ORGANIZATION OF INFORMATION
Management's Discussion and Analysis provides a narrative concerning our
financial performance and condition that should be read in conjunction with the
accompanying financial statements. It includes the following sections:

       Definition of Terms                                              21
       Forward-Looking Statements                                       21
       Overview and Outlook                                             21
       Analysis of Results of Operations for the First Three Months     24
       Results of Operations by Segment for the First Three Months      26
       Financial Condition                                              28
       Uses and Limitations of Non-GAAP Measures                        33
       Recent Accounting Requirements                                   33
       Safe Harbor Statement                                            33

DEFINITION OF TERMS
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP. Our discussion of financial results includes several non-GAAP measures to provide additional information concerning Avery Dennison Corporation's (the "Company's") performance. These non-GAAP financial measures are not in accordance with, nor are they a substitute for, GAAP financial measures. These non-GAAP financial measures are intended to supplement our presentation of our financial results that are prepared in accordance with GAAP. Refer to "Uses and Limitations of Non-GAAP Measures."
We use the following terms:
• Organic sales growth (decline) refers to the change in sales excluding the estimated impact of currency translation, acquisitions and divestitures, and the extra week in fiscal year 2009;

• Segment operating income (loss) refers to income (loss) before interest and taxes;

• Free cash flow refers to cash flow from operations and net proceeds from sale of investments, less payments for capital expenditures, software and other deferred charges;

• Operational working capital refers to trade accounts receivable and inventories, net of accounts payable.

FORWARD-LOOKING STATEMENTS
Certain statements contained in Management's Discussion and Analysis are
"forward-looking statements" and are subject to certain risks and uncertainties.
Refer to our "Safe Harbor Statement" herein.
OVERVIEW AND OUTLOOK
Overview
Sales
Our sales decreased 13% in the first three months of 2009 compared to the same
period last year.

                                                     Three Months Ended
       Estimated change in sales due to:      April 4, 2009       March 29, 2008

       Organic sales decline                        (15 )%              (2 )%
       Extra week in fiscal year 2009 (1)             7                  -
       Foreign currency translation                  (6 )                6
       Acquisitions, net of divestitures              1                 14

       Reported sales (decline) growth              (13 )%              18 %

(1) Our 2009 fiscal year includes a 53-week period, with the extra week reflected in the first quarter. Normally, each fiscal year consists of 52 weeks, but every fifth or sixth year consists of 53 weeks.

Net Income
Net income decreased approximately $967 million in the first three months of 2009 compared to the same period in 2008.

• Lower net sales

• Accrual for a legal settlement

• Higher restructuring and asset impairment charges related to cost reduction actions

• Higher raw material and employee-related costs

• Loss on debt extinguishment

• Unfavorable impact of foreign currency translation

Positive factors affecting net income included:
• Benefits from selling price increases

• Cost savings from productivity improvement initiatives, including savings from restructuring actions

• Higher tax benefit

• Lower transition costs related to acquisition integrations

Impairment of Goodwill and Indefinite-Lived Intangible Assets In the first three months of 2009, we recorded non-cash impairment charges of $832 million for the retail information services reporting unit, of which $820 million is related to goodwill and $12 million is related to indefinite-lived intangible assets. These charges are based on our preliminary estimates, which are expected to be finalized in the second quarter of 2009. We perform our test of impairment for goodwill and indefinite-lived intangible assets ("goodwill impairment") in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets." In performing the required impairment test, we primarily apply a present value (discounted cash flow) method to determine the fair value of the reporting units with goodwill. Our reporting units, which are composed of either a discrete business or an aggregation of businesses with similar economic characteristics, consist of roll materials; retail information services; office and consumer products; graphics and reflective products; industrial products; and business media.
We perform our annual goodwill impairment test during the fourth quarter. However, certain factors may result in the need to perform an impairment test prior to the fourth quarter, including significant underperformance of our business relative to expected operating results, significant adverse economic and industry trends, significant decline in our market capitalization for an extended period of time relative to net book value, or a decision to divest an individual business within a reporting unit. Based upon our assessment of these factors in connection with the preparation of our first quarter financial statements, we determined that there was a need to initiate an interim goodwill impairment test. The factors considered included both a sustained decline in our stock price and a decline in our 2009 revenue projections for the retail information services reporting unit, following lower than expected revenues in March 2009, which continued in April 2009. The peak season for the retail information services reporting unit has traditionally been March through the end of the second quarter.
The first step of our interim impairment analysis indicated that the fair value of each of our reporting units exceeded its carrying value, except for our retail information services reporting unit, which had a fair value less than its carrying value. Refer to Note 4, "Goodwill and Other Intangibles Resulting from Business Acquisitions," to the unaudited Condensed Consolidated Financial Statements for further information.
Goodwill
Based on the results of the first step and a preliminary assessment of the second step of the impairment test, we have recorded a non-cash impairment charge of $820 million for the retail information services reporting unit in the first three months of 2009. The second step of the impairment test is expected to be completed by the end of the second quarter of 2009. Once completed, there could potentially be an additional non-cash adjustment to the goodwill impairment charge.
Indefinite-Lived Intangible Assets
In connection with the acquisition of Paxar Corporation ("Paxar"), we acquired approximately $30 million of intangible assets, consisting of certain trade names and trademarks, which are not subject to amortization because they have an indefinite useful life. As part of the interim goodwill impairment test discussed above, we additionally recorded a non-cash impairment charge of $12 million in the first three months of 2009. Acquisitions
We completed the acquisition of DM Label Group ("DM Label") on April 1, 2008. DM Label operations are included in our Retail

Avery Dennison Corporation Information Services segment. See Note 2, "Acquisitions," to the unaudited Condensed Consolidated Financial Statements for further information. Cost Reduction Actions
Q4 2008 - 2009 Actions
In the fourth quarter of 2008, we initiated new restructuring actions that are expected to impact approximately 10% of our global workforce. These new actions target over $150 million in annualized savings by the middle of 2010, of which an estimated $75 million, net of transition costs, is expected to benefit 2009. We expect to incur approximately $160 million (of which $130 million will be settled in cash) of restructuring charges associated with these actions, with the majority to be incurred in 2009. At the end of the first quarter, we achieved run-rate savings representing approximately 30% of our target, and we anticipate reaching 50% by the end of the second quarter.
During the fourth quarter of 2008 and the first quarter of 2009, we recorded $51.4 million in charges related to these restructuring actions, consisting of severance and related employee costs, asset impairment charges, and lease cancellation costs. Severance and employee related costs related to approximately 1,425 positions, impacting all of our segments and geographic regions.
Q1 2008 - Q3 2008 Actions
During the first three quarters of 2008, we implemented cost reduction actions resulting in charges of $22.8 million, including severance and employee related costs for approximately 645 positions, asset impairment charges, and lease cancellation costs.
Refer to Note 9, "Cost Reduction Actions," to the unaudited Condensed Consolidated Financial Statements for further detail. Effective Rate of Taxes on Income
The effective tax rate for the first three months of 2009 was 1.9%, compared to a negative 12.3% for the same period in 2008, resulting in a benefit for both periods. The effective tax rate for the first three months of 2009 includes a benefit of approximately $19 million from discrete events, primarily the tax effect of impairments of goodwill and indefinite-lived intangible assets. Refer to Note 11, "Taxes Based on Income," to the unaudited Condensed Consolidated Financial Statements for further information. Free Cash Flow
Free cash flow, which is a non-GAAP measure, refers to cash flow from operating activities and net proceeds from sale of investments less spending on property, plant, equipment, software and other deferred charges. We use free cash flow as a measure of funds available for other corporate purposes, such as dividends, debt reduction, acquisitions, and repurchases of common stock. Management believes that this measure provides meaningful supplemental information to our investors to assist them in their financial analysis of the Company. This measure is not intended to represent the residual cash available for discretionary purposes. Refer to the "Uses and Limitations of Non-GAAP Measures" section for further information regarding limitations of this measure.

                                                           Three Months Ended
(In millions)                                       April 4, 2009      March 29, 2008

Net cash provided by operating activities            $       16.0       $        56.0
Purchase of property, plant and equipment                   (15.7 )             (38.4 )
Purchase of software and other deferred charges              (8.2 )             (16.5 )
Proceeds from sale of investments, net                         .6                   -

Free cash flow                                       $       (7.3 )     $         1.1

Free cash flow in the first three months of 2009 reflected timing of payments of accounts payable and lower inventory purchases, payments of bonuses and trade rebates, lower spending on property, plant, and equipment, software, and other deferred charges, and lower income from operations. These negative factors were partially offset by the timing of collection of accounts receivable. See "Analysis of Results of Operations" and "Liquidity" below for more information. Legal Proceedings
We are a named defendant in purported class actions in the U.S. seeking treble damages and other relief for alleged unlawful competitive practices.

Avery Dennison Corporation The Board of Directors created an ad hoc committee comprised of certain independent directors to oversee the foregoing matters.
As previously disclosed, we have discovered instances of conduct by certain employees that potentially violate the U.S. Foreign Corrupt Practices Act. We reported that conduct to authorities in the U.S. and we believe it is possible that fines or other penalties could be incurred.
We are unable to predict the effect of these matters at this time, although the effect could be adverse and material. These and other matters are reported in Note 15, "Commitments and Contingencies," to the unaudited Condensed Consolidated Financial Statements.
Outlook
Certain factors that we believe may contribute to 2009 results are listed below. If current exchange rate trends continue, they would have an unfavorable effect on earnings for 2009.
We expect incremental pension and other employee-related expenses and contributions in 2009.
We may incur additional non-cash goodwill and indefinite-lived intangible asset impairment charges upon completion of step two of our impairment test. We anticipate higher charges related to restructuring actions in 2009 compared to 2008.
We anticipate lower interest expense in 2009 due primarily to retirements of certain indebtedness. Our assumptions on interest expense are subject to changes in market rates through the remainder of the year.
The annual effective tax rate will be impacted by future events including changes in tax laws, geographic income mix, tax audits, closure of tax years, legal entity restructuring, and release of, or accrual for, valuation allowances on deferred tax assets. The effective tax rate can potentially have wide variances from quarter to quarter, resulting from interim reporting requirements and the recognition of discrete events.
We anticipate our capital and software expenditures to be in the range of $120 million to $150 million in 2009, including increased investment in new business opportunities to transform the Retail Information Services business and drive future growth and profitability improvement.
ANALYSIS OF RESULTS OF OPERATIONS FOR THE FIRST THREE MONTHS

(Loss) Income Before Taxes

(In millions)                                                                2009              2008

Net sales                                                              $  1,426.2        $  1,645.2
Cost of products sold                                                     1,081.1           1,221.2

Gross profit                                                                345.1             424.0
Marketing, general and administrative expense                               304.2             328.0
Goodwill and indefinite-lived intangible asset impairment charges           832.0                 -
Interest expense                                                             27.5              29.5
Other expense                                                                97.3               5.6

(Loss) income before taxes                                             $   (915.9 )      $     60.9


As a Percent of Sales:
Gross profit (margin)                                                        24.2 %            25.8 %
Marketing, general and administrative expense                                21.3              19.9
(Loss) income before taxes                                                  (64.2 )             3.7

Sales
Sales decreased 13% in the first three months of 2009 compared to the same period last year, due largely to the decline in sales on an organic basis, partially offset by incremental sales from the DM Label acquisition (approximately $9 million) and the impact of the

Avery Dennison Corporation extra week in the first three months of 2009. Foreign currency translation had an unfavorable impact on the change in sales of approximately $114 million in the first three months of 2009.
On an organic basis, sales declined 15% in the first three months of 2009, as continued deterioration in the global macroeconomic environment contributed to volume declines across all segments and geographic regions.
Refer to "Results of Operations by Segment" for information by reportable segment.
Gross Profit
Gross profit margin for the first three months of 2009 declined compared to the same period in 2008, reflecting reduced fixed-cost leverage due to lower sales on an organic basis, and higher raw material costs, partially offset by benefits from selling price increases and productivity. Marketing, General and Administrative Expenses The decrease in marketing, general and administrative expense in the first three months of 2009 compared to the same period last year primarily reflected cost reductions and benefits from productivity and currency translation, partially offset by costs associated with the extra week.
Goodwill and Indefinite-Lived Intangible Asset Impairment Charges In the first three months of 2009, we recorded non-cash estimated impairment charges of $832 million for the retail information services reporting unit. Refer to Note 4, "Goodwill and Other Intangibles Resulting from Business Acquisitions," to the unaudited Condensed Consolidated Financial Statements for more information.

Other Expense

      (In millions)                                              2009       2008

      Restructuring costs                                     $  17.1     $  3.3
      Asset impairment charges and lease cancellation costs      22.0        2.3
      Other                                                      58.2          -

      Other expense                                           $  97.3     $  5.6

In the first three months of 2009, "Other expense" consisted of asset impairment and lease cancellation charges, severance and other employee-related costs resulting in the reduction in headcount of approximately 725 positions across all segments and geographic regions, as well as an accrual for a legal settlement and a loss from debt extinguishment. For more information regarding the debt extinguishment, refer to "Financial Condition" herein and Note 5, "Debt," to the unaudited Condensed Consolidated Financial Statements. For more information regarding the legal settlement, refer to Note 15, "Commitments and Contingencies," to the unaudited Condensed Consolidated Financial Statements. In the first three months of 2008, "Other expense" consisted of charges for severance and other employee-related costs resulting in the reduction in headcount of approximately 155 positions across all segments and geographic regions, as well as asset impairment charges in the Pressure-sensitive Materials segment.
Refer to Note 9, "Cost Reduction Actions," to the unaudited Condensed Consolidated Financial Statements for more information.

Net (Loss) Income and Earnings per Share

  (In millions, except per share)                                2009          2008

  (Loss) income before taxes                              $    (915.9 )    $   60.9
  Benefit from income taxes                                     (17.0 )        (7.5 )

  Net (loss) income                                       $    (898.9 )    $   68.4

  Net (loss) income per common share                      $     (8.99 )    $    .70
  Net (loss) income per common share, assuming dilution   $     (8.99 )    $    .69


  Net (loss) income as a percent of sales                       (63.0 )%        4.2 %


  Percent change in:
  Net (loss) income                                          (1,414.2 )%      (13.5 )%
  Net (loss) income per common share                         (1,384.3 )       (13.6 )
  Net (loss) income per common share, assuming dilution      (1,402.9 )       (13.8 )

RESULTS OF OPERATIONS BY SEGMENT FOR THE FIRST THREE MONTHS
Pressure-sensitive Materials Segment

(In millions)                                                         2009            2008

Net sales including intersegment sales                            $  846.2        $  960.4
Less intersegment sales                                              (37.4 )         (40.8 )

Net sales                                                         $  808.8        $  919.6
Operating (loss) income (1)                                            (.2 )          71.8


(1) Includes an accrual for a legal settlement and lease
cancellation costs in 2009, and restructuring costs and
asset impairment charges in both years                            $   48.1        $    3.8

Net Sales
Sales in our Pressure-sensitive Materials segment decreased 12% in the first three months of 2009 compared to the same period in 2008, reflecting lower sales on an organic basis and the unfavorable impact of foreign currency translation (approximately $78 million), partially offset by the impact of the extra week in the first three months of 2009. On an organic basis, sales declined 11%, as the benefits from selling price increases were more than offset by the decline in volume.
On an organic basis, sales in our roll materials business in the first three months of 2009 declined at a low double-digit rate in Europe, a mid single-digit rate (excluding intercompany sales) in North America, and a low double-digit rate in emerging markets (Asia, Eastern Europe, South America) compared to the same period last year. These declines reflected continued weakness in end-markets.
On an organic basis, sales in our graphics and reflective business declined at a double-digit rate, reflecting lower promotional spending by businesses in response to weak market conditions.
Operating Income
Decreased operating income in the first three months of 2009 reflected an accrual for a legal settlement, lease cancellation costs, and higher restructuring and asset impairment charges. In addition, lower volume and the effects of raw material inflation more than offset the benefits of selling price increases and cost savings from restructuring and productivity improvement initiatives.

Retail Information Services Segment

(In millions)                                                          2009            2008

Net sales including intersegment sales                            $   316.3        $  373.2
Less intersegment sales                                                 (.3 )          (1.2 )

Net sales                                                         $   316.0        $  372.0
Operating loss (1) (2)                                               (853.4 )          (3.7 )


(1) Includes asset impairment charges in 2009, and
restructuring costs in both years                                 $     9.6        $    1.5
(2) Includes goodwill and indefinite-lived intangible asset
impairment charges in 2009 and transition costs related to
acquisition integrations in 2008                                  $   832.0        $    7.0

Net Sales
Sales in our Retail Information Services segment decreased 15% in the first three months of 2009 compared to the same period last year, reflecting lower sales on an organic basis and the unfavorable impact of foreign currency translation (approximately $20 million), partially offset by the impact of the extra week in the first three months of 2009 and incremental sales from the DM Label acquisition (approximately $9 million). On an organic basis, sales declined 20% due primarily to continued weakness of the retail apparel market in the U.S. and Europe.

                                                      Avery Dennison Corporation
Operating Income
Increased operating loss in the first three months of 2009 reflected goodwill
and indefinite-lived intangible asset impairment charges, as well as higher
restructuring and asset impairment charges, partially offset by transition costs
related to acquisition integrations in the prior year. In addition, incremental
savings from integration actions and the benefit of other productivity
improvement initiatives were more than offset by lower volume and higher
employee-related and raw material cost inflation.
Office and Consumer Products Segment

  (In millions)                                                2009            2008

  Net sales including intersegment sales                   $  184.7        $  194.7
  Less intersegment sales                                       (.3 )           (.3 )

  Net sales                                                $  184.4        $  194.4
  Operating income (1)                                         23.4            21.9


  (1) Includes asset impairment charges in 2009 and
  restructuring costs in both years                        $    2.7        $     .1

Net Sales
Sales in our Office and Consumer Products segment decreased 5% in the first three months of 2009 compared to the same period last year, reflecting lower sales on an organic basis and the unfavorable impact of foreign currency translation (approximately $10 million), partially offset by the impact of the extra week in the first three months of 2009. On an organic basis, sales declined 7% due primarily to weak end-market demand, partially offset by the effect of customer inventory management. Operating Income
Increased operating income in the first three months of 2009 reflected the benefit of selling price increases to offset raw material inflation carried throughout 2008, restructuring, and other productivity improvement initiatives. Operating income for both years included restructuring and asset impairment charges.

Other specialty converting businesses

  (In millions)                                                2009            2008

  Net sales including intersegment sales                   $  120.3        $  166.0
  Less intersegment sales                                      (3.3 )          (6.8 )
. . .