10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 2, 2005

Commission file number 001-03344

Sara Lee Corporation

(Exact name of registrant as specified in its charter)

Maryland	36-2089049
(State of incorporation)	(I.R.S. Employer Identification No.)
Three First National Plaza Chicago, Illinois	60602-4260
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number including area code: (312) 726-2600

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $.01 par value per share	The Chicago Stock Exchange The New York Stock Exchange The Pacific Exchange Euronext Amsterdam Stock Market N.V. Euronext Paris S.A. Stock Market The Swiss Exchange The Stock Exchange (London)
Preferred Stock Purchase Rights	The Chicago Stock Exchange The New York Stock Exchange The Pacific Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

Indicate by check mark whether the registrant (1) has filed all required reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes        ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    x  Yes        ¨  No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes        x  No

On August 6, 2005, the registrant had outstanding 784,552,128 shares of common stock, par value $.01 per share, which is the registrant’s only class of common stock.

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on December 31, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $19 billion (based upon the closing price per share of the registrant’s common stock on the New York Stock Exchange on such date).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Annual Report to Stockholders for the fiscal year ended July 2, 2005 are incorporated by reference into Parts I, II and IV of this Form 10-K, and are filed as Exhibit 13. Portions of the registrant’s Proxy Statement for its 2005 annual meeting of stockholders are incorporated by reference into Item 5 of Part II and Items 10-14 of Part III of this Form 10-K.

Table of Contents

		Page
Part I
Item 1.	Business	1
Item 2.	Properties	13
Item 3.	Legal Proceedings	14
Item 4.	Submission of Matters to a Vote of Security Holders	15
Part II
Item 5.	Market for Sara Lee’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
Item 6.	Selected Financial Data	16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	16
Item 8.	Financial Statements and Supplementary Data	16
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	16
Item 9A.	Controls and Procedures	16
Item 9B.	Other Information	17
Part III
Item 10.	Directors and Executive Officers of Sara Lee	17
Item 11.	Executive Compensation	19
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	19
Item 13.	Certain Relationships and Related Transactions	20
Item 14.	Principal Accounting Fees and Services	20
Part IV
Item 15.	Exhibits and Financial Statement Schedules	20

PART I

Item 1. Business

Sara Lee Corporation (“Sara Lee,” “we,” “our” or the “Company”) is a global manufacturer and marketer of high-quality, brand-name products for consumers throughout the world. With headquarters in Chicago, Illinois, Sara Lee has operations in 58 countries and markets products in nearly 200 nations. The Company was organized in Baltimore, Maryland in 1939 as the C.D. Kenny Company and adopted its current name in 1985.

Business Developments during Fiscal Year 2005

In February 2005, Sara Lee announced a comprehensive Transformation plan, including a new organization structure that became effective at the beginning of fiscal year 2006. Sara Lee’s new organization structure consists of three lines of business:

• Sara Lee Food & Beverage, which consists of the bakery, packaged meats and Senseo coffee retail businesses in North America.

• Sara Lee Foodservice, which consists of the bakery, coffee and meats foodservice businesses in North America.

• Sara Lee International, which consists of the bakery and beverage businesses outside of North America, the global household products business and the European packaged meats business.

Sara Lee also announced its intent to spin off its Branded Apparel Americas/Asia businesses into an independent public company. The timing and structure of the spin off has not yet been determined; however the spin off is expected to be completed in fiscal 2006.

In addition, Sara Lee announced portfolio actions that include the sale of Sara Lee Meats Europe, a packaged meat business with popular European brands such as Aoste and Imperial, which holds its largest positions in France and the Benelux region; Direct Selling, a global business that sells cosmetics, household products, apparel and other products to consumers through a network of independent sales people in countries around the world, most notably in Mexico, Australia, the Philippines and Japan; and U.S. Retail Coffee, a business with well-known, regional retail coffee brands such as Chock full o’Nuts, Hills Bros., MJB and Chase & Sanborn, but not including the Senseo brand.

On August 10, 2005, Sara Lee announced that it has entered into an agreement with Tupperware Corporation for the sale of the Direct Selling business for $557 million. The transaction has been approved by both companies’ boards of directors and is expected to close in the second quarter of fiscal 2006, subject to regulatory approvals and other customary closing conditions.

In connection with the Transformation plan, on February 9, 2005, Brenda C. Barnes was named Sara Lee’s President and Chief Executive Officer. Ms. Barnes joined Sara Lee in July 2004 as its President and Chief Operating Officer. C. Steven McMillan, formerly Sara Lee’s Chief Executive Officer, will continue to serve as Sara Lee’s Chairman through the 2005 annual meeting.

Description of the Business

During fiscal year 2005, Sara Lee had five reportable segments—Sara Lee Meats, Sara Lee Bakery, Beverage, Household Products and Branded Apparel. The Company’s products and services include fresh and frozen baked goods, processed meats, coffee and tea, beverage systems, intimate apparel, underwear, sportswear, legwear and other apparel, and personal, household and shoe care products. Results of operations for fiscal year 2005 are presented based upon this reporting structure.

Sara Lee Meats

Sara Lee Meats sells a variety of meat products, including hot dogs and corn dogs, breakfast sausages and sandwiches, smoked and dinner sausages, premium deli and luncheon meats, bacon, meat snacks and cooked and dry hams. Sara Lee Meats’ significant brands include Hillshire Farm, Ball Park, Imperial, Jimmy Dean, Sara Lee, Bryan, State Fair, Kahn’s and Best’s Kosher in the U.S.; Nobre, Aoste, Stegeman, Justin Bridou and Cochonou in Europe; and Kir, Zwan and Duby in Mexico.

Sara Lee Meats primarily sells its products in the U.S., western and central Europe and Mexico, and 67% of the segment’s fiscal 2005 sales were generated in U.S. dollars, 28% in euros and 5% in Mexican pesos. Sales are made in both the retail channel to supermarkets, warehouse clubs and national chains, and in the foodservice channel to foodservice distributors and large operators. Sales are generally transacted through Sara Lee’s own sales force and outside brokers.

The primary raw materials for Meats’ products include pork, turkey, beef and chicken, which are purchased almost entirely from independent farmers and vendors. Sara Lee does not rely on any one vendor or small group of vendors for these raw materials and prices fluctuate based primarily on supply and demand.

The top 20 customers of the Sara Lee Meats business represent approximately 54% of the segment’s sales. The meats business is highly competitive, with an emphasis on product quality, innovation and price. New product innovations are a key component to success. The Meats segment competes with other international, national, regional and local companies in each of the product groups.

Most of Sara Lee Meats’ operations are regulated by the U.S. Department of Agriculture, whose focus is the quality, sanitation and safety of meat products, and to a lesser extent by state and local government agencies. Sara Lee Meats’ operations in Europe and Mexico are regulated by local authorities.

The Sara Lee Meats’ business accounted for 22.1%, 21.8% and 20.9% of Sara Lee’s consolidated sales during fiscal 2005, 2004 and 2003, respectively.

Sara Lee Bakery

Sara Lee Bakery produces a wide variety of fresh and frozen baked products and specialty items, including bread, buns, bagels, rolls, muffins, specialty bread, refrigerated dough, frozen pies, cakes, cheesecakes and other desserts. Sara Lee Bakery’s significant brands include Sara Lee, Earth Grains, Grant’s Farm, Colonial, Rainbo, Holsum, IronKids, Mother’s, Sunbeam, Healthy Choice, Roman Meal and Chef Pierre in the U.S.; Bimbo, Ortiz and CroustiPate in Europe; and Sara Lee, Bon Gateaux and Universal Foods in Australia. Certain of the brands are used under licensing arrangements; however sales of products sold under licensing arrangements represent less than 7% of Sara Lee Bakery’s total sales.

Sara Lee Bakery primarily sells its products in the U.S., western and central Europe and Australia, and 76% of the segment’s fiscal 2005 sales were generated in U.S. dollars, 20% in euros and 3% in Australian dollars. Sales are made in both the retail channel to supermarkets, warehouse clubs and national chains, and in the foodservice channel to foodservice distributors, restaurants and other institutions. Sales primarily are made through Sara Lee’s sales force and independent wholesalers. The Bakery business offers delivery directly to retail customer stores and warehouses through its direct store delivery system, which maintains approximately 5,500 delivery routes.

Sara Lee Bakery’s primary raw materials include wheat flour, sugar, corn syrup, butter, fruit, eggs and cooking oils, which are purchased from independent suppliers. The Bakery segment does not rely on any one vendor or small group of vendors for these raw materials, and prices fluctuate based upon supply and demand, weather and government price supports.

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Sara Lee Bakery’s top 20 customers represent approximately 51% of its sales. The bakery business is highly competitive, with an emphasis on product quality, innovation and value. New product innovations drive growth in this segment. The Bakery segment competes with other international, national, regional and local companies in each of the product groups. Sara Lee Bakery competes in these markets by endeavoring to offer superior product quality and value, utilizing marketing strategies that are designed to reinforce and build brand recognition, and by endeavoring to provide superior customer service.

In the United States, Sara Lee Bakery products are subject to regulation by the Food and Drug Administration, the federal agency charged with, among other things, enforcing laws pertaining to food processing, content and labeling, by similar groups in foreign countries and, to a lesser extent, by state and local government agencies.

Sara Lee’s Bakery business accounted for 17.1%, 17.9% and 18.3% of Sara Lee’s consolidated revenues during fiscal 2005, 2004 and 2003, respectively.

Sara Lee Beverage

The Beverage business produces coffee and tea products that are sold in major markets around the world including the U.S., Europe, Australia and Brazil. In Europe, some of Beverage’s more prominent brands are Douwe Egberts, Senseo, Maison du Café, Marcilla, Merrild and Pickwick. In the U.S., significant brands include Chock full o’Nuts, Hills Bros., Chase & Sanborn and Superior, and in South America, significant brands include Café do Ponto, Café Caboclo, União and Café Pilão. Sara Lee Beverage also provides coffee and dispensing equipment in Europe and in the United States.

Fifty percent of the segment’s fiscal 2005 sales were generated in euros, 30% in U.S. dollars, 6% in Brazilian real and 3% in Australian dollars. Sales are made in both the retail channel to supermarkets, warehouse clubs and national chains, and in the foodservice channel to foodservice distributors. The Beverage segment also offers direct delivery to restaurants and warehouses through its direct delivery system.

The top 20 customers of the Beverage business represent approximately 40% of the segment’s sales. The beverage business is highly competitive, with an emphasis on quality and value. The Beverage segment competes with other international and regional companies by continuing to introduce new and innovative products to meet consumers’ needs and endeavoring to offer its customers superior product quality and value.

The most significant cost item in the production of coffee products is the price of green coffee beans, which are purchased from farmers and coffee bean vendors in various countries in the world. The price of green coffee fluctuates based upon supply and demand, weather, the political climate in the producing nations, unilateral pricing policies of various nations, speculation in the commodities markets and the relative valuations and fluctuations of the currencies of producer versus consumer countries. These factors also generally affect Sara Lee Beverage’s competitors. The Beverage business mitigates the effect of fluctuating green coffee prices through careful inventory management.

Sara Lee’s Beverage business accounted for 17.4%, 16.5% and 15.4% of Sara Lee’s consolidated revenues during fiscal 2005, 2004 and 2003, respectively.

Sara Lee Branded Apparel

Branded Apparel sources, manufactures and markets basic branded “innerwear” products primarily in three categories—intimate apparel, underwear/activewear and legwear. Products in the intimate apparel category include bras, panties, shapewear and other women’s undergarments. Sara Lee’s legwear products consist of a wide variety of branded, packaged consumer products, including pantyhose, combination panty and pantyhose garments, tights, knee-highs and socks. Sara Lee’s sportswear products include basic fleece, T-shirts, sportshirts

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and other jersey products. Branded Apparel’s principal brands include Hanes, Champion, Playtex, L’eggs, barely there, Bali, Just My Size and Wonderbra in the U.S. and Dim, Playtex, Unno, Nur Die, Lovable and Wonderbra in Europe.

Branded Apparel primarily sells its products in the U.S. and Europe, and 68% of the segment’s fiscal 2005 sales were generated in U.S. dollars, 16% in euros and 8% in British pounds. Distribution channels range from department and specialty stores for premium brands to warehouse clubs and mass-merchandise outlets for certain value-priced brands. Sales are transacted through Branded Apparel’s sales force.

Branded Apparel’s top 20 customers represent approximately 55% of the segment’s fiscal 2005 sales. Approximately 22% of this segment’s fiscal 2005 sales were to Wal-Mart Stores Inc. The branded apparel business is highly competitive, with an emphasis on product value and quality. Manufacturers rely on their products’ brand recognition, quality, price and customer loyalty. While many products such as white underwear, athletic socks, basic fleece products and T-shirts are not subject to significant change year-to-year, other products such as intimate apparel have a heavier emphasis on style and innovation. Branded Apparel competes against other national and international manufacturers. In addition, the consolidation of the retail trade has resulted in certain customers developing their own brands and sourcing product needs from third-party manufacturers. The sheer hosiery segment of the legwear business is challenging, as worldwide demand for sheer hosiery products has declined over the last several years. Branded Apparel competes by endeavoring to offer superior value, make use of low-cost sourcing and execute integrated marketing activities.

The primary raw materials used in the production of Branded Apparel products include various natural and synthetic fabrics and fibers, including those made from cotton, nylon, spandex and certain elastics that are purchased from various independent suppliers. Sara Lee relies on a small group of suppliers to provide sewing services and certain textiles and yarns that are used in production. The largest of these specific suppliers provides approximately 13% of Branded Apparel’s estimated manufacturing needs. Alternative sources of supply exist for each of these products, services and the other raw materials that are used in production. Prices for raw materials fluctuate based upon supply and demand, the fluctuating cost of cotton, which is affected by weather (which affects the quality and quantity of available supplies), consumer demand, speculation on the commodities market and the relative valuations and fluctuations of the currencies of producer versus consumer countries.

On January 1, 2005, the World Trade Organization completed a 10-year plan to phase out import quotas that limit the number of apparel products that can be imported into the U.S. from certain countries. Approximately 180 countries ship apparel products to the U.S. Branded Apparel sources products from a number of countries and regularly evaluates its sourcing options. In evaluating sourcing alternatives, Branded Apparel considers factors such as quality, style, delivery times and manufacturing flexibility, in addition to the cost of manufacturing the apparel products and compliance with specific operating standards. Branded Apparel will continue to evaluate its product sourcing strategies, including the ability to relocate production sourcing to lower cost locations that previously may not have been available due to the import quotas. The phase out of import quotas also could potentially allow new competitors to enter the apparel business, including both new domestic as well as foreign competitors who could establish manufacturing sites in these foreign locations. It is unclear what the long-term implications will be from the elimination of these quotas.

Sara Lee’s Branded Apparel business accounted for 33.4%, 33.7% and 35.8% of Sara Lee’s consolidated revenues during fiscal 2005, 2004 and 2003, respectively.

Household Products

Household Products produces and sells products in four primary product categories—body care, air care, shoe care and insecticides. Body care products consist of soaps, shampoos, bath and shower products, deodorants, shaving creams and toothpastes that are sold primarily in Europe under brands such as Sanex, Duschdas, Radox, Monsavon and Prodent. Air care products consist of air fresheners under the Ambi Pur brand

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in the U.S., Europe and certain Asian countries. Shoe care products consist of polishes, cleaners and wax under the Kiwi and Meltonian brands sold in many countries. Insecticides are sold primarily in Europe and Asia under brands such as Vapona, Catch, GoodKnight, Bloom and Ridsect. These products are sold through a variety of retail channels, including supermarkets.

Fifty percent of the segment’s fiscal 2005 sales were in euros, 12% in British pounds, 5% in U.S. dollars, and the remaining amount was generated primarily in the Asia-Pacific region and other portions of Europe.

The top 20 customers of the Household Products business represent approximately 36% of the segment’s sales. The household products business is highly competitive, with an emphasis on innovation, quality and value. The Household Products segment experiences higher sales in the second half of the fiscal year, as sales of both body care products and insecticides increase in anticipation of the warmer summer months.

Sara Lee’s Household Products business, excluding the Direct Selling business which is reported as a discontinued operation in Sara Lee’s financial statements, accounted for 10%, 10.1% and 9.6% of Sara Lee’s consolidated revenues during fiscal 2005, 2004 and 2003, respectively.

On August 10, 2005, Sara Lee announced that it had signed an agreement to sell the Direct Selling business for $557 million and that the transaction is expected to close in the second quarter of fiscal 2006, subject to regulatory approvals and other customary closing conditions. Accordingly, the Direct Selling business is classified as a discontinued operation in Sara Lee’s fiscal 2005 financial statements. The Direct Selling business, which previously was reported within the Household Products segment, sells body care and air care products such as hair care, deodorants, moisturizers and fragrances as well as jewelry and cosmetics primarily in Australia, Mexico, Argentina, Indonesia, the Philippines and South Africa. Sales to consumers are made through a worldwide network of independent sales representatives. Direct Selling includes the Nutrimetics, House of Fuller and NaturCare businesses.

Customers

Sara Lee considers major mass retailers and supermarket chains in both the United States and Europe to be significant customers across one or more business segments, and it has developed specific approaches to working with these individual customers. During fiscal 2005, Wal-Mart Stores Inc. was Sara Lee’s largest customer. Net sales to Wal-Mart Stores Inc. were $2.4 billion, or 12.7% of Sara Lee’s fiscal 2005 net sales. The Branded Apparel business made sales of approximately $1.4 billion, or 22% of its fiscal 2005 net sales, to Wal-Mart Stores Inc. and the Sara Lee Meats and Sara Lee Bakery businesses were responsible for $961 million of the remaining sales. Although no other single customer accounts for 10% or more of Sara Lee’s consolidated revenues, the loss of one of our major mass retailer or supermarket chain customers could have a material adverse effect on one or more of our business segments.

Trademarks

Sara Lee is the owner of approximately 40,000 trademark registrations and applications in more than 180 countries and believes that, as it continues to build brands globally, its trademarks are among its most valuable assets. Although the laws vary by jurisdiction, trademarks generally are valid as long as they are in use and/or their registrations are properly maintained and have not been found to have become generic. Trademark registrations generally can be renewed indefinitely as long as the trademarks are in use. Sara Lee believes that its core brands are covered by trademark registrations in most countries of the world in which Sara Lee does business, and Sara Lee has an active program designed to ensure that its marks and other intellectual property rights are registered, renewed, protected and maintained. Some of Sara Lee’s products are sold under brands that have been licensed from third parties. Sara Lee also owns a number of valuable patents; however, it does not regard any segment of its business as being dependent upon any single patent or group of related patents. In addition, Sara Lee owns numerous copyrights, both registered and unregistered, and proprietary trade secrets, technology, know-how processes and other intellectual property rights that are not registered.

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Seasonality

Generally, seasonal changes in demand for certain Sara Lee products are offset by Sara Lee’s diverse product offerings. Seasonality in the Sara Lee Meats segment is balanced by the diverse offering of products that tend to offset seasonal changes in demand. For example, sales of hot dogs and lunchmeat increase during the summer months, and ham and breakfast sausage sales increase during the winter holiday periods. Seasonality in the Sara Lee Bakery segment is balanced by the diverse offering of products that tend to offset the seasonal changes in demand. For example, sales of buns increase in the warm summer months, and sales of dough products, specialty cakes and pies increase for the winter holiday season. Seasonal sales increases for Beverage products are experienced in the second quarter due to higher consumer consumption in the winter months. In the Branded Apparel business, on a constant currency basis, sales are typically higher in the first two quarters of each year. Socks, hosiery and fleece products generally have higher sales in this period as a result of the cooler weather and back-to-school shopping. Sales levels in a period are also impacted by retailers’ decisions to increase or decrease inventory levels in response to anticipated consumer demand. The Household Products segment experiences higher sales in the second half of the fiscal year, as sales of both body care products and insecticides increase in anticipation of the warmer summer months.

In total during fiscal 2005, 24.7% of Sara Lee’s consolidated sales were recognized in the first quarter, 26.3% in the second quarter, 24.3% in the third quarter and 24.7% in the fourth quarter.

Regulations

Sara Lee’s U.S. Meats, Bakery and Beverage operations, food products and packaging materials are subject to regulations administered by the U.S. Department of Agriculture and the Food and Drug Administration. Among other things, these agencies enforce statutory prohibitions against misbranded and adulterated foods; establish safety standards for food processing; establish standards for ingredients and manufacturing procedures for certain foods; establish standards for identifying certain foods; determine the safety of food additives; and establish labeling standards and nutrition labeling requirements for food products. In addition, various states regulate these businesses by enforcing federal and state standards of identity for selected food products, grading food products, inspecting plants and imposing their own labeling requirements on food products.

Sara Lee buys livestock, meat and poultry products and processed food ingredients from numerous sources based on factors such as price, quality and availability. Many of these products and processed food ingredients are subject to governmental agricultural programs. These programs have substantial effects on prices and supplies and are subject to U.S. Congressional and administrative review.

The food industry is highly regulated on a worldwide basis, and Sara Lee’s food operations outside of the U.S. are subject to local and national regulations that are similar in nature to those applicable to our U.S. businesses. In some cases, Sara Lee’s food products are subject to international regulatory provisions, such as those of the European Union relating to labeling, packaging, food content, pricing, marketing and advertising and other areas.

Sara Lee’s operations, like those of similar businesses, also are subject to various federal, state, and local environmental laws and regulations including the Clean Water Act, Clean Air Act, Solid Waste Disposal Act (as amended by the Resource Conservation and Recovery Act), Comprehensive Environmental Response, Compensation and Liability Act, Emergency Planning Community Right-to-Know Act, Safe Drinking Water Act, Toxic Substances Control Act, and the Federal Insecticide, Fungicide, and Rodenticide Act, and related state and local laws and regulations (collectively “Environmental Laws”). These Environmental Laws require permits for the discharge of pollutants into the air or water; impose limitations on the discharge of pollutants into the air or water; require the installation of pollution control equipment; establish standards for the treatment, storage, transportation, and disposal of solid and hazardous wastes; impose obligations to investigate and remediate contamination in certain circumstances; govern underground storage tanks; require reporting of certain information to the public; and impose other requirements intended to protect public health and the environment.

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While Sara Lee expects to make capital and other expenditures in compliance with Environmental Laws, it does not anticipate that such compliance will have a material adverse effect on its consolidated results of operations, financial position or cash flows. Sara Lee has an ongoing program to monitor compliance with Environmental Laws.

Employees

Sara Lee employs approximately 137,000 employees worldwide in its continuing operations.

Information Available on Sara Lee’s Web Site

This Annual Report on Form 10-K and Sara Lee’s Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any amendments to those reports, and other documents filed with or furnished to the Securities and Exchange Commission (“SEC”) are available on Sara Lee’s Web site (www.saralee.com, under “Investors—Stock Information—SEC Reports”) as soon as reasonably practicable after such documents are electronically filed with or furnished to the SEC.

The following documents also are available on Sara Lee’s Web site, www.saralee.com, under the captions indicated:

• current versions of Sara Lee’s corporate charter and bylaws, under “Our Company”

• Corporate Governance Guidelines, under “Investors-Corporate Governance”

• Global Business Standards, Sara Lee’s corporate code of business conduct and ethics, and any amendments to or waivers of such code, if applicable, under “Our Company-Global Business Practices”

• current charters for the Audit, Compensation and Employee Benefits, and Corporate Governance and Nominating Committees of Sara Lee’s Board of Directors, under “Our Company-Board of Directors-Board Committee Charters”

• procedures for communicating with Sara Lee’s Board of Directors, or the chair of any committee of the Board, under “Our Company-Board of Directors-Communications with the Board”

A copy of Sara Lee’s Corporate Governance Guidelines, Global Business Standards or the charter of Sara Lee’s Audit, Compensation and Employee Benefits, or Corporate Governance and Nominating Committees will be sent to any stockholder without charge upon written request addressed to Sara Lee Corporation, Attn: Investor Relations Department, 70 W. Madison Street, Chicago, Illinois, 60602-4260, or by calling (312) 558-4947.

Throughout this Annual Report and as permitted by the SEC, Sara Lee “incorporates by reference” certain information from parts of other documents filed or to be filed with the SEC, including Sara Lee’s 2005 Annual Report to Stockholders and Sara Lee’s Proxy Statement. Readers of this Annual Report on Form 10-K are encouraged to read the information referenced in such other documents. Portions of Sara Lee’s 2005 Annual Report to Stockholders are filed as Exhibit 13 to this Form 10-K, and full copies of Sara Lee’s 2005 Annual Report to Stockholders and Proxy Statement will be available, on or about September 21, 2005, on Sara Lee’s Web site, www.saralee.com, under “Investors—Reports and Documents.”

Financial Information About Industry Segments

For financial reporting purposes, Sara Lee’s businesses are divided into five business segments: Sara Lee Meats, Sara Lee Bakery, Beverage, Household Products and Branded Apparel. Financial information about Sara Lee’s business segments is incorporated herein by reference to Note 24, “Business Segment Information,” to the Consolidated Financial Statements contained in the Company’s 2005 Annual Report to Stockholders.

Financial Information About Foreign and Domestic Operations and Export Sales

Sara Lee’s foreign operations are conducted primarily through wholly or partially owned subsidiaries incorporated outside the United States. Sara Lee’s principal foreign subsidiary is Sara Lee/DE N.V., a

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Netherlands limited liability company headquartered in Utrecht, the Netherlands (“Sara Lee/DE”). Sara Lee/DE has responsibility for managing the foreign Beverage and worldwide Household Products divisions of Sara Lee. The foreign operations of Sara Lee’s Meats and Bakery businesses are conducted by a number of subsidiaries, principally European, including Sara Lee/DE. Branded Apparel’s international operations are conducted through numerous foreign subsidiaries, including many in Europe and South America. Household Products’ operations are conducted by subsidiaries in over forty countries. The financial information about Sara Lee’s foreign and domestic operations in Note 25, “Geographic Area Information,” to the Consolidated Financial Statements contained in the Company’s 2005 Annual Report to Stockholders is incorporated herein by reference. Financial information about the impact on Sara Lee of foreign exchange rates appearing under the heading “Financial Review” of the Company’s 2005 Annual Report to Stockholders is incorporated herein by reference.

Risk Factors

This Annual Report on Form 10-K, including the information incorporated herein by reference, contains certain forward-looking statements including the anticipated costs and benefits of restructuring actions, Sara Lee’s access to credit markets and the corporation’s credit ratings, the planned extinguishment of debt, the funding of pension plans, potential payments under guarantees and amounts due under future contractual obligations and commitments. In addition, from time to time, in oral statements and written reports, the corporation discusses its expectations regarding the corporation’s future performance by making forward-looking statements preceded by terms such as “expects,” “projects,” “anticipates” or “believes.” These forward-looking statements are based on currently available competitive, financial and economic data, as well as management’s views and assumptions regarding future events, and are inherently uncertain. Readers should recognize that actual results may differ from those expressed or implied in the forward-looking statements. Among the factors that could cause Sara Lee’s actual results to differ from such forward-looking statements are the risk factors described below.

Sara Lee’s potential inability to implement the Transformation plan, or to realize the anticipated benefits of the Transformation plan, could adversely affect our results of operations and financial condition.

On February 10, 2005, Sara Lee announced a Transformation plan designed to improve performance and better position Sara Lee for long-term growth. There is no guarantee, however, that we will be able to implement the Transformation plan on terms and conditions that are favorable to us. For example, as part of the Transformation plan, we intend to sell our European Branded Apparel, European Meats, Direct Selling and U.S. retail coffee businesses, and to spin off our Branded Apparel Americas/Asia business into an independent, publicly traded company. There is no guarantee, however, that we will be able to complete these divestitures on terms and conditions that are favorable to us. The spin off requires that we obtain a favorable tax ruling, and other regulatory approvals, to effectuate this transaction and there is no guarantee that we will be able to obtain these rulings and approvals within the anticipated time frame.

Our Transformation plan is designed not only to change Sara Lee’s business portfolio, but also to dramatically increase operating efficiency and generate significant cost savings by fiscal 2010. These plans include integrating our businesses into the new business structure and consolidating our North American and European headquarters in the Chicago area and in Utrecht. The projected cost savings from these plans are important to enable Sara Lee to make the needed marketing and R&D investments to achieve our business growth goals and to improve ongoing financial returns. If Sara Lee is unable to implement any of these elements of the Transformation plan, we may not reap the anticipated benefits of the plan. Any negative impact the Transformation plan has on our relationships with employees, major customers, vendors or our cost of funds, and any failure to generate the anticipated efficiencies and savings from the plan, also could adversely affect our results of operations or financial condition.

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Sara Lee is subject to risks associated with our international operations, which could negatively affect our sales to customers in foreign countries as well as our operations and assets in such countries.

In fiscal year 2005, we derived approximately 44% of our net sales from customers located outside of the United States. In addition, we have substantial assets located outside of the United States. As a result, Sara Lee is subject to numerous risks and uncertainties relating to international sales and operations, including:

• difficulties and costs associated with complying with, and enforcing remedies under, a wide variety of complex laws, treaties and regulations;

• different regulatory structures and unexpected changes in regulatory environments;

• political and economic instability, including the possibility of civil unrest;

• nationalization of properties by foreign governments;

• tax rates that may exceed those in the United States and earnings that may be subject to withholding requirements and incremental taxes upon repatriation;

• potentially negative consequences from changes in tax laws;

• the imposition of tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements;

• increased costs, disruptions in shipping or reduced availability of freight transportation; and

• the impact of currency exchange rate fluctuations between the U.S. dollar and foreign currencies, particularly the European euro, the British pound, the Australian dollar and the Brazilian real.

The occurrence of any of these events in the markets where Sara Lee operates or in other developing markets could jeopardize or limit Sara Lee’s ability to transact business in those markets and could adversely affect our revenues and operating results.

Our profitability may suffer as a result of competition in our markets.

The brand-name consumer products industry is intensely competitive. In order to protect our existing market share or capture increased market share in this highly competitive retail environment, we may be required to increase expenditures for promotions and advertising and introduce and establish new products. Due to inherent risks in the marketplace associated with advertising and new product introductions, including uncertainties about trade and consumer acceptance, increased expenditures may not prove successful in maintaining or enhancing our market share and could result in lower sales and profits. In addition, we may incur increased credit and other business risks as a result of competing for customers in a highly competitive retail environment.

Our consumer products also are subject to significant price competition. From time to time, we may need to reduce the prices for some of our products to respond to competitive and customer pressures and to maintain market share. Such pressures also may restrict our ability to increase prices in response to raw material and other cost increases. Any reduction in prices as a result of competitive pressures, or any failure to increase prices when raw material costs increase, would harm profit margins and, if our sales volumes fail to grow sufficiently to offset any reduction in margins, our results of operations will suffer.

We may be required to establish additional inventory reserves in connection with our Branded Apparel business.

Inventory in our Branded Apparel business is subject to higher levels of obsolescence and excess stock than other components of Sara Lee’s business. This results from a more complex supply chain, a longer manufacturing process, the seasonal nature of certain inventory items and changes in fashion. As described under the heading “Financial Review” in the Company’s 2005 Annual Report to Stockholders, we increased inventory

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reserves in the underwear business by $29 million in fiscal 2005 to recognize slow moving and obsolete inventory. There are inherent uncertainties related to the recoverability of inventory, and it is possible that market factors and other conditions underlying the valuation of inventory may change in the future and result in further reserve requirements.

As a result of the Transformation plan, we may be required to take additional write downs in connection with impairment of our intangible assets.

Intangible assets and goodwill comprise a significant portion of out total assets. Intangible assets include trademarks, customer relationships, software and certain contractual relationships. 85% of all of Sara Lee’s intangible assets have a finite life and are amortized, and 15% have an indefinite life and are not amortized. Intangible assets with a finite life are tested for recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Such events include adverse changes in the business climate, current period operating or cash flow losses, forecasted continuing losses or a current expectation that an asset group will be disposed of before the end of its useful life. An impairment review of goodwill and intangible assets not subject to amortization is conducted at least once a year and if events or changes in circumstances indicate that their carrying value may not be recoverable. As a result of the Transformation plan, we are considering the sale of disposition of many of our businesses as well as the disposal or abandonment of certain other intangible assets. These actions may require us to recognize increased levels of future intangible amortization, or incur charges to recognize the impairment of certain of these assets.

Sara Lee may not be able to implement the capital structure strategic initiatives announced on August 4, 2005 or realize the anticipated benefits of these strategic initiatives.

On August 4, 2005, Sara Lee announced three major capital structure initiatives that we intend to implement as we pursue the Transformation plan. In particular, we announced that we intend to (i) repurchase approximately $2 billion of our common stock during the Transformation period, with $1 billion being repurchased in fiscal 2006, (ii) maintain our annual dividend of $0.79 per share through fiscal 2006, regardless of when the planned divestitures are completed, and (iii) use divestiture proceeds and cash from operations to reduce total debt by at least $1.5 billion. These initiatives are designed to return value to shareholders, optimize our capital structure and help us maintain a strong credit profile as we pursue the Transformation plan. We believe that we will be able to generate sufficient cash necessary to implement each of these initiatives and maintain current investments in our businesses, but there is no guarantee that this will be the case. Furthermore, even if we are able to implement these capital structure initiatives, there is no guarantee that they will achieve their intended results. In particular, we cannot be certain that the initiatives will not result in a downgrade of our credit ratings or that committing cash to these initiatives will be viewed by analysts and investors as an appropriate use of our resources.

Volatility in the equity markets or interest rates could substantially increase our pension costs.

The projected benefit obligation and assets of Sara Lee’s defined benefit pension plans as of the end of fiscal 2005 was $5.4 billion and $3.9 million, respectively. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Changes in interest rates and the market value of plan assets can impact the funded status of these plans and cause volatility in the net periodic benefit cost and future funding requirements of these plans. In addition, our announced plans to dispose of certain businesses and the terms of those disposition transactions may impact future contributions to the benefit plans and the related net periodic benefit cost. A significant increase in our funding requirements could have a negative impact on our results of operations.

The Transformation plan may increase Sara Lee’s effective tax rate.

As a global business, Sara Lee’s tax rate from period to period can be affected by many factors, including changes in tax legislation, our global mix of earnings, the tax characteristics of our income, acquisitions and

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dispositions, and the portion of the income of foreign subsidiaries that we expect to remit to the U.S. One component of our Transformation plan is the planned disposition of several significant businesses, which will impact future results in several ways. First, the tax expense or benefit directly associated with these dispositions will impact our net income and liquidity. Since the terms and conditions of future dispositions have not yet been determined, it is not possible to estimate the impact of such disposition transactions on Sara Lee’s tax expense and liquidity. Secondly, when the spin off of the Branded Apparel Americas/Asia business is completed, the effective tax rate of Sara Lee’s remaining business likely will increase. The Branded Apparel Americas/Asia business historically has had a lower effective tax rate than the remainder of the business and generates a significant amount of operating cash flow. The elimination of this cash flow may require us to remit a greater portion of the earnings of foreign subsidiaries to the U.S. than we have historically, which may result in higher levels of tax expense and cash taxes paid.

Changes in our relationship with our major customers, or in the trade terms required by such customers, may reduce sales and profits.

Because of the competitive environment facing retailers, many of our customers have increasingly sought to obtain pricing concessions or better trade terms. This trend has become more pronounced with increasing retailer consolidation. To the extent we provide concessions or better trade terms, our margins are reduced. Further, if we are unable to maintain terms that are acceptable to our major trade customers, such as Wal-Mart Stores Inc., our largest customer, or our customers determine that less inventory is necessary to service consumers, these customers could reduce purchases of our products and increase purchases of products from our competitors, which would harm our sales and profitability.

Commodity price increases would increase operating costs and may reduce profits.

We use many different commodities in our various businesses, including beef, pork, coffee, wheat, cotton, corn, corn syrup, soybean and corn oils, butter and sugar. Commodities are subject to price volatility caused by commodity market fluctuations, the quality and availability of supply, weather, currency fluctuations, trade agreements among producing and consuming nations, consumer demand and changes in governmental agricultural programs. Commodity price increases result in corresponding increases in our raw material costs. We do use commodity financial instruments to hedge commodity prices, but not at significant levels. We may be able to pass some or all of raw material cost increases to customers in the form of higher product prices; however higher product prices may also result in a reduction in unit volume. If we are not able to increase our product prices to significantly offset increased raw material costs, or if unit volume sales are significantly reduced, it could have a negative impact on our profitability.

Various food safety issues may negatively impact the consumption of meat products by our customers and may lead to increased governmental regulation.

Food safety issues have received increased media attention over the past few years. One prominent issue in the United States and Europe has been concern relating to “mad cow” disease. Any future outbreak of livestock disease in the United States may result in adverse publicity and a loss of customer confidence in the protein products affected by the particular disease. A reduction in consumption of such protein sources in the United States or Europe would have a negative impact on the profitability of our Meats business. Outbreaks of livestock disease may also result in import and export restrictions.

The food production industry is also subject to extensive government regulation. Our U.S. food processing facilities and food products are subject to frequent inspection by the United States Department of Agriculture (USDA), and our meat businesses in Europe and Mexico are regulated by local authorities in a similar fashion. Recently, the food safety practices and procedures in the meat processing industry have been subject to more intense scrutiny and oversight and future outbreaks of diseases among cattle, poultry or pigs could lead to further

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governmental regulation. We anticipate increased regulation by various governmental agencies concerning food safety. More stringent requirements could result in changes in industry practices that could increase our costs and reduce margins.

Changes in our credit ratings may have a negative impact on our financing costs in future periods.

Sara Lee has numerous credit facilities available which management considers sufficient to satisfy our operating requirements. Our current short-term credit rating allows us to participate in a commercial paper market that has a large number of potential investors and a high degree of liquidity. A downgrade in our credit ratings, particularly our short-term credit rating, would likely reduce the amount of commercial paper we could issue, raise our commercial paper borrowing costs, or both.

Resolution of tax disputes may impact our earnings and cash flow.

Significant judgment is required in determining our effective tax rate and in evaluating our tax positions. We establish accruals for certain tax contingencies when, despite the belief that our tax return positions are fully supported, we believe that certain positions will be challenged and that our positions may not be fully sustained. The tax contingency accruals are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. Our effective tax rate includes the impact of tax contingency accruals and changes to the accruals, including related interest and penalties, as considered appropriate by management. When particular matters arise, a number of years may elapse before such matters are audited and finally resolved. Favorable resolution of such matters could be recognized as a reduction to our effective tax rate in the year of resolution. Unfavorable resolution of any particular issue could increase the effective tax rate and may require the use of cash in the year of resolution.

Environmental matters create potential liability risks.

We must comply with various environmental laws and regulations in the jurisdictions in which we operate, including those relating to air emissions, water discharges, the handling and disposal of solid and hazardous wastes and the remediation of contamination associated with the use and disposal of hazardous substances. We have incurred, and will continue to incur, capital and operating expenditures and other costs in complying with environmental laws and regulations and in providing physical security for our worldwide operations. We are currently involved in or have potential liability with respect to the remediation of past contamination in the operation of some of our presently and formerly owned and leased facilities. In addition, some of our present and former facilities have been or had been in operation for many years, and over that time, some of these facilities may have used substances or generated and disposed of wastes that are or may be considered hazardous. It is possible that those sites, as well as disposal sites owned by third parties to which we have sent waste, may in the future be identified and become the subject of remediation. It is possible that we could become subject to additional environmental liabilities in the future that could result in an adverse effect on our results of operations or financial condition.

Failure to maximize or to successfully assert our intellectual property rights could impact our competitiveness.

We rely on trademark, trade secret, patent and copyright laws to protect our intellectual property rights. We cannot be sure that these intellectual property rights will be maximized or that they can be successfully asserted. There is a risk that we will not be able to obtain and perfect our own, or, where appropriate, license intellectual property rights necessary to support new product introductions. We cannot be sure that these rights, if obtained, will not be invalidated, circumvented or challenged in the future. In addition, even if such rights are obtained in the United States, the laws of some of the other countries in which our products are or may be sold do not protect our intellectual property rights to the same extent as the laws of the United States. Our failure to perfect or successfully assert our intellectual property rights could make us less competitive and could have an adverse effect on our business, operating results and financial condition.

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Failure of tobacco to remain a legal product in certain European nations would result in a loss of certain contingent sale proceeds.

We sold our European cut tobacco business in fiscal 1999. Under the terms of that agreement, we will receive an annual cash payment of 95 million euros if tobacco continues to be a legal product in the Netherlands, Germany and Belgium through 2010. If tobacco ceases to be a legal product prior to that date in any or all of these countries, future cash payments associated with the sale agreement will be reduced or eliminated in their entirety.

Item 2. Properties

Sara Lee’s corporate headquarters are located in leased facilities in Chicago, Illinois. In addition, Sara Lee operates more than 584 food processing and consumer product manufacturing plants, warehouses and distribution facilities that each contains more than 20,000 square feet in building area. Sara Lee or its subsidiaries own most of these facilities, and the majority of the leased facilities are subject to lease terms of less than 10 years. Management believes that Sara Lee’s facilities are maintained in good condition and are generally suitable and of sufficient capacity to support Sara Lee’s current business operations and that the loss of any single facility would not have a material adverse effect on the operations or financial results of Sara Lee or any of its lines of business.

The following table identifies the locations of Sara Lee facilities (owned or leased) containing more than 20,000 square feet in building area by line of business.

Sara Lee Meats
United States facilities (14 states)	approximately 5.6 million square feet
International facilities	approximately 6.8 million square feet
Belgium	Mexico
France	The Netherlands
Italy	Portugal
Sara Lee Bakery
United States facilities (27 states)	approximately 7.97 million square feet
International facilities	approximately 2.3 million square feet
Australia	Portugal
France	Spain
Beverage
United States facilities (16 states)	approximately 2.6 million square feet
International facilities	approximately 4.5 million square feet
Australia	France	Poland
Belgium	Germany	Spain
Brazil	Greece	Thailand
Czech Republic	Hungary	United Kingdom
Denmark	The Netherlands

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Branded Apparel
United States facilities (10 states)	approximately 12.6 million square feet
International facilities	approximately 11.7 million square feet
Argentina	Germany	Scotland
Belgium	Honduras	South Africa
Brazil	Italy	Spain
Canada	Mexico	Sri Lanka
Costa Rica	Morocco	Tunisia
Czech Republic	Northern Ireland	Turkey
Dominican Republic	The Philippines	United Kingdom
El Salvador	Puerto Rico
France	Romania
Household Products
United States facilities (2 states)	approximately 20,000 square feet
International facilities	approximately 5.7 million square feet
Argentina	Indonesia	Portugal
Australia	Italy	South Africa
Brazil	Japan	Spain
Canada	Kenya	Thailand
China	Malaysia	United Kingdom
Denmark	Mexico	Uruguay
France	The Netherlands	Zambia
Germany	New Zealand	Zimbabwe
Hong Kong	The Philippines
India	Poland

Item 3. Legal Proceedings

On May 13, 2003, John Gallo, a purported Sara Lee stockholder, filed a putative class action lawsuit in the United States District Court for the Northern District of Illinois, Eastern Division, on behalf of purchasers of Sara Lee common stock between and including August 1, 2002 and April 24, 2003. The complaint names Sara Lee, C. Steven McMillan, Chairman and former President and Chief Executive Officer, and Lambertus M. de Kool, Executive Vice President and Chief Financial Officer, as defendants. The complaint contains allegations that the defendants violated Sections 10(b) and 20(a) of the United States Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by allegedly misstating or omitting material adverse facts regarding Sara Lee’s business, operations and management and the value of Sara Lee common stock, which allegedly enabled Sara Lee to complete securities offerings, enabled the individual defendants and other insiders to sell their personally-held Sara Lee stock to the public, and caused the plaintiff to purchase Sara Lee common stock at artificially inflated prices. The plaintiff seeks, among other things, class action certification, compensatory damages in an unspecified amount and an award of costs and expenses, including counsel fees.

Seven other putative class action lawsuits were filed in the United States District Court for the Northern District of Illinois, Eastern Division, and named Sara Lee, Mr. McMillan, and Mr. de Kool as defendants. The allegations in each of those complaints are substantially similar to the allegations of the lawsuit described in the immediately preceding paragraph.

Each of the foregoing actions has been consolidated in a single proceeding, In re Sara Lee Corp. Securities Litigation. On January 20, 2004, plaintiffs filed a consolidated amended complaint containing similar allegations that the same defendants allegedly misstated or omitted material adverse facts regarding Sara Lee’s business

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operations, management and financial statements and the value of Sara Lee’s common stock, which allegedly enabled Sara Lee to complete securities offerings, enabled the individual defendants to increase their bonus compensation and caused the purported class to purchase Sara Lee common stock at artificially inflated prices. The consolidated amended complaint, however, omitted the previous allegations that the individual defendants or other insiders sold their personally-held Sara Lee stock to the public at artificially inflated prices. On March 5, 2004, Sara Lee filed a motion to dismiss the consolidated amended complaint. The motion was denied on December 21, 2004, and Sara Lee’s motion to take an immediate appeal from that ruling was denied on May 26, 2005. On June 30, 2005, Sara Lee filed its answer to the complaint, denying all allegations of wrongdoing. Discovery has commenced and is in its initial stages. Sara Lee believes that the allegations stated in the consolidated amended complaint are without merit and intends to defend the action vigorously.

In addition, on each of June 26, 2003 and July 11, 2003, two purported Sara Lee stockholders filed individual and derivative actions in the Circuit Court of Cook County, Illinois against Sara Lee and its Board of Directors purporting to seek recovery for Sara Lee and its shareholders for purported breaches of fiduciary duty relating to the allegations asserted in the federal securities litigation described above. Each complaint seeks damages in an unspecified amount allegedly sustained by the purported breaches of fiduciary duties, loyalty and due care, and attorneys’ fees and expenses, punitive damages and interest. Both purported derivative actions have been consolidated and the Court has appointed lead and liaison counsel for plaintiffs. The derivative proceedings have been stayed pending further developments in the federal litigation. As discovery is proceeding in the federal action, the parties have negotiated a stipulation that will defer further activity in the state court action pending additional developments in the federal litigation. Sara Lee believes that the allegations in these complaints are without merit and intends to defend each of these actions vigorously.

Sara Lee is a party to various other pending legal proceedings and claims. Some of the proceedings and claims against Sara Lee are for alleged environmental contamination and arise under the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”). CERCLA imposes liability, regardless of fault, on certain classes of parties that are considered to be responsible for contamination at a site. Although any one party can be held responsible for all the costs of investigation and cleanup, those costs are usually allocated among parties based on a variety of factors, such as the amount of waste each contributed to the site.

Although the outcome of the pending legal proceedings, including Superfund claims, cannot be determined with certainty, Sara Lee believes that the final outcomes should not have a material adverse effect on Sara Lee’s consolidated results of operations, financial position or cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5. Market for Sara Lee’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Sara Lee’s securities are traded on the exchanges listed on the cover page of this Annual Report on Form 10-K. As of August 6, 2005, Sara Lee had approximately 86,500 holders of record of its common stock. Information regarding market prices and cash dividends paid on Sara Lee’s common stock during the past two fiscal years in Note 26, “Quarterly Financial Data (Unaudited),” to the Consolidated Financial Statements contained in the Company’s 2005 Annual Report to Stockholders is incorporated herein by reference.

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Issuer Purchases of Equity Securities

The following table outlines Sara Lee’s purchases of shares of its common stock that were completed during the fourth quarter of fiscal 2005.

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 3, 2005 to May 7, 2005	2,388,000	$21.20	2,388,000	16,320,208
May 8, 2005 to June 4, 2005	0	0	0	16,320,208
June 5, 2005 to July 2, 2005	0	0	0	16,320,208
Total	2,388,000	$21.20	2,388,000	16,320,208

(1) Sara Lee has a continuing stock repurchase program under which it may repurchase shares of common stock in either open market or private transactions. As announced on August 4, 2005, subsequent to the end of fiscal year 2005, Sara Lee’s Board of Directors has increased the number of shares authorized under this program by an additional 100 million shares. After this additional share repurchase authorization, there were 116.3 million shares available for purchase under this program. There is no expiration date for the program.

Item 6. Selected Financial Data

Financial information for Sara Lee for the five fiscal years ended July 2, 2005 that appears under the heading “Financial Summary” in the Company’s 2005 Annual Report to Stockholders is incorporated herein by reference. Such information should be read in conjunction with the Consolidated Financial Statements and related Notes to Financial Statements, and the “Financial Review,” contained in the Company’s 2005 Annual Report to Stockholders.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information appearing under the heading “Financial Review” in the Company’s 2005 Annual Report to Stockholders is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information in the subsection entitled “Risk Management” under the heading “Financial Review” in the Company’s 2005 Annual Report to Stockholders is incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data

The Consolidated Financial Statements and related Notes to Financial Statements of Sara Lee contained in the Company’s 2005 Annual Report to Stockholders and the Report of Independent Registered Public Accounting Firm are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls

Sara Lee’s Chief Executive Officer and Chief Financial Officer, with assistance from other members of management, evaluated the effectiveness of Sara Lee’s disclosure controls and procedures (as defined in Rule

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13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”) and, based upon such evaluation, have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective.

Internal Control over Financial Reporting

Management’s report on Sara Lee’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), and the related Report of Independent Registered Public Accounting Firm, are contained Sara Lee’s 2005 Annual Report to Stockholders under the headings “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm,” respectively, and are incorporated herein by reference.

Changes in Internal Controls

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended July 2, 2005 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. As a result of the Transformation plan, the Company is likely to experience significant changes in personnel and processes throughout its businesses. These changes could impact the Company’s internal control over financial reporting in future periods.

Item 9B. Other Information

None.

PART III

Item 10. Directors and Executive Officers of Sara Lee

Set forth below is certain information with respect to the current executive officers of Sara Lee. There are no family relationships between any of the executive officers listed below.

Brenda C. Barnes, Age 51. President and Chief Executive Officer of Sara Lee since February 2005, and President and Chief Operating Officer from July 2004 to February 2005. She has served as a director of Sara Lee since July 2004. Ms. Barnes served as the Interim President of Starwood Hotels and Resorts from November 1999 to March 2000, and President and Chief Executive Officer of PepsiCola North America from 1996 until her retirement in 1998. Prior to that she held various positions with several divisions of PepsiCo, Inc. from 1976 to 1996. Ms. Barnes also served as an adjunct professor at the Kellogg Graduate School of Business and at North Central College in 2002. Ms. Barnes is a member of the Board of Directors of The New York Times Company and Staples, Inc. She also serves as Chair of the Board of Trustees of Augustana College, and is a member of the Steering Committee of the Kellogg Center for Executive Women.

Lee A. Chaden, Age 63. Executive Vice President of Sara Lee and Chief Executive Officer of Sara Lee Branded Apparel. He previously served as Executive Vice President—Global Marketing and Sales from May 2003 to May 2004, and Senior Vice President—Human Resources from 2001 until May 2003. Mr. Chaden joined Sara Lee in 1991 as President of the U.S. and Westfar divisions of Playtex Apparel, Inc., which Sara Lee acquired that year. He was promoted to President and Chief Executive Officer of Sara Lee Intimates in 1994, elected a Vice President of Sara Lee Corporation in 1995, elected a Senior Vice President in 1998, and promoted to Chief Executive Officer of Sara Lee Branded Apparel—Europe in 1999. Mr. Chaden serves on the Board of Directors of Stora Enso Corporation.

Diana S. Ferguson, Age 42. Senior Vice President, Strategy Corporate Development of Sara Lee since February 2005 and Treasurer from January 2001 to February 2005. Ms Ferguson was elected a Senior Vice President in January 2005 and a Vice President in January 2001. Prior to joining Sara Lee in 2001, Ms. Ferguson

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served as Vice President and Treasurer of Fort James Corporation, held a variety of treasury management positions at Eaton Corporation, and served in various financial positions at Fannie Mae, the First National Bank of Chicago and IBM. Ms. Ferguson serves on the Board of Director of Franklin Electric Co., Inc.

Christopher J. (CJ) Fraleigh, Age 42. Senior Vice President of Sara Lee Corporation and Chief Executive Officer of Sara Lee Food & Beverage since January 2005. Prior to joining Sara Lee, Mr. Fraleigh was employed by General Motors Corporation as general manager of its GMC-Buick-Pontiac division during 2004 and as Executive Director of Advertising and Corporate Marketing from 2001 to 2004. Mr. Fraleigh also served as Vice President, Colas from 1999 to 2001, and Director—Brand Pepsi from 1997 to 1999 for PepsiCo, Inc.

Lois M. Huggins, Age 44. Senior Vice President, Chief People Officer of Sara Lee since July 2005, Senior Vice President, Global Human Resources from January 2004 to July 2005, Vice President, Human Resources from April 2003 to January 2004, leader of Sara Lee’s Organization Development & Diversity initiative from 2000 to April 2003, and Divisional Vice President, Human Resources, for Sara Lee Intimate Apparel from 1997 to 2000. Ms. Huggins joined Sara Lee in 1987 and has held a variety of positions with increasing responsibilities with Sara Lee and its subsidiaries.

L.M. (Theo) de Kool, Age 52. Executive Vice President and Chief Financial and Administrative Officer of Sara Lee since February 2005; Executive Vice President and Chief Financial Officer of Sara Lee from January 2002 to February 2005. Mr. de Kool began his career with Sara Lee in 1990, serving as Vice President of Finance for the Household and Personal Care division of Sara Lee/DE N.V., a Dutch subsidiary of Sara Lee, from 1990 to 1993. From 1993 to 1995, he served as Chief Financial Officer of the Blokker retail chain. Mr. de Kool rejoined Sara Lee/DE in 1995 as its Chief Financial Officer and as a member of its Board of Management. Mr. de Kool was named a Vice President of Sara Lee in 1996 and a Senior Vice President of Sara Lee in 2001. Mr. de Kool also serves as a member of the Supervisory Board of Royal Wessanen nv, a multinational food corporation based in the Netherlands.

C. Steven McMillan, Age 59. Chairman of the Board of Sara Lee since October 2001, and Chief Executive Officer of Sara Lee from July 2000 to February 2005. Mr. McMillan also served as President of Sara Lee from 2000 to July 2004, President and Chief Operating Officer from 1997 to July 2000, Executive Vice President from 1993 to 1997 and Senior Vice President from 1986 to 1993. Mr. McMillan became a director of Sara Lee in 1993. He also is a director of Monsanto Corporation. Mr. McMillan is a member of the Advisory Board of the J.L. Kellogg Graduate School of Management at Northwestern University and is a member of the Supervisory Board of Sara Lee/DE N.V., a Dutch subsidiary of Sara Lee. He is a trustee of the Chicago Symphony Orchestra and serves on the Board of the Steppenwolf Theatre Company. Mr. McMillan also serves on the Boards of Directors of Grocery Manufacturers of America, the Chicago Council on Foreign Relations, the Economic Club of Chicago and Catalyst, Inc. He is a member of The Business Council, The Business Roundtable, G-100, The Executives’ Club of Chicago, and the Civic Committee of The Commercial Club of Chicago.

James W. Nolan, Age 49. Senior Vice President of Sara Lee and Chief Executive Officer of Sara Lee Foodservice since February 2005. Mr. Nolan served as Executive Vice President, U.S. Operations of PepsiAmericas, Inc., from 2002 to February 2005, and served as PepsiAmericas’ Senior Vice President—West Group from 2001 to 2002. Mr. Nolan was employed by PepsiCo, Inc. and served as Senior Vice President, Sales and Market Development from 1998 to 2001 and as Chief Customer Officer/Senior Vice President National Sales from 1994 to 1998.

Richard A. Noll, Age 48. Senior Vice President of Sara Lee since December 2002, President and Chief Operating Officer of Sara Lee Branded Apparel since July 2005 and Chief Executive Officer of the Sara Lee Bakery Group from July 2003 to July 2005. Mr. Noll joined Sara Lee in 1992 and has held a number of management positions with increasing responsibilities, including Chief Operating Officer of Sara Lee Bakery Group, Chief Executive Officer of Sara Lee’s sock business and Chief Executive Officer of Sara Lee Legwear, Direct and Mexico. He was elected a Vice President of Sara Lee in 1999.

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Adriaan Nühn, Age 52. Executive Vice President of Sara Lee since March 2003 and Chairman of the Board of Management and Chief Executive Officer of Sara Lee International B.V., Sara Lee’s Dutch subsidiary, from July 2003. Mr. Nühn joined Sara Lee International in 1990 and has held various positions of increasing responsibility. He was elected a Vice President of Sara Lee, Chief Executive Officer of Sara Lee’s Household and Body Care division and a member of the Board of Management of Sara Lee International in 1995, elected a Senior Vice President of Sara Lee in 1996 and appointed President of Sara Lee’s worldwide Coffee and Tea division in 1999.

Roderick A. Palmore, Age 53. Executive Vice President, General Counsel and Secretary of Sara Lee since April 2004, Senior Vice President, General Counsel and Secretary of Sara Lee since 1999 and Deputy General Counsel and Vice President of Sara Lee from 1996 to 1999. Prior to joining Sara Lee, Mr. Palmore was a partner of Sonnenschein, Nath & Rosenthal (law firm) in Chicago from 1993 to 1996 and a partner of Wildman, Harrold, Allen & Dixon (law firm) in Chicago from 1986 to 1993.

Wayne R. Szypulski, Age 54. Senior Vice President of Sara Lee since June 2001; Controller and Chief Accounting Officer of Sara Lee since 1993. Since joining Sara Lee in 1983, Mr. Szypulski has held various financial accounting positions with Sara Lee, including Vice President–Controller, Assistant Corporate Controller, Director–Accounting Projects, and Manager-Accounting.

The following information is incorporated herein by reference to Sara Lee’s Proxy Statement under the headings indicated: information with respect to Sara Lee’s directors, under the heading “Election of Directors;” information regarding Sara Lee’s audit committee and its designation of an audit committee financial expert, under the heading “Meetings and Committees of the Board–Audit Committee;” and information regarding compliance with Section 16(a) of the Securities Exchange Act, under “Section 16(a) Beneficial Ownership Reporting Compliance.”

Code of Ethics

Sara Lee’s Global Business Standards, its written corporate code of business conduct and ethics, embodies Sara Lee’s long-standing history of promoting workplace human rights and requiring adherence to high standards of ethical conduct and business practices. The Global Business Standards are available on Sara Lee’s Web site at www.saralee.com under “Our Company-Global Business Practices.” All of Sara Lee’s officers, directors and employees, including its Chief Executive Officer, Chief Financial Officer and principal accounting officer, are required to comply with the Global Business Standards. If the Global Business Standards are amended, or if Sara Lee grants a waiver from a provision of the Global Business Standards to a Sara Lee executive officer or director, Sara Lee promptly will post such information on its Web site in accordance with SEC rules.

Item 11. Executive Compensation

The information set forth in the Proxy Statement under the headings “Director Compensation” and “Executive Compensation” is incorporated herein by reference; provided, however, that the Report of the Compensation and Employee Benefits Committee on Executive Compensation and the Performance Graph contained in the Proxy Statement are not incorporated herein by this reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information set forth in the Proxy Statement under the heading “Sara Lee Stock Ownership by Certain Beneficial Owners” is incorporated herein by reference. Security ownership by management as contained in the Proxy Statement under the heading “Sara Lee Stock Ownership by Directors and Executive Officers” is incorporated herein by reference. The information set forth in the Proxy Statement under the heading “Equity Compensation Plan Information Table” is incorporated herein by reference.

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Item 13. Certain Relationships and Related Transactions

The information set forth in the Proxy Statement under the heading “Executive Compensation—Retirement Agreements” is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

The information set forth in the Proxy Statement under the headings “Audit Fees” and “Audit Committee Pre-Approval Policies and Procedures” is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

The following Consolidated Financial Statements and related Notes, together with the Reports of Independent Registered Public Accounting Firm with respect thereto, which are contained in the Company’s 2005 Annual Report to Stockholders are incorporated herein:

(a)  1.    Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Income—Years ended June 28, 2003, July 3, 2004 and July 2, 2005

Consolidated Balance Sheets—June 28, 2003, July 3, 2004 and July 2, 2005

Consolidated Statements of Common Stockholders’ Equity—For the period June 29, 2002 to July 2, 2005

Consolidated Statements of Cash Flows—Years ended June 28, 2003, July 3, 2004 and July 2, 2005

Notes to Financial Statements

      2.    Financial Statement Schedules

The following Financial Statement Schedule, together with the Report of Independent Registered Public Accounting Firm with respect thereto, appears elsewhere in this Report and is incorporated herein by reference.

Report of Independent Registered Public Accounting Firm on Financial Statement Schedule

Schedule II—Valuation and Qualifying Accounts

      3.    Exhibits

A list of exhibits to this Report is set forth in the Exhibit Index appearing elsewhere in this Report and is incorporated herein by reference.

20

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Sara Lee Corporation has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

September 2, 2005

SARA LEE CORPORATION
By:	/s/    WAYNE R. SZYPULSKI
	Wayne R. Szypulski
	Senior Vice President, Controller
	(Principal Accounting Officer)

KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Wayne R. Szypulski and Brenda C. Barnes, and each of them, his/her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to act for him/her and in his/her name, place and stead, in any and all capabilities to sign the Annual Report on Form 10-K of Sara Lee Corporation for the fiscal year ending July 2, 2005, and any and all amendments thereto and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done himself.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Sara Lee Corporation and in the capacities indicated on September 2, 2005.

Signature	Title
/s/    C. STEVEN MCMILLAN C. Steven McMillan	Chairman of the Board and Director
/s/    BRENDA C. BARNES Brenda C. Barnes	President, Chief Executive Officer and Director (Principal Executive Officer)
/s/    L.M. (THEO) DE KOOL L.M. (Theo) de Kool	Executive Vice President and Chief Financial and Administrative Officer (Principal Financial Officer)
/s/    WAYNE R. SZYPULSKI Wayne R. Szypulski	Senior Vice President and Controller (Principal Accounting Officer)
/s/    J.T. BATTENBERG III J.T. Battenberg III	Director
/s/    CHARLES W. COKER Charles W. Coker	Director
/s/    JAMES S. CROWN James S. Crown	Director

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Signature	Title
/s/    WILLIE D. DAVIS Willie D. Davis	Director
/s/    VERNON E. JORDAN, JR. Vernon E. Jordan, Jr.	Director
/s/    LAURETTE T. KOELLNER Laurette T. Koellner	Director
/s/    CORNELIS J.A. VAN LEDE Cornelis J.A. van Lede	Director
/s/    JOAN D. MANLEY Joan D. Manley	Director
/s/    IAN M.G. PROSSER Ian M.G. Prosser	Director
/s/    ROZANNE L. RIDGWAY Rozanne L. Ridgway	Director
/s/    RICHARD L. THOMAS Richard L. Thomas	Director

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EXHIBIT INDEX

3. Exhibits

		Incorporation by Reference
(3a)	1. Articles of Restatement of Charter dated August 28, 2003	Exhibit 3(a) to Report on Form 10-K for Fiscal Year ended June 28, 2003.
(3b)	2. Amended Bylaws, dated August 28, 2003	Exhibit 3(b) to Report on Form 10-K for Fiscal Year ended June 28, 2003.
(4)	1. Rights Agreement, dated as of March 26, 1998 between Sara Lee Corporation and First Chicago Trust Company of New York, as rights agent.	Exhibit 4.1 to Report on Form 8-K dated May 15, 1998
	2. Amendment No. 1 to Rights Agreement, dated as of June 1, 2002	Exhibit 4.2 to Report on Form 10-K for Fiscal Year ended June 28, 2003
	3. Amendment No. 2 to Rights Agreement, dated as of March 31, 2005	Exhibit 10.1 to Report on Form 10-Q for Fiscal Quarter ended April 2, 2005
	4. Form of Floating Rate Note due 2003	Exhibit 4.1 to Current Report on Form 8-K dated September 24, 2001
	5. Form of 6 1/4% Notes due 2011	Exhibit 4.2 to Current Report on Form 8-K dated September 24, 2001

Sara Lee, by signing this Report, agrees to furnish the Securities and Exchange Commission, upon its request, a copy of any instrument which defines the rights of holders of long-term debt of Sara Lee and all of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed, and which authorizes a total amount of securities not in excess of 10% of the total assets of Sara Lee and its subsidiaries on a consolidated basis.

(10)	*1. 1981 Stock Option Plan, as amended	Exhibit 10(11) to Report on Form 10-K for Fiscal Year ended July 1, 1989
	*2. 1988 Non-Qualified Stock Option Plan, as amended	Exhibit 10(3) to Report on Form 10-K for Fiscal Year ended July 1, 1995
	*3. 1989 Incentive Stock Plan, as amended	Exhibit 10(4) to Report on Form 10-K for Fiscal Year ended June 28, 1997
	*4. Supplemental Benefit Plan, as amended	Exhibit 10(5) to Report on Form 10-K for Fiscal Year ended June 28, 1997
	*5. Performance-Based Annual Incentive Plan	Exhibit A to Proxy Statement dated September 20, 1995
	*6. 1995 Long-Term Incentive Stock Plan, as amended	Exhibit 10(16) to Report on Form 10-K for Fiscal Year ended June 28, 1997
	*7. 1995 Non-Employee Director Stock Plan, as amended	Exhibit 10(8) to Report on Form 10-K for Fiscal Year ended July 3, 1999
	*8. 1998 Long-Term Incentive Stock Plan	Exhibit A to Proxy Statement dated September 21, 1998
	*9. 2002 Long-Term Incentive Stock Plan	Exhibit A to Proxy Statement dated September 25, 2002
	*10. Executive Deferred Compensation Plan	Exhibit 10(12) to Report on Form 10-K for Fiscal Year ended July 3, 1999

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	Incorporation by Reference
*11. Second Amendment to Executive Deferred Compensation Plan	Exhibit 10(13) to Report on Form 10-K for Fiscal Year ended July 1, 2000
*12. FY 2004-06 Long Term Restricted Stock Unit Grant Program	Exhibit 10.13 to Report on Form 10-K for Fiscal Year ended July 3, 2004
*13. Non-Qualified Estate Builder Deferred Compensation Plan	Exhibit 10(17) to Report on Form 10-K for Fiscal Year ended June 29, 1985
*14. Severance Plans For Corporate Officers, as amended	Exhibit 10.15 to Report on Form 10-K for Fiscal Year ended July 3, 2004
*15. Employee Option & Share Plan For Employees in the Netherlands	Exhibit 10.24 to Report on Form 10-K for Fiscal Year ended June 29, 2002
*16. U.K. Savings Incentive Plan	Exhibit 10.18 to Report on Form 10-K for Fiscal Year ended June 28, 2003
*17. International Employee Stock Purchase Plan	Exhibit 10.26 to Report on Form 10-K for Fiscal Year ended June 29, 2002
*18. Share 2000 Global Stock Plan	Exhibit 10.27 to Report on Form 10-K for Fiscal Year ended June 29, 2002
*19. Employment Agreement dated January 1, 1996 between Adriaan Nühn and Sara Lee Corporation.	Exhibit 10.21 to Report on Form 10-K for Fiscal Year ended July 3, 2004
*20. Employment Agreement dated June 11, 1987 between Adriaan Nühn and Sara Lee/DE N.V.	Exhibit 10.22 to Report on Form 10-K for Fiscal Year ended July 3, 2004
*21. FY04-06 Executive Management Long-Term Incentive Program	Exhibit 10.23 to Report on Form 10-K for Fiscal Year ended July 3, 2004
*22. Executive Management Long-Term Incentive Program for Fiscal Years 2005-2007	Exhibit 10.1 to Report on Form 10-Q for Fiscal Quarter ended October 2, 2004
*23. Form of Grant Notice under Executive Management Long-Term Incentive Program	Exhibit 10.2 to Report on Form 10-Q for Fiscal Quarter ended October 2, 2004
*24. Long-Term Restricted Stock Unit Grant program for Fiscal Years 2005-2007	Exhibit 10.3 to Report on Form 10-Q for Fiscal Quarter ended October 2, 2004
*25. Form of Grant Notice under Long-Term Restricted Stock Unit Grant program	Exhibit 10.4 to Report on Form 10-Q for Fiscal Quarter ended October 2, 2004
*26. Terms of Performance Stock Unit Grant to C. Steven McMillan	Exhibit 10.5 to Report on Form 10-Q for Fiscal Quarter ended October 2, 2004
*27. Form of 1998 Long-Term Incentive Stock Plan Stock Option Grant Notice and Agreement	Exhibit 10.1 to Report on Form 10-Q for Fiscal Quarter ended January 1, 2005
*28. Annual Incentive Plan Program for Fiscal Year 2005	Exhibit 10.2 to Report on Form 10-Q for Fiscal Quarter ended January 1, 2005
*29. Retirement Agreement dated May 4, 2005 between Sara Lee Corporation and C. Steven McMillan	Exhibit 10.2 to Report on Form 10-Q for Fiscal Quarter ended April 2, 2005
*30. Amended and Restated Sara Lee Corporation 1999 Non-Employee Director Stock Plan

24

		Incorporation by Reference
	*31. Retention and Recognition Program Related to 2005 Company Reorganization
	*32. Retention & Recognition Program for Individuals at “C” Level and Below
	*33. Annual Incentive Plan Program description for Fiscal Year 2006
	*34. Long-Term Restricted Stock Unit Grant program for Fiscal Years 2006 – 2008
	*35. Form of Restricted Stock Unit Grant Notice & Agreement for FY 06-08 LTRSU
	*36. Form of 1998 Long-Term Incentive Stock Plan Stock Option Grant Notice and Agreement
(12)	1. Computation of Ratio of Earnings to Fixed Charges
(13)	Portions of Sara Lee’s 2004 Annual Report to Stockholders (only those portions that are expressly incorporated by reference in this Annual Report on Form 10-K)
(21)	List of Subsidiaries
(23)	Consent of PricewaterhouseCoopers LLP
(24)	Powers of Attorney (included on signature page to this Report)
(31)	1. Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
	2. Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
(32)	1. Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
	2. Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

*  Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.

25

Report of Independent Registered Public Accounting Firm on

Financial Statement Schedule

To the Board of Directors of Sara Lee Corporation:

Our audits of the consolidated financial statements, of management’s assessment of the effectiveness of internal control over financial reporting and of the effectiveness of internal control over financial reporting referred to in our report dated August 30, 2005 appearing in the 2005 Annual Report to Shareholders of Sara Lee Corporation (which report, consolidated financial statements and assessment are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP

Chicago, Illinois

August 30, 2005

SCHEDULE II

Sara Lee Corporation and Subsidiaries

VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended June 28, 2003, July 3, 2004 and July 2, 2005

	Balance at Beginning of Year		Provision Charged to Costs and Expenses		Write-offs (1) Allowances Taken			Other Additions (Deductions)			Balance at End of Year
For the Year Ended June 28, 2003
Allowances for bad debts	$	94	$	10	$	(21	)	$	7		$	90
Other receivable allowances		111		164		(146	)		(7	)		122
Total	$	205	$	174	$	(167	)	$	0		$	212
For the Year Ended July 3, 2004
Allowances for bad debts	$	90	$	13	$	(19	)	$	0		$	84
Other receivable allowances		122		192		(176	)		(1	)		137
Total	$	212	$	205	$	(195	)	$	(1	)	$	221
For the Year Ended July 2, 2005
Allowances for bad debts	$	84	$	6	$	(25	)	$	(3	)	$	62
Other receivable allowances		137		192		(202	)		(6	)		121
Total	$	221	$	198	$	(227	)	$	(9	)	$	183

(1) Net of collections on accounts previously written off.

EX-10.30

Exhibit 10.30

SARA LEE CORPORATION

1999 NON-EMPLOYEE DIRECTOR STOCK PLAN

(As Amended and Restated through June 30, 2005)

ARTICLE I PURPOSE OF THE PLAN

The purpose of the Sara Lee Corporation 1999 Non-Employee Director Stock Plan is to promote the long-term growth of Sara Lee Corporation by increasing the proprietary interest of Non-Employee Directors in Sara Lee Corporation and to attract and retain highly qualified and capable Non-Employee Directors. Notwithstanding any provision of the Plan to the contrary, amounts deferred under the Plan after December 31, 2004 (including Awards of Restricted Stock Units) are subject to the provisions of Section 409A of the Internal Revenue Code (the “Code”) and at all times the Plan as applied to those amounts shall be interpreted and administered so that it is consistent with such Code section.

ARTICLE II DEFINITIONS

Unless the context clearly indicates otherwise, the following terms shall have the following meanings:

2.1 “Annual Retainer” means the annual cash retainer fee payable by the Corporation to a Non-Employee Director for services as a director of the Corporation, as such amount may be changed from time to time.

2.2 “Award” means an award granted to a Non-Employee Director under the Plan in the form of Restricted Stock Units or Shares.

2.3 “Board” means the Board of Directors of Sara Lee Corporation.

2.4 “Committee Retainer” means the annual retainer fee payable by the Corporation to a Non-Employee Director for services as a member and/or as a chair of a Board committee, as such amounts may be changed from time to time. Fifty percent (50%) of the Committee Retainer shall be payable in the form of cash ( the “Committee Cash Retainer”) which is subject to the election provided in Article IX and fifty percent (50%) of the Committee Retainer shall be payable as Committee RSUs as provided in Section 8.1(c).

2.5 “Corporation” means Sara Lee Corporation.

2.6 “Deferral Account” means a bookkeeping account in the name of a Non-Employee Director who elects to defer, pursuant to the Grandfathered Deferral Program or the Deferral Program, all or a portion of an Annual Retainer, Committee Cash Retainer or an Award.

2.7 “Deferred Compensation Rate” means, with respect to any date, the rate of interest payable as of such date on Interest Accounts under subparagraph A-4(b) of the Grandfathered Deferral Program or subparagraph B-4(b) of the Deferral Program.

2.8 “Deferral Program” means the terms and conditions (which are described in Supplement B hereto) pursuant to which Non-Employee Directors may after December 31, 2004 defer the payment of Annual Retainers, Committee Cash Retainers and vested Awards.

2.9 “Fair Market Value” means, with respect to any date, the average between the highest and lowest sale prices per Share on the New York Stock Exchange Composite Transactions Tape on such date; provided that if there shall be no sales of Shares reported on such date, the Fair Market Value of a Share on such date shall be deemed to be equal to the average between the highest and lowest sale prices per Share on such Composite Tape for the last preceding date on which sales of Shares were reported.

2.10 “Grandfathered Deferral Program” means the terms and conditions that apply to amounts deferred under the Plan prior to January 1, 2005 as described in Supplement A hereto.

2.11 “Non-Employee Director” means a director of the Corporation who is not an employee of the Corporation or any subsidiary of the Corporation.

2.12 “Plan” means this Sara Lee Corporation 1999 Non-Employee Director Stock Plan (As Amended through June 30, 2005), and as further amended and restated from time to time.

2.13 “Restricted Stock Unit” means a restricted stock unit granted to a Non-Employee Director pursuant to Article VIII hereof.

2.14 “Restricted Stock Unit Grant Notice” means a written notice provided to a Non-Employee Director evidencing a grant of Restricted Stock Units and setting forth the basic terms and conditions of the award.

2.15 “Stock Award Date” means the date on which Shares are awarded to a Non-Employee Director pursuant to Article IX hereof.

2.16 “Shares” means shares of the Common Stock, par value $.01 per share, of the Corporation.

2.17 “Settlement Date” means the date that is six (6) months after the Non-Employee Director ceases to be a director of the Corporation.

ARTICLE III ADMINISTRATION OF THE PLAN

3.1 Administrator of the Plan. The Plan shall be administered by the Compensation and Employee Benefits Committee of the Board (“Committee”).

3.2 Authority of Committee. The Committee shall have full power and authority to: (i) interpret and construe the Plan and adopt such rules and regulations as it shall deem necessary and advisable to implement and administer the Plan and (ii) designate persons other than members of the Committee to carry out its responsibilities, subject to applicable law and such limitations, restrictions and conditions as it may prescribe, such determinations to be made in accordance with the Committee’s best business judgment as to the best interests of the Corporation and its stockholders and in accordance with the purposes of the Plan. The Committee may delegate administrative duties under the Plan to one or more agents, as it shall deem necessary or advisable.

3.3 Determinations of Committee. A majority of the Committee shall constitute a quorum at any meeting of the Committee, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or a meeting of the Committee by a written consent signed by all members of the Committee.

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3.4 Effect of Committee Determinations. No member of the Committee or the Board shall be personally liable for any action or determination made in good faith with respect to the Plan or any Award or to any settlement of any dispute between a Non-Employee Director and the Corporation. Any decision or action taken by the Committee or the Board with respect to an Award or the administration or interpretation of the Plan shall be conclusive and binding upon all persons.

ARTICLE IV AWARDS UNDER THE PLAN

Awards in the form of Restricted Stock Units shall be granted to Non-Employee Directors in accordance with Article VIII. Awards in the form of Shares may be granted to Non-Employee Directors in accordance with Article IX. Grants of Restricted Stock Units that are made under the Plan shall be evidenced by a Restricted Stock Unit Grant Notice.

ARTICLE V ELIGIBILITY

Non-Employee Directors of the Corporation shall be eligible to participate in the Plan in accordance with Articles VIII and IX.

ARTICLE VI SHARES SUBJECT TO THE PLAN

Subject to adjustment as provided in Article XII, the aggregate number of Shares that may be issued under the Plan is seven hundred thousand (700,000) Shares, plus one million one hundred fifty thousand (1,150,000) Shares that are subject to outstanding Awards under the Plan on June 27, 2002. To the extent that Shares subject to an outstanding Award are not issued by reason of the expiration, termination, cancellation or forfeiture of such Award, or by reason of the tendering or withholding of Shares to satisfy all or a portion of the tax withholding obligations relating to an Award, then such Shares shall again be available under the Plan.

ARTICLE VII TRANSFERABILITY OF RESTRICTED STOCK UNITS

Restricted Stock Units granted under the Plan shall not be transferable or assignable other than by will or the laws of descent and distribution.

ARTICLE VIII RESTRICTED STOCK UNIT AWARDS

Each Non-Employee Director shall be granted Restricted Stock Units, subject to Article VI and to the following terms and conditions:

8.1 Grant of Restricted Stock Units. (a) On the first business day of each fiscal year of the Corporation (the “Annual Grant Date”), beginning with fiscal year 2003, each person who is a Non-Employee Director on such Annual Grant Date shall be granted a whole number of Restricted Stock Units determined by dividing $75,000 by the Fair Market Value of a Share on the Annual Grant Date; provided, however, that if on any Annual Grant Date it is known to the Committee that any Non-Employee Director will not stand for re-election at the next succeeding annual meeting of stockholders, such Non-Employee Director shall be granted, in lieu of the grant described above, a whole number of Restricted Stock Units determined by (a) dividing $75,000 by the Fair Market Value of a Share on the Annual Grant Date and (b) multiplying the quotient by one-third ( ¹/3); and provided further that if any Non-Employee Director whose grant of Restricted Stock Units on the immediately preceding Annual Grant Date was not prorated in accordance with the preceding proviso does not stand for re-election at an annual meeting of stockholders for a reason other than death, disability or normal retirement, or stands for re-election at such annual meeting of stockholders but is not re-elected by the Corporation’s stockholders,

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such Non-Employee Director shall forfeit a number of the Restricted Stock Units granted to the Non-Employee Director on the immediately preceding Annual Grant Date under this Section 8.1(a) determined by multiplying the total number of Restricted Stock Units granted to the Non-Employee Director on such immediately preceding Annual Grant Date under this Section 8.1(a) by two-thirds ( ²/3rds). In determining the number of Restricted Stock Units under this Section 8.1(a), all calculations shall be rounded up to the nearest whole number of Shares.

(b) A Non-Employee Director who is first elected or begins to serve as a Non-Employee Director between Annual Grant Dates shall be granted, on the date that such person is first elected or begins to serve as a Non-Employee Director, a number of Restricted Stock Units determined by (i) dividing $75,000 by the Fair Market Value of a Share on the date of grant (ii) multiplying the quotient by a fraction the numerator of which is the number of whole or partial months between the date of grant and the next Annual Grant Date and the denominator of which is 12 and (iii) rounding the result up the nearest whole number of Shares.

(c) On the Annual Grant Date, in addition to the Restricted Stock Units granted under Section 8.1(a) above, each Non-Employee Director who chairs or serves on a Board committee for which a Committee Retainer is payable shall be granted a whole number of Restricted Stock Units determined by dividing an amount equal to 50% of the Non-Employee Director’s Committee Retainer by the Fair Market Value of a Share on the Annual Grant Date (such Restricted Stock Units, the “Committee RSUs”); provided, however, that if on any Annual Grant Date it is known to the Committee that any Non-Employee Director will cease to serve in a Board committee position for which a Committee Retainer is payable as of the time of the next succeeding annual meeting of stockholders, such Non-Employee Director shall be granted, in lieu of the grant described above, a whole number of Restricted Stock Units determined by multiplying the number of Committee RSUs the Non-Employee Director would have been entitled to on such Annual Grant Date assuming he or she would continue to serve until the next succeeding Annual Grant Date by one-third ( ¹/3); and provided further that if any Non-Employee Director whose grant of Committee RSUs on the immediately preceding Annual Grant Date was not prorated in accordance with the preceding proviso ceases to serve in a Board committee position for which a Committee Retainer is payable as of the time of the next annual meeting of stockholders for a reason other than death, disability or normal retirement, such Non-Employee Director shall forfeit a number of the Committee RSUs granted to the Non-Employee Director on the immediately preceding Annual Grant Date under this Section 8.1(c) determined by multiplying the total number of Committee RSUs granted to the Non-Employee Director under this Section 8.1(c) on such immediately preceding Annual Grant Date by two-thirds ( ²/3rds). In determining the number of Restricted Stock Units under this Section 8.1(c), all calculations shall be rounded up to the nearest whole number of Shares.

(d) If the amount of a Non-Employee Director’s Committee Retainer increases between Annual Grant Dates, the Non-Employee Director shall be granted, on the date that such person’s Committee Retainer increases, a number of Restricted Stock Units determined by (i) multiplying the amount by which the Committee Retainer increases by 50%, (ii) dividing the product by the Fair Market Value of a Share on the date of grant, (iii) multiplying the quotient by a fraction the numerator of which is the number of whole or partial months between the date of grant and the next Annual Grant Date and the denominator of which is 12 and (iv) rounding the result up the nearest whole number of Shares.

(e) If the amount of a Non-Employee Director’s Committee Retainer decreases between Annual Grant Dates (other than pursuant to 8.2(c) above), the Non-Employee Director shall forfeit, on the date that such person’s Committee Retainer decreases, a number of Restricted Stock Units determined by (i) multiplying the number of Committee RSUs that were granted to such Non-Employee Director on the immediately preceding Annual Grant Date by a fraction the numerator of which is the number of whole or partial months between the date that such person’s Committee Retainer decreases and the next Annual

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Grant Date and the denominator of which is 12 and (iii) rounding the result up the nearest whole number of Shares.

8.2 Vesting. (a) Except as provided in Section 8.2(b), 8.3, 8.5 and 9.3 and Article 10, Restricted Stock Units granted on or after July 1, 2005 shall vest in full on the date immediately preceding the one year anniversary of the Annual Grant Date as of which such Restricted Stock Units were awarded.

(b) Notwithstanding Section 8.2(a), if a Non-Employee Director ceases to be a director of the Corporation due to death, disability or normal retirement, all Restricted Stock Units held by such Non-Employee Director shall vest in full on the date on which such Non-Employee Director ceases to be a director of the Corporation.

8.3 Payment of Restricted Stock Units. Restricted Stock Units granted on or after July 1, 2005 shall be paid on the Non-Employee Director’s Settlement Date. With respect to Awards granted under the Plan prior to July 1, 2005, a Non-Employee Director can elect to defer payment of all or any portion of such Awards provided such elections are in writing, on such forms as the Committee may prescribe, and in accordance with the terms and conditions of the Plan at the time of the deferral. The payment of any Awards deferred under the Plan prior to January 1, 2005 shall be governed by the provisions of Supplement A. The payment of any Awards deferred under the Plan after January 1, 2005 shall be governed by the provisions of Supplement B.

8.4 Dividend Equivalents. Restricted Stock Units shall accrue dividend equivalents at the same rate and at the same times as cash dividends are paid on Shares. Such dividend equivalents shall be retained by the Corporation on behalf of the Non-Employee Director and shall be paid in cash pursuant to Section 8.6 hereof, together with interest from the date of accrual to the date of payment at the Deferred Compensation Rate; provided that no interest shall be paid on any dividend equivalents accrued on Restricted Stock Units awarded after January 1, 2005.

8.5 Forfeiture. If a Non-Employee Director is determined, by a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board (excluding the Non-Employee Director whose conduct is in question), to have (i) acted in a manner detrimental to the Corporation’s best interests, or (ii) failed to act and such failure to act was detrimental to the Corporation’s best interests, each Restricted Stock Unit held by such Non-Employee Director shall, as of the date of the adoption of such resolution, be forfeited and all rights of the Non-Employee Director to or with respect to such Restricted Stock Unit shall terminate. No action or failure to act shall be deemed by the Board to be detrimental to the Corporation’s best interests unless such action was taken in bad faith or without reasonable belief that such action was in the best interests of the Company.

8.6 Settlement. Subject to Section 8.3 and Supplements A and B with respect to deferred Awards, as soon as practical after a Non-Employee Director’s Settlement Date the Corporation shall (i) issue to such Non-Employee Director one Share for each Restricted Stock Unit awarded to the Non-Employee Director and (ii) pay to such Non-Employee Director a cash amount equal to the amount of all dividend equivalents accrued with respect to such Restricted Stock Unit, together with interest, if any, accrued thereon pursuant to Section 8.4 hereof. Upon the satisfaction of the Corporation’s obligations under the first sentence of this Section 8.6, such Restricted Stock Unit shall be cancelled, such cancellation to be effective as of the Settlement Date.

8.7 No Stockholder Rights. Restricted Stock Units shall not confer upon the holder thereof any rights as a stockholder of the Company.

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ARTICLE IX ELECTION TO RECEIVE SHARES OR RESTRICTED STOCK UNITS

Each Non-Employee Director may elect to receive Shares or Restricted Stock Units in lieu of all or a portion of such Non-Employee Director’s Annual Retainer or Committee Cash Retainer, subject to Article VI and the following terms and conditions:

9.1 Grant of Shares. On the Annual Grant Date, Shares shall be granted to each Non-Employee Director who, prior to the Annual Grant Date, files with the Committee or its designee a written election to receive Shares in lieu of all or a portion of such Non-Employee Director’s Annual Retainer or Committee Cash Retainer for the one-year period beginning on the Annual Grant Date next following the date of the written election. An election pursuant to the first sentence of this Section 9.1 shall be irrevocable on and after the Annual Grant Date. In addition, Shares shall be granted to any Non-Employee Director who, within such period as the Committee may prescribe after the date on which such Non-Employee Director is first elected or begins to serve as a Non-Employee Director, files with the Committee or its designee a written election to receive Shares in lieu of all or a portion of the Annual Retainer, if any, that such Non-Employee Director is entitled to receive upon election as a Non-Employee Director as well as all or any portion of the Committee Cash Retainer to be paid during the year. Shares shall be granted to the Non-Employee Director after the date the Committee or its designee receives notice of such an election. An election pursuant to the third sentence of this Section 9.1 shall be irrevocable.

9.2 Number of Shares. The number of Shares granted pursuant to this Article shall be the number of Shares equal to (i) the portion of the Annual Retainer or Committee Cash Retainer which the Non-Employee Director has elected pursuant to Section 9.1 to be payable in Shares, divided by (ii) the Fair Market Value per Share on the Stock Award Date (iii) with the product rounded up to the nearest whole number of Shares. As soon as practical following an award of Shares to a Non-Employee Director, the stock certificate representing such Shares shall be issued and delivered to the Non-Employee Director, whereupon the Non-Employee Director shall become a stockholder of the Corporation with respect to such Shares and shall be entitled to vote the Shares.

9.3 Deferral of Annual Retainer or Committee Cash Retainer. A Non-Employee Director may elect to defer payment of all or any portion of such Non-Employee Director’s Annual Retainer or Committee Cash Retainer provided that no election shall be allowed for the Annual Retainer or Committee Cash Retainer with respect to the Corporation’s fiscal year beginning on July 3, 2005. All deferrals must be in writing, on such forms as the Committee may prescribe, and must be made in accordance with the terms and conditions of the Plan including the terms and conditions of Supplements A and B as applicable.

9.4 Conversion of Annual Retainer or Committee Cash Retainer to Restricted Stock Units. A Non-Employee Director may elect to convert all or any portion of an Annual Retainer or Committee Cash Retainer into Restricted Stock Units equal in number to (i) the portion of the Annual Retainer or Committee Cash Retainer which the Non-Employee Director has elected to convert pursuant to this Section 9.4 divided by (ii) the Fair Market Value per Share on the Stock Award Date (iii) with the product rounded up to the nearest whole number of Shares. A Non-Employee Director’s election to convert all or any portion of an Annual Retainer or Committee Cash Retainer into Restricted Stock Units shall be in writing, on such forms and at such times as the Committee may prescribe provided that any election must be made not later than the December 31 of the calendar year preceding the calendar year in which the Annual Retainer or Committee Cash Retainer would otherwise be paid. Restricted Stock Units resulting from the conversion of an Annual Retainer or Committee Cash Retainer shall be subject to the adjustments applicable to Restricted Stock Units awarded under Section 8.1(a) above, shall not be subject

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to the vesting requirements of Section 8.2. and shall be distributed on the Non-Employee Director’s Settlement Date as provided in Section 8.3.

ARTICLE X CHANGE OF CONTROL

10.1 Effect of Change of Control. Upon the occurrence of a “Change of Control” event, as defined below, any and all outstanding Restricted Stock Units shall become immediately vested and payable (including all awards subject to Section 8.3 above that vested on or after January 1, 2005 and all Restricted Stock Units subject to Section 9.4 above that were converted from an Annual Retainer or Committee Cash Retainer) and any and all stock certificates representing Shares awarded to a Non-Employee Director pursuant to Section 9.1 promptly shall be transferred to such Non-Employee Director.

10.2 Definition of Change of Control. A “Change of Control” shall occur:

(a) upon the acquisition by an individual, entity or group, including any “person” within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities and Exchange Act of 1934 (the “Exchange Act”) (a “Person”), during any 12-month period of beneficial ownership (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of 35% or more of the combined voting power of the then outstanding capital stock of the Corporation that by its terms may be voted on all matters submitted to stockholders of the Corporation generally (such capital stock, “Voting Stock”); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Corporation (excluding any acquisition resulting from the exercise of a conversion or exchange privilege in respect of outstanding convertible or exchangeable securities unless such outstanding convertible or exchangeable securities were acquired directly from the Corporation), (ii) any acquisition by the Corporation, (iii) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation, or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation involving the Corporation, if, immediately after such reorganization, merger or consolidation, each of the conditions described in clauses (i), (ii) and (iii) of subsection (b) of this Section 10.2 shall be satisfied; and provided further that, for purposes of clause (ii) of this subsection (a), if any Person (other than the Corporation or any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation) shall become the beneficial owner of 50% or more of the Voting Stock by reason of an acquisition by the Corporation and such Person was the beneficial owner of less than 35% of the Voting Stock prior to such acquisition such additional beneficial ownership shall constitute a Change of Control; or

(b) upon the consummation of a reorganization, merger or consolidation of the Corporation, or a sale or other disposition of all or substantially all of the Corporation’s property and assets (meaning property and assets of the Corporation having a total gross fair market value equal to or greater than 40 percent of the total gross fair market value of all of the property and assets of the Corporation); excluding, however, (A) any such reorganization, merger, consolidation, sale or other disposition with respect to which, immediately after consummation of such transaction, (i) all or substantially all of the beneficial owners of the Voting Stock of the Corporation outstanding immediately prior to such transaction continue to beneficially own, directly or indirectly (either by remaining outstanding or by being converted into voting securities of the entity resulting from such transaction), more than 50% of the combined voting power of the voting securities of the entity resulting from such transaction (including, without limitation, the Corporation or an entity which as a result of such transaction owns the Corporation or all or substantially all of the Corporation’s property or assets, directly or indirectly) (the “Resulting Entity”) outstanding immediately after such transaction, in substantially the same proportions relative to each other as their ownership immediately prior to such transaction, and (ii) no Person (other than any Person

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that beneficially owned, immediately prior to such reorganization, merger, consolidation, sale or other disposition, directly or indirectly, Voting Stock representing 35% or more of the combined voting power of the Corporation’s then outstanding securities) beneficially owns, directly or indirectly, 35% or more of the combined voting power of the then outstanding securities of the Resulting Entity, and (iii) at least a majority of the members of the board of directors of the entity resulting from such transaction were Continuing Directors of the Corporation at the time of the execution of the initial agreement or action of the Board authorizing such reorganization, merger, consolidation, sale or other disposition and (B) any transfer of all or substantially all of the Corporation’s property and assets to any person, group or entity that is considered to be controlled by the stockholders of the Corporation immediately after the transfer for purposes of Section 409A(a)(2)(A)(v) of the Internal Revenue Code of 1986, as amended (the “Code”), or

(c) upon the consummation of a plan of complete liquidation or dissolution of the Corporation; or

(d) when those individuals who, immediately after the 2002 annual meeting of stockholders of the Corporation, constitute the Board (the “Continuing Directors”) cease for any reason to constitute at least a majority of such Board; provided, however, that any individual who becomes a director of the Corporation subsequent to the 2002 annual meeting of stockholders of the Corporation whose election, or nomination for election by the Corporation’s stockholders, was approved by the vote of at least a majority of the Continuing Directors then comprising the Board (or by the nominating committee of the Board, if such committee is comprised of Continuing Directors and has such authority) shall be deemed to have been a Continuing Director; and provided further, that no individual shall be deemed to be a Continuing Director if such individual initially was elected as a director of the Corporation as a result of (A) an actual or threatened solicitation by a Person (other than the Board) made for the purpose of opposing a solicitation by the Board with respect to the election or removal of directors, or (B) any other actual or threatened solicitation of proxies or consents by or on behalf of any Person (other than the Board).

For purposes of this Section 10.2, persons will not be considered to be acting as a group solely because they purchase or own stock of the same corporation at the same time or as a result of the same public offering. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similarly business transaction with the Corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock or similar transaction, such stockholder is considered to be acting as a group with other stockholders in a corporation only with respect to the ownership in that corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation. Further, stock ownership shall be determined in accordance with Section 318(a) of the Code and the regulations thereunder.

ARTICLE XI AMENDMENT AND TERMINATION

The Board may amend the Plan from time to time or terminate the Plan at any time and may unilaterally modify the terms and conditions of an outstanding Award or an election under the Grandfathered Deferral Program or the Deferral Program as necessary, including revoking an election entirely, to reflect changes in applicable law.

ARTICLE XII ADJUSTMENT PROVISIONS

In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in

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capitalization or event, or any distribution to holders of Shares other than a regular cash dividend, the number, terms and conditions of the Restricted Stock Units subject to outstanding Awards, the number of Shares subject to the Plan pursuant to Article VI and the number of Share equivalents in the Share Equivalent Account under the Deferral Program shall be appropriately adjusted by the Committee. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive.

ARTICLE XIII FOREIGN DIRECTORS

Without amending the Plan, Awards granted to Non-Employee Directors who are foreign nationals may have such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to foster and promote achievement of the purposes of the Plan and, in furtherance of such purposes, the Committee may make such modifications, amendments, procedures, subplans and the like as may be necessary or advisable to comply with provisions of laws in other countries or jurisdictions in which the Corporation or its subsidiaries operate or have Non-Employee Directors.

ARTICLE XIV EFFECTIVE DATE AND TERM OF PLAN

The Plan shall be submitted to the stockholders of the Corporation for approval and, if approved by a majority of all the votes cast at the 2002 annual meeting of stockholders, shall become effective as of June 27, 2002, the date of approval by the Board (the “Effective Date”). If stockholder approval is not obtained at the 2002 annual meeting of stockholders, the Plan, in the form approved by stockholders at the 1999 annual meeting of stockholders, shall continue in full force and effect and all grants of Restricted Stock Units and Shares hereunder shall be null and void. The Plan shall terminate on June 30, 2012, unless terminated earlier by the Board.

As amended and restated by the Board on June 30, 2005.

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SUPPLEMENT A

GRANDFATHERED DEFERRAL PROGRAM

A-1 Purpose. The purpose of this Supplement A to the Sara Lee Corporation 1999 Non-Employee Director Stock Plan is to provide Non-Employee Directors with the opportunity to defer the payment of their Annual Retainer, Committee Cash Retainer and/or Awards under the Plan. The terms of this Supplement A replace the Non-Qualified Deferred Compensation Plan for Outside Directors of Sara Lee Corporation which was approved by the Board on August 27, 1992 and subsequently amended (the “Former Plan”) and apply to Annual Retainers and vested Awards that were deferred prior to January 1, 2005. The deferral program under this Supplement A (the “Grandfathered Deferral Program”) shall be administered on the basis of the calendar year (the “Program Year”).

A-2 Rules for Deferral Elections. All Non-Employee Directors who made deferrals hereunder prior to January 1, 2005 and any individual who was a participant in the Former Plan as of June 27, 2002 shall be considered a participant in the Grandfathered Deferral Program. Prior to January 1, 2005 any Eligible Director could make irrevocable elections to defer receipt of all or any portion not less than 25 percent of his Annual Retainer and/or Committee Cash Retainer or all or any portion not less than 25 percent of any Award (each such election is referred to herein as a “Deferral Election” and the amount deferred pursuant to such an election the “Deferral”) for a Program Year in accordance with the rules set forth below.

(a) A Non-Employee Director shall be eligible to make a Deferral Election only if he is an active member of the Board, or has been elected to the Board the date such election is made.

(b) For a Program Year, a Non-Employee Director may make no more than one Deferral Election for each Award and such number of Deferral Elections with respect to the Non-Employee Director’s Annual Retainer and/or Committee Cash Retainer as the Committee may prescribe.

(c) All Deferral Elections must be made in writing on such forms as the Committee may prescribe and must be received by the Committee no later than the date specified by the Committee. In no event will the date specified by the Committee with respect to an Award be later than the end of the Program Year preceding the Program Year in which the Award vests. Any Deferral Election with respect to a Non-Employee Director’s Annual Retainer or Committee Cash Retainer shall only apply to that portion of the Non-Employee Director’s Annual Retainer or Committee Cash Retainer remaining to be paid for services to be rendered after the date the Deferral Election is made.

(d) As part of each Deferral Election, the Non-Employee Director must specify the date on which the Deferral will be paid (a “Distribution Date”). The Distribution Dates specified in an Non-Employee Director’s Deferral Elections may, but need not necessarily, be the same for all Deferrals. Except as provided in subsection (f) below, each Distribution Date is irrevocable and shall apply only to that portion of the Non-Employee Director’s Deferral Account which is attributable to the Deferral.

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(e) The Distribution Date selected by a Non-Employee Director shall not be earlier than the January 1 immediately following the first anniversary of the date on which the Deferral Election is made.

(f) A Non-Employee Director may make an irrevocable election to extend a Distribution Date (a “Re-Deferral Election”); provided, that no Re-Deferral Election shall be effective unless (i) the Committee receives the election prior to the December 1 of the Program Year preceding the Program Year in which the Distribution Date to be changed occurs, and (ii) the new Distribution Date is not earlier than the January 1 immediately following the first anniversary of the date the Re-Deferral Election is made. All Re-Deferral Elections must be made in writing on such forms and pursuant to such rules as the Committee may prescribe.

(g) As part of each Deferral Election, a Non-Employee Director must elect the form in which the Deferral will be paid beginning on the selected Distribution Date. The Deferral may be paid in a single lump sum or in substantially equal annual installments over a period not exceeding ten years as provided under paragraph A-6. Except as provided in paragraph A-6, a Non-Employee Director’s election as to the form of payment shall be irrevocable. If the Non-Employee Director elects an installment method of payment the Distribution Date must be January 1.

(h) As part of each Deferral Election, a Non-Employee Director must elect the investment alternatives that shall apply to the Deferral in accordance with paragraphs A-4 and A-5.

(i) A Deferral Election shall be irrevocable; provided, that if the Committee determines that a Non-Employee Director has an Unforeseeable Financial Emergency (as defined in paragraph A-10), then the Non-Employee Director’s Deferral Elections then in effect shall be revoked with respect to all amounts not previously deferred.

A-3 Deferral Accounts. All amounts deferred pursuant to a Non-Employee Director’s Deferral Elections under the Grandfathered Deferral Program shall be allocated to a bookkeeping account in the name of the Non-Employee Director (a “Deferral Account”) and the Committee shall maintain a separate subaccount under a Non-Employee Director’s Deferral Account for each Deferral. Deferrals shall be credited to the Deferral Account as of the Deferral Crediting Date coinciding with or next following the date on which, in the absence of a Deferral Election, the Non-Employee Director would otherwise have received the Deferral. A “Deferral Crediting Date” shall mean the business day coinciding with or next following the 15th day of each calendar month and the business day coinciding with or next following the last day of each calendar month. A Non-Employee Director shall be fully vested at all times in the balance of his Deferral Account.

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A-4 Investment Alternatives. A Non-Employee Director must make an investment election at the time of each Deferral Election. The investment election must be made in writing on such forms and pursuant to such rules as the Committee may prescribe, subject to paragraph A-5, and shall designate the portion of the Deferral which is to be treated as invested in each investment alternative. The two investment alternatives shall be as follows:

(a) Share Equivalent Account. Under the Share Equivalent Account, the value of the Non-Employee Director’s Deferral shall be determined as if the Deferral were invested in Shares as of the Deferral Crediting Date. If payment of Shares or Restricted Stock Units is deferred, the number of Share equivalents to be credited to the Non-Employee Director’s Deferral Account and appropriate subaccounts on each Deferral Crediting Date shall equal the number of Shares or Restricted Stock Units deferred. If payment of cash is deferred, the number of Share equivalents to be credited to the Non-Employee Director’s Deferral Account and appropriate subaccounts on each Deferral Crediting Date shall be determined by dividing the Deferral to be “invested” on that date by the Fair Market Value of a Share on that date. Fractional Share equivalents will be computed to two decimal places. An amount equal to the number of Share equivalents multiplied by the dividend paid on a Share on each dividend payment date shall be credited to the Non-Employee Director’s Deferral Account and appropriate subaccount as of the Deferral Crediting Date coincident with or next following the dividend payment date and “invested” in additional Share equivalents as though such dividend credits were a Deferral. The number of Shares to be paid to a Non-Employee Director on a Distribution Date shall be equal to the number of Share equivalents accumulated in the Share Equivalent Account on the Distribution Date divided by the total of the payments to be made. All payments from the Share Equivalent Account shall be made in whole Shares with fractional Shares distributed in cash.

(b) Interest Account. Under the Interest Account, interest will be credited to the Non-Employee Director’s Deferral Account as of the business day coinciding with or next following each June 30 and December 31 (a “Valuation Date”) and on the date the final payment of a Deferral is to be made based on the balance in the Non-Employee Director’s Deferral Account deemed invested in the Interest Account on the Valuation Date or such final payment date. The rate of interest to be credited for a Plan Year will be set at the beginning of each Program Year and will equal the cost to the Corporation of issuing five-year maturity debt or, in the event such cost is determined not to satisfy the independence criteria under Section 409A of the Code and the guidance issued thereunder, such other independently established interest rate that the Corporation elects to use that satisfies such independence criteria. If installment payments are elected, the amount to be paid to the Non-Employee Director on a Distribution Date shall be determined as follows: the amount of the principal payment of each installment shall be determined by dividing the current principal balance by the number of remaining installment payments and the amount of the interest payment shall be determined by dividing the current interest balance by the number of remaining installment payments. All payments from the Interest Account shall be made in cash.

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A-5 Investment Elections and Changes. A Non-Employee Director’s investment elections shall be subject to the following rules:

(a) With respect to Annual Retainer or Committee Retainer payments that would have been paid in the form of cash, if the Non-Employee Director fails to make an investment election with respect to a Deferral, the Deferral shall be deemed to be invested in the Interest Account.

(b) Any Deferral attributable to an Award or an Annual Retainer payable in the form of Shares, restricted or otherwise, shall automatically be deemed to be invested in the Share Equivalent Account.

(c) All investments in the Share Equivalent Account shall be irrevocable.

(d) A Non-Employee Director may elect to transfer amounts invested in the Interest Account to the Share Equivalent Account as of any Valuation Date by filing an investment change election with the Committee prior to the Valuation Date the change is to become effective. The amount elected to be transferred to the Share Equivalent Account shall be treated as invested in Share equivalents as of the Valuation Date and the number of Share equivalents to be credited to the Non-Employee Director’s Deferral Account and appropriate subaccounts as of the Valuation Date shall be determined by dividing the amount to be transferred by the Fair Market Value on such Valuation Date.

(e) Until invested as of the Deferral Crediting Date in either the Interest Account or Share Equivalent Account, a Non-Employee Director’s Deferral shall be credited with interest in such amount as the Committee may determine.

A-6 Time and Method of Payment. Payment of a Non-Employee Director’s Deferral shall be made in a single lump sum or shall commence in installments as elected by the Non-Employee Director in the Deferral Election. A Non-Employee Director may make a one-time election after the original Deferral Election to change the method of payment elected by the Non-Employee Director; provided, that such election shall not be effective unless the election to change the method of payment is received by the Committee prior to the December 1 of the Program Year preceding the Program Year in which the Distribution Date specified in the original Deferral Election occurs. If a Non-Employee Director’s Deferral Account is payable in a single lump sum, the payment shall be made as soon as practicable following the Distribution Date but not later than 30 days following the Distribution Date. If a Non-Employee Director’s Deferral Account is payable in installment payments, then the Non-Employee Director’s Deferral Account shall be paid in substantially equal annual installments over the period as elected by the Non-Employee Director in the Deferral Election commencing as soon as practicable following the Distribution Date but not later than 30 days following the Distribution Date.

A-7 Payment Upon Death of a Non-Employee Director. In the event a Non-Employee Director dies before all amounts credited to his Deferral Account have been paid, payment of the Non-Employee Director’s Deferral Account shall be made or shall commence in the form of payment elected by the Non-Employee Director’s Beneficiary (as defined in paragraph A-8) or the Executor/Executrix of the Non-Employee Director’s estate; provided, that the request is made in writing within 180 days of the Non-Employee Director’s death. If such a request is not made, the deceased Non-Employee Director’s Deferrals will be paid pursuant to the Deferral Elections and the normal provisions of this Supplement A.

A-8 Beneficiary. A Non-Employee Director’s Beneficiary shall mean the individual(s) or entity designated by the Non-Employee Director to receive the balance of the Non-Employee

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Director’s Deferral Account in the event of the Non-Employee Director’s death prior to the payment of his entire Deferral Account. To be effective, any Beneficiary designation shall be filed in writing with the Committee. A Non-Employee Director may revoke an existing Beneficiary designation by filing another written Beneficiary designation with the Committee. The latest Beneficiary designation received by the Committee shall be controlling. If no Beneficiary is named by a Non-Employee Director or if he survives all of his named Beneficiaries, the Deferral Account shall be paid in the following order of precedence:

(1) the Non-Employee Director’s spouse;

(2) the Non-Employee Director’s children (including adopted children), per stirpes; or

(3) the Non-Employee Director’s estate.

A-9 Form of Payment. The payment of that portion of a Deferral Account deemed to be invested in the Interest Account shall be made in cash. The distribution of that portion of a Deferral Account deemed to be invested in the Share Equivalent Account shall be distributed in whole Shares with fractional shares distributed in cash.

A-10 Unforeseeable Financial Emergency. If the Committee or its designee determines that a Non-Employee Director has incurred an Unforeseeable Financial Emergency (as defined below), the Non-Employee Director may withdraw in cash and/or Shares the portion of the balance of his Deferral Account needed to satisfy the Unforeseeable Financial Emergency, to the extent that the Unforeseeable Financial Emergency may not be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Non-Employee Director’s assets, to the extent the liquidation of such assets would not itself cause severe financial hardship. An “Unforeseeable Financial Emergency” is a severe financial hardship to the Non-Employee Director resulting from (i) a sudden and unexpected illness or accident of the Non-Employee Director or of a dependent of the Non-Employee Director; (ii) loss of the Non-Employee Director’s property due to casualty; or (iii) such other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Non-Employee Director as determined by the Committee. A withdrawal on account of an Unforeseeable Financial Emergency shall be paid as soon as possible following the date on which the withdrawal is approved.

A-11 Funding. Benefits payable under the Grandfathered Deferral Program to any Non-Employee Director shall be paid directly by the Corporation. The Corporation shall not be required to fund, or otherwise segregate assets to be used for payment of benefits under the Grandfathered Deferral Program. Notwithstanding the foregoing, the Corporation, in the discretion of the Committee, may maintain one or more grantor trusts (“Trust”) to hold assets to be used for payment of benefits under the Grandfathered Deferral Program. The assets of the Trust shall remain the assets of the Corporation subject to the claims of its general creditors. Any payments by a Trust of benefits provided to a Non-Employee Director under the Grandfathered Deferral Program shall be considered payment by the Corporation and shall discharge the Corporation of any further liability under the Grandfathered Deferral Program for such payments.

A-12 Interests Not Transferable. No benefit payable at any time under the Grandfathered Deferral Program shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, or other legal process, or encumbrance of any kind. Any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any such benefits, whether currently or thereafter payable, shall be void. No person shall, in any manner, be liable for or subject to the debts or liabilities of any person entitled to such benefits. If any person shall attempt to, or shall alienate, sell, transfer, assign, pledge or otherwise encumber his benefits under the Grandfathered Deferral Program, or if by any reason of his

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bankruptcy or other event happening at any time, such benefits would devolve upon any other person or would not be enjoyed by the person entitled thereto under the Grandfathered Deferral Program, then the Committee, in its discretion, may terminate the interest in any such benefits of the person entitled thereto under the Grandfathered Deferral Program and hold or apply them for or to the benefit of such person entitled thereto under the Grandfathered Deferral Program or his spouse, children or other dependents, or any of them, in such manner as the Committee may deem proper.

A-13 Forfeitures and Unclaimed Amounts. Unclaimed amounts shall consist of the amounts of the Deferral Account of a Non-Employee Director that are not distributed because of the Committee’s inability, after a reasonable search, to locate a Non-Employee Director or his Beneficiary, as applicable, within a period of two (2) years after the Distribution Date upon which the payment of any benefits becomes due. Unclaimed amounts shall be forfeited at the end of such two-year period. These forfeitures will reduce the obligations of the Corporation under the Grandfathered Deferral Program and the Non-Employee Director or Beneficiary, as applicable, shall have no further right to his Deferral Account.

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SUPPLEMENT B

DEFERRAL PROGRAM

B-1 Purpose. The purpose of this Supplement B to the Sara Lee Corporation 1999 Non-Employee Director Stock Plan is to provide Non-Employee Directors with the opportunity to defer the payment of (i) Awards granted prior to July 1, 2005 that vest on or after January 1, 2005 and (ii) Annual Retainers and/or Committee Cash Retainer payable on and after January 1, 2006 in compliance with the provisions of Section 409A of the Internal Revenue Code. The deferral program under this Supplement B (the “Deferral Program”) shall be administered on the basis of the calendar year (the “Program Year”).

B-2 Rules for Deferral and Re-Deferral Elections. All Non-Employee Directors shall be eligible to participate in the Deferral Program. Any Eligible Director may make irrevocable elections to defer receipt of all or any portion not less than 25 percent of his Annual Retainer and/or Committee Cash Retainer (each such election shall be referred to as a “Deferral Election”) and all or any portion not less than 25 percent of any Award granted under the Plan prior to July 1, 2005 that has not vested (an “Award Deferral Election”)(any amounts deferred pursuant to such elections is referred to as a “Deferral”) for a Program Year in accordance with the rules set forth below.

(a) A Non-Employee Director shall be eligible to make a Deferral or Award Deferral Election only if he is an active member of the Board, or has been elected to the Board the date such election is made.

(b) For a Program Year, a Non-Employee Director may make no more than one Deferral Election with respect to the Non-Employee Director’s Annual Retainer and/or Committee Cash Retainer.

(c) All Deferral and Award Deferral Elections must be made in writing on such forms as the Committee may prescribe and must be received by the Committee no later than the date specified by the Committee. In no event will the date specified by the Committee with respect to a Deferral Election be later than the end of the Program Year preceding the Program Year in which the Annual Retainer or Committee Cash Retainer would otherwise be paid. And in no event will the date specified by the Committee with respect to an Award Deferral be later than the December 1 preceding the Program Year in which the Award vests. In the case of the first year in which the Non-Employee Directors becomes eligible to participate, such election may be made with respect to services to be performed subsequent to the election within 30 days after the date the Non-Employee Director becomes eligible to participate.

(d) As part of each Deferral and Award Deferral Election, the Non-Employee Director must specify the date on which the Deferral will be paid or commence (a “Distribution Date”). The Distribution Dates specified in an Non-Employee Director’s Deferral Elections may, but need not necessarily, be the same for all Deferrals. Except as provided in subsection (f) below, each Distribution Date is irrevocable and shall apply only to that portion of the Non-Employee Director’s Deferral Account which is attributable to the Deferral.

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(e) The Distribution Date selected by a Non-Employee Director as part of a Deferral Election shall not be earlier than the January 1 immediately following the first anniversary of the date on which the Deferral Election is made. The Distribution Date selected by a Non-Employee Director as part of an Award Deferral Election shall not be earlier than the fifth anniversary of the date the Award would otherwise have vested.

(f) A Non-Employee Director may make an irrevocable election to extend a Distribution Date (a “Re-Deferral Election”); provided, that no Re-Deferral Election shall be effective unless (i) the Committee receives the election not later than 12 months prior to the Distribution Date to be changed, and (ii) the new Distribution Date is not earlier than the fifth anniversary of the prior Distribution Date. All Re-Deferral Elections must be made in writing on such forms and pursuant to such rules as the Committee may prescribe.

(g) As part of each Deferral and Award Deferral Election, a Non-Employee Director must elect the form in which the Deferral will be paid beginning on the selected Distribution Date. The Deferral may be paid in a single lump sum or in substantially equal annual installments over a period not exceeding ten years as provided under paragraph B-6. Except as provided in paragraph B-6, a Non-Employee Director’s election as to the form of payment shall be irrevocable. If the Non-Employee Director elects an installment method of payment the Distribution Date must be in January. If a Non-Employee Director fails to elect a method of payment, such payment shall be payable in a single lump sum.

(h) As part of each Deferral and Award Deferral Election, a Non-Employee Director must elect the investment alternatives that shall apply to the Deferral in accordance with paragraphs B-4 and B-5.

(i) Deferral and Award Deferral Elections shall be irrevocable; provided, that if the Committee determines that a Non-Employee Director has an Unforeseeable Financial Emergency (as defined in paragraph B-10), then the Non-Employee Director’s Deferral Elections then in effect shall be revoked with respect to all amounts not previously deferred.

B-3 Deferral Accounts. All amounts deferred pursuant to a Non-Employee Director’s Deferral and Award Deferral Elections under the Deferral Program shall be allocated to a bookkeeping account in the name of the Non-Employee Director (a “Deferral Account”) and the Committee shall maintain a separate subaccount under a Non-Employee Director’s Deferral Account for each Deferral. Deferrals shall be credited to the Deferral Account as of the Deferral Crediting Date coinciding with or next following the date on which, in the absence of a Deferral Election, the Non-Employee Director would otherwise have received the Deferral. A “Deferral Crediting Date” shall mean the business day coinciding with or next following the 15th day of each calendar month and the business day coinciding with or next following the last day of each calendar month. A Non-Employee Director shall be fully vested at all times in the balance of his Deferral Account.

B-4 Investment Alternatives. A Non-Employee Director must make an investment election at the time of each Deferral and Award Deferral Election. The investment election must be made in writing on such forms and pursuant to such rules as the Committee may prescribe, subject to paragraph

B-2

B-5, and shall designate the portion of the Deferral which is to be treated as invested in each investment alternative. The two investment alternatives shall be as follows:

(a) Share Equivalent Account. Under the Share Equivalent Account, the value of the Non-Employee Director’s Deferral shall be determined as if the Deferral were invested in Shares as of the Deferral Crediting Date. If payment of Shares or Restricted Stock Units is deferred, the number of Share equivalents to be credited to the Non-Employee Director’s Deferral Account and appropriate subaccounts on each Deferral Crediting Date shall equal the number of Shares or Restricted Stock Units deferred. If payment of cash is deferred, the number of Share equivalents to be credited to the Non-Employee Director’s Deferral Account and appropriate subaccounts on each Deferral Crediting Date shall be determined by dividing the Deferral to be “invested” on that date by the Fair Market Value of a Share on that date. Fractional Share equivalents will be computed to two decimal places. An amount equal to the number of Share equivalents multiplied by the dividend paid on a Share on each dividend payment date shall be credited to the Non-Employee Director’s Deferral Account and appropriate subaccount as of the Deferral Crediting Date coincident with or next following the dividend payment date and “invested” in additional Share equivalents as though such dividend credits were a Deferral. The number of Shares to be paid to a Non-Employee Director on a Distribution Date shall be equal to the number of Share equivalents accumulated in the Share Equivalent Account on the Distribution Date divided by the total of the payments to be made. All payments from the Share Equivalent Account shall be made in whole Shares with fractional Shares distributed in cash.

(b) Interest Account. Under the Interest Account, interest will be credited to the Non-Employee Director’s Deferral Account as of the business day coinciding with or next following each June 30 and December 31 (a “Valuation Date”) and on the date the final payment of a Deferral is to be made based on the balance in the Non-Employee Director’s Deferral Account deemed invested in the Interest Account on the Valuation Date or such final payment date. The rate of interest to be credited for a Plan Year will be set at the beginning of each Program Year and will equal the cost to the Corporation of issuing five-year maturity debt or, in the event such cost is determined not to satisfy the independence criteria under Section 409A of the Code and the guidance issued thereunder, such other independently established interest rate that the Corporation elects to use that satisfies such independence criteria. If installment payments are elected, the amount to be paid to the Non-Employee Director on a Distribution Date shall be determined as follows: the amount of the principal payment of each installment shall be determined by dividing the current principal balance by the number of remaining installment payments and the amount of the interest payment shall be determined by dividing the current interest balance by the number of remaining installment payments. All payments from the Interest Account shall be made in cash.

B-3

B-5 Investment Elections and Changes. A Non-Employee Director’s investment elections shall be subject to the following rules:

(a) With respect to Annual Retainer or Committee Retainer payments that would have been paid in the form of cash, if the Non-Employee Director fails to make an investment election with respect to a Deferral, the Deferral shall be deemed to be invested in the Interest Account.

(b) Any Deferral attributable to an Award Deferral, restricted or otherwise, shall automatically be deemed to be invested in the Share Equivalent Account.

(c) All investments in the Share Equivalent Account shall be irrevocable.

(d) A Non-Employee Director may elect to transfer amounts invested in the Interest Account to the Share Equivalent Account as of any Valuation Date by filing an investment change election with the Committee prior to the Valuation Date the change is to become effective. The amount elected to be transferred to the Share Equivalent Account shall be treated as invested in Share equivalents as of the Valuation Date and the number of Share equivalents to be credited to the Non-Employee Director’s Deferral Account and appropriate subaccounts as of the Valuation Date shall be determined by dividing the amount to be transferred by the Fair Market Value on such Valuation Date.

(e) Until invested as of the Deferral Crediting Date in either the Interest Account or Share Equivalent Account, a Non-Employee Director’s Deferral shall be credited with interest in such amount as the Committee may determine.

B-6 Time and Method of Payment. Payment of a Non-Employee Director’s Deferral shall be made in a single lump sum or shall commence in installments as elected by the Non-Employee Director in the Deferral Election. A Non-Employee Director may make a one-time election after the original Deferral Election to change the method of payment elected by the Non-Employee Director; provided, that such election shall not be effective unless the election to change the method of payment is received by the Committee not later that 12 months prior to the Distribution Date specified in the original Deferral Election. If a Non-Employee Director has elected installment payments as the method of payment, he may not elect a single lump sum or installments over a shorter period. In addition, a Non-Employee Director may make a one-time election to change the method of payment of an Award; provided, that such election shall not be effective unless the election to change the method of payment is received by the Committee not later than 12 months prior to the date the Award is to be distributed. If a Non-Employee Director has elected a single lump sum and later elects installment payments, such election shall constitute a Re-Deferral and will require a new Distribution Date that is not earlier than the fifth anniversary of the previous Distribution Date. If a Non-Employee Director’s Deferral Account is payable in a single lump sum, the payment shall be made as soon as practicable following the Distribution Date but not later than 30 days following the Distribution Date. If a Non-Employee Director’s Deferral Account is payable in installment payments, then the Non-Employee Director’s Deferral Account shall be paid in substantially equal annual installments over the period as elected by the Non-Employee Director in the Deferral Election commencing as soon as practicable following the Distribution Date but not later than 30 days following the Distribution Date.

B-4

B-7 Payment Upon Death of a Non-Employee Director. In the event a Non-Employee Director dies before all amounts credited to his Deferral Account have been paid, payment of the Non-Employee Director’s Deferral Account shall be made in a single sum payment as soon as practicable thereafter.

B-8 Beneficiary. A Non-Employee Director’s Beneficiary shall mean the individual(s) or entity designated by the Non-Employee Director to receive the balance of the Non-Employee Director’s Deferral Account in the event of the Non-Employee Director’s death prior to the payment of his entire Deferral Account. To be effective, any Beneficiary designation shall be filed in writing with the Committee. A Non-Employee Director may revoke an existing Beneficiary designation by filing another written Beneficiary designation with the Committee. The latest Beneficiary designation received by the Committee shall be controlling. If no Beneficiary is named by a Non-Employee Director or if he survives all of his named Beneficiaries, the Deferral Account shall be paid in the following order of precedence:

(1) the Non-Employee Director’s spouse;

(2) the Non-Employee Director’s children (including adopted children), per stirpes; or

(3) the Non-Employee Director’s estate.

B-9 Form of Payment. The payment of that portion of a Deferral Account deemed to be invested in the Interest Account shall be made in cash. The distribution of that portion of a Deferral Account deemed to be invested in the Share Equivalent Account shall be distributed in whole Shares with fractional shares distributed in cash.

B-10 Unforeseeable Financial Emergency. If the Committee or its designee determines that a Non-Employee Director has incurred an Unforeseeable Financial Emergency (as defined below), the Non-Employee Director may withdraw in cash and/or Shares the portion of the balance of his Deferral Account needed to satisfy the Unforeseeable Financial Emergency, to the extent that the Unforeseeable Financial Emergency may not be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Non-Employee Director’s assets, to the extent the liquidation of such assets would not itself cause severe financial hardship. An “Unforeseeable Financial Emergency” is a severe financial hardship to the Non-Employee Director resulting from (i) a sudden and unexpected illness or accident of the Non-Employee Director or of a dependent of the Non-Employee Director; (ii) loss of the Non-Employee Director’s property due to casualty; or (iii) such other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Non-Employee Director as determined by the Committee. A withdrawal on account of an Unforeseeable Financial Emergency shall be paid as soon as possible following the date on which the withdrawal is approved.

B-11 Funding. Benefits payable under the Deferral Program to any Non-Employee Director shall be paid directly by the Corporation. The Corporation shall not be required to fund, or otherwise segregate assets to be used for payment of benefits under the Deferral Program. Notwithstanding the foregoing, the Corporation, in the discretion of the Committee, may maintain one or more grantor trusts (“Trust”) to hold assets to be used for payment of benefits under the Deferral Program. The assets of the Trust shall remain the assets of the Corporation subject to the claims of its general creditors. Any payments by a Trust of benefits provided to a Non-Employee Director under the Deferral Program shall be considered payment by the Corporation and shall discharge the Corporation of any further liability under the Deferral Program for such payments.

B-5

B-12 Interests Not Transferable. No benefit payable at any time under the Deferral Program shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, or other legal process, or encumbrance of any kind. Any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any such benefits, whether currently or thereafter payable, shall be void. No person shall, in any manner, be liable for or subject to the debts or liabilities of any person entitled to such benefits. If any person shall attempt to, or shall alienate, sell, transfer, assign, pledge or otherwise encumber his benefits under the Deferral Program, or if by any reason of his bankruptcy or other event happening at any time, such benefits would devolve upon any other person or would not be enjoyed by the person entitled thereto under the Deferral Program, then the Committee, in its discretion, may terminate the interest in any such benefits of the person entitled thereto under the Deferral Program and hold or apply them for or to the benefit of such person entitled thereto under the Deferral Program or his spouse, children or other dependents, or any of them, in such manner as the Committee may deem proper.

B-13 Forfeitures and Unclaimed Amounts. Unclaimed amounts shall consist of the amounts of the Deferral Account of a Non-Employee Director that are not distributed because of the Committee’s inability, after a reasonable search, to locate a Non-Employee Director or his Beneficiary, as applicable, within a period of two (2) years after the Distribution Date upon which the payment of any benefits becomes due. Unclaimed amounts shall be forfeited at the end of such two-year period. These forfeitures will reduce the obligations of the Corporation under the Deferral Program and the Non-Employee Director or Beneficiary, as applicable, shall have no further right to his Deferral Account.

B-6

EX-10.31

Exhibit 10.31

SARA LEE CORPORATION

RETENTION & RECOGNITION PROGRAM

RELATED TO 2005 COMPANY REORGANIZATION

(For A and B Level Executives)

Eligibility

A and B level executives, on a highly selective basis, who will play key roles in implementing the Sara Lee organizational transformation initiative and/or manage a special projects supporting these transformation efforts.

Program Structure

Form of compensation – Grants of service-based restricted stock units (not “covered compensation” for employee benefit purposes)

Value of grants – Minimum of 1X salary, Maximum of 2X salary

Grant/Approval Date – April 27, 2005 (additional grant dates may occur after this date)

Vesting Date – 50% on April 27, 2006, 50% on April 27, 2007 (vesting dates could be other than 1 year following the Grant/Approval date)

Approvals –

• Chairman of the Compensation and Employee Benefits Committee of the Sara Lee Corporation Board Of Directors for any corporate officers at or above the Senior Vice President level

• Chief Executive Officer of Sara Lee Corporation for all others.

EX-10.32

Exhibit 10.32

SARA LEE CORPORATION

RETENTION & RECOGNITION PROGRAM

FOR INDIVIDUALS AT “C” LEVEL AND BELOW

Assumptions:

• The critical dimensions are the length of time the person is needed and the criticality of the individual

• All awards are paid as a lump sum cash bonus

• Participants may face the possibility of job loss at end of assignment/project

• Retention bonus is in addition to standard severance but is not covered compensation for employee benefits purposes

Est. Retention Time (months)	% of Salary Paid as Retention Bonus
	Employee Criticality
	3	2	1
12 +	30%	40%	50%
10 - 12	25%	35%	40%
7 - 9	15%	25%	30%
3 - 6	10%	15%	20%

DEFINITIONS OF EMPLOYEE CRITICALITY

#1

• Individual is extremely critical to the project

• Skills are extremely scarce both within Sara Lee and the external marketplace

• Skills are unique to Sara Lee and of a proprietary nature

• Loss of the person seriously jeopardizes the successful completion of the project

• Staffing alternatives are extremely limited, even from external temporary sources

#2

• Individual is critical to the completion of the project

• Skills are scarce both within Sara Lee and the marketplace but there are back-up staffing sources

• Loss of this person would delay the project completion and result in higher costs as a result of alternative staffing and lost productivity

#3

• Individual is important to the project’s completion but may be a member of a team that could back-fill in event of loss

• Skills are in short supply but alternatives would be available but at a higher cost and lower productivity level

• Loss of person would be disruptive to the process and would complicate but not jeopardize the completion of the project

EX-10.33

Exhibit 10.33

SARA LEE CORPORATION

ANNUAL INCENTIVE PLAN

PROGRAM DESCRIPTION FOR FISCAL YEAR 2006

Purpose

The objective of the Annual Incentive Plan (the “AIP”) is to advance the interests of Sara Lee Corporation (“SLC”) by:

a) Rewarding financial performance that contributes to increased shareholder value;

b) Measuring the effectiveness of SLC operating performance and capital management;

c) Basing a significant portion of all executives’ incentives on Business Segment results;

d) Continuing to provide significant rewards for exceptional performance.

Incentive Opportunity & Standards of Performance

Beginning in FY06 the Plan will adjust its focus from Maximum award opportunity to Target award opportunity. Previous Plans provided a Maximum opportunity that was approximately 133% of the Target payout level. The FY06 AIP will increase the Maximum opportunity to approximately 150% of Target, with correspondingly higher performance goals to warrant the additional Maximum opportunity.

Another change effective in FY06 is the linking of bonus opportunity to Participants’ salary grades rather than a variety of other statuses. Attachment 1 shows the FY06 AIP Target and Maximum payout levels at the various salary grades.

The following applies to the Plan goals:

• Financial and Individual Standards of Performance are established at the beginning of the Incentive Plan Year. The Financial Standards of Performance for Corporate Staff Participants and the Plan parameters applicable to all Plan Participants are approved by the Compensation and Employee Benefits Committee of the SLC Board of Directors (“the Committee”).

• Business Segment executive management will develop the financial goals within their respective business. The SLC Chief Executive Officer (CEO) will approve the Business Segment financial goals for each business.

• In FY06 the number of Performance Measures has been reduced from six to four. The FY06 Performance Measures are:

• Operating Profit - (Operating Income will be used for Corporate Staff positions) - 35% of Target Bonus Opportunity

• Sales - 25% of Target Bonus Opportunity

• Cash Flow - (Free Cash Flow for Corporate Staff positions; Operating Cash Flow for Business Segment positions) - 20% of Target Bonus Opportunity

• Individual Objectives - 20% of Target Bonus Opportunity

When expressed as a percentage of Target bonus opportunity, the weighting of each performance measure is approximately the same for each salary grade. A summary of FY06 Standards of Performance and the corresponding incentive opportunities for Participants are shown in Attachment 2. Where applicable, similar Attachments for Participants in countries other than the U.S. are available from the appropriate Business Segment Human Resources representative.

• It is recommended that Individual objectives be limited to a maximum of two or three including the required People/Organization objective. These same objectives should be reflected in PMP.

• At the end of the fiscal year, the Participant’s manager will make an overall assessment of performance results for each of the specific SOPs as well as any other accomplishments or criteria deemed relevant in determining the payout level.

Performance Period

All Standards of Performance are measured over a one-year performance period, i.e. the Incentive Plan Year. The Incentive Plan Year for FY06 is July 3, 2005 to July 1, 2006.

Performance Level Definitions

Level 4 - Maximum – An unusually high level of performance far exceeding targeted performance requiring significant “stretch” to achieve.

Level 3 - Target – Typically the level of performance specified in the appropriate Annual Operating Plan (“AOP”).

Level 2 - Below Target – The level of performance at which attainment of goals is below the Target level but considerably above the Threshold level.

Level 1 - Threshold – Performance that is below an acceptable level and not warranting any payout.

2

Incentive Award Payout Levels

Beginning in FY06 the number of Performance Levels under the AIP has been reduced from five to four. Also Sara Lee has established the following schedule to be used in setting the performance goals at the various payout levels. The table below shows how that goal setting process will work:

Performance Measure

Performance Level	Performance Goal	Payout Level as a % of Target Bonus
Level 4 - Maximum	110% of AOP	150%
Level 3 - Target	AOP	100%
Level 2 - Below Target	95% of AOP	50%
Level 1 - Threshold	90% of AOP	0%

Business Segment CEOs may deviate from this approach with the prior approval of the SLC CEO. Attachment 3 provides an example of calculating results and the associated Payout Levels under the Target bonus approach. Attachment 4 provides the FY06 Financial Performance Measures and goals.

Straight-line interpolation is used for calculating results between performance levels.

Incentive Award Payments

Incentive award payments are distributed after the Incentive Plan Year results have been publicly announced and the individual awards requiring the review and approval of the Committee have been approved at its August, 2006 meeting. Generally, a Participant must be an employee on the last day of the fiscal year in order to be eligible to receive any incentive award.

Administrative Provisions

The Committee and the Chief Executive Officer of SLC, whose decisions are final, shall administer the Plan jointly. The Senior Vice President – Global Human Resources will be responsible for the administrative procedures governing the Plan including ensuring the existence of approved Standards of Performance and presenting the performance results under the Plan to the Committee for its approval. The following administrative procedures shall govern:

a) The Committee will approve individual incentive awards for all corporate officers and those executives whose salaries are above the midpoint of salary grade 39. The Chief Executive Officer may approve all other incentive awards.

b) Incentive awards may be made in cash, stock or any combination of cash and stock as permitted under the 1998 and 2002 Long-Term Incentive Stock Plans. Any awards earned under the FY06 AIP will be made in cash. Participants paid in the U.S. and subject to

3

taxation in the U.S. may elect to defer part or all of their incentive awards pursuant to the terms and conditions of the SLC Executive Deferred Compensation Plan.

c) A new Participant who begins participation during the Incentive Plan Year may be eligible for a pro-rata incentive award from the date of entry into the Plan. Typically, a new Participant should have been actively employed for at least one calendar quarter of the Incentive Plan Year in order to receive consideration for a pro-rata incentive award.

d) In the case of death, total disability, or retirement under a SLC retirement plan during the Incentive Plan Year, a Participant or the Participant’s estate is eligible for a pro-rata incentive award based upon the Participant’s period of active service during the Incentive Plan Year. The award will be distributed at the same time as those of active Participants.

e) A Participant who is terminated and who subsequently receives severance pay under a SLC severance plan may be eligible for a pro-rata incentive award. Management will determine the amount of any pro-rata incentive award based upon the facts and circumstances related to the Participant’s termination as well as the amount of time the Participant was actively employed during the Incentive Plan Year.

f) Unless otherwise approved by the Chief Executive Officer, any Participant who resigns or is terminated during the Incentive Plan Year (except as provided for above) will not be entitled to any incentive award attributable to the Incentive Plan Year.

g) A Participant who is employed as of the end of the Incentive Plan Year shall be entitled to receive an incentive award regardless of whether the Participant resigns or is terminated between the end of the Incentive Plan Year and the date the incentive awards are actually distributed.

h) Performance results under the Plan will be measured by taking into consideration those Exclusions listed in Attachment 5.

i) SLC reserves the right to offset any funds from any incentive award due a terminating or terminated Participant to which SLC has a “claim of right”.

j) Nothing herein shall be construed as an agreement or commitment to employ any Participant or to employ a Participant for any fixed period of time or constitute a commitment by SLC that any Participant will continue to receive an incentive award or will continue as a Participant in the Plan.

k) The Committee reserves the right to amend, modify, interpret or terminate the Plan or awards to be paid under the Plan at any time for any reason.

l) The Committee may delegate certain administrative responsibilities to the Chief Executive Officer except for the following:

1) Any actions affecting the Chief Executive Officer, and other elected officers of SLC,

4

2) Approval of Corporate Financial Standards of Performance and certification of performance results relative to such standards following the end of the Incentive Plan Year,

3) Approval of any substantive changes or amendments to the Plan.

m) For purposes of calculating the actual performance results at the end of the Performance Period, Operating Profit will be reduced by any amount that actual MAP expenditures are less than the budgeted amount stated in an Operating Unit’s FY06 AOP for Strategic Investment Brands and Support and Grow Brands as submitted to SLC. The impact of any such adjustment will also be reflected in the Operating Unit’s ROI and operating cash flow results.

5

Attachment 1

SARA LEE CORPORATION

FY06 ANNUAL INCENTIVE PLAN

TARGETS AND MAXIMUMS

	FY06 Annual Incentive Plan
Salary Grades	Target - %s Of Salary	Maximum - %s Of Salary
50	200%	300%
49	200%	300%
48	165%	250%
47	160%	240%
46	150%	225%
45	145%	220%
44	135%	205%
43	130%	195%
42	125%	190%
41	125%	190%
40	120%	180%
39	120%	180%
38	115%	175%
37	115%	175%
36	115%	175%
35	95%	145%
34	75%	115%
33	65%	100%
32	55%	85%
31	45%	70%
30	40%	60%
29	30%	45%
28	30%	45%

Attachment 2

SARA LEE CORPORATION

FY06 ANNUAL INCENTIVE PLAN

PERFORMANCE MEASURES AND WEIGHTINGS

	Performance Measures as a % of Target Annual Incentive Opportunity
	Operating Profit	Sales	Cash Flow	Individual Objectives	Target Annual Incentive Opportunity
	35%	25%	20%	20%	100%
Salary Grades	Operating Profit	Sales	Cash Flow	Individual Objectives	Target Annual Incentive Opportunity
50	85.0%	65.0%	50.0%	0.0%	200%
49	85.0%	65.0%	50.0%	0.0%	200%
48	55.0%	40.0%	35.0%	35.0%	165%
47	54.0%	40.0%	33.0%	33.0%	160%
46	50.0%	40.0%	30.0%	30.0%	150%
45	50.0%	35.0%	30.0%	30.0%	145%
44	49.0%	32.0%	27.0%	27.0%	135%
43	46.0%	32.0%	26.0%	26.0%	130%
42	44.0%	31.0%	25.0%	25.0%	125%
41	44.0%	31.0%	25.0%	25.0%	125%
40	42.0%	30.0%	24.0%	24.0%	120%
39	42.0%	30.0%	24.0%	24.0%	120%
38	41.0%	30.0%	22.0%	22.0%	115%
37	41.0%	30.0%	22.0%	22.0%	115%
36	41.0%	30.0%	22.0%	22.0%	115%
35	32.0%	23.0%	20.0%	20.0%	95%
34	25.0%	20.0%	15.0%	15.0%	75%
33	22.0%	17.0%	13.0%	13.0%	65%
32	20.0%	13.0%	11.0%	11.0%	55%
31	16.0%	11.0%	9.0%	9.0%	45%
30	14.0%	10.0%	8.0%	8.0%	40%
29	10.0%	8.0%	6.0%	6.0%	30%
28	10.0%	8.0%	6.0%	6.0%	30%

Attachment 3

SARA LEE CORPORATION

FY06 PERFORMANCE MEASURES AND WEIGHTINGS

Calculating Payouts Under Target Bonus Approach

Performance Measure	Performance Measure Weighting	Performance Levels & Goals				Actual Results	Earned Payout as % Target
		Threshold	Good	Target	Max
		Payout Rates by Performance Level					(Weighting x Payout Rate)
		0%	50%	100%	150%
Sales	25%	$75	$100	$125	$175	$175	37.5%
Op Profit	35%	$10	$12	$14	$20	$14	35.0%
Cash Flow	20%	$40	$45	$50	$65	$45	10.0%
Individual SOPs	20%					Mid-way Between Target & Max (1) (i.e. 125% payout)	25.0%
	100%						107.5%
	Target Bonus Opportunity (Salary grade 29)			30%
	Earned Payout as % Target			107.5%
	Earned Bonus as % Salary			32.25%

(1) Manager determines overall Individual SOP results

Attachment 4

SARA LEE CORPORATION

FY06 ANNUAL INCENTIVE PLAN

PERFORMANCE GOALS-CORPORATE LEVEL

Performance Levels	Level 1 (Threshold)	Level 2 (Below Target)	Level 3 (Target-AOP)	Level 4 (Maximum)
Bonus Payout Levels as a % of Target	0%	50%	100%	150%

(All goals are stated at plan currency rates, in $ millions)

Operating Income	90% of AOP (1)	95% of AOP (1)	100% of AOP (1)	110% of AOP (1)
Net Sales	90% of AOP (1)	95% of AOP (1)	100% of AOP (1)	110% of AOP (1)
Free Cash Flow	90% of AOP (1)	95% of AOP (1)	100% of AOP (1)	110% of AOP (1)

(1) The specific financial goals were approved by the Committee and are contained in the minutes of the Committee’s June 29, 2005 meeting.

Attachment 5

Definitions

a) Base Salary means base salary earned or actually paid (dependent upon the practice of the business unit) to the Participant during the Incentive Plan Year disregarding any deferral elections, premiums, expatriate allowances, expense reimbursements, commissions, other incentives, severance or termination pay, lump sum merit awards, retention awards, payments from deferred compensation arrangements and compensation attributable to the exercise of stock options or other forms of long-term incentive compensation.

b) Board means the SLC Board of Directors.

c) Business Segment means one of the three major Sara Lee business units, i.e. Sara Lee North America Food & Beverage, Sara Lee International or Sara Lee North America Food Service.

d) Committee is the Compensation and Employee Benefits Committee of the Board.

e) Division means an operating profit center of SLC.

f) Exclusions means the automatic exclusion of the following from relevant financial data for purposes of measuring performance (subject to the Committee’s use of negative discretion):

1. Any extraordinary or unusual charges or income (accounting definition) that are quantified and identified separately on the face of the Income Statement, excluding earnings related to the receipt of Tobacco Divestiture Proceeds

2. Revisions to the U.S. Internal Revenue Code

3. Changes in generally accepted accounting principles

4. Gains or losses from discontinued operations (accounting definition)

5. Restructuring and Transformation charges

g) Free Cash Flow shall be measured using actual currency rates and is defined as Net Cash from Operating Activities, plus Tobacco Divestiture Proceeds, less Capital Expenditures, with the following exceptions:

1. Cash Flow of businesses acquired during the year and not included in the Annual Operating Plan shall be excluded.

2. Cash Flow of businesses divested and not included in the Annual Operating Plan as divestments will only be included through the date of divestment.

h) Incentive Plan Year is the same as SLC’s fiscal year beginning on July 3, 2005 and ending July 1, 2006.

i) Net Sales means net outside sales, as shown on Line 5 of the EO-200 income statement, with the following adjustment(s):

1. Actual Net Sales shall be measured using plan currency rates

2. Net Sales of businesses acquired during the year and not included in the Annual Operating Plan shall be excluded.

3. Net Sales of businesses divested and not included in the Annual Operating Plan as divestments will only be included through the date of divestment.

j) Operating Cash Flow means cash flow as calculated in the EO-600 – cash flow statement, using FY 06 peg currency rates, with the flowing exceptions:

1. Operating Cash Flow of businesses acquired during the year and not included in the Annual Operating Plan shall be excluded.

2. Operating Cash Flow of businesses divested and not included in the Annual Operating Plan as divestments will only be included through the date of divestment.

k) Operating Income means pre-tax income, before interest, and Exclusions, with the following adjustment(s):

1. Actual Operating Income shall be measured using plan currency rates

2. Operating Income of businesses acquired during the year and not included in the Annual Operating Plan shall be excluded.

3. Operating Income of businesses divested and not included in the Annual Operating Plan as divestments will only be included through the date of divestment.

l) Operating Profit means Line 16 of the EO-200 income statement, using FY 06 peg currency rates, with the following exceptions:

1. Operating Profit of businesses acquired during the year and not included in the Annual Operating Plan shall be excluded.

2. Operating Profit of businesses divested and not included in the Annual Operating Plan as divestments will only be included through the date of divestment.

m) Participant means an “A”, “B” or “C” (i.e. salary grades 28 through and including 50) level executive of SLC or any of its Business Segments.

n) Return on Investment (“ROI”) as defined in Finance Policy 130.

o) Standards of Performance means a Financial or Individual performance measure.

p) Total Disability is as defined under the SLC Long-Term Disability Plan or the specific Sara Lee sponsored disability plan under which the Participant is covered.

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EX-10.34

Exhibit 10.34

LONG-TERM RESTRICTED STOCK UNIT GRANT

FISCAL YEARS 2006 – 2008

Program Description

Highlights

This booklet explains the plan provisions of the Sara Lee Corporation Long-Term Restricted Stock Unit (LTRSU) grant covering fiscal years 2006 through 2008 (“Service Period”) with the restricted stock units (“RSUs”) vesting one-third each year on August 31, 2006, August 31, 2007 and August 31, 2008, the “Vesting Dates”. The following pages provide detailed information relating to the grant of RSUs that you have received under the Plan.

The key features of this Plan are summarized below. In some countries other than the United States, variations in Plan design and rules may occur in order to comply with local laws and tax provisions.

Purpose

The LTRSU is a significant component of Sara Lee’s long-term compensation program. It enhances the competitiveness of Sara Lee’s total executive compensation package and facilitates the attraction and retention of highly qualified executives.

Restricted Stock Units

LTRSU awards are authorized under the Sara Lee Corporation 1998 Long-Term Incentive Stock Plan (“Stock Plan”). LTRSU awards are initially granted as RSUs at the beginning of the Service Period. On each of the Vesting Dates, one-third of the RSUs that are earned will be converted to shares of Sara Lee common stock. Dividend equivalents that are payable on RSUs during the vesting periods are accrued on your behalf.

The release of RSUs on each of the Vesting Dates is contingent upon your continued active employment by the Corporation until the Vesting Dates.

SLC may substitute or offer alternative forms of incentive in the event it either determines that tax or legal regulations in some countries outside the United States provide more favorable treatment for these alternative forms of incentive or as a voluntary alternative to RSUs.

• RSUs are approved on August 25, 2005 and January 26, 2006. Based upon your continued active service through the Vesting Dates the RSUs are converted to actual shares of Sara Lee stock, on a one-for-one basis, and issued in your name.

• You do not have voting rights on RSUs until the RSUs are converted to actual shares.

Dividend Equivalents

During the Service Period, dividend equivalents that are payable on the RSUs will be accrued on your behalf. These dividend equivalents are paid to you in cash after the RSUs have vested.

Award Grant Notice

Each Participant will receive a Restricted Stock Unit Grant Notice and Agreement (“Grant Notice”) specifying the number of RSUs that have been granted, and certain terms and conditions applicable to the grant. The Grant Notice should be retained by the Participant along with your other important legal documents. The Grant Notice will be distributed electronically through Sara Lee’s Desktop application in Insite. You must go into Desktop and actually accept this grant on-line and instructions will be provided. Sara Lee may from time to time modify the grant acceptance process and will notify participants of any changes.

Tax Consequences

United States

Under current United States tax law, a Participant receives no taxable income from the RSUs when initially granted, or from accrued dividend equivalents. The Vesting Date, the release date of the RSUs, is the date when the taxable event will occur, except to the extent a Participant paid in the U.S. and subject to U.S. taxation has elected to defer eligible distributions of the shares until a later date (“Deferred Vesting Date”). The market value of SLC common stock on the Vesting Date or the Deferred Vesting Date, as the case may be, will determine the amount of taxable income. When the number of shares actually earned has been determined, the market value of the shares on the Vesting Date or the Deferred Vesting Date, as well as the proportionate dividend equivalents are considered income to the Participant. This amount is then subject to any applicable federal, state and local withholding. Amounts necessary to settle the tax-withholding obligation will be withheld from the cash and/or shares otherwise to be distributed to the Participant.

Countries other than the United States

Tax laws vary significantly from country to country, so advice should be obtained from appropriate counsel concerning the tax consequences of this grant in your country. In most cases, Participants incur no taxable income from RSUs when initially awarded, or on the accrued dividend equivalents, until the Vesting Date. When the shares are earned, both the market value of the shares on the Vesting Date as well as the dividends distributed are typically considered income. For those individuals residing outside the U.S. and not subject to U.S. tax laws, tax withholding for certain countries may be taken by SLC in Chicago. Each Participant is responsible for compliance with the relevant legal and tax regulations in his or her tax jurisdiction.

Impact on Other Benefits

Any shares or dividend equivalents ultimately earned under this LTRSU grant are not considered compensation for purposes of any retirement plan, severance arrangement or other benefit plans in which a Participant currently participates or may become eligible to participate in at a later date.

Stock Ownership Compliance

These RSUs will count toward the Corporation’s stock ownership guidelines during the Service Period.

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Forfeiture

Notwithstanding anything contained in this document to the contrary, if you engage in any activity inimical, contrary or harmful to the interests of the Company, including but not limited to: (1) competing, directly or indirectly (either as owner, employee or agent), with any of the businesses of the Company, (2) violating any Company policies, (3) soliciting any present or future employees or customers of the Company to terminate such employment or business relationship(s) with the Company, (4) disclosing or misusing any confidential information regarding the Company, or (5) participating in any activity not approved by the Board of Directors which could reasonably be foreseen as contributing to or resulting in a Change of Control of the Company (as defined in the Plan) (such activities to be collectively referred to as “wrongful conduct”), then (i) this RSU award, to the extent it remains restricted, shall terminate automatically on the date on which you first engaged in such wrongful conduct and (ii) if the misconduct occurred within 6 months following a Vesting Date, you shall pay to the Company in cash any financial gain you realized from the vesting of the RSUs. For purposes of this section, financial gain shall equal, the difference between the fair market value of the Common Stock on the Vesting Date, multiplied by the number of RSUs pursuant to the vesting (without reduction for any shares of Common Stock surrendered or attested to) reduced by any taxes paid in countries other than the United States which taxes are not otherwise eligible for refund from the taxing authorities. By accepting this RSU grant, you consent to and authorize the Sara Lee Companies to deduct from any amounts payable by the Sara Lee Companies to you, any amounts you owe to the Company under this section. This right of set-off is in addition to any other remedies the Company may have against you for the wrongful conduct.

Administrative Guidelines

The following guidelines apply to the FY06-08 LTRSU grant. Additional Administrative Guidelines may be adopted, as needed, during the Service Period for the efficient administration of the Plan.

• The Compensation and Employee Benefit Committee (“Committee”) is responsible for administering the Plan and has full power and authority to interpret the Plan and to adopt rules, regulations and guidelines for carrying out the Plan, as it deems necessary.

• The Committee functions as the Plan Administrator and its decisions are binding on all persons.

• The Committee reserves the right, in its absolute discretion, to make further adjustments in awards granted to any Participant prior to the release of those RSUs.

• The Committee may, as it deems appropriate, delegate some or all of its power to the Chief Executive Officer of Sara Lee Corporation or other executive officer of the Corporation. However, the Committee may not delegate its power concerning the grant, timing, pricing or amount of an award to any person who is a corporate officer or Key Executive.

• The Committee will approve the awards at the time they are granted for all Corporate Officers and Key Executives. The RSUs to be distributed along with the related dividend equivalents will be distributed as soon as practicable after the Vesting Dates.

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• Awards may be made to new Participants during the first year of the Service Period. The number of RSUs awarded may be adjusted to reflect that the executive is not a Participant for the entire Service Period.

• Awards may also be made to Participants who change positions during the first year of the Service Period, if such a change would have resulted in the Participant qualifying for an increased level of award.

• In the event of death or permanent and total disability (as defined under the appropriate disability benefit plan if applicable) the RSUs immediately vest and will be distributed to the estate or participant as soon as practicable after that event date.

• In the case of a Participant attaining age 55 or older and having at least 10 years of service with the Corporation when a Participant’s employment terminates or attain age 65 regardless of service, the RSUs will continue to vest under the normal vesting schedule (no pro-ration) and payout will occur at the normal payout times.

• A Participant who resigns or is terminated for cause during the Service Period generally forfeits the rights to all RSUs and any accrued dividend equivalents. Exceptions to this rule must be approved by the Chief Executive Officer of Sara Lee Corporation.

• A Participant who is involuntarily terminated and receives severance from the Company may be eligible for a pro-rated distribution of shares and any accrued dividend equivalents. Active service as well as the severance period will be used to determine the pro-ration and payout will occur at the normal payout times.

• In the event of a sale, closing, spin-off or other disposition of the Participant’s business unit, resulting in the termination of the Participant’s employment with the Company, the Participant will be eligible for a full distribution of shares and any accrued dividend equivalents. The shares will be distributed as soon as practicable after the event.

• Should a change in control occur (as defined in the Stock Plan), the Committee will decide what effect, if any, this should have on the awards which are outstanding under this Plan.

• If any statement in this Plan Description or any oral representation differs from the Stock Plan, the Stock Plan document prevails. The Stock Plan Grant Notice and Plan Descriptions collectively comprise all terms and conditions applicable to the FY06-08 LTRSU grant.

• Any stock dividend, stock split, combination or exchange of securities, merger, consolidation, recapitalization, spin-off or other distribution of any or all of the assets of the Company will be handled as provided for in the Stock Plan.

• Nothing in the LTRSU grant shall confer on a Participant any right to continue in the employ of SLC or in any way affect SLC’s right to terminate the Participant’s employment in accordance with applicable laws.

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Appendix I

FY06-08 LTRSU

Definitions

a) The Committee means the Compensation and Employee Benefits Committee of the Sara Lee Corporation Board of Directors.

b) Award Date means the date upon which the Committee approved the awards under this Plan. In this case the Award Date can mean August 25,2005 or January 26, 2006, unless an alternate date was required for tax and/or legal reasons in locations outside the United States.

c) Company, Corporation or SLC means Sara Lee Corporation or any entity that is directly or indirectly controlled by Sara Lee Corporation, and its subsidiaries.

d) Deferred Vesting Date means the Distribution Date specified under the Sara Lee Corporation Executive Deferred Compensation Plan, in the event the Participant elected to defer his or her LTRSU award.

e) Dividend Equivalents has the same meaning as in the Stock Plan.

f) Grant Notice means the electronic document provided to each Participant evidencing the number of restricted stock units awarded, Vesting Dates and the basic terms and conditions of the award.

g) Key Executive means an employee whose salary, when expressed in U.S. dollars, is above the midpoint of salary grade 39.

h) Participant means an executive of the company who has been determined to be an eligible Participant and who has received a Grant Notice specifying the basic terms of participation in this Plan.

i) Restricted Stock Units (“RSUs”) has the same meaning as “stock awards” as that term is used in the Stock Plan.

j) Service Period is the three-year period of August 25, 2005 through and including August 31, 2008.

k) Stock Plan means the Sara Lee Corporation 1998 Long-Term Incentive Stock Plan or its successor plan or plans.

l) Total Disability is defined in the Key Executive Long-Term Disability Plan of SLC.

m) Vesting Dates mean August 31, 2006, August 31, 2007 and August 31, 2008.

EX-10.35

Exhibit 10.35

SARA LEE CORPORATION

FORM OF RESTRICTED STOCK UNIT GRANT NOTICE & AGREEMENT

FY 06-08 LTRSU

(“Participant”)

This Restricted Stock Unit (RSU) Grant Notice made this August 25, 2005 (“Award Date”), by Sara Lee Corporation, a Maryland Corporation (“Corporation”) to Participant is evidence of an award made under the Sara Lee Corporation 1998 Long-Term Incentive Stock Plan (“Plan”) which is incorporated into this Grant Notice and Agreement by reference. A copy of the Plan has been provided to the Participant and is also available from the Sara Lee Corporate Compensation department.

1. Restricted Stock Unit Award. Subject to the restrictions, limitations, terms and conditions specified in the FY06-08 LTRSU Program Description (“Program Description”), the Plan and this Grant Notice, the Corporation hereby awards to the Participant as of the Award Date

             restricted stock units (RSUs)

from the FY06-08 LTRSU grant

which vest as follows:

         RSUs on Aug-31, 2006

         RSUs on Aug-31, 2007

         RSUs on Aug-31, 2008

which are considered Stock Awards under the Plan. These RSUs will remain restricted until the end of each Vesting Date (“Vesting Date”).

Prior to the Vesting Dates, the RSUs are not transferable by the Participant by means of sale, assignment, exchange, pledge, or otherwise.

2. Dividend Equivalents. Subject to the restrictions, limitations and conditions as described in the Plan, Dividend Equivalents payable on the RSUs will be accrued on behalf of the Participant at the time that dividends are otherwise paid to owners of Sara Lee Corporation common stock.

3. Distribution of the Award. If the distribution is subject to tax withholding, such taxes will be settled by withholding cash and/or a number of shares with a market value not less than the amount of such taxes. Any cash from Dividend Equivalents remaining after withholding taxes are paid will be paid in cash to the Participant. The net number of shares of Sara Lee Corporation stock to be distributed will be delivered to the Participant as soon as practicable after each of the Vesting Dates. If withholding of taxes is not required, none will be taken and the gross number of shares will be distributed. The Participant is personally responsible for the proper reporting and payment of all taxes related to distribution.

4. Election to Defer Distribution. If the distribution is subject to U.S. tax law, the Participant may elect to defer the distribution of some or all of the RSUs vesting in the second or third tranche. Such election must be received in writing by the Corporation no later than 12 months prior to each of the eligible Vesting Dates. The deferral, if elected, will result in the transfer of the RSUs into the Corporation’s Executive Deferred Compensation Plan’s Stock Equivalent Fund in effect at the time the RSUs would have otherwise been distributed. The Executive Deferred Compensation Plan rules will govern the administration of this award beginning on the date the RSUs are credited to the Executive Deferred Compensation Plan.

5. Death, Total Disability or Retirement. If you cease active employment with the Corporation, because of your death or permanent and total disability (as defined under the appropriate disability benefit plan if applicable), the award will vest immediately and be distributed to you or your estate as soon as practical. In the case of your attaining age 55 or older and, if you have at least 10 years of service with the Corporation when your employment terminates or attain age 65 regardless of service, the award will continue to vest after your termination. These provisions apply only to awards under the FY06-08 LTRSU; other types of RSU awards may have different provisions.

6. Involuntary Termination, Voluntary Termination and Non-Severance Event Termination.

(a) Involuntary Termination. If your employment with the Company is terminated by the Company and you are eligible to receive severance benefits under the Sara Lee Corporation Severance Plan for Corporate Officers, the Severance Pay Plan, the Severance Pay Plan for A & B Level Executives, the Severance Pay Plan for Certain Events or any other written severance plan of the Company (collectively, a “Severance Event Termination”), you will receive a prorated portion of the non-vested shares after the vesting date(s).

In the event your employment with the Company is terminated as a result of the sale, closing or spin-off of a division, business unit or other component of the Company, all RSUs will vest as of the closing date of the transaction and be distributed as soon as practicable after the closing date of the transaction, unless otherwise determined by the Company. This provision does not apply with respect to any transaction that would be considered a Change of Control as defined in Article X of the Plan.

(b) Voluntary Termination and Non-Severance Event Termination. If your employment terminates for reasons other than those described above (i.e., you voluntarily terminate your employment with the Company or your employment is terminated by the Company and you are not eligible for severance pay under any of the Company’s severance plans), then the non-vested portion of this RSU award shall be canceled on the date of your termination of employment.

7. Forfeiture. Notwithstanding anything contained in this Agreement to the contrary, if you engage in any activity inimical, contrary or harmful to the interests of the Corporation, including but not limited to: (1) competing, directly or indirectly (either as owner, employee or agent), with any of the businesses of the Corporation, (2) violating any Corporation policies, (3) soliciting any present or future employees or customers of the Corporation to terminate such employment or business relationship(s) with the Corporation, (4) disclosing or misusing any confidential information regarding the Corporation, or (5) participating in any activity not approved by the Board of Directors which could reasonably be foreseen as contributing to or resulting in a Change of Control of the Corporation (as defined in the Plan) (such activities to be collectively referred to as “wrongful conduct”), then (i) this RSU award, to the extent it remains restricted, shall terminate automatically on the date on which you first engaged in such wrongful conduct and (ii) if the misconduct occurred within 6 months of a RSU Vesting Date, you shall pay to the Corporation in cash any financial gain you realized from the vesting of the RSU. For purposes of this section, financial gain shall equal, the difference between the fair market value of the Common Stock on the Vesting Date, multiplied by the number of RSUs actually distributed pursuant to this award, reduced by any taxes paid in countries other than the United States which taxes are not otherwise eligible for refund from the taxing authorities. By accepting this RSU, you consent to and authorize the Corporation to deduct from any amounts payable by the Corporation to you, any amounts you owe to the Corporation under this section. This right of set-off is in addition to any other remedies the Corporation may have against you for your breach of this Agreement.

8. Rights as a Stockholder. You will have no rights as a stockholder with respect to any RSUs until and unless ownership of such RSUs have been transferred to you.

9. Conformity with the Plan. This award is intended to conform in all respects with, and is subject to, all applicable provisions of the Plan. Any inconsistencies between this Grant Notice, the Plan or the Program Description shall be resolved in accordance with the terms of the Plan. By your acceptance of this Grant Notice, you agree to be bound by all of the terms of this Grant Notice, the Plan and Program Description.

10. Interpretations. Any dispute, disagreement or question which arises under, or as a result of, or in any way relates to the interpretation, construction or application of the Plan, this Grant Notice or the Program

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Description will be determined and resolved by the Compensation and Employee Benefits Committee of the Corporation’s Board of Directors (“Committee”). Such determination or resolution by the Committee will be final, binding and conclusive for all purposes.

11. Employment Rights. Nothing in the Plan, this Grant Notice or the Program Description confers on any Participant any right to continue in the employ of the Corporation or in any way affects the Corporation’s right to terminate the Participant’s employment without prior notice any time for any reason.

12. Miscellaneous.

(a) Modification. This RSU grant is documented by the minutes of the Committee and or as approved by the CEO for non-corporate officers, which records are the final determinant of the number of RSUs granted and the conditions of this grant. The Committee may amend or modify this RSU grant in any manner to the extent that the Committee would have had the authority under the Plan initially to grant such RSUs, provided that no such amendment or modification shall impair your rights under this Agreement without your consent. Except as in accordance with the two immediately preceding sentences and paragraph 13, this Agreement may be amended, modified or supplemented only by an instrument in writing signed by both parties hereto.

(b) Governing Law. All matters regarding or affecting the relationship of the Company and its stockholders shall be governed by the General Corporation Law of the State of Maryland. All other matters arising under this Agreement shall be governed by the internal laws of the State of Illinois, including matters of validity, construction and interpretation. You and the Company agree that all claims in respect of any action or proceeding arising out of or relating to this Agreement shall be heard or determined in any state or federal court sitting in Chicago, Illinois, and you agree to submit to the jurisdiction of such courts, to bring all such actions or proceedings in such courts and to waive any defense of inconvenient forum to such actions or proceedings. A final judgment in any action or proceeding so brought shall be conclusive and may be enforced in any manner provided by law.

(c) Successors and Assigns. Except as otherwise provided herein, this Agreement will bind and inure to the benefit of the respective successors and permitted assigns of the parties hereto whether so expressed or not.

(d) Severability. Whenever feasible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.

13. Amendment. Notwithstanding anything in the Plan, the Program Description or this Grnat Notice to the contrary, this award may be amended by the Corporation without the consent of the Participant, including but not limited to modifications to any of the rights granted to the Participant under this award, at such time and in such manner as the Corporation may consider necessary or desirable to reflect changes in law.

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EX-10.36

Exhibit 10.36

SARA LEE CORPORATION

1998 Long-Term Incentive Stock Plan

Stock Option Grant Notice and Agreement

«First_Name» «Last_Name»

(“Participant”)

Sara Lee Corporation (the “Company”) is pleased to confirm that you have been granted a stock option (an “Option”), effective as of August 25, 2005 (the “Grant Date”), as provided in this Stock Option Grant Notice and Agreement (the “Agreement”):

1. Option Right. Your Option is to purchase, on the terms and conditions set forth below, the following number of shares (the “Option Shares”) of the Company’s Common Stock, par value $.01 per share (the “Common Stock”) at the exercise price specified below (the “Exercise Price”).

	Number of Option Shares	Exercise Price Per Option Share
Shares Granted		$

2. Option. This Option is a non-qualified stock option that is intended to conform in all respects with the 1998 Long-Term Incentive Stock Plan (the “Plan”), a copy of which has been provided to you, and the provisions of which are incorporated herein by reference. This Option is not intended to qualify as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.

3. Expiration Date. This Option expires on the tenth anniversary of the Grant Date (the “Expiration Date”), subject to earlier expiration upon your death, disability or other termination of employment, as provided below.

4. Vesting. This Option may be exercised only to the extent it has vested. Subject to paragraphs 5 and 6 below, if you are continuously employed by the Company or any of its subsidiaries (collectively, the “Sara Lee Companies”) from the Grant Date until the first anniversary of the Grant Date, this Option will vest with respect to one-third of the Option Shares, and on each subsequent anniversary of the Grant Date on which you continue to be employed by the Sara Lee Companies, your Option will vest with respect to an additional one-third of the Option Shares, until you are 100% vested in your Option on the third anniversary of the Grant Date.

5. Death, Total Disability or Retirement. In the event of your death or permanent and total disability, all Option Shares will vest as of the date of death or the date you are determined to be permanently and totally disabled. In the event of your retirement, this Option will continue to vest subject to paragraph 4.

If you cease active employment with the Sara Lee Companies, because of your death or permanent and total disability (as defined under the appropriate disability benefit plan if applicable), the last day on which this Option may be exercised is the earlier of (a) the Expiration Date or (b) five years after the date of your death or permanent and total disability. In the case of your attaining age 55 or older and, if you have at least 10 years of service with the Corporation when your employment terminates or attain age 65 regardless of service, the last date on which this Option may be exercised is the Expiration Date of the Option.

6. Involuntary Termination, Voluntary Termination and Non-Severance Event Termination.

(a) Involuntary Termination. If your employment with the Company is terminated by the Company and you are eligible to receive severance benefits under the Sara Lee Corporation Severance Plan for Corporate Officers, the Severance Pay Plan, the Severance Pay Plan for A & B Level Executives, the Severance Pay Plan for Certain Events or any other written severance plan of the Company (collectively, a “Severance Event Termination”), the last day on which this Option may be exercised is the earlier of (i) the Expiration Date or (ii) 90 days following the last day of your severance period as defined in your severance agreement. This Option will continue to vest only through the last day of your severance period.

In the event your employment with the Company is terminated as a result of the sale, closing or spin-off of a division, business unit or other component of the Company, all Options will vest as of the closing date of the transaction and be exercisable for six months following the closing date of the transaction, subject to the provisions of paragraph 5, unless otherwise determined by the Company. This provision does not apply with respect to any transaction that would be considered a Change of Control as defined in Article X of the Plan.

(b) Voluntary Termination and Non-Severance Event Termination. If your employment terminates for reasons other than those described in sections 5. and 6.(a), (i.e., you voluntarily terminate your employment with the Company or your employment is terminated by Company and you are not eligible for severance pay under the Company’s severance plans), then this Option shall terminate 90 days after the date of your termination of employment. Vesting of this Option ends on the date of your termination of employment.

7. Exercise. This Option may be exercised in whole or in part for the number of shares specified (which in all cases must be at least the lesser of 250 or the total number of shares outstanding under this Option) in a company specified notice that is delivered to the Company or its designated agent and is accompanied by full payment of the Exercise Price for such number of Option Shares. Payment of the Exercise Price may be made in cash, or by surrendering or attesting to the ownership of shares of Common Stock, or a combination of cash and shares of Common Stock, in an amount or having a combined value equal to the aggregate Exercise Price for such Option Shares. In connection with any payment of the Exercise Price by surrender or attesting to the ownership of shares of Common Stock, proof acceptable to the Company shall be submitted substantiating the shares owned. The value of previously acquired shares submitted (directly or by attestation) in full or partial payment for the Option Shares purchased upon exercise of the Option shall be equal to the aggregate fair market value (as defined in the Plan) of such previously acquired shares on the date of the exercise of the Option. This Option will be considered exercised on the date on which (a) your notice of exercise and (b) your payment of the Exercise Price have both been received by the Company. The exercise of any portion of this Option will be considered your acceptance of all terms and conditions specified in this Agreement.

8. Forfeiture. Notwithstanding anything contained in this Agreement to the contrary, if you engage in any activity inimical, contrary or harmful to the interests of the Company, including but not limited to: (1) competing, directly or indirectly (either as owner, employee or agent), with any of the businesses of the Company, (2) violating any Company policies, (3) soliciting any present or future employees or customers of the Company to terminate such employment or business relationship(s) with the Company, (4) disclosing or misusing any confidential information regarding the Company, or (5) participating in any activity not approved by the Board of Directors which could reasonably be foreseen as contributing to or resulting in a Change of Control of the Company (as defined in the Plan) (such activities to be collectively referred to as “wrongful conduct”), then (i) this Option, to the extent it remains unexercised, shall terminate automatically on the date on which you first engaged in such wrongful conduct and (ii) you shall pay to the Company in cash any financial gain you realized from exercising all or a portion of this Option within the six month period immediately preceding such wrongful conduct. For purposes of this paragraph 8, financial gain shall equal, on each date of exercise during the six month period immediately preceding such wrongful conduct, the difference between the fair market value of the Common Stock on the date of exercise and the Exercise Price, multiplied by the number of shares of Common Stock purchased pursuant to that exercise (without reduction for any shares of Common Stock surrendered or attested to) reduced by any taxes paid in countries other than the United States to acquire and or exercise and which taxes are not otherwise eligible for refund from the taxing authorities. By accepting this Option, you consent to and authorize the Company to deduct from any amounts payable by the Company to you, any amounts you owe to the Company under this paragraph 8. This right of set-off is in addition to any other remedies the Company may have against you for your breach of this Agreement.

9. Rights as a Stockholder. You will have no rights as a stockholder with respect to any Option Shares until and unless ownership of such Option Shares has been transferred to you.

10. Transferability of Option Shares. You may not offer, sell or otherwise dispose of any common stock covered by the Option in a way which would: (i) require the Company to file any registration statement with the Securities and Exchange Commission (or any similar filing under state law or the laws of any other country) or to amend or supplement any such filing or (ii) violate or cause the Company to violate the Securities Act of 1933, as amended, the Securities Act of 1934, as amended, the rules and regulations promulgated thereunder, any other state or federal law, or the laws of any other country. The Company reserves the right to place restrictions on Common Stock received by you pursuant to this Option.

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11. Conformity with the Plan. This Option is intended to conform in all respects with, and is subject to all applicable provisions of the Plan. Inconsistencies between this Agreement, the Plan or the Program Description shall be resolved in accordance with the terms of the Plan. By your acceptance of this Agreement, you agree to be bound by all of the terms of this Agreement, the Plan or the Program Description.

12. Interpretations. Any dispute, disagreement or question which arises under, or as a result of, or in any way relates to the interpretation, construction or application of the Plan, this Grant Agreement or the Program Description will be determined and resolved by the Compensation and Employee Benefits Committee of the Corporation’s Board of Directors (“Committee”) or its authorized delegate. Such determination or resolution by the Committee or its authorized delegate will be final, binding and conclusive for all purposes.

13. No Rights to Continued Employment. Nothing in this Agreement, the Plan or Program Description confers any right on you to continue in the employ of the Company or affects in any way the right of the Company to terminate your employment with or without prior written notice at any time for any reason.

14. Miscellaneous.

(a) Modification. The grant of this Option is documented by the minutes of the Committee which records are the final determinant of the number of shares granted and the conditions of this grant. The Committee may amend or modify this Option in any manner to the extent that the Committee would have had the authority under the Plan initially to grant such Option, provided that no such amendment or modification shall impair your rights under this Agreement without your consent. Except as in accordance with the two immediately preceding sentences and paragraph 16, this Agreement may be amended, modified or supplemented only by an instrument in writing signed by both parties hereto.

(b) Governing Law. All matters regarding or affecting the relationship of the Company and its stockholders shall be governed by the General Corporation Law of the State of Maryland. All other matters arising under this Agreement shall be governed by the internal laws of the State of Illinois, including matters of validity, construction and interpretation. You and the Company agree that all claims in respect of any action or proceeding arising out of or relating to this Agreement shall be heard or determined in any state or federal court sitting in Chicago, Illinois, and you agree to submit to the jurisdiction of such courts, to bring all such actions or proceedings in such courts and to waive any defense of inconvenient forum to such actions or proceedings. A final judgment in any action or proceeding so brought shall be conclusive and may be enforced in any manner provided by law.

(c) Successors and Assigns. Except as otherwise provided herein, this Agreement will bind and inure to the benefit of the respective successors and permitted assigns of the parties hereto whether so expressed or not.

(d) Severability. Whenever feasible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.

15. Confidentiality. You agree that you will not disclose the existence or terms of this Agreement to any other employees of the Company or third parties with the exception of your accountants, attorneys, or spouse, and shall ensure that none of them discloses such existence or terms to any other person, except as required to comply with legal process.

16. Amendment. Notwithstanding anything in the Plan, any program description or this Grant Notice to the contrary, this award may be amended by the Company without the consent of the Participant, including but not limited to modifications to any of the rights granted to the Participant under this award, at such time and in such manner as the Company may consider necessary or desirable to reflect changes in law.

SARA LEE CORPORATION

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EX-12

EXHIBIT 12.1

SARA LEE CORPORATION AND SUBSIDIARIES

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(In millions except ratios)

	Years Ended
	July 2, 2005 (1)		July 3, 2004 (2)
Fixed charges:
Interest expense	$	290	$	271
Interest portion of rental expense		71		66
Total fixed charges before capitalized interest and preference security dividends of consolidated subsidiaries		361		337
Preference security dividends of consolidated subsidiaries		0		0
Capitalized interest		10		10
Total fixed charges	$	371	$	347
Earnings available for fixed charges:
Income before income taxes continuing operations	$	934	$	1,487
Less undistributed income (loss) in minority-owned companies		1		1
Add minority interest in majority-owned subsidiaries		11		6
Add amortization of capitalized interest		16		17
Add fixed charges before capitalized interest and preference security dividends of consolidated subsidiaries		361		337
Total earnings available for fixed charges	$	1,323	$	1,848
Ratio of earnings to fixed charges		3.6		5.3

(1) During fiscal 2005, the corporation recorded charges in pretax income from continuing operations of $93 million in connection with certain restructuring activities and $350 million for impairments. Also during fiscal 2005, the corporation recognized $117 million of contingent sales proceeds from the disposal of its European tobacco business in 1999.

(2) During fiscal 2004, the corporation recorded a charge of $48 million in pretax income from continuing operations in connection with certain restructuring activities. Also during fiscal 2004, the corporation recognized $119 million of contingent sales proceeds from the disposal of its European tobacco business in 1999.

EX-13

Exhibit 13

Financial Summary

Dollars in millions, except per share data	July 2, 20051			July 3, 20042,3			June 28, 20034			June 29, 20025			June 30, 20016
Results of Operations
Continuing operations
Net sales	$	19,254		$	19,119		$	17,888		$	17,216		$	16,198
Operating income7		1,120			1,670			1,634			1,349			1,979
Income before income taxes		934			1,487			1,434			1,139			1,795
Income		731			1,239			1,187			979			1,565
Effective tax rate		21.7	%		16.7	%		17.2	%		14.0	%		12.8	%
Income per share of common stock
Basic	$	0.93		$	1.57		$	1.51		$	1.23		$	1.90
Diluted		0.92			1.55			1.46			1.19			1.83
(Loss) income from discontinued operations		(12	)		33			34			31			701
Net income		719			1,272			1,221			1,010			2,266
Net income per share of common stock
Basic		0.91			1.61			1.55			1.27			2.75
Diluted		0.90			1.59			1.50			1.23			2.65
Financial Position
Total assets	$	14,412		$	14,879		$	15,496		$	13,692		$	10,138
Total debt		4,754			5,325			6,301			5,544			3,261
Cash flow to balance sheet debt8		27.6	%		37.1	%		28.7	%		30.7	%		45.4	%
Adjusted cash flow to total debt9		35.4	%		38.9	%		29.5	%		28.2	%		49.4	%
Per Common Share
Dividends	$	0.78		$	0.75		$	0.615		$	0.595		$	0.57
Book value at year-end		3.74			3.76			2.68			2.27			1.43
Market value at year-end		19.65			23.17			18.44			20.64			18.94
Shares used in the determination of net income per share
Basic (in millions)		789			788			781			785			819
Diluted (in millions)		796			798			812			818			854
Other Information
Continuing operations
Net cash flow from operating activities	$	1,314		$	1,973		$	1,807		$	1,701		$	1,481
Depreciation		563			554			525			464			386
Media advertising expense		446			421			458			404			378
Total advertising and promotion expense		890			887			922			820			902
Capital expenditures		538			530			746			669			532
Common stockholders of record		87,000			91,000			95,000			74,000			78,000
Number of employees		137,000			144,000			140,000			149,000			136,000

¹ In 2005, amounts recognized for exit activities, business dispositions and impairment charges decreased income from continuing operations before income taxes and income from continuing operations by $458 and $365, respectively.

² 53-week year.

³ In 2004, amounts recognized for exit activities and business dispositions decreased income from continuing operations before income taxes and income from continuing operations by $54 and $36, respectively.

⁴ In 2003, amounts recognized for exit activities and business dispositions decreased income from continuing operations before income taxes by $2 and increased income from continuing operations by $3.

⁵ In 2002, amounts recognized for exit activities and business dispositions decreased income from continuing operations before income taxes and income from continuing operations by $170 and $101, respectively.

⁶ In 2001, the gain on the disposal of Coach of $967, net of the charges for exit activities and business dispositions of $554, had the following impacts on continuing operations – income before income taxes and income increased $413 and $467, respectively. Including the after-tax gain on the sale of PYA/Monarch of $638, recorded as discontinued operations, and the previous items, net income increased $1,105.

⁷ Operating income is reconciled between the income from each of the corporation’s business segments to income before income taxes in Note 24 to the Consolidated Financial Statements titled “Business Segment Information.”

⁸ Net cash from operating activities as a percentage of balance sheet debt.

⁹ Net cash from operating activities, excluding the impact of working capital changes and adjusted for assumed depreciation on leased assets, as a percentage of balance sheet debt and imputed lease liabilities. Details of this computation are included in the Financial Review.

The Consolidated Financial Statements and Notes and the Financial Review should be read in conjunction with the Financial Summary.

Sara Lee Corporation and Subsidiaries            1

Financial Review

This Financial Review discusses the corporation’s results of operations, financial condition and liquidity, risk management activities, and significant accounting policies and critical estimates. The results of the corporation’s Direct Selling business are reported as a discontinued operation in fiscal 2005 and all prior years. Unless otherwise noted, the discussion below focuses on the continuing operations of the business.

This discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto contained elsewhere in this Annual Report. The corporation’s fiscal year ends on the Saturday closest to June 30. Fiscal years 2005 and 2003 were 52-week years, while fiscal 2004 was a 53-week year. All reported results for fiscal year 2004, unless otherwise indicated, include the impact of the additional week. Unless otherwise stated, references to years relate to fiscal years. The following is an outline of the analysis included herein:

• Overview

• Description of the Business Segments

• Business Transformation Plan

• Review of Consolidated Results of Operations – 2005 Compared With 2004

• Operating Results by Business Segment – 2005 Compared With 2004

• Review of Consolidated Results of Operations – 2004 Compared With 2003

• Operating Results by Business Segment – 2004 Compared With 2003

• Financial Condition

• Liquidity

• Risk Management

• Significant Accounting Policies and Critical Estimates

• Issued But Not Yet Effective Accounting Standards

• Forward-Looking Information

Overview

2005 During 2005, net sales increased by 0.7%, reflecting the benefit from favorable foreign currency rates and the consolidation of a joint venture upon the adoption of FASB Interpretation Number (FIN) 46 during 2004. Partially offsetting these increases were the negative impact of one less week in 2005 than in 2004 and the disposition of certain businesses after the start of 2004. The strengthening of foreign currencies versus the U.S. dollar increased sales by 2.7%, while the impact of one less week in 2005 reduced sales by 1.9%. The net impact of the business dispositions and the consolidation of the joint venture was a reduction in sales of 0.2%.

Operating income for the corporation in 2005 decreased by $550 million, or 32.9%, and was composed of the following:

• The gross margin declined by $282 million, as a 1.7% decline in the gross margin percentage more than offset the increase in the gross margin resulting from increased sales. The gross margin percentage declined in each business segment except Sara Lee Bakery, primarily due to increased raw material costs in all segments.

• Selling, general and administrative (SG&A) expenses in 2005 were $129 million lower than in the comparable period of the prior year. This decline was due to several factors including a $61 million reduction in the net periodic benefit cost of pension and postretirement medical plans; the favorable resolution of a $20 million withholding tax obligation that was established in 2004; lower annual bonus costs; and a lower cost structure resulting from exit activities initiated in 2004. Total advertising and promotion costs of $890 million were $3 million greater than in 2004.

• In 2005, the corporation recognized a $350 million charge for the impairment of property and intangible assets. In addition, charges for exit and business disposition activities in 2005 and 2004 were $93 million and $48 million, respectively. In total, charges for impairments, exit costs and business dispositions in 2005 were $395 million in excess of 2004 levels.

• Contingent sale proceeds of $117 million associated with the prior sale of a business were received in 2005, which was $2 million less than was received in 2004.

Income from continuing operations before income taxes in 2005 decreased by $553 million, primarily due to the decrease in operating income and a $3 million increase in net interest expense.

Income tax expense from continuing operations decreased by $45 million in 2005, primarily from the following factors:

• Income from continuing operations before income taxes decreased by $553 million in 2005.

• The corporation recognized a $365 million tax charge related to the repatriation of the income of foreign subsidiaries to the U.S.

• Certain tax reviews were finalized for $348 million less than originally anticipated.

• The impairment charge recognized in 2005 included $182 million of goodwill upon which no tax benefit was recognized.

Income from discontinued operations declined by $45 million as a result of the recognition of a $50 million tax charge. The increase in the tax expense of the discontinued Direct Selling business was to recognize the tax obligation associated with the accumulated earnings of this business which are outside the U.S., and no longer considered permanently invested.

Net income in 2005 decreased by $553 million, or 43.5%, and diluted earnings per share in 2005 decreased by $0.69, or 43.4%. The following table sets out the significant items that impacted the results of the corporation in 2005 and 2004.

2            Sara Lee Corporation and Subsidiaries

Impact of Significant Items on Income From Continuing Operations and Net Income

	52 Weeks Ended July 2, 2005												53 Weeks Ended July 3, 2004
In millions, except per share data	Pretax Impact			Tax			Net Income			Diluted EPS Impact 1			Pretax Impact			Tax			Net Income			Diluted EPS Impact1
Income from continuing operations	$	934		$	(203	)	$	731		$	0.92		$	1,487		$	(248	)	$	1,239		$	1.55
Net income							$	719		$	0.90								$	1,272		$	1.59
Significant items affecting comparability of income from continuing operations and net income
Impairment charges	$	(350	)	$	59		$	(291	)	$	(0.37	)	$	—		$	—		$	—		$	—
Exit activities and business dispositions
Charges for exit activities		(119	)		41			(78	)		(0.10	)		(57	)		20			(37	)		(0.04	)
Income from business disposition activity		26			(9	)		17			0.02			9			(4	)		5			0.01
Transformation charges in cost of sales and SG&A		(43	)		12			(31	)		(0.04	)		(6	)		2			(4	)		(0.01	)
Bakery curtailment gain		28			(10	)		18			0.02			—			—			—			—
Impact of 53rd week2		—			—			—			—			48			(17	)		31			0.04
Impact of significant items on continuing operations before income taxes		(458	)		93			(365	)		(0.47	)		(6	)		1			(5	)		—
Significant tax matters affecting comparability
Finalization of certain tax reviews		—			348			348			0.44			—			207			207			0.26
Tax on remittance of foreign earnings		—			(365	)		(365	)		(0.46	)		—			(140	)		(140	)		(0.18	)
Netherlands tax rate change		—			24			24			0.03			—			—			—			—
Deferred taxes provided on earnings of foreign subsidiaries		—			(30	)		(30	)		(0.04	)		—			—			—			—
Impact of significant items on income from continuing operations		(458	)		70			(388	)		(0.49	)		(6	)		68			62			0.08
Deferred taxes provided on earnings of Direct Selling business reported as a discontinued operation		—			(50	)		(50	)		(0.06	)		—			—			—			—
Impact of significant items on net income	$	(458	)	$	20		$	(438	)	$	(0.55	)	$	(6	)	$	68		$	62		$	0.08

¹ The earnings per share (EPS) impact of individual amounts in the table above are rounded to the nearest $0.01 and may not add to the total.

² Tax effect on the impact of the 53rd week is assumed at 35%.

Cash Flow The corporation’s cash flow from operations decreased from $2,042 million in 2004 to $1,350 million in 2005, a decline of 33.9%. This decline was primarily related to lower profitability, higher cash utilization for working capital purposes and funding of employee benefit obligations.

The corporation used cash on hand and borrowings of short- and long-term indebtedness to repay $1,033 million of long-term debt, repurchase $396 million of common stock and pay $464 million of dividends. The corporation issued $339 million of long-term debt and $178 million of net short-term debt to help fund the debt repayment. Further information and details regarding the performance of the corporation and its business segments follows.

Description of the Business Segments

The corporation’s worldwide operations are managed in five business segments. The following is a description of each segment:

• Sara Lee Meats sells a variety of meat products, including hot dogs and corn dogs, breakfast sausages and sandwiches, smoked and dinner sausages, premium deli and luncheon meats, bacon, meat snacks, and cooked and dry hams. The primary raw materials for these meat products include pork, turkey, beef and chicken, which are purchased almost entirely from independent farmers and vendors. The corporation does not rely on any one vendor or small group of vendors for these raw materials, and prices fluctuate based on supply and demand in the marketplace. Sara Lee Meats sells its products primarily in the U.S., western and central Europe and Mexico; 67% of the segment’s 2005 sales were generated in U.S. dollars, 28% in euros and 5% in Mexican pesos. Sales are made in both the retail channel to supermarkets, warehouse clubs and national chains, and in the foodservice channel to foodservice distributors and large operators. Sales are generally transacted through Sara Lee’s own sales force and outside brokers. The top 20 customers of the Sara Lee Meats business represent approximately 54% of the segment’s sales. The major brands under which Sara Lee Meats sells its products include Hillshire Farm, Ball Park, Jimmy Dean, Sara Lee,

Sara Lee Corporation and Subsidiaries            3

Bryan, State Fair, Kahn’s and Best’s Kosher in the U.S.; Nobre, Aoste, Stegeman, Justin Bridou and Cochonou in Europe; and Kir, Zwan and Duby in Mexico. Seasonality in the Sara Lee Meats segment is balanced by the diverse offering of products that tend to offset seasonal changes in demand. For example, sales of hot dogs and lunchmeat increase during the summer months, and ham and breakfast sausage sales increase during the winter holiday periods. The meats business is highly competitive, with an emphasis on product quality, innovation and price. New product innovations are a key component to success. The Sara Lee Meats segment competes with other international, national, regional and local companies in each of the product groups. The U.S. meats business is regulated by the U.S. Department of Agriculture, whose focus is on the quality, sanitation and safety of meat products. Sara Lee’s meat businesses in Europe and Mexico are regulated by local authorities in a similar fashion.

• Sara Lee Bakery produces a wide variety of fresh and frozen baked products and specialty items, including bread, buns, bagels, rolls, muffins, specialty bread, refrigerated dough, frozen pies, cakes, cheesecakes and other desserts. The primary raw materials include wheat flour, sugar, corn syrup, butter, fruit, eggs and cooking oils, which are purchased from independent suppliers. The Sara Lee Bakery segment does not rely on any one vendor or small group of vendors for these raw materials, and prices fluctuate based upon supply and demand in the marketplace, weather and government price supports. The Sara Lee Bakery sells its products primarily in the U.S., western and central Europe and Australia; 76% of the segment’s 2005 sales were generated in U.S. dollars, 20% in euros and 3% in Australian dollars. Sales are made in both the retail channel to supermarkets, warehouse clubs and national chains, and in the foodservice channel to foodservice distributors, restaurants and other institutions. Sales are generally made through Sara Lee’s sales force and independent wholesalers. The Sara Lee Bakery Group offers delivery directly to retail customer stores and warehouses through its direct store delivery system, which maintains approximately 5,500 delivery routes. The top 20 customers of the Sara Lee Bakery business represent approximately 51% of the segment’s sales. The major brands under which Sara Lee Bakery sells its products include Sara Lee, Earth Grains, Grant’s Farm, Colonial, Rainbo, Holsum, IronKids, Mother’s, Sunbeam, Healthy Choice, Roman Meal and Chef Pierre in the U.S.; Bimbo, Ortiz and CroustiPate in Europe; and Sara Lee, Bon Gateaux and Universal Foods in Australia. Certain of the brands are used under licensing arrangements. Sales of products sold under these licensing arrangements represent less than 7% of total Sara Lee Bakery sales. Seasonality in the Sara Lee Bakery segment is balanced by the diverse offering of products that tend to offset the seasonal changes in demand. For example, sales of buns increase in the warm summer months, and sales of dough products, specialty cakes and pies increase for the winter holiday season. The bakery business is highly competitive, with an emphasis on product quality, innovation and value. New product innovations drive growth in this segment. The Sara Lee Bakery segment competes with other international, national, regional and local companies in each of the product groups. The bakery business is subject to the regulations of the Food and Drug Administration in the U.S. and by similar authorities in foreign countries.

• The Beverage segment produces coffee and tea products that are sold in major markets around the world, including the U.S., Europe, Australia and Brazil. The significant cost item in the production of coffee products is the price of green coffee beans, which are purchased from farmers and coffee bean vendors in various countries in the world. The price of green coffee fluctuates based upon supply and demand, weather, the political climate in the producing nations, unilateral pricing policies of various nations and speculation in the commodities markets. Fifty percent of the segment’s 2005 sales were generated in euros, 30% in U.S. dollars, 6% in Brazilian real and 3% in Australian dollars. Sales are made in both the retail channel to supermarkets, warehouse clubs and national chains, and in the foodservice channel to foodservice distributors. The Beverage segment also offers direct delivery to restaurants and warehouses through its direct delivery system. The top 20 customers of the Beverage business represent approximately 40% of the segment’s sales. In Europe, some of the more prominent brands are Douwe Egberts, Senseo, Maison du Café, Marcilla, Merrild and Pickwick. In the U.S., brands include Chock full o’Nuts, Hills Bros., Chase and Sanborn and Superior, while in South America, significant brands include Café do Ponto, Café Caboclo, União and Café Pilão. Seasonal sales increases for Beverage products are experienced in the second quarter due to higher consumer consumption in the winter months. The beverage business is highly competitive, with an emphasis on quality and value, and Sara Lee competes with other international and regional companies. Coffee consumption has increased in the world at a low single-digit rate over the past six years. However, consumer preferences as to the blend or flavor and convenience of their purchase continue to change, with differing preferences in various countries and locations around the world. The Beverage segment continues to introduce new and innovative products to meet consumers’ needs.

• Household Products produces and sells products in four primary product categories – body care, air care, shoe care and insecticides. Body care consists of soaps, shampoos, bath and shower products, deodorants, shaving creams and toothpastes, which are sold primarily in Europe under brands such as Sanex, Duschdas, Radox, Monsavon and Prodent. Air care provides air fresheners under the Ambi Pur brand in Europe and certain Asian countries. Shoe care includes polishes, cleaners and wax under the Kiwi and Meltonian brands in many countries around the world. Insecticides are sold primarily in Europe and Asia under brands such as Vapona, Catch, GoodKnight, Bloom and Ridsect. Fifty percent of the segment’s 2005 sales were in euros, 12% in British pounds, 5% in U.S. dollars, and the remaining portion of the segment’s sales were generated primarily in the Asia-Pacific region and other portions of Europe. The top 20 customers of the Household Products business represent approximately 36% of the segment’s sales. The Household Products segment experiences higher sales in the second half of the fiscal year, as sales of both body care products and insecticides increase in anticipation of the warmer summer months. The household products business is highly competitive, with an emphasis on innovation,

4            Sara Lee Corporation and Subsidiaries

quality and value, and Sara Lee competes with other international and regional companies.

• Branded Apparel sources, manufactures and markets basic branded apparel products under the three categories of intimate apparel, underwear/activewear and legwear. The primary raw materials used in the production of these products include various natural and synthetic fabrics and fibers, including those made from cotton, nylon, spandex and certain elastics, which are purchased from various independent suppliers. The corporation relies on a small group of suppliers to provide sewing services and certain textiles and yarns that are used in production. The largest of these specific suppliers provides approximately 13% of estimated manufacturing needs. Alternative sources of supply exist for each of these products, services and the other raw materials that are used in production. Prices for raw materials fluctuate based upon supply and demand in the marketplace. Branded Apparel sells its products primarily in the U.S. and Europe; 68% of the segment’s 2005 sales were generated in U.S. dollars, 16% in euros and 8% in British pounds. The top 20 customers of the Branded Apparel segment represent approximately 55% of the segment’s sales. Approximately 22% of this segment’s sales are to Wal-Mart stores. Principal brands include Hanes, Champion, Playtex, L’eggs, barely there, Bali, Just My Size and Wonderbra in the U.S. and Dim, Playtex, Unno, Nur Die, Lovable and Wonderbra in Europe. Distribution channels range from department and specialty stores for premium brands to warehouse clubs and mass-merchandise outlets for certain value-priced brands. Sales are transacted through Sara Lee’s sales force. On a constant currency basis, sales are typically higher in the first two quarters of each year. Socks, hosiery and fleece products generally have higher sales in this period as a result of the cooler weather and back-to-school shopping. Sales levels in a period are also impacted by retailers’ decisions to increase or decrease inventory levels in response to anticipated consumer demand. The Branded Apparel business is highly competitive, with an emphasis on product value and quality. While many products such as white underwear, athletic socks, basic fleece products and T-shirts are not subject to significant change year-to-year, other products such as intimate apparel and sheer hosiery have a heavier emphasis on style and innovation. The corporation’s products in this segment compete against those of other national and international manufacturers. In addition, the consolidation of the retail trade has resulted in certain customers developing their own brands and sourcing product needs from third-party manufacturers.

On January 1, 2005, the World Trade Organization completed a 10-year plan to phase out import quotas that limit the number of apparel products that can be imported into the U.S. and other countries from certain countries in the world. Approximately 180 countries ship apparel products to the U.S. The corporation sources products from a number of countries in the world and is continually evaluating its sourcing options. In evaluating these alternatives, the corporation considers factors such as quality, style, delivery times and manufacturing flexibility, in addition to the cost of manufacturing the apparel products and compliance with specific operating standards. The corporation will continue to evaluate its product sourcing strategies, including the ability to relocate production sourcing to lower cost locations that previously may not have been available due to the import quotas. The phaseout of import quotas also could potentially allow new competitors to enter the apparel business. This includes both new domestic as well as foreign competitors who could establish manufacturing sites in these foreign locations. The corporation, under its numerous brands, designs, sources, produces, markets and delivers apparel products in this highly competitive business and will continue to evaluate sourcing and marketing options. It is unclear what the long-term implications will be from the elimination of these quotas.

Business Transformation Plan

In February 2005, the corporation announced a Transformation plan designed to improve the corporation’s performance and better position Sara Lee for long-term growth. The plan is expected to be completed by 2010 and a number of significant gains and losses are anticipated to be recognized over that period. The significant components of the plan are as follows:

Organization Structure The corporation indicated that it will organize its business operations around distinct consumers, customers and geographic markets in order to build functional excellence, increase strategic focus and simplify the organization. During 2005, the corporation announced plans to locate the management of its North American business along with the majority of its corporate staff at a single site in suburban Chicago. In Europe, the corporation announced plans to centralize management on a regional basis. Beginning in 2006, the corporation will be organized around the following business groups:

• Sara Lee Food & Beverage – This will include the bakery, packaged meats and coffee retail businesses in North America.

• Sara Lee Foodservice – This will include the bakery, beverage and meats foodservice businesses in North America.

• Sara Lee International – This will include the beverage, bakery and meats businesses outside of North America and the global household products business.

• Sara Lee Branded Apparel – Until this business is disposed, the worldwide branded apparel operations will continue to be organized in the same manner as they currently are.

As a result of these changes, the corporation’s reportable segments will change in 2006.

Portfolio Changes The corporation announced plans to dispose of certain businesses in order to concentrate financial and management resources on a smaller number of entities that are better positioned for increased growth. The businesses targeted for disposal include the following:

• Direct Selling – The results of this business are reported as a discontinued operation in 2005 and prior years have been restated. In August 2005, the corporation announced it had signed a definitive agreement to sell this business for $557 million of cash. Further information regarding the Direct Selling business is contained in Note 3, titled “Discontinued Operations,” in the Consolidated Financial Statements.

Sara Lee Corporation and Subsidiaries            5

• European Meats, European Apparel and U.S. Retail Coffee – The corporation indicated that it intends to sell these businesses and has initiated steps to dispose of them. At the end of 2005, these businesses are classified as held for use. As of July 2, 2005, in accordance with Statement of Financial Accounting Standards (SFAS) No. 142 and SFAS No. 144, a $350 million impairment charge was recognized on the long-lived assets of the European Apparel and U.S. retail coffee operations. Further information regarding this charge is contained in Note 4, titled “Impairment Charges,” in the Consolidated Financial Statements.

• Branded Apparel Americas/Asia – The corporation indicated that it intends to separate the Branded Apparel Americas and Asia business from the corporation and has initiated steps to facilitate that transaction. At the end of 2005, the operations were classified as held for use.

Improving Operational Efficiency The third element of the Transformation plan involves several initiatives to improve operational efficiency. These initiatives include the following:

• The simplification of the organization structure will result in the termination of a number of employees and the elimination of certain manufacturing facilities. The exit activities initiated by the corporation in 2005 are fully explained in other sections of this Financial Review and in Note 19, titled “Exit and Disposal Activities,” in the Consolidated Financial Statements. In 2006, the corporation expects to recognize additional exit costs to reduce employment levels in the organization and eliminate manufacturing capacity.

• The company expects to reduce the number of brands utilized in its North American Bakery business as well as to increase the research and development and marketing spending behind a smaller group of large brands. The carrying value of the trademarks in the North American Bakery operations at the end of 2005 was $323 million. When a plan is developed and approved by management to exit certain of these trademarks, the ongoing amortization will increase and a charge to recognize the impairment of these assets may result.

• The corporation expects to make a substantial investment to improve information technology systems and processes. This is primarily related to the costs to implement a standardized information technology platform in the North American operations and the continued consolidation of information processing. There are a number of variables that impact the cost of installing and transitioning to new information systems. At the present time, the corporation expects that from 2006 through 2010, the cost of these information technology initiatives will be $190 million, with a substantial portion of the cost being incurred after 2006.

Review of Consolidated Results of Operations – 2005 Compared With 2004

In millions	2005			2004			Dollar Change			Percent Change
Net sales	$	19,254		$	19,119		$	135		0.7	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	—		$	(514	)	$	514
Acquisitions/dispositions		77			107			(30	)
Impact of the 53rd week		—			364			(364	)
Total	$	77		$	(43	)	$	120
Operating income	$	1,120		$	1,670		$	(550	)	(32.9	)%
Increase/(decrease) in operating income from
Receipt of contingent sale proceeds	$	117		$	119		$	(2	)
Changes in foreign currency exchange rates		—			(67	)		67
Exit activities and business dispositions		(93	)		(48	)		(45	)
Transformation restructuring costs		(15	)		—			(15	)
Curtailment gain		28			—			28
Accelerated depreciation on facilities sold		(19	)		(5	)		(14	)
Accelerated amortization of intangibles		(9	)		(1	)		(8	)
Acquisitions/dispositions		6			11			(5	)
Impairment charges		(350	)		—			(350	)
Increase in U.S. underwear inventory reserves		(29	)		(1	)		(28	)
Impact of the 53rd week		—			48			(48	)
Total	$	(364	)	$	56		$	(420	)

Net Sales Consolidated net sales increased $135 million, or 0.7%, in 2005 over 2004, to $19,254 million. The strengthening of foreign currencies, particularly the euro and British pound, increased reported net sales by 2.7%, or $514 million. Net sales in 2005 include sales of $77 million from a joint venture that the corporation started to consolidate upon the adoption of SFAS Interpretation No. 46, “Consolidation of Variable Interest Entities,” in the fourth quarter of 2004. The adoption of this accounting standard is more fully described in the “Summary of Significant Accounting Policies” contained in Note 2 to the Consolidated Financial Statements. The impact of these sales is included in the table above in the line labeled “Acquisitions/dispositions.” Net sales in 2004 include $107 million from businesses disposed of after the start of 2004. The net impact of acquisitions and dispositions between 2005 and 2004 reduced net sales by $30 million, or 0.2%. The 2004 fiscal year included 53 weeks, while the 2005 fiscal year included 52 weeks. The impact of the additional week decreased net sales by $364 million, or 1.9%. The remaining net sales increase of $15 million resulted from increases in net sales in the Sara Lee Meats and Beverage business segments, which were substantially offset by declines in the Sara Lee Bakery, Household Products and Branded Apparel segments. The Sara Lee Meats and Beverage segments increased selling prices during the period to pass along a portion of the higher raw material costs. In the Sara Lee Meats and Beverage segments, the higher selling prices had a negative impact on unit volumes, but increased net sales. Net sales in the Household Products segment decreased primarily due to lower net selling prices from a competitive marketplace and to lower unit volumes of air care products. The Sara Lee Bakery segment experienced lower net sales

6            Sara Lee Corporation and Subsidiaries

under a continuing program to exit lower margin nonbranded fresh bread business and private label fresh breads and lower unit volumes for frozen bakery products. In the Branded Apparel segment, unit volumes decreased based upon lower consumer demand in an increasingly competitive marketplace.

The corporation developed a brand segmentation strategy to help drive growth by focusing its investment and management attention on those brands with the most compelling opportunities. All of the corporation’s retail brands are placed into one of four brand classifications: Strategic Investment, Support and Grow, Sustain, and Manage for Cash. The following table summarizes the net sales by brand segmentation strategy for 2005.

In millions	2005		% Change Versus 20041		Effect of Currency Rate Changes2 (percentage points)
Strategic investment	$	3,773	11	%	3 pts.
Support and grow		5,167	—		3
Sustain		3,987	(3	)	2
Manage for cash		3,231	(8	)	3
Total retail		16,158	—		3
Foodservice/other		3,096	5		2
Total	$	19,254	1	%	3 pts.

¹ Fiscal year 2004 was a 53-week year.

² In order to calculate the percent change in sales on a constant currency basis, the reported percent change versus fiscal year 2004 should be decreased by the effect of currency rate changes.

Unit Volumes Unit volumes in each of the business segments were impacted by the additional 53^rd week in 2004. Unit volumes in the Sara Lee Meats segment declined 3% in 2005. Reductions in the U.S., Mexico and Europe from the impact of the 53^rd week and higher commodity costs led to higher customer selling prices, which negatively impacted unit volume. The Sara Lee Bakery segment unit volumes declined by 8% in 2005, primarily from a strategy to reduce unit volumes for low margin U.S. fresh bread and from lower unit volumes of frozen baked goods. In the Beverage segment in 2005, unit volumes declined by 3% from continued weakness in the U.S. and European retail coffee markets, which were only partially offset by higher unit volumes in Brazil. The unit volumes for the four core categories of the Household Products segment decreased 3% in 2005, primarily due to the impact of the 53^rd week and lower unit volumes for air care products due to the continued category weakness. In 2005, unit volumes decreased 3% in the Branded Apparel segment from lower unit volume in the intimates and knit products categories. Legwear unit volumes were unchanged.

Gross Margin Percent The gross margin percentage declined from 37.9% in 2004 to 36.2% in 2005. The gross margin percent of the Sara Lee Meats segment declined by 3 points during the period, while the Beverage, Household Products and Branded Apparel segments gross margin percentages each declined by 2 points. The gross margin percentage in the Sara Lee Bakery segment increased by almost 1 point. The gross margin percentages in the Sara Lee Meats and Beverage operations reflect the impact of higher raw material costs, primarily hogs and green coffee beans, respectively, that the corporation was not able to pass along to customers through higher selling prices. The Household Products segment reflects lower net selling prices due to a competitive marketplace. The Branded Apparel operations represent higher raw material costs for cotton, charges for slow-moving inventory, plus costs associated with new product rollouts. The improved gross margin percentage in the Sara Lee Bakery business is primarily due to improvements in the mix of products sold and the benefits resulting from ongoing restructuring efforts and lower benefit plan costs.

Selling, General and Administrative Expenses

In millions	2005		2004		Dollar Change			Percent Change
Selling, general and administrative expenses:
SG&A expenses in the business segment results	$	5,179	$	5,238	$	(59	)	(1.1	)%
Amortization of identifiable intangibles		114		102		12		11.9
General corporate expenses		231		313		(82	)	(26.2	)
Total	$	5,524	$	5,653	$	(129	)	(2.3	)%

Total selling, general and administrative (SG&A) expenses decreased $129 million, or 2.3%, in 2005 over the comparable prior year period. Changes in foreign currency exchange rates, primarily in the euro, increased SG&A expenses by $165 million, or 2.8%. Therefore, the remaining decrease in SG&A expenses was $294 million, or 5.1%. SG&A expenses reported in the business segment results declined primarily from lower benefit plan costs and the disposition of certain businesses in 2004. Measured as a percent of sales, SG&A expenses declined from 29.6% in 2004 to 28.7% in 2005, primarily from reductions in Sara Lee Bakery, Beverage and Branded Apparel. These declines were partially offset by increases in Sara Lee Meats and Household Products. Amortization of intangibles increased by $12 million, or 11.9%, primarily from the impact of the accelerated amortization of certain Sara Lee Bakery brands that will be abandoned, the impact of foreign currency exchange rates, and the decision in the second quarter to begin amortizing certain trademarks that were previously determined to have an indefinite life. General corporate expenses, which are not allocated to the individual business segments, declined by $82 million, or 26.2%, primarily due to the favorable settlement of a $20 million withholding tax obligation that was established in 2004, a decline in benefit plan costs and lower annual bonus costs.

Sara Lee Corporation and Subsidiaries            7

Charges for (Income From) Exit Activities and Business Dispositions The reported results for 2005 and 2004 reflect amounts recognized for exit and disposal actions, including the impact of certain activities that were completed for amounts more favorable than previously estimated. The following table illustrates where the costs (income) associated with all exit and disposal activities are recognized in the Consolidated Statements of Income of the corporation.

In millions	2005			2004
Cost of sales
Curtailment gain from Sara Lee Bakery workforce reduction	$	(28	)	$	—
Accelerated depreciation related to facility closures in
Sara Lee Bakery segment		10			5
Household Products segment		9			—
Other Transformation costs		2			—
Selling, general and administrative expenses
Accelerated amortization of intangibles		9			1
Transformation expenses		13			—
Charges for (income from)
Exit activities		119			57
Business dispositions		(26	)		(9	)
Impact on income from continuing operations before income taxes		108			54
Income taxes		(34	)		(18	)
Impact on income from continuing operations	$	74		$	36

The following is a summary of the actions that impacted 2005. The amount recognized on the line titled “Cost of sales,” as noted in the table above, consists of a $28 million curtailment gain from the termination of certain Sara Lee Bakery employees, which was partially offset by a $21 million charge for accelerated depreciation on certain facilities to be sold in the Sara Lee Bakery and Household Products segments and other Transformation costs. SG&A expenses include a $22 million net charge, which includes a $9 million charge for accelerated amortization for the cost to abandon certain Sara Lee Bakery intangible assets and a $13 million charge for Transformation costs, which include accelerated depreciation of certain leasehold improvements in the Branded Apparel segment, consulting costs associated with Transformation efforts, and various employee relocation and recruiting efforts. The line titled “Charges for (income from) exit activities and business dispositions” includes a $93 million net charge that consists of the following components: $119 million net charge for certain exit activities and a net $26 million gain from certain business disposition actions. The $119 million charge for exit activities includes the following components: a $123 million charge relates to certain severance actions related to the planned termination of 1,959 employees; an $8 million charge relates to certain lease exit and other contractual costs; and $12 million of income relates to certain exit activities that were completed for amounts more favorable than originally estimated. The $26 million net gain from business disposition actions includes the following components: $57 million of income relates to the disposition of trademarks and working capital related to a noncore skin care product line and certain noncore regional meat products and brands; $3 million of income represents amounts received from prior business dispositions; and partially offsetting these amounts is a $34 million charge related to the costs of evaluating certain business dispositions. The net impact of these actions was to decrease income from continuing operations before income taxes and income from continuing operations by $108 million and $74 million, respectively, which reduced diluted earnings per share from continuing operations during the period by $0.10 per share.

The total charge recognized in 2004 consists of the following components. Included on the line titled “Cost of sales” is a $5 million charge for accelerated depreciation expense related to assets to be disposed in the Sara Lee Bakery segment. Included on the SG&A line is a $1 million charge for accelerated trademark amortization related to the cost to abandon certain Sara Lee Bakery trademarks. The line titled “Charges for (income from) exit activities and business dispositions” includes a net charge of $48 million that consists of a $57 million charge for exit activities and a $9 million credit for business dispositions. The $57 million for exit activities consists of the following components: a $70 million charge associated with terminating a number of employees, a $6 million charge for anticipated losses on assets held for sale, and partially offsetting these amounts is income of $19 million related to the disposal of assets and the settlement of lease and employee termination obligations for amounts more favorable than originally estimated. The $9 million net gain for business dispositions was recognized from management’s approved actions to dispose of certain businesses and consists of a $13 million gain recognized on the disposal of a minority ownership position in Johnsonville Foods. Offsetting this gain is a net $4 million charge related to the disposal of an Italian hosiery business and the favorable settlement of amounts associated with prior dispositions. The net impact of these actions was to decrease income from continuing operations before income taxes and net income by $54 million and $36 million, respectively, which reduced diluted earnings per share from continuing operations by $0.05.

        The costs (income) of the above actions on the corporation’s business segments and amortization expense are summarized as follows:

In millions	2005			2004
Sara Lee Meats	$	(29	)	$	(3	)
Sara Lee Bakery		(9	)		19
Beverage		40			(2	)
Household Products		8			—
Branded Apparel		44			35
Impact on the business segments		54			49
Corporate office		45			4
Accelerated amortization of intangibles		9			1
Total	$	108		$	54

These actions are more fully explained in Note 19 to the Consolidated Financial Statements titled “Exit and Disposal Activities.” As a result of the exit activities taken since the beginning of 2004, the corporation’s cost structure was reduced and efficiency improved. The total annual savings generated from restructuring efforts is $64 million in 2005.

Impairment Charges The corporation recognized in 2005 an impairment charge that reduced income from continuing operations before tax by $350 million, reduced income from continuing operations by $291 million, and reduced diluted earnings per share (EPS) from

8            Sara Lee Corporation and Subsidiaries

continuing operations by $0.37. The $350 million pretax charge consists of a $305 million charge for the European Branded Apparel business and a $45 million charge for the U.S. retail coffee business. These actions are more fully explained in Note 4 titled “Impairment Charges” to the Consolidated Financial Statements.

Receipt of Contingent Sale Proceeds The corporation sold its European cut tobacco business in fiscal 1999. Under the terms of that agreement, the corporation will receive an annual cash payment of 95 million euros if tobacco continues to be a legal product in the Netherlands, Germany and Belgium through 2010. The legal status of tobacco in each country accounts for a portion of the total contingency with the Netherlands accounting for 67%, Germany 22% and Belgium 11%. If tobacco ceases to be a legal product within any of these countries, the corporation forfeits the receipt of all future amounts related to that country. The contingencies associated with the first payment passed in the third quarter of 2004 and the corporation received the payment that was equivalent to $119 million based upon the exchange rates on the date of receipt. The contingencies associated with the second contingent payment passed in the first quarter of 2005 and the corporation received the payment that was equivalent to $117 million based upon exchange rates on the date of receipt. Each of these amounts is recognized in the corporation’s earnings when received and each of the payments increased diluted earnings per share from continuing operations by $0.15 when they were recognized.

Net Interest Expense Net interest expense for continuing operations increased by $3 million in 2005, to $186 million, primarily as a result of higher average interest rates.

Income Tax Expense The effective tax rate for continuing operations increased from 16.7% in 2004 to 21.7% in 2005. The tax expense for both 2005 and 2004 was impacted by a number of significant items, which are set out in the reconciliation of the corporation’s effective tax rate to the U.S. statutory rate in Note 23, titled “Income Taxes” to the Consolidated Financial Statements. The most significant of these items in 2005 were the following:

• The corporation recognized a $365 million tax charge related to the repatriation of the earnings of foreign subsidiaries to the U.S. Of this total, $261 million was recognized in connection with the remittance of current year earnings to the U.S., $48 million relates to earnings repatriated under the provisions of the American Jobs Creation Act of 2004, and $56 million relates to cash to be repatriated from the corporation’s European meat business.

• The corporation finalized certain tax reviews for amounts less than originally anticipated and recognized a benefit of $348 million.

• The impairment charge included the write-off of $182 million of goodwill upon which no tax benefit was recognized.

As a global commercial enterprise, the corporation’s tax rate from period to period can be affected by many factors. The most significant of these factors are changes in tax legislation; the corporation’s global mix of earnings; the tax characteristics of the corporation’s income; acquisitions and dispositions; and the portion of the income of foreign subsidiaries that is expected to be remitted to the U.S. and be taxable. It is reasonably possible that the following items can have a material impact on income tax expense, net income and liquidity in future periods.

• The corporation’s Transformation plan includes the planned disposition of several significant businesses and these actions will impact future results in several ways. First, the tax expense or benefit directly associated with these dispositions will impact the net income and liquidity of the corporation. At this time, the terms and conditions of future dispositions have not been determined, and accordingly it is not possible to estimate the impact of such transactions on the tax expense and liquidity of the corporation. Secondly, if the disposal of the Americas and Asian Apparel business is completed, the effective tax rate of the continuing business will likely increase. The Americas and Asian Apparel operations have historically had a lower effective tax rate than the remainder of the business and generate a significant amount of operating cash flow. The elimination of this cash flow may require the corporation to remit a greater portion of the future earnings of foreign subsidiaries to the U.S. than has historically been the case, and may result in higher levels of tax expense and cash taxes paid. The corporation has indicated that it expects its effective tax rate to increase to approximately 29% to 31% after the business Transformation is completed.

• Tax legislation in the jurisdictions in which the corporation does business may change in future periods. While such changes cannot be predicted, if they occur, the impact on the corporation’s tax assets and obligations will need to be measured and recognized in the financial statements.

The corporation’s tax returns are routinely audited and settlements of issues raised in these audits affect the corporation’s tax expense. The corporation has ongoing audits in the U.S. and a number of international jurisdictions. The examination of the U.S. federal income tax returns is current through June 29, 2002. Consistent with prior experience, the corporation expects the Internal Revenue Service to initiate the audit of the tax returns of 2003 and subsequent years. The obligations recognized in the financial statements reflect the probable finalization of anticipated worldwide audits. In addition, the corporation believes that it has sufficient cash resources to fund the settlement of these audits.

Income From Continuing Operations and Diluted EPS From Continuing Operations Income from continuing operations of $731 million in 2005 was $508 million, or 41.0% lower than the prior year comparable period. The decline in income from continuing operations was primarily due to the following factors:

• The corporation’s gross margin percentage declined by 1.7% as the corporation’s business segments experienced higher costs for certain commodity-based raw materials in the Sara Lee Meats, Beverage and Branded Apparel businesses and experienced pricing pressures from a competitive marketplace in all business segments, which reduced the corporation’s gross profit by $282 million.

• SG&A expenses declined by $129 million as compared to the prior year period. This decline was due to several factors including a $61 million reduction in the net periodic benefit cost of pension and postretirement medical plans, the favorable settlement of a

Sara Lee Corporation and Subsidiaries            9

$20 million withholding tax obligation that was established in 2004, lower annual bonus costs, and a lower cost structure resulting from exit activities initiated in 2004. Total advertising and promotion costs of $890 million were $3 million greater than in 2004.

• In 2005, the corporation recognized charges from exit activities, business dispositions and impairments of $443 million, while in 2004, the corporation recognized charges for exit activities of $48 million.

• The corporation received and recognized contingent sale proceeds of $117 million in 2005 and $119 million in 2004 from the sale of the corporation’s cut tobacco business.

• Net interest expense increased by $3 million in 2005.

• Income tax expense decreased by $45 million, as a result of the tax items noted above.

Diluted EPS from continuing operations decreased from $1.55 in 2004 to $0.92 in 2005, a decrease of 40.6%.

Discontinued Operations The corporation’s Direct Selling business is classified as a discontinued operation. The following summarizes the results of the discontinued operations for 2005 and 2004:

In millions	2005			2004			Dollar Change			Percent Change
Net Sales	$	473		$	447		$	26		5.7	%
Income before taxes	$	55		$	55		$	—
Income taxes		(67	)		(22	)		(45	)
Net (loss) income from discontinued operations	$	(12	)	$	33		$	(45	)

Net sales from discontinued operations increased in 2005 by $26 million, or 5.7%, while income before taxes was unchanged between 2005 and 2004. The Direct Selling operations are outside the U.S. and at the end of 2005, the accumulated earnings of the foreign subsidiaries were no longer considered permanently invested. The increase in the income tax expense of this business in 2005 resulted from the recognition of the tax obligation associated with the accumulated earnings of these foreign subsidiaries.

Consolidated Net Income and Diluted Earnings Per Share (EPS) Net income of $719 million in 2005 was $553 million, or 43.5% lower than the prior year comparable period. The decline in net income was primarily due to the decline in income from continuing operations. Diluted EPS decreased from $1.59 in 2004 to $0.90 in 2005, a decline of 43.4%.

Operating Results by Business Segment – 2005 Compared With 2004

Operating results by business segment in 2005 compared with 2004 are as follows:

	Net Sales						Income From Continuing Operations Before Income Taxes
In millions	2005			2004			2005			2004
Sara Lee Meats	$	4,254		$	4,171		$	323		$	415
Sara Lee Bakery		3,297			3,415			213			156
Beverage		3,357			3,157			388			492
Household Products		1,927			1,934			310			354
Branded Apparel		6,426			6,449			114			549
Total business segments		19,261			19,126			1,348			1,966
Intersegment sales		(7	)		(7	)		—			—
Total net sales and operating segment income		19,254			19,119			1,348			1,966
Amortization of intangibles		—			—			(114	)		(102	)
General corporate expenses		—			—			(231	)		(313	)
Contingent sale proceeds		—			—			117			119
Total net sales and operating income		19,254			19,119			1,120			1,670
Net interest expense		—			—			(186	)		(183	)
Net sales and income from continuing operations before income taxes	$	19,254		$	19,119		$	934		$	1,487

A discussion of each business segment’s sales and operating segment income is presented below.

The intangible amortization in the table above relates to trademarks and customer relationships. Software amortization is recognized in the earnings of the segments. The amortization related to trademarks and customer relationships increased in 2005 due to the impact of the accelerated amortization of certain Sara Lee Bakery brands that were abandoned, the impact of foreign currency exchange rates, and the decision in the second quarter to begin amortizing certain trademarks that were previously determined to have an indefinite life.

General corporate expenses declined primarily due to a decline in benefit plan costs, lower corporate office and administrative expenses and favorable foreign currency costs as compared to the prior year.

10            Sara Lee Corporation and Subsidiaries

Sara Lee Meats

In millions	2005			2004			Dollar Change			Percent Change
Change in unit volume 1										(3	)%
Net sales	$	4,254		$	4,171		$	83		2.0	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	—		$	(71	)	$	71
Dispositions		—			42			(42	)
Impact of the 53rd week		—			83			(83	)
Total	$	—		$	54		$	(54	)
Operating segment income	$	323		$	415		$	(92	)	(22.1	)%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	—		$	(9	)	$	9
Exit activities and business dispositions		33			3			30
Transformation restructuring costs		(4	)		—			(4	)
Dispositions		—			4			(4	)
Impact of the 53rd week		—			7			(7	)
Total	$	29		$	5		$	24

¹ Excludes the impact of dispositions

Unit volumes in the Sara Lee Meats segment for processed meats decreased 3% as compared to the prior year period, consisting of declines of 3% in the U.S., 7% in Mexico, and 2% in Europe. The 2004 fiscal year included 53 weeks, while the 2005 fiscal year included 52 weeks. In the U.S., unit volumes decreased in both the retail and foodservice channels. The decline in unit volumes in each of the geographic regions was due to both the impact of the 53^rd week in 2004 and higher net selling prices resulting from higher commodity costs, which reduced unit volume.

Net sales in the Sara Lee Meats segment increased by $83 million, or 2.0%, to $4,254 million in 2005 from $4,171 million in the prior year period. During the period, the strengthening of the euro, partially offset by the weakening of the Mexican peso, increased reported net sales by $71 million, or 1.7%. 2004 includes $42 million of sales from businesses that have been disposed of subsequent to the start of 2004, which reduced net sales by 1.0%. The 2004 fiscal year included 53 weeks, while the 2005 fiscal year included 52 weeks. The impact of the 53^rd week in 2004 reduced net sales by $83 million, or 2.0%. The remaining net sales increase of $137 million, or 3.3%, was primarily due to unit selling prices that increased as the corporation passed on certain raw material cost increases to the customer and the impact of a favorable product mix, which were partially offset by the impact of declining unit volumes during the period.

The Sara Lee Meats gross margin percentage decreased from 29.7% in 2004 to 26.8% in 2005, as the impact of higher raw material costs during the period was only partially mitigated by a combination of higher selling prices, a favorable product mix and various production efficiency programs.

Operating segment income in Sara Lee Meats decreased by $92 million, or 22.1%, from $415 million in the prior year period to $323 million in 2005. Changes in foreign currency, particularly the euro, increased reported operating segment income by $9 million, or 1.6%. Both 2005 and 2004 were impacted by exit activities and business dispositions. The 2005 period includes income of $29 million from exit activities, business dispositions and certain Transformation restructuring costs, while the 2004 period includes income of $3 million. The difference between these amounts increased operating segment income by $26 million, or 6.4%. The 2004 period includes results of certain businesses that have been disposed of subsequent to the start of 2004, which decreased operating segment income by $4 million, or 0.7%. The impact of the 53^rd week reduced operating segment income by $7 million, or 1.3%. The remaining operating segment income decrease of $116 million, or 28.1%, as compared to the same period of the prior year is the result of lower gross margins, higher administrative expenses related to sales force and supply chain projects, higher fuel costs and higher media advertising and promotion costs.

        In February 2005, the corporation announced that it is exploring the sale of the corporation’s European meats business. At the end of 2005, no decisions have been made regarding the ultimate actions that may be taken regarding this business, and therefore this business was not classified as “held for sale” under the provisions of SFAS No. 144.

Sara Lee Bakery

In millions	2005			2004			Dollar Change			Percent Change
Change in unit volume										(8	)%
Net sales	$	3,297		$	3,415		$	(118	)	(3.5	)%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	—		$	(48	)	$	48
Impact of the 53rd week		—			69			(69	)
Total	$	—		$	21		$	(21	)
Operating segment income	$	213		$	156		$	57		36.4	%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	—		$	(4	)	$	4
Exit activities and business dispositions		(5	)		(14	)		9
Transformation restructuring costs		(4	)		—			(4	)
Curtailment gain		28			—			28
Accelerated depreciation		(10	)		(5	)		(5	)
Impact of the 53rd week		—			7			(7	)
Total	$	9		$	(16	)	$	25

Unit volumes in the Sara Lee Bakery segment declined 8% during 2005, primarily as a result of the planned exit of lower margin nonbranded fresh bread business, declines in frozen bakery products, plus the impact of the extra week in the 2004 results. This decline was partially offset by increases in unit volume for European refrigerated dough products and frozen products in Australia.

Net sales in the Sara Lee Bakery segment decreased $118 million, or 3.5%, over the comparable prior year period. Changes in foreign currency exchange rates increased reported net sales by $48 million, or 1.3%. There were no acquisitions or dispositions that impacted the Sara Lee Bakery segment during the period. The impact of the 53^rd week in 2004 reduced net sales by $69 million, or 2.0%. The remaining net sales decrease of $97 million, or 2.8%, was primarily a result of lower unit volumes, particularly institutional and private label white bread and regional brand fresh bread.

Sara Lee Corporation and Subsidiaries            11

The gross margin percentage in the Sara Lee Bakery segment increased 0.7% from 41.8% in 2004 to 42.5% in 2005 as favorable pricing and product mix, efficiency improvements, plus benefits from previous restructuring actions and lower benefit plan costs, offset higher costs for certain key ingredients and the impact of lower unit volumes.

Operating segment income in the Sara Lee Bakery segment increased by $57 million, or 36.4%, from $156 million in 2004 to $213 million in 2005. Changes in foreign currency, particularly the euro, increased reported operating segment income by $4 million, or 3.1%. In 2005, as a result of the decision to close certain Sara Lee Bakery plants, both accelerated depreciation expense of $10 million and a curtailment gain of $28 million were recognized. Also in 2005, $9 million of charges from exit activities and Transformation restructuring expenses were recognized. In 2004, the Sara Lee Bakery Group recognized charges for accelerated depreciation of $5 million and charges for exit activities of $14 million. The difference between the 2005 and 2004 amounts recorded for curtailment, accelerated depreciation, and exit and Transformation activities increased operating segment income by $28 million, or 19.4%. The impact of the 53^rd week reduced operating segment income by $7 million, or 4.4%. The remaining operating segment income increase of $32 million, or 18.3% during the period, was attributable to higher gross margins and a lower cost structure, which resulted from the benefits of prior restructuring actions, lower media advertising and promotion costs, plus the benefit from a reduction in retiree pension and postretirement medical expense as compared to the prior year period.

Beverage

In millions	2005			2004			Dollar Change			Percent Change
Change in unit volume										(3	)%
Net sales	$	3,357		$	3,157		$	200		6.3	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	—		$	(155	)	$	155
Impact of 53rd week		—			61			(61	)
Total	$	—		$	(94	)	$	94
Operating segment income	$	388		$	492		$	(104	)	(21.2	)%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	—		$	(32	)	$	32
Exit activities and business dispositions		(37	)		2			(39	)
Transformation restructuring costs		(3	)		—			(3	)
Impairment charges		(45	)		—			(45	)
Impact of 53rd week		—			10			(10	)
Total	$	(85	)	$	(20	)	$	(65	)

Unit volumes in the Beverage segment declined 3% as compared to the prior year period, primarily due to continued weakness in the European retail market and both the retail and foodservice markets in the U.S., plus the impact of the 53^rd week in the 2004 results. In the retail channel, unit volumes declined 2% with declines in the U.S. and Europe, due to increased price competition in a competitive marketplace, which were partially offset by increases in unit volumes in Brazil. In the foodservice channel, unit volumes declined by 5% with weakness in the U.S. and was only partially offset by increases in the remaining sectors.

Net sales in the Beverage segment increased by $200 million, or 6.3%, to $3,357 million in 2005, reflecting the impact of changes in foreign currency, higher green coffee commodity prices and improvements in product mix. The impact of foreign currency changes, particularly in the euro, increased reported net sales by $155 million, or 4.9%. There were no acquisitions and dispositions that impacted the Beverage segment during the period. The impact of the 53^rd week in 2004 reduced net sales by $61 million, or 1.9%. The remaining net sales increase of $106 million, or 3.3% compared to the comparable period of the prior year, was primarily due to higher selling prices and the improved performance of the Brazilian operations.

The gross margin percent in the Beverage segment decreased 2.0% from 43.9% in 2004 to 41.9% in 2005, primarily as a result of higher raw material costs that could not be fully passed along to the customer, plus the impact of lower unit volumes.

        Operating segment income for the Beverage segment declined by $104 million, or 21.2%, from $492 million in 2004 to $388 million in 2005. The strengthening of foreign currencies versus the U.S. dollar increased operating segment income by $32 million, or 5.8%. In 2005, the Beverage segment recognized charges for exit activities of $37 million, an impairment charge of $45 million, which is described below, and Transformation restructuring charges of $3 million. In 2004, the Beverage segment recognized income from exit activities of $2 million. The difference between the 2005 and 2004 amounts decreased operating segment income by $87 million, or 17.6%. The impact of the 53rd week reduced operating segment income by $10 million, or 1.7%. The remaining operating segment income decrease of $39 million, or 7.7%, was primarily due to lower gross margins and unit volumes and increases in media advertising to support Senseo.

In February 2005, the corporation announced that it would explore the sale of the corporation’s U.S. retail coffee assets, excluding Senseo. At the end of 2005, the corporation received a third-party valuation of the U.S. retail coffee operations and conducted an impairment review. Based upon this review, the Beverage segment recognized a $45 million impairment charge to recognize the impairment of $13 million of manufacturing assets and $32 million of trademarks in the asset group. At the end of 2005, no decisions have been made regarding the ultimate actions that may be taken regarding these operations, and therefore these assets were not classified as “held for sale” under the provisions of SFAS No. 144. Should this asset group meet the “held for sale” criteria at a future date, a portion of the goodwill associated with the corporation’s U.S. coffee reporting unit will be allocated to the assets held for disposal, and an additional impairment charge may result. Due to the fact that the structure and timing of a future transaction is not known at this time, it is currently not possible to determine the amount of any future impairment.

12            Sara Lee Corporation and Subsidiaries

Household Products

In millions	2005			2004			Dollar Change			Percent Change
Change in unit volume1										(3	)%
Net sales	$	1,927		$	1,934		$	(7	)	(0.3	)%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	—		$	(106	)	$	106
Dispositions		—			24			(24	)
Impact of 53rd week		—			46			(46	)
Total	$	—		$	(36	)	$	36
Operating segment income	$	310		$	354		$	(44	)	(12.3	)%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	—		$	(19	)	$	19
Exit activities and business dispositions		1			—			1
Accelerated depreciation		(9	)		—			(9	)
Dispositions		—			9			(9	)
Impact of 53rd week		—			8			(8	)
Total	$	(8	)	$	(2	)	$	(6	)

¹ Excludes the impact of dispositions

The corporation has initiated activities to sell the Direct Selling business, which was previously reported in the Household Products segment. These activities meet the criteria to report this business as a discontinued operation. Accordingly, the financial results for the Household Products segment have been restated to reflect the Direct Selling business as a discontinued operation in the results of operations and statement of position for all periods presented in this Annual Report. Subsequent to end of 2005, the corporation announced that it had entered into a definitive agreement to sell the Direct Selling business, which is further described in Note 27, titled “Subsequent Events,” to the Consolidated Financial Statements.

Unit volumes in the Household Products segment for the four core categories – shoe care, body care, insecticides and air care – decreased 3% in 2005 as the prior year was a 53-week year. Unit volumes increased in the insecticide category due to an increased marketing effort and higher sales of lower-priced products. In the body care category, unit volumes increased from higher promotional activity. Unit volumes were unchanged in the shoe care category and declined in the air care category due to increased competition in this category.

Net sales in the Household Products segment decreased by $7 million, or 0.3%, from $1,934 million in 2004 to $1,927 million in 2005. The impact of changes in foreign currency exchange rates increased reported net sales by $106 million, or 5.3%, primarily due to the strengthening of currencies in Europe and the United Kingdom. 2004 includes sales of $24 million from businesses that had been disposed of after the start of 2004, which reduced net sales by 1.2%. The impact of the 53^rd week in 2004 reduced net sales by $46 million, or 2.2%. The remaining net sales decrease of $43 million, or 2.2%, was primarily due to lower unit volumes in the air care category and lower net selling prices in the insecticide category.

The gross margin percentage in the Household Products segment decreased 1.7% from the prior year to 51.6% in 2005, primarily from competitive pricing in the marketplace and lower unit volumes.

Operating segment income decreased $44 million, or 12.3%, to $310 million in 2005. Changes in foreign currency exchange rates increased operating segment income by $19 million, or 4.7%. In 2005, a $9 million charge for accelerated depreciation was recognized related to a facility to be sold and income of $1 million was recognized from exit activities and business dispositions. The net impact of these amounts decreased operating segment income by $8 million, or 2.4%. 2004 includes $9 million from product lines that had been disposed of after the start of 2004, which decreased operating segment income by 2.2%. The impact of the 53^rd week reduced operating segment income by $8 million, or 2.0%. The remaining operating segment income decrease of $38 million, or 10.4%, was primarily due to lower unit volumes and gross margins, partially offset by lower administrative expenses.

Branded Apparel

In millions	2005			2004			Dollar Change			Percent Change
Change in unit volume1										(3	)%
Net sales	$	6,426		$	6,449		$	(23	)	(0.4	)%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	—		$	(134	)	$	134
Acquisitions/dispositions		77			41			36
Impact of 53rd week		—			105			(105	)
Total	$	77		$	12		$	65
Operating segment income	$	114		$	549		$	(435	)	(79.2	)%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	—		$	(5	)	$	5
Exit activities and business dispositions		(40	)		(35	)		(5	)
Transformation restructuring costs		(4	)		—			(4	)
Impairment charges		(305	)		—			(305	)
Acquisitions/dispositions		6			(2	)		8
Increase in U.S. underwear inventory reserves		(29	)		(1	)		(28	)
Impact of 53rd week		—			20			(20	)
Total	$	(372	)	$	(23	)	$	(349	)

¹ Excludes the impact of acquisitions and dispositions

Unit volumes in the Branded Apparel segment, excluding acquisitions and dispositions, decreased by 3% in 2005 with a 1% decrease in knit products, a 6% decrease in intimates and no change in legwear. The 2004 prior year results included the impact of the extra week. The 1% decrease in knit products was primarily due to lower shipments of printable T-shirts, which was only partially offset by higher shipments of underwear and Champion products. The 6% decline in intimates was primarily due to a decline in unit volumes in Europe due to manufacturing issues and category and market softness. Legwear unit volumes were unchanged with an 8% increase in socks, which was offset by a 6% decrease in sheer hosiery.

Net sales decreased by $23 million, or 0.4%, from $6,449 million in 2004 to $6,426 million in 2005. The impact of foreign currency exchange rate changes during the period, particularly the euro and British pound, increased reported sales during the period by $134 million, or 2.0%. 2005 includes sales of $77 million from a joint venture that the corporation started to consolidate upon the adoption of SFAS Interpretation No. 46, “Consolidation of Variable Interest Entities,” in the fourth quarter of fiscal 2004. The impact of these sales

Sara Lee Corporation and Subsidiaries            13

is shown in the table above under the caption “Acquisitions/dispositions.” 2004 includes $41 million of sales from businesses that have been disposed of after the start of 2004. The net impact of the acquisitions and dispositions increased net sales by $36 million, or 0.5%, during the period. The impact of the 53^rd week in 2004 reduced net sales by $105 million, or 1.5%. As a result, the remaining net sales decrease was $88 million, or 1.4%, which was primarily due to unit volume decreases in European intimates and in printable T-shirts.

The gross margin percent decreased by 2.1%, from 33.6% in 2004 to 31.5% in 2005, reflecting the impact of higher raw material costs, supply chain disruptions, a $29 million charge for slow-moving inventory items, additional start-up costs associated with new product rollouts, the impact of lower unit volumes on manufacturing costs and an unfavorable sales mix.

Branded Apparel operating segment income decreased by $435 million, or 79.2%, from $549 million in 2004 to $114 million in 2005. Changes in foreign currency exchange rates increased operating segment income by $5 million, or 0.8%. 2005 includes charges for exit activities and business dispositions, Transformation expenses and impairment charges of $349 million, while 2004 includes charges for exit activities and business dispositions of $35 million. The difference between these amounts decreased operating segment income by $314 million, or 58.3%. The impact of acquisitions and dispositions increased operating segment income by $8 million, or 1.2%. The underwear group increased inventory reserves by $29 million to recognize slow-moving and obsolete inventory in 2005 versus a $1 million increase in 2004. The net change in these amounts decreased operating segment income by $28 million, or 5.0%. The impact of the 53^rd week, reduced operating segment income by $20 million, or 2.8%. The remaining decrease in operating segment income was $86 million, or 15.1%, which was primarily due to lower unit volumes and gross margins that were partially offset by the impact of lower media advertising and promotion.

The corporation previously announced its intent to dispose of its European Branded Apparel business, and during 2005, steps were taken to market and identify potential buyers for this business. As part of this process, the corporation received a series of nonbinding bids for the business. During 2005, the operating results of the business deteriorated significantly from prior years and failed to meet planned expectations. Prospective buyers reacted to this downturn by progressively lowering their offers. The nonbinding offers received in the fourth quarter of 2005 were less than the carrying value of the reporting unit and resulted in a pretax charge of $305 million to recognize the impairment of $182 million of goodwill and $123 million of indefinite lived trademarks in this reporting unit. At the end of 2005, no decisions have been made regarding the ultimate actions that may be taken regarding either of these operations, and therefore these assets were not classified as “held for sale” under the provisions of SFAS No. 144.

Review of Consolidated Results of Operations – 2004 Compared With 2003

In millions	2004			2003			Dollar Change			Percent Change
Net sales	$	19,119		$	17,888		$	1,231		6.9	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	—		$	(865	)	$	865
Acquisitions/dispositions		16			51			(35	)
Impact of 53rd week		364			—			364
Total	$	380		$	(814	)	$	1,194
Operating income	$	1,670		$	1,634		$	36		2.3	%
Increase/(decrease) in operating income from
Receipt of contingent sale proceeds	$	119		$	—		$	119
Changes in foreign currency exchange rates		—			(124	)		124
Exit activities and business dispositions		(48	)		11			(59	)
Accelerated depreciation on facilities sold		(5	)		(7	)		2
Accelerated amortization of intangibles		(1	)		(6	)		5
Acquisitions/dispositions		2			2			—
Impact of the 53rd week		48			—			48
Total	$	115		$	(124	)	$	239

Net Sales Consolidated net sales increased $1,231 million, or 6.9%, in 2004 over 2003, to $19,119 million. The strengthening of foreign currencies, particularly the euro, increased reported net sales by 5.0%, or $865 million. Net sales in 2003 include $51 million from businesses that have been disposed of subsequent to the start of 2003. During 2004, the corporation adopted new accounting standard FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” Upon the adoption, the corporation began to consolidate a joint venture investment and, as a result, has included net sales of $16 million in 2004 as a result of this consolidation. This is shown in the table above in the line labeled “Acquisitions/dispositions.” The impact of acquisitions and dispositions decreased net sales between the years by $35 million, or 0.2%. In addition, the 2004 fiscal year included 53 weeks, while the 2003 fiscal year included 52 weeks. The impact of the extra week in 2004 increased net sales by $364 million, or 1.9%. The remaining net sales increase of $37 million, or 0.2%, was primarily attributable to net sales increases in Sara Lee Meats and Beverage, due to higher raw material costs that are partially passed on to customers and an improved product mix. Partially offsetting this increase is a net sales decline in the Sara Lee Bakery segment, primarily due to a decline in unit volumes, a decline in the Branded Apparel segment, due to changes in product mix and lower average selling prices, and a decline in the Household Products segment, due to lower selling prices for air care and shoe care products.

Gross Margin Percent The gross margin percent decreased from 38.9% in 2003 to 37.9% in 2004. Raw material commodity costs in Sara Lee Meats, Beverage and Branded Apparel all increased during the year, and these businesses were unable to recover all of these cost increases from the customer. The Household Products gross margin percent fell as a result of a competitive marketplace, and the Sara Lee Bakery gross margin percent increased slightly due to a favorable product mix during the year and benefits from restructuring actions.

14            Sara Lee Corporation and Subsidiaries

Selling, General and Administrative Expenses

In millions	2004		2003		Dollar Change		Percent Change
Selling, general and administrative expenses
SG&A expenses in the business segment results	$	5,238	$	4,988	$	250	5.0	%
Amortization of identifiable intangibles		102		98		4	3.7
General corporate expenses		313		248		65	26.2
Total	$	5,653	$	5,334	$	319	6.0	%

Total selling, general and administrative (SG&A) expenses increased $319 million, or 6.0%, in 2004. SG&A expenses increased primarily due to the strengthening of foreign currencies, particularly the euro, versus the U.S. dollar as the impact of these changes in foreign currency increased selling, general and administrative expenses by $262 million, or 5.0%. Therefore, the remaining increase in SG&A expenses was $57 million, or 1.0%, which was attributable to increased expenses associated with pension and medical plans and other employee benefit costs, and higher levels of software and trademark amortization, offset in part by lower advertising and promotion costs. When measured as a percentage of sales, SG&A expenses decreased by 0.2%, from 29.8% of sales in 2003 to 29.6% in 2004. SG&A expenses, measured as a percentage of sales, increased in the Branded Apparel and Household Products segments and declined in the Sara Lee Meats, Sara Lee Bakery and Beverage segments.

Charges for (Income from) Exit Activities and Business Dispositions The reported results for 2004 and 2003 reflect amounts recognized for exit and disposal actions, including the impact of certain activities that were completed for amounts more favorable than previously estimated. The objective of the actions taken was to improve the competitive structure of the corporation by exiting certain high-cost manufacturing, distribution and administrative activities and disposing of both certain businesses in which the corporation had a minority ownership position and other components of business investments. The following table illustrates where the costs (income) associated with all exit and disposal activities are recognized in the Consolidated Statements of Income of the corporation.

In millions	2004			2003
Cost of sales
Accelerated depreciation related to facility closures in
Sara Lee Bakery segment	$	5		$	7
Selling, general and administrative expenses		1			6
Charges for (income from)
Exit activities		57			(7	)
Business dispositions		(9	)		(4	)
Impact on income from continuing operations before income taxes		54			2
Income taxes		(18	)		(5	)
Impact on income from continuing operations	$	36		$	(3	)

The following is a summary of the actions that impacted 2004. The amount recognized in the line titled “Cost of sales,” as noted in the table above, consists of a $5 million charge for accelerated depreciation expense related to the assets to be disposed of in the Sara Lee Bakery segment. SG&A expenses include a $1 million charge for accelerated amortization related to the cost to abandon certain Sara Lee Bakery trademarks. The line titled “Charges for (income from) exit activities and business dispositions” includes a $48 million net charge that consists of a $57 million charge for exit activities and a $9 million gain from business dispositions. The $57 million charge for exit activities consists of a $70 million charge associated with terminating a number of employees and a $6 million charge for anticipated losses on assets held for sale, partially offset by a $19 million credit related to the disposal of assets and the settlement of lease and employee termination obligations for amounts more favorable than originally estimated. The $9 million gain on business dispositions consists of a $13 million gain recognized on the disposal of a minority ownership position in Johnsonville Foods. Offsetting this gain is a net $4 million charge related to the disposal of an Italian hosiery business and the favorable settlement of amounts associated with prior dispositions. The net impact of these actions was to reduce income from continuing operations before income taxes by $54 million, reduce income from continuing operations by $36 million, and reduce diluted EPS from continuing operations by $0.05.

The total amount recognized for exit activities and business dispositions in 2003 consists of the following. The amount recognized in the line titled “Cost of sales” includes $7 million for accelerated depreciation on certain assets to be sold in the Sara Lee Bakery segment. SG&A expenses include $6 million for the abandonment of trademarks within the Sara Lee Bakery Group. The line titled “Charges for (income from) exit activities and business dispositions” includes a net $11 million of income that consists of $7 million of income from exit activities and $4 million of income from business dispositions. The net $7 million of income from exit activities consists of a $15 million charge associated with terminating a number of employees, a $5 million charge to exit certain lease obligations and a $6 million charge to dispose of certain manufacturing and distribution assets, which was offset by $33 million of income from completing certain previously announced exit activities for amounts more favorable than originally estimated. The $4 million of income from business dispositions resulted from completing certain previously announced business dispositions for amounts more favorable than originally estimated. The net impact of these actions reduced income from continuing operations before income taxes by $2 million and increased income from continuing operations by $3 million, which did not have an impact on diluted EPS from continuing operations.

Sara Lee Corporation and Subsidiaries            15

The costs (income) of the above actions on the corporation’s business segments are summarized as follows:

In millions	2004			2003
Sara Lee Meats	$	(3	)	$	(6	)
Sara Lee Bakery		19			27
Beverage		(2	)		1
Household Products		—			—
Branded Apparel		35			(26	)
Impact on business segments		49			(4	)
Corporate office		4			—
Accelerated amortization of intangibles		1			6
Total	$	54		$	2

These actions are more fully explained in Note 19 to the Consolidated Financial Statements titled “Exit and Disposal Activities.” As a result of the exit activities taken, the corporation’s cost structure was reduced and efficiency improved. It is estimated that income before income taxes in 2004 included $59 million of incremental benefits over those realized in the prior year. The total annual savings generated from restructuring efforts initiated since 2001 was $274 million in 2004.

Receipt of Contingent Sale Proceeds The corporation sold its European cut tobacco business in 1999. Under the terms of that agreement, the corporation received a cash payment of 95 million euros from the buyer in January 2004. If tobacco continues to be a legal product in the Netherlands, Germany and Belgium, additional annual cash payments of 95 million euros can be received through 2010. If tobacco ceases to be a legal product at any time during this period, the corporation forfeits the receipt of all future amounts. The contingent payment of these amounts is based on the legal status of the product in each country, with the Netherlands accounting for 67% of the total, Germany 22% and Belgium 11%. If the contingencies on these amounts pass, the amounts will be recognized in income upon receipt. In 2004, the contingencies associated with the first payment passed, and the corporation received a cash payment of 95 million euros. This was equivalent to $119 million, or $0.15 per diluted share, based upon exchange rates in effect on the date of receipt.

Net Interest Expense Net interest expense of continuing operations decreased by $17 million in 2004, to $183 million, primarily as a result of lower average borrowings and interest rates.

Income Tax Expense The effective tax rate from continuing operations decreased from 17.2% in 2003 to 16.7% in 2004. The 2004 tax expense was impacted by a number of significant items that are set out in a reconciliation of the corporation’s effective tax rate to the U.S. statutory tax rate in Note 23, titled “Income Taxes,” to the Consolidated Financial Statements. The most significant of these items was the finalization of certain tax reviews and audits for $207 million less than originally anticipated. In addition, the corporation recognized a tax charge of $140 million in connection with the remittance of current year foreign earnings to the U.S.

As a global commercial enterprise, the corporation’s tax rate from period to period can be affected by many factors. The most significant of these factors are changes in tax legislation, the corporation’s global mix of earnings, and the tax characteristics of the corporation’s income, acquisitions and dispositions. It is reasonably possible that tax legislation in the jurisdictions in which the corporation does business may change in future periods. While such changes cannot be predicted, if they occur, the impact on the corporation’s tax assets and obligations will need to be measured and recognized in the financial statements. Such changes can have a material impact on income tax expense, net income and liquidity. Significant business combinations or dispositions may impact the effective tax rate of the corporation in future periods.

The corporation’s tax returns are routinely audited and settlements of issues raised in these audits sometimes affect our tax provisions. The corporation has ongoing audits in the U.S. and a number of international jurisdictions. The obligations recognized in the financial statements reflect the probable settlement of anticipated worldwide audits. In addition, the corporation believes that it has sufficient cash resources to fund the settlement of these audits.

Income From Continuing Operations and Diluted EPS From Continuing Operations Income from continuing operations in 2004 of $1,239 million was $52 million, or 4.4% higher than the prior year comparable period. The increase in income from continuing operations was primarily due to the following factors:

• The corporation’s gross profit increased $295 million as higher commodity costs and changes in foreign currency led to a 6.9% increase in net sales. The commodity cost increase was the primary reason for the 1% decline in the gross margin percentage.

• SG&A expenses increased by $319 million.

• During 2004, the corporation recognized charges for exit activities and business dispositions of $48 million, while in 2003, the corporation recognized income from exit activities and business dispositions of $11 million.

• The corporation received the first contingent sale proceeds payment of $119 million in 2004.

• Net interest expense declined by $17 million.

• Income tax expense increased by $1 million.

Diluted EPS from continuing operations increased from $1.46 in 2003 to $1.55 in 2004, a 6.2% increase. Diluted EPS increased at a higher rate than income from continuing operations primarily as a result of the corporation purchasing shares of its outstanding common stock that reduced the average shares outstanding.

16            Sara Lee Corporation and Subsidiaries

Discontinued Operations The corporation’s Direct Selling business is classified as a discontinued operation. The following summarizes the results of the discontinued operations for 2004 and 2003:

In millions	2004			2003			Dollar Change			Percent Change
Net sales	$	447		$	403		$	44		11.0	%
Income before taxes	$	55		$	51		$	4
Income taxes		(22	)		(17	)		(5	)
Net income from discontinued operations	$	33		$	34		$	(1	)

Net Income and Diluted EPS Net income of $1,272 million in 2004 was $51 million, or 4.2%, higher than the prior year comparable period. The increase in net income was primarily due to the increase in income from continuing operations. Diluted EPS increased from $1.50 to $1.59 in 2004, an increase of 6.0%. Diluted EPS increased at a higher rate than net income, primarily as a result of the corporation purchasing shares of its outstanding common stock that reduced the average shares outstanding.

Operating Results by Business Segment – 2004 Compared With 2003

Operating results by business segment in 2004 compared with 2003 are as follows:

							Income From Continuing Operations Before Income Taxes
	Net Sales
In millions	2004			2003			2004			2003
Sara Lee Meats	$	4,171		$	3,746		$	415		$	375
Sara Lee Bakery		3,415			3,276			156			98
Beverage		3,157			2,756			492			429
Household Products		1,934			1,715			354			315
Branded Apparel		6,449			6,399			549			763
Total business segments		19,126			17,892			1,966			1,980
Intersegment sales		(7	)		(4	)		—			—
Total net sales and operating segment income		19,119			17,888			1,966			1,980
Amortization of intangibles		—			—			(102	)		(98	)
General corporate expenses		—			—			(313	)		(248	)
Contingent sale proceeds		—			—			119			—
Total net sales and operating income		19,119			17,888			1,670			1,634
Net interest expense		—			—			(183	)		(200	)
Net sales and income from continuing operations before income taxes	$	19,119		$	17,888		$	1,487		$	1,434

A discussion of each business segment’s sales and operating segment income is presented below.

The intangible amortization in the table above relates to trademarks and customer relationships. Software amortization is recognized in the earnings of the segments. The amortization related to trademarks and customer relationships increased in 2004 due to the impact of foreign currency exchange rates, and the decision in the second quarter of the year to begin amortizing certain trademarks that were previously determined to have an indefinite life. In addition, amortization in 2003 included the impact of the accelerated amortization of various Bakery trademarks that were abandoned and fully written off at the end of 2003.

General corporate expenses increased primarily as a result of higher pension and other employee benefit plan costs, the centralization of certain finance and marketing functions in the corporate office and expenses associated with hedging certain transactions.

Sara Lee Meats

In millions	2004		2003			Dollar Change			Percent Change
Change in unit volume1									1	%
Net sales	$	4,171	$	3,746		$	425		11.3	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	—	$	(117	)	$	117
Dispositions		—		4			(4	)
Impact of the 53rd week		83		—			83
Total	$	83	$	(113	)	$	196
Operating segment income	$	415	$	375		$	40		10.7	%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	—	$	(14	)	$	14
Exit activities and business dispositions		3		6			(3	)
Dispositions		—		—			—
Impact of the 53rd week		7		—			7
Total	$	10	$	(8	)	$	18

¹ Excludes the impact of dispositions

Unit volumes for processed meats in the Sara Lee Meats segment, including the 53rd week and excluding the impact of dispositions, increased 1% as compared to 2003 levels. Unit volumes were up 1% in the U.S. and Europe, which were partially offset by a decline of 4% in Mexico. In the U.S., unit volumes in the deli channel increased 9% from a combination of increased distribution and new products; retail channel volumes increased 1% as increased new product sales were partially offset by volume declines in smoked and dinner sausage; and foodservice unit volumes declined by 1% due to reduced low margin sales.

Net sales in the Sara Lee Meats segment increased by $425 million, or 11.3%, to $4,171 million in 2004 from $3,746 million in 2003. During the year, the strengthening of the euro, partially offset by the weakening of the Mexican peso, increased reported net sales by $117 million, or 3.4%. The 2004 fiscal year included 53 weeks, while the 2003 fiscal year included 52 weeks. The impact of the 53rd week in 2004 increased net sales by $83 million, or 2.2%. 2003 includes net sales of $4 million from a business that was disposed of subsequent to the beginning of 2003. The remaining net sales increase of $229 million, or 5.9%, was primarily due to higher net product prices and reduced promotion spending in connection with higher raw material costs, plus the impact of a favorable product mix and higher unit volumes during the year.

The Sara Lee Meats gross margin percentage decreased from 31.0% in 2003 to 29.7% in 2004, primarily as a result of increases in commodity meat prices, including pork, which could not be passed along to customers in their entirety. The impact of higher commodity

Sara Lee Corporation and Subsidiaries            17

costs was partially offset by an improved product mix and manufacturing cost savings.

Operating segment income in Sara Lee Meats increased by $40 million, or 10.7%, from $375 million in 2003 to $415 million in 2004. Changes in foreign currency, particularly the euro, increased reported operating segment income by $14 million, or 4.0%. The impact from the extra week of operating results in 2004 increased operating segment income by $7 million, or 1.9%. Dispositions completed subsequent to the beginning of 2003 did not have a significant impact on operating segment income during the year. Income from exit activities and business dispositions of $3 million was recognized in 2004, as compared to $6 million in 2003. The difference in income from exit activities and business dispositions of $3 million decreased reported operating segment income by 1.0%. The remaining operating segment income increase of $22 million, or 5.6% as compared to the prior year, is the result of improved sales performance from a favorable product mix, manufacturing and distribution efficiencies and lower spending on media advertising and promotion, partially offset by higher administrative costs.

Sara Lee Bakery

In millions	2004			2003			Dollar Change		Percent Change
Change in unit volume									(1	)%
Net sales	$	3,415		$	3,276		$	139	4.2	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	—		$	(88	)	$	88
Impact of the 53rd week		69			—			69
Total	$	69		$	(88	)	$	157
Operating segment income	$	156		$	98		$	58	59.2	%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	—		$	(8	)	$	8
Exit activities and business dispositions		(14	)		(20	)		6
Accelerated depreciation		(5	)		(7	)		2
Impact of the 53rd week		7			—			7
Total	$	(12	)	$	(35	)	$	23

Unit volumes in the Sara Lee Bakery segment, including the 53rd week, declined 1% during 2004 as volume decreased for fresh bread in the U.S., primarily regional and store brands, due to a category decline for white breads. These declines were partially offset by unit volume increases in frozen bakery products in the U.S. and Australia and increases in fresh bread in Europe. Unit volumes for refrigerated dough products were unchanged between the years.

Net sales in the Sara Lee Bakery segment increased $139 million, or 4.2%, in 2004 as compared to 2003. Changes in foreign currency exchange rates increased reported net sales by $88 million, or 2.7%. The impact of the extra week in 2004 increased reported net sales by $69 million, or 2.0%. There were no acquisitions or dispositions that impacted the Sara Lee Bakery segment during the year. The remaining net sales decline of $18 million, or 0.5%, was primarily a result of a decline in unit volumes in the U.S. white bread category that were partially offset by increased unit volumes of health-oriented fresh breads in the U.S., crustless breads in Europe and more favorable promotional pricing practices during the year.

The gross margin percentage in the Sara Lee Bakery segment increased 0.8%, from 41.0% in 2003 to 41.8% in 2004, as a result of a favorable product mix and benefits from restructuring actions, which offset higher costs for certain key ingredients, wages and employee benefits and the impact of lower unit volumes.

Operating segment income in the Sara Lee Bakery segment increased by $58 million, or 59.2%, from $98 million in 2003 to $156 million in 2004. Changes in foreign currency, particularly the euro, increased reported operating segment income by $8 million, or 8.4%. The impact of the extra week in 2004 increased operating segment income by $7 million, or 5.0%. Charges for exit activities and business dispositions, including the cost of accelerated depreciation on facilities to be sold, decreased operating segment income by $19 million in 2004 as compared to $27 million in 2003. The $8 million difference between these two amounts increased operating segment income by 20.2%. The remaining operating segment income increase of $35 million, or 25.6% during the year, was attributable to an improved product mix plus lower employee costs as a result of restructuring actions taken in the prior year.

Beverage

In millions	2004		2003			Dollar Change		Percent Change
Change in unit volume								3	%
Net sales	$	3,157	$	2,756		$	401	14.6	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	—	$	(242	)	$	242
Impact of 53rd week		61		—			61
Total	$	61	$	(242	)	$	303
Operating segment income	$	492	$	429		$	63	14.7	%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	—	$	(49	)	$	49
Exit activities and business dispositions		2		(1	)		3
Impact of 53rd week		10		—			10
Total	$	12	$	(50	)	$	62

Net unit volumes in the Beverage segment, including the impact of the 53rd week, increased 3% in 2004 as strong shipments in the Brazilian and U.S. retail markets were partially offset by declines in U.S. foodservice markets due to a competitive marketplace.

Net sales in the Beverage segment increased by $401 million, or 14.6%, to $3,157 million in 2004, reflecting the impact of changes in foreign currency, higher unit selling prices related to increased green coffee commodity prices, an improved product mix and improved sales performance in the Brazilian and U.S. retail markets. The impact of foreign currency changes, particularly in the euro, increased reported net sales by $242 million, or 9.3%. The impact of the 53rd week in 2004 increased reported net sales by $61 million, or 2.0%. There were no acquisitions or dispositions that impacted the Beverage segment during the period. The remaining net sales increase of $98 million, or

18            Sara Lee Corporation and Subsidiaries

3.3% compared to the prior year, was primarily due to higher raw material costs that were passed along in part to customers, as well as an improved product mix, plus the impact of improved sales performance in the U.S. and Brazilian retail markets.

The gross margin percent in the Beverage segment decreased 1.6%, from 45.5% in 2003 to 43.9% in 2004, primarily as a result of the combination of increased price competition and the fact that not all raw material price increases could be passed along to the customer.

Operating segment income for the Beverage segment increased $63 million, or 14.7%, to $492 million in 2004 from $429 million in 2003. The strengthening of foreign currencies versus the U.S. dollar increased operating segment income by $49 million, or 11.7%. The impact of the extra week in 2004 increased operating segment income by $10 million, or 2.0%. The remaining operating segment income increase was $1 million, or 0.3%, resulting from higher unit volumes and lower media advertising and promotion that were mostly offset by lower gross margins and higher employee pension expense.

Household Products

In millions	2004		2003			Dollar Change			Percent Change
Change in unit volume									1	%
Net sales	$	1,934	$	1,715		$	219		12.8	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	—	$	(191	)	$	191
Dispositions		—		5			(5	)
Impact of 53rd week		46		—			46
Total	$	46	$	(186	)	$	232
Operating segment income	$	354	$	315		$	39		12.3	%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	—	$	(36	)	$	36
Dispositions		—		—			—
Impact of 53rd week		8		—			8
Total	$	8	$	(36	)	$	44

Unit volumes for the Household Products segment’s four core categories – body care, air care, shoe care and insecticides – increased 1% in 2004, including the impact of the 53rd week. Unit volumes increased in the body care and insecticide categories, primarily due to improved sales performance in Asia and Europe from new product introductions, market share increases and category growth during the year, which benefited from favorably warm weather. Partially offsetting this increase was a unit volume decline in the shoe care and air care categories due to a competitive marketplace.

Net sales increased by $219 million, or 12.8%, from $1,715 million in 2003 to $1,934 million in 2004. The impact of changes in foreign currency exchange rates increased reported net sales by $191 million, or 11.4%, as the strengthening of currencies in Europe and the United Kingdom had the greatest impact. The impact of the 53rd week increased reported net sales by $46 million, or 2.4%. Net sales in 2003 include $5 million from a business that was disposed subsequent to the beginning of 2003. As a result, the remaining net sales decrease of $13 million, or 0.7%, was primarily due to competitive pricing and unit volume declines in the shoe care and air care categories.

The gross margin percentage in the Household Products segment decreased 0.2%, from 53.5% in 2003 to 53.3% in 2004, primarily from competitive pricing in the marketplace.

Operating segment income increased $39 million, or 12.3%, to $354 million in 2004. Changes in foreign exchange rates increased operating segment income by $36 million, or 11.6%. The impact of the 53rd week increased reported operating segment income by $8 million, or 2.2%. The remaining operating segment income decreased by $5 million, or 1.5%, primarily from the impact of lower net sales and margins, higher pension charges and increased information technology-related expenses that were partially offset by lower media advertising and promotion expenses.

Branded Apparel

In millions	2004			2003			Dollar Change			Percent Change
Change in unit volume1										—	%
Net sales	$	6,449		$	6,399		$	50		0.8	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	—		$	(227	)	$	227
Acquisitions/dispositions		16			42			(26	)
Impact of 53rd week		105			—			105
Total	$	121		$	(185	)	$	306
Operating segment income	$	549		$	763		$	(214	)	(27.9	)%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	—		$	(13	)	$	13
Exit activities and business dispositions		(35	)		26			(61	)
Acquisitions/dispositions		2			2			—
Impact of 53rd week		20			—			20
Total	$	(13	)	$	15		$	(28	)

¹ Excludes the impact of acquisitions and dispositions

Unit volumes in the Branded Apparel segment, including the impact of the 53rd week, were unchanged from prior year levels. Unit volumes increased 3% in knit products and declined 4% in intimates. Unit volumes in legwear were unchanged between the years. Knit products unit volumes increased 4% in the U.S. and declined 1% in Europe, as unit volumes increased in all of the subcategories of underwear, activewear and Champion products. Intimates unit volumes declined 5% in the U.S. and 3% in Europe from competitive market conditions. In legwear, unit volumes increased 2% in the U.S. and declined 6% in Europe, as unit volumes for socks in the U.S. offset declines for sheer hosiery products from this declining category.

Net sales increased by $50 million, or 0.8%, from $6,399 million in 2003 to $6,449 million in 2004. The impact of foreign currency exchange rate changes during the period, particularly the euro and British pound, increased reported sales during 2004 by $227 million, or 3.5%. The impact of the 53rd week increased reported net sales by $105 million, or 1.6%. 2003 includes net sales of $42 million from businesses disposed subsequent to the start of 2003. During 2004, the corporation adopted FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” which required the consolidation of a joint venture investment. This is more fully described in Note 2 to the Consolidated Financial Statements titled “Summary of Significant

Sara Lee Corporation and Subsidiaries            19

Accounting Policies.” As a result of the adoption of this accounting standard, 2004 includes sales of $16 million made by the consolidated joint venture, which is shown in the table above in the line labeled “Acquisitions/dispositions.” The net impact of the acquisitions and dispositions shown in the table decreased reported net sales by $26 million, or 0.4%. As a result, the remaining net sales decrease was $256 million, or 3.9%, which was primarily due to the impact of changes in product mix and competitive pricing practices, particularly in the printable T-shirt market and in Europe.

The gross margin percent decreased by 2.0%, from 35.6% in 2003 to 33.6% in 2004, reflecting lower product pricing, plus higher cotton and other raw material costs that were partially offset by the benefits of lower production costs.

Branded Apparel operating segment income decreased by $214 million, or 27.9%, from $763 million in 2003 to $549 million in 2004. Changes in foreign currency exchange rates increased reported operating segment income by $13 million, or 1.3%. The impact from the 53rd week increased operating segment income by $20 million, or 2.8%. In 2003, Branded Apparel recognized income from exit activities and business dispositions of $26 million, while in 2004, charges of $35 million were recognized. The difference between the amounts reported in 2004 versus 2003 reduced operating segment income by $61 million, or 7.3%. Acquisitions and dispositions impacted both 2004 and 2003 equally. The remaining decrease in operating segment income was $186 million, or 24.8%. Fiscal 2003, which is used for comparison purposes here, had reported a 28.1% increase in operating segment income from 2002. The 2003 comparison period included benefits from higher gross margins resulting from lower raw material costs and the benefits from restructuring activities. During 2004, the segment experienced lower product pricing and lower gross margins, which include the impact of higher raw material costs. These factors, plus increased expense for employee costs such as pensions, led to the decline in operating segment income.

Financial Condition

Cash From Operations Net cash provided from operating activities from continuing operations decreased to $1,314 million in 2005 from $1,973 million in 2004 and $1,807 million in 2003. The 33.4% decrease in cash from continuing operations in 2005 was primarily due to the combination of lower profitability in the business and higher usage of cash for working capital needs, including benefit plan payments. The increase in cash used to fund working capital included $258 million more of cash used to fund receivables and accrued liabilities as compared to the 2004 period. The company expended $348 million to fund the corporation’s pension plans during 2005, as compared to $112 million in 2004.

Net cash provided from operating activities of continuing operations increased 9.2% in 2004 versus 2003, primarily due to improved profitability in the business, lower levels of cash taxes paid and a lower level of payments to employee benefit plans.

Cash From Investment Activities Net cash used in investment activities was $233 million in 2005, as compared to $184 million in 2004 and $674 million in 2003. In 2005, the corporation received $37 million less in proceeds from the sale of businesses, investments and assets than was received in 2004, and spent $8 million more to purchase property and equipment than in 2004.

In 2005, the corporation received $190 million from the sale of businesses, trademarks, working capital and fixed assets, the largest of which was related to a canned and shelf-stable meat and poultry business. In 2004, the corporation received $227 million of proceeds primarily from the disposition of its equity method investment in Johnsonville Foods and the divestment of the assets of an Italian hosiery operation. In 2005 and 2004, the corporation received $117 million and $119 million, respectively, as a result of the passage of contingencies associated with the disposition of a European cut tobacco business – these contingencies are fully explained in Note 16, titled “Contingencies,” to the Consolidated Financial Statements. For 2005, 2004 and 2003, the corporation expended $538 million, $530 million and $746 million, respectively, to fund the purchases of property and equipment and received proceeds from the sales of investments, businesses and assets of $190 million, $227 million, and $81 million, respectively. The corporation expects to expend approximately $700 million to fund capital expenditures in 2006, which will be funded by operating cash flow of the business. The projected increase in 2006 is primarily related to leasehold improvements and the purchase of information technology assets.

Cash From Financing Activities Net cash used in financing activities was $1,215 million in 2005, $2,231 million during 2004, and $535 million in 2003. During 2005, long-term debt of $1,033 million was repaid using a combination of long-term and net short-term debt issuances of $517 million plus cash on hand and cash generated from operations. In 2004, the corporation repaid $1,288 million of long-term debt using cash on hand and cash generated from operations, while in 2003, the corporation had net long-term borrowings of $778 million.

An ongoing share repurchase program is in place that allows the repurchase of the corporation’s common stock at times management deems appropriate, given current market valuations. During 2005, the corporation repurchased shares of common stock with a value of $396 million, as compared to common stock repurchases of $350 million in 2004 and $305 million in 2003. Subsequent to the end of 2005, the corporation’s Board of Directors authorized the repurchase of an additional 100 million shares of common stock. As a result of these actions, the total number of shares authorized for repurchase increased to 116 million. At a $20 per share price, the additional authorization is equivalent to $2 billion, and the corporation indicated that it expects to repurchase $1 billion of the corporation’s common stock in 2006, using either cash generated from operations, proceeds from borrowings or the proceeds from business dispositions. The timing and amount of share repurchases beyond 2006 will be based upon market conditions and other factors.

Cash dividends paid during 2005 were $464 million, as compared to the $714 million paid in 2004 and $497 million paid in 2003. Due to

20            Sara Lee Corporation and Subsidiaries

the 53^rd week that is included in 2004, five dividend payments were included in 2004, versus three in 2005.

Liquidity

Notes Payable Notes payable increased to $258 million in 2005 from $84 million in 2004 and $140 million in 2003, as additional borrowings in 2005 were used to repay maturing long-term debt and fund certain working capital requirements of the corporation.

Debt and Minority Interest The corporation’s total long-term debt decreased $745 million in 2005, from $5,241 million at the end of 2004 to $4,496 million at the end of 2005, as the corporation repaid maturing debt. Long-term debt was $6,161 million at the end of 2003. During 2005, $1,033 million of long-term debt matured and was repaid using a combination of cash borrowings and cash generated during the year, while $1,288 million of debt was repaid in 2004.

During 2004, the corporation adopted a new accounting standard, Statement of Financial Accounting Standards (SFAS) No. 150, which resulted in the reclassification on the balance sheet of $295 million to the current portion of long-term debt for certain preferred equity securities issued by a wholly owned subsidiary of the corporation. Prior to the end of 2004, these securities were redeemed by the corporation and are included in the total debt maturities during the year.

The corporation’s total long-term debt of $4,496 million is due to be repaid as follows: $381 million in 2006; $359 million in 2007; $1,349 million in 2008; $164 million in 2009; $29 million in 2010 and $2,214 million thereafter. Debt obligations due to mature in the next year are expected to be satisfied with a combination of either borrowings, operating cash flows or the proceeds from business dispositions.

Including the impact of swaps, which are effective hedges and convert the economic characteristics of the debt, the corporation’s long-term debt and notes payable consist of 52% fixed-rate debt as of July 2, 2005, as compared with 59% as of July 3, 2004, and 74% as of June 28, 2003. The decrease in fixed-rate debt at July 2, 2005, versus July 3, 2004, is due to the maturity and repayment of certain fixed-rate debt instruments during the period. The corporation monitors the interest rate environments in the geographic regions in which it operates and modifies the components of its debt portfolio as necessary to manage interest rate and foreign currency risks.

In 2005, the corporation repatriated $929 million of earnings of foreign subsidiaries under the provisions of the American Jobs Creation Act of 2004.

Credit Facilities and Ratings The corporation has numerous credit facilities available which management considers sufficient to satisfy its operating requirements. These credit facilities include $3.2 billion of available credit from a group of 23 banks and lending institutions. These facilities consist of a $1.35 billion three-year revolving credit facility and a $1.85 billion five-year revolving credit facility. The three-year $1.35 billion facility expires in June 2008. The five-year $1.85 billion facility expires in June 2009. The pricing for each of these facilities is based upon the corporation’s current credit rating. At July 2, 2005, the corporation had not borrowed under any of these facilities. None of these facilities mature or terminate upon a credit rating downgrade. These facilities contain a number of typical covenants, which the corporation is in compliance with, including a requirement to maintain an interest coverage ratio of at least 2.0 to 1.0. The interest coverage ratio is generally defined as a ratio of pretax income, excluding net interest expense, to net interest expense. For the 12 months ended July 2, 2005, the corporation’s interest coverage ratio was 8.4 to 1.0. The corporation has amended the covenants of both the three- and five-year credit facilities for the potential disposition of various businesses outlined in the corporation’s Transformation plan.

On August 4, 2005, the corporation announced certain capital structure initiatives, including the corporation’s intention to maintain the annual dividend at $0.79 per share in 2006, the repurchase of up to $2 billion of shares of the corporation’s common stock and the expectation that the corporation will use a portion of the proceeds from business dispositions to reduce total debt by approximately $1.5 billion over the next two years. As a result of these announcements, the following credit rating actions were taken by the credit rating agencies on August 4, 2005: Standard & Poor’s (S&P) reduced its senior unsecured debt rating for the corporation from “A” to “BBB+,” reduced its short-term credit and commercial paper rating from “A-1” to “A-2” and indicated that the credit rating outlook is “stable”; FitchRatings reduced its senior unsecured debt rating for the corporation from “A” to “BBB+,” reduced its short-term commercial paper rating from “F-1” to “F-2” and indicated that the outlook is “stable”; Moody’s Investors Service Inc. lowered its outlook on the corporation’s credit ratings to “negative.”

The corporation’s credit ratings by Standard & Poor’s, Moody’s Investors Service and FitchRatings, as of August 4, 2005, were as follows:

	Senior Unsecured Obligations	Short-term Borrowings
Standard & Poor’s	BBB+	A-2
Moody’s Investors Service	A3	P-2
FitchRatings	BBB+	F-2

Changes in the corporation’s credit ratings result in changes in the corporation’s borrowing costs. The changes in the corporation’s credit ratings that were announced on August 4, 2005, will increase the corporation’s borrowing costs, but the impact is not expected to be significant. The corporation’s current short-term credit rating allows it to participate in a commercial paper market that has a number of potential investors and a high degree of liquidity. A downgrade of the corporation’s short-term credit rating to “A-3” (S&P Rating) would place the corporation in a commercial paper market that would contain significantly less market liquidity than it currently operates with a rating of “A-2.” This would reduce the amount of commercial paper the corporation could issue and raise its commercial paper borrowing cost. To the extent that the corporation’s operating requirements were to exceed its ability to issue commercial paper following a downgrade of its short-term credit rating, the corporation has the ability to use available credit facilities to satisfy operating requirements, if necessary.

Sara Lee Corporation and Subsidiaries            21

Off-Balance Sheet Arrangements The off-balance sheet arrangements that are reasonably likely to have a current or future effect on the corporation’s financial condition are lease transactions for facilities, warehouses, office space, vehicles, and machinery and equipment.

Leases The corporation has numerous operating leases for manufacturing facilities, warehouses, office space, vehicles, and machinery and equipment. Operating lease obligations are scheduled to be paid as follows: $147 million in 2006, $126 million in 2007, $102 million in 2008, $86 million in 2009, $73 million in 2010 and $200 million thereafter. The corporation is contingently liable for certain long-term leases on property operated by others. These leased properties relate to certain businesses that have been sold. The corporation continues to be liable for the remaining terms of the leases on these properties in the event that the owners of the businesses are unable to satisfy the lease liability. The minimum annual rentals under these leases are as follows: $28 million in 2006, $26 million in 2007, $24 million in 2008, $22 million in 2009, $20 million in 2010 and $93 million thereafter.

Sale of Accounts Receivable During 2005, the corporation terminated its receivable sale program and no receivables were sold under this program at the end of 2005. Previously, the corporation had an agreement under which several of its operating units sold trade accounts receivable to a limited purpose subsidiary of the corporation. The subsidiary, a separate bankruptcy remote corporate entity, is consolidated in the corporation’s results of operations and statement of financial position. This subsidiary held trade accounts receivable that it purchased from the operating units and sold participating interests in these receivables to financial institutions, which in turn purchased and received ownership and security interests in those receivables. There were no receivables sold under this program at the end of 2005. The amount of receivables sold under this program was $150 million at the end of 2004 and $250 million at the end of 2003. The proceeds from the receivables sales were used to reduce borrowings. Changes in the balance of receivables sold are reported in the Consolidated Statement of Cash Flows as a component of operating cash flow (change in trade receivables). As collections reduced accounts receivable included in the pool, the operating units sold new receivables to the limited purpose subsidiary. The limited purpose subsidiary had the risk of credit loss on the sold receivables.

The proceeds from the sale of the receivables were equal to the face amount of the receivables less a discount. The discount was a floating rate that approximated short-term borrowing rates for investment grade entities and was accounted for as a cost of the receivable sale program. This cost has been included in “Selling, general and administrative expenses” in the Consolidated Statements of Income. This discount aggregated $3 million, $3 million and $5 million in 2005, 2004 and 2003, respectively, or 2.5%, 1.5% and 1.9%, respectively, of the weighted average balance of the receivables outstanding during the periods. The corporation retained collection and administrative responsibilities for the participating interests in the defined pool.

Future Contractual Obligations and Commitments The corporation has no material unconditional purchase obligations as defined by SFAS No. 47, “Disclosure of Long-Term Purchase Obligations.” The corporation’s Branded Apparel business is a party to an agreement to purchase certain textiles from a single supplier. These purchases amount to approximately 13% of estimated manufacturing needs. At July 2, 2005, the agreement had 2.5 years remaining with pricing at market rates subject to adjustment every 90 days. The following table aggregates information on the corporation’s contractual obligations and commitments:

			Payments Due by Fiscal Year
In millions	Total		2006		2007		2008		2009		2010		Thereafter
Long-term debt	$	4,496	$	381	$	359	$	1,349	$	164	$	29	$	2,214
Interest on debt obligations1		1,741		224		205		153		128		118		913
Operating lease obligations		734		147		126		102		86		73		200
Purchase obligations2		4,829		4,245		377		117		50		16		24
Other long-term liabilities3		649		262		50		37		24		16		260
Subtotal		12,449		5,259		1,117		1,758		452		252		3,611
Contingent lease obligations4		213		28		26		24		22		20		93
Total5	$	12,662	$	5,287	$	1,143	$	1,782	$	474	$	272	$	3,704

¹ Interest obligations on floating rate debt instruments are calculated for future periods using interest rates in effect at the end of 2005.

² Purchase obligations include expenditures to purchase goods and services in the ordinary course of business for production and inventory needs (such as raw materials, supplies, packaging, manufacturing arrangements, storage, distribution and union wage agreements); capital expenditures; marketing services; information technology services; maintenance and other professional services where, as of the end of 2005, the corporation has agreed upon a fixed or minimum quantity to purchase, a fixed, minimum or variable pricing arrangement, and the approximate delivery date. Future cash expenditures will vary from the amounts shown in the table above. The corporation enters into purchase obligations when terms or conditions are favorable or when a long-term commitment is necessary. Many of these arrangements are cancelable after a notice period without a significant penalty. Additionally, certain costs of the corporation are not included in the table since at the end of 2005 an obligation did not exist. An example of these include situations where purchasing decisions for these future periods have not been made at the end of 2005. Ultimately, the corporation’s decisions and cash expenditures to purchase these various items will be based upon the corporation’s sales of products, which are driven by consumer demand. The corporation’s obligations for accounts payable and accrued liabilities recorded on the balance sheet are also excluded from the table.

³ Represents the projected payment for long-term liabilities recorded on the balance sheet for deferred compensation, restructuring costs, deferred income, sales and other incentives and the projected 2006 pension contribution of $219 million. The corporation has employee benefit obligations consisting of pensions and other postretirement benefits including medical; other than the projected 2006 pension contribution of $219 million, noted previously, pension and postretirement obligations have been excluded from the table. A discussion of the corporation’s pension and postretirement plans, including funding matters, is included in Notes 20 and 21 to the Consolidated Financial Statements. The corporation’s obligations for employee health and property and casualty losses are also excluded from the table.

22            Sara Lee Corporation and Subsidiaries

⁴ Contingent lease obligations represent leases on property operated by others that only become an obligation of the corporation in the event that the owners of the businesses are unable to satisfy the lease liability. Substantially all of these amounts relate to leases operated by Coach, Inc. At July 2, 2005, the corporation has not recognized a contingent lease liability on the Consolidated Balance Sheet for any owners who were unable to satisfy their lease liability.

⁵ Contractual commitments and obligations identified under SFAS No. 5 are reflected and disclosed on the Consolidated Balance Sheet and in the related notes.

Pension Plans The corporation expects to contribute $219 million of cash to its pension plans in 2006 as compared to $348 million in 2005. This estimate assumes the disposition of the Direct Selling business and no other changes in the composition of the business or current minimum funding requirements. The exact amount of cash contributions made to pension plans in any year is dependent upon a number of factors including minimum funding requirements in the jurisdictions in which the company operates, the timing of cash tax benefits for amounts funded and arrangements made with the trustees of certain foreign plans. In addition, the corporation has announced its intent to dispose of certain businesses, and the terms of those transactions may impact future contributions to these plans. The pension plans for the corporation’s Branded Apparel operations in the United Kingdom had plan obligations that exceeded plan assets by $525 million at the end of 2005, and it may be necessary to accelerate the funding of a portion of this deficit if the Branded Apparel operations are disposed of in 2006. As a result, the actual funding in 2006 may be materially different from the current estimate.

Guarantees The corporation is a party to a variety of agreements under which it may be obligated to indemnify a third party with respect to certain matters. Typically, these obligations arise as a result of contracts entered into by the corporation under which the corporation agrees to indemnify a third party against losses arising from a breach of representations and covenants related to such matters as title to assets sold, the collectibility of receivables, specified environmental matters, lease obligations assumed and certain tax matters. In each of these circumstances, payment by the corporation is conditioned on the other party making a claim pursuant to the procedures specified in the contract. These procedures allow the corporation to challenge the other party’s claims. In addition, the corporation’s obligations under these agreements may be limited in terms of time and/or amount, and in some cases the corporation may have recourse against third parties for certain payments made by the corporation. It is not possible to predict the maximum potential amount of future payments under certain of these agreements, due to the conditional nature of the corporation’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the corporation under these agreements have not had a material effect on the corporation’s business, financial condition or results of operations. The corporation believes that if it were to incur a loss in any of these matters, such loss would not have a material effect on the corporation’s business, financial condition or results of operations.

The material guarantees, within the scope of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45), for which the maximum potential amount of future payments can be determined, include the corporation’s contingent liability on leases on property operated by others that is described above, and the corporation’s guarantees of certain third-party debt. These debt guarantees require the corporation to make payments under specific debt arrangements in the event that the third parties default on their debt obligations. The maximum potential amount of future payments that the corporation could be required to make in the event that these third parties default on their debt obligations is $33 million. At the present time, the corporation does not believe it is probable that any of these third parties will default on the amount subject to guarantee.

Ratios of Cash Flow to Balance Sheet Debt and Adjusted Cash Flow to Total Debt The corporation uses the ratios of cash flow to balance sheet debt and adjusted cash flow to total debt to evaluate financial performance. The ratio of cash flow to balance sheet debt consists of net cash from operating activities from continuing operations divided by balance sheet debt, which is the total of notes payable and long-term debt. Many creditors, and the rating agencies, adjust the corporation’s cash flow and balance sheet debt when they calculate financial ratios for evaluation purposes. The adjustments include adding both the cash flow impact of changes in working capital and the assumed depreciation from leased assets to the net cash from operations amount, and adding imputed debt from operating lease obligations to the balance sheet debt amount. The corporation makes these adjustments to calculate the adjusted cash flow to total debt ratio. The adjusted cash flow to total debt ratio is a non-GAAP ratio and is reconciled to the reported amounts in the financial statements as follows:

In millions	2005			2004			2003
Net cash from operating activities from continuing operations	$	1,314		$	1,973		$	1,807
Cash flow impact of changes in working capital		456			175			72
Assumed depreciation on leased assets		95			110			104
Adjusted net cash from operating activities	$	1,865		$	2,258		$	1,983
Notes payable	$	258		$	84		$	140
Long-term debt		4,496			5,241			6,161
Balance sheet debt		4,754			5,325			6,301
Present value of operating leases		519			478			411
Total debt	$	5,273		$	5,803		$	6,712
Ratios
Cash flow to balance sheet debt		27.6	%		37.1	%		28.7	%
Adjusted cash flow to total debt		35.4	%		38.9	%		29.5	%

Risk Management

Geographic Risks The corporation maintains a presence in a large number of nations in the world. This includes geographic locations where the corporation has a direct economic presence through owned manufacturing or distribution facilities, or companies where Sara Lee maintains a direct equity investment. The corporation also has an indirect economic presence in many geographic locations through third-party suppliers who provide inventory or distribution services. The corporation does not have a high concentration of manufacturing or distribution locations in any one city or country in the Middle East or in other developing nations. The corporation has not experienced any direct losses as a result of the conflicts in the Middle East. In most cases, alternative sources of supply are available for inventory products that are manufactured or purchased from these foreign locations.

Sara Lee Corporation and Subsidiaries            23

However, the general insurance coverage that is maintained by the corporation does not cover losses resulting from acts of war or terrorism. As a result, a loss of a significant direct or indirect manufacturing or distribution location could impact the corporation’s operations, cash flows and liquidity.

Foreign Exchange, Interest and Commodity Risks The corporation is exposed to market risk from changes in foreign exchange rates, interest rates and commodity prices. To mitigate the risk from interest rate, foreign currency exchange rate and commodity price fluctuations, the corporation enters into various hedging transactions that have been authorized pursuant to the corporation’s policies and procedures. The corporation does not use financial instruments for trading purposes and is not a party to any leveraged derivatives.

Foreign Exchange The corporation primarily uses foreign currency forward and option contracts to hedge its exposure from adverse changes in foreign exchange rates. The corporation’s exposure to foreign exchange rates exists primarily with the European euro, Mexican peso, Swiss franc, Canadian dollar, British pound and Hungarian forint against the U.S. dollar. Hedging is accomplished through the use of financial instruments as the gain or loss on the hedging instrument offsets the gain or loss on an asset, a liability or a basis adjustment to a firm commitment. Hedging of anticipated transactions is accomplished with financial instruments as the gain or loss on the hedge occurs on or near the maturity date of the anticipated transactions.

Interest Rates The corporation uses interest rate swaps to modify its exposure to interest rate movements and to reduce borrowing costs. The corporation’s net exposure to interest rate risk consists of floating-rate instruments that are benchmarked to U.S. and European short-term money market interest rates. Interest rate risk management is accomplished through the use of swaps to modify interest payments under these instruments.

Commodities The corporation is a purchaser of certain commodities such as beef, pork, coffee, wheat, corn, corn syrup, soybean and corn oils, butter and sugar. The corporation generally buys these commodities based upon market prices that are established with the vendor as part of the purchase process. The corporation does not use significant levels of commodity financial instruments to hedge commodity prices. In circumstances where commodity derivative instruments are used, there is a high correlation between the commodity costs and the derivative instrument.

Risk Management Activities The corporation maintains risk management control systems to monitor the foreign exchange, interest rate and commodity risks, and the corporation’s offsetting hedge positions. The risk management control system uses analytical techniques including market value, sensitivity analysis and value at risk estimations.

Value at Risk The value at risk estimations are intended to measure the maximum amount the corporation could lose from adverse market movements in interest rates and foreign exchange rates, given a specified confidence level, over a given period of time. Loss is defined in the value at risk estimation as fair market value loss. As a result, foreign exchange gains or losses that are charged directly to translation adjustments in common stockholders’ equity are included in this estimate. The value at risk estimation utilizes historical interest rates and foreign exchange rates from the past year to estimate the volatility and correlation of these rates in the future. The model uses the variance-covariance statistical modeling technique and includes all interest rate sensitive debt and swaps, foreign exchange hedges and their corresponding underlying exposures. The estimated value at risk amounts shown below represent the potential loss the corporation could incur from adverse changes in either interest rates or foreign exchange rates for a one-day period. The average value at risk amount represents the simple average of the quarterly amounts for the past year. These amounts are not significant compared with the equity, historical earnings trend or daily change in market capitalization of the corporation.

In millions	Amounts		Average		Time Interval	Confidence Level
Value at Risk Amounts
2005
Interest rates	$	9.4	$	8.8	1 day	95	%
Foreign exchange		5.3		7.0	1 day	95
2004
Interest rates	$	14.0	$	13.5	1 day	95	%
Foreign exchange		5.9		5.2	1 day	95

Sensitivity Analysis For commodity derivative instruments held, the corporation utilizes a sensitivity analysis technique to evaluate the effect that changes in the market value of commodities will have on the corporation’s commodity derivative instruments. This analysis includes the commodity derivative instruments and, thereby, does not consider the underlying exposure. At the end of 2005 and 2004, the potential change in fair value of commodity derivative instruments, assuming a 10% change in the underlying commodity price, was $10 million and $13 million, respectively. This amount is not significant compared with the earnings and equity of the corporation.

Significant Accounting Policies and Critical Estimates

The corporation’s significant accounting policies are discussed in the Notes to the Consolidated Financial Statements. In most cases, the accounting policies utilized by the corporation are the only ones permissible under U.S. Generally Accepted Accounting Principles. However, the application of certain of these policies requires significant judgments or a complex estimation process that can affect the results of operations and financial position of the corporation, as well as the related footnote disclosures. The corporation bases its estimates on historical experience and other assumptions that it believes are reasonable. If actual amounts are ultimately different from previous estimates, the revisions are included in the corporation’s results of operations for the period in which the actual amounts become known. The accounting policies and estimates that can have a significant impact upon the operating results, financial position and footnote disclosures of the corporation are as follows:

Sales Recognition and Incentives Sales are recognized when title and risk of loss pass to the customer. Management records provisions for

24            Sara Lee Corporation and Subsidiaries

any uncollectible amounts based upon historical collection statistics and current customer information. These estimates are reviewed each quarter and adjusted based upon actual experience. The Notes to the Consolidated Financial Statements specify a variety of sales incentives that the corporation offers to resellers and consumers of its products. Measuring the cost of these incentives requires, in many cases, estimating future customer utilization and redemption rates. Historical data for similar transactions is used in estimating the cost of current incentive programs. These estimates are reviewed each quarter and adjusted based upon actual experience and other available information.

Inventory Valuation Inventory is carried on the balance sheet at the lower of cost or market. Obsolete, damaged and excess inventories are carried at net realizable value. Historical recovery rates, current market conditions, future marketing and sales plans, and spoilage rates are key factors used by the corporation in assessing the net realizable value of obsolete, damaged and excess inventory. These factors are evaluated at a point in time and there are inherent uncertainties related to determining the recoverability of inventory. It is possible that market factors and other conditions underlying the valuation of inventory may change in the future and result in further reserve requirements. A reduction in the carrying amount of an inventory item from cost to market value creates a new cost basis for the item that cannot be reversed in a later period.

Depreciation and Impairment of Property Property is stated at historical cost, and depreciation is computed using the straight-line method over the lives of the assets. The lives used in computing depreciation are based on estimates of the period over which the assets will be of economic benefit to the corporation. Such lives may be the same as the physical lives of the assets, but they can be shorter. Estimated lives are based on historical experience, manufacturers’ estimates, engineering or appraisal evaluations and future business plans. The corporation’s policies require the periodic review of remaining depreciable lives based upon actual experience and expected future utilization. Based upon current levels of depreciation, the average remaining depreciable life of the net property is 5.3 years.

Property is tested for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Such events include significant adverse changes in the business climate, current period operating or cash flow losses, forecasted continuing losses or a current expectation that an asset group will be disposed of before the end of its useful life. Recoverability of property is evaluated by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the asset exceeds the estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amount of those assets is depreciated over its remaining useful life. Restoration of a previously recognized impairment loss is not allowed.

Assets that are to be disposed of by sale are recognized in the financial statements at the lower of carrying amount or fair value, less cost to sell, and are not depreciated after being classified as held for sale. In order for an asset to be classified as held for sale, the asset must be actively marketed, available for immediate sale and meet certain other specified criteria.

Trademarks and Other Identifiable Intangible Assets The primary identifiable intangible assets of the corporation are trademarks and customer relationships acquired in business combinations and computer software. Identifiable intangibles with finite lives are amortized and those with indefinite lives are not amortized. The estimated useful life of an identifiable intangible asset to the corporation is based upon a number of factors, including the effects of demand, competition, expected changes in distribution channels and the level of maintenance expenditures required to obtain future cash flows. As of July 2, 2005, the net book value of trademarks and other identifiable intangible assets was $1,679 million, of which $1,426 million is being amortized. The anticipated amortization over the next five years is $627 million.

Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate elements of property. Identifiable intangible assets not subject to amortization are assessed for impairment at least as often as annually and as triggering events may occur. The impairment test for identifiable intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset. The fair value of the trademarks is measured using the royalty saved method. In making this assessment, management relies on a number of factors to discount anticipated future cash flows including operating results, business plans and present value techniques. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of intangible asset impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future.

Goodwill Goodwill is not amortized but is subject to periodic assessments of impairment. At July 2, 2005, the corporation has $3,202 million of goodwill on its books. Of this total, $1,710 million is related to the Sara Lee Bakery segment. Goodwill is assessed for impairment at least as often as annually and as triggering events may occur. The corporation performs its annual review in the second quarter of each year. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Reporting units are business components one level below the operating segment level for which discrete financial information is available and reviewed by segment management.

In evaluating the recoverability of goodwill, it is necessary to estimate the fair value of the reporting units. In making this

Sara Lee Corporation and Subsidiaries            25

assessment, management relies on a number of factors to discount anticipated future cash flows including operating results, business plans and present value techniques. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future.

Assets and Liabilities Acquired in Business Combinations All business acquisitions are accounted for using the purchase method. The purchase method requires the corporation to allocate the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the cost of an acquired business over the fair value of the assets acquired and liabilities assumed is recognized as goodwill. The valuation of the acquired assets and liabilities will impact the determination of future operating performance of the corporation. The corporation utilizes a variety of information sources to determine the value of acquired assets and liabilities. Third-party appraisers are utilized to determine the value and lives of property and identifiable intangibles, consulting actuaries are used to value the obligations associated with defined benefit retirement plans, and legal counsel is used to assess the obligations associated with legal and environmental claims.

Self-Insurance Reserves The corporation purchases third-party insurance for workers’ compensation, automobile and product and general liability claims that exceed a certain level. The corporation is responsible for the payment of claims under these insured limits, and consulting actuaries are utilized to estimate the obligation associated with incurred losses. Historical loss development factors are utilized to project the future development of incurred losses, and these amounts are adjusted based upon actual claim experience and settlements.

Income Taxes Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. Federal income taxes are provided on that portion of the income of foreign subsidiaries that is expected to be remitted to the U.S. and be taxable. The management of the corporation periodically estimates the probable tax obligations of the corporation using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which the corporation transacts business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to, or further interpretations of, regulations. The corporation adjusts its income tax expense in the period in which these events occur. If such changes take place, there is a risk that the tax rate may increase or decrease in any period.

Contingent Asset The corporation sold its European cut tobacco business in 1999. Under the terms of that agreement, the corporation can receive an annual cash payment of 95 million euros if tobacco continues to be a legal product in the Netherlands, Germany and Belgium through 2010. The legal status of tobacco in each country accounts for a portion of the total contingency, with the Netherlands accounting for 67% of the total, Germany 22% and Belgium 11%. If tobacco ceases to be a legal product at any time during this period, the corporation forfeits the receipt of all future amounts related to that country. Payments of 95 million euros were received in 2004 and 2005 that were equivalent to $119 million and $117 million, respectively. Any future contingent payments received will be recognized in the corporation’s earnings when received.

Defined Benefit Pension Plans See Note 20 to the Consolidated Financial Statements for information regarding the net periodic benefit cost, plan obligations, plan assets and the measurements of these amounts.

Pension costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include estimates of the present value of projected future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. The assumptions used in developing the required estimates include the following key factors: discount rates, salary growth, expected return on plan assets, retirement rates and mortality.

In determining the discount rate, the corporation utilizes the yield on high-quality fixed-income investments that have a AA bond rating and match the average duration of pension obligations. Salary increase assumptions are based on historical experience and anticipated future management actions. In determining the long-term rate of return on plan assets, the corporation assumes that the historical long-term compound growth rate of equity and fixed-income securities will predict the future returns of similar investments in the plan portfolio. Investment management and other fees paid out of plan assets are factored into the determination of asset return assumptions. Retirement rates are based primarily on actual plan experience, while standard actuarial tables are used to estimate mortality. Results that differ from these assumptions are accumulated and amortized over future periods and, therefore, generally affect the net periodic benefit cost in future periods.

26            Sara Lee Corporation and Subsidiaries

The following information illustrates the sensitivity of the net periodic benefit cost and projected benefit obligation to a change in the discount rate and return on plan assets. Amounts relating to foreign plans are translated at the spot rate at the close of 2005. The sensitivities reflect the impact of changing one assumption at a time and are specific to base conditions at the end of 2005. It should be noted that economic factors and conditions often affect multiple assumptions simultaneously and the effects of changes in assumptions are not necessarily linear.

		Increase/(Decrease) In
Assumption	Change	2006 Net Periodic Benefit Cost			2005 Projected Benefit Obligation
Discount rate	1% increase	$	(85	)	$	(787	)
Discount rate	1% decrease		105			980
Asset return	1% increase		(38	)		—
Asset return	1% decrease		38			—

The corporation’s defined benefit pension plans had a net actuarial loss of $1,447 million at the end of 2005, $1,341 million at the end of 2004 and $1,622 million at the end of 2003. The increase in the net actuarial loss in 2005 was primarily due to a reduction in the discount rate used to measure plan obligations, and updated mortality assumptions for certain plans, offset in part by amortization of the opening balance. The decrease in the net actuarial loss in 2004 was primarily as a result of plan assets earning a rate of return in excess of the 7.2% assumed rate of return, and amortization of the opening balance, offset in part by actuarial losses on the plan obligations.

The corporation makes periodic cash contributions to its defined benefit pension plans. In 2006, the corporation expects to contribute $219 million of cash to these plans as compared to $348 million in 2005 and $112 million in 2004.

Issued But Not Yet Effective Accounting Standards

Following is a discussion of recently issued accounting standards that the corporation will be required to adopt in a future period.

Share-Based Payments Currently, the corporation recognizes employee services received in exchange for equity instruments in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). APB No. 25 requires the use of the intrinsic value method, which measures compensation cost as the excess, if any, of the quoted market price of the stock over the amount the employee must pay for the stock. Compensation for substantially all of the corporation’s equity-based awards is measured on the date the shares are granted. Under APB No. 25, no compensation expense has been recognized for stock options, replacement stock options and shares purchased under the Employee Stock Purchase Plan. Compensation expense is, however, recognized for the cost of restricted share unit awards granted to employees under the provisions of APB No. 25.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (SFAS No. 123R), “Share-Based Payments,” the provisions of which become effective for the corporation on July 3, 2005. This Statement eliminates the alternative to use APB No. 25’s intrinsic value method of accounting that was provided in SFAS No. 123 as originally issued. SFAS No. 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those awards. While the fair-value-based method prescribed by SFAS No. 123R is similar to the fair-value-based method disclosed under the provisions of SFAS No. 123 in most respects, there are some differences.

When the corporation adopts the provisions of SFAS No. 123R at the beginning of 2006, it will apply the modified prospective transition method in which compensation cost is recognized for all share-based payments granted after the beginning of 2006, plus any awards granted to employees prior to 2006 that remain unvested at that time. The corporation will not have a significant number of awards that will remain unvested at the beginning of 2006. Under this method of adoption, no restatement of prior periods is made.

The corporation has not estimated the impact of adopting SFAS No. 123R at this time. However, had SFAS No. 123R been adopted in prior periods, the effect would have approximated the SFAS No. 123 pro forma net income and earnings per share disclosures shown in Note 2 to the Consolidated Financial Statements.

Exchange of Nonmonetary Assets In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,” which clarifies that all nonmonetary transactions that have commercial substance should be recorded at fair value. SFAS No. 153 becomes effective for the corporation in 2006, and should not have a material effect on the corporation’s results of operations, cash flows or financial position.

Inventory Costs In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151, “Inventory Costs” (SFAS No. 151). The provisions of this statement become effective for the corporation in 2006. SFAS No. 151 amends the existing guidance on the recognition of inventory costs to clarify the accounting for abnormal amounts of idle expense, freight, handling costs and wasted material (spoilage). Existing rules indicate that under some circumstances, items such as idle facility expense, excessive spoilage, double freight and rehandling costs may be so abnormal as to require treatment as current period charges. SFAS No. 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The corporation’s existing policies with regard to inventory accounting are consistent with the provisions of SFAS No. 151 and the adoption of this Statement is not expected to have a material impact on the valuation of inventory or operating results.

Forward-Looking Information

This document contains certain forward-looking statements, including the anticipated costs and benefits of restructuring actions, access to credit markets and the corporation’s credit ratings, the planned extinguishment of debt, the funding of pension plans, potential payments under guarantees and amounts due under future contractual obligations and commitments. In addition, from time to time, in oral statements and written reports, the corporation discusses its expectations regarding the corporation’s future performance by making forward-looking statements preceded by terms such as “expects,” “projects,” “anticipates” or “believes.” These forward-looking statements are based on currently available competitive, financial and

Sara Lee Corporation and Subsidiaries            27

economic data, as well as management’s views and assumptions regarding future events. Such forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements. Consequently, the corporation wishes to caution readers not to place undue reliance on any forward-looking statements. Among the factors that could cause Sara Lee’s actual results to differ from such forward-looking statements are factors relating to:

Sara Lee’s relationship with its customers, such as

(i) a significant change in Sara Lee’s business with any of its major customers, such as Wal-Mart, the corporation’s largest customer, including changes in the level of inventory these customers maintain;

(ii) credit and other business risks associated with customers operating in a highly competitive retail environment;

the consumer marketplace, such as

(iii) significant competition, including advertising, promotional and price competition, and changes in consumer demand for Sara Lee’s products;

(iv) fluctuations in the availability and cost of raw materials, Sara Lee’s ability to increase product prices in response and the impact on Sara Lee’s profitability;

(v) the impact of various food safety issues on sales and profitability of Sara Lee products;

(vi) inherent risks in the marketplace associated with new product introductions, including uncertainties about trade and consumer acceptance;

Sara Lee’s Transformation plan, such as

(vii) Sara Lee’s ability to complete planned business dispositions, and the timing and terms of such transactions;

(viii) Sara Lee’s ability to obtain a favorable tax ruling, and any other required regulatory approvals, on the proposed separation of its Branded Apparel Americas and Asian business;

(ix) the impact which the separation of the Branded Apparel Americas and Asian business will have upon the funding requirements of the remaining domestic operations and related cost of remitting additional earnings of foreign subsidiaries to the U.S.;

(x) Sara Lee’s ability to effectively integrate its remaining businesses into the contemplated new business structure, including Sara Lee’s ability to transition customers to different Bakery brands, transition to common information systems and processes and manage plant capacity and workforce reductions;

(xi) Sara Lee’s ability to generate the anticipated efficiencies and savings from the various business Transformation efforts; and

(xii) the impact of the Transformation plan on Sara Lee’s relationships with its employees, its major customers and vendors and Sara Lee’s cost of funds;

Sara Lee’s international operations, such as

(xiii) impacts on reported earnings from fluctuations in foreign currency exchange rates, particularly the euro, given Sara Lee’s significant concentration of business in Western Europe;

(xiv) Sara Lee’s ability to continue to source production and conduct manufacturing and selling operations in various countries due to changing business conditions, political environments, import quotas and the financial condition of suppliers;

previous business decisions, such as

(xv) Sara Lee’s ability to achieve planned cash flows from capital expenditures and acquisitions, particularly Earthgrains, and the impact of changing interest rates and the cost of capital on the discounted value of those planned cash flows;

(xvi) credit ratings issued by the three major credit rating agencies and the impact these ratings have on the corporation’s cost to borrow funds and access to capital/debt markets;

(xvii) the settlement of a number of ongoing reviews of Sara Lee’s income tax filing positions in various jurisdictions and inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which the corporation transacts business; and

(xviii) the continued legality of tobacco products in the Netherlands, Germany and Belgium.

        In addition, the corporation’s results may also be affected by general factors, such as economic conditions, political developments, interest and inflation rates, accounting standards, taxes, and laws and regulations in markets where the corporation competes. We have provided additional information in our Form 10-K for fiscal 2005, which readers are encouraged to review, concerning factors that could cause actual results to differ materially from those in the forward-looking statements. Sara Lee undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

28            Sara Lee Corporation and Subsidiaries

Consolidated Statements of Income

	Years Ended
Dollars in millions except per share data	July 2, 2005			July 3, 2004			June 28, 2003
Continuing operations
Net sales	$	19,254		$	19,119		$	17,888
Cost of sales		12,284			11,867			10,931
Selling, general and administrative expenses		5,524			5,653			5,334
Charges for (income from) exit activities and business dispositions		93			48			(11	)
Impairment charges		350			—			—
Contingent sale proceeds		(117	)		(119	)		—
Interest expense		290			271			276
Interest income		(104	)		(88	)		(76	)
		18,320			17,632			16,454
Income from continuing operations before income taxes		934			1,487			1,434
Income taxes		203			248			247
Income from continuing operations		731			1,239			1,187
Discontinued operations
Net (loss) income from discontinued operations, net of tax of $67, $22 and $17		(12	)		33			34
Net income	$	719		$	1,272		$	1,221
Net income from continuing operations per share of common stock
Basic	$	0.93		$	1.57		$	1.51
Diluted	$	0.92		$	1.55		$	1.46
Net income per share of common stock
Basic	$	0.91		$	1.61		$	1.55
Diluted	$	0.90		$	1.59		$	1.50

The accompanying Notes to Financial Statements are an integral part of these statements.

Sara Lee Corporation and Subsidiaries            29

Consolidated Balance Sheets

Dollars in millions except share data	July 2, 2005		July 3, 2004		June 28, 2003
Assets
Cash and equivalents	$	545	$	655	$	1,004
Trade accounts receivable, less allowances of $183 in 2005, $221 in 2004 and $212 in 2003		2,040		1,848		1,787
Inventories
Finished goods		1,889		1,879		1,767
Work in process		345		397		405
Materials and supplies		460		452		480
		2,694		2,728		2,652
Other current assets		379		380		359
Assets of discontinued operations held for sale		153		125		110
Total current assets		5,811		5,736		5,912
Other noncurrent assets		121		143		281
Deferred tax asset		310		281		453
Property
Land		147		148		195
Buildings and improvements		2,133		2,030		1,895
Machinery and equipment		5,065		5,045		4,872
Construction in progress		224		282		289
		7,569		7,505		7,251
Accumulated depreciation		4,427		4,269		3,939
Property, net		3,142		3,236		3,312
Trademarks and other identifiable intangibles, net		1,679		1,977		2,058
Goodwill		3,202		3,354		3,331
Assets of discontinued operations held for sale		147		152		149
	$	14,412	$	14,879	$	15,496

The accompanying Notes to Financial Statements are an integral part of these balance sheets.

30            Sara Lee Corporation and Subsidiaries

	July 2, 2005			July 3, 2004			June 28, 2003
Liabilities and Stockholders’ Equity
Notes payable	$	258		$	84		$	140
Accounts payable		1,453			1,293			1,314
Accrued liabilities
Payroll and employee benefits		1,081			1,150			1,193
Advertising and promotion		521			531			439
Taxes other than payroll and income		116			119			111
Income taxes		160			247			22
Other		843			829			900
Current maturities of long-term debt		381			1,070			1,004
Liabilities of discontinued operations held for sale		155			87			46
Total current liabilities		4,968			5,410			5,169
Long-term debt		4,115			4,171			5,157
Pension obligation		858			870			1,178
Other liabilities		1,452			1,362			1,496
Liabilities of discontinued operations held for sale		—			7			18
Minority interest in subsidiaries		81			74			356
Preferred stock (authorized 13,500,000 shares; no par value)
ESOP convertible: Issued and outstanding – 3,051,643 shares in 2003		—			—			221
Unearned deferred compensation		—			—			(182	)
Common stockholders’ equity
Common stock: (authorized 1,200,000,000 shares; $0.01 par value) Issued and outstanding – 785,894,778 shares in 2005; 793,924,013 shares in 2004 and 777,347,330 shares in 2003		8			8			8
Capital surplus		79			104			32
Retained earnings		4,408			4,437			3,787
Unearned stock		(155	)		(170	)		(10	)
Accumulated other comprehensive loss		(1,402	)		(1,394	)		(1,734	)
Total common stockholders’ equity		2,938			2,985			2,083
	$	14,412		$	14,879		$	15,496

Sara Lee Corporation and Subsidiaries            31

Consolidated Statements of Common Stockholders’ Equity

Dollars in millions	Total			Common Stock		Capital Surplus			Retained Earnings			Unearned Stock			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income (Loss)
Balances at June 29, 2002	$	1,779		$	8	$	96		$	3,168		$	(23	)	$	(1,470	)
Net income		1,221			—		—			1,221			—			—		$	1,221
Translation adjustments, net of tax of $(123)		345			—		—			—			—			345			345
Minimum pension liability, net of tax of $327		(606	)		—		—			—			—			(606	)		(606	)
Net unrealized loss on qualifying cash flow hedges		(3	)		—		—			—			—			(3	)		(3	)
Comprehensive income																		$	957
Dividends		(497	)		—		—			(497	)		—			—
Stock issuances - restricted stock		14			—		14			—			—			—
Stock option and benefit plans		98			—		98			—			—			—
Tax benefit related to stock-based compensation		10			—		10			—			—			—
Share repurchases and retirements		(305	)		—		(194	)		(111	)		—			—
ESOP tax benefit, redemptions and other		27			—		8			6			13			—
Balances at June 28, 2003		2,083			8		32			3,787			(10	)		(1,734	)
Net income		1,272			—		—			1,272			—			—		$	1,272
Translation adjustments, net of tax of $59		135			—		—			—			—			135			135
Minimum pension liability, net of tax of $(110)		202			—		—			—			—			202			202
Net unrealized gain on qualifying cash flow hedges		3			—		—			—			—			3			3
Comprehensive income																		$	1,612
Dividends		(594	)		—		—			(594	)		—			—
Stock issuances - restricted stock		20			—		20			—			—			—
Stock option and benefit plans		138			—		138			—			—			—
Tax benefit related to stock-based compensation		14			—		14			—			—			—
Share repurchases and retirements		(350	)		—		(321	)		(29	)		—			—
Conversion of ESOP preferred to common		28			—		210			—			(182	)		—
ESOP tax benefit, redemptions and other		34			—		11			1			22			—
Balances at July 3, 2004		2,985			8		104			4,437			(170	)		(1,394	)
Net income		719			—		—			719			—			—		$	719
Translation adjustments, net of tax of $(14)		62			—		—			—			—			62			62
Minimum pension liability, net of tax of $39		(70	)		—		—			—			—			(70	)		(70	)
Net unrealized gain on qualifying cash flow hedges		—			—		—			—			—			—			—
Comprehensive income																		$	711
Dividends		(614	)		—		—			(614	)		—			—
Stock issuances - restricted stock		51			—		51			—			—			—
Stock option and benefit plans		167			—		167			—			—			—
Tax benefit related to stock-based compensation		10			—		10			—			—			—
Share repurchases and retirements		(396	)		—		(258	)		(138	)		—			—
ESOP tax benefit, redemptions and other		24			—		5			4			15			—
Balances at July 2, 2005	$	2,938		$	8	$	79		$	4,408		$	(155	)	$	(1,402	)

The accompanying Notes to Financial Statements are an integral part of these statements.

32            Sara Lee Corporation and Subsidiaries

Consolidated Statements of Cash Flows

	Years Ended
Dollars in millions	July 2, 2005			July 3, 2004			June 28, 2003
Operating Activities
Income from continuing operations	$	731		$	1,239		$	1,187
Less: Cash received from contingent sale proceeds		(117	)		(119	)		—
Adjustments to reconcile income from continuing operations to net cash provided by operating activities
Depreciation		563			554			525
Amortization of intangibles		174			166			136
Impairment charge		350			—			—
Net (loss) gain on business dispositions		(68	)		14			(16	)
Increase in deferred taxes		79			138			5
Other		58			156			42
Changes in current assets and liabilities, net of businesses acquired and sold
(Increase) decrease in trade accounts receivable		(196	)		(42	)		94
Decrease (increase) in inventories		23			(50	)		(23	)
(Increase) decrease in other current assets		(2	)		44			(17	)
(Decrease) increase in accounts payable		(4	)		46			(126	)
(Decrease) in accrued liabilities		(277	)		(173	)		—
Net cash from operating activities from continuing operations		1,314			1,973			1,807
Operating cash flows from discontinued operations		36			69			17
Net cash from operating activities		1,350			2,042			1,824
Investment Activities
Purchases of property and equipment		(538	)		(530	)		(746	)
Acquisitions of businesses and investments		(2	)		—			(10	)
Dispositions of businesses and investments		86			137			—
Cash received from contingent sale proceeds		117			119			—
Sales of assets		104			90			81
Other		—			—			1
Net cash used in investment activities		(233	)		(184	)		(674	)
Financing Activities
Issuances of common stock		161			139			98
Purchases of common stock		(396	)		(350	)		(305	)
Redemption of preferred stock		—			—			(250	)
Borrowings of long-term debt		339			1			1,773
Repayments of long-term debt		(1,033	)		(1,288	)		(995	)
Short-term borrowings (repayments), net		178			(19	)		(359	)
Payments of dividends		(464	)		(714	)		(497	)
Net cash used in financing activities		(1,215	)		(2,231	)		(535	)
Effect of changes in foreign exchange rates on cash		(7	)		35			65
(Decrease) increase in cash and equivalents		(105	)		(338	)		680
Less: Cash and equivalents of discontinued operations		(19	)		(14	)		(3	)
Cash and equivalents at beginning of year		669			1,007			327
Cash and equivalents at end of year	$	545		$	655		$	1,004

The accompanying Notes to Financial Statements are an integral part of these statements.

Sara Lee Corporation and Subsidiaries            33

Notes to Financial Statements

(Dollars in millions except per share data)

Note 1 – Nature of Operations and Basis of Presentation

Nature of Operations Sara Lee Corporation (the corporation) is a U.S.-based multinational corporation. The corporation’s principal product lines are branded packaged meat products; fresh and frozen bakery products; roast and ground coffee; household products; and branded apparel products consisting primarily of intimate apparel, knit products and legwear. The relative importance of each operation over the past three years, as measured by sales and operating segment income, is presented in Note 24 – Business Segment Information of these financial statements. Food and beverage sales are made in both the retail channel to supermarkets, warehouse clubs and national chains, and the foodservice channel. Household products are primarily sold through the retail channel, while distribution channels in the Branded Apparel business range from department and specialty stores for premium brands to warehouse clubs and mass-merchandise outlets for value-priced brands.

Basis of Presentation The Consolidated Financial Statements include Sara Lee Corporation and its controlled subsidiaries and have been prepared in accordance with generally accepted accounting principles in the U.S. (GAAP). The results of the corporation’s Direct Selling business are reported as a discontinued operation in 2005 and all prior years. The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amount of assets and liabilities, revenues and expenses, and certain financial statement disclosures. Significant estimates in these Consolidated Financial Statements include allowances for doubtful accounts receivable, net realizable value of inventories, the cost of sales incentives, useful lives of property and identifiable intangible assets, the evaluation of impairments of property, identifiable intangible assets and goodwill, self-insurance reserves, income tax and valuation reserves, the valuation of assets and liabilities acquired in business combinations, and assumptions used in the determination of the funded status and annual expense of pension and postretirement employee benefit plans. Actual results could differ from these estimates.

The corporation’s fiscal year ends on the Saturday closest to June 30. Fiscal year 2004 was a 53-week year, while fiscal years 2005 and 2003 were 52-week years. Unless otherwise stated, references to years relate to fiscal years. Certain prior year amounts have been reclassified to conform with the current year’s presentation.

Note 2 – Summary of Significant Accounting Policies

The Consolidated Financial Statements include the accounts of the corporation, its controlled subsidiary companies, which in general are majority owned, and the accounts of variable interest entities (VIEs) for which the corporation is deemed the primary beneficiary, as defined by the Financial Accounting Standards Board’s (FASB) Interpretation No. 46 (FIN 46) and related interpretations. The results of companies acquired or disposed of during the year are included in the Consolidated Financial Statements from the effective date of acquisition, or up to the date of disposal. All significant intercompany balances and transactions have been eliminated in consolidation. Gains and losses resulting from the issuance of common stock by a subsidiary of the corporation are recognized in earnings as realized.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities,” which addresses consolidation by business enterprises of VIEs that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) have equity investors that lack an essential characteristic of a controlling financial interest.

Throughout 2003, the FASB released numerous proposed and final FASB Staff Positions (FSPs) regarding FIN 46, which both clarified and modified FIN 46’s provisions. In December 2003, the FASB issued Interpretation No. 46 (FIN 46-R), which replaced FIN 46. FIN 46-R retains many of the basic concepts introduced in FIN 46; however, it also introduced a new scope exception for certain types of entities that qualify as a “business” as defined in FIN 46-R, revised the method of calculating expected losses and residual returns for determination of the primary beneficiary, included new guidance for assessing variable interests, and codified certain FSPs on FIN 46.

The corporation adopted the provisions of FIN 46-R in 2004 and consolidated VIEs with total assets and total liabilities of $54 and $48, respectively. The impact of consolidating these VIEs did not have a material impact on the results of operations or financial position of the corporation.

Foreign Currency Translation Foreign-currency-denominated assets and liabilities are translated into U.S. dollars at exchange rates existing at the respective balance sheet dates. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of other comprehensive income within common stockholders’ equity. The corporation translates the results of operations of its foreign subsidiaries at the average exchange rates during the respective periods. Gains and losses resulting from foreign currency transactions, the amounts of which are not material, are included in net income.

Discontinued Operations A business component that either has been disposed of or is classified as held for sale is accounted for as a discontinued operation if the cash flow of the component has been or will be eliminated from the ongoing operations of the corporation and the corporation will no longer have any significant continuing involvement in the business. The results of operations of the discontinued operations through the date of sale, including any gain or loss on disposition, are aggregated and presented on a separate line in the income statement. Prior to disposition, the assets and liabilities of discontinued operations are aggregated and reported on separate lines in the balance sheet.

Sales Recognition and Incentives Sales are recognized when title and risk of loss pass to the customer. The corporation offers a variety of sales incentives to resellers and consumers of its products, and the policies regarding the recognition and display of these incentives within the Consolidated Statements of Income are as follows:

Discounts, Coupons and Rebates The cost of these incentives is recognized at the later of the date at which the related sale is recognized or the date at which the incentive is offered. The cost of these incentives is estimated using a number of factors including historical utilization and redemption rates. Substantially all cash incentives of this type are included in the determination of net sales. Incentives offered in the form of free product are included in the determination of cost of sales.

Slotting Fees Certain retailers require the payment of slotting fees in order to obtain space for the corporation’s products on the retailer’s store shelves. The cost of these fees is recognized at the earlier of the date cash is paid or a liability to the retailer is created. These amounts are included in the determination of net sales.

34            Sara Lee Corporation and Subsidiaries

Volume-Based Incentives These incentives typically involve rebates or refunds of a specified amount of cash consideration that are redeemable only if the reseller completes a specified cumulative level of sales transactions. Under incentive programs of this nature, the corporation estimates the anticipated rebate to be paid and allocates a portion of the estimated cost of the rebate to each underlying sales transaction with the customer.

Cooperative Advertising Under these arrangements, the corporation agrees to reimburse the reseller for a portion of the costs incurred by the reseller to advertise and promote certain of the corporation’s products. The corporation recognizes the cost of cooperative advertising programs in the period in which the advertising and promotional activity first takes place. The costs of these incentives are generally included in the determination of net sales.

Fixtures and Racks Store fixtures and racks are given to retailers to display certain of the corporation’s products. The costs of these fixtures and racks are recognized in the determination of net income in the period in which they are delivered to the retailer.

Advertising Expense Advertising costs, which include the development and production of advertising materials and the communication of this material through various forms of media, are expensed in the period the advertising first takes place. Advertising expense is recognized in the “Selling, general and administrative expenses” caption in the Consolidated Statements of Income and was $446 in 2005, $421 in 2004 and $458 in 2003.

Cash and Equivalents All highly liquid investments purchased with a maturity of three months or less at the time of purchase are considered to be cash equivalents. The corporation revised its classification of certain balances to notes payable by an immaterial amount at the end of 2004 and 2003, to recognize that the legal right of offset did not exist.

Accounts Receivable Valuation Accounts receivable are stated at their net realizable value. The allowance for doubtful accounts reflects the corporation’s best estimate of probable losses inherent in the receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information.

Inventory Valuation Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method for 98% of the corporation’s inventories at July 2, 2005, and by the last-in, first-out (LIFO) for the remainder. There was no difference between the FIFO and LIFO inventory valuation at July 2, 2005, July 3, 2004 or June 28, 2003. Rebates, discounts and other cash consideration received from a vendor related to inventory purchases is reflected as a reduction in the cost of the related inventory item, and is therefore reflected in cost of sales when the related inventory item is sold.

Property Property is stated at historical cost, and depreciation is computed using the straight-line method over the lives of the assets. Machinery and equipment is depreciated over periods ranging from 3 to 25 years and buildings and building improvements over periods of up to 40 years. Additions and improvements that substantially extend the useful life of a particular asset and interest costs incurred during the construction period of major properties are capitalized. Repairs and maintenance costs are charged to expense. Upon sale or disposition of a property element, the cost and related accumulated depreciation are removed from the accounts. Capitalized interest was $10, $9 and $11 in 2005, 2004 and 2003, respectively.

Property is tested for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Such events include significant adverse changes in the business climate, current period operating or cash flow losses, forecasted continuing losses or a current expectation that an asset group will be disposed of before the end of its useful life. Recoverability of property is evaluated by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the asset exceeds the estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amount of those assets is depreciated over its remaining useful life. Restoration of a previously recognized impairment loss is not permitted under U.S. generally accepted accounting principles.

Assets that are to be disposed of by sale are recognized in the financial statements at the lower of carrying amount or fair value, less cost to sell, and are not depreciated after being classified as held for sale. In order for an asset to be classified as held for sale, the asset must be actively marketed, be available for immediate sale and meet certain other specified criteria.

Trademarks and Other Identifiable Intangible Assets The primary identifiable intangible assets of the corporation are trademarks and customer relationships acquired in business combinations, and computer software. Identifiable intangibles with finite lives are amortized and those with indefinite lives are not amortized. The estimated useful life of a finite-lived identifiable intangible asset to the corporation is based upon a number of factors including the effects of demand, competition, expected changes in distribution channels and the level of maintenance expenditures required to obtain future cash flows.

        Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used in evaluating elements of property. Identifiable intangible assets not subject to amortization are assessed for impairment at least as often as annually and as triggering events may occur. The impairment test for identifiable intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset. In making this assessment, management relies on a number of factors to discount anticipated future cash flows including operating results, business plans and present value techniques. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of intangible asset impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future.

Goodwill Goodwill is the difference between the purchase price and the fair value of the assets acquired and liabilities assumed in a business combination. When a business combination is completed, the assets acquired and liabilities assumed are assigned to the reporting unit or units of the corporation given responsibility for managing, controlling and generating returns on these assets and liabilities. Reporting units are business components one level below the operating segment level for which discrete financial information is available and reviewed by segment management. In many instances, all of the acquired assets and liabilities are assigned to a single reporting unit and in these cases all of the goodwill is assigned to the same reporting unit. In those situations in which the acquired assets and liabilities are allocated to more than one reporting unit, the

35            Sara Lee Corporation and Subsidiaries

goodwill to be assigned to each reporting unit is determined in a manner similar to how the amount of goodwill recognized in the business combination is determined.

Goodwill is not amortized; however, it is assessed for impairment at least as often as annually and as triggering events may occur. The corporation performs its annual review in the second quarter of each year. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the implied fair value and the carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

In evaluating the recoverability of goodwill, it is necessary to estimate the fair values of the reporting units. In making this assessment, management relies on a number of factors to discount anticipated future cash flows including operating results, business plans and present value techniques. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner that impairment in value may occur in the future.

Stock-Based Compensation The corporation recognizes employee services received in exchange for equity instruments in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). APB No. 25 requires the use of the intrinsic value method, which measures compensation cost as the excess, if any, of the quoted market price of the stock over the amount an employee must pay to acquire the stock. Compensation for substantially all of the corporation’s equity-based awards is measured on the date the shares are granted. Under APB No. 25, no compensation expense was recognized for stock options, replacement stock options and shares purchased under the Employee Stock Purchase Plan (ESPP).

Compensation expense is, however, recognized for the cost of restricted stock unit (RSU) awards granted to key executives under the provisions of APB No. 25. The corporation utilizes two types of restricted share awards.

• A substantial portion of all RSUs vest solely upon continued future service to the corporation. The cost of these awards is determined using the fair value of shares on the date of grant, and compensation is recognized ratably over the period during which the employees provide the requisite service to the corporation.

• A small portion of RSUs vest based upon continued future employment and the achievement of certain defined performance measures. The cost of these awards is determined using the fair value of the shares awarded at the end of the performance period. At interim dates, the corporation determines the expected compensation expense using the estimated number of shares to be earned and the change in the market price of the shares from the beginning to the end of the period.

Had the cost of employee services received in exchange for equity instruments been recognized based on the grant-date fair value of those instruments in accordance with the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-based Compensation” (SFAS No. 123), the corporation’s net income and earnings per share would have been impacted as shown in the following table:

	2005			2004			2003
Reported net income	$	719		$	1,272		$	1,221
Plus – stock-based employee compensation included in reported net income, net of related tax effects		50			20			16
Less – total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects		(68	)		(48	)		(49	)
Pro forma net income	$	701		$	1,244		$	1,188
Earnings per share
Basic – as reported	$	0.91		$	1.61		$	1.55
Basic – pro forma	$	0.89		$	1.58		$	1.51
Diluted – as reported	$	0.90		$	1.59		$	1.50
Diluted – pro forma	$	0.88		$	1.56		$	1.46

Income Taxes As a global commercial enterprise, the corporation’s tax rate from period to period is affected by many factors. The most significant of these factors are changes in tax legislation, the global mix of earnings, the tax characteristics of the corporation’s income, acquisitions and dispositions, and the portion of the income of foreign subsidiaries that is expected to be repatriated to the U.S. and be taxable. In addition, the corporation’s tax returns are routinely audited and finalization of issues raised in these audits sometimes affect the tax provision. It is reasonably possible that tax legislation in the jurisdictions in which the corporation does business may change in future periods. While such changes cannot be predicted, if they occur, the impact on the corporation’s tax assets and obligations will need to be measured and recognized in the financial statements.

Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates for the years in which the differences are expected to reverse. Federal income taxes are provided on that portion of the income of foreign subsidiaries that are expected to be remitted to the U.S. and be taxable.

The management of the corporation periodically estimates the probable tax obligations of the corporation using historical experience in tax jurisdictions and informed judgments. The corporation adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these situations, the ultimate payment may be materially different from the estimated recorded amounts. If the corporation’s estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payments of these amounts ultimately prove to be less than the recorded amounts, the reversal of the liabilities would result in income tax benefits being recognized in the period when it is determined the liabilities are no longer necessary.

Financial Instruments The corporation uses financial instruments, including forward exchange, option, futures and swap contracts, to manage its exposures to movements in interest rates, foreign exchange rates and commodity prices. The use of these financial instruments modifies the exposure of these risks with the intent to reduce the risk or cost to the corporation. The corporation does not use derivatives for trading purposes and is not a party to leveraged derivatives.

The corporation formally documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivatives that are designated as hedges of specific assets, liabilities,

Sara Lee Corporation and Subsidiaries            36

firm commitments or forecasted transactions. The corporation also formally assesses, both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer likely to occur, the corporation discontinues hedge accounting, and any deferred gains or losses are recorded in selling, general and administrative expenses.

Derivatives are recorded in the Consolidated Balance Sheets at fair value in other assets and other liabilities. The fair value is based upon either market quotes for actively traded instruments or independent bids for non-exchange-traded instruments.

On the date the derivative is entered into, the corporation designates the derivative as one of the following types of hedging instruments and accounts for the derivative as follows:

Fair Value Hedge A hedge of a recognized asset or liability or an unrecognized firm commitment is declared as a fair value hedge. For fair value hedges, both the effective and ineffective portions of the changes in the fair value of the derivative, along with the gain or loss on the hedged item that is attributable to the hedged risk, are recorded in earnings and reported in the Consolidated Statements of Income on the same line as the hedged item.

Cash Flow Hedge A hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability is declared as a cash flow hedge. The effective portion of the change in the fair value of a derivative that is declared as a cash flow hedge is recorded in accumulated other comprehensive income. When the hedged item impacts the income statement, the gain or loss included in accumulated other comprehensive income is reported on the same line in the Consolidated Statements of Income as the hedged item. In addition, both the fair value of changes excluded from the corporation’s effectiveness assessments and the ineffective portion of the changes in the fair value of derivatives used as cash flow hedges are reported in the “Selling, general and administrative expenses” line in the Consolidated Statements of Income.

Net Investment Hedge A hedge of a net investment in a foreign operation is declared as a net investment hedge. The effective portion of the change in the fair value of derivatives, based upon spot rates, used as a net investment hedge of a foreign operation is recorded in the cumulative translation adjustment account within common stockholders’ equity. The ineffective portion of the change in the fair value of a derivative or non-derivative instrument designated as a net investment hedge is recorded in “Selling, general and administrative expenses,” or “Interest expense,” if the hedging instrument is a swap, in the Consolidated Statements of Income. Non-U.S. dollar financing transactions are accounted for as net investment hedges when the hedged item is a long-term investment in the corresponding foreign currency.

Natural Hedge A derivative used as a natural hedging instrument whose change in fair value is recognized to act as an economic hedge against changes in the values of the hedged item is declared as a natural hedge. For derivatives designated as natural hedges, changes in fair value are reported in earnings in the “Selling, general and administrative expenses” line of the Consolidated Statements of Income. Forward exchange contracts are recorded as natural hedges when the hedged item is a recorded asset or liability that is revalued in each accounting period, in accordance with SFAS No. 52, “Foreign Currency Translation.”

Business Acquisitions and Dispositions All business acquisitions have been accounted for under the purchase method. Cash, the fair value of other assets distributed, securities issued unconditionally, and amounts of consideration that are determinable at the date of acquisition are included in determining the cost of an acquired business. Consideration that is issued or issuable at the expiration of a contingency period, or that is held in escrow pending the outcome of a contingency, is not recorded as a liability or shown as an outstanding security unless the outcome of the contingency is determinable.

Gains on business dispositions are recognized when the transactions close and the amounts are realized. Losses on business dispositions are recognized when the losses are probable and measurable. In measuring gains or losses on the disposition of a business, the consideration received is measured as the amount of cash, and the fair value of other assets received and securities transferred unconditionally.

Substantially all consideration associated with business acquisitions and dispositions recognized in 2005, 2004 and 2003 involved the receipt or payment of cash. These amounts are disclosed in the Consolidated Statements of Cash Flows and the Consolidated Statements of Common Stockholders’ Equity.

Note 3 – Discontinued Operations

As part of the corporation’s Transformation plan, steps were undertaken to dispose of the Direct Selling business. In 2005, the Direct Selling business was reported as a discontinued operation and on August 10, 2005, the corporation announced that it had entered into a definitive agreement to sell this business for $557 of cash. The transaction is expected to close in the second quarter of 2006, subject to regulatory approval and customary closing conditions. Previously, the Direct Selling business had been reported as a component of the Household Products business segment.

Summary results of operations for the Direct Selling business are as follows:

	2005			2004			2003
Net sales	$	473		$	447		$	403
Income before income taxes	$	55		$	55		$	50
Income tax expense		(67	)		(22	)		(16	)
(Loss) income from discontinued operations	$	(12	)	$	33		$	34
Earnings from discontinued operations per share of common stock
– Basic	$	(0.02	)	$	0.04		$	0.04
– Diluted	$	(0.01	)	$	0.04		$	0.04

The operations of this business are outside the U.S. and at the end of 2005, the accumulated earnings of these foreign subsidiaries were no longer considered permanently invested. The increase in the income tax expense of this business in 2005 resulted from the recognition of the tax obligation associated with the accumulated earnings of these foreign subsidiaries.

37            Sara Lee Corporation and Subsidiaries

The assets and liabilities of the Direct Selling business, which are reflected as assets and liabilities of the discontinued operations held for sale on the Consolidated Balance Sheet, are as follows:

	2005		2004		2003
Cash	$	19	$	14	$	3
Trade accounts receivable		43		40		36
Inventories		64		51		52
Other current assets		27		20		19
Total current assets held for sale		153		125		110
Property		38		35		38
Trademarks and other intangibles		41		47		52
Goodwill		60		60		56
Other assets		8		10		3
Asset of discontinued operations held for sale	$	300	$	277	$	259
Accounts payable	$	36	$	32	$	32
Notes payable		7		1		—
Accrued expenses		112		54		14
Total current liabilities held for sale		155		87		46
Other liabilities		—		7		18
Liabilities of discontinued operations held for sale	$	155	$	94	$	64

Note 4 – Impairment Charges

In 2005, the corporation recognized impairment charges that reduced income from continuing operations before tax by $350 and reduced income from continuing operations and diluted earnings per share from continuing operations by $291 and $0.37, respectively. A description of each charge follows:

European Branded Apparel The corporation previously announced its intent to dispose of its European Branded Apparel business, and during 2005, steps were taken to market and identify potential buyers for this business. As part of this process, the corporation received a series of nonbinding bids for the business. During 2005, the operating results of the business deteriorated significantly from prior years and failed to meet planned expectations. Prospective buyers reacted to this downturn by progressively lowering their offers. The nonbinding offers received in the fourth quarter of 2005 were less than the carrying value of the reporting unit and resulted in a pretax charge of $305 to recognize the impairment of $182 of goodwill and $123 of indefinite lived trademarks in this reporting unit. The assets of this reporting unit were classified as held for use at the close of 2005 and the corporation is evaluating alternative courses of action. This charge was recognized in the results of the Branded Apparel segment. It is possible that an additional impairment charge may be recognized when the assets are classified as held for sale.

U.S. Retail Coffee As part of the business Transformation effort, the corporation initiated steps to dispose of certain assets used to manufacture and market roast and ground coffee products in the U.S. retail coffee channel. These assets are part of a larger U.S. coffee reporting unit that also provides products to the foodservice channel. The specific retail coffee trademarks and assets identified for disposal were classified as held for use as of the end of 2005, and the corporation obtained a third-party estimate of the selling price of these assets. The carrying value of the retail coffee asset group exceeded the estimated future cash flows, and a pretax charge of $45 was recorded to recognize the impairment of $13 of manufacturing assets and $32 of trademarks in the asset group. This charge is recognized in the results of the Beverage segment. Should the U.S. retail coffee asset group be sold, it will be necessary to allocate a portion of the goodwill associated with the U.S. coffee reporting unit to the retail asset group and an additional impairment charge may be recognized.

Note 5 – Common Stock

Changes in outstanding shares of common stock for the past three years were:

Shares in thousands	2005		2004		2003
Beginning balances	793,924		777,347		784,721
Stock issuances
Stock option and benefit plans	9,379		9,147		6,797
Business acquisitions	7		5		11
Restricted stock plans	700		869		1,035
Reacquired shares	(18,293	)	(18,035	)	(15,911	)
Conversion of ESOP preferred shares	—		23,211		—
ESOP share redemption	—		1,262		579
Other	178		118		115
Ending balances	785,895		793,924		777,347

Common stock dividends and dividend per share amounts declared were $614 and $0.78 in 2005, $594 and $0.75 in 2004 and $480 and $0.615 in 2003.

Note 6 – Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income are as follows:

	Cumulative Translation Adjustment			Net Unrealized Gain (Loss) on Qualifying Cash Flow Hedges			Minimum Pension Liability Adjustment			Accumulated Other Comprehensive Income
Balance at June 29, 2002	$	(1,273	)	$	(14	)	$	(183	)	$	(1,470	)
Other comprehensive income (loss) activity		345			(3	)		(606	)		(264	)
Balance at June 28, 2003		(928	)		(17	)		(789	)		(1,734	)
Other comprehensive income (loss) activity		135			3			202			340
Balance at July 3, 2004		(793	)		(14	)		(587	)		(1,394	)
Other comprehensive income (loss) activity		62			—			(70	)		(8	)
Balance at July 2, 2005	$	(731	)	$	(14	)	$	(657	)	$	(1,402	)

Note 7 – Stock-Based Compensation

The corporation has various stock option, employee stock purchase and stock award plans.

Stock Options The exercise price of each stock option equals or exceeds the market price of the corporation’s stock on the date of grant. Options can generally be exercised over a maximum term of 10 years. Options generally vest ratably over three years.

Under certain stock option plans, an active employee may receive a replacement stock option equal to the number of shares surrendered upon a stock-for-stock exercise. The exercise price of the replacement option is 100% of the market value at the date of exercise of the original option, and the replacement option will remain exercisable for the remaining term of the original option. Replacement stock options generally vest six months from the grant date. Beginning in 2006, the corporation has discontinued the granting of replacement stock options.

Sara Lee Corporation and Subsidiaries            38

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions:

	2005		2004		2003
Expected lives	3.5 years		3.5 years		3.7 years
Risk-free interest rate	3.3	%	2.5	%	2.4	%
Expected volatility	23.2	%	25.6	%	29.2	%
Dividend yield	3.5	%	3.6	%	3.0	%

A summary of the changes in stock options outstanding under the corporation’s option plans during the years ended July 2, 2005, July 3, 2004 and June 28, 2003 is presented below:

Shares in thousands	Shares		Weighted Average Exercise Price
Outstanding at June 29, 2002	80,619		$	21.04
Granted	12,357			20.24
Exercised	(8,861	)		17.17
Canceled/expired	(8,059	)		23.00
Outstanding at June 28, 2003	76,056			21.15
Granted	4,715			22.11
Exercised	(11,170	)		17.34
Canceled/expired	(5,228	)		23.26
Outstanding at July 3, 2004	64,373			21.72
Granted	3,651			23.20
Exercised	(10,930	)		19.31
Canceled/expired	(3,551	)		24.39
Outstanding at July 2, 2005	53,543		$	22.14

The following table summarizes information about stock options outstanding at July 2, 2005:

Shares in thousands	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at July 2, 2005	Weighted Average Remaining Contractual Life (Yrs.)	Weighted Average Exercise Price		Number Exercisable at July 2, 2005	Weighted Average Exercise Price
$ 3.76–$21.60	17,818	4.0	$	18.86	16,329	$	18.89
21.61–  23.13	17,832	4.6		22.29	17,581		22.30
23.14–  31.60	17,893	2.7		25.24	17,722		25.26
$ 3.76–$31.60	53,543	3.8	$	22.14	51,632	$	22.24

At July 3, 2004 and June 28, 2003, the number of options exercisable was 54,656 and 61,074, respectively, with weighted average exercise prices of $21.86 and $21.38, respectively. Options available for future grant at the end of 2005, 2004 and 2003 were 63,940, 65,367 and 62,825, respectively. The weighted average fair value of individual options granted during 2005, 2004 and 2003 was $2.78, $2.56 and $2.76, respectively.

Employee Stock Purchase Plan (ESPP) The ESPP permits eligible full-time employees to purchase a limited number of shares of the corporation’s common stock at 85% of market value. Under the plan, the corporation sold 1,630,014, 1,845,382 and 1,799,338 shares to employees in 2005, 2004 and 2003, respectively. Pro forma compensation expense is calculated for the fair value of the employees’ purchase rights using the Black-Scholes model. Assumptions include an expected life of 1/4 of a year and weighted average risk-free interest rates of 2.3% in 2005, 0.97% in 2004 and 1.4% in 2003. Other underlying assumptions are consistent with those used for the corporation’s stock option plans described above. The weighted average fair value of individual options granted during 2005, 2004 and 2003 was $4.05, $3.81 and $4.09, respectively.

Stock Unit Awards Restricted stock units (RSUs) are granted to certain employees to incent performance and retention over periods ranging from one to five years. Upon the achievement of defined goals, the RSUs are converted into shares of the corporation’s common stock on a one-for-one basis and issued to the employees. Awards granted in 2005, 2004 and 2003 were 4,892,223 units, 2,114,377 units and 2,696,621 units, respectively. The fair value of the stock unit awards on the date of grant in 2005, 2004 and 2003 was $107, $40 and $50, respectively. Compensation expense for these plans in 2005, 2004 and 2003 was $76, $30 and $25, respectively.

Note 8 – Employee Stock Ownership Plans (ESOP)

Sara Lee ESOP The corporation maintains an ESOP that provides a retirement benefit for nonunion domestic employees. The convertible preferred stock sold to the corporation’s ESOP was converted by the trustees into 23,211,245 shares of the corporation’s common stock in September 2003. The conversion reflects the conversion rate of 8-to-1, for the three 2-for-1 common stock splits since the Sara Lee ESOP was formed in 1989. The ESOP trustees decided to convert the preferred stock since the dividend received by the Trust on the corporation’s common stock exceeded the dividend received for holding preferred stock. The conversion of the preferred stock and the related unearned deferred compensation are reflected in the common equity of the corporation at the end of 2004. Prior to the conversion to common stock, the plan held both allocated and unallocated shares. Upon the conversion, all allocated shares were released from the plan to participants’ accounts. During 2005 and 2004, the Sara Lee ESOP unallocated common stock received total dividends of $8 or $0.78 per share in 2005 and $8 or $0.75 per share in 2004. During 2003, the Sara Lee ESOP held both allocated and unallocated shares of preferred stock, and total dividends and dividend per share amounts declared were $17 and $5.4375 per share. The purchase of the original preferred stock by the Sara Lee ESOP was funded both with debt guaranteed by the corporation and loans from the corporation. The debt guaranteed by the corporation was fully paid in 2004. Each year, the corporation makes contributions that, with the dividends on the common stock held by the Sara Lee ESOP, are used to pay loan interest and principal. Shares are allocated to participants based upon the ratio of the current year’s debt service to the sum of the total principal and interest payments over the remaining life of the loan. Plan expense is recognized in accordance with Emerging Issues Task Force Opinion 89-8.

Sara Lee ESOP related expenses amounted to $7 in 2005, $11 in 2004 and $15 in 2003. Payments to the Sara Lee ESOP were $12 in 2005, $39 in 2004 and $57 in 2003. The debt of the ESOP was fully repaid in 2004 and only loans from the corporation to the ESOP remain. Principal and interest payments made by the Sara Lee ESOP on ESOP debt guaranteed by the corporation were $31 and $2 in 2004 and $52 and $5 in 2003, respectively.

Earthgrains ESOP During 2004, the remaining common stock held by the Earthgrains ESOP plan were utilized to make 401(k) matching contributions and the plan was terminated. The corporation acquired The Earthgrains Company (Earthgrains) on August 7, 2001. Earthgrains had established a Common Stock ESOP on July 1, 1996, that borrowed $16.8 from Earthgrains for a term of 10 years at a rate of 8% to purchase Earthgrains’ common stock to establish the plan. The Earthgrains ESOP provided a 401(k) match to eligible domestic employees. Common stock is allocated to participants over the period as contributions are made to the plan based upon a ratio of the current year’s debt service to the sum of the total principal and interest payments over the remaining life of the loan.

Earthgrains ESOP expense is recognized in accordance with American Institute of Certified Public Accountants Statement of Position No. 93-6. Earthgrains ESOP expense was $6 in 2004 and $14 in 2003. Payments to the Earthgrains ESOP were $1 in 2004 and $3 in 2003, and principal and interest payments made by the Earthgrains ESOP were $1 and less than $0.1 in 2004 and $3 and $0.3 in 2003. All common stock had been released by the plan at the

39            Sara Lee Corporation and Subsidiaries

end of 2004. Common stock pledged and common stock released but unallocated by the Earthgrains ESOP were 348,378 and zero in 2003. The fair value of unearned shares in the Earthgrains ESOP was $6 and $23 at the end of 2003. These shares of common stock were included in outstanding shares for basic and diluted earnings per share in the respective periods.

Note 9 – Preferred Stock Purchase Rights

The corporation has a Preferred Stock Purchase Rights Plan. The Rights are exercisable 10 days after certain events involving the acquisition of 15% or more of the corporation’s outstanding common stock, or the commencement of a tender or exchange offer for at least 15% of the common stock. Upon the occurrence of such an event, each Right, unless redeemed by the Board of Directors, entitles the holder to receive, upon exercise and payment of the exercise price, common stock with a value equal to twice the exercise price of the Right. The initial exercise price of a Right is $215.00 subject to adjustment. There are 6 million shares of preferred stock reserved for issuance upon exercise of the Rights.

Note 10 – Minority Interest in Subsidiaries

Minority interest in subsidiaries in 2005 consists of the equity interest of minority investors in consolidated subsidiaries of the corporation. In 2003, minority interest also included preferred equity securities issued by subsidiaries of the corporation. The corporation’s consolidated minority interest expense of $11 in 2005, $6 in 2004 and $20 in 2003 is recorded in “Selling, general and administrative expenses.”

On the first day of 2004, the provisions of Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (SFAS No. 150) became effective for the corporation. Under the provisions of that standard, $295 of preferred equity securities were reclassified from “Minority interest in subsidiaries” to the “Current maturities of long-term debt” on the Consolidated Balance Sheet. These securities were outstanding in 2003 and included in “Minority interest in subsidiaries.” These preferred equity securities were issued by a wholly owned foreign subsidiary of the corporation. The securities provided a rate of return based upon the Euribor interbank borrowing rate, which averaged 3.3% in 2003. The provisions of SFAS No. 150 prohibit the restatement of financial statements for periods prior to the effective date of the statement.

During 2003, the preferred equity securities issued by a domestic subsidiary were redeemed by the corporation for $250. The securities provided the holder a rate of return based upon the LIBOR interest rate plus 0.425%. The average LIBOR borrowing rates in 2003 were 2.0%.

No gain or loss was recognized as a result of the issuance of either of these preferred equity securities, and the corporation owned substantially all of the voting equity of the subsidiaries both before and after the transactions.

Note 11 – Earnings per Share

Net income per share – basic is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Net income per share – diluted reflects the potential dilution that could occur if options and fixed awards to be issued under stock-based compensation arrangements were converted into common stock.

Options to purchase 26.7 million shares of common stock at July 2, 2005, 40.3 million shares of common stock at July 3, 2004 and 53.7 million shares of common stock at June 28, 2003 were not included in the computation of diluted earnings per share because the exercise price of these options was greater than the average market price of the corporation’s outstanding common stock, and therefore are anti-dilutive.

The following is a reconciliation of net income to net income per share – basic and – diluted for the years ended July 2, 2005, July 3, 2004 and June 28, 2003:

Shares in millions	2005			2004		2003
Income from continuing operations	$	731		$	1,239	$	1,187
(Loss) income from discontinued operations		(12	)		33		34
Net income		719			1,272		1,221
Less dividends on preferred stock, net of tax benefits		—			—		(10	)
Net income applicable to common stockholders – basic		719			1,272		1,211
Adjustment for assumed conversion of ESOP shares		—			—		9
Net income applicable to common stockholders – diluted	$	719		$	1,272	$	1,220
Average shares outstanding – basic		789			788		781
Dilutive effect of stock option and stock award plans		7			5		7
Dilutive effect of ESOP shares		—			5		24
Diluted shares outstanding		796			798		812
Income from continuing operations per share
– Basic	$	0.93		$	1.57	$	1.51
– Diluted	$	0.92		$	1.55	$	1.46
Net income per share
– Basic	$	0.91		$	1.61	$	1.55
– Diluted	$	0.90		$	1.59	$	1.50

Sara Lee Corporation and Subsidiaries            40

Note 12 – Long-Term Debt

The composition of the corporation’s long-term debt, which includes capital lease obligations, is summarized in the following table:

	Maturity Date	2005			2004			2003
Senior Debt – Fixed Rate
1.95% notes	2006	$	200		$	200		$	200
6.125% notes	2008		726			729			686
11.35% Mexican peso notes	2008		19			24			29
5.6% - 6.95% Medium term notes	2006-20081		396			475			601
2.75% notes	2008		300			300			300
7.05% - 7.40% notes	2008		75			75			75
6.5% notes	2009		150			150			150
7.26% - 7.71% notes	2010		25			25			25
6.25% notes	2012		1,110			1,110			1,110
3.875% notes	2013		500			500			500
10.00% Zero coupon notes	2014		8			7			7
10.00% - 14.25% Zero coupon notes	2015		35			31			27
6.125% notes	2033		500			500			500
5% euro notes	2004		—			—			261
8.375% notes	2004		—			—			300
4.625% euro notes	2005		—			608			571
1.55% Japanese yen notes	2005		—			42			38
5.73% - 8.176% ESOP debt	2004		—			—			29
Total Senior Fixed Rate			4,044			4,776			5,409
Senior Debt – Variable Rate
Euro denominated – Euro interbank offered rate (EURIBOR) plus .10%	2007		303			—			—
U.S. dollar – London interbank offered rate (LIBOR) plus .20%	2004		—			—			250
Euro denominated – Euro overnight index average plus .25%	2005		—			304			286
Total Senior Debt			4,347			5,080			5,945
Obligations under capital lease			81			65			51
Other			54			95			103
Total debt			4,482			5,240			6,099
Unamortized discounts			(10	)		(12	)		(9	)
Hedged debt adjustment to fair value			24			13			71
Total long-term debt			4,496			5,241			6,161
Less current portion			381			1,070			1,004
		$	4,115		$	4,171		$	5,157

¹ Amounts outstanding at the end of 2005 mature as follows: $144 in 2006; $25 in 2007 and $227 in 2008.

As more fully described in Note 10 – “Minority Interest in Subsidiaries,” the corporation adopted SFAS No. 150 as of the beginning of 2004 and reclassified $295 of preferred equity securities from “Minority interest in subsidiaries” to “Current maturities of long-term debt” on the Consolidated Balance Sheet. These preferred equity securities were redeemed by the corporation prior to the end of 2004.

Payments required on long-term debt during the years ending in 2006 through 2010 are $381, $359, $1,349, $164 and $29, respectively. The corporation made cash interest payments of $311, $293 and $294 in 2005, 2004 and 2003, respectively.

Note 13 – Leases

The corporation leases certain facilities, equipment and vehicles under agreements that are classified as capital leases. The building leases have original terms that range from 10 to 15 years, while the equipment and vehicle leases have terms of generally less than seven years. The net book value of capital lease assets included in property at July 2, 2005, July 3, 2004 and June 28, 2003 was $79, $67 and $51, respectively.

Future minimum payments, by year and in the aggregate, under capital leases and noncancelable operating leases having an original term greater than one year at July 2, 2005 were as follows:

	Capital Leases			Operating Leases
2006	$	28		$	147
2007		21			126
2008		14			102
2009		7			86
2010		4			73
Thereafter		11			200
Total minimum lease payments		85		$	734
Amounts representing interest		(4	)
Present value of net minimum payments		81
Current portion		26
Noncurrent portion	$	55

Depreciation expense of capital lease assets was $35 in 2005, $22 in 2004 and $11 in 2003. Rental expense under operating leases was $210 in 2005, $198 in 2004 and $197 in 2003.

Contingent Lease Obligation The corporation is contingently liable for leases on property operated by others. At July 2, 2005, the maximum potential amount of future payments the corporation could be required to make, if all of the current operators default on the rental arrangements, is $213. The minimum annual rentals under these leases is $28 in 2006, $26 in 2007, $24 in 2008, $22 in 2009, $20 in 2010 and $93 thereafter. The largest single component of these amounts relate to a number of retail store leases operated by Coach, Inc., which is contractually obligated to provide the corporation, on an annual basis, with a standby letter of credit approximately equal to the next year’s rental obligations. The letter of credit in place at the close of 2005 was $15. This obligation to provide a letter of credit expires when the corporation’s contingent lease obligation is substantially extinguished. The corporation has not recognized a liability for the contingent obligation on the Coach, Inc. leases.

Note 14 – Credit Facilities

The corporation has numerous credit facilities available, including ongoing revolving credit agreements totaling $3.2 billion that had a weighted average annual fee of 0.08% as of July 2, 2005. These agreements support commercial paper borrowings and other financial instruments. Selected data on the corporation’s short-term obligations follow:

	2005			2004			2003
Maximum month-end borrowings	$	2,996		$	2,087		$	1,965
Average borrowings during the year		2,625			1,817			1,364
Year-end borrowings		258			84			140
Weighted average interest rate during the year		2.3	%		1.3	%		1.7	%
Weighted average interest rate at year-end		3.9			6.3			5.0

Note 15 – Sale of Accounts Receivable

During 2005, the corporation terminated its receivable sale program and no receivables were sold under this program at the end of 2005. Previously, the corporation had an agreement under which several of its operating units sold trade accounts receivable to a limited purpose subsidiary of the corporation. The subsidiary, a separate bankruptcy remote corporate entity, is consolidated in the corporation’s results of operations and statement of financial position. This subsidiary held trade accounts receivable that it purchased from the operating units and sold participating interests in these receivables to financial institutions, which in turn purchased and received ownership and security interests in those receivables. The amount of receivables sold under this program was $150 at the end of 2004 and $250 at the end of 2003. The proceeds from the receivables sales were used to reduce borrowings. Changes in the balance of receivables sold are reported in the Consolidated Statement of Cash Flows as a component of operating cash flow (change in trade receivables). As collections reduced

41            Sara Lee Corporation and Subsidiaries

accounts receivable included in the pool, the operating units sold new receivables to the limited purpose subsidiary. The limited purpose subsidiary had the risk of credit loss on the sold receivables.

The proceeds from the sale of the receivables was equal to the face amount of the receivables less a discount. The discount was a floating rate that approximated short-term borrowing rates for investment grade entities and was accounted for as a cost of the receivable sale program. This cost has been included in “Selling, general and administrative expenses” in the Consolidated Statements of Income. This discount aggregated $3, $3 and $5 in 2005, 2004 and 2003, respectively, or 2.5%, 1.5% and 1.9%, respectively, of the weighted average balance of the receivables outstanding during the periods. The corporation retained collection and administrative responsibilities for the participating interests in the defined pool.

Note 16 – Contingencies

Contingent Asset The corporation sold its European cut tobacco business in 1999. Under the terms of that sale agreement, the corporation received a cash payment of 95 million euros from the buyer in the third quarter of 2004 and a second payment of 95 million euros in the first quarter of 2005. If tobacco continues to be a legal product in the Netherlands, Germany and Belgium, additional annual payments of 95 million euros can be received beginning in 2006 and extending through 2010. If tobacco ceases to be a legal product at any time during this period, the corporation forfeits the receipt of all future amounts. The contingent payment of these amounts is based on the legal status of the product in each country, with the Netherlands accounting for 67% of the total, Germany 22% and Belgium 11%. If any of these amounts are received, they will be recognized in income upon receipt and separately disclosed.

Contingent Liabilities The corporation is a party to various pending legal proceedings, claims and environmental actions by government agencies. In accordance with SFAS No. 5, “Accounting for Contingencies,” the corporation records a provision with respect to a claim, suit, investigation, or proceeding when it is probable that a liability has been incurred and the amount of the loss can reasonably be estimated. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to the particular matter. The recorded liabilities for these items were not material to the Consolidated Financial Statements of the corporation in any of these years presented. Although the outcome of such items cannot be determined with certainty, the corporation’s general counsel and management are of the opinion that the final outcome of these matters will not have a material adverse impact on the consolidated financial position, results of operations or liquidity.

Note 17 – Guarantees

The corporation is a party to a variety of agreements under which it may be obligated to indemnify a third party with respect to certain matters. Typically, these obligations arise as a result of contracts entered into by the corporation, under which the corporation agrees to indemnify a third party against losses arising from a breach of representations and covenants related to such matters as title to assets sold, the collectibility of receivables, specified environmental matters, lease obligations assumed and certain tax matters. In each of these circumstances, payment by the corporation is conditioned on the other party making a claim pursuant to the procedures specified in the contract. These procedures allow the corporation to challenge the other party’s claims. In addition, the corporation’s obligations under these agreements may be limited in terms of time and/or amount, and in some cases the corporation may have recourse against third parties for certain payments made by the corporation. It is not possible to predict the maximum potential amount of future payments under certain of these agreements, due to the conditional nature of the corporation’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the corporation under these agreements have not had a material effect on the corporation’s business, financial condition or results of operations. The corporation believes that if it were to incur a loss in any of these matters, such loss would not have a material effect on the corporation’s business, financial condition or results of operations.

The material guarantees, within the scope of FIN 45, for which the maximum potential amount of future payments can be determined, are as follows:

• The corporation is contingently liable for leases on property operated by others. At July 2, 2005, the maximum potential amount the corporation could be required to make if all the current operators default is $213. This contingent obligation is more completely described in Note 13 to the Consolidated Financial Statements titled “Leases.”

• The corporation has guaranteed the payment of certain third-party debt. The maximum potential amount of future payments that the corporation could be required to make, in the event that these third parties default on their debt obligations, is $33. At the present time, the corporation does not believe it is probable that any of these third parties will default on the amount subject to guarantee.

Note 18 – Financial Instruments and Risk Management

Interest Rate and Currency Swaps To manage interest rate risk, the corporation has entered into interest rate swaps that effectively convert certain fixed-rate debt instruments into floating-rate instruments or fix the interest payments of certain floating-rate debt instruments. The corporation has issued certain foreign-denominated debt instruments and utilizes currency swaps to reduce the variability of functional currency cash flows related to the foreign currency debt.

Interest rate swap agreements that are effective at hedging the fair value of fixed-rate debt agreements are designated and accounted for as fair value hedges.

Currency swap agreements that are effective at hedging the variability of foreign-denominated cash flows are designated and accounted for as cash flow hedges. The effective portion of the gains or losses of currency swaps which are recorded as cash flow hedges is recorded in accumulated other comprehensive income and reclassified into earnings to offset the gain or loss arising from the remeasurement of the hedged item.

The fair value of interest rate and currency swaps is determined based upon externally developed pricing models, using financial data obtained from swap dealers.

Sara Lee Corporation and Subsidiaries            42

	Notional Principal1		Weighted Average Interest Rates2
			Receive		Pay
Interest Rate Swaps
2005 Receive fixed – pay variable	$	1,644	4.8	%	4.4	%
2004 Receive fixed – pay variable		1,725	4.9		3.1
2003 Receive fixed – pay variable		887	5.6		2.2
Currency Swaps
2005 Receive fixed – pay fixed	$	680	5.1	%	5.0	%
2004 Receive fixed – pay fixed		683	5.1		5.0
Receive variable – pay variable		248	2.5		1.7
2003 Receive fixed – pay fixed		380	6.3		6.0

¹ The notional principal is the amount used for the calculation of interest payments that are exchanged over the life of the swap transaction and is equal to the amount of foreign currency or dollar principal exchanged at maturity, if applicable.

² The weighted average interest rates are as of the respective balance sheet dates.

Forward Exchange, Futures and Option Contracts The corporation uses forward exchange and option contracts to reduce the effect of fluctuating foreign currencies on short-term foreign-currency-denominated intercompany transactions, third-party product sourcing transactions, foreign-denominated investments and other known foreign currency exposures. Gains and losses on the derivative are intended to offset losses and gains on the hedged transaction in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates. The principal currencies hedged by the corporation include the European euro, Mexican peso, Swiss franc, Canadian dollar, British pound and Hungarian forint.

The corporation uses futures contracts to hedge commodity price risk. The principal commodities hedged by the corporation include hogs, beef, coffee, wheat, butter and corn. The corporation does not use significant levels of commodity financial instruments to hedge commodity prices. In circumstances where commodity derivative instruments are used, there is a high correlation between the commodity costs and the derivative instrument.

The following table summarizes by major currency the contractual amounts of the corporation’s forward exchange contracts in U.S. dollars. The bought amounts represent the net U.S. dollar equivalent of commitments to purchase foreign currencies, and the sold amounts represent the net U.S. dollar equivalent of commitments to sell foreign currencies. The foreign currency amounts have been translated into a U.S. dollar equivalent value using the exchange rate at the reporting date. Forward exchange contracts mature at the anticipated cash requirement date of the hedged transaction, generally within one year.

	2005			2004			2003
Foreign Currency – Bought (Sold)
European euro	$	1,564		$	1,685		$	403
British pound		23			(6	)		(94	)
Swiss franc		137			92			66
Canadian dollar		25			(66	)		(82	)
Hungarian forint		170			69			46
Other		(38	)		93			3

The corporation held foreign exchange option contracts to reduce the foreign exchange fluctuations on anticipated purchase transactions. The following table summarizes the notional amount of option contracts to sell foreign currency, in U.S. dollars:

	2005		2004		2003
Foreign Currency – Sold
European euro	$	548	$	792	$	628
Mexican peso		—		33		34
British pound		—		48		13

The following table summarizes the net derivative gains or losses deferred into accumulated other comprehensive income and reclassified to earnings in 2005, 2004 and 2003:

	2005			2004			2003
Net accumulated derivative gain (loss) deferred at beginning of year	$	(14	)	$	(17	)	$	(14	)
Deferral of net derivative gain (loss) in accumulated other comprehensive income		(10	)		(38	)		(38	)
Reclassification of net derivative (gain) loss to income		10			41			35
Net accumulated derivative gain (loss) at end of year	$	(14	)	$	(14	)	$	(17	)

At July 2, 2005, the maximum maturity date of any cash flow hedge was two years, excluding any forward exchange, option or swap contracts related to the payment of variable interest on existing financial instruments. The corporation expects to reclassify into earnings during the next 12 months net gains from accumulated other comprehensive income of less than $1 at the time the underlying hedged transactions are realized. During the year ended July 2, 2005, the corporation recognized an expense of $7 million for hedge ineffectiveness related to cash flow hedges which is recorded in the “Selling, general & administrative expenses” line in the Consolidated Statement of Income. In 2004 and 2003, hedge ineffectiveness was insignificant. In 2005, 2004 and 2003, derivative losses excluded from the assessment of effectiveness, and gains or losses resulting from the disqualification of hedge accounting are insignificant in each of these periods.

Non-U.S. Dollar Financing Transactions The corporation uses non-U.S. dollar financing transactions as net investment hedges of long-term investments in the corresponding foreign currency. Hedges that meet the effectiveness requirements are accounted for under net investment hedging rules. For the year ended July 2, 2005, net gains of $24 arising from effective hedges of net investments have been reflected in the cumulative translation adjustment account within common stockholders’ equity.

Fair Values The carrying amounts of cash and equivalents, trade accounts receivable, notes payable and accounts payable approximated fair value as of July 2, 2005, July 3, 2004 and June 28, 2003. The fair values of the remaining financial instruments recognized on the Consolidated Balance Sheets of the corporation at the respective year-ends were:

	2005			2004			2003
Long-term debt, including current portion	$	4,760		$	5,358		$	6,512
ESOP convertible preferred stock		—			—			450
Interest rate swaps		18			8			60
Currency swaps		(170	)		(92	)		(46	)
Foreign currency forwards		(1	)		(3	)		(22	)
Foreign currency options		24			5			10

The fair value of the corporation’s long-term debt, including the current portion, is estimated using discounted cash flows based on the corporation’s current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the ESOP preferred stock is based on the contracted conversion into the corporation’s common stock. The fair value of interest rate and currency swaps is determined based upon externally developed pricing models, using financial market data obtained from swap dealers. The fair value of foreign currency forwards and options is based upon currency forward rates obtained from third-party institutions.

Concentrations of Credit Risk A large number of major international financial institutions are counterparties to the corporation’s financial instruments. The corporation enters into financial instrument agreements only with counterparties meeting very stringent credit standards, limiting the amount of agreements or contracts it enters into with any one party and, where legally available, executing master netting agreements. These positions are

43            Sara Lee Corporation and Subsidiaries

continuously monitored. While the corporation may be exposed to credit losses in the event of nonperformance by these counterparties, it does not anticipate material losses because of these control procedures.

Trade accounts receivable due from customers that the corporation considers highly leveraged were $205 at July 2, 2005, $145 at July 3, 2004 and $180 at June 28, 2003. The financial position of these businesses has been considered in determining allowances for doubtful accounts.

Note 19 – Exit and Disposal Activities

The reported results for 2005, 2004 and 2003 reflect amounts recognized for exit and disposal actions, including the impact of certain activities that were completed for amounts more favorable than previously estimated. The impact of these activities on income before income taxes is summarized as follows:

	2005			2004			2003
Exit and disposal programs
2005 restructuring actions	$	146		$	—		$	—
2004 restructuring actions		(4	)		82			—
2003 Bakery and Beverage restructuring actions		(1	)		(2	)		39
Business Reshaping		(1	)		(12	)		(33	)
Other restructuring actions		(6	)		(5	)		—
Total exit costs (income)		134			63			6
Business dispositions		(26	)		(9	)		(4	)
Impact on income from continuing operations before income taxes	$	108		$	54		$	2

The following table illustrates where the costs (income) associated with these actions are recognized in the Consolidated Statements of Income of the corporation:

	2005			2004			2003
Cost of sales
Curtailment gain from Bakery workforce reduction	$	(28	)	$	—		$	—
Accelerated depreciation related to facility closures in:
Sara Lee Bakery segment		10			5			7
Household Products segment		9			—			—
Other Transformation costs		2			—			—
Selling, general and administrative expenses
Transformation costs		13			—			—
Accelerated amortization of intangibles		9			1			6
Charges for (income from):
Exit activities		119			57			(7	)
Business dispositions		(26	)		(9	)		(4	)
Impact on income from continuing operations before income taxes	$	108		$	54		$	2

The exit and business disposition actions recognized in 2005 reduced income from continuing operations and diluted earnings per share from continuing operations by $74 and $0.10, respectively. The exit and business disposition actions recognized in 2004 reduced income from continuing operations and diluted earnings per share from continuing operations by $36 and $0.05, respectively. The exit and business disposition actions recognized in 2003 had no material impact on income from continuing operations or diluted earnings per share from continuing operations.

The impact of these actions on the corporation’s business segments and unallocated corporate expenses is summarized as follows:

	2005			2004			2003
Sara Lee Meats	$	(29	)	$	(3	)	$	(6	)
Sara Lee Bakery		(9	)		19			27
Beverage		40			(2	)		1
Household Products		8			—			—
Branded Apparel		44			35			(26	)
Decrease (increase) in business segment income		54			49			(4	)
Increase in unallocated corporate expense		45			4			—
Accelerated amortization of intangibles		9			1			6
Total	$	108		$	54		$	2

2005 Restructuring Actions During 2005, the corporation approved a series of actions to exit certain defined business activities and lower its cost structure. Each of these actions is to be completed within a 12-month period after being approved. The net impact of these actions was to reduce income from continuing operations before income taxes by $146 and impacted the operating results of the corporation’s business segments as follows: Sara Lee Meats – a charge of $7; Sara Lee Bakery – a credit of $6; Beverage – a charge of $40; Household Products – a charge of $31; Branded Apparel – a charge of $54; the corporate headquarters – a charge of $11; and a charge of $9 for accelerated amortization of intangibles. The components of the net charge are as follows:

• $123 of the net charge is for the cost associated with terminating 1,959 employees and providing them with severance benefits in accordance with benefits plans previously communicated to the affected employee group. The specific location of these employees is summarized in a table contained in this note. This charge is reflected in the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statement of Income. As of the end of 2005, 197 of the employees have been terminated and the severance obligation remaining in accrued liabilities on the Consolidated Balance Sheet was $120.

• $8 of the net charge is for the cost of certain noncancelable lease and other contractual obligations. This charge is reflected in the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statement of Income. The lease costs relate to the exit of 11 retail stores for the Branded Apparel segment. The other contractual obligations relate to the exit of a German distribution agreement for the Beverage business. As of the end of 2005, the retail spaces have been exited and there are no remaining obligations owed to third parties. The contractual obligation remaining in accrued liabilities on the Consolidated Balance Sheet as of the end of 2005 was $5.

• $28 of the net charge is related to the recognition of curtailment gains in a postretirement medical benefit plan. These gains resulted from the termination of certain Bakery employees during 2005 who participated in the plan. This credit is reflected in the “Cost of sales” line of the Consolidated Statement of Income.

• $21 of the net charge is related to the accelerated depreciation recognized on certain assets targeted for disposal and other related Transformation costs. These charges are reflected in the “Cost of sales” line of the Consolidated Statement of Income. Decisions to dispose of six manufacturing facilities and certain manufacturing equipment related to the Sara Lee Bakery and Household Products operations resulted in increased level of depreciation on those assets. As of the end of 2005, three of the facilities have been sold and the remaining three facilities have been closed. The carrying value of the closed facilities is less than $1 and represents their estimated net realizable value.

Sara Lee Corporation and Subsidiaries            44

• $9 of the net charge is related to the accelerated amortization recognized on certain Bakery intangibles. During 2005, decisions were made to abandon certain regional Bakery trademarks and customer relationships. As of the end of 2005, the actions have been completed and there is no remaining carrying value for these assets. This charge is reflected in the “Selling, general and administrative expenses” line of the Consolidated Statement of Income.

• $13 of the net charge is for various Transformation costs, which include the accelerated depreciation of certain leasehold improvements in the Branded Apparel segment, professional fees associated with Transformation efforts and various costs associated with employee relocation and recruiting efforts. This charge is reflected in the “Selling, general and administrative expenses” line of the Consolidated Statement of Income.

The following table summarizes the charges taken for the exit activities approved during 2005 and the related status as of July 2, 2005. Any accrued amounts remaining as of the end of 2005 represent those cash expenditures necessary to satisfy remaining obligations.

	Exit Costs Recognized			Non-Cash Credits and (Charges)			Cash Payments			Accrued Exit Costs as of July 2, 2005
Employee termination and other benefits	$	123		$	—		$	(3	)	$	120
Noncancelable lease and other contractual obligations		8			—			(3	)		5
Curtailment gains on benefit plans		(28	)		28			—			—
Accelerated depreciation		21			(21	)		—			—
Accelerated amortization		9			(9	)		—			—
Transformation costs		13			(4	)		(9	)		—
	$	146		$	(6	)	$	(15	)	$	125

The following table summarizes the employee terminations by location and business segment:

Number of Employees	Sara Lee Meats	Sara Lee Bakery	Beverage	Household Products	Branded Apparel	Corporate	Total
United States	60	153	224	—	773	10	1,220
Canada	—	—	—	—	216	—	216
Mexico	—	—	—	—	139	—	139
Europe	—	60	122	139	—	1	322
Australia	—	—	—	62	—	—	62
	60	213	346	201	1,128	11	1,959
As of July 2, 2005
Actions Completed	—	—	—	—	188	9	197
Actions Remaining	60	213	346	201	940	2	1,762
	60	213	346	201	1,128	11	1,959

2004 Restructuring Actions During 2004, the corporation approved a series of actions to exit certain defined business activities and lower its cost structure. During 2005, certain of these actions were completed for amounts more favorable than originally estimated. As a result, costs previously accrued were adjusted and resulted in an increase of $4 to income from continuing operations before income taxes. The $4 is composed of a credit for employee termination benefits and resulted from the actual costs to settle termination obligations being lower than expected and certain employees originally targeted for termination not being severed as originally planned. This adjustment is reflected in the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statement of Income and increased the operating results of the corporation’s business segments as follows: Sara Lee Meats — $1; Sara Lee Bakery — $1; and Branded Apparel — $2.

In 2004, these actions reduced income from continuing operations before income taxes by $82 and decreased the operating results of the corporation’s business segments as follows: Sara Lee Meats – $11; Sara Lee Bakery – $25; Beverage – $6; Household Products – $1; Branded Apparel – $34; and the corporate headquarters – $4. In addition, a charge of $1 was recognized for the accelerated amortization of intangibles.

        After combining the amounts recognized in 2005 and 2004, the exit activities completed by the corporation under these action plans reduced income from continuing operations before income taxes by $78 and consisted of the following components:

• $66 of the net charge is for the cost associated with terminating 6,069 employees and providing them with severance benefits in accordance with existing benefit plans or local employment laws. The specific location of these employees is summarized in a table contained in this note. This cumulative charge is reflected in the “Charges for (income from) exit activities and business dispositions” line in the Consolidated Statements of Income for 2005 and 2004, respectively. As of the end of 2005, all of the employees have been terminated and the severance obligation remaining in accrued liabilities on the Consolidated Balance Sheet was $9.

• $11 of the net charge is related to the cost to dispose of certain manufacturing equipment. When management approved the actions, certain of the assets were classified as held for use and others as held for sale. The depreciation on the held for use assets was accelerated and this resulted in a charge of $5 to the “Cost of sales” line of the Consolidated Statement of Income. The remaining equipment was deemed held for sale and this resulted in a charge of $6 to the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statement of Income. As of the end of 2005, the corporation is in the process of completing the disposition of these assets, and any remaining assets have a current net book value of zero. The estimated realizable value of these assets was based upon management’s estimates.

• $1 of the net charge is related to the decision to abandon certain trademarks obtained with the Earthgrains acquisition. As a result, the amortization associated with these assets was accelerated, with the cost recognized in the “Selling, general and administrative expenses” line of the Consolidated Statement of Income. These trademarks were abandoned by the end of 2004 and their net book value is zero.

45            Sara Lee Corporation and Subsidiaries

The following table summarizes the cumulative charges taken for the exit activities approved during 2004 and the related status as of July 2, 2005. Any accrued amounts remaining as of the end of 2005 represent those cash expenditures necessary to satisfy remaining obligations.

	Exit Costs Recognized		Non-Cash (Charges)			Cash Payments			Accrued Exit Costs as of July 2, 2005
Employee termination and other benefits	$	66	$	—		$	(57	)	$	9
Losses on disposals of equipment		6		(6	)		—			—
Accelerated depreciation		5		(5	)		—			—
Accelerated amortization		1		(1	)		—			—
	$	78	$	(12	)	$	(57	)	$	9

The following table summarizes the employee terminations by location and business segment. All actions have been completed.

Number of Employees	Sara Lee Meats	Sara Lee Bakery	Beverage	Household Products	Branded Apparel	Corporate	Total
United States	44	1,071	37	—	573	48	1,773
Canada	—	—	—	12	—	—	12
Puerto Rico, Mexico and Latin America	—	—	155	—	3,852	—	4,007
Europe	55	31	19	1	171	—	277
	99	1,102	211	13	4,596	48	6,069

2003 Bakery and Beverage Restructuring Actions During 2003, the corporation’s management approved actions to reduce the cost structure of the Bakery and Beverage businesses. During 2005, certain termination obligations related to these actions for the Bakery business were settled for amounts more favorable than originally estimated. As a result, costs previously accrued were adjusted and resulted in an increase of $1 to income from continuing operations before income taxes. During 2004, the disposal of some of the Bakery assets targeted under these plans was completed for amounts more favorable than originally estimated. As a result, costs previously accrued were adjusted and resulted in an increase of $2 to income from continuing operations before income taxes. In 2003, these actions reduced income from continuing operations before income taxes by $39 and decreased the operating results of the Sara Lee Bakery and Beverage segments by $31 and $2, respectively. In addition, a charge of $6 was recognized for the accelerated amortization of intangibles.

After combining the amounts recognized in 2005, 2004 and 2003, the exit activities completed by the corporation under these action plans reduced income from continuing operations before income taxes by $36 and consisted of the following components:

• $14 of the cumulative charge is for the cost associated with terminating 645 domestic employees and providing them with severance benefits in accordance with existing benefit plans. All of the employees had been terminated by the end of 2004 and the severance obligation remaining in accrued liabilities on the Consolidated Balance Sheet as of the end of 2005 is less than $1. These charges were reflected in the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statements of Income.

• $11 of the charge is related to actions to dispose of three manufacturing facilities, as well as equipment and leasehold improvements at other locations. When management approved the actions, certain of the assets were classified as held for use and others as held for sale. The depreciation on the held for use assets was accelerated, and this resulted in a charge of $7 to the “Cost of sales” line of the Consolidated Statement of Income. The losses on the assets held for sale are reflected in the “Charges for (income from) exit activities and business dispositions” line. All of these assets had been disposed of by the end of 2004.

• $6 of the charge is for costs associated with the accelerated amortization from the abandonment of certain trademarks obtained with the Earthgrains acquisition. This component of the charge was recognized in the “Selling, general and administrative expenses” line of the Consolidated Statement of Income. All of these trademarks had been abandoned by the end of 2004 and their net book value is zero.

• $5 of the charge is for the cost of noncancelable lease obligations for certain leased equipment and for some administrative office space. The obligations for the equipment have been satisfied and the office space has been exited. As of the end of 2005, the lease obligation remaining in accrued liabilities in the Consolidated Balance Sheet was less than $1. These charges were reflected in the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statements of Income.

Business Reshaping Beginning in the second quarter of 2001, the corporation’s management approved a series of actions to exit certain defined business activities. The final series of actions was approved in the second quarter of 2002. Each of these actions was to be completed in a 12-month period after being approved. All actions included in this program have been completed. The impact of these actions on income from continuing operations before income taxes is described below.

During 2005, certain noncancelable lease and other contractual obligations under this program were settled for amounts that were more favorable than originally anticipated. As a result, the costs previously accrued were adjusted and resulted in an increase of $1 to income from continuing operations before income taxes. This adjustment is reflected in the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statement of Income and increased the operating income of the Bakery segment.

During 2004, exit activities were completed for amounts that were more favorable than originally anticipated. As a result, the costs previously accrued were adjusted and resulted in an increase of $12 to income from continuing operations before income taxes. The $12 consists of a $6 credit for employee termination benefits and a $6 credit for noncancelable leases and other third-party obligations. Actual severance benefits were lower than originally anticipated primarily as a result of better than expected settlements reached with foreign governments on the corporation’s funding obligations of the termination benefits. The adjustment for noncancelable leases and other third-party obligations resulted from settling these liabilities for less than originally estimated. These adjustments are reflected in the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statement of Income and increased the operating results of the corporation’s business segments as follows: Sara Lee Meats – $1; Sara Lee Bakery – $4; Beverage – $4; and Branded Apparel – $3.

During 2003, exit activities were completed for amounts that were more favorable than originally anticipated. As a result, the costs previously accrued were adjusted and resulted in an increase of $33 to income from continuing operations before income taxes. The $33 consists of a $20 credit for employee termination benefits, a credit of

Sara Lee Corporation and Subsidiaries            46

$9 for losses on the disposal of property and equipment, a $5 credit for noncancelable leases and other third-party obligations, and a $1 charge for moving expenses. Actual severance benefits were lower than originally anticipated primarily for two reasons. First, certain individuals left the corporation prior to their involuntary termination – as a result, no severance benefits were owed to these individuals. Secondly, approximately 4% of the employees originally targeted for termination were not severed as planned – as a result, the related accruals were no longer required. The adjustment recognized for the disposal of property and equipment resulted primarily from the receipt of cash proceeds that exceeded prior estimates. The adjustment for noncancelable leases and other third-party obligations resulted primarily from settling these liabilities for less than originally estimated. These adjustments are reflected in the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statement of Income and increased the operating results of the corporation’s business segments as follows: Sara Lee Meats – $6; Sara Lee Bakery – $4; Beverage – $1; and Branded Apparel – $22.

The following table summarizes the cumulative charges taken for approved exit activities under the Business Reshaping program since 2001 and the related status as of July 2, 2005. All actions included in this program have been completed. Any accrued amounts remaining as of the end of 2005 represent those cash expenditures necessary to satisfy remaining obligations.

	Cumulative Exit Costs Recognized		Actual Loss on Asset Disposal			Cash Payments			Accrued Exit Costs as of July 2, 2005
Employee termination and other benefits	$	196	$	—		$	(188	)	$	8
Other exit costs – includes noncancelable lease and other contractual obligations		53		—			(49	)		4
Losses on disposals of property and equipment and other related costs		54		(54	)		—			—
Losses on disposal of inventories		19		(19	)		—			—
Moving and other related costs		10		—			(10	)		—
Total exit costs	$	332	$	(73	)	$	(247	)	$	12

The completion of the remainder of the Business Reshaping program is expected to require the use of $12 in cash, which will be funded from internal sources.

Other Restructuring Actions During 2005, adjustments were made to certain accrued obligations that had been recorded in prior periods. These adjustments related to the final settlement of certain planned actions for amounts more favorable than originally anticipated. They included adjustments made to accrued termination benefits for certain Branded Apparel employees, adjustments to certain lease and other contractual obligations of the Branded Apparel business and the disposal of manufacturing assets targeted for disposal for the Sara Lee Meats business. These adjustments resulted in an increase of $6 to income from continuing operations before income taxes and are reflected in the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statement of Income. The adjustments increased the operating results of the corporation’s business segments as follows: Sara Lee Meats – $1 and Branded Apparel – $5.

During 2004, adjustments were made to certain accrued obligations that had been recorded for foreign employees who had been previously terminated. As a result of better than expected settlements reached with foreign governments, the corporation’s funding obligations for the severance benefits owed to these employees was less than originally anticipated. As a result, the related accrued obligations were eliminated. This adjustment resulted in an increase of $5 to income from continuing operations before income taxes and is reflected in the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statement of Income. The adjustment increased the operating results of the corporation’s business segments as follows: Beverage – $4 and Household Products – $1.

Business Dispositions During 2005, a net $26 credit was recognized on various business disposition activities. Included in this amount is $60 of gains related to completed transactions in the Sara Lee Meats, Household Products and Branded Apparel business segments. The most significant of these transactions is a $31 gain recognized on the disposal of certain trademarks and other assets of the corporation’s canned meats business and a $14 gain related to the disposal of an ethnic skin care products line sold primarily in the U.S. Offsetting these gains is $34 of professional fees incurred in connection with evaluating certain future business dispositions. This net credit is reflected in the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statement of Income and impacted the operating results of the corporation’s business segments as follows: Sara Lee Meats – a credit of $34; Household Products – a credit of $23; Branded Apparel – a credit of $3; and the corporate headquarters – a charge of $34. The total cash proceeds from business dispositions was $86 in 2005.

During 2004, a net $9 credit was recognized on actions approved by management to dispose of certain businesses. The most significant of these is a $13 gain recognized on the disposal of an equity method ownership position in Johnsonville Foods that was completed for an amount more favorable than originally estimated. Offsetting this gain is a net $4 charge, primarily related to the disposal of an Italian hosiery business. This net credit is reflected in the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statement of Income and impacted the operating results of the corporation’s business segments as follows: Sara Lee Meats – a credit of $13; and Branded Apparel – a charge of $4. The total cash proceeds from business dispositions was $137 in 2004, primarily from the sale of the corporation’s equity method investment in Johnsonville Foods.

During 2003 and 2002, the corporation completed the disposition of 18 businesses targeted for disposal under the previously announced Business Reshaping program. The completion of these actions resulted in certain adjustments to previously accrued amounts for the estimated losses expected on these disposals. In 2003, a $4 credit was recorded that increased the operating results of the Branded Apparel segment. This amount was recorded in the “Charges for (income from) exit activities and business dispositions” line of the Consolidated Statement of Income.

Note 20 – Defined Benefit Pension Plans

The corporation sponsors a number of U.S. and foreign pension plans to provide retirement benefits to certain employees. The benefits provided under these plans are based primarily on years of service and compensation levels.

Measurement Date and Assumptions A March 31 measurement date is utilized to value plan assets and obligations for all of the corporation’s defined benefit pension plans.

47            Sara Lee Corporation and Subsidiaries

The weighted average actuarial assumptions used in measuring the net periodic benefit cost and plan obligations for the three years ending July 2, 2005 were:

	2005		2004		2003
Net periodic benefit cost
Discount rate	5.5	%	5.4	%	6.0	%
Long-term rate of return on plan assets	6.8		7.2		7.6
Rate of compensation increase	4.4		5.0		5.0
Plan obligations
Discount rate	5.3	%	5.5	%	5.4	%
Rate of compensation increase	3.9		4.4		5.0

In determining the discount rate, the corporation utilizes the yield on high-quality fixed-income investments that have a AA bond rating and match the average duration of the pension obligations. Salary increase assumptions are based upon historical experience and anticipated future management actions. In determining the long-term rate of return on plan assets, the corporation assumes that the historical long-term compound growth rates of equity and fixed-income securities will predict the future returns of similar investments in the plan portfolio. Investment management and other fees paid out of plan assets are factored into the determination of asset return assumptions. Similar assumptions are used for the corporation’s U.S. and foreign plans.

Net Periodic Benefit Cost and Funded Status The components of the net periodic benefit cost were:

	2005			2004			2003
Components of defined benefit net periodic benefit cost
Service cost	$	144		$	136		$	106
Interest cost		273			238			217
Expected return on assets		(243	)		(203	)		(228	)
Amortization of
Net initial liability		1			5			1
Prior service cost		3			5			8
Net actuarial loss		83			124			34
Net periodic benefit cost	$	261		$	305		$	138

Better than anticipated asset returns in 2004 reduced the net periodic benefit cost in 2005; however, this reduction was partially offset by higher interest on plan obligations, the strengthening of foreign currencies versus the U.S. dollar and higher service cost. The significant increase in the net periodic benefit cost from 2003 to 2004 was primarily related to lower than anticipated returns on plan assets in 2003, lower discount rates used to determine plan obligations and annual service cost and the strengthening of foreign currencies versus the U.S. dollar.

The funded status of defined benefit pension plans at the respective year-ends was as follows:

	2005			2004			2003
Projected benefit obligation
Beginning of year	$	5,095		$	4,363		$	3,513
Service cost		144			136			106
Interest cost		273			238			217
Plan amendments		(17	)		(2	)		(32	)
Acquisitions/dispositions		—			—			(6	)
Benefits paid		(216	)		(209	)		(176	)
Participant contributions		6			6			3
Actuarial loss		203			355			443
Curtailment		(16	)		4			—
Foreign exchange		(35	)		204			295
End of year	$	5,437		$	5,095		$	4,363
Fair value of plan assets
Beginning of year	$	3,558		$	2,791		$	2,957
Actual return on plan assets		266			612			(335	)
Employer contributions		348			112			124
Participant contributions		6			6			3
Benefits paid		(216	)		(209	)		(176	)
Settlement		(4	)		—			—
Acquisitions/dispositions		—			—			12
Foreign exchange		(22	)		246			206
End of year	$	3,936		$	3,558		$	2,791
Funded status	$	(1,501	)	$	(1,537	)	$	(1,572	)
Unrecognized
Prior service cost		5			24			20
Net actuarial loss		1,447			1,341			1,622
Net initial liability (asset)		1			2			5
(Liability) prepaid benefit cost recognized	$	(48	)	$	(170	)	$	75
Amounts recognized on the Consolidated Balance Sheets
Noncurrent asset	$	18		$	34		$	39
Current liability		(219	)		(236	)		—
Noncurrent liability		(858	)		(870	)		(1,178	)
Accumulated other comprehensive income		1,011			902			1,214
(Liability) prepaid benefit cost recognized	$	(48	)	$	(170	)	$	75

The accumulated benefit obligation is the present value of pension benefits (whether vested or unvested) attributed to employee service rendered before the measurement date and based on employee service and compensation prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. The accumulated benefit obligations of the corporation’s pension plans as of the measurement dates in 2005, 2004 and 2003 were $5,120, $4,742 and $4,051, respectively. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were:

	2005		2004		2003
Projected benefit obligation	$	4,416	$	4,726	$	4,056
Accumulated benefit obligation		4,197		4,399		3,767
Fair value of plan assets		2,965		3,192		2,487

Plan Assets, Expected Benefit Payments and Funding The allocation of pension plan assets as of the respective year-end measurement dates is as follows:

	2005		2004		2003
Asset category
Equity securities	45	%	44	%	47	%
Debt securities	46		49		45
Real estate	2		3		3
Cash and other	7		4		5
	100	%	100	%	100	%

The investment objectives for the pension plan assets are designed to generate returns that will enable the pension plans to meet their future obligations. The precise amount for which these obligations will be settled depends on future events, including the life expectancy of the plan participants and salary inflation. The obligations are

Sara Lee Corporation and Subsidiaries            48

estimated using actuarial assumptions, based on the current economic environment. This strategy balances the requirements to generate returns, using higher-returning assets such as equity securities with the need to control risk in the pension plan with less volatile assets, such as fixed-income securities. Risks include, among others, the likelihood of the pension plans becoming underfunded, thereby increasing their dependence on contributions from the corporation. The assets are managed by professional investment firms and performance is evaluated against specific benchmarks. In the U.S., assets are primarily invested in broadly diversified passive vehicles.

Outside the U.S., the investment objectives are similar, subject to local regulations. In some countries, a higher percentage allocation to fixed-income securities is required. In others, the responsibility for managing the investments typically lies with a board that may include up to 50 percent of members elected by employees and retirees. This can result in slight differences compared to the strategies described above.

Pension assets at the 2005, 2004 and 2003 measurement dates do not include any direct investment in the corporation’s debt or equity securities.

Substantially all pension benefit payments are made from assets of the pension plans. Using foreign exchange rates as of July 2, 2005 and expected future service, it is anticipated that the future benefit payments will be as follows: $202 in 2006; $212 in 2007; $225 in 2008; $239 in 2009; $252 in 2010 and $1,451 from 2011 to 2015.

At the present time, the corporation expects to contribute $219 of cash to its pension plans in 2006. This estimate assumes the disposition of the Direct Selling business and no other changes in the composition of the business or current minimum funding requirements. The exact amount of cash contributions made to pension plans in any year is dependent upon a number of factors including minimum funding requirements in the jurisdictions in which the company operates, the tax deductibility of amounts funded and arrangements made with the trustees of certain foreign plans. In addition, the corporation has announced its intent to dispose of certain businesses and the terms of those transactions may impact future contributions to these plans. As a result, the actual funding in 2006 may be materially different from the current estimate.

Multiemployer Plans The corporation participates in multiemployer plans that provide defined benefits to certain employees covered by collective-bargaining agreements. Such plans are usually administered by a board of trustees composed of the management of the participating companies and labor representatives. The net pension cost of these plans is equal to the annual contribution determined in accordance with the provisions of negotiated labor contracts. These contributions were $46 in 2005 and $49 in both 2004 and 2003. Assets contributed to such plans are not segregated or otherwise restricted to provide benefits only to the employees of the corporation. The future cost of these plans is dependent on a number of factors including the funded status of the plans, and the ability of the other participating companies to meet ongoing funding obligations.

Note 21 – Postretirement Health-Care and Life-Insurance Plans

The corporation provides health-care and life-insurance benefits to certain retired employees and their covered dependents and beneficiaries. Generally, employees who have attained age 55 and have rendered 10 or more years of service are eligible for these postretirement benefits. Certain retirees are required to contribute to plans in order to maintain coverage.

Measurement Date and Assumptions A March 31 measurement date is utilized to value plan assets and obligations for the corporation’s postretirement health-care and life-insurance plans.

The weighted average actuarial assumptions used in measuring the net periodic benefit cost and plan obligations for the three years ending July 2, 2005, were:

	2005		2004		2003
Net periodic benefit cost
Discount rate	5.5	%	5.5	%	6.4	%
Plan obligations
Discount rate	5.2	%	5.5	%	5.5	%
Health-care cost trend assumed for the next year	9	%	9	%	10	%
Rate to which the cost trend is assumed to decline	5.3	%	6.5	%	6.5	%
Year that rate reaches the ultimate trend rate	2010		2008		2008

In determining the discount rate, the corporation utilizes the yield on high-quality fixed-income investments that have a AA bond rating that match the average duration of the plan obligations. Assumed health-care trend rates are based on historical experience and management’s expectations of future cost increases. A one-percentage-point change in assumed health-care cost trend rates would have the following effects:

	One Percentage Point Increase		One Percentage Point Decrease
Effect on total service and interest components	$	7	$	(5	)
Effect on postretirement benefit obligation		45		(38	)

Net Periodic Benefit Cost and Funded Status The components of the net periodic benefit cost were:

	2005			2004			2003
Components of defined benefit net periodic cost
Service cost	$	14		$	17		$	13
Interest cost		23			28			28
Net amortization and deferral		(15	)		(6	)		(6	)
Net periodic benefit cost	$	22		$	39		$	35

The funded status of postretirement health-care and life-insurance plans at the respective year-ends were:

	2005			2004			2003
Accumulated postretirement benefit obligation
Beginning of year	$	518		$	535		$	499
Service cost		14			17			13
Interest cost		23			28			28
Net benefit paid		(29	)		(26	)		(25	)
Actuarial loss (gain)		11			(15	)		109
Acquisitions/dispositions		—			—			(3	)
Curtailment		(24	)		(3	)		—
Plan amendments		(125	)		(22	)		(94	)
Foreign exchange		(1	)		4			8
End of year	$	387		$	518		$	535
Fair value of plan assets	$	1		$	1		$	1
Funded status	$	(386	)	$	(517	)	$	(534	)
Unrecognized
Prior service cost		(174	)		(94	)		(89	)
Net actuarial loss (gain)		60			76			100
Net initial asset		(10	)		(11	)		(12	)
Net accrued liability recognized on the Consolidated Balance Sheets	$	(510	)	$	(546	)	$	(535	)

During 2005, the corporation amended certain of its postretirement medical benefit plans. The most significant of these amendments involved the elimination of post-65 coverage and increased cost sharing by covered employees in the Bakery operations. Curtailment gains of $28 and $7 were recognized in 2005 and 2004, respectively. The curtailment gain in 2005 resulted from the termination of certain employees in the Sara Lee Bakery segment,

49            Sara Lee Corporation and Subsidiaries

and the amount recognized in 2004 was a result of other actions to reduce benefits.

On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act was signed into law. This law provides for a federal subsidy to sponsors of retiree health-care benefits that provide a benefit that is at least actuarially equivalent to the benefit established by the law. The federal subsidy included in the law results in a $37 reduction in the accumulated postretirement benefit obligation. This reduction is reflected as an actuarial gain in the above table. In 2005, the net periodic benefit cost for the postretirement health-care plans was reduced by $5 as a result of the recognition of this gain. Actuarial equivalence was determined by a consulting actuary. If the expected amount that the plan will pay exceeds the expected amount that the government will pay under Medicare Part D, then the plan is considered actuarially equivalent.

Expected Benefit Payments and Funding Substantially all postretirement health-care and life-insurance benefit payments are made by the corporation. Using foreign exchange rates at July 2, 2005, and expected future service, it is anticipated that the future benefit payments that will be funded by the corporation will be as follows: $25 in 2006; $22 in 2007; $22 in 2008; $23 in 2009; $23 in 2010 and $120 from 2011 to 2015.

Note 22 – Intangible Assets and Goodwill

Intangible Assets The primary components of the corporation’s intangible assets and the related amortization expense are as follows:

	Gross		Accumulated Amortization		Net Book Value
2005
Intangible assets subject to amortization
Trademarks and brand names	$	1,525	$	502	$	1,023
Customer relationships		368		103		265
Computer software		301		173		128
Other contractual agreements		23		13		10
	$	2,217	$	791		1,426
Trademarks and brand names not subject to amortization						253
Net book value of intangible assets					$	1,679

	Gross		Accumulated Amortization		Net Book Value
2004
Intangible assets subject to amortization
Trademarks and brand names	$	1,490	$	421	$	1,069
Customer relationships		375		78		297
Computer software		288		119		169
Other contractual agreements		23		10		13
	$	2,176	$	628		1,548
Trademarks and brand names not subject to amortization						429
Net book value of intangible assets					$	1,977

	Gross		Accumulated Amortization		Net Book Value
2003
Intangible assets subject to amortization
Trademarks and brand names	$	1,116	$	265	$	851
Customer relationships		374		51		323
Computer software		227		67		160
Other contractual agreements		22		7		15
	$	1,739	$	390		1,349
Trademarks and brand names not subject to amortization						709
Net book value of intangible assets					$	2,058

The amortization expense for intangible assets subject to amortization was $174 in 2005, $166 in 2004 and $136 in 2003. The estimated amortization expense for the next five years, assuming no change in the estimated useful lives of identifiable intangible assets or changes in foreign exchange rates is as follows: $152 in 2006, $143 in 2007, $130 in 2008, $104 in 2009 and $98 in 2010.

During 2005, the corporation recognized $155 of impairment charges related to trademarks. These charges are more fully described in Note 4 to the Consolidated Financial Statements. In addition, as a result of the annual impairment review, the corporation concluded that certain trademarks had lives that were no longer indefinite. As a result of this change, trademarks with a net book value of $51 were moved from the indefinite lived category and amortization was initiated.

During 2004, the corporation recognized a $15 charge in selling, general and administrative expenses for the impairment of certain trademarks. Of this total, $8 relates to a domestic apparel trademark, $5 was related to trademarks associated with Household Products brands in Europe and $2 was related to Beverage brands in the U.S. and Greece. As a result of the annual impairment review, the corporation also concluded that certain trademarks had lives that were no longer indefinite. As a result of this change, trademarks with a net book value of $279 were moved from the indefinite lived category and amortization was initiated.

Goodwill The goodwill associated with each business segment and the changes in those amounts during the period are as follows:

	Sara Lee Meats		Sara Lee Bakery		Beverage		Household Products		Branded Apparel			Total
Net book value at June 29, 2002	$	252	$	1,710	$	401	$	449	$	454		$	3,266
Foreign exchange/other		13		—		7		41		4			65
Net book value at June 28, 2003		265		1,710		408		490		458			3,331
Foreign exchange/other		4		—		1		16		2			23
Net book value at July 3, 2004		269		1,710		409		506		460			3,354
Impairment charges		—		—		—		—		(182	)		(182	)
Foreign exchange/other		1		—		24		3		2			30
Net book value at July 2, 2005	$	270	$	1,710	$	433	$	509	$	280		$	3,202

In 2005, goodwill of $2 was recognized in connection with an insignificant business combination. Additionally, $182 of charges were recognized for the impairment of goodwill, which is more fully described in Note 4, titled “Impairment Charges,” to the Consolidated Financial Statements. In 2004 and 2003, goodwill balances were not impacted by business acquisitions.

Sara Lee Corporation and Subsidiaries            50

Note 23 – Income Taxes

The provisions for income taxes on continuing operations computed by applying the U.S. statutory rate to income from continuing operations before taxes as reconciled to the actual provisions were:

	2005		2004		2003
Income from continuing operations before income taxes
United States	(33.0	)%	11.1	%	18.0	%
Foreign	133.0		88.9		82.0
	100.0	%	100.0	%	100.0	%
Tax expense at U.S. statutory rate	35.0	%	35.0	%	35.0	%
Tax on remittance of foreign earnings	39.2		9.4		—
Finalization of tax reviews and audits	(37.3	)	(13.9	)	—
Foreign taxes less than U.S. statutory rate	(13.3	)	(11.6	)	(10.5	)
Goodwill impairment	6.8		—		—
Benefit of foreign tax credits	(5.1	)	(1.0	)	(0.9	)
Contingent sale proceeds	(4.4	)	(2.8	)	—
Taxes related to earnings previously deemed permanently invested	3.2		—		—
Intangibles and amortization	2.9		5.5		(1.3	)
Netherlands tax rate change	(2.6	)	—		—
Tax carry (back) forward	—		(2.7	)	(2.9	)
Other, net	(2.7	)	(1.2	)	(2.2	)
Taxes at effective worldwide tax rates	21.7	%	16.7	%	17.2	%

Current and deferred tax provisions (benefits) were:

	2005						2004						2003
	Current			Deferred			Current			Deferred			Current			Deferred
United States	$	(172	)	$	141		$	(164	)	$	33		$	154		$	(149	)
Foreign		278			(52	)		263			108			100			128
State		18			(10	)		11			(3	)		(12	)		26
	$	124		$	79		$	110		$	138		$	242		$	5

The components of the deferred tax provisions (benefits) occurring as a result of transactions being reported in different years for financial and tax reporting were:

	2005			2004			2003
Depreciation	$	(47	)	$	(5	)	$	56
Inventory valuation methods		(5	)		(10	)		1
Nondeductible reserves		84			182			(18	)
Intangibles		114			22			137
Employee benefits		—			(122	)		(127	)
Other, net		(67	)		71			(44	)
	$	79		$	138		$	5
Cash payments for income taxes	$	218		$	184		$	265

The deferred tax (assets) liabilities at the respective year-ends were as follows:

	2005			2004			2003
Deferred tax (assets)
Nondeductible reserves	$	(257	)	$	(305	)	$	(455	)
Minimum pension liability		(354	)		(316	)		(425	)
Employee benefits		(428	)		(428	)		(306	)
Net operating loss and other tax carryforwards		(304	)		(252	)		(206	)
Other		(38	)		—			(96	)
Gross deferred tax (assets)		(1,381	)		(1,301	)		(1,488	)
Less valuation allowances		108			84			65
Net deferred tax (assets)		(1,273	)		(1,217	)		(1,423	)
Deferred tax liabilities
Property, plant and equipment		113			128			112
Intangibles		790			675			653
Other		—			3			—
Net deferred tax liabilities		903			806			765
Total deferred tax (assets)	$	(370	)	$	(411	)	$	(658	)

Increases in the valuation allowances in 2005 and 2004 are primarily due to increases in net operating losses in certain jurisdictions. Net operating loss and other tax carryforwards expire as follows: $27 in 2010, $35 in 2012, $15 in 2013, $31 in 2014, $16 in 2015, $6 in 2020 and $174 does not expire.

At July 2, 2005, applicable U.S. federal income taxes and foreign withholding taxes have not been provided on the accumulated earnings of foreign subsidiaries that are expected to be permanently reinvested. If these earnings had not been permanently reinvested, deferred taxes of approximately $493 would have been recognized in the Consolidated Financial Statements.

The corporation has ongoing audits in the U.S. and a number of international jurisdictions. The U.S. federal income tax returns filed by the corporation through June 29, 2002 have been examined by the Internal Revenue Service.

Note 24 – Business Segment Information

The corporation has five reportable segments that are organized principally by product category. Management of each segment is responsible for the worldwide assets and operations of these businesses. The types of products and services from which each reportable segment derives its revenues are as follows:

• Sara Lee Meats sells a variety of meat products, including hot dogs and corn dogs, breakfast sausages and sandwiches, smoked and dinner sausages, premium deli and luncheon meats, bacon, meat snacks, and cooked and dry hams.

• Sara Lee Bakery sells a wide variety of fresh and frozen baked products and specialty items, including bread, buns, bagels, rolls, muffins, specialty bread, refrigerated dough, frozen pies, cakes, cheesecakes and other desserts.

• The Beverage segment primarily sells coffee and tea products.

• Household Products produces and sells products in four primary product categories – body care, air care, shoe care and insecticides. The corporation’s Direct Selling business was previously reported in the Household Products segment but has been excluded as this business is being reported as a discontinued operation.

• Branded Apparel sells basic branded innerwear products under the three product categories of intimate apparel, underwear/activewear and legwear.

The corporation’s management uses operating segment income, which is defined as operating income before general corporate expenses and amortization of trademarks and customer relationship intangibles, to evaluate segment performance and allocate resources. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments. Interest and other debt expense, as well as income tax expense, are centrally managed, and accordingly, such items are not presented by segment since they are not included in the measure of segment profitability reviewed by management. The accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies.

51            Sara Lee Corporation and Subsidiaries

	2005			2004			2003
Sales1,2
Sara Lee Meats	$	4,254		$	4,171		$	3,746
Sara Lee Bakery		3,297			3,415			3,276
Beverage		3,357			3,157			2,756
Household Products		1,927			1,934			1,715
Branded Apparel		6,426			6,449			6,399
		19,261			19,126			17,892
Intersegment		(7	)		(7	)		(4	)
Total	$	19,254		$	19,119		$	17,888
Operating Segment Income
Sara Lee Meats	$	323	3	$	415	4	$	375	5
Sara Lee Bakery		213	3		156	4		98	5
Beverage		388	3		492	4		429	5
Household Products		310	3		354			315
Branded Apparel		114	3		549	4		763	5
Total operating segment income		1,348			1,966			1,980
Amortization of trademarks and other intangibles		(114	)3		(102	)4		(98	)5
General corporate expenses		(231	)3		(313	)4		(248	)
Contingent sale proceeds		117			119			—
Total operating income		1,120			1,670			1,634
Net interest expense		(186	)		(183	)		(200	)
Income from continuing operations before income taxes	$	934		$	1,487		$	1,434
	2005			2004			2003
Assets
Sara Lee Meats	$	2,128		$	2,066		$	2,092
Sara Lee Bakery		3,732			3,877			3,984
Beverage		2,132			2,018			2,200
Household Products		1,695			1,840			2,001
Branded Apparel		4,800			5,021			4,563
		14,487			14,822			14,840
Discontinued operations		300			277			259
Other6		(375	)		(220	)		397
Total assets	$	14,412		$	14,879		$	15,496
Depreciation
Sara Lee Meats	$	117		$	111		$	105
Sara Lee Bakery		138			155			145
Beverage		128			109			98
Household Products		29			34			27
Branded Apparel		136			135			140
		548			544			515
Other		15			10			10
Total depreciation	$	563		$	554		$	525
Additions to Long-Lived Assets
Sara Lee Meats	$	158		$	125		$	143
Sara Lee Bakery		73			75			119
Beverage		165			174			193
Household Products		40			52			36
Branded Apparel		72			95			208
		508			521			699
Other		18			7			44
Total additions to long-lived assets	$	526		$	528		$	743

¹ Includes sales between segments. Such sales are at transfer prices that are equivalent to market value.

² Revenues from one customer represent approximately $2.4 billion, $2.3 billion and $2.1 billion of the corporation’s consolidated revenues in 2005, 2004 and 2003, respectively. All of the corporation’s business segments sell to this customer.

³ Includes amounts recognized for exit activities and business dispositions in the 2005 Consolidated Statement of Income that impacted operating segment income by: Sara Lee Meats – a credit of $29; Sara Lee Bakery – a credit of $9; Beverage – a charge of $85; Household Products – a charge of $8; Branded Apparel – a charge of $349; Corporate Office – a charge of $45; and accelerated amortization of intangibles in the Sara Lee Bakery Group – a charge of $9.

⁴ Includes amounts recognized for exit activities and business dispositions in the 2004 Consolidated Statement of Income that impacted operating segment income by: Sara Lee Meats – a credit of $3; Sara Lee Bakery – a charge of $19; Beverage – a credit of $2; Branded Apparel – a charge of $35; Corporate Office – a charge of $4; and accelerated amortization of intangibles in the Sara Lee Bakery Group – a charge of $1.

⁵ Includes amounts recognized for exit activities and business dispositions reported in the 2003 Consolidated Statement of Income that impacted operating segment income by: Sara Lee Meats – a credit of $6; Sara Lee Bakery – a charge of $27; Beverage – a charge of $1; Branded Apparel – a credit of $26; and accelerated amortization of intangibles in the Sara Lee Bakery Group – a charge of $6.

⁶ Principally cash and equivalents, certain fixed assets, deferred tax assets and certain other noncurrent assets.

Note 25 – Geographic Area Information

	United States		France		Netherlands		Other		Total
2005
Sales	$	10,811	$	1,567	$	1,375	$	5,501	$	19,254
Long-lived assets		5,347		428		533		1,741		8,049
2004
Sales	$	10,933	$	1,537	$	1,335	$	5,314	$	19,119
Long-lived assets		5,841		489		538		1,712		8,580
2003
Sales	$	10,662	$	1,235	$	1,139	$	4,852	$	17,888
Long-lived assets		6,087		480		880		1,282		8,729

Sara Lee Corporation and Subsidiaries            52

Note 26 – Quarterly Financial Data (Unaudited)

	Quarter
	First		Second		Third		Fourth
2005
Continuing operations
Net sales	$	4,757	$	5,073	$	4,670	$	4,754
Gross profit		1,722		1,827		1,692		1,729
Income (loss)1,2,3		347		314		179		(109	)
Income (loss) per common share
– Basic4		0.44		0.40		0.23		(0.14	)
– Diluted5		0.44		0.40		0.23		(0.14	)
Net income (loss)6,7		352		326		189		(148	)
Net income (loss) per common share
– Basic8		0.45		0.41		0.24		(0.19	)
– Diluted9		0.44		0.41		0.24		(0.19	)
Cash dividends declared		0.1875		0.1975		0.1975		0.1975
Market price – high		23.30		24.49		25.00		22.22
– low		20.71		22.10		20.92		19.24
– close		23.19		24.14		22.01		19.65
2004
Continuing operations
Net sales	$	4,565	$	4,891	$	4,643	$	5,020
Gross profit		1,729		1,860		1,790		1,873
Income10		227		301		366		345
Income per common share
– Basic11		0.29		0.38		0.46		0.44
– Diluted12		0.28		0.38		0.46		0.43
Net income11		230		312		376		354
Net income per common share
– Basic11		0.29		0.39		0.47		0.45
– Diluted12		0.29		0.39		0.47		0.44
Cash dividends declared		0.1875		0.1875		0.1875		0.1875
Market price – high		19.90		21.49		22.78		23.75
– low		18.22		18.28		20.17		21.54
– close		18.86		20.96		21.61		23.17

The amounts above include the impact of the following exit activities, business dispositions, Transformation expenses and significant tax items. The impact of exit activities, business dispositions, Transformation expenses and significant tax items shown as negative amounts are charges and positive amounts are income.

	First			Second			Third			Fourth
2005
1 Income (charges) for exit activities, business dispositions and Transformation expenses, net of tax	$	2		$	8		$	10		$	(94	)
2 Impairment charges, net of tax		—			—			—			(291	)
3 Tax benefit (charge) of significant tax items		—			24			(51	)		4
4 EPS impact of footnotes 1, 2 and 3 – basic		—			0.04			(0.05	)		(0.48	)
5 EPS impact of footnotes 1, 2 and 3 – diluted		—			0.04			(0.05	)		(0.48	)
6 Income (charges) for exit activities, business dispositions, Transformation expenses and impairment, net of tax		2			32			(41	)		(381	)
7 Discontinued operations significant tax item		—			—			—			(50	)
8 EPS impact of footnotes 6 and 7 – basic		—			0.04			(0.05	)		(0.55	)
9 EPS impact of footnotes 6 and 7 – diluted		—			0.04			(0.05	)		(0.55	)
	First			Second			Third			Fourth
2004
10 Income (charges) for exit activities and business dispositions, net of tax	$	(5	)	$	(1	)	$	(6	)	$	(24	)
11 EPS impact of footnote 10 – basic		—			—			(0.01	)		(0.03	)
12 EPS impact of footnote 10 – diluted		—			—			(0.01	)		(0.03	)

Note 27 – Subsequent Events

Direct Selling – On August 10, 2005, the corporation announced that it had entered into a definitive agreement to sell this business for $557 of cash. The transaction is expected to close in the second quarter of 2006, subject to regulatory approval and customary closing conditions.

Contingent Sale Proceeds – In July 2005, the corporation received a payment of 95 million euros, as the contingencies had passed related to the 2006 annual contingent payment from the sale of the corporation’s cut tobacco business. Based upon exchange rates in effect on the date of receipt, the payment was equivalent to $114 and will be recognized in the first quarter of 2006. Further details regarding these contingent payments from the sale of the corporation’s cut tobacco business are contained in Note 16 to the Consolidated Financial Statements.

53            Sara Lee Corporation and Subsidiaries

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Sara Lee Corporation:

We have completed an integrated audit of Sara Lee Corporation’s fiscal 2005 consolidated financial statements and of its internal control over financial reporting as of July 2, 2005 and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, common stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Sara Lee Corporation and its subsidiaries at July 2, 2005, July 3, 2004 and June 28, 2003, and the results of its operations and cash flows for each of the three years in the period ended July 2, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that the Corporation maintained effective internal control over financial reporting as of July 2, 2005 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of July 2, 2005, based on criteria established in Internal Control – Integrated Framework issued by the COSO. The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Corporation’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Chicago, IL

August 30, 2005

Sara Lee Corporation and Subsidiaries            54

Management’s Report on Internal Control Over Financial Reporting

Under Section 404 of The Sarbanes-Oxley Act of 2002, the corporation is required to assess the effectiveness of its internal control over financial reporting as of July 2, 2005 and report, based on that assessment, whether the corporation’s internal controls over financial reporting are effective.

Management of the corporation is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The corporation’s internal control over reporting is designed to provide reasonable assurance regarding the reliability of the corporation’s financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

The corporation’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the acquisition, disposition and other transactions regarding the assets of the corporation, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the corporation’s assets that could have a material effect on the financial statements.

Internal control over financial reporting, because of its inherent limitations, may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The corporation’s management has assessed the effectiveness of its internal control over financial reporting as of July 2, 2005. In making this assessment, the corporation used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The corporation’s assessment included documenting, evaluating and testing of the design and operating effectiveness of its internal control over financial reporting. Management of the corporation reviewed the results of its assessment with the Audit Committee of our Board of Directors.

Based on the corporation’s assessment, management has concluded that, as of July 2, 2005, the corporation’s internal control over financial reporting was effective.

Management’s assessment of the effectiveness of the corporation’s internal control over financial reporting as of July 2, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

/s/ Brenda C. Barnes

President and Chief Executive Officer

/s/ L.M. (Theo) de Kool

Chief Financial and Administrative Officer

55            Sara Lee Corporation and Subsidiaries

EX-21

Exhibit 21

Sara Lee Corporation

Following is a list of active subsidiaries of the registrant. Subsidiaries that are inactive or exist solely to protect business names but do not conduct business have been omitted. The omitted subsidiaries, considered in the aggregate, do not constitute a significant subsidiary.

UNITED STATES SUBSIDIARIES

Name	Jurisdiction
Sara Lee Direct, LLC	Colorado
ARP I, LLC	Delaware
BA International, L.L.C.	Delaware
Bryan Foods, Inc.	Delaware
Caribesock, Inc.	Delaware
Caribetex, Inc.	Delaware
Ceibena Del, Inc.	Delaware
Courtaulds Textiles America Inc.	Delaware
Courtaulds Textiles U.S., Inc.	Delaware
DFP Technical, Industrial, Commercial Energy Inc.	Delaware
Earthgrains Baking Companies, Inc.	Delaware
Earthgrains International Holdings, Inc.	Delaware
Egbert LLC	Delaware
EGR International, Inc.	Delaware
EGR Resources, Inc.	Delaware
EGR Texas General Partner, LLC	Delaware
Hanes Menswear, Inc.	Delaware
Hanes Puerto Rico, Inc.	Delaware
International Affiliates & Investment Inc.	Delaware
Metz Holdings, Inc.	Delaware
Playtex Dorado Corporation	Delaware
Playtex Marketing Corporation	Delaware
Sara Lee - Kiwi Holdings, Inc.	Delaware
Sara Lee Bakery Group, Inc.	Delaware
Sara Lee Champion Europe, Inc.	Delaware
Sara Lee Coffee LLC	Delaware
Sara Lee Distribution, Inc.	Delaware
Sara Lee Equity II, LLC	Delaware
Sara Lee Equity, L.L.C.	Delaware
Sara Lee Foods, Inc.	Delaware
Sara Lee France, L.L.C.	Delaware
Sara Lee French Funding Company L.L.C	Delaware
Sara Lee French Investment Company, L.L.C.	Delaware
Sara Lee Fresh, Inc.	Delaware
Sara Lee Global Finance, L.L.C.	Delaware
Sara Lee International Corporation	Delaware
Sara Lee International Finance Corporation	Delaware

Sara Lee Corporation Exhibit 21

Sara Lee International Funding Company L.L.C.	Delaware
Sara Lee International Investment, L.L.C.	Delaware
Sara Lee Investments, Inc.	Delaware
Sara Lee Mexican Investments, L.L.C.	Delaware
Sara Lee Mexicana Holdings Investment, L.L.C.	Delaware
Sara Lee U.K. Depositor L.L.C.	Delaware
Sara Lee U.K. Leasing, L.L.C.	Delaware
Sara Lee/DE US LLC	Delaware
Saramar, L.L.C.	Delaware
SASL Holdco L.L.C.	Delaware
Seamless Textiles, Inc.	Delaware
SL Sourcing, LLC	Delaware
SLKP Administrative Services Company, Inc.	Delaware
SLKP Sales, Inc.	Delaware
Southern Family Foods, L.L.C.	Delaware
UPCR, Inc.	Delaware
UPEL, Inc.	Delaware
WS Real Estate, LLC	Delaware
Metz Baking Company	Iowa
DJW Incorporated	Kentucky
Quikava, Inc.	Massachusetts
Sara Lee Business Service Center, L.L.C.	Maryland
SLC Leasing (Nevada) - II, Inc.	Nevada
J.E. Morgan Knitting Mills, Inc.	Pennsylvania
Earthgrains Refrigerated Dough Products, L.P.	Texas
SLC Leasing (Wyoming), Inc.	Wyoming
International Subsidiaries
Aoste Argentina	Argentina
House Of Fuller Argentina S.A.	Argentina
Indumentaria Andina Sociedad Anonima	Argentina
Nuvo Argentina, S.A.	Argentina
Sara Lee Argentina S.A.	Argentina
Cosmetic Manufacturers Pty. Ltd.	Australia
Nutrimetics International (Australia) Pty Ltd	Australia
Sara Lee Apparel (Australasia) Pty. Ltd.	Australia
Sara Lee Australia	Australia
Sara Lee Bakery (Australia) Pty. Ltd.	Australia
Sara Lee Coffee & Tea (Australia) Pty Ltd.	Australia
Sara Lee Food Holdings Pty. Ltd.	Australia

2

Sara Lee Corporation Exhibit 21

Sara Lee Group (Australia) Pty Ltd	Australia
Sara Lee Holdings (Australia) Pty. Ltd.	Australia
Sara Lee Household & Body Care (Australia) Pty Ltd.	Australia
SL/DE Australia Pty Ltd	Australia
Douwe Egberts Kaffee Systeme Vertieb Gmbh	Austria
Edoo Gesmbh	Austria
Nur Die Textilvertrieb Ges.M.B.H & Co. Kg	Austria
Santora Kaffee Gmbh	Austria
Sara Lee Austria Gmbh	Austria
Sara Lee Household And Body Care Osterreich Gmbh	Austria
Aoste Belgique B.V.	Belgium
Belgian Nur Die Textile Company S.A.	Belgium
Douwe Egberts Coffee Systems N.V.	Belgium
Douwe Egberts N.V.	Belgium
Imperial Coordination Center Bvba	Belgium
Imperial Holding N.V.	Belgium
Imperial Meat Products N.V.	Belgium
Intradal Produktie Belgium Nv	Belgium
Jacqmotte N.V.	Belgium
Pierre Yves Fashion B.V.B.A.	Belgium
Sara Lee Household And Body Care Belgium N.V.	Belgium
Sara Lee Intimates Belux Nv	Belgium
Sara Lee Knit Products Europe B.V.B.A.	Belgium
Sara Lee/DE Immo N.V.	Belgium
Zwarte Kat B.V.B.A.	Belgium
Conoplex Insurance Company Ltd.	Bermuda
Nuage Cosmetics (Botswana) Ltd.	Botswana
Sara Lee Brasil Limitada	Brazil
Sara Lee Cafes Do Brasil Ltda.	Brazil
Sara Lee Venda Direta Do Brasil Ltda.	Brazil
Nutri-Metics (B) Sdn. Bhd.	Brunei Darussalam
Canadelle Holding Corporation Limited	Canada
Canadelle Limited Partnership	Canada
Sara Lee Coffee & Tea Ltd.	Canada
Sara Lee Holding Corporation Limited	Canada
Sara Lee Of Canada Limited Partnership	Canada
Sara Lee Of Canada NS ULC	Canada
Tana Canada, Inc.	Canada
Caysock, Inc.	Cayman Islands
Caytex, Inc.	Cayman Islands
Caywear, Inc.	Cayman Islands
Choloma, Inc.	Cayman Islands

3

Sara Lee Corporation Exhibit 21

Confecciones El Pedregal, Inc.	Cayman Islands
Confecciones La Caleta	Cayman Islands
Dos Rios Enterprises, Inc.	Cayman Islands
Hanes Caribe, Inc.	Cayman Islands
Hanes Dominican, Inc.	Cayman Islands
PTX (D.R.) Inc.	Cayman Islands
SL Alpha Holdings, Inc.	Cayman Islands
SL Beta Holdings, Inc.	Cayman Islands
SLIA Dominicana, Inc.	Cayman Islands
TOS Dominicana Inc.	Cayman Islands
Fujian Sara Lee Consumer Products Co. Ltd.	China
Kiwi Brands Tianjin Co. Ltd.	China
Nutri-Metics International (Guangzhou) Ltd.	China
Sara Lee Apparel International Shanghai Co. Ltd.	China
Sara Lee Columbia S.A.	Columbia
Cartex Manufacturera, S.A.	Costa Rica
Industrias Textilera Del Este, S.A.	Costa Rica
Manufacturera De Cartago S.R.L.	Costa Rica
Sara Lee De Costa Rica, S.A.	Costa Rica
Servicios De Soporte Intmate Apparel S.R.L.	Costa Rica
SLKP Compania De Servicios Administrativos S.A.	Costa Rica
Sara Lee/DE (Cyprus) Limited	Cyprus
Sara Lee/DE Investments (Cyprus) Limited	Cyprus
Balirny Douwe Egberts A.S.	Czech Republic
Sara Lee Apparel Ceska Republic, S.R.O.	Czech Republic
A/S Blumoller	Denmark
Merrild Kaffe A/S	Denmark
Sara Lee Intimates Scandinavia A/S	Denmark
Sara Lee/DE Nordic Finance K/S	Denmark
Socks Dominicana, S.A.	Dominican Republic
Confecciones El Pedregal, S.A. De C.V.	El Salvador
Confecciones Jiboa Sociedad Anonima De Capital Variable	El Salvador
Confecciones La Herradura, S.A. De C.V.	El Salvador
Confecciones La Libertad, S.A. De C.V.	El Salvador
Hanes De El Salvador S.A. De C.V.	El Salvador
Jasper Salvador, S.A. De C.V.	El Salvador
Manufacturera Comalapa, S.A. De C.V.	El Salvador
SLBA Compania De Servicio, S.A. De C.V.	El Salvador
Texlee El Salvador S.A. De C.V.	El Salvador
3DK Limited	England
Actonbarn Limited	England

4

Sara Lee Corporation Exhibit 21

APD Chemicals Limited	England
Arabella Pollen Limited	England
Aris Isotoner UK Limited	England
Bairns-Wear Limited	England
Bellrise Fashions Limited	England
Claremont Garments (Holdings) Limited	England
Claremont Garments (Midlands) Limited	England
Claremont Garments (South) Limited	England
Columbus Swimwear Limited	England
Courtaulds C.P.G. (Holdings) Limited	England
Courtaulds Clothing Brands Limited	England
Courtaulds Clothing Limited	England
Courtaulds D.I.Y. Limited	England
Courtaulds Distributors Limited	England
Courtaulds Home Furnishings Limited	England
Courtaulds Initmate Apparel Limited	England
Courtaulds Printers Limited	England
Courtaulds Textiles (Holdings) Limited	England
Courtaulds Textiles (Overseas) Limited	England
Courtaulds Textiles Investments Limited	England
Courtaulds Textiles Limited	England
Courtaulds Textiles Nominees Limited	England
Courtaulds Textiles Retail Limited	England
Douwe Egberts Coffee Systems Limited	England
Douwe Egberts UK Limited	England
Gossard (Holdings) Limited	England
Gossard Limited	England
Inter Food Service Limited	England
J & J Fashions International Limited	England
Kayser Bondor Limited	England
Kiwi (EA) Limited	England
Kiwi Holdings	England
Macanie (London) Limited	England
Magellan Industries Limited	England
Magellan Management Limited	England
Meridian Limited	England
New Way Packaged Products Limited	England
Nutri-Metics International (UK) Limited	England
Roger Scott Limited	England
Sara Lee (UK Investments) Limited	England
Sara Lee Acquisition Limited	England
Sara Lee Bakery UK Limited	England
Sara Lee Household & Body Care UK Limited	England
Sara Lee Intimates UK Limited	England
Sara Lee Investments	England
Sara Lee UK Holdings Limited	England
Sara Lee UK Pension Trustee Limited	England
Sara Lee/DE Holdings Limited	England
Sara Lee/DE International Finance	England
Sara Lee/DE International Investments	England

5

Sara Lee Corporation Exhibit 21

Silkventure Limited	England
Taylor Merrymade Limited	England
Temana International Limited	England
The Long Eaton Fabric Company (Holdings) Limited	England
The Long Eaton Fabric Company Limited	England
Wilkinson & Riddell (Holdings) Limited	England
Zambesi Finance	England
Sara Lee Personal Products (Fiji) Limited	Fiji
ABCI SASU	France
Aoste Export SNC	France
Aoste Food Service Sa	France
Aoste Holding SNC	France
Aoste Libre Service Pretranche SNC	France
Aoste Management SASU	France
Aoste SNC	France
Aoste Traiteur SNC	France
C.T. Compagnie S.N.C.	France
C.T. Participations S.A.S.	France
Calixte Producteur SNC	France
Cochonou SNC	France
Courtaulds Textiles Holdings S.A.S.	France
DEF Finance S.N.C.	France
DEF Holding S.N.C.	France
DIM Finance S.A.S.	France
DIM S.A.	France
Douwe Egberts Coffee Systems France S.N.C.	France
Douwe Egberts France S.N.C.	France
Et.G.Y. SASU	France
Eurodough, S.A.S.	France
Euro-Raulet, S.A.S.	France
Eurorol, S.A.S.	France
Eurovita, S.A.S.	France
GIE G-SEC	France
Gossard S.A.S.	France
Hermine S.A.S.	France
Justin Bridou SNC	France
Kiwi Holdings S.N.C.	France
Nutrimetics France S.N.C.	France
Nutri-Metics Holding France S.N.C.	France
Philippe Matignon France S.A.	France
Playtex France S.A.S	France
Playtex Investments Europe S.A.S.	France
Sagepar S.A.R.L.	France
Salaisons Du Dousey SASU	France
Sara Lee Branded Apparel S.A.S.	France
Sara Lee Charcuterie, S.A.	France
Sara Lee Europe Direct Marketing S.A.S	France
Sara Lee France Finance S.A.S.	France

6

Sara Lee Corporation Exhibit 21

Sara Lee France S.N.C.	France
Sara Lee Household And Body Care France S.N.C.	France
Sara Lee/De France S.A.S.	France
Sdp Rungis S.A.	France
SEC, SNC	France
Societe Des Salaisons De Balanod SNC	France
Tradi France S.A.	France
Allsohl Gmbh	Germany
Aoste Sb Gmbh	Germany
Coffenco International Gmbh	Germany
Contenta Gmbh & Co. Kg	Germany
DEFACTO Deutschland Gmbh	Germany
Douwe Egberts Coffee And Tea Consumer Products Gmbh	Germany
Fairwind Gmbh	Germany
Jensen & Graf Kaffeespezialitaten Gmbh	Germany
Justepas Gmbh	Germany
Lovable Design Gmbh	Germany
Meltonian Gmbh	Germany
Sara Lee Branded Apparel Gmbh	Germany
Sara Lee Deutschland Gmbh	Germany
Sara Lee Foods Germany Gmbh	Germany
Sara Lee Germany Gmbh	Germany
Sara Lee Household & Body Care Deutschland	Germany
Sara Lee Private Label Gmbh	Germany
Sara Lee/DE Holding Gmbh	Germany
Strozzi Vermogensverwaltung Gmbh	Germany
Tricobest Ceska Republica Spol. R.R.O.	Germany
Tricotbest Gmbh	Germany
Van Nelle Holding (Germany) Gmbh	Germany
Yourstep Gmbh	Germany
Nutri-Metics International (Greece) A.E.	Greece
Sara Lee Branded Apparel Hellas S.A.	Greece
Sara Lee Coffee And Tea Hellas S.A.	Greece
Sara Lee Hellas A.E.	Greece
Sara Lee Holdings Hellas S.A.	Greece
Hanes De Centroamerica S.A.	Guatemala
Ceiba Industrial S. De R.L.	Honduras
Confecciones Atlantida S. De R.L.	Honduras
Hanes Choloma S. De R.L.	Honduras
Hanes De Honduras S. De R.L. De C.V.	Honduras
Industrias El Porvenir S. De R.L.	Honduras
J.E. Morgan De Honduras, S.A.	Honduras
Jasper Honduras, S.A.	Honduras
Jogbra Honduras S.A.	Honduras
Manufacturera Ceibena, S De R.L.	Honduras
Manufacturera San Pedro Sula, S. De R.L.	Honduras

7

Sara Lee Corporation Exhibit 21

Sara Lee Intimates, S. De R.L.	Honduras
SL Socks De Honduras S. De R.L.	Honduras
The Harwood Honduras Companies, S. De R.L. De C.V.	Honduras
DFK International Limited	Hong Kong
Sara Lee Hong Kong Ltd.	Hong Kong
Sara Lee Sourcing Asia Limited	Hong Kong
Sara Lee Apparel Hungaria Kft.	Hungary
Sara Lee Hungary Kave Es Tea Kereskedelmi Kft.	Hungary
Sara Lee Kave Es Tea Elelmiezer Feldolgozo, Csomagolo, Kereskedelmi Rt	Hungary
Godrej Sara Lee Ltd.	India
Sara Lee Apparel India Private Limited	India
Sara Lee Household And Body Care India Pvt. Ltd.	India
P.T. Premier Ventures Indonesia	Indonesia
P.T. Sara Lee Body Care Indonesia Tbk	Indonesia
P.T. Sara Lee Household Indonesia	Indonesia
P.T. Sara Lee Indonesia	Indonesia
P.T. Sara Lee Trading Indonesia	Indonesia
P.T. Suria Yozani Indonesia	Indonesia
Sara Lee (Ireland) Limited	Ireland
Linnyshaw Insurance Limited	Isle of Man
Al Ponte Prosciutti S.R.L.	Italy
Eurodough Italia Srl	Italy
Fontane Del Duca S.R.L.	Italy
Hanes Italia S.P.A.	Italy
Sara Lee Branded Apparel Italia Srl	Italy
Sara Lee Household And Body Care Italy S.P.A.	Italy
Naturcare Japan Ltd.	Japan
Sara Lee Japan Ltd	Japan
Kiwi (East Africa) Limited	Kenya
Sara Lee Household And Body Care Kenya Ltd.	Kenya
Swissgarde (Kenya) Ltd.	Kenya
Sara Lee Baltic, S.I.A.	Latvia
Agepal Sarl	Luxembourg
Sara Lee Coffee Luxembourg S.A.R.L.	Luxembourg
Sara Lee Finance Luxembourg Sarl	Luxembourg
Sara Lee Household And Body Care (Malawi) Ltd.	Malawi
2476230 Malta Limited	Malta

8

Sara Lee Corporation Exhibit 21

Kiwi Manufacturing Sdn. Bhd.	Malaysia
Nutri-Metics Worldwide (Malaysia) Sdn. Bhd.	Malaysia
Sara Lee Malaysia Sdn. Bhd.	Malaysia
Sara Lee South East Asia Sdn Bhd	Malaysia
Sara Lee Mauritius Holding Pte Ltd.	Mauritius
Allende Internacional, S. De R.L. De C.V.	Mexico
Bal-Mex, S. De R.L. De C.V.	Mexico
Champion Products, S. De R.L. De C.V.	Mexico
Confecciones De Nueva Rosita S. De R.L. De C.V.	Mexico
Congelacion Y Conservacion De Alimentos, S. De R.L. De C.V.	Mexico
Decs Global Network Mexicana, S.A. De C.V.	Mexico
Decs International Mexico, S.A. De C.V.	Mexico
Fc Mexican Consulting S. De R.L. De C.V.	Mexico
Fuller Cosmetics S.A. De C.V.	Mexico
House Of Fuller Holdings S. De R.L. De C.V.	Mexico
House Of Fuller, S. De R.L. De C.V.	Mexico
Industrias Internacionales De San Pedro, S. De R.L. De C.V.	Mexico
Inmobiliaria Meck-Mex, S.A. De C.V.	Mexico
Madero Internacional, S. De R.L. De C.V.	Mexico
Mexican Traders S.A. De C.V.	Mexico
Monclova Internacional, S. De R.L. De C.V.	Mexico
Probemex Consultoria, S. De R.L. De C.V.	Mexico
Probemex S.A. De C.V.	Mexico
Qualtia Alimentos Comercial S. De R.L. De C.V.	Mexico
Qualtia Alimentos Operaciones S. De R.L. De C.V.	Mexico
Qualtia Alimentos S. De R.L. De C.V.	Mexico
Qualtia Alimentos Servicios Comerciales S. De R.L. De C.V.	Mexico
Sara Lee Administracion Y Servicios, S.A. De C.V.	Mexico
Sara Lee Household And Body Care De Mexico S. De R.L. De C.V.	Mexico
Sara Lee Knit Products Mexico, S.A. De C.V.	Mexico
Sara Lee Mexican Funding, S. De R.L. De C.V.	Mexico
Sara Lee Mexicana Holdings, S. De R.L. De C.V.	Mexico
Sara Lee Mexicana, S.A. De C.V.	Mexico
Sara Lee Moda Femenina, S.A. De C.V.	Mexico
Servicios Administrativos Sara Lee, S. De R.L. De C.V.	Mexico
International Underwear S.A.R.L.	Morocco
Mornatex S.A.R.L.	Morocco
Avory Shlain Cosmetics (Namibia) Pty. Ltd.	Namibia
Swissgarde (Namibia) (Pty.) Ltd.	Namibia
Baro Bestuursmaatschappij B.V.	Netherlands
Beheersmaatschappij Bevem B.V.	Netherlands
Betke Hollandsche Cacaproducten Export Maatschappij B.V.	Netherlands
Biotex Bv	Netherlands
Buttress B.V.	Netherlands

9

Sara Lee Corporation Exhibit 21

Control International Investments (Consecfin) Bv	Netherlands
Cooperatieve Douwe Egberts Finance U.A.	Netherlands
Cooperatieve Sara Lee Household And Body Care Finance U.A.	Netherlands
De Participations B.V.	Netherlands
Decaf B.V.	Netherlands
Decoma Operating B.V.	Netherlands
Defacto B.V.	Netherlands
Devn Coffee Systems N.V.	Netherlands
Douwe Egberts Beleggingsmaatschappij B.V.	Netherlands
Douwe Egberts Coffee Care B.V.	Netherlands
Douwe Egberts Coffee Systems Global Network B.V.	Netherlands
Douwe Egberts Coffee Systems International B.V.	Netherlands
Douwe Egberts Coffee Systems Nederland B.V.	Netherlands
Douwe Egberts Coffee Systems Operating B.V.	Netherlands
Douwe Egberts Coffee Treatment & Supply B.V.	Netherlands
Douwe Egberts Diensten Bv	Netherlands
Douwe Egberts Global Network B.V.	Netherlands
Douwe Egberts Holdings Bv	Netherlands
Douwe Egberts Nederland B.V.	Netherlands
Douwe Egberts Rho Bv	Netherlands
Douwe Egberts Sigma Bv	Netherlands
Douwe Egberts Tau Bv	Netherlands
Douwe Egberts Van Nelle Coffee Systems N.V.	Netherlands
Douwe Egberts Van Nelle Participations B.V.	Netherlands
Droste Administratie Maatschappij B.V.	Netherlands
Droste Inkoop Maatschappij B.V.	Netherlands
Duyvis B.V.	Netherlands
Duyvis Production B.V.	Netherlands
Earthgrains European Holdings, C.V.	Netherlands
Earthgrains European Investments, B.V.	Netherlands
Euragral B.V.	Netherlands
Fihomij B.V.	Netherlands
Findeggo Finance (Germany) B.V.	Netherlands
Findeggo Investments B.V.	Netherlands
I. Tas Ezn B.V.	Netherlands
Intec B.V.	Netherlands
Intervend Automaten B.V.	Netherlands
Kiwi European Holdings B.V.	Netherlands
Koninklijke Douwe Egberts B.V.	Netherlands
Lassie B.V.	Netherlands
Laurentis B.V.	Netherlands
Loda B.V.	Netherlands
Marander Assurantie Compagnie B.V.	Netherlands
Meester Stegeman C.V.	Netherlands
Natrena B.V.	Netherlands
Redipro B.V.	Netherlands
Sara Lee Coffee & Tea Asia B.V.	Netherlands
Sara Lee Export B.V.	Netherlands
Sara Lee Foods Europe B.V.	Netherlands
Sara Lee Foods Netherlands B.V.	Netherlands

10

Sara Lee Corporation Exhibit 21

Sara Lee Foods Participaties B.V.	Netherlands
Sara Lee Household & Body Care Nederland B.V.	Netherlands
Sara Lee Household And Body Care International B.V.	Netherlands
Sara Lee International Bv	Netherlands
Sara Lee Initmates Nederland B.V.	Netherlands
Sara Lee Investments Greece B.V.	Netherlands
Sara Lee/DE Beheersmaatschapij B.V.	Netherlands
Sara Lee/DE Finance B.V.	Netherlands
Sara Lee/DE Financieringsmaatschappij B.V.	Netherlands
Sara Lee/DE Investments B.V.	Netherlands
Sara Lee/DE N.V.	Netherlands
Saramar Europe B.V.	Netherlands
Tricobest B.V.	Netherlands
Vlijmense Belegging-Maatschappij B.V.	Netherlands
Zijlstra’s Meubelfabriek B.V.	Netherlands
Caitlin Financial Corporation N.V.	Netherlands Antilles
Codef Financial Services CV	Netherlands Antilles
Cofico N.V.	Netherlands Antilles
Defico N.V.	Netherlands Antilles
Sara Lee/DE Antilles N.V.	Netherlands Antilles
Sara Lee/DE Finance (Antilles) N.V.	Netherlands Antilles
Sara Lee/DE Finance S.E.P.	Netherlands Antilles
Sara Lee/DE Investments (Antilles) NV	Netherlands Antilles
Sara Lee/DE Trading (Antilles) N.V.	Netherlands Antilles
Nutrimetics International (Nz) Ltd.	New Zealand
Sara Lee Coffee And Tea (Nz) Ltd.	New Zealand
Sara Lee Group (Nz) Ltd.	New Zealand
Sara Lee Holdings (Nz) Ltd.	New Zealand
Sara Lee Household And Body Care (Nz) Ltd.	New Zealand
Kiwi (Nigeria) Limited	Nigeria
Sara Lee Household & Body Care Norge As	Norway
Sara Lee Canada Holdings Limited	Nova Scotia
Pervez Industrial Corporation Pte. Ltd.	Pakistan
Bali Dominicana Inc.	Panama
Bali Dominicana Textiles, S.A.	Panama
Hanes Panama, Inc.	Panama
Metrolab Industries, Inc.	Philippines
Metrolaboratories Inc.	Philippines
Penn Philippines Inc.	Philippines
Sara Lee Philippines Inc.	Philippines
Bama Polska Sp. Z.O.O.	Poland

11

Sara Lee Corporation Exhibit 21

Przediebiorstwo Prima Sa	Poland
Sara Lee Apparel Polska Sp. Z.O.O.	Poland
Sara Lee Household And Body Care Poland Sp.Z.O.O.	Poland
Bimbo-Productos Alimentares Socoedade Unipessoal, Limitada	Portugal
Dim Portugal - Importacao E Commercializacado, Limitada	Portugal
Douwe Egberts Portugal - Produtos Alimentares Lda.	Portugal
Industrias De Carnes Nobre, S.A.	Portugal
Nutri-Metics International (Portugal) Lda.	Portugal
Sara Lee Household And Body Care Portugal, Produtos De Consumo Lda	Portugal
Sara Lee Portugal - Sgps, Sociedada Unipessoal, Limitada	Portugal
Pikecu S.R.L.	Romania
Rosko Textiles S.R.L.	Romania
Douw Egberts Russbrands Z.A.O.	Russian Federation
Sara Lee Export B.V.	Russian Federation
Courtaulds Ls Limited	Scotland
Sara Lee Singapore Pte Ltd.	Singapore
Sara Lee Apparel Slovakia Spol, S.R.O.	Slovak Republic
Sara Lee Slovakia, S.R.O.	Slovak Republic
Tricotbest Slovensko Spol S.R.O.	Slovak Republic
Avroy Shlain Cosmetics (Pty) Ltd.	South Africa
Courtaulds Lingerie (Sa) (Proprietary) Limited	South Africa
Kayser (South Africa) (Pty) Limited	South Africa
Natal Textiles (Proprietary) Limited	South Africa
Sara Lee (South Africa) Pty Ltd.	South Africa
Sara Lee/De Holdings (South Africa) (Pty.) Limited	South Africa
SATG Management Services (Proprietary) Limited	South Africa
South Africa Gossard (Proprietary) Limited	South Africa
Swissgarde (Pty.) Ltd.	South Africa
Aoste Espana S.A.	Spain
Bimbo, S.A.	Spain
Bimbo-Martinez Comercial, S.L.	Spain
Cafes A La Crema J. Marcilla Y Cafes Soley, S.L.	Spain
Catdes, S.A.	Spain
Marcilla Coffee Systems S.A.	Spain
Pimad, S.A.	Spain
Sara Lee Bakery Iberia Corporativa, S.L.	Spain
Sara Lee Bakery Iberian Investments, S.L.	Spain
Sara Lee Branded Apparel Espana S.L.	Spain
Sara Lee Espana, S.A.	Spain
Sara Lee Finance Spain S.L.	Spain
Sara Lee Southern Europe, S.L.	Spain
Sara Lee/DE Espana S.A.	Spain

12

Sara Lee Corporation Exhibit 21

Courtaulds Clothing Land (Private) Limited	Sri Lanka
Godrej Sara Lee Lanka Pvt. Ltd.	Sri Lanka
Isabella (Private) Ltd.	Sri Lanka
Leisureline (Pvt) Ltd.	Sri Lanka
Sara Lee Household & Body Care Lanka Pvt. Ltd.	Sri Lanka
Shadowline (Pvt) Ltd.	Sri Lanka
Slimline (Private) Limited	Sri Lanka
Unichela (Pvt) Ltd.	Sri Lanka
Nuage Cosmetics (Proprietary) Ltd.	Swaziland
Merrild Coffee Systems Ab	Sweden
Opus Health Care Ab	Sweden
Sara Lee Household & Body Care Sverige Ab	Sweden
Sara Lee Intmates Scandinavia Ab	Sweden
Decotrade Ag	Switzerland
Dim Schweiz Ag / Dim Suisse S.A.	Switzerland
Dim-Rosy Ag	Switzerland
Intex Textil-Vertriebsgesellschaft Ag Ag	Switzerland
Product Suppliers A.G.	Switzerland
Sara Lee Household And Body Care Schweiz Ag	Switzerland
Tana Schuhpflege Ag	Switzerland
Telec A.G.	Switzerland
Sara Lee (Taiwan) Limited	Taiwan
Swissgarde (Tanzania) Ltd.	Tanzania
Kiwi (Thailand) Ltd	Thailand
Nutrimetics International (Thailand) Ltd.	Thailand
Sara Lee (Thailand) Ltd.	Thailand
Sara Lee Coffee & Tea (Thailand) Ltd.	Thailand
Allbrains Sarl	Tunisia
Ancilar Sarl	Tunisia
Essel Tunisie Sa.R.L.	Tunisia
Gromtex S.A.R.L.	Tunisia
KRS S.A.R.L.	Tunisia
P.T.X. Tunisie S.A.R.L.	Tunisia
Tagco S.A.R.L.	Tunisia
Gossard Tekstil Sanayi Ve Ticaret Limited Sirketi	Turkey
Sara Lee Household And Body Care (Turkey)	Turkey
Sara Lee Household & Body Care Uganda Ltd.	Uganda
Swissgarde (Uganda) Ltd.	Uganda
Tricobest Ukraine	Ukraine

13

Sara Lee Corporation Exhibit 21

Nuvo Cosmeticos Sa	Uruguay
Uninex, S.A.	Uruguay
Sara Lee Household And Body Care Zambia Ltd.	Zambia
Swissgarde (Zambia) (Pty.) Ltd.	Zambia
Kiwi Brands (Private) Limited	Zimbabwe
Sara Lee Household And Body Care Zimbabwe Pte Ltd.	Zimbabwe

14

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 33-35760, 33-57615, 33-64383, 33-63715, 33-63717, 33-59002, 33-33245, 33-33244, 333-17987, 333-41427, 333-71839, 333-91345, 333-67442, 333-68958, 33-41487, 333-107692, 333-112615) and Form S-3 (Nos. 333-83776, 333-18385, 33-60071, 333-71797, 333-96173, 333-67512) of Sara Lee Corporation of our report dated August 30, 2005 relating to the financial statements, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated August 30, 2005 relating to the financial statement schedule, which appears in this Form 10-K.

PricewaterhouseCoopers LLP

Chicago, Illinois

September 1, 2005

EX-31.1

Exhibit 31.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT

TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Brenda C. Barnes, President and Chief Executive Officer of Sara Lee Corporation, certify that:

1. I have reviewed this annual report on Form 10-K of Sara Lee Corporation for the fiscal year ended July 2, 2005.

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: September 2, 2005

/s/ Brenda C. Barnes,

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT

TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, L.M. (Theo) de Kool, Executive Vice President and Chief Financial and Administrative Officer of Sara Lee Corporation, certify that:

1. I have reviewed this annual report on Form 10-K of Sara Lee Corporation for the fiscal year ended July 2, 2005.

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: September 2, 2005

/s/ L.M. (Theo) de Kool,

Executive Vice President and Chief Financial
and Administrative Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Sara Lee Corporation (the “Company”) for the fiscal year ended July 2, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brenda C. Barnes, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Dated: September 2, 2005

/s/ Brenda C. Barnes,

President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Sara Lee Corporation (the “Company”) for the fiscal year ended July 2, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, L.M. (Theo) de Kool, Executive Vice President and Chief Financial and Administrative Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Dated: September 2, 2005

/s/ L.M. (Theo) de Kool,

Executive Vice President and Chief Financial
and Administrative Officer