Basis of Presentation

Financial statements for all periods presented in this report were prepared on a consolidated basis in accordance with generally accepted accounting principles consistently applied. All per share information is presented on a diluted basis unless otherwise noted. Certain reclassifications have been made to prior year financial information to conform to the current year presentation.

We acquired 100% of the stock of Prairie Packaging, Inc. (Prairie) on June 5, 2007. The results of Prairie's operations have been included in the consolidated financial statements as of that date.

On January 5, 2009, we purchased the polypropylene cup business of WinCup for $20 million. This business operated one manufacturing facility in North Carolina with approximately 100 employees. The results of this business have been included in the consolidated financial statements as of that date.

We have three reporting segments:

• Consumer Products manufactures disposable plastic, foam, molded fiber, pressed paperboard, and aluminum packaging products, and sells them to customers such as grocery stores, mass merchandisers, and discount chains. Products include waste bags, food storage bags, and disposable tableware and cookware. We sell many of our consumer products under well-known trademarks, such as Hefty®.

• Foodservice/Food Packaging manufactures foam, clear plastic, aluminum, pressed paperboard, and molded fiber packaging products, and sells them to customers in the food distribution channel, who prepare and process food for consumption. Customers include foodservice distributors, restaurants, and other institutional foodservice outlets, food processors, and grocery chains.

• Other includes corporate and administrative service operations and retiree benefit income and expense.

The accounting policies of the reporting segments are the same as those for Pactiv as a whole. Where discrete financial information is not available by segment, reasonable allocations of expenses and assets/liabilities are used.

Restructuring and Other

In 2008, we implemented a cost reduction program that included the consolidation of two small facilities, asset rationalizations, and headcount reductions. The program is essentially complete with the exception of a small idle plant held for sale. The accrued restructuring balance of $2 million as of December 31, 2008, and March 31, 2009, is for remaining severance payments. Cash payments related to restructuring and other was immaterial for the three-month period ended March 31, 2009.

In the first quarter of 2008, we recorded a charge of approximately $9 million after tax, or $0.07 per share. Cash payments related to restructuring and other charges were $1 million after tax for the three-month period ended March 31, 2008.

Significant Trends, Opportunities and Challenges

The primary raw materials used to manufacture our products are plastic resins, principally polystyrene and polyethylene. The prices of plastic resins are affected by the prices of crude oil and natural gas, as well as supply and demand factors of various intermediate petrochemicals. In recent years, there have been significant movements in resin prices, which rose to historic highs in 2008, and dropped precipitously at the end of 2008 and into early 2009. In the first quarter of 2009, prices have risen moderately. Average industry prices for polystyrene were approximately 35% lower in the first quarter of 2009 than in the same period of 2008. Average industry prices for polyethylene were approximately 30% lower in the first quarter of 2009, compared with the same period in 2008. We have historically adjusted our selling prices, in many areas of our business, to reflect changes in raw material costs, although there is usually a lag of several months. Some of our

business is pursuant to contracts that have price indexes that automatically adjust, usually quarterly, to reflect changes in certain raw materials.

Our business is sensitive to other energy-related cost movements, particularly those that affect transportation and utility costs. Historically, we have been able to mitigate the effect of higher energy-related costs with productivity improvements and other cost reductions. As energy costs have declined, we have seen a favorable impact on our margins. However, the extent and duration of energy-related cost reductions is uncertain.

Due to the current economic downturn and lower consumer confidence, the markets for our packaging products are experiencing weak demand. While we experienced some improvement in demand for our products in March and April, market demand is difficult to predict in this uncertain environment.

In 2006, we began to introduce "lean" principles and tools in many of our operating facilities. We are expanding the use of lean principles to help us accelerate productivity improvements by reducing inventory and scrap levels, providing rapid stock replenishment, shortening scheduling cycles, improving our "one-stop shopping" service, eliminating nonvalue-added activities, and streamlining processes. As this is a long-term process, we expect our ability to use these tools throughout the organization will have a positive effect on our operating results in future years.

Worldwide stock markets declined significantly in 2008 and, as a result, our U.S. pension plan was substantially underfunded at December 31, 2008. See the "Liquidity and Capital Resources" section for further discussion of the impact on the company of this underfunding.

We believe that cash flow from operations, available cash reserves, and the ability to obtain cash under our credit facility and asset securitization program will be sufficient to meet current and future potential pension funding, liquidity, and capital requirements.

Results of Continuing Operations

Three Months Ended March 31, 2009, Compared with Three Months Ended March 31, 2008

Sales


                                         Three months                Increase
                                       ended March 31,              (decrease)
        (In millions)                  2009         2008       Amount       Percent

        Consumer Products            $     283      $ 290     $     (7 )        (2.4 )%
        Foodservice/Food Packaging         483        518          (35 )        (6.8 )

        Total                        $     766      $ 808     $    (42 )        (5.2 )%

Sales decreased 5%, reflecting a decline in volume of 3%, lower pricing of 1%, and unfavorable foreign exchange of 1%.

Sales for Consumer Products declined 2%, reflecting a decrease in volume of 5% impacted by weaker consumer demand, offset partially by favorable pricing of 3%. Volume growth in cups and cutlery partially offset declines in waste bags and disposable plates.

Foodservice/Food Packaging sales fell 7%, driven by average selling price decreases of 3%, lower volume of 2%, and unfavorable foreign exchange of 2%. Continued growth in cups and cutlery, partially as a result of new business, was more than offset by softness in market demand.

Operating Income


                                          Three months
                                              ended                 Increase
                                            March 31,              (decrease)
           (In millions)                 2009       2008       Amount      Percent

           Consumer Products                $74       $30          $44        146.7 %
           Foodservice/Food Packaging        95        47           48        102.1
           Other                             (2 )       2           (4 )     (200.0 )

           Total                           $167       $79          $88        111.4 %

Operating income increased primarily as a result of an $82 million improvement in spread, lower restructuring costs of $14 million, and lower operating costs of $12 million driven by improvement in logistics costs and productivity. This was offset, in part, by lower sales volume of $9 million, higher advertising and promotional expenses of $8 million, and lower pension income of $5 million.

The following table shows the impact of restructuring and other charges on 2008 operating income by segment.

                                                          Operating income - three months ended March 31, 2008
                                                 GAAP              Restructuring and             Excluding restructuring
(In millions)                                    basis               other charges                  and other charges

Consumer Products                               $    30           $                 5           $                      35
Foodservice/Food Packaging                           47                             8                                  55
Other                                                 2                             1                                   3

Total                                           $    79           $                14           $                      93

We believe that focusing on operating income excluding the effect of restructuring and other charges is a meaningful alternative way of evaluating our operating results. The restructuring and other charges relate to actions that will have an ongoing effect on our company. Considering such charges as being only applicable to the periods in which they are recognized could make our operating performance in those periods more difficult to evaluate relative to other periods in which there are no such charges. We use operating income excluding restructuring and other charges to evaluate operating performance and, along with other factors, in determining management compensation.

The following table shows operating income excluding restructuring and other charges.

                                           Three months
                                              ended                  Increase
                                            March 31,               (decrease)
           (In millions)                  2009       2008      Amount      Percent

           Consumer Products                 $74     $  35     $    39        111.4 %
           Foodservice/Food Packaging         95        55          40         72.7
           Other                              (2 )       3          (5 )     (166.7 )

           Total                            $167     $  93     $    74         79.6 %

The increase in operating income for Consumer Products was driven mainly by favorable spread of $44 million and lower operating costs of $8 million, offset partially by higher advertising and promotional expense of $8 million and lower sales volume of $6 million.

Higher operating income for Foodservice/Food Packaging was driven primarily by favorable spread of $38 million and lower operating costs of $4 million, partially offset by lower volume of $3 million.

The decrease in Other operating income was due mainly to lower pension income.

Income from Continuing Operations

We recorded income from continuing operations of $91 million, or $0.69 per share, compared with $35 million, or $0.26 per share, in 2008. The change was driven primarily by higher operating income of $56 million ($88 million before tax) as described previously.

Liquidity and Capital Resources

Capitalization


                                                          March 31,       December 31,        Increase
(In millions)                                               2009              2008           (decrease)

Short-term debt, including current maturities of
long-term debt                                           $         -      $           -      $         -
Long-term debt                                                 1,345              1,345                -

Total debt                                                     1,345              1,345                -
Noncontrolling interest                                           16                 16                -
Pactiv shareholders' equity                                      727                639               88

Total capitalization                                     $     2,088      $       2,000      $        88

Ratio of total debt to total capitalization                     64.4 %             67.3 %

Cash Flows


                                     Three months ended March 31,         Increase
       (In millions)                    2009                2008         (decrease)

       Cash provided (used) by:
       Operating activities         $      116           $       24       $      92
       Investing activities                (42 )                (46 )             4
       Financing activities                 (1 )                (22 )            21

The increase in cash provided by operating activities was driven primarily by higher income from continuing operations of $56 million. In addition, a reduction in accounts receivable compared with an increase in accounts receivable in the same quarter last year contributed $45 million, a smaller inventory build than prior year added $33 million, and lower noncash retirement benefits added $5 million. This was offset partially by a $100 million pretax contribution to our U.S. pension plan, reduced by related favorable cash tax effects of approximately $50 million.

The increase in cash used by investing activities was driven by lower capital expenditures of $24 million partially offset by the acquisition of WinCup for $20 million.

Cash used by financing activities increased as a result of the repayment of long-term revolving debt of $20 million in 2008.

Capital Commitments

Commitments for authorized capital expenditures totaled approximately $50 million at March 31, 2009. It is anticipated that the majority of these expenditures will be funded from existing cash and short-term investments and internally generated cash.

Contractual Obligations

There was no material change in the company's aggregate contractual obligations since December 31, 2008.

Liquidity and Off-Balance-Sheet Financing

We use various sources of funding to manage liquidity. Sources of liquidity include cash flow from operations and a 5-year revolving credit facility of $750 million, under which $70 million was outstanding at March 31, 2009. We were in full compliance with the financial and other covenants of our revolving credit agreement at the end of the period. The two financial covenant ratios contained in our debt agreements are an interest coverage ratio and the total debt to EBITDA ratio. The interest coverage ratio is defined as consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) divided by interest expense. The minimum required ratio is 3.50 to 1. The total debt to EBITDA ratio is calculated by dividing the total debt by EBITDA. The maximum permitted total debt to EBITDA ratio is 3.50 to 1.

The interest coverage ratio and the debt to EBITDA ratio are shown in the following table.

                                                                    Plus                Less
                                          Twelve months         Three months        Three months         Twelve months
                                              ended                 ended               ended                ended
(In millions)                           December 31, 2008      March 31, 2009      March 31, 2008       March 31, 2009

Net income (1)                         $               217     $            91     $            34      $           274
Adjustments:
Noncash restructuring and other (2)                     12                   -                  12                    -
Interest expense, net of interest
capitalized (1)                                        106                  23                  27                  102
Income tax expense (1)                                 120                  53                  18                  155
Depreciation and amortization (1)                      182                  46                  46                  182
Noncontrolling interest (1)                              1                   -                   -                    1

EBITDA                                 $               638     $           213     $           137      $           714


EBITDA                                 $               638                                              $           714
Interest expense, net of interest
capitalized (1)                                        106                                                          102

Interest coverage ratio                               6.02                                                         7.00


Total debt (3)                         $             1,345                                              $         1,345
EBITDA                                                 638                                                          714

Total debt to EBITDA ratio                            2.11                                                         1.88

(1) Amounts per the consolidated statement of income (for 2008 information, refer to our 2008 10-K and first quarter 2008 10-Q).

(2) Amounts per the consolidated statement of cash flows (for 2008 information, refer to our 2008 10-K and first quarter 2008 10-Q).

(3) Amounts per the consolidated statement of financial position.

We also use an asset securitization facility as a form of off-balance-sheet financing. At March 31, 2009, $118 million was securitized under this facility, and $130 million was securitized at December 31, 2008. We do not participate in financial commercial paper markets.

We have a U.S. qualified pension plan that covers approximately 7,000 of our employees, as well as approximately 65,000 others, mostly retirees and persons who worked for predecessor companies that were part of Tenneco. The requirement to make contributions to this plan is a function of several factors, the most important of which are the return on plan assets and applicable funding discount rate used in calculating plan liabilities. We are not required to make a contribution to this plan in 2009; however, we have elected to make

a contribution to the plan in 2009 to lessen the impact in the future. We contributed $100 million pretax in February 2009, and an additional $100 million pretax in April 2009.

After making a total 2009 contribution of $200 million ($130 million after tax), and assuming the plan assets earn an actual rate of return in 2009 equal to our expected long-term rate of return of 9% and the pension funding discount rate as of January 1, 2010, is 6.95%, unchanged from the rate as of January 1, 2009, we estimate a minimum required cash contribution in 2010 to the U.S. pension plan on an after-tax basis of approximately $18 million.

Holding the pension funding discount rate constant, each one percentage-point increase (decrease) in the annual actual rate of return up to 15% would reduce (increase) the minimum cash contribution on an after-tax basis by approximately $17 million. On the same basis, each one percentage-point increase in the actual rate of return above 15% would reduce the minimum required after-tax cash contribution by approximately $5 million.

Holding the actual rate of return constant, each one-half percentage-point increase (decrease) in the pension funding discount rate would reduce (increase) the minimum required after-tax cash contribution by approximately $95 million.

The above funding scenarios all assume we would maintain a funded ratio above 80% as defined in the Pension Protection Act of 2006 in order to avoid certain benefit restrictions on our plan. However, as long as our funded ratio is above 60%, those benefit restrictions do not have a meaningful impact on us or the plan. This allows us more flexibility in the timing of pension contributions.

We believe that cash flow from operations, available cash reserves, and the ability to obtain cash under our credit facility and asset securitization program will be sufficient to meet current and future potential pension funding, liquidity, and capital requirements.

Changes in Accounting Principles

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements." SFAS No. 157 establishes a framework for measuring fair value by providing a standard definition of fair value as it applies to assets and liabilities. SFAS No. 157, which does not require the use of any new fair value measurements, clarifies the application of other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 was effective as of January 1, 2008, and did not have a material effect on our financial statements upon adoption and as of March 31, 2009.

We adopted the measurement provisions of SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an Amendment of SFAS Nos. 87, 88, 106, and 132(R)," on January 1, 2008, using the transition method, based on data from our September 30, 2007, measurement date. As a result, we increased "retained earnings" by $7 million after tax in 2008.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115." SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value as of specified election dates. SFAS No. 159 expands the use of fair value measurement, but does not eliminate disclosure requirements of other accounting standards, including SFAS No. 157. SFAS No. 159 was effective January 1, 2008, and it did not impact our financial statements upon adoption and as of March 31, 2009. We did not choose to measure any financial instruments at fair value as permitted under the statement.

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," which replaces SFAS No. 141, "Business Combinations." SFAS No. 141(R) retains the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value using the acquisition method of accounting, but it changes the application of the acquisition method in a number of significant ways. In this regard, the pronouncement requires that
(1) acquisition-related costs generally be expensed as

incurred, (2) noncontrolling interests be recorded at fair value, (3) in-process research and development costs be recorded at fair value as an indefinite lived intangible asset, (4) restructuring costs associated with a business combination generally be expensed subsequent to the date of such a combination, and
(5) changes in valuation allowances on deferred tax assets and income tax uncertainties after the acquisition date generally be recorded as income tax expense. SFAS No. 141(R) is effective on a prospective basis for all business combinations that occur in fiscal years beginning after December 15, 2008, with the exception of accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS No. 141(R) amends SFAS No. 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS No. 141(R) would also be subject to the provisions of SFAS No. 141(R). SFAS No. 141(R) was effective January 1, 2009, and did not have a material impact our financial statements upon adoption and as of March 31, 2009.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an Amendment of Accounting Research Bulletin (ARB) No. 51." SFAS No. 160 is effective for fiscal years, and interim periods within such fiscal years, beginning on or after December 15, 2008. SFAS No. 160 requires that noncontrolling (minority) interests be recognized as equity (but separate from parents' equity) in consolidated financial statements, and that net earnings related to noncontrolling interests be included in consolidated net income, but identified separately on the face of the income statement. SFAS No. 160 also amends some of ARB No. 51's consolidation procedures, and expands disclosure requirements regarding the interests of parents and noncontrolling interests. SFAS No. 160 was effective January 1, 2009, and did not have a material impact on our financial statements upon adoption and as of March 31, 2009.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133." SFAS No. 161 is effective for fiscal years, and interim periods within such fiscal years, beginning on or after November 15, 2008. SFAS No. 161 requires enhanced disclosures about an entity's derivative and hedging activities, specifically how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 was effective January 1, 2009, and did not have a material impact our financial statements upon adoption and as of March 31, 2009.

Critical Accounting Policies

For a complete discussion of the company's critical accounting policies, refer to Pactiv's most recent filing on Form 10-K.

Certain statements included in this Quarterly Report on Form 10-Q, including statements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and in the notes to the financial statements, are "forward-looking statements." All statements other than statements of historical fact, including statements regarding prospects and future results, are forward-looking. These forward-looking statements generally can be identified by the use of terms and phrases such as "will", "believe", "anticipate", "may", "might", "could", "expect", "estimated", "projects", "intends", "foreseeable future", and similar terms and phrases. These . . .