We’re not just talking about earning our stripes – we’re doing it. Every day, across the globe, Kellogg people are deliv- ering results and creating the future. In the pages that follow, you’ll read about these efforts, especially as they relate to sustaining our growth. Growing our sales requires earning our stripes in so many ways: Improving our advertising and promotion programs; launching more, differentiated new products; finding new revenue streams within our focused strategy; partnering with our customers and executing better in the store. To fuel our growth, we’ll need to increase our profitability, than it is today. and that requires earning our stripes, too. We are contin- ually identifying ways to be more efficient, rationalizing our capacity, shifting our mix to more profitable business- es, and controlling overhead expenses. Ultimately, the value of our Company – and your stock – is driven by the cash flow we generate. So, we earn our stripes by turning our sales and profit into cash, by limiting our capital expenditure to high-return projects, using existing assets wherever possible, and reducing the amount of cash we have tied up in inventory and accounts receivable. These are only the financial elements of dependability and sus- tainability – we also must earn our stripes with our employees, our communities, and our consumers. Simply put, our entire organization is focused on executing our plans and making this an even better company tomorrow A. D. David Mackay President and Chief Operating Officer EARNING OUR STRIPES GROWING OUR SALES Our brand-building investment, which includes advertis- ing and consumer promotions, increased at a double- digit rate in 2003, substantially outpacing our net sales growth. This underscores our commitment to sustaining the strength and growth of our valuable brands. Not only did we spend more, but we also improved the effectiveness of these brand-building efforts, as a focus on execution and the sharing of proven ideas from around the world led to better programs. We also stepped up our innovation activity. Net sales from prod- ucts launched within the last three years again approached 15% of total sales in 2003, an outstanding contribution. These product and packaging innovations created excitement for consumers, leveraged our exist- ing brands and manufacturing capacity, and shifted our mix toward more profitable sales. Meanwhile, as we used brand building and innovation to drive demand, we were able to rely less on discounting, which further helped our net sales growth.  Most encouraging is the fact that virtually all of our businesses in 2003 were successful in using  Volume to Value to generate profitable sales growth.  8 Earning Our Stripes The first step to sustainable cash flow growth is growing our sales.  Volume to Value has our entire organization focused on profitable net sales growth, rather than on simply increasing tonnage. This means adding value to our products, through brand building and innovation, instead of relying on price discounts. It also means con- centrating our marketing and sales resources on our most profitable brands, as well as launching new prod- ucts that have more favorable profit margins than our portfolio average. Solid execution of this principle led to our strong 6% net sales gain in 2003. VOLUME to VALUE Improve Mix Expand  Gross Profit  Margin Grow Net Sales Increase Brand Building Drive  Innovation