	issued	for	fiscal	years	beginning	after	November	15,	2007,	and	interim	periods	within	those	years.	Early	adoption	is	permitted.	The	Company	plans	to	adopt SFAS	No.	157	in	the	first	quarter	of	its	2008	fiscal	year.	For	the	Company,	balance	sheet	items	carried	at	fair	value	consist	primarily	of	derivatives	and	other	financial	instruments,	assets	held for	sale,	exit	liabilities,	and	the	trust	asset	component	of	net	benefit	plan	obligations.	Additionally,	the	Company	uses	fair	value	concepts	to	test	various	long-lived	assets	for	impairment	and	to initially	measure	assets	and	liabilities	acquired	in	a	business	combination.	Management	is	currently	evaluating	the	impact	of	adoption	on	how	these	assets	and	liabilities	are	currently measured.

# Use	of	estimates

The	preparation	of	financial	statements	in	conformity	with	generally	accepted	accounting	principles	requires	management	to	make	estimates	and	assumptions	that	affect	the	reported	amounts of	assets	and	liabilities	and	disclosure	of	contingent	assets	and	liabilities	at	the	date	of	the	financial	statements	and	the	reported	amounts	of	revenues	and	expenses	during	the	reporting period.	Actual	results	could	differ	from	those	estimates.

# Note	2 Acquisitions,	other	investments,	and	intangibles

# Acquisitions

In	order	to	support	the	continued	growth	of	its	North	American	fruit	snacks	business,	the	Company	completed	two	separate	business	acquisitions	during	2005	for	a	total	of	approximately $50	million	in	cash,	including	related	transaction	costs.	In	June	2005,	the	Company	acquired	a	fruit	snacks	manufacturing	facility	and	related	assets	from	Kraft	Foods	Inc.	The	facility	is	located in	Chicago,	Illinois	and	employs	approximately	400	active	hourly	and	salaried	employees.	In	November	2005,	the	Company	acquired	substantially	all	of	the	assets	and	certain	liabilities	of	a Washington	State-based	manufacturer	of	natural	and	organic	fruit	snacks.	Assets,	liabilities,	and	results	of	the	acquired	businesses	have	been	included	in	the	Company's	consolidated financial	statements	since	the	respective	dates	of	acquisition.	The	combined	purchase	price	for	both	transactions	was	allocated	to	property	($22	million);	goodwill	and	other	indefinite-lived intangibles	($16	million);	and	inventory	and	other	working	capital	($12	million).

# Joint	venture	arrangement

In	early	2006,	a	subsidiary	of	the	Company	formed	a	joint	venture	with	a	third-party	company	domiciled	in	Turkey,	for	the	purpose	of	selling	co-branded	products	in	the	surrounding	region.	As of	December	30,	2006,	the	Company	had	contributed	approximately	$3.5	million	in	cash	for	a	50%	equity	interest	in	this	arrangement.	The	Turkish	joint	venture	is	reflected	in	the	consolidated financial	statements	on	the	equity	basis	of	accounting.	Accordingly,	the	Company	records	its	share	of	the	earnings	or	loss	from	this	arrangement	as	well	as	other	direct	transactions	with	or	on behalf	of	the	joint	venture	entity	such	as	product	sales	and	certain	administrative	expenses.	Summary	financial	information	for	one	hundred	percent	of	the	joint	venture	is	as	follows:

For	2004,	the	Company	recorded	in	selling,	general,	and	administrative	expense	impairment	losses	of	$10.4	million	to	write	off	the	remaining	carrying	value	of	a	$7.9	million	contract-based intangible	asset	in	North	America	and	$2.5	million	of	goodwill	in	Latin	America.

For	the	periods	presented,	the	Company's	intangible	assets	consisted	of	the	following:

# Intangible	assets	subject	to	amortization

(a) The	currently	estimated	aggregate	amortization	expense	for	each	of	the	four	succeeding	fiscal	years	is	approximately	$1.5	per	year	and	$1.1	for	the	fifth	succeeding	fiscal	year.

# Intangible	assets	not	subject	to	amortization

| Intangible	assets	not	subject	to	amortization |  |  |  |
| :--- | :--- | :--- | :--- |
| (millions) |  | Total\tcarrying\tamount |  |
|  | 2006 |  | 2005 |
| Trademarks | $1,410.2 |  | $1,410.2 |
| Pension\t(a) | — |  | 17.0 |
| Total | $1,410.2 |  | $1,427.2 |

(a) The	Company	adopted	SFAS	No.	158	"Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans"	as	of	the	end	of	its	2006	fiscal	year.	The	standard	generally	requires	company	plan	sponsors	to reflect	the	net	over-	or	under-funded	position	of	a	defined	postretirement	benefit	plan	as	an	asset	or	liability	on	the	balance	sheet.	Accordingly,	the	pension-related	intangible	included	in	the	preceding	table	for	2005	was eliminated	by	the	adoption	of	this	standard.	Refer	to	Note	1	for	further	information.

# Changes	in	the	carrying	amount	of	goodwill

| (millions) | United<br>States | Europe | Latin<br>America | Asia<br>Pacific<br>(a) | Consoli-<br>dated |
| :--- | :--- | :--- | :--- | :--- | :--- |
| January\t1,\t2005 | $3,443.3 | — | — | $ 2.2 | $3,445.5 |
| Acquisitions | 10.2 | — | — | — | 10.2 |
| Other | (.3) | — | — | (.1) | (.4) |
| December\t31,\t2005 | $3,453.2 | — | — | $ 2.1 | $3,455.3 |
| Purchase\taccounting\tadjustments\t(b) | (7.0) | — | — | — | (7.0) |
| Other | (.1) | — | — | .1 | — |
| December\t30,\t2006 | $3,446.1 | — | — | $ 2.2 | $3,448.3 |

(b) Relates	principally	to	the	recognition	of	an	acquired	tax	benefit	arising	from	the	purchase	of	Keebler	Foods	Company	in	2001.

# Note	3	Cost-reduction	initiatives

The	Company	views	its	continued	spending	on	cost-reduction	initiatives	as	part	of	its	ongoing	operating	principles	to	reinvest	earnings	so	as	to	provide	greater	reliability	in	meeting	long-term growth	targets.	Initiatives	undertaken	must	meet	certain	pay-back	and	internal	rate	of	return	(IRR)	targets.	Each	cost-reduction	initiative	is	normally	one	to	three	years	in	duration.	Upon completion	(or	as	each	major	stage	is	completed	in	the	case	of	multi-year	programs),	the	project	begins	to	deliver	cash	savings	and/or	reduced	depreciation,	which	is	then	used	to	fund	new initiatives.	To	implement	these	programs,	the	Company	has	incurred	various	up-front	costs,	including	asset	write-offs,	exit	charges,	and	other	project	expenditures.

# Cost	summary

For	2006,	the	Company	recorded	total	program-related	charges	of	approximately	$82	million,	comprised	of	$20	million	of	asset	write-offs,	$30	million	for	severance	and	other	exit	costs, $9	million	for	other	cash	expenditures,	$4	million	for	a	multiemployer	pension	plan	withdrawal	liability,	and	$19	million	for	pension	and	other	postretirement	plan	curtailment	losses	and	special termination	benefits.	Approximately	$74	million	of	the	total	2006	charges	were	recorded	in	cost	of	goods	sold	within	operating	segment	results,	with	approximately	$8	million	recorded	in selling,	general,	and	administrative	(SGA)	expense	within	corporate	results.	The	Company's	operating	segments	were	impacted	as	follows	(in	millions):	North	America−$46;	Europe−$28.

For	2005,	the	Company	recorded	total	program-related	charges	of	approximately	$90	million,	comprised	of	$16	million	for	a	multiemployer	pension	plan	withdrawal	liability,	$44	million	of	asset write-offs,	$21	million	for	severance	and	other	exit	costs,	and	$9	million	for	other	cash	expenditures.	All	of	the	2005	charges	were	recorded	in	cost	of	goods	sold	within	the	Company's	North America	operating	segment.

For	2004,	the	Company	recorded	total	program-related	charges	of	approximately	$109	million,	comprised	of	$41	million	in	asset	write-offs,	$1	million	for	special	pension	termination	benefits, $15	million	in	severance	and	other	exit	costs,	and	$52	million	in	other	cash	expenditures	such	as	relocation	and	consulting.	Approximately	$46	million	of	the	total	2004	charges	were	recorded in	cost	of	goods	sold,	with	approximately	$63	million	recorded	in	SGA	expense.	The	2004	charges	impacted	the	Company's	operating	segments	as	follows	(in	millions):	North	America−$44; Europe−$65.

Exit	cost	reserves	were	approximately	$14	million	at	December	30,	2006,	consisting	principally	of	severance	obligations	associated	with	projects	commenced	in	2006,	which	are	expected	to be	paid	out	in	2007.	At	December	31,	2005,	exit	cost	reserves	were	approximately	$13	million,	primarily	representing	severance	costs	that	were	substantially	paid	out	in	2006.

# Specific	initiatives

In	September	2006,	the	Company	approved	a	multi-year	European	manufacturing	optimization	plan	to	improve	utilization	of	its	facility	in	Manchester,	England	and	to	better	align	production	in Europe.	Based	on	forecasted	foreign	exchange	rates,	the	Company	currently	expects	to	incur	approximately	$60	million	in	total	up-front	costs	(including	those	already	incurred	in	2006), comprised	of	approximately	80%	cash	and	20%	non-cash	asset	write-offs,	to	complete	this	initiative.	The	cash	portion	of	the	total	up-front	costs	results	principally	from	management's	plan	to eliminate	approximately	220	hourly	and	salaried	positions	from	the	Manchester	facility	by	the	end	of	2008	through	voluntary	early	retirement	and	severance	programs.	The	pension	trust funding	requirements	of	these	early	retirements	are	expected	to	exceed	the	recognized	benefit	expense	impact	by	approximately	$10	million;	most	of	this	incremental	funding	occurred	in 2006.	During	this	period,	certain	manufacturing	equipment	will	also	be	removed	from	service.	For	2006,	the	Company	incurred	approximately	$28	million	of	total	up-front	costs,	including $9	million	of	pension	plan	curtailment	losses	and	special	termination	benefits.

During	2006,	the	Company	commenced	several	initiatives	to	enhance	the	productivity	and	efficiency	of	its	U.S.	cereal	manufacturing	network,	primarily	through	technological	and	sourcing improvements	in	warehousing	and	packaging	operations.	In	conjunction	with	these	initiatives,	the	Company	offered	voluntary	separation	incentives,	which	resulted	in	the	retirement	of approximately	80	hourly	employees	by	early	2007.	During	the	fourth	quarter	of	2006,	the	Company	incurred	approximately	$15	million	of	total	up-front	costs,	comprised	of	approximately	20% asset	write-offs	and	80%	cash	costs,	including	$10	million	of	pension	and	other	postretirement	plan	curtailment	losses.

Also	during	2006,	the	Company	undertook	an	initiative	to	improve	customer	focus	and	selling	efficiency	within	a	particular	Latin	American	market,	leading	to	a	shift	from	a	third-party	distributor to	a	direct	sales	force	model.	As	a	result	of	this	initiative,	the	Company	paid	$8	million	in	cash	during

the	fourth	quarter	of	2006	to	exit	the	existing	distribution	arrangement.

To	improve	operational	efficiency	and	better	position	its	North	American	snacks	business	for	future	growth,	during	2005,	the	Company	undertook	an	initiative	to	consolidate	U.S.	bakery capacity,	which	was	completed	by	the	end	of	2006.	The	project	resulted	in	the	closure	and	sale	of	the	Company's	Des	Plaines,	Illinois	facility	in	late	2005	and	closure	of	its	Macon,	Georgia facility	in	April	2006,	with	sale	occurring	in	September	2006.	These	closures	resulted	in	the	elimination	of	over	700	hourly	and	salaried	employee	positions,	through	the	combination	of involuntary	severance	and	attrition.	Related	to	this	initiative,	the	Company	incurred	up-front	costs	of	approximately	$80	million	in	2005,	comprised	of	approximately	one-half	asset	write-offs and	one-half	cash	costs,	including	$16	million	for	the	present	value	of	a	projected	multiemployer	pension	plan	withdrawal	liability	associated	with	closure	of	the	Macon	facility.	The	Company incurred	approximately	$31	million	in	up-front	costs	for	2006,	comprised	of	approximately	one-third	asset	write-offs	and	two-thirds	cash	costs,	including	a	$4	million	increase	in	the	Company's estimated	pension	plan	withdrawal	liability	to	$20	million.	This	increase	was	principally	attributable	to	investment	loss	experienced	during	2005	in	conjunction	with	increased	benefit	levels	for all	participating	employers.	The	final	calculation	of	this	liability	is	pending	full-year	2007	employee	hours	attributable	to	the	Company's	remaining	participation	in	this	plan,	and	is	therefore subject	to	adjustment	in	early	2008.	The	associated	cash	obligation	is	payable	to	the	pension	fund	over	a	20-year	maximum	period;	management	has	not	currently	determined	the	actual period	over	which	the	payments	will	be	made.	Except	for	this	pension	plan	withdrawal	liability,	the	Company's	cash	obligations	attributable	to	this	initiative	were	substantially	paid	out	by	year end	2006.

During	2004,	the	Company	commenced	an	operational	improvement	initiative	which	resulted	in	the	consolidation	of	veggie	foods	manufacturing	at	its	Zanesville,	Ohio	facility	and	the	closure and	sale	of	its	Worthington,	Ohio	facility	by	mid	2005.	As	a	result	of	this	closing,	approximately	280	employee	positions	were	eliminated	through	separation	and	attrition.	Related	to	this initiative,	the	Company	recognized	approximately	$20	million	of	up-front	costs	in	2004	and	$10	million	in	2005.	For	both	years,	the	total	amounts	were	comprised	of	approximately	two-thirds asset	write-offs	and	one-third	cash	costs	such	as	severance	and	removal,	which	were	entirely	paid	out	by	the	end	of	2005.

During	2004,	the	Company's	global	rollout	of	its	SAP	information	technology	system	resulted	in	accelerated	depreciation	of	legacy	software	assets	to	be	abandoned	in	2005,	as	well	as	related consulting	and	other	implementation	expenses.	Total	incremental	costs	for	2004	were	approximately	$30	million.	In	close	association	with	this	SAP	rollout,	management	undertook	a	major initiative	to	improve	the	organizational	design	and	effectiveness	of	pan-European	operations.	Specific	benefits	of	this	initiative	were	expected	to	include	improved	marketing	and	promotional coordination	across	Europe,	supply	chain	network	savings,	overhead	cost	reductions,	and	tax	savings.	To	achieve	these	benefits,	management	implemented,	at	the	beginning	of	2005,	a	new European	legal	and	operating	structure	headquartered	in	Ireland,	with	strengthened	pan-European	management	authority	and	coordination.	During	2004,	the	Company	incurred	various	up- front	costs,	including	relocation,	severance,	and	consulting,	of	approximately	$30	million.	Additional	relocation	and	other	costs	to	complete	this	business	transformation	after	2004	have	been insignificant.

In	order	to	integrate	it	with	the	rest	of	our	U.S.	operations,	during	2004,	the	Company	completed	the	relocation	of	its	U.S.	snacks	business	unit	from	Elmhurst,	Illinois	(the	former	headquarters of	Keebler	Foods	Company)	to	Battle	Creek,	Michigan.	About	one-third	of	the	approximately	300	employees	affected	by	this	initiative	accepted	relocation	or	reassignment	offers.	The	recruiting effort	to	fill	the	remaining	open	positions	was	substantially	completed	by	year-end	2004.	Attributable	to	this	initiative,	the	Company	incurred	approximately	$15	million	in	relocation,	recruiting, and	severance	costs	during	2004.	Subject	to	achieving	certain	employment	levels	and	other	regulatory	requirements,	management	expects	to	defray	a	significant	portion	of	these	up-front costs	through	various	multi-year	tax	incentives,	which	began	in	2005.	The	Elmhurst	office	building	was	sold	in	late	2004,	and	the	net	sales	proceeds	approximated	carrying	value.

# Note	4	Other	income	(expense),	net

Other	income	(expense),	net	includes	non-operating	items	such	as	interest	income,	charitable	donations,	and	foreign	exchange	gains	and	losses.	Net	foreign	exchange	transaction	losses	for the	periods	presented	were	approximately	(in	millions):	2006−$2;	2005−$2;	2004−$15.

# Note	5	Equity

During	the	year	ended	December	30,	2006,	the	Company	revised	the	classification	of	$101.4	million	of	prior	net	losses	realized	upon	reissuance	of	treasury	shares	from	capital	in	excess	of par	value	to	retained	earnings	on	the	Consolidated	Balance	Sheet.	Such	reissuances	occurred	in	connection	with	employee	and	director	stock	option	exercises	and	other	share-based settlements.	The	revision	did	not	have	an	effect	on	the	Company's	results	of	operations,	total	shareholders'	equity,	or	cash	flows.

# Earnings	per	share

Basic	net	earnings	per	share	is	determined	by	dividing	net	earnings	by	the	weighted-average	number	of	common	shares	outstanding	during	the	period.	Diluted	net	earnings	per	share	is similarly	determined,	except	that	the	denominator	is	increased	to	include	the	number	of	additional	common	shares	that	would	have	been	outstanding	if	all	dilutive	potential	common	shares had	been	issued.	Dilutive	potential	common	shares	are	comprised	principally	of	employee	stock	options	issued	by	the	Company.	Basic	net	earnings	per	share	is	reconciled	to	diluted	net earnings	per	share	in	the	following	table.	The	total	number	of	anti-dilutive	potential	common	shares	excluded	from	the	reconciliation	for	each	period	was	(in	millions):	2006−.7;	2005−1.5; 2004−4.3.

| (millions,	except	per	share	data) | Earnings | Average	shares<br>outstanding | Per<br>share |
| :--- | :--- | :--- | :--- |
| 2006 |  |  |  |
| Basic | $1,004.1 | 397.0 | $2.53 |
| Dilutive\tpotential\tcommon\tshares | \t— | 3.4 | \t(.02) |
| Diluted | $1,004.1 | 400.4 | $2.51 |
| 2005 |  |  |  |
| Basic | $980.4 | 412.0 | $2.38 |
| Dilutive\tpotential\tcommon\tshares | — | 3.6 | \t(.02) |
| Diluted | $980.4 | 415.6 | $2.36 |
| 2004 |  |  |  |
| Basic | $890.6 | 412.0 | $2.16 |
| Dilutive\tpotential\tcommon\tshares | — | 4.4 | \t(.02) |
| Diluted | $890.6 | 416.4 | $2.14 |

# Stock	transactions

The	Company	issues	shares	to	employees	and	directors	under	various	equity-based	compensation	and	stock	purchase	programs,	as	further	discussed	in	Note	8.	The	number	of	shares	issued during	the	periods	presented	was	(in	millions):	2006−7.2;	2005−7.7;	2004−10.7.	Additionally,	during	2006,	the	Company	established	Kellogg	Directtm,	a	direct	stock	purchase	and	dividend reinvestment	plan	for	U.S.	shareholders	and	issued	less	than	.1	million	shares	for	that	purpose	in	2006.

To	offset	these	issuances	and	for	general	corporate	purposes,	the	Company's	Board	of	Directors	has	authorized	management	to	repurchase	specified	amounts	of	the	Company's	common stock	in	each	of	the	periods	presented.	In	2006,	the	Company	spent	$650	million	to	repurchase	approximately	14.9	million	shares.	This	activity	consisted	principally	of	a	February	2006	private transaction	with	the	W.K.	Kellogg	Foundation	Trust	to	repurchase	approximately	12.8	million	shares	for	$550	million.	In	2005,	the	Company	spent	$664	million	to	repurchase	approximately 15.4	million	shares.	This	activity	consisted	principally	of	a	November	2005	private	transaction	with	the	W.K.	Kellogg	Foundation	Trust	to	repurchase	approximately	9.4	million	shares	for $400	million.	In	2004,	the	Company	spent	$298	million	to	repurchase	approximately	7.3	million	shares.

On	December	8,	2006,	the	Company's	Board	of	Directors	authorized	a	stock	repurchase	program	of	up	to	$650	million	for	2007.

# Comprehensive	income

Comprehensive	income	includes	net	earnings	and	all	other	changes	in	equity	during	a	period	except	those	resulting	from	investments	by	or	distributions	to	shareholders.	Other	comprehensive income	for	the	periods	presented	consists	of	foreign	currency	translation	adjustments	pursuant	to	SFAS	No.	52	"Foreign	Currency	Translation,"	unrealized	gains	and	losses	on	cash	flow hedges	pursuant	to	SFAS	No.	133	"Accounting	for	Derivative	Instruments	and	Hedging	Activities,"	and	minimum	pension	liability	adjustments	pursuant	to	SFAS	No.	87	"Employers'	Accounting for	Pensions."	Additionally,	accumulated	other	comprehensive	income	at	December	30,	2006,	reflects	the	adoption	of	SFAS	No.	158	"Employers'	Accounting	for	Defined	Benefit	Pension	and Other	Postretirement	Plans"	as	of	the

Company's	2006	fiscal	year	end.	Refer	to	Note	1	for	further	information.

|  |  | Tax |  |
| :--- | :--- | :--- | :--- |
| (millions) | Pretax\namount | (expense)\nbenefit | After-tax\namount |
| 2006 |  |  |  |
| Net\tearnings |  |  | $1,004.1 |
| Other\tcomprehensive\tincome: |  |  |  |
| Foreign\tcurrency\ttranslation\tadjustments | $10.0 | $— | 10.0 |
| Cash\tflow\thedges: |  |  |  |
| Unrealized\tloss\ton\tcash\tflow\thedges | (12.6) | 4.6 | (8.0) |
| Reclassification\tto\tnet\tearnings | 11.9 | (4.3) | 7.6 |
| Minimum\tpension\tliability\tadjustments | 172.3 | (60.1) | 112.2 |
|  | $ 181.6 | $(59.8) | 121.8 |
| Total\tcomprehensive\tincome |  |  | $1,125.9 |
| 2005 |  |  |  |
| Net\tearnings |  |  | $980.4 |
| Other\tcomprehensive\tincome: |  |  |  |
| Foreign\tcurrency\ttranslation\tadjustments | $(85.2) | $— | (85.2) |
| Cash\tflow\thedges: |  |  |  |
| Unrealized\tloss\ton\tcash\tflow\thedges | (3.7) | 1.6 | (2.1) |
| Reclassification\tto\tnet\tearnings | 26.4 | (9.9) | 16.5 |
| Minimum\tpension\tliability\tadjustments | \t(102.7) | 37.3 | (65.4) |
|  | $(165.2) | $29.0 | (136.2) |
| Total\tcomprehensive\tincome |  |  | $844.2 |
| 2004 |  |  |  |
| Net\tearnings |  |  | $890.6 |
| Other\tcomprehensive\tincome: |  |  |  |
| Foreign\tcurrency\ttranslation\tadjustments | $71.7 | $— | 71.7 |
| Cash\tflow\thedges: |  |  |  |
| Unrealized\tloss\ton\tcash\tflow\thedges | (10.2) | 3.1 | (7.1) |
| Reclassification\tto\tnet\tearnings | 19.3 | (6.9) | 12.4 |
| Minimum\tpension\tliability\tadjustments | 308.9 | (96.6) | 212.3 |
|  | $ 389.7 | $(100.4) | 289.3 |
| Total\tcomprehensive\tincome |  |  | $1,179.9 |

| (millions) | 2006 | 2005 |
| :--- | :--- | :--- |
| Foreign\tcurrency\ttranslation\tadjustments | $(409.5) | $(419.5) |
| Cash\tflow\thedges\t—\tunrealized\tnet\tloss | (32.6) | (32.2) |
| Minimum\tpension\tliability\tadjustments | \t— | \t(124.4) |
| Postretirement\tand\tpostemployment\tbenefits: |  |  |
| Net\texperience\tloss | (540.5) | — |
| Prior\tservice\tcost | (63.6) | — |
| Total\taccumulated\tother\tcomprehensive\tincome\t(loss) | $(1,046.2) | $(576.1) |

# Note	6 Leases	and	other	commitments

The	Company's	leases	are	generally	for	equipment	and	warehouse	space.	Rent	expense	on	all	operating	leases	was	(in	millions):	2006–$122.8;	2005–$115.1;	2004–$107.4.	Additionally,	the Company	is	subject	to	a	residual	value	guarantee	on	one	operating	lease	of	approximately	$13	million	which	expires	in	July	2007.	At	December	30,	2006,	the	Company	had	not	recorded	any liability	related	to	this	residual	value	guarantee.	During	2006	and	2005,	the	Company	entered	into	approximately	$2	million	and	$3	million,	respectively,	in	capital	lease	agreements	to	finance the	purchase	of	equipment.	Similar	transactions	in	2004	were	insignificant.

At	December	30,	2006,	future	minimum	annual	lease	commitments	under	noncancelable	operating	and	capital	leases	were	as	follows:

| (millions) | Operating<br>leases | Capital<br>leases |
| :--- | :--- | :--- |
| 2007 | $119.7 | $2.1 |
| 2008 | 103.4 | 1.4 |
| 2009 | 85.9 | 1.3 |
| 2010 | 67.7 | 1.0 |
| 2011 | 49.8 | .6 |
| 2012\tand\tbeyond | 148.6 | 3.0 |
| Total\tminimum\tpayments | $575.1 | $9.4 |
| Amount\trepresenting\tinterest |  | (1.6) |
| Obligations\tunder\tcapital\tleases |  | 7.8 |
| Obligations\tdue\twithin\tone\tyear |  | (2.1) |
| Long-term\tobligations\tunder\tcapital\tleases |  | $5.7 |

One	of	the	Company's	subsidiaries	is	guarantor	on	loans	to	independent	contractors	for	the	purchase	of	DSD	route	franchises.	At	year-end	2006,	there	were	total	loans	outstanding	of $16.0	million	to	517	franchisees.	All	loans	are	variable	rate	with	a	term	of	10	years.	Related	to	this	arrangement,	the	Company	has	established	with	a	financial	institution	a	one-year	renewable loan	facility	up	to	$17.0	million	with	a	five-year	term-out	and	servicing	arrangement.	The	Company	has	the	right	to	revoke	and	resell	the	route	franchises	in	the	event	of	default	or	any	other breach	of	contract	by	franchisees.	Revocations	are	infrequent.	The	Company's	maximum	potential	future	payments	under	these	guarantees	are	limited	to	the	outstanding	loan	principal balance	plus	unpaid	interest.	The	estimated	fair	value	of	these	guarantees	is	recorded	in	the	Consolidated	Balance	Sheet	and	was	insignificant	for	the	periods	presented.

The	Company	has	provided	various	standard	indemnifications	in	agreements	to	sell	business	assets	and	lease	facilities	over	the	past	several	years,	related	primarily	to	pre-existing	tax, environmental,	and	employee	benefit	obligations.	Certain	of	these	indemnifications	are	limited	by	agreement	in	either	amount	and/or	term	and	others	are	unlimited.	The	Company	has	also provided	various	"hold	harmless"	provisions	within	certain	service	type	agreements.	Because

the	Company	is	not	currently	aware	of	any	actual	exposures	associated	with	these	indemnifications,	management	is	unable	to	estimate	the	maximum	potential	future	payments	to	be	made.	At December	30,	2006,	the	Company	had	not	recorded	any	liability	related	to	these	indemnifications.

# Note	7 Debt

Notes	payable	at	year	end	consisted	of	commercial	paper	borrowings	in	the	United	States	and	Canada,	and	to	a	lesser	extent,	bank	loans	of	foreign	subsidiaries	at	competitive	market	rates, as	follows:

(a) In	March	2001,	the	Company	issued	$4.6	billion	of	long-term	debt	instruments,	primarily	to	finance	the	acquisition	of	Keebler	Foods	Company.	The	preceding	table	reflects	the remaining	principal	amounts	outstanding	as	of	year-end	2006	and	2005.	The	effective	interest	rates	on	these	Notes,	reflecting	issuance	discount	and	swap	settlement,	were	as	follows: due	2011	–	7.08%;	due	2031	–	7.62%.	Initially,	these	instruments	were	privately	placed,	or	sold	outside	the	United	States,	in	reliance	on	exemptions	from	registration	under	the Securities	Act	of	1933,	as	amended	(the	"1933	Act").	The	Company	then	exchanged	new	debt	securities	for	these	initial	debt	instruments,	with	the	new	debt	securities	being substantially	identical	in	all	respects	to	the	initial	debt	instruments,	except	for	being	registered	under	the	1933	Act.	These	debt	securities	contain	standard	events	of	default	and covenants.	The	Notes	due	2011	and	the	Debentures	due	2031	may	be	redeemed	in	whole	or	in	part	by	the	Company	at	any	time	at	prices	determined	under	a	formula	(but	not	less than	100%	of	the	principal	amount	plus	unpaid	interest	to	the	redemption	date).

(b) In	November	2001,	a	subsidiary	of	the	Company	issued	$375	million	of	five-year	4.49%	fixed	rate	U.S.	Dollar	Notes	to	replace	other	maturing	debt.	These	Notes	were	guaranteed	by the	Company	and	matured	$75	million	per	year	over	the	five-year	term,	with	the	final	principal	payment	made	in	November	2006.	These	Notes,	which	were	privately	placed,	contained standard	warranties,	events	of	default,	and	covenants.	They	also	required	the	maintenance	of	a	specified	consolidated	interest	expense	coverage	ratio,	and	limited	capital	lease obligations	and	subsidiary	debt.	In	conjunction	with	this	issuance,	the	subsidiary	of	the	Company	entered	into	a	$375	million	notional	US$/Pound	Sterling	currency	swap,	which effectively	converted	this	debt	into	a	5.302%	fixed	rate	Pound	Sterling	obligation	for	the	duration	of	the	five-year	term.

(c) In	June	2003,	the	Company	issued	$500	million	of	five-year	2.875%	fixed	rate	U.S.	Dollar	Notes,	using	the	proceeds	from	these	Notes	to	replace	maturing	long-term	debt.	These	Notes were	issued	under	an	existing	shelf	registration	statement.	The	effective	interest	rate	on	these	Notes,	reflecting	issuance	discount	and	swap	settlement,	is	3.35%.	The	Notes	contain customary	covenants	that	limit	the	ability	of	the	Company	and	its	restricted	subsidiaries	(as	defined)	to	incur	certain	liens	or	enter	into	certain	sale	and	lease-back	transactions.	In December	2005,	the	Company	redeemed	$35.4	million	of	these	Notes.

(d) In	November	2005,	a	subsidiary	of	the	Company	(the	"Borrower")	issued	Euro	550	million	of	Guaranteed	Floating	Rate	Notes	(the	"Euro	Notes")	due	May	2007.	The	Euro	Notes	were issued	and	sold	in	transactions	outside	the	United	States	in	reliance	on	exemptions	from	registration	under	the	1933	Act.	The	Euro	Notes	are	guaranteed	by	the	Company	and	bear interest	at	a	rate	of	0.12%	per	annum	above	three-month	EURIBOR	for	each	quarterly	interest	period.	The	Euro	Notes	contain	customary	covenants	that	limit	the	ability	of	the Company	and	its	restricted	subsidiaries	(as	defined)	to	incur	certain	liens	or	enter	into	certain	sale	and	lease-back	transactions.	The	Euro	Notes	were	redeemable	in	whole	or	in	part	at par	on	interest	payment	dates	or	upon	the	occurrence	of	certain	events	in	2006	and	2007.	In	accordance	with	these	terms,	on	January	31,	2007,	the	Borrower	announced

that	it	had	exercised	its	right	to	call	for	early	redemption	all	of	the	outstanding	Euro	Notes	effective	February	28,	2007,	at	a	redemption	price	equal	to	the	principal	amount,	plus accrued	and	unpaid	interest	through	the	redemption	date.

At	December	30,	2006,	the	Company	had	$2.2	billion	of	short-term	lines	of	credit,	virtually	all	of	which	were	unused	and	available	for	borrowing	on	an	unsecured	basis.	These	lines	were comprised	principally	of	an	unsecured	Five-Year	Credit	Agreement,	which	the	Company	entered	into	during	November	2006	to	replace	an	existing	facility,	which	would	have	expired	in	2009. The	agreement	allows	the	Company	to	borrow,	on	a	revolving	credit	basis,	up	to	$2.0	billion,	to	obtain	letters	of	credit	in	an	aggregate	amount	up	to	$75	million,	and	to	provide	a	procedure	for lenders	to	bid	on	short-term	debt	of	the	Company.	The	agreement	contains	customary	covenants	and	warranties,	including	specified	restrictions	on	indebtedness,	liens,	sale	and	leaseback transactions,	and	a	specified	interest	coverage	ratio.	If	an	event	of	default	occurs,	then,	to	the	extent	permitted,	the	administrative	agent	may	terminate	the	commitments	under	the	credit facility,	accelerate	any	outstanding	loans,	and	demand	the	deposit	of	cash	collateral	equal	to	the	lender's	letter	of	credit	exposure	plus	interest.	The	facility	is	available	for	general	corporate purposes,	including	commercial	paper	back-up,	although	the	Company	does	not	currently	anticipate	any	usage	under	the	facility.

# Subsequent	events

As	discussed	in	preceding	subnote	(d),	on	January	31,	2007,	a	subsidiary	of	the	Company	announced	an	early	redemption,	effective	February	28,	2007,	of	Euro	550	million	of	Guaranteed Floating	Rate	Notes	otherwise	due	May	2007.	To	partially	refinance	this	redemption,	the	Company	and	two	of	its	subsidiaries	(the	"Issuers")	established	a	program	under	which	the	Issuers may	issue	euro-commercial	paper	notes	up	to	a	maximum	aggregate	amount	outstanding	at	any	time	of	$750	million	or	its	equivalent	in	alternative	currencies.	The	notes	may	have	maturities ranging	up	to	364	days	and	will	be	senior	unsecured	obligations	of	the	applicable	Issuer.	Notes	issued	by	subsidiary	Issuers	will	be	guaranteed	by	the	Company.	The	notes	may	be	issued	at	a discount	or	may	bear	fixed	or	floating	rate	interest	or	a	coupon	calculated	by	reference	to	an	index	or	formula.

In	connection	with	these	financing	activities,	the	Company	increased	its	short-term	lines	of	credit	from	$2.2	billion	at	December	30,	2006	to	approximately	$2.6	billion,	via	a	$400	million unsecured	364-Day	Credit	Agreement	effective	January	31,	2007.	The	364-Day	Agreement	contains	customary	covenants,	warranties,	and	restrictions	similar	to	those	described	herein	for the	Five-Year	Credit	Agreement.	The	facility	is	available	for	general	corporate	purposes,	including	commercial	paper	back-up,	although	the	Company	does	not	currently	anticipate	any	usage under	the	facility.

# Note	8	Stock	compensation

The	Company	uses	various	equity-based	compensation	programs	to	provide	long-term	performance	incentives	for	its	global	workforce.	Currently,	these	incentives	consist	principally	of	stock options,	and	to	a	lesser	extent,	executive	performance	shares	and	restricted	stock	grants.	The	Company	also	sponsors	a	discounted	stock	purchase	plan	in	the	United	States	and	matching- grant	programs	in	several	international	locations.	Additionally,	the	Company	awards	stock	options	and	restricted	stock	to	its	outside	directors.	These	awards	are	administered	through	several plans,	as	described	within	this	Note.

The	2003	Long-Term	Incentive	Plan	("2003	Plan"),	approved	by	shareholders	in	2003,	permits	benefits	to	be	awarded	to	employees	and	officers	in	the	form	of	incentive	and	non-qualified	stock options,	performance	units,	restricted	stock	or	restricted	stock	units,	and	stock	appreciation	rights.	The	2003	Plan	authorizes	the	issuance	of	a	total	of	(a)	25	million	shares	plus	(b)	shares	not issued	under	the	2001	Long-Term	Incentive	Plan,	with	no	more	than	5	million	shares	to	be	issued	in	satisfaction	of	performance	units,	performance-based	restricted	shares	and	other	awards (excluding	stock	options	and	stock	appreciation	rights),	and	with	additional	annual	limitations	on	awards	or	payments	to	individual	participants.	At	December	30,	2006,	there	were	15.0	million remaining	authorized,	but	unissued,	shares	under	the	2003	Plan.	During	the	periods	presented,	specific	awards	and	terms	of	those	awards	granted	under	the	2003	Plan	are	described	in	the following	sections	of	this	Note.

The	Non-Employee	Director	Stock	Plan	("Director	Plan")	was	approved	by	shareholders	in	2000	and	allows	each	eligible	non-employee	director	to	receive	1,700	shares	of	the	Company's common	stock	annually	and	annual	grants	of	options	to	purchase	5,000	shares	of	the	Company's	common	stock.	At	December	30,	2006,	there	were

.4	million	remaining	authorized,	but	unissued,	shares	under	this	plan.	Shares	other	than	options	are	placed	in	the	Kellogg	Company	Grantor	Trust	for	Non-Employee	Directors	(the	"Grantor Trust").	Under	the	terms	of	the	Grantor	Trust,	shares	are	available	to	a	director	only	upon	termination	of	service	on	the	Board.	Under	this	plan,	awards	were	as	follows:	2006−50,000	options and	17,000	shares;	2005−55,000	options	and	17,000	shares;	2004−55,000	options	and	18,700	shares.	Options	granted	to	directors	under	this	plan	are	included	in	the	option	activity	tables within	this	Note.

The	2002	Employee	Stock	Purchase	Plan	was	approved	by	shareholders	in	2002	and	permits	eligible	employees	to	purchase	Company	stock	at	a	discounted	price.	This	plan	allows	for	a maximum	of	2.5	million	shares	of	Company	stock	to	be	issued	at	a	purchase	price	equal	to	the	lesser	of	85%	of	the	fair	market	value	of	the	stock	on	the	first	or	last	day	of	the	quarterly purchase	period.	Total	purchases	through	this	plan	for	any	employee	are	limited	to	a	fair	market	value	of	$25,000	during	any	calendar	year.	At	December	30,	2006,	there	were	1.5	million remaining	authorized,	but	unissued,	shares	under	this	plan.	Shares	were	purchased	by	employees	under	this	plan	as	follows	(approximate	number	of	shares):	2006−237,000;	2005−218,000; 2004−214,000.	Options	granted	to	employees	to	repurchase	discounted	stock	under	this	plan	are	included	in	the	option	activity	tables	within	this	Note.

Additionally,	during	2002,	a	foreign	subsidiary	of	the	Company	established	a	stock	purchase	plan	for	its	employees.	Subject	to	limitations,	employee	contributions	to	this	plan	are	matched	1:1 by	the	Company.	Under	this	plan,	shares	were	granted	by	the	Company	to	match	an	approximately	equal	number	of	shares	purchased	by	employees	as	follows	(approximate	number	of shares):	2006−80,000;	2005−80,000;	2004−82,000.

The	Executive	Stock	Purchase	Plan	was	established	in	2002	to	encourage	and	enable	certain	eligible	employees	of	the	Company	to	acquire	Company	stock,	and	to	align	more	closely	the interests	of	those	individuals	and	the	Company's	shareholders.	This	plan	allows	for	a	maximum	of	500,000	shares	of	Company	stock	to	be	issued.	At	December	30,	2006,	there	were	.5	million remaining	authorized,	but	unissued,	shares	under	this	plan.	Under	this	plan,	shares	were	granted	by	the	Company	to	executives	in	lieu	of	cash	bonuses	as	follows	(approximate	number	of shares):	2006−4,000;	2005−2,000;	2004−8,000.

For	2006,	the	Company	used	the	fair	value	method	prescribed	by	SFAS	No.	123(R)	"Share-Based	Payment"	to	account	for	its	equity-based	compensation	programs.	Prior	to	2006,	the Company	used	the	intrinsic	value	method	prescribed	by	Accounting	Principles	Board	Opinion	(APB)	No.	25	"Accounting	for	Stock	Issued	to	Employees."	Refer	to	Note	1	for	further	information on	the	Company's	accounting	policy	for	stock	compensation.

For	the	year	ended	December	30,	2006,	compensation	expense	for	all	types	of	equity-based	programs	and	the	related	income	tax	benefit	recognized	was	$95.7	million	and	$34.0	million, respectively.	As	a	result	of	adopting	SFAS	No.	123(R)	in	2006,	the	Company's	reported	pre-tax	stock-based	compensation	expense	for	the	year	was	$65.4	million	higher	(with	net	earnings and	net	earnings	per	share	(basic	and	diluted)	correspondingly	lower	by	$42.4	million	and	$.11,	respectively)	than	if	it	had	continued	to	account	for	its	equity-based	programs	under	APB No.	25.	Amounts	for	the	prior	years	are	presented	in	the	following	table	in	accordance	with	SFAS	No.	123	"Accounting	for	Stock-Based	Compensation"	and	related	interpretations.	Reported amounts	consist	principally	of	expense	recognized	for	executive	performance	share	and	restricted	stock	awards;	pro	forma	amounts	are	attributable	primarily	to	stock	option	grants.

| (millions,	except	per	share	data) | 2005 | 2004 |
| :--- | :--- | :--- |
| Stock-based\tcompensation\texpense,\tpre-tax: |  |  |
| As\treported | $18.5 | $17.5 |
| Pro\tforma | $76.4 | $64.1 |
| Associated\tincome\ttax\tbenefit\trecognized: |  |  |
| As\treported | $6.7 | $6.1 |
| Pro\tforma | $27.7 | $22.3 |
| Stock-based\tcompensation\texpense,\tnet\tof\ttax: |  |  |
| As\treported | $11.8 | $11.4 |
| Pro\tforma | $48.7 | $41.8 |
| Net\tearnings: |  |  |
| As\treported | $980.4 | $890.6 |
| Pro\tforma | $943.5 | $860.2 |
| Basic\tnet\tearnings\tper\tshare: |  |  |
| As\treported | $2.38 | $2.16 |
| Pro\tforma | $2.29 | $2.09 |
| Diluted\tnet\tearnings\tper\tshare: |  |  |
| As\treported | $2.36 | $2.14 |
| Pro\tforma | $2.27 | $2.07 |

As	of	December	30,	2006,	total	stock-based	compensation	cost	related	to	nonvested	awards	not	yet	recognized	was	approximately	$36	million	and	the	weighted-average	period	over	which this	amount	is	expected	to	be	recognized	was	approximately	1.4	years.

Cash	flows	realized	upon	exercise	or	vesting	of	stock-based	awards	in	the	periods	presented	are	included	in	the	following	table.	Within	this	table,	the	2006	windfall	tax	benefit	(amount	realized in	excess	of	that	previously	recognized	in	earnings)	of	$21.5	million	represents	the	operating	cash	flow	reduction	(and	financing	cash	flow	increase)	related	to	the	Company's	adoption	of SFAS	No.	123(R)	in	2006.	(Refer	to	Note	1	for	further	information	on	the	Company's	accounting	policies

regarding	tax	benefit	windfalls	and	shortfalls.)	Cash	used	by	the	Company	to	settle	equity	instruments	granted	under	stock-based	awards	was	insignificant.

| (millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Total\tcash\treceived\tfrom\toption\texercises\tand\tsimilar\tinstruments | $217.5 | $221.7 | $291.8 |
| Tax\tbenefits\trealized\tupon\texercise\tor\tvesting\tof\tstock-based\tawards: |  |  |  |
| Windfall\tbenefits\tclassified\tas\tfinancing\tcash\tflow | $21.5 | n/a | n/a |
| Other\tamounts\tclassified\tas\toperating\tcash\tflow | 23.4 | 40.3 | 38.6 |
| Total | $44.9 | $40.3 | $38.6 |

Shares	used	to	satisfy	stock-based	awards	are	normally	issued	out	of	treasury	stock,	although	management	is	authorized	to	issue	new	shares	to	the	extent	permitted	by	respective	plan provisions.	Refer	to	Note	5	for	information	on	shares	issued	during	the	periods	presented	to	employees	and	directors	under	various	long-term	incentive	plans	and	share	repurchases	under	the Company's	stock	repurchase	authorizations.	The	Company	does	not	currently	have	a	policy	of	repurchasing	a	specified	number	of	shares	issued	under	employee	benefit	programs	during any	particular	time	period.

# Stock	Options

During	the	periods	presented,	non-qualified	stock	options	were	granted	to	eligible	employees	under	the	2003	Plan	with	exercise	prices	equal	to	the	fair	market	value	of	the	Company's	stock on	the	grant	date,	a	contractual	term	of	ten	years,	and	a	two-year	graded	vesting	period.	Grants	to	outside	directors	under	the	Non-Employee	Director	Stock	Plan	included	similar	terms,	but vested	immediately.	Additionally,	"reload"	options	were	awarded	to	eligible	employees	and	directors	to	replace	previously-owned	Company	stock	used	by	those	individuals	to	pay	the	exercise price,	including	related	employment	taxes,	of	vested	pre-2004	option	awards	containing	this	accelerated	ownership	feature.	These	reload	options	are	immediately	vested,	with	an	expiration date	which	is	the	same	as	the	original	option	grant.

Management	estimates	the	fair	value	of	each	annual	stock	option	award	on	the	date	of	grant	using	a	lattice-based	option	valuation	model.	Due	to	the	already-vested	status	and	short	expected term	of	reload	options,	management	uses	a	Black-Scholes	model	to	value	such	awards.	Composite	assumptions,	which	are	not	materially	different	for	each	of	the	two	models,	are	presented in	the	following	table.	Weighted-average	values	are	disclosed	for	certain	inputs	which	incorporate	a	range	of	assumptions.	Expected	volatilities	are	based	principally	on	historical	volatility	of the	Company's	stock,	and	to	a	lesser	extent,	on	implied	volatilities	from	traded	options	on	the	Company's	stock.	For	the	lattice-based	model,	historical	volatility	corresponds	to	the	contractual term	of	the	options	granted;	whereas,	for	the	Black-Scholes	model,	historical	volatility	corresponds	to	the	expected	term.	The	Company	generally	uses	historical	data	to	estimate	option exercise	and	employee	termination	within	the	valuation	models;	separate	groups	of	employees	that	have	similar	historical	exercise	behavior	are	considered	separately	for	valuation	purposes. The	expected	term	of	options	granted	(which	is	an	input	to	the	Black-Scholes	model	and	an	output	from	the	lattice-based	model)	represents	the	period	of	time	that	options	granted	are expected	to	be	outstanding;	the	weighted-average	expected	term	for	all	employee	groups	is	presented	in	the	following	table.	The	risk-free	rate	for	periods	within	the	contractual	life	of	the options	is	based	on	the	U.S.	Treasury	yield	curve	in	effect	at	the	time	of	grant.

| for	grants	within	the	year	ended: | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Weighted-average\texpected\tvolatility | \t17.94% | \t22.00% | \t23.00% |
| Weighted-average\texpected\tterm\t(years) | 3.21 | 3.42 | 3.69 |
| Weighted-average\trisk-free\tinterest\trate | 4.65% | 3.81% | 2.73% |
| Dividend\tyield | 2.40% | 2.40% | 2.60% |
| Weighed-average\tfair\tvalue\tof\toptions\tgranted | $6.67 | $7.35 | $6.39 |

A	summary	of	option	activity	for	the	year	ended	December	30,	2006,	is	presented	in	the	following	table:

| Employee	and	director<br>stock	options | Shares<br>(millions) | Weighted-<br>average<br>exercise<br>price | Weighted-<br>average<br>remaining<br>contractual<br>term	(yrs.) | Aggregate<br>intrinsic<br>value<br>(millions) |
| :--- | :--- | :--- | :--- | :--- |
| Outstanding,\tbeginning\tof\tyear | 28.8 | $38 |  |  |
| Granted | 9.6 | 46 |  |  |
| Exercised | (10.9) | 37 |  |  |
| Forfeitures | (.3) | 43 |  |  |
| Expirations | (.2) | 43 |  |  |
| Outstanding,\tend\tof\tyear | 27.0 | $41 | 6.1 | $243.0 |
| Exercisable,\tend\tof\tyear | 19.9 | $40 | 5.1 | $199.0 |

Additionally,	option	activity	for	comparable	prior-year	periods	is	presented	in	the	following	table:

| (millions,	except	per	share	data) | 2005 | 2004 |
| :--- | :--- | :--- |
| Outstanding,\tbeginning\tof\tyear | 32.5 | 37.0 |
| Granted | 8.3 | 9.7 |
| Exercised | \t(10.9) | \t(12.9) |
| Forfeitures\tand\texpirations | (1.1) | (1.3) |
| Outstanding,\tend\tof\tyear | 28.8 | 32.5 |
| Exercisable,\tend\tof\tyear | 21.3 | 22.8 |
| Weighted-average\texercise\tprice: |  |  |
| Outstanding,\tbeginning\tof\tyear | $35 | $33 |
| Granted | 44 | 40 |
| Exercised | 34 | 32 |
| Forfeitures\tand\texpirations | 41 | 41 |
| Outstanding,\tend\tof\tyear | $38 | $35 |
| Exercisable,\tend\tof\tyear | $37 | $35 |

# Other	stock-based	awards

During	the	periods	presented,	other	stock-based	awards	consisted	principally	of	executive	performance	shares	and	restricted	stock	granted	under	the	2003	Plan.

In	2005	and	2006,	the	Company	granted	performance	shares	to	a	limited	number	of	senior	executive-level	employees,	which	entitled	these	employees	to	receive	a	specified	number	of	shares of	the	Company's	common	stock	on	the	vesting	date,	provided	cumulative	three-year	net	sales	growth	targets	were	achieved.	Subsequent	to	the	adoption	of	SFAS	No.	123(R),	management has	estimated	the	fair	value	of	performance	share	awards	based	on	the	market	price	of	the	underlying	stock	on	the	date	of	grant,	reduced	by	the	present	value	of	estimated	dividends foregone	during	the	performance	period.	The	2005	and	2006	target	grants	(as	revised	for	non-vested	forfeitures	and	other	adjustments)	currently	correspond	to	approximately	275,000	and 260,000	shares,	respectively;	each	with	a	grant-date	fair	value	of	approximately	$41	per	share.	The	actual	number	of	shares	issued	on	the	vesting	date	could	range	from	zero	to	200%	of target,	depending	on	actual	performance	achieved.	Based	on	the	market	price	of	the	Company's	common	stock	at	year-end	2006,	the	maximum	future	value	that	could	be	awarded	on	the vesting	date	is	(in	millions):	2005	award−$27.5;	2006	award−$25.8.	In	addition	to	these	performance	share	plans,	a	2003	performance	unit	plan	(payable	in	stock	or	cash	under	certain conditions)	was	settled	at	74%	of	target	in	February	2006	for	a	total	dollar	equivalent	of	$2.9	million.

The	Company	also	periodically	grants	restricted	stock	and	restricted	stock	units	to	eligible	employees	under	the	2003	Plan.	Restrictions	with	respect	to	sale	or	transferability	generally	lapse after	three	years	and	the	grantee	is	normally	entitled	to	receive	shareholder	dividends	during	the	vesting	period.	Management	estimates	the	fair	value	of	restricted	stock	grants	based	on	the market	price	of	the	underlying	stock	on	the	date	of	grant.	A	summary	of	restricted	stock	activity	for	the	year	ended	December	30,	2006,	is	presented	in	the	following	table:

| Employee	restricted	stock<br>and	restricted	stock	units | Shares<br>(thousands) | Weighted-<br>average<br>grant-date<br>fair	value |
| :--- | :--- | :--- |
| Non-vested,\tbeginning\tof\tyear | 447 | $39 |
| Granted | 190 | 47 |
| Vested | (176) | 34 |
| Forfeited | (27) | 43 |
| Non-vested,\tend\tof\tyear | 434 | $45 |

Grants	of	restricted	stock	and	restricted	stock	units	for	comparable	prior-year	periods	were:	2005−141,000;	2004−140,000.

The	total	fair	value	of	restricted	stock	and	restricted	stock	units	vesting	in	the	periods	presented	was	(in	millions):	2006−$8;	2005−$4;	2004−$4.

# Note	9 Pension	benefits

The	Company	sponsors	a	number	of	U.S.	and	foreign	pension	plans	to	provide	retirement	benefits	for	its	employees.	The	majority	of	these	plans	are	funded	or	unfunded	defined	benefit	plans, although	the	Company	does	participate	in	a	few	multiemployer	or	other	defined	contribution	plans	for	certain	employee	groups.	Defined	benefits	for	salaried	employees	are	generally	based	on salary	and	years	of	service,	while	union	employee	benefits	are	generally	a	negotiated	amount	for	each	year	of	service.	The	Company	uses	its	fiscal	year	end	as	the	measurement	date	for	its defined	benefit	plans.

# Obligations	and	funded	status

The	aggregate	change	in	projected	benefit	obligation,	plan	assets,	and	funded	status	is	presented	in	the	following	tables.	The	Company	adopted	SFAS	No.	158	"Employers'	Accounting	for Defined	Benefit	Pension	and	Other	Postretirement	Plans"	as	of	the	end	of	its	2006	fiscal	year.	The	impact	of	the	adoption	is	discussed	in	Note	1.	The	standard	generally	requires	company	plan sponsors	to	reflect	the	net	over-	or	under-

funded	position	of	a	defined	postretirement	benefit	plan	as	an	asset	or	liability	on	the	balance	sheet.

| (millions) | 2006 | 2005 |
| :--- | :--- | :--- |
| Change\tin\tprojected\tbenefit\tobligation |  |  |
| Beginning\tof\tyear | $3,145.1 | $2,972.9 |
| Service\tcost | 94.2 | 80.2 |
| Interest\tcost | 172.0 | 160.1 |
| Plan\tparticipants'\tcontributions | 1.7 | 2.5 |
| Amendments | 24.2 | 42.2 |
| Actuarial\tloss\t(gain) | (96.7) | 114.3 |
| Benefits\tpaid | (160.4) | (144.0) |
| Curtailment\tand\tspecial\ttermination\tbenefits | 15.3 | 1.3 |
| Foreign\tcurrency\tadjustments\tand\tother | 113.9 | (84.4) |
| End\tof\tyear | $3,309.3 | $3,145.1 |
| Change\tin\tplan\tassets |  |  |
| Fair\tvalue\tbeginning\tof\tyear | $2,922.6 | $2,685.9 |
| Actual\treturn\ton\tplan\tassets | 448.4 | 277.9 |
| Employer\tcontributions | 85.7 | 156.4 |
| Plan\tparticipants'\tcontributions | 1.7 | 2.5 |
| Benefits\tpaid | (149.6) | (132.3) |
| Foreign\tcurrency\tadjustments\tand\tother | 117.7 | (67.8) |
| Fair\tvalue\tend\tof\tyear | $3,426.5 | $2,922.6 |
| Funded\tstatus\tat\tyear\tend | $117.2 | $(222.5) |
| Unrecognized\tnet\tloss | — | 826.3 |
| Unrecognized\ttransition\tamount | — | 1.9 |
| Unrecognized\tprior\tservice\tcost | — | 100.1 |
| Net\tbalance\tsheet\tposition | $117.2 | $705.8 |
| Amounts\trecognized\tin\tthe\tConsolidated\tBalance\tSheet\tconsist\tof |  |  |
| Prepaid\tbenefit\tcost |  | $683.3 |
| Accrued\tbenefit\tliability |  | (185.8) |
| Intangible\tasset |  | 17.0 |
| Other\tcomprehensive\tincome\t—\tminimum\tpension\tliability |  | 191.3 |
| Noncurrent\tassets | $352.6 |  |
| Current\tliabilities | (9.6) |  |
| Noncurrent\tliabilities | (225.8) |  |
| Net\tamount\trecognized | $117.2 | $705.8 |
| Amounts\trecognized\tin\taccumulated\tother\tcomprehensive\tincome\tconsist\tof |  |  |
| Net\texperience\tloss | $502.7 |  |
| Prior\tservice\tcost | 115.5 |  |
| Net\tamount\trecognized | $618.2 | $191.3 |

The	accumulated	benefit	obligation	for	all	defined	benefit	pension	plans	was	$2.99	billion	and	$2.87	billion	at	December	30,	2006	and	December	31,	2005,	respectively.	Information	for pension	plans	with	accumulated	benefit	obligations	in	excess	of	plan	assets	were:

| (millions) | 2006 | 2005 |
| :--- | :--- | :--- |
| Projected\tbenefit\tobligation | $253.4 | $1,621.4 |
| Accumulated\tbenefit\tobligation | \t202.5 | \t1,473.7 |
| Fair\tvalue\tof\tplan\tassets | 55.5 | \t1,289.1 |

The	significant	decrease	in	accumulated	benefit	obligations	in	excess	of	plan	assets	for	2006	is	due	primarily	to	favorable	asset	returns	in	a	major	U.S.	pension	plan.

# Expense

The	components	of	pension	expense	are	presented	in	the	following	table.	Pension	expense	for	defined	contribution	plans	relates	principally	to	multiemployer	plans	in	which	the	Company participates	on	behalf	of	certain	unionized	workforces	in	the	United	States.	The	amounts	for	2006	and	2005	include	charges	of	approximately	$4	million	and	$16	million,	respectively,	for	the Company's	current	estimate	of	a	multiemployer	plan	withdrawal	liability,	which	is	further	described	in	Note	3.

| (millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Service\tcost | $94.2 | $80.2 | $76.0 |
| Interest\tcost | 172.0 | 160.1 | 157.3 |
| Expected\treturn\ton\tplan\tassets | \t(256.7) | \t(229.0) | \t(238.1) |
| Amortization\tof\tunrecognized\ttransition\tobligation | — | .3 | .2 |
| Amortization\tof\tunrecognized\tprior\tservice\tcost | 12.4 | 10.0 | 8.2 |
| Recognized\tnet\tloss | 79.8 | 64.5 | 54.1 |
| Curtailment\tand\tspecial\ttermination\tbenefits\t—\tnet\tloss | 16.7 | 1.6 | 12.2 |
| Pension\texpense: |  |  |  |
| Defined\tbenefit\tplans | 118.4 | 87.7 | 69.9 |
| Defined\tcontribution\tplans | 18.7 | 31.9 | 14.4 |
| Total | $ 137.1 | $ 119.6 | $84.3 |

Any	arising	obligation-related	experience	gain	or	loss	is	amortized	using	a	straight-line	method	over	the	average	remaining	service	period	of	active	plan	participants.	Any	asset-related experience	gain	or	loss	is	recognized	as	described	on	page	46.	The	estimated	net	experience	loss	and	prior	service	cost	for	defined	benefit	pension	plans	that	will	be	amortized	from accumulated	other	comprehensive	income	into	pension	expense	over	the	next	fiscal	year	are	approximately	$61	million	and	$13	million,	respectively.

Net	losses	from	curtailment	and	special	termination	benefits	recognized	in	2006	are	related	primarily	to	plant	workforce	reductions	in	the	United	States	and	England,	as	further	described	in Note	3.	Net	losses	from	curtailment	and	special	termination	benefits	recognized	in	2004	are	related	primarily	to	special	termination	benefits	granted	to	the	Company's	former	CEO	and	other former	executive	officers	pursuant	to	separation	agreements,	and	to	a	lesser	extent,	liquidation	of	the	Company's	pension	fund	in	South	Africa	and	plant	workforce	reductions	in	Great	Britain.

Certain	of	the	Company's	subsidiaries	sponsor	401(k)	or	similar	savings	plans	for	active	employees.	Expense	related

to	these	plans	was	(in	millions):	2006–$33;	2005–$30;	2004–$26.	Company	contributions	to	these	savings	plans	approximate	annual	expense.	Company	contributions	to	multiemployer	and other	defined	contribution	pension	plans	approximate	the	amount	of	annual	expense	presented	in	the	preceding	table.

# Assumptions

The	worldwide	weighted-average	actuarial	assumptions	used	to	determine	benefit	obligations	were:

To	determine	the	overall	expected	long-term	rate	of	return	on	plan	assets,	the	Company	works	with	third	party	financial	consultants	to	model	expected	returns	over	a	20-year	investment horizon	with	respect	to	the	specific	investment	mix	of	its	major	plans.	The	return	assumptions	used	reflect	a	combination	of	rigorous	historical	performance	analysis	and	forward-looking	views of	the	financial	markets	including	consideration	of	current	yields	on	long-term	bonds,	price-earnings	ratios	of	the	major	stock	market	indices,	and	long-term	inflation.	The	U.S.	model,	which corresponds	to	approximately	70%	of	consolidated	pension	and	other	postretirement	benefit	plan	assets,	incorporates	a	long-term	inflation	assumption	of	2.8%	and	an	active	management premium	of	1%	(net	of	fees)	validated	by	historical	analysis.	Similar	methods	are	used	for	various	foreign	plans	with	invested	assets,	reflecting	local	economic	conditions.	Although management	reviews	the	Company's	expected	long-term	rates	of	return	annually,	the	benefit	trust	investment	performance	for	one	particular	year	does	not,	by	itself,	significantly	influence	this evaluation.	The	expected	rates	of	return	are	generally	not	revised,	provided	these	rates	continue	to	fall	within	a	"more	likely	than	not"	corridor	of	between	the	25th	and	75th	percentile	of expected	long-term	returns,	as	determined	by	the	Company's	modeling	process.	The	expected	rate	of	return	for	2006	of	8.9%	equated	to	approximately	the	50th	percentile	expectation.	Any future	variance	between	the	expected	and	actual	rates	of	return	on	plan	assets	is	recognized	in	the	calculated	value	of	plan	assets	over	a	five-year	period	and	once	recognized,	experience gains	and	losses	are	amortized	using	a	declining-balance	method	over	the	average	remaining	service	period	of	active	plan	participants.

# Plan	assets

The	Company's	year-end	pension	plan	weighted-average	asset	allocations	by	asset	category	were:

|  | 2006 | 2005 |
| :--- | :--- | :--- |
| Equity\tsecurities | 76% | 73% |
| Debt\tsecurities | 21% | 24% |
| Other | 3% | 3% |
| Total | \t100% | \t100% |

The	Company's	investment	strategy	for	its	major	defined	benefit	plans	is	to	maintain	a	diversified	portfolio	of	asset	classes	with	the	primary	goal	of	meeting	long-term	cash	requirements	as they	become	due.	Assets	are	invested	in	a	prudent	manner	to	maintain	the	security	of	funds	while	maximizing	returns	within	the	Company's	guidelines.	The	current	weighted-average	target asset	allocation	reflected	by	this	strategy	is:	equity	securities−74%;	debt	securities−24%;	other−2%.	Investment	in	Company	common	stock	represented	1.5%	of	consolidated	plan	assets	at December	30,	2006	and	December	31,	2005.	Plan	funding	strategies	are	influenced	by	tax	regulations.	The	Company	currently	expects	to	contribute	approximately	$39	million	to	its	defined benefit	pension	plans	during	2007.

# Benefit	payments

# Note	10 Nonpension	postretirement	and	postemployment	benefits

# Postretirement

The	Company	sponsors	a	number	of	plans	to	provide	health	care	and	other	welfare	benefits	to	retired	employees	in	the	United	States	and	Canada,	who	have	met	certain	age	and	service requirements.	The	majority	of	these	plans	are	funded	or	unfunded	defined	benefit	plans,	although	the	Company	does	participate	in	a	few	multiemployer	or	other	defined	contribution	plans	for certain	employee	groups.	The	Company	contributes	to	voluntary	employee	benefit	association	(VEBA)	trusts	to	fund	certain	U.S.	retiree	health

and	welfare	benefit	obligations.	The	Company	uses	its	fiscal	year	end	as	the	measurement	date	for	these	plans.

The	aggregate	change	in	accumulated	postretirement	benefit	obligation,	plan	assets,	and	funded	status	is	presented	in	the	following	tables.	The	Company	adopted	SFAS	No.	158	"Employers' Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans"	as	of	the	end	of	its	2006	fiscal	year.	The	impact	of	the	adoption	is	discussed	in	Note	1.	The	standard	generally requires	company	plan	sponsors	to	reflect	the	net	over-	or	under-funded	position	of	a	defined	postretirement	benefit	plan	as	an	asset	or	liability	on	the	balance	sheet.

| (millions) | 2006 | 2005 |
| :--- | :--- | :--- |
| Change\tin\taccumulated\tbenefit\tobligation |  |  |
| Beginning\tof\tyear | $1,224.9 | $1,046.7 |
| Service\tcost | 17.4 | 14.5 |
| Interest\tcost | 65.8 | 58.3 |
| Actuarial\tloss\t(gain) | (54.4) | 164.6 |
| Amendments | 3.6 | — |
| Benefits\tpaid | (56.0) | (60.4) |
| Curtailment\tand\tspecial\ttermination\tbenefits | 6.2 | — |
| Foreign\tcurrency\tadjustments | .1 | 1.2 |
| End\tof\tyear | $1,207.6 | $1,224.9 |
| Change\tin\tplan\tassets |  |  |
| Fair\tvalue\tbeginning\tof\tyear | $682.7 | $468.4 |
| Actual\treturn\ton\tplan\tassets | 123.6 | 32.5 |
| Employer\tcontributions | 13.6 | 240.9 |
| Benefits\tpaid | (56.0) | (59.1) |
| Fair\tvalue\tend\tof\tyear | $763.9 | $682.7 |
| Funded\tstatus | $(443.7) | $(542.2) |
| Unrecognized\tnet\tloss | — | 446.0 |
| Unrecognized\tprior\tservice\tcredit | — | (26.3) |
| Accrued\tpostretirement\tbenefit\tcost | $(443.7) | $(122.5) |
| Amounts\trecognized\tin\tthe\tConsolidated\tBalance\tSheet\tconsist\tof |  |  |
| Current\tliabilities | $(1.4) |  |
| Noncurrent\tliabilities | (442.3) |  |
| Total\tliabilities | $(443.7) | $(122.5) |
| Amounts\trecognized\tin\taccumulated\tother\tcomprehensive\tincome\tconsist\tof |  |  |
| Net\texperience\tloss | $294.8 | $— |
| Prior\tservice\tcredit | (19.2) | — |
| Net\tamount\trecognized | $275.6 | $— |

Components	of	postretirement	benefit	expense	were:

| (millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Service\tcost | $ 17.4 | $ 14.5 | $ 12.1 |
| Interest\tcost | 65.8 | 58.3 | 55.6 |
| Expected\treturn\ton\tplan\tassets | \t(58.2) | \t(42.1) | \t(39.8) |
| Amortization\tof\tunrecognized\tprior\tservice\tcredit | (2.6) | (2.9) | (2.9) |
| Recognized\tnet\tloss | 30.6 | 19.8 | 14.8 |
| Curtailment\tand\tspecial\ttermination\tbenefits\t—\tnet\tloss | 6.2 | — | — |
| Postretirement\tbenefit\texpense: |  |  |  |
| Defined\tbenefit\tplans | 59.2 | 47.6 | 39.8 |
| Defined\tcontribution\tplans | 1.9 | 1.3 | 1.8 |
| Total | $ 61.1 | $ 48.9 | $ 41.6 |

Any	arising	health	care	claims	cost-related	experience	gain	or	loss	is	recognized	in	the	calculated	amount	of	claims	experience	over	a	four-year	period	and	once	recognized,	is	amortized using	a	straight-line	method	over	15	years,	resulting	in	at	least	the	minimum	amortization	prescribed	by	SFAS	No.	106.	Any	asset-related	experience	gain	or	loss	is	recognized	as	described for	pension	plans	on	page	46.	The	estimated	net	experience	loss	for	defined	benefit	plans	that	will	be	amortized	from	accumulated	other	comprehensive	income	into	nonpension postretirement	benefit	expense	over	the	next	fiscal	year	is	approximately	$24	million,	partially	offset	by	amortization	of	prior	service	credit	of	$3	million.

Net	losses	from	curtailment	and	special	termination	benefits	recognized	in	2006	are	related	primarily	to	plant	workforce	reductions	in	the	United	States	as	further	described	in	Note	3.

The	weighted-average	actuarial	assumptions	used	to	determine	benefit	obligations	were:

The	Company	determines	the	overall	expected	long-term	rate	of	return	on	VEBA	trust	assets	in	the	same	manner	as	that	described	for	pension	trusts	in	Note	9.

The	assumed	health	care	cost	trend	rate	is	9.5%	for	2007,	decreasing	gradually	to	4.75%	by	the	year	2012	and	remaining	at	that	level	thereafter.	These	trend	rates	reflect	the	Company's recent	historical	experience	and	management's	expectations	regarding	future	trends.	A	one	percentage	point	change	in	assumed	health	care	cost	trend	rates	would	have	the	following	effects:

| (millions) | One<br>percentage<br>point	increase | One<br>percentage<br>point	decrease |
| :--- | :--- | :--- |
| Effect\ton\ttotal\tof\tservice\tand\tinterest\tcost\tcomponents | $9.2 | $(10.5) |
| Effect\ton\tpostretirement\tbenefit\tobligation | $127.8 | $(125.4) |

The	Company's	year-end	VEBA	trust	weighted-average	asset	allocations	by	asset	category	were:

|  | 2006 | 2005 |
| :--- | :--- | :--- |
| Equity\tsecurities | 77% | 78% |
| Debt\tsecurities | 22% | 22% |
| Other | 1% | \t — |
| Total | \t100% | \t100% |

The	Company's	asset	investment	strategy	for	its	VEBA	trusts	is	consistent	with	that	described	for	its	pension	trusts	in	Note	9.	The	current	target	asset	allocation	is	75%	equity	securities	and 25%	debt	securities.	The	Company	currently	expects	to	contribute	approximately	$15	million	to	its	VEBA	trusts	during	2007.

# Postemployment

Under	certain	conditions,	the	Company	provides	benefits	to	former	or	inactive	employees	in	the	United	States	and	several	foreign	locations,	including	salary	continuance,	severance,	and	long- term	disability.	The	Company	recognizes	an	obligation	for	any	of	these	benefits	that	vest	or	accumulate	with	service.	Postemployment	benefits	that	do	not	vest	or	accumulate	with	service (such	as	severance	based	solely	on	annual	pay	rather	than	years	of	service)	or	costs	arising	from	actions	that	offer	benefits	to	employees	in	excess	of	those	specified	in	the	respective	plans are	charged	to	expense	when	incurred.	The	Company's	postemployment	benefit	plans	are	unfunded.	Actuarial	assumptions	used	are	generally	consistent	with	those	presented	for	pension benefits	on	page	46.	The	Company	previously	applied	postretirement	accounting	concepts	for	purposes	of	recognizing	its	postemployment	benefit	obligations.	Accordingly,	the	Company's adoption	of	SFAS	No.	158	"Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans"	as	of	the	end	of	its	2006	fiscal	year	impacted	its	presentation	of postemployment	benefits	as	discussed	in	Note	1.	The	aggregate	change	in	accumulated	postemployment	benefit	obligation	and	the	net	amount	recognized	were:

| (millions) | 2006 | 2005 |
| :--- | :--- | :--- |
| Change\tin\taccumulated\tbenefit\tobligation |  |  |
| Beginning\tof\tyear | $ 42.2 | $ 37.9 |
| Service\tcost | 4.3 | 4.5 |
| Interest\tcost | 2.0 | 2.0 |
| Actuarial\tloss\t(gain) | (.8) | 7.4 |
| Benefits\tpaid | (8.6) | (9.0) |
| Foreign\tcurrency\tadjustments | .4 | (.6) |
| End\tof\tyear | $ 39.5 | $ 42.2 |
| Funded\tstatus | $(39.5) | $(42.2) |
| Unrecognized\tnet\tloss | — | 19.1 |
| Accrued\tpostemployment\tbenefit\tcost | $(39.5) | $(23.1) |
| Amounts\trecognized\tin\tthe\tConsolidated\tBalance\tSheet\tconsist\tof |  |  |
| Current\tliabilities | $(7.8) |  |
| Noncurrent\tliabilities | \t(31.7) |  |
| Total\tliabilities | $(39.5) | $(23.1) |
| Amounts\trecognized\tin\taccumulated\tother\tcomprehensive\tincome\tconsist\tof |  |  |
| Net\texperience\tloss | $ 16.0 | $— |
| Net\tamount\trecognized | $ 16.0 | $— |

Components	of	postemployment	benefit	expense	were:

| (millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Service\tcost | $4.3 | $4.5 | $3.5 |
| Interest\tcost | \t2.0 | 2.0 | \t1.9 |
| Recognized\tnet\tloss | \t2.4 | 3.5 | \t4.5 |
| Postemployment\tbenefit\texpense | $8.7 | $10.0 | $9.9 |

All	gains	and	losses	are	recognized	over	the	average	remaining	service	period	of	active	plan	participants.	The	estimated	net	experience	loss	that	will	be	amortized	from	accumulated	other comprehensive	income	into	postemployment	benefit	expense	over	the	next	fiscal	year	is	approximately	$2	million.

The	following	benefit	payments,	which	reflect	expected	future	service,	as	appropriate,	are	expected	to	be	paid:

| (millions) | Postretirement | Postemployment |
| :--- | :--- | :--- |
| 2007 | $64.0 | $8.0 |
| 2008 | 67.7 | 7.3 |
| 2009 | 71.2 | 7.0 |
| 2010 | 73.9 | 7.3 |
| 2011 | 76.5 | 7.7 |
| 2012-2016 | 397.5 | 44.4 |

# Note	11	Income	taxes

Earnings	before	income	taxes	and	the	provision	for	U.S.	federal,	state,	and	foreign	taxes	on	these	earnings	were:

| (millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Earnings\tbefore\tincome\ttaxes |  |  |  |
| United\tStates | $1,048.3 | $971.4 | $952.0 |
| Foreign | 423.3 | 453.7 | 413.9 |
|  | $1,471.6 | $1,425.1 | $1,365.9 |
| Income\ttaxes |  |  |  |
| Currently\tpayable |  |  |  |
| Federal | $342.0 | $376.8 | $249.8 |
| State | 34.1 | 26.4 | 30.0 |
| Foreign | 134.1 | 100.7 | 137.8 |
|  | 510.2 | 503.9 | 417.6 |
| Deferred |  |  |  |
| Federal | (9.6) | (69.6) | 51.5 |
| State | (4.4) | .6 | 5.3 |
| Foreign | (29.7) | 9.8 | .9 |
|  | (43.7) | (59.2) | 57.7 |
| Total\tincome\ttaxes | $466.5 | $444.7 | $475.3 |

The	difference	between	the	U.S.	federal	statutory	tax	rate	and	the	Company's	effective	income	tax	rate	was:

|  | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| U.S.\tstatutory\tincome\ttax\trate | \t35.0% | \t35.0% | \t35.0% |
| Foreign\trates\tvarying\tfrom\t35% | \t−3.5 | \t−3.8 | −.5 |
| State\tincome\ttaxes,\tnet\tof\tfederal\tbenefit | 1.3 | 1.2 | 1.7 |
| Foreign\tearnings\trepatriation | 1.2 | — | 2.1 |
| Tax\taudit\tsettlements | \t−1.7 | — | — |
| Net\tchange\tin\tvaluation\tallowances | .5 | −.2 | \t−1.5 |
| Statutory\trate\tchanges,\tdeferred\ttax\timpact | \t— | — | .1 |
| Other | \t−1.1 | \t−1.0 | \t−2.1 |
| Effective\tincome\ttax\trate | \t31.7% | \t31.2% | \t34.8% |

As	presented	in	the	preceding	table,	the	Company's	2006	consolidated	provision	for	income	taxes	included	two	significant,	but	partially-offsetting,	discrete	adjustments.	First,	during	the second	quarter,	the	Company	revised	its	repatriation	plan	for	certain	foreign	earnings,	giving	rise	to	an	incremental	net	tax	cost	of	$18	million.	Also	in	the	second	quarter,	the	Company reduced	its	reserves	for	uncertain	tax	positions	by	$25	million,	related	principally	to	closure	of	several	domestic	tax	audits.

The	consolidated	effective	income	tax	rate	for	2004	of	nearly	35%	was	higher	than	the	rates	for	2006	and	2005	primarily	because	this	period	preceded	the	final	reorganization	of	the Company's	European	operations	which	favorably	affected	the	country-weighting	impact	on	the	rate.	(Refer	to	Note	3	for	further	information	on	this	initiative.)	Additionally,	the	2004 consolidated	effective	income	tax	rate	included	a	provision	of	approximately	$40	million,	partially	offset	by	related	foreign	tax	credits	of	approximately	$12	million,	for	approximately	$1.1	billion of	dividends	from	foreign	subsidiaries	which	the	Company	elected	to	repatriate	in	2005	under	the	American	Jobs	Creation	Act.	Finally,	2005	was	the	first	year	in	which	the	Company	was permitted	to	claim	a	phased-in	deduction	from	U.S.	taxable	income	equal	to	a	stipulated	percentage	of	qualified	production	income	("QPI").

Generally,	the	changes	in	valuation	allowances	on	deferred	tax	assets	and	corresponding	impacts	on	the	effective	income	tax	rate	result	from	management's	assessment	of	the	Company's ability	to	utilize	certain	operating	loss	and	tax	credit	carryforwards	prior	to	expiration.	For	2004,	the	1.5	percent	rate	reduction	presented	in	the	preceding	table	primarily	reflects	reversal	of	a valuation	allowance	against	U.S.	foreign	tax	credits,	which	were	utilized	in	conjunction	with	the	aforementioned	2005	foreign	earnings	repatriation.	Total	tax	benefits	of	carryforwards	at	year- end	2006	and	2005	were	approximately	$29	million	and	$23	million,	respectively.	Of	the	total	carryforwards	at	year-end	2006,	less	than	$2	million	expire	in	2007	with	the	remainder	principally expiring	after	five	years.	After	valuation	allowance,	the	carrying	value	of	carryforward	tax	benefits	at	year-end	2006	was	only	$1	million.

The	deferred	tax	assets	and	liabilities	included	in	the	balance	sheet	at	year	end	are	presented	in	a	table	on	page	50.	The	Company	adopted	SFAS	No.	158	"Employers'	Accounting	for Defined	Benefit	Pension	and	Other	Postretirement	Plans"	as	of	the	end	of	its	2006	fiscal	year.	The	standard	generally	requires	company	plan	sponsors	to	reflect	the	net	over-	or	under-funded position	of	a	defined	postretirement	benefit	plan	as	an	asset	or	liability	on	the	balance	sheet.	Any	unrecognized	prior	service	cost,	experience	gains/losses,	or	transition	obligation	are	reported as	a	component	of	other	comprehensive	income,	net	of	tax,	in	shareholders'	equity.	As	a	result	of	adopting	this	standard,	the	employee	benefits	component	of	the	Company's	deferred	tax assets	increased	(or	liabilities	decreased)	by	a	total	of	$298.9	million	at	December	30,	2006.	Refer	to	Note	1	for	further	information.

Deferred	tax	assets Deferred	tax	liabilities

| (millions) | 2006 | 2005 | 2006 | 2005 |
| :--- | :--- | :--- | :--- | :--- |
| Current: |  |  |  |  |
| U.S.\tstate\tincome\ttaxes | $7.6 | $12.1 | $— | $— |
| Advertising\tand\tpromotion-related | 19.7 | 19.4 | 11.0 | 8.8 |
| Wages\tand\tpayroll\ttaxes | 26.3 | 28.8 | — | — |
| Inventory\tvaluation | 22.5 | 25.5 | 4.6 | 6.3 |
| Employee\tbenefits | 18.0 | 32.0 | — | — |
| Operating\tloss\tand\tcredit\tcarryforwards | 13.9 | 7.0 | — | — |
| Hedging\ttransactions | 19.2 | 17.5 | .8 | .1 |
| Depreciation\tand\tasset\tdisposals | .1 | .1 | — | — |
| Deferred\tintercompany\trevenue | 6.1 | 76.3 | — | — |
| Other | 26.4 | 22.6 | 15.2 | 22.8 |
|  | \t159.8 | \t241.3 | 31.6 | 38.0 |
| Less\tvaluation\tallowance | \t(15.2) | (3.2) | — | — |
|  | $144.6 | $238.1 | $31.6 | $38.0 |
| Noncurrent: |  |  |  |  |
| U.S.\tstate\tincome\ttaxes | $— | $— | $47.0 | $54.4 |
| Employee\tbenefits | \t217.4 | 20.4 | 53.2 | 129.7 |
| Operating\tloss\tand\tcredit\tcarryforwards | 15.2 | 15.5 | — | — |
| Hedging\ttransactions | 2.0 | 1.7 | — | — |
| Depreciation\tand\tasset\tdisposals | 15.1 | 12.7 | \t306.5 | 340.8 |
| Capitalized\tinterest | 5.3 | 5.1 | 11.9 | 12.7 |
| Trademarks\tand\tother\tintangibles | .1 | .1 | \t473.9 | 472.4 |
| Deferred\tcompensation | 40.6 | 34.9 | — | — |
| Stock\toptions | 22.4 | — | — | — |
| Other | 12.0 | 15.3 | 6.3 | 2.1 |
|  | \t330.1 | \t105.7 | \t898.8 | \t1,012.1 |
| Less\tvaluation\tallowance | \t(13.0) | \t(16.2) | — | — |
|  | \t317.1 | 89.5 | \t898.8 | \t1,012.1 |
| Total\tdeferred\ttaxes | $461.7 | $327.6 | $930.4 | $1,050.1 |

The	change	in	valuation	allowance	against	deferred	tax	assets	was:

| (millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Balance\tat\tbeginning\tof\tyear | $19.4 | $22.3 | $ 36.8 |
| Additions\tcharged\tto\tincome\ttax\texpense | \t11.4 | .2 | 13.3 |
| Reductions\tcredited\tto\tincome\ttax\texpense | \t(3.6) | \t(3.2) | \t(28.9) |
| Currency\ttranslation\tadjustments | 1.0 | .1 | 1.1 |
| Balance\tat\tend\tof\tyear | $28.2 | $19.4 | $ 22.3 |

At	December	30,	2006,	accumulated	foreign	subsidiary	earnings	of	approximately	$1.1	billion	were	considered	permanently	invested	in	those	businesses.	Accordingly,	U.S.	income	taxes	have not	been	provided	on	these	earnings.

Cash	paid	for	income	taxes	was	(in	millions):	2006−$428;	2005−$425;	2004−$421.	Income	tax	benefits	realized	from	stock	option	exercises	and	deductibility	of	other	equity-based	awards	are presented	in	Note	8.

# Note	12 Financial	instruments	and	credit	risk	concentration

The	fair	values	of	the	Company's	financial	instruments	are	based	on	carrying	value	in	the	case	of	short-term	items,	quoted	market	prices	for	derivatives	and	investments,	and	in	the	case	of long-term	debt,	incremental	borrowing	rates	currently	available	on	loans	with	similar	terms	and	maturities.	The	carrying	amounts	of	the	Company's	cash,	cash	equivalents,	receivables,	and notes	payable	approximate	fair	value.	The	fair	value	of	the	Company's	long-term	debt	at	December	30,	2006,	exceeded	its	carrying	value	by	approximately	$275	million.

The	Company	is	exposed	to	certain	market	risks	which	exist	as	a	part	of	its	ongoing	business	operations.	Management	uses	derivative	financial	and	commodity	instruments,	where appropriate,	to	manage	these	risks.	In	general,	instruments	used	as	hedges	must	be	effective	at	reducing	the	risk	associated	with	the	exposure	being	hedged	and	must	be	designated	as	a hedge	at	the	inception	of	the	contract.	In	accordance	with	SFAS	No.	133,	the	Company	designates	derivatives	as	either	cash	flow	hedges,	fair	value	hedges,	net	investment	hedges,	or	other contracts	used	to	reduce	volatility	in	the	translation	of	foreign	currency	earnings	to	U.S.	Dollars.	The	fair	values	of	all	hedges	are	recorded	in	accounts	receivable	or	other	current	liabilities. Gains	and	losses	representing	either	hedge	ineffectiveness,	hedge	components	excluded	from	the	assessment	of	effectiveness,	or	hedges	of	translational	exposure	are	recorded	in	other income	(expense),	net.	Within	the	Consolidated	Statement	of	Cash	Flows,	settlements	of	cash	flow	and	fair	value	hedges	are	classified	as	an	operating	activity;	settlements	of	all	other derivatives	are	classified	as	a	financing	activity.

# Cash	flow	hedges

Qualifying	derivatives	are	accounted	for	as	cash	flow	hedges	when	the	hedged	item	is	a	forecasted	transaction.	Gains	and	losses	on	these	instruments	are	recorded	in	other	comprehensive income	until	the	underlying	transaction	is	recorded	in	earnings.	When	the	hedged	item	is	realized,	gains	or	losses	are	reclassified	from	accumulated	other	comprehensive	income	to	the Consolidated	Statement	of	Earnings	on	the	same	line	item	as	the	underlying	transaction.	For	all	cash	flow	hedges,	gains	and	losses	representing	either	hedge	ineffectiveness	or	hedge components	excluded	from	the	assessment	of	effectiveness	were	insignificant	during	the	periods	presented.

The	total	net	loss	attributable	to	cash	flow	hedges	recorded	in	accumulated	other	comprehensive	income	at	December	30,	2006,	was	$32.6	million,	related	primarily	to	forward	interest	rate contracts	settled	during	2001	and	2003	in	conjunction

with	fixed	rate	long-term	debt	issuances	and	to	a	lesser	extent,	to	10-year	natural	gas	price	swaps	entered	into	in	2006.	The	interest	rate	contract	losses	will	be	reclassified	into	interest expense	over	the	next	25	years.	The	natural	gas	swap	losses	will	be	reclassified	to	cost	of	goods	sold	over	10	years.	Other	insignificant	amounts	related	to	foreign	currency	and	commodity price	cash	flow	hedges	will	be	reclassified	into	earnings	during	the	next	18	months.

# Fair	value	hedges

Qualifying	derivatives	are	accounted	for	as	fair	value	hedges	when	the	hedged	item	is	a	recognized	asset,	liability,	or	firm	commitment.	Gains	and	losses	on	these	instruments	are	recorded	in earnings,	offsetting	gains	and	losses	on	the	hedged	item.	For	all	fair	value	hedges,	gains	and	losses	representing	either	hedge	ineffectiveness	or	hedge	components	excluded	from	the assessment	of	effectiveness	were	insignificant	during	the	periods	presented.

# Net	investment	hedges

Qualifying	derivative	and	nonderivative	financial	instruments	are	accounted	for	as	net	investment	hedges	when	the	hedged	item	is	a	nonfunctional	currency	investment	in	a	subsidiary.	Gains and	losses	on	these	instruments	are	recorded	as	a	foreign	currency	translation	adjustment	in	other	comprehensive	income.

# Other	contracts

The	Company	also	periodically	enters	into	foreign	currency	forward	contracts	and	options	to	reduce	volatility	in	the	translation	of	foreign	currency	earnings	to	U.S.	Dollars.	Gains	and	losses	on these	instruments	are	recorded	in	other	income	(expense),	net,	generally	reducing	the	exposure	to	translation	volatility	during	a	full-year	period.

The	Company	is	exposed	to	fluctuations	in	foreign	currency	cash	flows	related	primarily	to	third-party	purchases,	intercompany	transactions,	and	nonfunctional	currency	denominated	third- party	debt.	The	Company	is	also	exposed	to	fluctuations	in	the	value	of	foreign	currency	investments	in	subsidiaries	and	cash	flows	related	to	repatriation	of	these	investments.	Additionally, the	Company	is	exposed	to	volatility	in	the	translation	of	foreign	currency	earnings	to	U.S.	Dollars.	Management	assesses	foreign	currency	risk	based	on	transactional	cash	flows	and translational	volatility	and	enters	into	forward	contracts,	options,	and	currency	swaps	to	reduce	fluctuations	in	net	long	or	short	currency	positions.	Forward	contracts	and	options	are	generally less	than	18	months	duration.	Currency	swap	agreements	are	established	in	conjunction	with	the	term	of	underlying	debt	issues.

For	foreign	currency	cash	flow	and	fair	value	hedges,	the	assessment	of	effectiveness	is	generally	based	on	changes	in	spot	rates.	Changes	in	time	value	are	reported	in	other	income (expense),	net.

The	Company	is	exposed	to	interest	rate	volatility	with	regard	to	future	issuances	of	fixed	rate	debt	and	existing	issuances	of	variable	rate	debt.	The	Company	periodically	uses	interest	rate swaps,	including	forward-starting	swaps,	to	reduce	interest	rate	volatility	and	funding	costs	associated	with	certain	debt	issues,	and	to	achieve	a	desired	proportion	of	variable	versus	fixed	rate debt,	based	on	current	and	projected	market	conditions.

Variable-to-fixed	interest	rate	swaps	are	accounted	for	as	cash	flow	hedges	and	the	assessment	of	effectiveness	is	based	on	changes	in	the	present	value	of	interest	payments	on	the underlying	debt.	Fixed-to-variable	interest	rate	swaps	are	accounted	for	as	fair	value	hedges	and	the	assessment	of	effectiveness	is	based	on	changes	in	the	fair	value	of	the	underlying	debt, using	incremental	borrowing	rates	currently	available	on	loans	with	similar	terms	and	maturities.

The	Company	is	exposed	to	price	fluctuations	primarily	as	a	result	of	anticipated	purchases	of	raw	and	packaging	materials,	fuel,	and	energy.	The	Company	has	historically	used	the combination	of	long-term	contracts	with	suppliers,	and	exchange-traded	futures	and	option	contracts	to	reduce	price	fluctuations	in	a	desired	percentage	of	forecasted	raw	material	purchases over	a	duration	of	generally	less	than	18	months.	During	2006,	the	Company	entered	into	two	separate	10-year	over-the-counter	commodity	swap	transactions	to	reduce	fluctuations	in	the price	of	natural	gas	used	principally	in	its	manufacturing	processes.

Commodity	contracts	are	accounted	for	as	cash	flow	hedges.	The	assessment	of	effectiveness	for	exchange-traded	instruments	is	based	on	changes	in	futures	prices.	The	assessment	of effectiveness	for	over-the-counter	transactions	is	based	on	changes	in	designated	indexes.

# Credit	risk	concentration

The	Company	is	exposed	to	credit	loss	in	the	event	of	nonperformance	by	counterparties	on	derivative	financial	and	commodity	contracts.	This	credit	loss	is	limited	to	the

cost	of	replacing	these	contracts	at	current	market	rates.	Management	believes	the	probability	of	such	loss	is	remote.

Financial	instruments,	which	potentially	subject	the	Company	to	concentrations	of	credit	risk	are	primarily	cash,	cash	equivalents,	and	accounts	receivable.	The	Company	places	its investments	in	highly	rated	financial	institutions	and	investment-grade	short-term	debt	instruments,	and	limits	the	amount	of	credit	exposure	to	any	one	entity.	Management	believes concentrations	of	credit	risk	with	respect	to	accounts	receivable	is	limited	due	to	the	generally	high	credit	quality	of	the	Company's	major	customers,	as	well	as	the	large	number	and geographic	dispersion	of	smaller	customers.	However,	the	Company	conducts	a	disproportionate	amount	of	business	with	a	small	number	of	large	multinational	grocery	retailers,	with	the	five largest	accounts	comprising	approximately	27%	of	consolidated	accounts	receivable	at	December	30,	2006.

# Note	13 Quarterly	financial	data	(unaudited)

The	principal	market	for	trading	Kellogg	shares	is	the	New	York	Stock	Exchange	(NYSE).	The	shares	are	also	traded	on	the	Boston,	Chicago,	Cincinnati,	Pacific,	and	Philadelphia	Stock Exchanges.	At	year-end	2006,	the	closing	price	(on	the	NYSE)	was	$50.06	and	there	were	41,450	shareholders	of	record.

Dividends	paid	per	share	and	the	quarterly	price	ranges	on	the	NYSE	during	the	last	two	years	were:

|  | Dividend | Stock	price | Stock	price |
| :--- | :--- | :--- | :--- |
|  | per\tshare | High | Low |
| 2006\t—\tQuarter |  |  |  |
| First | $.2775 | $45.78 | $42.41 |
| Second | .2775 | \t48.50 | \t43.06 |
| Third | .2910 | \t50.87 | \t47.31 |
| Fourth | .2910 | \t50.95 | \t47.71 |
|  | $1.1370 |  |  |
| 2005\t—\tQuarter |  |  |  |
| First | $.2525 | $45.59 | $42.41 |
| Second | .2525 | \t46.89 | \t42.35 |
| Third | .2775 | \t46.99 | \t43.42 |
| Fourth | .2775 | \t46.70 | \t43.22 |

# Note	14 Operating	segments

Kellogg	Company	is	the	world's	leading	producer	of	cereal	and	a	leading	producer	of	convenience	foods,	including	cookies,	crackers,	toaster	pastries,	cereal	bars,	fruit	snacks,	frozen	waffles, and	veggie	foods.	Kellogg	products	are	manufactured	and	marketed	globally.	Principal	markets	for	these	products	include	the	United	States	and	United	Kingdom.	The	Company	currently manages	its	operations	in	four	geographic	operating	segments,	comprised	of	North	America	and	the	three	International	operating	segments	of	Europe,	Latin	America,	and	Asia	Pacific.	For	the periods	presented,	the	Asia	Pacific	operating	segment	included	Australia	and	Asian	markets.	Beginning	in	2007,	this	segment	will	also	include	South	Africa,	which	was	formerly	a	part	of Europe.

The	measurement	of	operating	segment	results	is	generally	consistent	with	the	presentation	of	the	Consolidated	Statement	of	Earnings	and	Balance	Sheet.	Intercompany	transactions between	operating	segments	were	insignificant	in	all	periods	presented.

| (millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Net\tsales |  |  |  |
| North\tAmerica | $7,348.8 | $6,807.8 | $6,369.3 |
| Europe | 2,143.8 | 2,013.6 | \t2,007.3 |
| Latin\tAmerica | 890.8 | 822.2 | 718.0 |
| Asia\tPacific\t(a) | 523.3 | 533.6 | 519.3 |
| Consolidated | $10,906.7 | $10,177.2 | $9,613.9 |
| Segment\toperating\tprofit |  |  |  |
| North\tAmerica | $1,340.5 | $1,251.5 | $1,240.4 |
| Europe | 334.1 | 330.7 | 292.3 |
| Latin\tAmerica | 220.1 | 202.8 | 185.4 |
| Asia\tPacific\t(a) | 76.9 | 86.0 | 79.5 |
| Corporate | (205.8) | (120.7) | (116.5) |
| Consolidated | $1,765.8 | $1,750.3 | $1,681.1 |

| (millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Depreciation\tand\tamortization |  |  |  |
| North\tAmerica | $241.8 | 272.3 | $261.4 |
| Europe | 66.4 | 61.2 | 95.7 |
| Latin\tAmerica | 21.9 | 20.0 | 15.4 |
| Asia\tPacific\t(a) | 17.2 | 20.9 | 20.9 |
| Corporate | 5.4 | 17.4 | 16.6 |
| Consolidated | $352.7 | 391.8 | $410.0 |
| Interest\texpense |  |  |  |
| North\tAmerica | $8.7 | $1.4 | $1.7 |
| Europe | 27.0 | 12.4 | 15.6 |
| Latin\tAmerica | .1 | .2 | .2 |
| Asia\tPacific\t(a) | .4 | .3 | .2 |
| Corporate | 271.2 | 286.0 | 290.9 |
| Consolidated | $307.4 | $300.3 | $308.6 |
| Income\ttaxes |  |  |  |
| North\tAmerica | $396.2 | $372.7 | $371.5 |
| Europe | 9.8 | 30.2 | 64.5 |
| Latin\tAmerica | 31.8 | 21.5 | 39.8 |
| Asia\tPacific\t(a) | 14.4 | 12.4 | (.8) |
| Corporate | 14.3 | 7.9 | .3 |
| Consolidated | $466.5 | $444.7 | $475.3 |
| Total\tassets\t(b) |  |  |  |
| North\tAmerica | $7,996.2 | $7,944.6 | $7,641.5 |
| Europe | 2,380.7 | 2,356.7 | 2,324.2 |
| Latin\tAmerica | 661.4 | 450.6 | 411.1 |
| Asia\tPacific\t(a) | 328.8 | 294.7 | 347.4 |
| Corporate | 4,934.0 | 5,336.4 | 5,619.0 |
| Elimination\tentries | (5,587.1) | (5,808.5) | (5,781.3) |
| Consolidated | $10,714.0 | $10,574.5 | $10,561.9 |
| Additions\tto\tlong-lived\tassets\t(c) |  |  |  |
| North\tAmerica | $316.0 | $317.0 | $167.4 |
| Europe | 62.6 | 42.3 | 59.7 |
| Latin\tAmerica | 52.8 | 38.1 | 37.2 |
| Asia\tPacific\t(a) | 18.9 | 14.4 | 9.9 |
| Corporate | 2.8 | .4 | 4.4 |
| Consolidated | $453.1 | $412.2 | $278.6 |

(b) The	Company	adopted	SFAS	No.	158	"Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans"	as	of	the	end	of	its	2006	fiscal	year.	The	standard	generally	requires	company	plan	sponsors	to reflect	the	net	over-	or	under-funded	position	of	a	defined	postretirement	benefit	plan	as	an	asset	or	liability	on	the	balance	sheet.	Accordingly,	the	Company's	consolidated	and	corporate	total	assets	for	2006	were	reduced by	$512.4	and	$152.4	respectively.	Operating	segment	total	assets	were	reduced	as	follows:	North	America−$71.8;	Europe−$284.3;	Latin	America−$2.9;	Asia	Pacific−$1.0.	Refer	to	Note	1	for	further	information.

(c) Includes	plant,	property,	equipment,	and	purchased	intangibles.

The	Company's	largest	customer,	Wal-Mart	Stores,	Inc.	and	its	affiliates,	accounted	for	approximately	18%	of	consolidated	net	sales	during	2006,	17%	in	2005,	and	14%	in	2004,	comprised principally	of	sales	within	the	United	States.

Supplemental	geographic	information	is	provided	below	for	net	sales	to	external	customers	and	long-lived	assets:

# Note	15 Supplemental	financial	statement	data

# (millions)

| Consolidated	Balance	Sheet | 2006 | 2005 |
| :--- | :--- | :--- |
| Deferred\tincome\ttaxes | $115.9 | $207.6 |
| Other\tprepaid\tassets | 131.8 | 173.7 |
| Other\tcurrent\tassets | $247.7 | $381.3 |
| Land | $77.5 | $75.5 |
| Buildings | 1,521.3 | 1,458.8 |
| Machinery\tand\tequipment\t(a) | 4,992.0 | 4,692.4 |
| Construction\tin\tprogress | 326.8 | 237.3 |
| Accumulated\tdepreciation | (4,102.0) | (3,815.6) |
| Property,\tnet | $2,815.6 | $2,648.4 |
| Goodwill | $3,448.3 | $3,455.3 |
| Other\tintangibles\t(b) | 1,468.8 | 1,485.8 |
| —Accumulated\tamortization | (49.1) | (47.6) |
| Pension\t(b) | 352.6 | 629.8 |
| Other | 250.8 | 206.3 |
| Other\tassets | $5,471.4 | $5,729.6 |
| Accrued\tincome\ttaxes | $151.7 | $148.3 |
| Accrued\tsalaries\tand\twages | 311.1 | 276.5 |
| Accrued\tadvertising\tand\tpromotion | 338.0 | 320.9 |
| Other\t(b) | 317.7 | 339.1 |
| Other\tcurrent\tliabilities | $1,118.5 | $1,084.8 |
| Nonpension\tpostretirement\tbenefits\t(b) | $442.3 | $74.5 |
| Deferred\tincome\ttaxes\t(b) | 619.3 | 945.8 |
| Other\t(b) | 510.2 | 405.1 |
| Other\tliabilities | $1,571.8 | $1,425.4 |

(a) Includes	an	insignificant	amount	of	capitalized	internal-use	software.

(b) The	Company	adopted	SFAS	No.	158	"Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans"	as	of	the	end	of	its	2006	fiscal year.	The	standard	generally	requires	company	plan	sponsors	to	reflect	the	net	over-	or	under-funded	position	of	a	defined	postretirement	benefit	plan	as	an asset	or	liability	on	the	balance	sheet.	Accordingly,	the	2006	balances	associated	with	the	identified	captions	within	the	preceding	table	were	materially affected	by	the	adoption	of	this	standard.	Refer	to	Note	1	for	further	information.

| Allowance	for	doubtful	accounts | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Balance\tat\tbeginning\tof\tyear | $ 6.9 | $13.0 | $15.1 |
| Additions\tcharged\tto\texpense | 1.6 | — | 2.1 |
| Doubtful\taccounts\tcharged\tto\treserve | \t(2.8) | \t(7.4) | \t(4.3) |
| Currency\ttranslation\tadjustments | .2 | 1.3 | .1 |
| Balance\tat\tend\tof\tyear | $ 5.9 | $6.9 | $13.0 |

# Management's	Responsibility	for	Financial	Statements

Management	is	responsible	for	the	preparation	of	the	Company's	consolidated	financial	statements	and	related	notes.	We	believe	that	the	consolidated	financial	statements	present	the Company's	financial	position	and	results	of	operations	in	conformity	with	accounting	principles	that	are	generally	accepted	in	the	United	States,	using	our	best	estimates	and	judgments	as required.

The	independent	registered	public	accounting	firm	audits	the	Company's	consolidated	financial	statements	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight Board	and	provides	an	objective,	independent	review	of	the	fairness	of	reported	operating	results	and	financial	position.

The	Board	of	Directors	of	the	Company	has	an	Audit	Committee	composed	of	three	non-management	Directors.	The	Committee	meets	regularly	with	management,	internal	auditors,	and	the independent	registered	public	accounting	firm	to	review	accounting,	internal	control,	auditing	and	financial	reporting	matters.

Formal	policies	and	procedures,	including	an	active	Ethics	and	Business	Conduct	program,	support	the	internal	controls	and	are	designed	to	ensure	employees	adhere	to	the	highest standards	of	personal	and	professional	integrity.	We	have	a	vigorous	internal	audit	program	that	independently	evaluates	the	adequacy	and	effectiveness	of	these	internal	controls.

# Management's	Report	on	Internal	Control	over	Financial	Reporting

Our	management	is	responsible	for	establishing	and	maintaining	adequate	internal	control	over	financial	reporting,	as	such	term	is	defined	in	Exchange	Act	Rules	13a-15(f).	Under	the supervision	and	with	the	participation	of	management,	we	conducted	an	evaluation	of	the	effectiveness	of	our	internal	control	over	financial	reporting	based	on	the	framework	in	Internal Control	—	Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of	effectiveness	to	future	periods	are subject	to	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the	policies	or	procedures	may	deteriorate.

Based	on	our	evaluation	under	the	framework	in	Internal	Control	—	Integrated	Framework,	management	concluded	that	our	internal	control	over	financial	reporting	was	effective	as	of December	30,	2006.	Our	management's	assessment	of	the	effectiveness	of	our	internal	control	over	financial	reporting	as	of	December	30,	2006	has	been	audited	by PricewaterhouseCoopers	LLP,	an	independent	registered	public	accounting	firm,	as	stated	in	their	report	which	follows	on	page	56.

A.D.	David	Mackay President	and	Chief	Executive	Officer

John	A.	Bryant Executive	Vice	President, Chief	Financial	Officer,	Kellogg	Company and	President,	Kellogg	International

# REPORT	OF	INDEPENDENT	REGISTERED	PUBLIC	ACCOUNTING	FIRM

# To	the	Shareholders	and	Board	of	Directors

# of	Kellogg	Company:

We	have	completed	integrated	audits	of	Kellogg	Company's	consolidated	financial	statements	and	of	its	internal	control	over	financial	reporting	as	of	December	30,	2006,	in	accordance	with the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Our	opinions,	based	on	our	audits,	are	presented	below.

# Consolidated	financial	statements

In	our	opinion,	the	consolidated	financial	statements	listed	in	the	index	appearing	under	Item	15(a)1	present	fairly,	in	all	material	respects,	the	financial	position	of	Kellogg	Company	and	its subsidiaries	at	December	30,	2006	and	December	31,	2005,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	30,	2006	in conformity	with	accounting	principles	generally	accepted	in	the	United	States	of	America.	These	financial	statements	are	the	responsibility	of	the	Company's	management.	Our	responsibility	is to	express	an	opinion	on	these	financial	statements	based	on	our	audits.	We	conducted	our	audits	of	these	statements	in	accordance	with	the	standards	of	the	Public	Company	Accounting Oversight	Board	(United	States).	Those	standards	require	that	we	plan	and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	the	financial	statements	are	free	of	material misstatement.	An	audit	of	financial	statements	includes	examining,	on	a	test	basis,	evidence	supporting	the	amounts	and	disclosures	in	the	financial	statements,	assessing	the	accounting principles	used	and	significant	estimates	made	by	management,	and	evaluating	the	overall	financial	statement	presentation.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our opinion.

As	discussed	in	Note	1	to	the	consolidated	financial	statements,	the	Company	changed	the	manner	in	which	it	accounted	for	share-based	compensation	and	defined	benefit	pension,	other postretirement,	and	postemployment	plans	in	2006.

# Internal	control	over	financial	reporting

Also,	in	our	opinion,	management's	assessment,	included	in	Management's	Report	on	Internal	Control	over	Financial	Reporting,	appearing	under	Item	8,	that	the	Company	maintained effective	internal	control	over	financial	reporting	as	of	December	30,	2006	based	on	criteria	established	in	Internal	Control	—	Integrated	Framework	issued	by	the	Committee	of	Sponsoring Organizations	of	the	Treadway	Commission	(COSO),	is	fairly	stated,	in	all	material	respects,	based	on	those	criteria.	Furthermore,	in	our	opinion,	the	Company	maintained,	in	all	material respects,	effective	internal	control	over	financial	reporting	as	of	December	30,	2006,	based	on	criteria	established	in	Internal	Control	—	Integrated	Framework	issued	by	the	COSO.	The Company's	management	is	responsible	for	maintaining	effective	internal	control	over	financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal	control	over	financial	reporting. Our	responsibility	is	to	express	opinions	on	management's	assessment	and	on	the	effectiveness	of	the	Company's	internal	control	over	financial	reporting	based	on	our	audit.	We	conducted our	audit	of	internal	control	over	financial	reporting	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we	plan and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	effective	internal	control	over	financial	reporting	was	maintained	in	all	material	respects.	An	audit	of	internal	control	over financial	reporting	includes	obtaining	an	understanding	of	internal	control	over	financial	reporting,	evaluating	management's	assessment,	testing	and	evaluating	the	design	and	operating effectiveness	of	internal	control,	and	performing	such	other	procedures	as	we	consider	necessary	in	the	circumstances.	We	believe	that	our	audit	provides	a	reasonable	basis	for	our	opinions. A	company's	internal	control	over	financial	reporting	is	a	process	designed	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and	the	preparation	of	financial statements	for	external	purposes	in	accordance	with	generally	accepted	accounting	principles.	A	company's	internal	control	over	financial	reporting	includes	those	policies	and	procedures that	(i)	pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and	dispositions	of	the	assets	of	the	company;	(ii)	provide	reasonable assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in	accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and expenditures	of	the	company	are	being	made	only	in	accordance	with	authorizations	of	management	and	directors	of	the	company;	and	(iii)	provide	reasonable	assurance	regarding	prevention or	timely	detection	of	unauthorized	acquisition,	use,	or	disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of	effectiveness	to	future	periods	are subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the	policies	or	procedures	may	deteriorate.

# Battle	Creek,	Michigan

(a)	We	maintain	disclosure	controls	and	procedures	that	are	designed	to	ensure	that	information	required	to	be	disclosed	in	our	Exchange	Act	reports	is	recorded,	processed,	summarized	and reported	within	the	time	periods	specified	in	the	SEC's	rules	and	forms,	and	that	such	information	is	accumulated	and	communicated	to	our	management,	including	our	Chief	Executive	Officer and	Chief	Financial	Officer	as	appropriate,	to	allow	timely	decisions	regarding	required	disclosure	under	Rules	13a-15(e)	and	15d-15(e).	Disclosure	controls	and	procedures,	no	matter	how well	designed	and	operated,	can	provide	only	reasonable,	rather	than	absolute,	assurance	of	achieving	the	desired	control	objectives.

As	of	December	30,	2006,	management	carried	out	an	evaluation	under	the	supervision	and	with	the	participation	of	our	Chief	Executive	Officer	and	our	Chief	Financial	Officer,	of	the effectiveness	of	the	design	and	operation	of	our	disclosure	controls	and	procedures.	Based	on	the	foregoing,	our	Chief	Executive	Officer	and	Chief	Financial	Officer	concluded	that	our disclosure	controls	and	procedures	were	effective	at	the	reasonable	assurance	level.

(b)	Pursuant	to	Section	404	of	the	Sarbanes-Oxley	Act	of	2002,	we	have	included	a	report	of	management's	assessment	of	the	design	and	effectiveness	of	our	internal	control	over	financial reporting	as	part	of	this	Annual	Report	on	Form	10-K.	The	independent	registered	public	accounting	firm	of	PricewaterhouseCoopers	LLP	also	attested	to,	and	reported	on,	management's assessment	of	the	internal	control	over	financial	reporting.	Management's	report	and	the	independent	registered	public	accounting	firm's	attestation	report	are	included	in	our	2006	financial statements	in	Item	8	of	this	Report	under	the	captions	entitled	"Management's	Report	on	Internal	Control	over	Financial	Reporting"	and	"Report	of	Independent	Registered	Public	Accounting Firm"	and	are	incorporated	herein	by	reference.

(c)	During	the	last	fiscal	quarter,	there	have	been	no	changes	in	our	internal	control	over	financial	reporting	that	have	materially	affected,	or	are	reasonably	likely	to	materially	affect,	our	internal control	over	financial	reporting.

Directors	—	Refer	to	the	information	in	our	Proxy	Statement	to	be	filed	with	the	Securities	and	Exchange	Commission	for	the	Annual	Meeting	of	Shareowners	to	be	held	on	April	27,	2007	(the "Proxy	Statement"),	under	the	caption	"Proposal	1	—	Election	of	Directors,"	which	information	is	incorporated	herein	by	reference.

Identification	and	Members	of	Audit	Committee;	Audit	Committee	Financial	Expert	—	Refer	to	the	information	in	the	Proxy	Statement	under	the	caption	"Board	and	Committee	Membership," which	information	is	incorporated	herein	by	reference.

Executive	Officers	of	the	Registrant	—	Refer	to	"Executive	Officers	of	the	Registrant"	under	Item	1	at	pages	3	and	4	of	this	Report.

For	information	concerning	Section	16(a)	of	the	Securities	Exchange	Act	of	1934,	refer	to	the	information	under	the	caption	"Security	Ownership	—	Section	16(a)	Beneficial	Ownership Reporting	Compliance"	of	the	Proxy	Statement,	which	information	is	incorporated	herein	by	reference.

Code	of	Ethics	for	Chief	Executive	Officer,	Chief	Financial	Officer	and	Controller	—	We	have	adopted	a	Global	Code	of	Ethics	which	applies	to	our	chief	executive	officer,	chief	financial officer,	corporate	controller	and	all	our	other	employees,	and	which	can	be	found	at	www.kelloggcompany.com.	Any	amendments	or	waivers	to	the	Global	Code	of	Ethics	applicable	to	our chief	executive	officer,	chief	financial	officer	or	corporate	controller	may	also	be	found	at	www.kelloggcompany.com.

Refer	to	the	information	under	the	captions	"2006	Non-Employee	Director	Compensation	and	Benefits,"	"Compensation	Discussion	and	Analysis,"	"Compensation	Committee	Interlocks	and Insider	Participation,"	"Executive	Compensation,"	"Retirement	and	Non-Qualified	Defined	Contribution	and	Deferred	Compensation	Plans,"	"Employment	Agreements"	and	"Potential	Post- Employment	Payments"	of	the	Proxy	Statement,	which	is	incorporated	herein	by	reference.	See	also	the	information	under	the	caption	"Compensation	Committee	Report"	of	the	Proxy Statement,	which	information	is	incorporated	herein	by	reference;	however,	such	information	is	only	"furnished"	hereunder	and	not	deemed	"filed"	for	purposes	of	Section	18	of	the	Securities Exchange	Act	of	1934.

Refer	to	the	information	under	the	captions	"Security	Ownership	—	Five	Percent	Holders"	and	"Security	Ownership	—	Officer	and	Director	Stock	Ownership"	of	the	Proxy	Statement,	which information	is	incorporated	herein	by	reference.

# Securities	Authorized	for	Issuance	Under	Equity	Compensation	Plans

(millions,	except	per	share	data)

| Plan	category | Number	of	securities<br>to	be	issued	upon<br>exercise	of<br>outstanding	options,<br>warrants	and	rights	as	of<br>December	30,	2006<br>(a) | Weighted-average<br>exercise	price<br>of	outstanding<br>options,	warrants<br>and	rights	as	of<br>December	30,<br>2006<br>(b) | Number	of<br>securities	remaining<br>available	for	future<br>issuance	under<br>equity	compensation<br>plans	(excluding<br>securities	reflected<br>in	column	(a))	as	of<br>December	30,	2006<br>(c) |
| :--- | :--- | :--- | :--- |
| Equity\tcompensation\tplans\tapproved\tby\tsecurity\tholders | 26.9 | $41 | 16.9 |
| Equity\tcompensation\tplans\tnot\tapproved\tby\tsecurity\tholders | .1 | $27 | .6 |
| Total | 27.0 | $41 | 17.5 |

Five	plans	(including	one	individual	compensation	arrangement)	are	included	in	the	"Equity	compensation	plans	not	approved	by	security	holders"	line:	the	Kellogg	Share	Incentive	Plan,

which	was	adopted	in	2002	and	is	available	to	most	U.K.	employees	of	specified	Kellogg	Company	subsidiaries;	a	similar	plan,	which	is	available	to	employees	in	the	Republic	of	Ireland;	the Kellogg	Company	Executive	Stock	Purchase	Plan,	which	was	adopted	in	2002	and	is	available	to	selected	senior	level	Kellogg	employees;	the	Deferred	Compensation	Plan	for	Non- Employee	Directors,	which	was	adopted	in	1986	and	amended	in	1993	and	2002;	and	a	non-qualified	stock	option	granted	in	2000	to	Mr.	Jenness,	when	he	had	just	been	appointed	a	Kellogg Director,	Chairman	of	the	Board	and	Chief	Executive	Officer.

Under	the	Kellogg	Share	Incentive	Plan,	eligible	U.K.	employees	may	contribute	up	to	1,500	Pounds	Sterling	annually	to	the	plan	through	payroll	deductions.	The	trustees	of	the	plan	use those	contributions	to	buy	shares	of	our	common	stock	at	fair	market	value	on	the	open	market,	with	Kellogg	matching	those	contributions	on	a	1:1	basis.	Shares	must	be	withdrawn	from	the plan	when	employees	cease	employment.	Under	current	law,	eligible	employees	generally	receive	certain	income	and	other	tax	benefits	if	those	shares	are	held	in	the	plan	for	a	specified number	of	years.	A	similar	plan	is	also	available	to	employees	in	the	Republic	of	Ireland.	As	these	plans	are	open	market	plans	with	no	set	overall	maximum,	no	amounts	for	these	plans	are included	in	the	above	table.	However,	approximately	80,000	shares	were	purchased	by	eligible	employees	under	the	Kellogg	Share	Incentive	Plan,	the	plan	for	the	Republic	of	Ireland	and other	similar	predecessor	plans	during	2006,	with	approximately	an	additional	80,000	shares	being	provided	as	matched	shares.

Under	the	Kellogg	Company	Executive	Stock	Purchase	Plan,	selected	senior	level	Kellogg	employees	may	elect	to	use	all	or	part	of	their	annual	bonus,	on	an	after-tax	basis,	to	purchase shares	of	our	common	stock	at	fair	market	value	(as	determined	over	a	thirty-day	trading	period).	No	more	than	500,000	treasury	shares	are	authorized	for	use	under	this	plan.

Under	the	Deferred	Compensation	Plan	for	Non-Employee	Directors,	non-employee	Directors	may	elect	to	defer	all	or	part	of	their	compensation	(other	than	expense	reimbursement)	into units	which	are	credited	to	their	accounts.	The	units	have	a	value	equal	to	the	fair	market	value	of	a	share	of	our	common	stock	on	the	appropriate	date,	with	dividend	equivalents	being earned	on	the	whole	units	in	non-employee	Directors'	accounts.	Units	may	be	paid	in	either	cash	or	shares	of	our	common	stock,	either	in	a	lump	sum	or	in	up	to	ten	annual	installments,	with the	payments	to	begin	as	soon	as	practicable	after	the	non-employee	Director's	service	as	a	Director	terminates.	No	more	than	150,000	shares	are	authorized	for	use	under	this	plan,	none	of which	had	been	issued	or	allocated	for	issuance	as	of	December	30,	2006.	Because	Directors	may	elect,	and	are	likely	to	elect,	a	distribution	of	cash	rather	than	shares,	the	contingently issuable	shares	are	not	included	in	column	(a)	of	the	table	above.

When	Mr.	Jenness	joined	Kellogg	as	a	director	in	2000,	he	was	granted	a	non-qualified	stock	option	to	purchase	300,000	shares	of	our	common	stock.	In	connection	with	this	option,	which was	to	vest	over	three	annual	installments,	he	agreed	to	devote	50%	of	his	working	time	to	consulting	with	Kellogg,	with	further	vesting	to	immediately	stop	if	he	was	no	longer	willing	to	devote such	amount	of	time	to	consulting	with	Kellogg	or	if	Kellogg	decided	that	it	no	longer	wishes	to	receive	such	services.	During	2001,	Kellogg	and	Mr.	Jenness	agreed	to	terminate	the	consulting relationship,	which	immediately	terminated	the	unvested	200,000	shares.	This	option	contains	the	AOF	feature	described	in	the	Proxy	Statement.

Refer	to	the	information	under	the	captions	"Corporate	Governance	—	Director	Independence"	and	"Related	Person	Transactions"	of	the	Proxy	Statement,	which	information	is	incorporated herein	by	reference.

Refer	to	the	information	under	the	captions	"Proposal	2	—	Ratification	of	Independent	Auditors	for	2007	—	Fees	Paid	to	Independent	Registered	Accounting	Firm"	and	"Proposal	2	—

Ratification	of	PricewaterhouseCoopers	LLP	—	Preapproval	Policies	and	Procedures"	of	the	Proxy	Statement,	which	information	is	incorporated	herein	by	reference.

The	Consolidated	Financial	Statements	and	related	Notes,	together	with	Management's	Report	on	Internal	Control	over	Financial	Reporting,	and	the	Report	thereon	of PricewaterhouseCoopers	LLP	dated	February	23,	2007,	are	included	herein	in	Part	II,	Item	8.

# (a)	1.	Consolidated	Financial	Statements

Consolidated	Statement	of	Earnings	for	the	years	ended	December	30,	2006,	December	31,	2005	and	January	1,	2005.

Consolidated	Statement	of	Shareholders'	Equity	for	the	years	ended	December	30,	2006,	December	31,	2005	and	January	1,	2005.

Notes	to	Consolidated	Financial	Statements.

# (a)	2.	Consolidated	Financial	Statement	Schedule

All	financial	statement	schedules	are	omitted	because	they	are	not	applicable	or	the	required	information	is	shown	in	the	financial	statements	or	the	notes	thereto.

# (a)	3.	Exhibits	required	to	be	filed	by	Item	601	of	Regulation	S-K

The	information	called	for	by	this	Item	is	incorporated	herein	by	reference	from	the	Exhibit	Index	on	pages	61	through	64	of	this	Report.

Pursuant	to	the	requirements	of	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934,	the	Registrant	has	duly	caused	this	Report	to	be	signed	on	its	behalf	by	the	undersigned, thereunto	duly	authorized,	this	23rd	day	of	February,	2007.

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	Report	has	been	signed	below	by	the	following	persons	on	behalf	of	the	Registrant	and	in	the	capacities	and on	the	dates	indicated.

Electronic(E),

| 10.48 |  | IBRF |
| :--- | :--- | :--- |
|  | Commission\tfile\tnumber\t1-4171.* |  |
| \t21.01 | Domestic\tand\tForeign\tSubsidiaries\tof\tKellogg. | E |
| \t23.01 | Consent\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm. | E |
| \t24.01 | Powers\tof\tAttorney\tauthorizing\tGary\tH.\tPilnick\tto\texecute\tour\tAnnual\tReport\ton\tForm\t10-K\tfor\tthe\tfiscal\tyear\tended\tDecember\t30,\t2006,\ton\tbehalf\tof | E |
|  | the\tBoard\tof\tDirectors,\tand\teach\tof\tthem. |  |
| \t31.1 | Rule\t13a-14(a)/15d-14(a)\tCertification\tby\tA.D.\tDavid\tMackay. | E |
| \t31.2 | Rule\t13a-14(a)/15d-14(a)\tCertification\tby\tJohn\tA.\tBryant. | E |
| \t32.1 | Section\t1350\tCertification\tby\tA.D.\tDavid\tMackay. | E |
| \t32.2 | Section\t1350\tCertification\tby\tJohn\tA.\tBryant. | E |

* A	management	contract	or	compensatory	plan	required	to	be	filed	with	this	Report.

We	agree	to	furnish	to	the	Securities	and	Exchange	Commission,	upon	its	request,	a	copy	of	any	instrument	defining	the	rights	of	holders	of	long-term	debt	of	Kellogg	and	our	subsidiaries	and any	of	our	unconsolidated	subsidiaries	for	which	Financial	Statements	are	required	to	be	filed.

We	will	furnish	any	of	our	shareowners	a	copy	of	any	of	the	above	Exhibits	not	included	herein	upon	the	written	request	of	such	shareowner	and	the	payment	to	Kellogg	of	the	reasonable expenses	incurred	in	furnishing	such	copy	or	copies.



Question: what percent of net cash provided by operations is retained as cashflow in 2006?
Calculation: net_cash_2006 = 957.4
net_cash_2005 = 1410.5
percent_cash_2006 = net_cash_2006 / net_cash_2005
answer = percent_cash_2006 * 100
Answer: 67.88