Our Economic Performance

The following should be read in conjunction with Management's Discussion and Analysis and Consolidated Financial Statements included in PepsiCo's 2005 annual report on Form 10-K.

Sales and Major Markets

PepsiCo net sales were $32,562 million in 2005. Our major markets are the United States, Mexico, United Kingdom and Canada. In 2005, PepsiCo's net revenue increased 11%, reflecting across all divisions, increased volume, favorable effective net pricing, and net favorable foreign currency movements. Volume gains contributed 6 percentage points. The United States represented 61% of net revenue; Mexico was 10%; United Kingdom was 6%, Canada was 4%; with all other countries generating 19%.

Costs and Expenses

Our cost of sales was $14,176 million in 2005. Our selling, general and administrative expenses were $12,314 million. Substantially all of our pension plans are fully funded on an Accumulated Benefit Obligation (ABO) basis.

Sales Terms

Our policy is to provide customers with product when needed. Our sales terms do not allow for a right of return. However, our policy for direct-store-delivery and chilled products is to remove and replace damaged and out-of-date products from store shelves to ensure that consumers receive the product quality and freshness they expect. Similarly, our policy for warehouse distributed products is to replace damaged and out-of-date products. Based on our historical experience with this practice, we have reserved for anticipated damaged and out-of-date products. Our bottlers have a similar replacement policy and are responsible for the products they distribute.

For more information see PepsiCo's 2005 Annual Report:
http://www.pepsico.com/PEP_Investors/AnnualReports/05/index.cfm

Uses of Cash

Our cash-generating capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting operating, investing and financing needs. In 2005, our Capital Spending was $1,736 million. Our Common Share repurchases were $3,012 million. Dividends paid totaled $1,642 million and we repaid long-term debt of $177 million.

For more information see PepsiCo's 2005 Annual Report:
http://www.pepsico.com/PEP_Investors/AnnualReports/05/index.cfm

Retained Earnings

Our retained earnings increased 13% in 2005, from $18,730 million to $21,116 million.

Infrastructure Development

Business Process Transformation (BPT) is a comprehensive effort to drive efficiencies at PepsiCo and fuel our future growth. It includes efforts to leverage key business functions to take advantage of our scale. It includes moving to a common set of processes that underlie key activities and supporting these activities with common technology applications. It also includes linking our information systems so that data will flow seamlessly from one function to another.