Introduction

The following is management's discussion and analysis of the results of operations for the first quarter of 2010 compared with the first quarter of 2009 and a discussion of the changes in financial condition and liquidity during the first three months of 2010. Below is an outline of the analyses included herein:

• Business Overview

• Consolidated Results - First Quarter of 2010

• Operating Results by Business Segment

• Financial Condition

• Liquidity

• Significant Accounting Policies and Critical Estimates

• Issued by not yet Effective Accounting Standards

• Forward-Looking Information

Our Business

Sara Lee is a global manufacturer and marketer of high-quality, brand name products for consumers throughout the world focused primarily in the meats, bakery, and beverage products categories. Our brands include Ball Park, Douwe Egberts, Hillshire Farm, Jimmy Dean, Senseo and our namesake, Sara Lee.

In North America, the company sells a variety of packaged meat products that include hot dogs, corn dogs, breakfast sausages, dinner sausages and deli meats as well as a variety of fresh and frozen baked products and specialty items that include bread, buns, bagels, cakes and cheesecakes. These products are sold through the retail channel to supermarkets, warehouse clubs and national chains. The company also sells a variety of meat, bakery and beverage products to foodservice customers in North America. Internationally, the company sells coffee and tea products in Europe, Brazil, Australia and Asia through both the retail and foodservice channels as well as a variety of bakery and dough products to retail and foodservice customers in Europe and Australia.

In September 2009, the corporation announced that it had received a binding offer to acquire its global body care and European detergents businesses for 1.275 billion euro. These businesses represent approximately 50% of the net sales of the International Household and Body Care segment. The results of these businesses and the remaining household and body care businesses, which were previously reported as a separate business segment, are now being reported as discontinued operations. Prior period results have been revised to reflect these businesses as discontinued operations. See Note 4 - "Discontinued Operations and Sold Businesses" for additional information regarding these discontinued operations. Unless stated otherwise, any reference to income statement items in these financial statements refers to results from continuing operations. The corporation intends to use the proceeds from the divestiture to invest for growth in its core businesses and to repurchase stock.

Challenges and Risks

As an international consumer products company, we face certain risks and challenges that impact our business and financial performance. The risks and challenges described below have impacted our performance and are likely to impact our future results as well.

The food businesses are highly competitive. In many product categories, we compete not only with widely advertised branded products, but also with private label products that are generally sold at lower prices. As a result, from time to time, we may need to reduce the prices for some of our products to respond to competitive pressures and commodity cost decreases. In addition, the turmoil in the financial markets has led to general economic weakness, which has negatively impacted our business. The continued economic uncertainty may also result in increased pressure to reduce the prices for some of our products, limit our ability to increase or maintain prices or lead to a continued shift toward private label products. Any reduction in prices or our inability to increase prices could negatively impact profit margins and the overall profitability of our reporting units, which could potentially trigger a goodwill impairment.

Commodity prices directly impact our business because of their effect on the cost of raw materials used to make our products and the cost of inputs to manufacture, package and ship our products. Many of the commodities we use, including coffee, wheat, beef, pork, corn, corn syrup, soybean and corn oils, butter, sugar and fuel, have experienced price volatility due to factors beyond our control. The company's objective is to offset commodity price increases with pricing actions and to offset any operating cost increases with continuous improvement savings.

The company's business results are also heavily influenced by changes in foreign currency exchange rates. For the most recently completed fiscal year, approximately 35% of net sales and 50% of operating segment income were generated outside of the U.S. As a result, changes in foreign currency exchange rates, particularly the European euro, can have a significant impact on the reported results. Changes in foreign currency exchange rates decreased net sales by $74 million and decreased operating income by $6 million for the first three months of 2010.

Significant Items Affecting Comparability

The reported results for 2010 and 2009 reflect amounts recognized for actions associated with the corporation's ongoing business transformation program, Project Accelerate and other significant amounts that impact comparability. More information on these costs can be found in Note 5 to the Consolidated Financial Statements, "Exit, Disposal and Transformation/Accelerate Activities." The nature of these items includes the following:

Exit Activities, Asset and Business Dispositions - These costs are reported on a separate line of the Consolidated Statements of Income. Exit activities primarily relate to charges taken to recognize severance actions approved by the corporation's management and the exit of leased facilities or other contractual arrangements. Asset and business disposition activities include costs associated with separating businesses targeted for sale, as well as gains and losses associated with the disposition of asset groups that do not qualify for discontinued operations reporting.

Project Accelerate Costs - These include costs associated with the transition of services to an outside third party vendor as part of a business process outsourcing initiative. The initiative includes the outsourcing of a portion of the North American and European finance processing functions, information systems application development and maintenance as well as indirect procurement activities. These costs are recognized in the Consolidated Statements of Income in Selling, general and administrative expenses or Cost of sales. Employee termination costs, lease exit costs and gains or losses on the disposition of assets or asset groupings that do not qualify as discontinued operations associated with these initiatives are reported as part of exit activities, asset and business dispositions.

The savings resulting from the Project Accelerate actions were approximately $25 million in the first quarter of 2010. The corporation anticipates annualized savings in 2010 of approximately $100-$150 million related to these actions, of which $50-$100 million is incremental to the Project Accelerate savings in 2009.

Business Transformation Costs - These include costs to retain and relocate existing employees, recruit new employees, and third-party consulting costs associated with transformation efforts. These costs are recognized in the Consolidated Statements of Income in Selling, general and administrative expenses or Cost of sales. Employee termination costs, lease exit costs and gains or losses on the disposition of assets or asset groupings that do not qualify as discontinued operations associated with these initiatives are reported as part of exit activities, asset and business dispositions.

Other Significant Items - The reported results are also impacted by other items that affect comparability. These items may include impairment charges, pension partial withdrawal liability charges, curtailment gains and certain discrete tax matters, which include contingent tax obligation and valuation allowance adjustments and various other tax matters.

    Impact of Significant Items on Net Income and Diluted Earnings per Share



                                                               Quarter ended September 26, 2009                            Quarter ended September 27, 2008
                                                      Pretax               Net                Diluted EPS         Pretax                Net               Diluted EPS
In millions, except per share data                    Impact           Income  (2)            Impact (1)          Impact            Income  (2)           Impact (1)
Income from continuing operations                    $    296         $          190         $        0.27       $     268         $         191         $        0.27


Net income                                                            $          284         $        0.41                         $         230         $        0.32


Significant items affecting comparability of
income from continuing operations:
Charges for exit activities, asset and business
dispositions:
Income from (charges for) exit activities            $    (13 )       $           (9 )       $       (0.01 )     $       1         $          -          $          -
Income from (charges for) business disposition
activities                                                 -                      -                     -                3                     2                    -

Subtotal                                                  (13 )                   (9 )               (0.01 )             4                     2                    -

(Charges to) income in Cost of sales:
Curtailment gain                                           -                      -                     -                6                     4                  0.01
Pension partial withdrawal liability charge                (1 )                   (1 )                  -               -                     -                     -

(Charges to) income in SG&A expenses:
Transformation charges - IT costs                          -                      -                     -               (3 )                  (1 )                  -
Accelerate charges - Other                                 (5 )                   (3 )                  -               -                     -                     -
Curtailment gain                                           -                      -                     -                6                     4                  0.01
Pension partial withdrawal liability charge                (6 )                   (4 )               (0.01 )            -                     -                     -


Impact of significant items on income from
continuing operations before significant tax
matters                                                   (25 )                  (17 )               (0.02 )            13                     9                  0.01

Significant tax matters affecting comparability:
Tax valuation allowance adjustment                         -                     (25 )               (0.04 )            -                     -                     -
U.K. net operating loss utilization                        -                       6                  0.01              -                     -                     -
Other tax adjustments                                      -                       1                    -               -                     -                     -

Impact of significant items on income from
continuing operations                                     (25 )                  (35 )               (0.05 )            13                     9                  0.01

Significant items impacting discontinued
operations:
Valuation allowance adjustment                             -                      47                  0.07              -                     -                     -
Tax basis difference adjustment                            -                      11                  0.02              -                     -                     -
Tax on unremitted earnings                                 -                      (5 )               (0.01 )            -                     -                     -
Transformation/Accelerate charges                          -                      -                     -               (2 )                  (2 )                  -
Professional fees/other                                    (4 )                   (3 )                  -               -                     -                     -
Curtailment gain                                           -                      -                     -                5                     4                    -

Impact of significant items on net income            $    (29 )       $           15         $        0.03       $      16         $          11         $        0.01

Notes:

(1) EPS amounts are rounded to the nearest $0.01 and may not add to the total.

(2) Taxes computed at applicable statutory rates.

Consolidated Results - First Quarter of 2010 Compared with First Quarter of 2009

The following table summarizes net sales and operating income for the first
quarter of 2010 and 2009 and certain items that affected the comparability of
these amounts:



                                                                             Quarter ended
                                                        Sept. 26,         Sept. 27,                      Percent
Total Corporation Performance (In millions)               2009              2008           Change        Change
Net sales                                              $     2,588       $     2,794       $  (206 )        (7.4 )%


Increase / (Decrease) in net sales from:
Changes in foreign currency exchange rates             $        -        $        74       $   (74 )
Acquisitions/dispositions                                       12                58           (46 )

Total                                                  $        12       $       132       $  (120 )


Operating income                                       $       325       $       293       $    32          10.7 %


Increase / (Decrease) in operating income from:
Changes in foreign currency exchange rates             $        -        $         6       $    (6 )
Exit activities, asset and business dispositions               (13 )               4           (17 )
Transformation/Accelerate charges                               (5 )              (3 )          (2 )
Pension partial withdrawal liability charge                     (7 )              -             (7 )
Curtailment gain                                                -                 12           (12 )
Acquisitions/dispositions                                        1                 3            (2 )

Total                                                  $       (24 )     $        22       $   (46 )

Net Sales

Net sales decreased by $206 million or 7.4%. The weakening of foreign currencies, particularly the European euro and Brazilian real decreased reported net sales by $74 million, or 2.6%. Divestitures net of acquisitions made after the start of the first quarter of 2009 reduced net sales by $46 million, or 1.5%. Sales were negatively impacted by a decline in unit volumes of 3.8% and pricing actions that decreased net sales by less than 1% which were partially offset by a favorable shift in sales mix. The following table summarizes the components of the percentage change in net sales as compared to the prior year:

First Quarter 2010



                       Unit          Price/         Acquisitions/       Foreign        Net Sales
  Net Sales Changes   Volumes   +   Mix/Other   +   Divestitures    +   Exchange   =    Change
  Total Corporation   (3.8)%          0.5%             (1.5)%            (2.6)%         (7.4)%

Operating Income

Operating income increased by $32 million, or 10.7%. The year-over-year net impact of the changes in foreign currency exchange rates, transformation/Accelerate charges and the other factors identified in the preceding table decreased operating income by $46 million. Operating income was favorably impacted by a $32 million reduction in unrealized commodity mark-to-market derivative losses versus the prior year partially offset by a $17 million reduction in contingent sales proceeds year-over-year due to changes in foreign currency exchange rates. The remaining increase in operating income of $63 million was primarily due to improved operating results for the North American business segments and a reduction in other general corporate expenses. The individual components that impacted operating income are discussed in more detail below.

Gross Margin

Gross margin dollars in the first quarter of 2010 decreased $8 million over the prior year due to lower unit volumes, changes in foreign currency exchange rates, the impact of business dispositions and the unfavorable impact of pricing actions, partially offset by savings from continuous improvement programs. The gross margin percent in the first quarter of 2010 increased to 37.5% from 35.0% in the first quarter of 2009 primarily due to the impact of lower commodity costs.

Selling, General and Administrative Expenses



                                                                     Quarter ended
                                                   Sept. 26,      Sept. 27,                    Percent
(In millions)                                        2009           2008         Change        Change
SG&A expenses in the business segment results:
Media advertising and promotion                   $        72    $        79    $     (7 )        (9.4 )%
Other                                                     621            661         (40 )        (6.1 )

Total business segments                                   693            740         (47 )        (6.5 )
Amortization of identifiable intangibles                   11             12          (1 )        (3.8 )
General corporate expenses:
Other                                                      55             64          (9 )       (13.9 )
Mark-to-market derivative (gains) / losses                  5             22         (17 )       (77.4 )

Total SG&A Expenses                               $       764    $       838    $    (74 )        (8.8 )%

Selling, general and administrative (SG&A) expenses decreased by $74 million, or 8.8%. Measured as a percent of sales, SG&A expenses decreased from 30.0% in 2009 to 29.5% in 2010. Changes in foreign currency exchange rates decreased SG&A costs by $20 million, or 2.3%. The remaining decrease in SG&A expenses is $54 million, or 6.5%. SG&A expenses in the business segments decreased by $47 million, or 6.5%, due to a reduction in distribution and selling costs, the impact of cost containment actions and a reduction in media advertising and promotion (MAP) spending. Other general corporate expenses decreased $9 million versus the prior year due to the impact of headcount reductions and lower casualty insurance costs and professional fees. Derivative losses were $17 million lower than the prior year due to a reduction in mark-to-market losses primarily related to derivative energy contracts.

Transformation/Accelerate Actions, Impairment Charges, Exit Activities and Other Significant Items

The reported results for the first quarter of 2010 and 2009 reflect amounts recognized for actions associated with the corporation's ongoing Project Accelerate and business transformation programs and other exit and disposal actions. The expense related to exit activities, asset and business dispositions was $13 million in the first quarter of 2010 versus $4 million of income in the first quarter of 2009. As discussed in Note 5 to the financial statements, "Exit, Disposal and Transformation/Accelerate Activities," the charge in 2010 relates to the planned termination of employees related to both European and North American operations as part of Project Accelerate. The income in the first quarter of 2009 represented a net gain associated with the disposal of the sauces and dressings business in the Foodservice segment.

These actions are more fully described in the Exit, Disposal and Transformation/Accelerate Activities Note to the Consolidated Financial Statements.

Net Interest Expense

Net interest expense in the first quarter of 2010 was $29 million, an increase of $4 million over the first quarter of the prior year. Interest expense decreased by $10 million, related primarily to lower average debt outstanding, lower interest rates and changes in foreign currency exchange rates, while interest income declined by $14 million, due to changes in foreign currency exchange rates and lower average cash and cash equivalents year-over-year.

Income Tax Expense

Note 9 to the Consolidated Financial Statements provides a detailed explanation
of the determination of the interim tax provision.

                                                  First Quarter
                   (In millions)                 2010        2009
                   Continuing operations
                   Income before income taxes   $  296      $  268
                   Income tax expense              106          77
                   Effective tax rate             35.7 %      28.6 %

In the first quarter of 2010, the corporation recognized tax expense of $106 million on pretax income from continuing operations of $296 million, or an effective tax rate of 35.7%. The tax expense and related effective tax rate on continuing operations was determined by applying a 27.6% estimated annual effective tax rate to pretax earnings and then recognizing $24 million of discrete tax items. The discrete tax items primarily relate to additional tax expense of $25 million to establish a valuation allowance on net operating losses and other deferred tax assets in Belgium. The 2010 estimated annual effective rate includes a charge of $32 million related to the expected repatriation of a portion of 2010 earnings, which increases the rate by 4%. The estimated annual effective tax rate also includes $16 million of non-recurring tax benefits related to the utilization of U.K. net operating losses which lowered the estimated annual effective rate by approximately 2%. The portion of this tax benefit recognized in the first quarter of 2010 is $6 million.

In the first quarter of 2009, the corporation recognized tax expense of $77 million on pretax income of $268 million, or an effective rate of 28.6%. This rate also represents the estimated annual effective rate in the first quarter of 2009 as there were no discrete items. In 2009, the estimated annual effective tax rate includes a charge of $55 million for the repatriation of a portion of 2009 earnings, which increased the estimated effective annual tax rate by approximately 8%.

Income from Continuing Operations and Diluted Earnings per Share (EPS)

Income from continuing operations in the first quarter of 2010 was $190 million versus $191 million in the comparable period of the prior year, as a $32 million increase in operating income in 2010 was offset by a $29 million increase in income tax expense and a $4 million increase in net interest expense versus the prior year.

Diluted EPS from continuing operations of $0.27 in the first quarter of 2010 was unchanged from the amount reported in the first quarter of 2009. Diluted EPS were favorably impacted by lower average shares outstanding during the first quarter of 2010 than during the first quarter of 2009. The lower average shares are due to the corporation's ongoing share repurchase program.

Discontinued Operations

Net sales from discontinued operations were $521 million in the first quarter compared to $555 million in the prior year. On a constant currency basis, revenues were up 1% primarily driven by unit volume growth in body care. Pre-tax income increased to $63 million from $61 million, driven by continuous improvement savings and reduced advertising and promotional spending, partially offset by a non-recurring curtailment gain in the prior year and unfavorable foreign exchange impacts. The net income from discontinued operations was $94 million in the first quarter of 2010 and $39 million in the first quarter of 2009. The effective tax rate for the discontinued operations was a benefit of
(49.5)% in the first quarter of 2010 as compared to a tax expense of 36.0% in the first quarter of 2009. The tax benefit in 2010 was due to the expected utilization of tax loss carryforwards precipitated by the anticipated sale of the household and body care businesses. The results of discontinued operations in the first quarter of 2010 and 2009 are related to the international household and body care businesses and represents a full quarter of results in each period.

In the first quarter of 2010, the corporation reported net income of $284 million versus $230 million of net income in the comparable period of the prior year. The $54 million increase in net income was due to the $55 million increase in net income from discontinued operations. Diluted EPS increased from $0.32 per share in the first quarter of 2009 to $0.41 per share in the first quarter of 2010. Diluted EPS were impacted by lower average shares outstanding during the first quarter of 2010 than during the first quarter of 2009. The lower average shares are due to the corporation's ongoing share repurchase program.

Operating Results by Business Segment

The results of the corporation's household and body care businesses, which were previously reported as a separate business segment, are now being reported as discontinued operations. Prior period results have been revised to reflect these businesses as discontinued operations. See Note 4 - "Discontinued Operations and Sold Businesses" for additional information regarding these discontinued operations.

Net sales and income before income taxes by business segment for 2010 and 2009 are as follows:

                                                                      Quarter Ended
                                                   Net Sales                     Income Before Income Taxes
                                          Sept. 26,         Sept. 27,         Sept. 26,              Sept. 27,
(In millions)                               2009              2008               2009                   2008
. . .