Summary of AVERY DENNISON CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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                                                   22
     Forward-looking Statements                                            22
     Overview and Outlook                                                  22
     Analysis of Results of Operations for the Second Quarter              25
     Results of Operations by Segment for the Second Quarter               27
     Analysis of Results of Operations for the Six Months Year-to-Date     29
     Results of Operations by Segment for the Six Months Year-to-Date      30
     Financial Condition                                                   32
     Uses and Limitations of Non-GAAP Measures                             37
     Recent Accounting Requirements                                        38
     Safe Harbor Statement                                                 38

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 the 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" contained elsewhere in this report.
OVERVIEW AND OUTLOOK
Overview
Sales
Our sales decreased 20% and 17% in the first three and six months of 2009,
respectively, compared to the same period last year.

                                                               Three Months Ended                          Six Months Ended
Estimated change in sales due to:                       July 4, 2009          June 28, 2008        July 4, 2009          June 28, 2008

Organic sales decline                                        (14 )%                (1 )%                (14 )%               (1 )%
Extra week in fiscal year 2009 (1)                             -                    -                     4                   -
Foreign currency translation                                  (7 )                  7                    (7 )                 7
Acquisitions, net of divestitures                              -                   14                     -                  14

Reported sales (decline) growth (2)                          (20 )%                20 %                 (17 )%               19 %

(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.

(2) Totals may not sum due to rounding.

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Avery Dennison Corporation Net Income
In the first six months of 2009, we had a net loss of approximately $860 million compared to a net income of approximately $161 million in the same period in 2008.
Negative factors affecting net income included:
• Impairment of goodwill and indefinite-lived intangible assets

• Lower net sales

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

• Legal settlement costs

• Loss on debt extinguishment

• Higher raw material and employee-related costs

• Unfavorable impact of foreign currency translation

Positive factors affecting net income included:
• Cost savings from productivity improvement initiatives, including savings from restructuring actions

• Pricing

• Lower tax rate, resulting in a tax benefit for the first six months of 2009

• Lower transition costs related to acquisition integrations

Impairment of Goodwill and Indefinite-Lived Intangible Assets In the first quarter 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. We completed our impairment test of goodwill and indefinite-lived intangible assets ("goodwill impairment") in the second quarter of 2009, with no additional impairment charge incurred. We perform our goodwill impairment test in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets." In performing the required goodwill 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 a goodwill 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.
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
As part of the interim goodwill impairment test completed in the second quarter of 2009, which is discussed above, we recorded a non-cash impairment charge of $820 million for the retail information services reporting unit in the first quarter of 2009, with no additional impairment charge in the second quarter of 2009.

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Avery Dennison Corporation Indefinite-Lived Intangible Assets
In connection with the acquisition of 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 completed in the second quarter of 2009, which is discussed above, we recorded an additional non-cash impairment charge of $12 million related to these indefinite-lived intangible assets in the first quarter of 2009, with no additional impairment charge in the second quarter 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 Information Services segment. See also Note 2, "Acquisitions," to the unaudited Condensed Consolidated Financial Statements.
Cost Reduction Actions
Q4 2008 - 2009 Actions
In the fourth quarter of 2008, we initiated restructuring actions that are now expected to generate over $160 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 $100 million to $110 million of cash restructuring charges associated with these actions, with the majority to be incurred in 2009. At the end of the second quarter, we achieved run-rate savings representing approximately 50% of our target.
During the fourth quarter of 2008 and the first six months of 2009, we recorded $81 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 2,600 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 six months of 2009 was approximately 2%, compared with approximately 8% for the same period in 2008. The effective tax rate for the first six months of 2009 includes a benefit of $18.4 million from discrete events, primarily the tax effect of impairments of goodwill and indefinite-lived intangible assets, partially offset by the build of certain valuation allowances and other items. 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 discussion under "Uses and Limitations of Non-GAAP Measures" elsewhere in this report for further information regarding limitations of this measure.

                                                             Six Months Ended
 (In millions)                                       July 4, 2009       June 28, 2008

 Net cash provided by operating activities         $        132.8     $         188.7
 Purchase of property, plant and equipment                  (30.5 )             (69.1 )
 Purchase of software and other deferred charges            (14.9 )             (33.0 )
 Proceeds from sale of investments, net                        .1                13.0

 Free cash flow                                    $         87.5     $          99.6

Free cash flow in the first six months of 2009 declined by $12.1 million compared to the same period in 2008 due to lower income from operations, partially offset by reduced working capital and lower spending on property, plant, and equipment, software, and other deferred charges.

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Avery Dennison Corporation See "Analysis of Results of Operations" and "Liquidity" below for more information.
Dividend
On July 30, 2009, we declared a third-quarter dividend of $.20 per share, a reduction from our previous dividend of $.41 per share. This precautionary action was taken in response to the possibility of continued poor market conditions beyond 2009, to focus on reducing debt and to plan for increased pension funding requirements.
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. The Board of Directors created an ad hoc committee comprised of certain independent directors to oversee the foregoing matters.
As previously disclosed and reported to authorities in the U.S., 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 have entered into a settlement agreement with the SEC in this regard. Refer to Note 15, "Commitments and Contingencies," to the unaudited Condensed Consolidated Financial Statements for further information. 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. In addition, we currently expect increased pension contributions in the range of $200 million to $300 million from the end of the second quarter of 2009 through 2013.
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 $115 million to $130 million in 2009, including increased investment in new business opportunities to drive future growth and profitability.
We are targeting a reduction of debt of at least $350 million from the end of the second quarter of 2009 through 2010.

ANALYSIS OF RESULTS OF OPERATIONS FOR THE SECOND QUARTER
Income Before Taxes

                   (In millions)                2009          2008

                   Net sales               $ 1,455.4     $ 1,828.9
                   Cost of products sold     1,065.1       1,338.6

                   Gross profit                390.3         490.3



         (In millions)                                      2009        2008

         Marketing, general and administrative expense     300.1       341.0
         Interest expense                                   20.4        29.3
         Other expense, net                                 29.6         5.8

         Income before taxes                             $  40.2     $ 114.2


         As a Percent of Sales:
         Gross profit (margin)                              26.8 %      26.8 %
         Marketing, general and administrative expense      20.6        18.6
         Income before taxes                                 2.8         6.2

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Avery Dennison Corporation Sales
Sales decreased 20% in the second quarter of 2009 compared to the same period last year, due largely to the decline in volume, partially offset by the benefit from pricing. Foreign currency translation had an unfavorable impact on the change in sales of approximately $147 million in the second quarter of 2009. On an organic basis, sales declined 14% in the second quarter of 2009, as continued deterioration in the global macroeconomic environment contributed to volume declines across all segments and geographic regions, except Asia. Refer to "Results of Operations by Segment" for information by reportable segment.
Gross Profit Margin
Gross profit margin for the second quarter of 2009 remained flat compared to the same period in 2008, as reduced fixed-cost leverage was offset by benefits from pricing, productivity improvement initiatives, and restructuring. Marketing, General and Administrative Expenses The decrease in marketing, general and administrative expense in the second quarter of 2009 compared to the same period last year primarily reflected cost reductions and benefits from productivity and the impact of currency translation.

Other Expense, net

      (In millions)                                             2009       2008

      Restructuring costs                                     $ 25.8     $  7.2
      Asset impairment charges and lease cancellation costs      3.8        3.1
      Other                                                        -       (4.5 )

      Other expense, net                                      $ 29.6     $  5.8

In the second quarter of 2009, "Other expense, net" consisted of restructuring costs including severance and other employee-related costs, as well as asset impairment and lease cancellation charges. Restructuring costs in the second quarter of 2009 relate to a reduction in headcount of approximately 1,205 positions across all segments and geographic regions.
In the second quarter of 2008, "Other expense, net" consisted of restructuring costs including severance and other employee-related costs, asset impairment and lease cancellation charges (primarily in the Retail Information Services segment), and a gain on sale of investments. Restructuring costs in the second quarter of 2008 relate to a reduction in headcount of approximately 310 positions across all segments and geographic regions.
Refer to Note 9, "Cost Reduction Actions," to the unaudited Condensed Consolidated Financial Statements for more information.

Net Income and Earnings per Share

         (In millions, except per share)                    2009        2008

         Income before taxes                              $ 40.2     $ 114.2
         Provision for income taxes                           .4        21.8

         Net income                                       $ 39.8     $  92.4

         Net income per common share                      $  .38     $   .94
         Net income per common share, assuming dilution   $  .38     $   .93


         Net income as a percent of sales                    2.7 %       5.1 %




         (In millions, except per share)                     2009       2008

         Percent change in:
         Net income                                         (56.9 )%     7.2 %
         Net income per common share                        (59.6 )      6.8
         Net income per common share, assuming dilution     (59.1 )      6.9

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                                                      Avery Dennison Corporation
Provision for Income Taxes
Our effective tax rate for the second quarter of 2009 was approximately 1%,
compared with approximately 19% for the same period in 2008. The effective tax
rate for the second quarter of 2009 includes a benefit of $.6 million from
discrete events, primarily the impact of tax law changes and the build of
certain valuation allowances, partially offset by the release of certain tax
contingencies. Refer to Note 11, "Taxes Based on Income," to the unaudited
Condensed Consolidated Financial Statements for further information.
RESULTS OF OPERATIONS BY SEGMENT FOR THE SECOND QUARTER
Pressure-sensitive Materials Segment

(In millions)                                                        2009             2008

Net sales including intersegment sales                            $ 829.6        $ 1,025.7
Less intersegment sales                                             (36.0 )          (45.8 )

Net sales                                                         $ 793.6        $   979.9
Operating income (1)                                                 50.6             82.4


(1) Includes lease cancellation costs in 2009, and
restructuring costs and asset impairment charges in both
years                                                             $  13.8        $      .5

Net Sales
Sales in our Pressure-sensitive Materials segment decreased 19% in the second quarter of 2009 compared to the same period in 2008, which included the unfavorable impact of foreign currency translation (approximately $102 million). On an organic basis, sales declined 10% in the second quarter of 2009, as the benefits from pricing were more than offset by the decline in volume. On an organic basis, sales in our roll materials business in the second quarter 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 single-digit rate in emerging markets (mid single-digit decline in Eastern Europe and South America, partially offset by mid single-digit increase in Asia) 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 second quarter of 2009 reflected the impact of lower volume, partially offset by the benefits from pricing and cost savings from restructuring and productivity improvement initiatives. In addition, operating income in 2009 included lease cancellation costs and higher restructuring and asset impairment charges compared to the same period in 2008.

Retail Information Services Segment

(In millions)                                                        2009           2008

Net sales including intersegment sales                            $ 331.7        $ 438.3
Less intersegment sales                                               (.2 )          (.1 )

Net sales                                                         $ 331.5        $ 438.2
Operating (loss) income (1) (2)                                      (5.9 )         20.3


(1) Includes asset impairment charges in 2008, and
restructuring and lease cancellation costs in both years          $   5.1        $   5.6
(2) Includes transition costs related to acquisition
integrations in 2008                                              $     -        $   5.7

Net Sales
Sales in our Retail Information Services segment decreased 24% in the second quarter of 2009 compared to the same period last year,

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Avery Dennison Corporation which included the unfavorable impact of foreign currency translation (approximately $23 million). On an organic basis, sales declined 20% in the second quarter of 2009 due primarily to lower volume from continued weakness of the retail apparel market in the U.S. and Europe. Operating (Loss) Income
Operating loss in the second quarter of 2009 reflected the impact of lower volume, partially offset by the benefit of restructuring and productivity improvement initiatives. Operating (loss) income included asset impairment charges and transition costs related to acquisition integrations in 2008, and restructuring and lease cancellation costs in both years.

Office and Consumer Products Segment

(In millions)                                                        2009           2008

Net sales including intersegment sales                            $ 217.0        $ 255.7
Less intersegment sales                                               (.1 )          (.3 )

Net sales                                                         $ 216.9        $ 255.4
Operating income (1)                                                 34.5           40.7


(1) Includes asset impairment charges in 2009 and
restructuring costs in both years                                 $   3.0        $   4.2

Net Sales
Sales in our Office and Consumer Products segment decreased 15% in the second quarter of 2009 compared to the same period last year, which included the unfavorable impact of foreign currency translation (approximately $13 million). On an organic basis, sales declined 11% in the second quarter of 2009 due primarily to lower volume from weak end-market demand led by slower corporate purchasing activity, partially offset by the benefit from pricing. Operating Income
Decreased operating income in the second quarter of 2009 reflected the impact of lower volume, partially offset by the benefits from pricing, restructuring, and productivity improvement initiatives. Operating income included asset impairment charges in 2009 and restructuring costs in both years.

Other specialty converting businesses

(In millions)                                                        2009           2008

Net sales including intersegment sales                            $ 117.1        $ 163.4
Less intersegment sales                                              (3.7 )         (8.0 )

Net sales                                                         $ 113.4        $ 155.4
Operating (loss) income (1)                                         (10.4 )          5.8


(1) Includes restructuring costs and asset impairment
charges in 2009                                                   $   7.7        $     -

Net Sales
Sales in our other specialty converting businesses decreased 27% in the second quarter of 2009 compared to the same period last year, which included the . . .