The accompanying notes are an integral part of these consolidated financial statements.

Our unaudited consolidated financial statements provided in this report include the accounts of the Company and our majority-owned subsidiaries and entities in which we have a controlling financial interest after the elimination of intercompany accounts and transactions. We have a controlling financial interest if we own a majority of the outstanding voting common stock or have significant control over an entity through contractual or economic interests in which we are the primary beneficiary.  We prepared these statements in accordance with the instructions to Form 10-Q.  These statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

We included all adjustments (consisting only of normal recurring accruals) which we believe were considered necessary for a fair presentation. We reclassified certain prior year amounts to conform to the 2007 presentation.  Operating results for the threesix months ended AprilJuly 1, 2007 may not be indicative of the results that may be expected for the year ending December 31, 2007, because of the seasonal effects of our business.

We had twoAt our annual meeting of stockholders, held April 17, 2007, stockholders approved The Hershey Company Equity and Incentive Compensation Plan (“EICP”).  The EICP is an amendment and restatement of our former Key Employee Incentive Plan, a share-based employee incentive compensation plansplan, and is also a continuation of our Broad Based Stock Option Plan, Broad Based Annual Incentive Plan and Directors’ Compensation Plan as ofPlan.  Following its adoption on April 1, 2007.17, 2007, the EICP became the single plan under which grants using shares for compensation and incentive purposes will be made.  The following table summarizes our stock compensation costs:

The decrease in share-based compensation expense from 2006 to 2007 was primarily associated with lower performance expectations for the PSUs and the timing of stock option grants in 2007.  The 2007 stock option grants were delayed pending approval by our stockholders of The Hershey Company Equity and Incentive Compensation Planthe EICP at the Annual Meetingannual meeting in April 2007.

We estimated the fair value of each stock option grant on the date of the grant using a Black-Scholes option-pricing model and the weighted-average assumptions set forth in the following table:

A summary of the status of our stock options as of AprilJuly 1, 2007, and the change during 2007 is presented below:

A summary of the status of our performance stock units and restricted stock units as of AprilJuly 1, 2007, and the change during 2007 is presented below:

As of AprilJuly 1, 2007, there was $18.5$16.5 million of unrecognized compensation cost relating to non-vested performance stock units and restricted stock units.  We expect to recognize that cost over a weighted-average period of 2.52.6 years.

The higherlower amount in 20072006 was primarily associated with the additional three-year vesting term for the 2003 performance stock unit grants for the 2003-2005 performance cycle (“2003 grants”) which reduced the number of shares that vested in 2006 compared with 2007.  An additional three-year vesting term was imposed on the grant date for the 2003 grants with accelerated vesting for retirement, disability or death.  The compensation cost based on grant date fair value for the 2003 grants is being recognized over a period from three to six years.

Deferred performance stock units, deferred restricted stock units, deferredand directors’ fees and accumulated dividend amounts representing deferred stock units totaled 703,297725,705 units as of April,July 1, 2007. Each unit is equivalent to one share of the Company's Common Stock.

No stock appreciation rights were outstanding as of AprilJuly 1, 2007.

For more information on our stock compensation plans, refer to the consolidated financial statements and notes included in our 2006 Annual Report on Form 10-K.10-K and our proxy statement for the 2007 annual meeting of stockholders.

For the first threesix months of 2007, net interest expense was higher than the comparable period of 2006, primarily due to higher interest expense associated with the issuancefinancing of $500.0 million of long-term debt in August 2006.share repurchases.  Higher interest rates in 2007 as compared towith 2006 also contributed to the increase in net interest expense.

In February 2007, we announced a comprehensive, three-year supply chain transformation program (the “2007 business realignment initiatives”).  When completed, this program will greatly enhance our manufacturing, sourcing and customer service capabilities, reduce inventories resulting in improvements in working capital and will also generate significant resources to invest in our growth initiatives.  These initiatives include accelerated marketplace momentum within our core U.S. business, creation of innovative new product platforms to meet customer needs and disciplined global expansion.  Under the program, which will be implemented in stages over the next three years, we will significantly increase manufacturing capacity utilization by reducing the number of production lines by more than one-third, outsource production of low value-added items and construct a flexible, cost-effective production facility in Monterrey, Mexico to meet current and emerging marketplace needs.  The program will result in a total net reduction of approximately 1,500 positions across our supply chain over the next three years.

We expect the totalThe estimated pre-tax cost of the program to beis from $525 million to $575 million over the next three years.  The total includes from $475 million to $525 million in business realignment costs and approximately $50 million in project implementation costs.  The costs will be incurred primarily in 2007 and 2008, with approximately $270 million to $300 million expected in 2007.

In July 2005, we announced initiatives intended to advance our value-enhancing strategy (the “2005 business realignment initiatives”).  Charges for the 2005 business realignment initiatives were recorded during 2005 and 2006 and the 2005 business realignment initiatives were completed by December 31, 2006.

Charges (credits) associated with business realignment initiatives recorded during the three monthsthree-month and six-month periods ended AprilJuly 1, 2007 and AprilJuly 2, 2006 were as follows:

The charge of $9.9$41.3 million recorded in cost of sales during the firstsecond quarter of 2007 for the 2007 business realignment initiatives related to the accelerated depreciation of fixed assets over a reduced estimated remaining useful life.life and costs related to inventory reductions.  The $3.0$3.3 million recorded in selling, marketing and administrative expenses related primarily to project implementation costs.administration.  In determining the costs related to fixed asset impairments, fair value was estimated based on the expected sales proceeds.  Certain real estate with a net realizable value of approximately $5.0$5.4 million was being held for sale as of AprilJuly 1, 2007.  The netemployee separation costs included $22.3 million for involuntary terminations at six North American manufacturing facilities which are being closed.  The facilities are located in Naugatuck, Connecticut; Reading, Pennsylvania; Oakdale, California; Smiths Falls, Ontario; Montreal, Quebec; and Dartmouth, Nova Scotia.  The employee separation costs also included $29.2 million for charges relating to pension and other post-retirement benefits curtailments and special termination benefits.

Charges (credits) associated with previous business realignment initiatives which began in 2003 and asset impairments2001 resulted from the finalization of the sale of certain properties, adjustments to liabilities which had previously been recorded, and the impact of the settlement as to several of the eight former employees who had filed a complaint alleging that the Company had discriminated against them on the basis of age in connection with the 2003 business realignment initiatives.  The $3.7 million charge associated with the 2005 business realignment initiatives was related primarily to the U.S. Voluntary Workforce Reduction Program (“VWRP”), in addition to costs for streamlining the Company’s international operations and facility rationalization relating to the closure of the Las Piedras, Puerto Rico plant.  The business realignment charge included $1.3$2.1 million for involuntary terminations.

The charge of $51.2 million recorded in cost of sales during the first six months of 2007 for the 2007 business realignment initiatives related to the accelerated depreciation of fixed assets over a reduced estimated remaining useful life and costs related to inventory reductions.  The $6.3 million recorded in selling, marketing and administrative expenses related primarily to project administration.  In determining the costs related to fixed asset impairments, fair value was estimated based on the expected sales proceeds.  The employee separation costs

A credit of $1.6 million recorded in cost of sales duringfor the first quarter of 20062005 business realignment initiatives related to higher than expected proceeds from the sale of equipment from the Las Piedras Puerto Rico plant.  The $3.3$7.1 million net business realignment charge recorded forassociated with the 2005 business realignment initiatives included $1.4 million related primarily to athe U.S. Voluntary Workforce Reduction Program, $1.3 millionVWRP, along with costs for streamlining the Company’s international operations and facility rationalization relating to the closure of the Las Piedras plantplant.  The business realignment charge included $2.9 million for involuntary terminations.  Charges (credits) associated with previous business realignment initiatives which began in 2003 and $.6 million related2001 resulted from the finalization of the sale of certain properties, adjustments to streamlining our international operations.liabilities which had previously been recorded, and the impact of the settlement as to several of the eight former employees who had filed a complaint alleging that the Company had discriminated against them on the basis of age in connection with the 2003 business realignment initiatives.

The AprilJuly 1, 2007 liability balance relating to the 2007 business realignment initiatives was $1.3$23.5 million for employee separation costs.  The AprilJuly 1, 2007 liability balance relating to the 2005 business realignment initiatives was $12.1$8.7 million.

For the three-month periodand six-month periods ended AprilJuly 1, 2007, we excluded from5.6 million stock options were not included in the diluted earnings per share calculation a totalbecause the effect would have been antidilutive. In the second quarter and

Our cash flow hedging derivative activity during the three months and six months ended AprilJuly 1, 2007 and AprilJuly 2, 2006 was as follows:

The amount of net gains on cash flow hedging derivatives, including foreign exchange forward contracts, interest rate swap agreements and commodities futures contracts, expected to be reclassified into earnings in the next twelve months was approximately $1.2$1.4 million after tax as of AprilJuly 1, 2007. This amount was primarily associated with foreign exchange forward contracts.

In February 2006, we terminated a forward swap agreement hedging the anticipated execution of $250 million of term financing because the transaction was no longer expected to occur by the originally specified time period or within an additional two-month period of time thereafter.  A gain of $1.0 million was recorded in the first quarter of 2006 as a result of the discontinuance of this cash flow hedge.  No other gains or losses on cash flow hedging derivatives were reclassified from accumulated other comprehensive income (loss) into income as a result of the discontinuance of a hedge because it became probable that a hedged forecasted transaction would not occur.

For more information, refer to the consolidated financial statements and notes included in our 2006 Annual Report on Form 10-K.

The components of accumulated other comprehensive income (loss) as shown on the Consolidated Balance Sheets are as follows:

We value the majority of our inventories under the last-in, first-out (“LIFO”) method and the remaining inventories at the lower of first-in, first-out (“FIFO”) cost or market. Inventories were as follows:

The increase in raw material inventories as of AprilJuly 1, 2007 resulted from the timing of deliveries to support manufacturing requirements, reflecting the seasonality of our business, and higher costs in 2007. LowerThe increase in finished goods inventories aswas primarily associated with seasonal sales patterns and the introduction of April 1, 2007 primarily reflected the impact of various improvements to our sales and operations planning process to reduce working capital utilization.new products.

As a source of short-term financing, we utilize commercial paper or bank loans with an original maturity of three months or less. In December 2006, we entered into a new five-year unsecured revolving credit agreement. The credit limit is $1.1 billion with an option to borrow an additional $400 million with the concurrence of the lenders. These funds may be used for general corporate purposes.  This unsecured revolving credit agreement contains certain financial covenants and customary representations and warranties, and events of default. As of AprilJuly 1, 2007 we complied with all covenants pertaining to our credit agreement. There were no significant compensating balance agreements that legally restricted these funds. For more information, refer to the consolidated financial statements and notes included in our 2006 Annual Report on Form 10-K.

In May 2006, we filed a new shelf registration statement on Form S-3 that registered an indeterminate amount of debt securities. This registration statement was effective immediately upon filing under new Securities and Exchange Commission regulations governing “well-known seasoned issuers” (the "WKSI Registration Statement"). In August 2006, we issued $500 million of Notes under the WKSI Registration Statement.  Proceeds from the debt issuances and any other offerings under the WKSI Registration Statement may be used for general corporate requirements. These may include reducing existing borrowings, financing capital additions, funding contributions to our pension plans, future business acquisitions and working capital requirements.

The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximated fair value as of AprilJuly 1, 2007 and December 31, 2006, because of the relatively short maturity of these instruments.

The carrying value of long-term debt, including the current portion, was $1,248.1$1,287.2 million as of AprilJuly 1, 2007, compared with a fair value of $1,321.5$1,327.3 million, an increase of $73.4$40.1 million over the carrying value, based on quoted market prices for the same or similar debt issues.

The following table summarizes our foreign exchange activity:

Our foreign exchange forward contracts mature in 2007 and 2008.

We define the fair value of foreign exchange forward contracts as the amount of the difference between contracted and current market foreign currency exchange rates at the end of the period. On a quarterly basis, we estimate the fair value of foreign exchange forward contracts by obtaining market quotes for future contracts with

We adopted the provisions of FIN No. 48 as of January 1, 2007.  The adoption of FIN No. 48 did not result in a significant change to the liability for unrecognized tax benefits.  Upon adoption, we had unrecognized tax benefits of $63.3$79.0 million of which $45.5 million would impact the effective income tax rate if recognized.  The entire amount of unrecognized tax benefits was classified as other long-term liabilities on the balance sheet since we do not expect to make any payments to taxing authorities related to such tax positions in the next twelve months.  We report accrued interest and penalties related to unrecognized tax benefits in income tax expense.  Upon adoption, we had accruals of $13.8approximately $17.4 million for the payment of interest and penalties.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.  A number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our unrecognized tax benefits reflect the most likely outcome.  We adjust these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position would usually require the use of cash.  Favorable resolution would be recognized as a reduction to our effective income tax rate in the period of resolution.

The number of years with open tax audits varies depending on the tax jurisdiction.  Our major taxing jurisdictions include the United States (federal and state) and Canada.  We are no longer subject to U.S. federal examinations by the Internal Revenue Service (“IRS”) for years before 2004.  Various state2004 and various tax examinations by state taxing authorities could be conducted for years beginning in 2000, and some2000.  We are no longer subject to Canadian federal income tax examinations are currently in progress.  Theby the Canada Revenue Agency (“CRA”) is conducting anfor years before 1999. U.S. and Canadian federal audit issues typically involve the timing of our income tax returns in Canada for 1999 through 2002 that is expected to be completed bydeductions and transfer pricing adjustments.  We work with the end

Components of net periodic benefits (income) cost consisted of the following: