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.

In May 2009, the FASB issued SFAS 165. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. Although the standard is based on the same principles as those that currently exist in the auditing standards, it includes a new required disclosure of the date through which an entity has evaluated subsequent events. We will include the required disclosures of SFAS 165 beginning in the third 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.

Our operations outside of the United States generate approximately 45% 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 June 13, 2009, unfavorable foreign currency impacted net revenue performance by 9 percentage points, primarily due to depreciation of the Mexican peso, British pound, euro and Brazilian real. During the 24 weeks ended June 13, 2009, unfavorable foreign currency impacted net revenue performance by 8 percentage points, primarily due to depreciation of the Mexican peso, British pound, Canadian dollar and euro. Currency declines against the U.S. dollar which are not offset could adversely impact our future results.

In addition, we continue to use the official exchange rate to translate the financial statements of our snack and beverage businesses in Venezuela. It is possible that Venezuela will be designated a hyperinflationary economy this year. If Venezuela is designated as a hyperinflationary economy and there is a devaluation of the official rate, our financial results will be negatively impacted. In the 12 and 24 weeks ended June 13, 2009, our operations in Venezuela generated less than 2% of our net revenue.

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 instruments, including their fair value as of June 13, 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, and "net pricing" reflects the year-over-year combined impact of list price changes, weight changes per package, discounts and allowances. 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              24 Weeks Ended
                                                6/13/09         6/14/08     6/13/09         6/14/08
Operating profit
Mark-to-market net gains                        $    100       $      61    $    162       $      57
Restructuring and impairment charges            $    (11 )     $       -    $    (36 )     $       -
Net income attributable to PepsiCo
Mark-to-market net gains                        $     65       $      39    $    105       $      36
Restructuring and impairment charges            $    (10 )     $       -    $    (29 )     $       -
Net income attributable to PepsiCo per
common share
- diluted
Mark-to-market net gains                        $   0.04       $    0.02    $   0.07       $    0.02
Restructuring and impairment charges            $  (0.01 )     $       -    $  (0.02 )     $       -

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.

For the 12 weeks ended June 13, 2009, we recognized $100 million ($65 million after-tax or $0.04 per share) of mark-to-market net gains on commodity hedges in corporate unallocated expenses. For the 24 weeks ended June 13, 2009, we recognized $162 million ($105 million after-tax or $0.07 per share) of mark-to-market net gains on commodity hedges in corporate unallocated expenses.

For the 12 weeks ended June 14, 2008, we recognized $61 million ($39 million after-tax or $0.02 per share) of mark-to-market net gains on commodity hedges in corporate unallocated expenses. For the 24 weeks ended June 14, 2008, we recognized $57 million ($36 million after-tax or $0.02 per share) of mark-to-market net gains on commodity hedges in corporate unallocated expenses.

Restructuring and Impairment Charges

In the fourth quarter of 2008, we incurred a charge of $543 million ($408 million after-tax or $0.25 per share) in conjunction with our 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.

In the 12 and 24 weeks ended June 13, 2009, we incurred charges of $11 million ($10 million after-tax or $0.01 per share) and $36 million ($29 million after-tax or $0.02 per share), respectively, in conjunction with this program. These initiatives were 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 ended June 13, 2009, total servings increased nearly 1%, as worldwide beverages decreased nearly 1% and worldwide snacks increased 1%. For the 24 weeks ended June 13, 2009, total servings were unchanged, as worldwide beverages decreased 1% and worldwide snacks increased slightly.

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 second quarter includes beverage volume outside of North America for March, April, and May. 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                              24 Weeks Ended
                                 6/13/09        6/14/08        Change        6/13/09        6/14/08        Change
Total net revenue                $ 10,592       $ 10,945           (3 )%     $ 18,855       $ 19,278           (2 )%

Operating profit
FLNA                             $    783       $    735            7 %      $  1,480       $  1,368            8 %
QFNA                                  132            122            8 %           307            288            7 %
LAF                                   240            254           (6 )%          404            421           (4 )%
PAB                                   618            681           (9 )%        1,043          1,185          (12 )%
Europe                                257            283           (9 )%          355            402          (12 )%
AMEA                                  237            218            9 %           373            344            8 %
Corporate - net impact
of mark-to-market
on commodity
hedges                                100             61           65 %           162             57          185 %
Corporate - other                    (177 )         (163 )          9 %          (346 )         (317 )          9 %


Total operating profit           $  2,190       $  2,191            - %      $  3,778       $  3,748            1 %


Total operating profit margin        20.7 %         20.0 %        0.7            20.0 %         19.4 %        0.6

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

12 Weeks

Total operating profit was flat and operating margin increased 0.7 percentage points. The net favorable mark-to-market impact of our commodity hedges contributed 2 percentage points to operating profit performance and was partially offset by nearly 1 percentage point from the restructuring and impairment charges related to our Productivity for Growth program. Unfavorable foreign currency negatively impacted operating profit performance by 8 percentage points and was slightly offset by the impact of acquisitions, which positively contributed 1 percentage point to the operating profit performance.

Other corporate unallocated expenses increased 9%, primarily reflecting the absence of certain favorable employee-related items in the prior year.

24 Weeks

Total operating profit increased 1% and operating margin increased 0.6 percentage points. The net favorable mark-to-market impact of our commodity hedges contributed 3 percentage points to operating profit growth and was partially offset by 1 percentage point from the restructuring and impairment charges related to our Productivity for Growth program. Unfavorable foreign currency negatively impacted operating profit growth by almost 8 percentage points and was slightly offset by the impact of acquisitions, which contributed nearly 1 percentage point to the operating profit growth.

Other corporate unallocated expenses increased 9%, primarily reflecting the absence of certain favorable employee-related items in the prior year.

Other Consolidated Results



                                             12 Weeks Ended                                24 Weeks Ended
                                 6/13/09        6/14/08         Change         6/13/09        6/14/08         Change
Bottling equity income           $    119       $    168            (29 )%     $    144       $    238            (40 )%
Interest expense, net            $    (73 )     $    (36 )     $    (37 )      $   (171 )     $    (93 )     $    (78 )
Tax rate                             25.4 %         26.6 %                         25.1 %         26.6 %
Net income attributable to
PepsiCo                          $  1,660       $  1,699             (2 )%     $  2,795       $  2,847             (2 )%
Net income attributable to
PepsiCo per common share
- diluted                        $   1.06       $   1.05              - %      $   1.78       $   1.76              1 %

12 Weeks

Bottling equity income decreased 29%, primarily reflecting pre-tax gains on our sales of PBG and PAS stock in the prior year.

Net interest expense increased $37 million, primarily reflecting higher average debt balances and lower average rates on our investment balances. This increase was partially offset by gains in the market value of investments used to economically hedge a portion of our deferred compensation costs.

The tax rate decreased 1.2 percentage points compared to the prior year, primarily due to the favorable resolution of a certain foreign tax matter.

Net income attributable to PepsiCo decreased 2% and net income attributable to PepsiCo per common share was flat. 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 1 percentage

point 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 in the prior year.

24 Weeks

Bottling equity income decreased 40%, primarily reflecting pre-tax gains on our sales of PBG and PAS stock in the prior year.

Net interest expense increased $78 million, primarily reflecting higher average debt balances and lower average rates on our investment balances. This increase was partially offset by gains in the market value of investments used to economically hedge a portion of our deferred compensation costs.

The tax rate decreased 1.5 percentage points compared to the prior year, primarily due to the favorable resolution of certain foreign tax matters.

Net income attributable to PepsiCo decreased 2% and net income attributable to PepsiCo per common share increased 1%. 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 over 1 percentage point 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 in 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
June 13, 2009                    $ 3,138      $ 396       $ 1,378       $ 2,618       $ 1,642       $ 1,420      $ 10,592
June 14, 2008                    $ 2,950      $ 406       $ 1,523       $ 2,880       $ 1,837       $ 1,349      $ 10,945
% Impact of:
Volume(a)                              2 %       (4 )%         (1 )%         (6 )%         (5 )%          6 %          (1 )%
Effective net pricing(b)               5          3            13          (0.5 )         5.5             7             5
Foreign exchange                    (1.5 )       (2 )         (22 )          (2 )         (21 )          (9 )          (9 )
Acquisitions                           -          -             -             -            10             1             2

% Change(c)                            6 %       (3 )%         (9 )%         (9 )%        (11 )%          5 %          (3 )%

Net Revenue
24 Weeks Ended                    FLNA        QFNA          LAF           PAB         Europe         AMEA         Total
June 13, 2009                    $ 6,138      $ 881       $ 2,245       $ 4,706       $ 2,589       $ 2,296      $ 18,855
June 14, 2008                    $ 5,680      $ 901       $ 2,494       $ 5,240       $ 2,821       $ 2,142      $ 19,278
% Impact of:
Volume(a)                              1 %       (2 )%         (3 )%         (6 )%       (4.5 )%          7 %          (2 )%
Effective net pricing(b)               9          2            14            (2 )           6             7             6
Foreign exchange                      (2 )       (2 )         (22 )          (2 )         (21 )          (8 )          (8 )
Acquisitions                           -          -             -             -            11             2             2

% Change(c)                            8 %       (2 )%        (10 )%        (10 )%         (8 )%          7 %          (2 )%

(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         %          24 Weeks Ended         %
                                          6/13/09     6/14/08     Change    6/13/09     6/14/08     Change
Net revenue                               $  3,138    $  2,950         6    $  6,138    $  5,680         8
Operating profit                          $    783    $    735         7    $  1,480    $  1,368         8
Impact of restructuring and impairment
charges                                          -           -                     2           -

Operating profit, excluding
restructuring and
impairment charges                        $    783    $    735         7    $  1,482    $  1,368         8

12 Weeks

Net revenue grew 6% and pound volume increased 3%. The volume increase reflects high-single-digit growth in trademark Lay's, double-digit growth in dips and mid-single-digit growth in trademark Doritos. Net revenue growth also benefited from favorable net pricing. Foreign currency reduced net revenue growth by 1.5 percentage points.

Operating profit grew 7%, primarily reflecting the net revenue growth. Operating profit growth was adversely impacted by higher commodity costs, as well as the absence of a favorable casualty insurance actuarial adjustment recorded in the prior year. Foreign currency reduced operating profit growth by 1 percentage point.

24 Weeks

Net revenue grew 8% and pound volume increased 1%. Pound volume was adversely impacted by weight outs throughout 2008 to cover commodity cost inflation. Foreign currency reduced net revenue growth by almost 2 percentage points.

Operating profit grew 8%, primarily reflecting the net revenue growth. Operating profit growth was adversely impacted by higher commodity costs, as well as the absence of the favorable casualty insurance actuarial adjustment recorded in the prior year. Foreign currency reduced operating profit growth by 1 percentage point.

Quaker Foods North America



                                        12 Weeks Ended           %              24 Weeks Ended           %
                                     6/13/09      6/14/08      Change        6/13/09      6/14/08      Change
Net revenue                         $     396    $      406        (3 )     $     881    $      901        (2 )
Operating profit                    $     132    $      122         8       $     307    $      288         7
Impact of restructuring and
impairment
charges                                     -             -                         1             -

Operating profit, excluding
restructuring
and impairment charges              $     132    $      122         8       $     308    $      288         7

12 Weeks

Net revenue decreased 3% and volume declined 4%. The volume decline primarily reflects a high-single-digit decline in Oatmeal and a mid-single-digit decline in Aunt Jemima syrup and mix. Favorable net pricing, driven by price increases taken last year, was partially offset by unfavorable mix. Unfavorable foreign currency contributed nearly 2 percentage points to the net revenue decline.

Operating profit increased 8%, primarily reflecting lower advertising expenses, as well as the absence of 2008 costs related to flood damage at the Cedar Rapids facility which contributed 4 percentage points to the operating profit growth. Unfavorable foreign currency reduced operating profit growth by 1 percentage point.

24 Weeks

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

Operating profit increased 7%. A final insurance settlement gain in the first quarter of 2009 related to the prior year Cedar Rapids flood, and the absence of 2008 costs incurred to cover the related insurance deductible, collectively contributed 8 percentage points to the operating profit growth. Unfavorable foreign currency reduced operating profit growth by 1 percentage point.

Latin America Foods


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