FINANCIAL REVIEW

Our discussion and analysis is an integral part of understanding our financial results. Also refer to Basis of Presentation and Our Divisions in the Notes to the Condensed Consolidated Financial Statements. Tabular dollars are presented in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless otherwise noted and are based on unrounded amounts. Percentage changes are based on unrounded amounts.

Our Critical Accounting Policies

Sales Incentives and Advertising and Marketing Costs

We offer sales incentives and discounts through various programs to customers and consumers. These incentives are accounted for as a reduction of revenue. Certain sales incentives are recognized at the time of sale while other incentives, such as bottler funding and customer volume rebates, are recognized during the year incurred, generally in proportion to revenue, based on annual targets. Anticipated payments are estimated based on historical experience with similar programs and require management judgment with respect to estimating customer participation and performance levels. Differences between estimated expense and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. In addition, certain advertising and marketing costs are also recognized during the year incurred, generally in proportion to revenue.

Income Taxes

In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on our expected annual income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Subsequent recognition, derecognition and measurement of a tax position taken in a previous period are separately recognized in the quarter in which they occur.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS 141R, to improve, simplify and converge internationally the accounting for business combinations. SFAS 141R continues the movement toward the greater use of fair value in financial reporting and increased transparency through expanded disclosures. It changes how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. We adopted the provisions of SFAS 141R as of the beginning of our 2009 fiscal year and the adoption did not have a material impact on our financial statements. Future adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the beginning of our 2009 fiscal year apply the provisions of SFAS 141R and will be evaluated based on the outcome of these matters.

In December 2007, the FASB issued SFAS 160. SFAS 160 amends ARB 51 to establish new standards that will govern the accounting for and reporting of
(1) noncontrolling interests in partially owned consolidated subsidiaries and
(2) the loss of control of subsidiaries. We adopted the accounting provisions of SFAS 160 on a prospective basis as of the beginning of our 2009 fiscal year. The adoption of SFAS 160 did not have a material impact on our financial statements. In addition, we adopted the presentation and disclosure requirements of SFAS 160 on a retrospective basis in the first quarter of 2009.

Our Business Risks

We discuss expectations regarding our future performance, such as our business outlook, in our annual and quarterly reports, press releases, and other written and oral statements. These "forward-looking statements" are based on currently available information, operating plans and projections about future events and trends. They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from our expectations. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

In the first quarter of 2009, our operations outside of the United States generated approximately 40% of our net revenue. As a result, we are exposed to foreign currency risks, including unforeseen economic changes and political unrest. During the 12 weeks ended March 21, 2009, unfavorable foreign currency impacted net revenue performance by 7 percentage points, primarily due to depreciation of the Mexican peso, Canadian dollar, British pound and Brazilian real. In addition, we continue to use the official exchange rate to translate the financial statements of our snack and beverage businesses in Venezuela. In the first quarter of 2009, our operations in Venezuela generated approximately 1% of our net revenue. Currency declines against the U.S. dollar which are not offset could adversely impact our future results.

We expect to be able to reduce the impact of volatility in our raw material and energy costs through our hedging strategies and ongoing sourcing initiatives. See Financial Instruments in the Notes to the Condensed Consolidated Financial Statements for further discussion of our derivative contracts, including their fair value as of March 21, 2009.

Cautionary statements included in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 27, 2008 and in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in Exhibit 99.4 to our Current Report on Form 8-K dated March 24, 2009 should be considered when evaluating our trends and future results.

Results of Operations - Consolidated Review

In the discussions of net revenue and operating profit below, "effective net pricing" reflects the year-over-year impact of discrete pricing actions, sales incentive activities and mix resulting from selling varying products in different package sizes and in different countries. Additionally, "acquisitions" reflect all mergers and acquisitions activity, including the impact of acquisitions, divestitures and changes in ownership or control in consolidated subsidiaries and nonconsolidated equity investees.

Items Affecting Comparability

The year-over-year comparisons of our financial results are affected by the
following items:



                                                                        12 Weeks Ended
                                                                   3/21/09          3/22/08
Operating profit
Mark-to-market net gains/(losses)                                 $       62       $      (4 )
Restructuring and impairment charges                              $      (25 )     $       -
Net income attributable to PepsiCo
Mark-to-market net gains/(losses)                                 $       40       $      (3 )
Restructuring and impairment charges                              $      (19 )     $       -
Net income attributable to PepsiCo per common share - diluted
Mark-to-market net gains                                          $     0.03       $       -
Restructuring and impairment charges                              $    (0.01 )     $       -

Mark-to-Market Net Impact

We centrally manage commodity derivatives on behalf of our divisions. These commodity derivatives include energy, fruit and other raw materials. Certain of these commodity derivatives do not qualify for hedge accounting treatment and are marked to market with the resulting gains and losses recognized in corporate unallocated expenses. These gains and losses are subsequently reflected in division results when the divisions take delivery of the underlying commodity.

In the first quarter of 2009, we recognized $62 million ($40 million after-tax or $0.03 per share) of mark-to-market net gains on commodity hedges in corporate unallocated expenses.

In the first quarter of 2008, we recognized $4 million ($3 million after-tax) of mark-to-market net losses on commodity hedges in corporate unallocated expenses.

Restructuring and Impairment Charges

In the first quarter of 2009, we incurred a charge of $25 million ($19 million after-tax or $0.01 per share) in conjunction with our previously initiated Productivity for Growth program. The program includes actions in all divisions of the business, including the closure of six plants that we believe will increase cost competitiveness across the supply chain, upgrade and streamline our product portfolio, and simplify the organization for more effective and timely decision-making. As previously announced, we expect the initiatives to be completed in the second quarter of 2009.

Volume

Since our divisions each use different measures of physical unit volume, a common servings metric is necessary to reflect our consolidated physical unit volume. For the 12 weeks, total servings decreased 1%, with both worldwide beverages and snacks decreasing 1%.

We discuss volume for our beverage businesses on a bottler case sales (BCS) basis in which all beverage volume is converted to an 8-ounce-case metric. A portion of our volume is sold by our bottlers, and that portion is based on our bottlers' sales to retailers and independent distributors. The remainder of our volume is based on our shipments to retailers and independent distributors. As disclosed in our Current Report on Form 8-K dated March 24, 2009, beginning in the first quarter of 2009, we report BCS volume for PepsiCo Beverages North America on a period basis, rather than on a monthly basis. We continue to report our international beverage volume on a monthly basis. Our first quarter includes beverage volume outside of North America for January and February. Concentrate shipments and equivalents (CSE) represent our physical beverage volume shipments to bottlers, retailers and independent distributors, and is the measure upon which our revenue is based.

Consolidated Results

Total Net Revenue and Operating Profit



                                                           12 Weeks Ended
                                                       3/21/09        3/22/08        Change
Total net revenue                                      $  8,263       $  8,333           (1 )%

Operating profit
FLNA                                                   $    697       $    633           10 %
QFNA                                                        175            166            5 %
LAF                                                         164            167           (1 )%
PAB                                                         425            504          (16 )%
Europe                                                       98            119          (18 )%
AMEA                                                        136            126            8 %
Corporate - net impact of mark-to-market on
commodity hedges                                             62             (4 )        n/m
Corporate - other                                          (169 )         (154 )          9 %

Total operating profit                                 $  1,588       $  1,557            2 %


Total operating profit margin                              19.2 %         18.7 %        0.5

n/m represents year-over-year changes that are not meaningful

See Results of Operations - Division Review for a tabular presentation and discussion of key drivers of net revenue.

Total operating profit increased 2% and operating margin increased 0.5 percentage points. The net favorable mark-to-market impact of our commodity hedges contributed 4 percentage points to operating profit growth and was partially offset by nearly 2 percentage points from the restructuring and impairment charges related to our Productivity for Growth program. The net favorable impact

of these items contributed 0.5 percentage points to the increase in operating margin. Effective net pricing positively contributed to operating profit growth and was partially offset by the impact of higher commodity costs and the volume declines. Unfavorable foreign currency reduced operating profit growth by 7 percentage points.

Other corporate unallocated expenses increased 9%, primarily reflecting increased foreign exchange transaction losses of $11 million over the prior year.

Other Consolidated Results



                                                           12 Weeks Ended
                                                       3/21/09        3/22/08         Change
Bottling equity income                                 $     25       $     70            (64 )%
Interest expense, net                                  $    (98 )     $    (57 )     $    (41 )
Tax rate                                                   24.7 %         26.6 %
Net income attributable to PepsiCo                     $  1,135       $  1,148             (1 )%
Net income attributable to PepsiCo per common
share - diluted                                        $   0.72       $   0.70              3 %

Bottling equity income decreased 64%, primarily reflecting pre-tax gains on our sales of PBG and PAS stock in the prior year.

Net interest expense increased $41 million, primarily reflecting higher average debt balances.

The tax rate decreased 1.9 percentage points compared to the prior year, primarily due to the favorable resolution of certain foreign tax matters.

Net income attributable to PepsiCo decreased 1% and net income attributable to PepsiCo per common share increased 3%. The favorable net mark-to-market impact of our commodity hedges was partially offset by the restructuring and impairment charges related to our Productivity for Growth program. These items affecting comparability positively contributed 2 percentage points to both the performance of net income attributable to PepsiCo and net income attributable to PepsiCo per common share. Net income attributable to PepsiCo per common share was also favorably impacted by share repurchases throughout the prior year.

Results of Operations - Division Review

The results and discussions below are based on how our Chief Executive Officer monitors the performance of our divisions. In addition, our operating profit and growth, excluding the impact of restructuring and impairment charges, are not measures defined by accounting principles generally accepted in the U.S. However, we believe investors should consider these measures as they are more indicative of our ongoing performance and with how management evaluates our operating results and trends. For additional information on our divisions and our restructuring and impairment charges, see Our Divisions and Restructuring and Impairment Charges in the Notes to the Condensed Consolidated Financial Statements.

Net Revenue

12 Weeks Ended                    FLNA         QFNA         LAF           PAB          Europe        AMEA        Total
March 21, 2009                   $ 3,000       $ 485       $  867       $ 2,088       $    947       $ 876      $ 8,263
March 22, 2008                   $ 2,730       $ 495       $  971       $ 2,360       $    984       $ 793      $ 8,333
% Impact of:
Volume(a)                             (1 )%       (1 )%      (5.5 )%         (6 )%          (4 )%        9 %         (2 )%
Effective net pricing(b)              13           1           16            (3 )            7           6            7
Foreign exchange                      (2 )        (2 )        (22 )          (2 )          (21 )        (7 )         (7 )
Acquisitions                           -           -            -             -             13         2.5            2

% Change(c)                           10 %        (2 )%       (11 )%        (12 )%          (4 )%       11 %         (1 )%

(a) Excludes the impact of acquisitions. In certain instances, volume growth varies from the amounts disclosed in the following divisional discussions due to nonconsolidated joint venture volume, and, for our beverage businesses, temporary timing differences between BCS and CSE. Our net revenue excludes nonconsolidated joint venture volume, and, for our beverage businesses, is based on CSE.

(b) Includes the year-over-year impact of discrete pricing actions, sales incentive activities and mix resulting from selling varying products in different package sizes and in different countries.

(c) Amounts may not sum due to rounding.

Frito-Lay North America



                                                              12 Weeks Ended           %
                                                           3/21/09      3/22/08      Change
Net revenue                                                $  3,000     $  2,730         10

Operating profit                                           $    697     $    633         10
Impact of restructuring and impairment charges                    2            -

Operating profit, excluding restructuring and
impairment charges                                         $    699     $    633         10

Net revenue grew 10% and pound volume declined almost 1%, primarily due to weight outs throughout 2008 to cover commodity cost inflation. Additionally, our 2008 Sabra joint venture contributed nearly 1 percentage point to volume growth. Foreign currency reduced net revenue growth by 2 percentage points.

Operating profit grew 10%, primarily reflecting the net revenue growth. Foreign currency reduced operating profit growth by 1 percentage point. Acquisitions had a nominal impact on operating profit growth. Restructuring and impairment charges related to our Productivity for Growth program also had a nominal impact on operating profit growth.

Quaker Foods North America



                                                             12 Weeks Ended           %
                                                         3/21/09       3/22/08      Change
Net revenue                                              $    485     $     495         (2 )

Operating profit                                         $    175     $     166          5
Impact of restructuring and impairment charges                  1             -

Operating profit, excluding restructuring and
impairment charges                                       $    176     $     166          6

Net revenue decreased 2% and volume declined 1%. The volume decline reflects a mid-single-digit decline in Oatmeal, partially offset by mid-single-digit growth in ready-to-eat cereals. The net revenue decline primarily reflects unfavorable foreign currency which contributed 2 percentage points to the decline. Favorable effective net pricing, driven primarily by price increases taken last year, was mostly offset by the volume decline.

Operating profit increased 5%, primarily reflecting final insurance settlement recoveries related to the Cedar Rapids flood in the prior year which contributed 10 percentage points to operating profit growth. Additionally, increased commodity costs negatively impacted operating profit performance. Foreign currency reduced operating profit growth by 1 percentage point. Operating profit growth was negatively impacted by less than $1 million, resulting from restructuring and impairment charges related to our Productivity for Growth program. Operating profit, excluding restructuring and impairment charges, grew 6%.

Latin America Foods



                                                            12 Weeks Ended           %
                                                        3/21/09       3/22/08      Change
Net revenue                                             $    867     $     971        (11 )

Operating profit                                        $    164     $     167         (1 )
Impact of restructuring and impairment charges                 3             -

Operating profit, excluding restructuring and
impairment charges                                      $    167     $     167          1

Volume declined 5.5%, as a result of fewer trading days, a shift in the Easter holiday to the second quarter and pricing actions to cover commodity inflation. A high-single-digit decline at Sabritas in Mexico and a mid-single-digit decline at Gamesa in Mexico were partially offset by double-digit growth in Argentina.

Net revenue declined 11%, primarily reflecting an unfavorable foreign currency impact of 22 percentage points. Favorable effective net pricing was partially offset by the volume declines.

Operating profit declined 1%, driven by unfavorable foreign currency which negatively impacted results by 25 percentage points. Effective net pricing positively contributed to operating profit, partially offset by higher commodity costs and the volume decline. Operating profit growth was negatively impacted by 2 percentage points, resulting from restructuring and impairment charges related to our Productivity for Growth program. Operating profit, excluding restructuring and impairment charges, grew 1%.

PepsiCo Americas Beverages



                                                              12 Weeks Ended           %
                                                           3/21/09      3/22/08      Change
Net revenue                                                $  2,088     $  2,360        (12 )

Operating profit                                           $    425     $    504        (16 )
Impact of restructuring and impairment charges                   13            -

Operating profit, excluding restructuring and
impairment charges                                         $    438     $    504        (13 )

BCS volume declined 6%, partially attributable to the Easter holiday shift to the second quarter, as well as challenging overlaps from the successful launch of G2 and Gatorade Tiger in the prior year. An 8% decline in North America was partially offset by a 1.5% increase in Latin America.

In North America, non-carbonated beverage volume declined 14%, largely driven by double-digit declines in Gatorade sports drinks, and CSD volumes declined in the mid-single-digit range.

Net revenue declined 12%, primarily reflecting unfavorable mix, due to the migration from higher-priced non-carbonated beverages to CSDs, as well as the volume declines in North America. These declines were partially offset by the favorable impact of price increases taken on concentrate this year. Unfavorable foreign currency contributed over 2 percentage points to the net revenue decline.

Operating profit declined 16%, primarily reflecting the net revenue decline. Foreign currency contributed over 3 percentage points to the operating profit decline. Operating profit was also negatively impacted by 2.5 percentage points, resulting from restructuring and impairment charges related to our Productivity for Growth program. Operating profit, excluding restructuring and impairment charges, declined 13%.

Europe



                                                            12 Weeks Ended           %
                                                        3/21/09       3/22/08      Change
Net revenue                                             $    947     $     984         (4 )

Operating profit                                        $     98     $     119        (18 )
Impact of restructuring and impairment charges                 3             -

Operating profit, excluding restructuring and
impairment charges                                      $    101     $     119        (16 )

Snacks volume grew 1%, primarily reflecting our acquisition in the fourth quarter of 2008 of a snacks company in Serbia which contributed 3 percentage points to volume growth. Volume was negatively impacted by planned weight outs in response to higher input costs and two fewer trading days in key markets. Double-digit volume declines in Spain and Poland were mostly offset by mid-single-digit growth at Walkers in the United Kingdom and double-digit growth in Russia.

Beverage volume grew 7%, primarily reflecting our acquisition of Lebedyansky in Russia in the fourth quarter of 2008 which contributed 14 percentage points to volume growth. A high-single-digit increase in the United Kingdom and a low-single-digit increase in Germany were more than offset by double-digit declines in the Ukraine and Russia. CSDs experienced mid-single-digit declines and non-carbonated beverages grew at a double-digit rate.

Net revenue declined 4%, reflecting adverse foreign currency which contributed 21 percentage points to the decline, partially offset by acquisitions which positively contributed 13 percentage points to net revenue performance.

Operating profit declined 18%, reflecting adverse foreign currency which contributed 25 percentage points to the decline, partially offset by acquisitions which positively contributed 8 percentage points to operating profit performance. Favorable effective net pricing was offset by increased commodity costs and the volume declines. Operating profit performance was negatively impacted by 2 percentage points, resulting from restructuring and impairment charges related to our Productivity for Growth program. Operating profit, excluding restructuring and impairment charges, declined 16%.

Asia, Middle East & Africa



                                                             12 Weeks Ended           %
                                                         3/21/09       3/22/08      Change
Net revenue                                              $    876     $     793         11

Operating profit                                         $    136     $     126          8
Impact of restructuring and impairment charges                  3             -

Operating profit, excluding restructuring and
impairment charges                                       $    139     $     126         11

Snacks volume grew 8%, reflecting double-digit growth in the Middle East, partially offset by a high-single-digit decline in South Africa. Additionally, India and China each grew at high-single-digit rates.

Beverage volume grew 10%, reflecting broad-based increases driven by double-digit growth in the Middle East and India. Additionally, China grew at a high-single-digit rate. Acquisitions had no impact to the beverage volume growth . . .