In a small bowl, mix together cream cheese and powdered sugar until well blended.
Form small balls of cream cheese (about a teaspoon) and set them on a plate lined with wax paper.
Refrigerate cream cheese balls while you prepare the dough.
Grind cereal in a food processor or blender until smooth.
In a large bowl, combine cereal, flour, sugar, salt, baking powder and baking soda. Mix well.
Add the egg, milk, oil, and vanilla. Whisk the batter until smooth and free of lumps.
Fill a small frying pan halfway with oil. Heat oil to 375°F. While waiting for the oil to heat, line a platter or two large plates with paper towels.
Remove cream cheese balls from the refrigerator.
One at a time, drop a cream cheese ball into the dough. Using two spoons, lift the ball out of the dough, coating it with dough in the process. Carefully transfer the dough-covered cream cheese ball to the hot oil. Only fry 2-3 at a time to prevent crowding in the pan.
Fry the donut holes for one minute then flip over with a slotted spoon and cook for an additional minute. Use a slotted spoon to remove donut holes from the pan and transfer to paper towels.