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 June 30, 2007

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.)
3500 Lacey Road Downers Grove, Illinois	60515-5424
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (630) 598-6000

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 Stock Exchange (London)

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

NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    x  Yes    ¨  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    x  No

Indicate by check mark whether the registrant (1) has filed all reports required 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.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    x        Accelerated filer    ¨        Non-accelerated filer    ¨

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 4, 2007, the registrant had outstanding 724,527,126 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 29, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $12.3 billion (based upon the closing price per share of the registrant’s common stock on the New York Stock Exchange on that date).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Annual Report to Stockholders for the fiscal year ended June 30, 2007 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 2007 annual meeting of stockholders are incorporated by reference into Items 10-14 of Part III of this Form 10-K.

Table of Contents

		Page
Part I
Item 1.	Business	1
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	14
Item 2.	Properties	14
Item 3.	Legal Proceedings	15
Item 4.	Submission of Matters to a Vote of Security Holders	16
Part II
Item 5.	Market for Sara Lee’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17
Item 6.	Selected Financial Data	17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 8.	Financial Statements and Supplementary Data	18
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	18
Item 9A.	Controls and Procedures	18
Item 9B.	Other Information	18
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	19
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, and Director Independence	22
Item 14.	Principal Accounting Fees and Services	22
Part IV
Item 15.	Exhibits and Financial Statement Schedules	23

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. The Company was organized in Baltimore, Maryland in 1939 as the C.D. Kenny Company and adopted its current name in 1985. Sara Lee’s principal executive offices are located in Downers Grove, Illinois.

Recent Business Developments

In February 2005, Sara Lee began a comprehensive transformation plan designed to improve performance and better position the company for long-term growth. The transformation plan involved several components, including (i) transforming Sara Lee’s business portfolio by disposing of a number of businesses; (ii) reorganizing its business operations around distinct consumers, customers and geographic markets, so that Sara Lee’s operations are organized as six business segments: North American Retail Meats, North American Retail Bakery, Foodservice, International Beverage, International Bakery, and Household and Body Care; (iii) improving operational efficiency by utilizing continuous improvement methods and centralizing our procurement and information technology across the organization; and (iv) consolidating the headquarters of our North American businesses to one location in the Chicago area and the headquarters of our European businesses to a single location per country or region. In fiscal 2007, Sara Lee completed most of its one-time transformation initiatives, such as transforming its business portfolio.

The reorganization of our business operations into six business segments and the consolidation of the headquarters for our North American businesses were completed in fiscal 2007. In addition, Sara Lee completed the transformation of its business portfolio with the spin-off of Hanesbrands Inc. On September 5, 2006, Sara Lee spun off its Branded Apparel segment into an independent, publicly traded business named Hanesbrands Inc. Sara Lee completed the spin-off by distributing Hanesbrands’ common stock in a pro rata dividend to holders of Sara Lee common stock as of August 18, 2006. The dividend represented 100% of the common stock of Hanesbrands Inc. outstanding at the time of the spin-off. Sara Lee’s consolidated financial statements contained in Sara Lee’s 2007 Annual Report to Stockholders have been reclassified, for all periods presented, to report as discontinued operations the results of operations of Hanesbrands Inc. and all other businesses that were disposed of by Sara Lee.

Description of the Business

Sara Lee’s operations are organized around six business segments—North American Retail Meats, North American Retail Bakery, Foodservice, International Beverage, International Bakery, and Household and Body Care. Results of operations for all periods presented are presented based upon this reporting structure.

North American Retail Meats

North American Retail Meats sells a variety of packaged meat products to retail customers in North America. Products include hot dogs and corn dogs, breakfast sausages and sandwiches, smoked and dinner sausages, premium deli and luncheon meats, bacon, and cooked and dry hams. North American Retail Meats’ significant brands include Hillshire Farm, Ball Park, Jimmy Dean, Sara Lee, Bryan, State Fair, Kahn’s and Best’s Kosher in the U.S. and Kir, Zwan, Duby and DonFer in Mexico.

North American Retail Meats primarily sells its products in the U.S. and Mexico, and 89% of the segment’s fiscal 2007 sales were generated in U.S. dollars. Sales are made in the retail channel to supermarkets, warehouse clubs and national chains and generally are transacted through Sara Lee’s own sales force and outside brokers.

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The primary raw materials for the segment’s 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 on supply and demand in the marketplace.

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 North American Retail Meats segment competes with other international, national, regional and local companies in each of the product groups.

North American Retail Meats’ business accounted for 21.4%, 22.1% and 21.4% of Sara Lee’s consolidated sales during fiscal years 2007, 2006 and 2005, respectively.

North American Retail Bakery

North American Retail Bakery sells a wide variety of fresh and frozen baked products and specialty items to retail customers in North America. Products include bread, buns, bagels, rolls, muffins, specialty bread, frozen pies, cakes, cheesecakes and other desserts. North American Retail Bakery sells its products under the brands Sara Lee, Earth Grains, Grant’s Farm, Colonial, Rainbo, Holsum, IronKids, Mother’s, Sunbeam, Healthy Choice and Chef Pierre. Certain brands are used under licensing arrangements; however sales of products sold under licensing arrangements represent less than 7% of total North American Retail Bakery sales. The North American Retail Bakery segment also includes the results of the corporation’s Senseo retail coffee business in the U.S.

Substantially all of the North American Retail Bakery’s sales are generated in the U.S. Sales are made in the retail channel to supermarkets, warehouse clubs and national chains, and generally are made through Sara Lee’s sales force and independent wholesalers. The North American Retail Bakery segment offers delivery directly to retail customer stores and warehouses through its direct-store-delivery system, which maintains approximately 4,400 delivery routes.

North American Retail Bakery’s primary raw materials include wheat flour, sugar, corn syrup, butter, fruit, eggs and cooking oils, which are purchased from independent suppliers. Sara Lee 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 bakery business is highly competitive, with an emphasis on product quality, innovation and value. New product innovations drive growth in this segment. The North American Retail Bakery segment competes with other international, national, regional and local companies in each of the product groups.

North American Retail Bakery’s business accounted for 16.3%, 16.3% and 16.0% of Sara Lee’s consolidated sales during fiscal years 2007, 2006 and 2005, respectively.

Foodservice

Foodservice sells a variety of meat, bakery and beverage products to foodservice customers in North America. Products include hot dogs and corn dogs, breakfast sausages and sandwiches, smoked and dinner sausages, premium deli and luncheon meats, bacon, meat snacks, cooked and dry hams, bread, buns, bagels, rolls, muffins, specialty bread, refrigerated dough, frozen pies, cakes, cheesecakes, roast, ground and liquid coffee, cappuccinos, lattes, teas, and a variety of sauces, dressings and condiments.

During fiscal 2007, virtually all of the segment’s sales were generated in the U.S. Sales are made in the foodservice channel to distributors, restaurants, hospitals and other large institutions. The Foodservice segment also offers direct delivery of beverage products to restaurants and warehouses through its direct-store-delivery system. Unit volumes in the Foodservice segment are generally a function of consumer eating patterns outside of the home.

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The primary raw materials for Foodservice’s products include pork, turkey, beef, chicken, wheat flour, sugar, corn syrup, butter, fruit, eggs, cooking oils and green coffee beans, which are purchased from independent vendors and farmers. The Foodservice 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 Foodservice segment competes with other international, national, regional and local companies in each of its product categories.

Foodservice’s business accounted for 17.9%, 19.0% and 18.8% of Sara Lee’s consolidated sales during fiscal years 2007, 2006 and 2005, respectively.

International Beverage

International Beverage sells coffee and tea products in Europe, Brazil, Australia and Asia. In Europe, some of the more prominent brands are Douwe Egberts, Senseo, Maison du Café, Marcilla, Merrild and Pickwick. In South America, significant brands include Café do Ponto, Café Caboclo, União and Café Pilão.

In fiscal 2007, 82% of the segment’s sales were generated in Western and Central Europe, 12% in Brazil and 4% in Australia. Sales are made in both the retail channel to supermarkets, warehouse clubs and national chains, and in the foodservice channel to distributors. The International Beverage segment also offers direct delivery to restaurants and warehouses through its direct delivery system.

The beverage business is highly competitive, with an emphasis on quality and value, and the International Beverage segment competes with other international and regional companies. Consumer preferences as to the blend or flavor and convenience of their purchases continue to change, with differing preferences around the world.

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 around 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.

Sara Lee’s International Beverage business accounted for 21.3%, 20.2% and 20.1% of Sara Lee’s consolidated revenues during fiscal years 2007, 2006 and 2005, respectively.

International Bakery

International Bakery sells a variety of bakery and dough products to retail and foodservice customers in Europe and Australia. Products include a variety of bread, buns, rolls, specialty bread, refrigerated dough, frozen desserts and ice cream. The major brands under which International Bakery sells its products include Bimbo, CroustiPate, Ortiz, BonGateaux and Sara Lee.

During fiscal 2007, 86% of the segment’s sales were generated in Western Europe, while the remaining sales were generated in Australia. Sales are made in the retail channel to supermarkets, warehouse clubs and national chains and in the foodservice channel to distributors and other institutions. Sales generally are made through Sara Lee’s sales force and independent wholesalers. The International Bakery segment offers delivery directly to retail customer stores and warehouses through its direct store delivery system.

International Bakery’s primary raw materials include wheat flour, sugar, corn syrup, butter, fruit, eggs, milk and cooking oils, which are purchased from independent suppliers. The International 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.

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The bakery business is highly competitive, with an emphasis on product quality, innovation and value. New product innovations drive growth in this segment. The International Bakery segment competes with other international, national, regional and local companies in each of the product groups.

The International Bakery’s business accounted for 6.5%, 6.5% and 6.8% of Sara Lee’s consolidated revenues during fiscal years 2007, 2006 and 2005, respectively.

Household and Body Care

Household and Body Care sells products in four primary 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.

In fiscal 2007, 69% of the segment’s sales were generated in Western and Central Europe, 21% in the Asia Pacific region and 5% in the U.S. The remaining portion of the segment’s sales was generated primarily in Africa.

The Household and Body Care business is highly competitive, with an emphasis on innovation, quality and value. Sara Lee competes with other international and regional companies.

Sara Lee’s Household and Body Care segment accounted for 16.6%, 15.9% and 16.9% of Sara Lee’s consolidated revenues during fiscal years 2007, 2006 and 2005, respectively.

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 2007, Wal-Mart Stores Inc. was Sara Lee’s largest customer. Net sales to Wal-Mart Stores Inc. were $1.29 billion, or 10.5% of Sara Lee’s fiscal 2007 net sales. Of this amount, $796 million of net sales were made by the North American Retail Meat business and $351 million of net sales were made by the North American Retail Bakery business. 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 28,000 active trademark registrations and applications in countries around the world 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 North American Retail Meats segment is balanced by the diverse offering of products that tends 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 North American Retail Bakery and International Bakery segments also is balanced by the diverse offering of products that tends to offset the seasonal changes in demand. For example, sales of buns increase in the warm summer months, and sales of specialty cakes and pies increase for the winter holiday season. Seasonality in the Foodservice segment is balanced by a diverse offering of products to meet the consumer’s seasonal eating patterns. Sales of beverage products are higher in the second quarter due to higher consumer consumption in the winter months. The Household and Body Care 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 2007, 23.5% of Sara Lee’s consolidated net sales from continuing operations were recognized in the first quarter, 25.9% in the second quarter, 24.5% in the third quarter and 26.1% in the fourth quarter.

Regulations

Sara Lee’s North American Retail Meats, North American Retail Bakery and Foodservice 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

At the end of fiscal year 2007, Sara Lee employed approximately 52,400 employees worldwide.

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 53. Chairman and Chief Executive Officer of Sara Lee Corporation since October 2005, President and Chief Executive Officer from February 2005 to October 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 (hotel chain) from November 1999 to March 2000, and President and Chief Executive Officer of PepsiCola North America (soft drink manufacturer) from 1996 until 1998. Prior to that she held various positions with several divisions of PepsiCo, Inc. (food and beverage manufacturer) from 1976 to 1996. Ms. Barnes is a member of the Board of Directors of The New York Times Company. Ms. Barnes also served as an adjunct professor at the Kellogg Graduate School of Business and at North Central College in 2002. She also serves on the Board of Trustees of Augustana College and is a member of the Steering Committee of the Kellogg Center for Executive Women.

Stephen J. Cerrone, Age 48. Executive Vice President, Human Resources of Sara Lee Corporation since January 2007. Prior to joining Sara Lee, Mr. Cerrone served as Executive Vice President, Human Resources of JPMorganChase Corporation (financial services) from 2004 to 2007, and Executive Vice President, Human Resources of BankOne Corporation from 2003 until it merged with JPMorganChase in 2004. Prior to that, he was employed by Burger King Corporation (restaurant chain) from 1989 to 2004, most recently serving as its Executive Vice President, Worldwide Human Resources from 1999 to 2003, and as Vice President, Human Resources, Burger King Europe/Middle East/Africa from 1997 to 1999.

Christopher J. (CJ) Fraleigh, Age 43. Executive Vice President of Sara Lee Corporation since January 2007 and Chief Executive Officer of Sara Lee Food & Beverage since January 2005; Senior Vice President of Sara Lee from January 2005 to January 2007. Prior to joining Sara Lee, Mr. Fraleigh was employed by General Motors Corporation (automobile manufacturer) 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 for PepsiCo, Inc. from 1999 to 2001.

B. Thomas Hansson, Age 47. Senior Vice President, Strategy and Corporate Development of Sara Lee Corporation since January 2007. Prior to joining Sara Lee, Mr. Hansson was employed by Booz Allen Hamilton (consulting firm) from 1987 to January 2007. Mr. Hansson was elected a partner of Booz Allen Hamilton in 1995 and he was based in London from 1995 to 1997 and in Los Angeles from 1997 until he joined Sara Lee.

Vincent H.A.M. Janssen, Age 54. Chief Executive Officer of Sara Lee International’s Household and Body Care division since 2003 and Senior Vice President of Sara Lee Corporation since January 2004. He also is a member of the Sara Lee International Board of Management. Mr. Janssen joined Sara Lee in 1992 as Director of Marketing and Sales for Douwe Egberts, the Netherlands. Since that time, he has held positions of increasing responsibility, including president of Douwe Egberts, the Netherlands, and Regional Vice President of Coffee and Tea with responsibility for all coffee and tea activities in the Netherlands, the U.K., Australia and Poland as well as the worldwide out-of-home coffee systems business.

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L.M. (Theo) de Kool, Age 54. 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.

James W. Nolan, Age 51. Executive Vice President of Sara Lee Corporation since January 2007 and Chief Executive Officer of Sara Lee Foodservice since February 2005; Senior Vice President of Sara Lee from February 2005 to January 2007. Mr. Nolan served as Executive Vice President, U.S. Operations of PepsiAmericas, Inc. (beverage manufacturer), 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. (food and beverage manufacturer) 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.

Adriaan Nühn, Age 54. Executive Vice President of Sara Lee since March 2003. Mr. Nühn joined Sara Lee International in 1990 and has held various positions of increasing responsibility, most recently as Chief Executive Officer of Sara Lee International from July 2003 to July 2007. In connection with the restructuring of Sara Lee International, Mr. Nühn transitioned out of his position as Chief Executive Officer of that business, but will remain employed with Sara Lee until December 31, 2007. Mr. Nühn 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.

Frank van Oers, Age 48. Chief Executive Officer of Sara Lee International’s Coffee & Tea division since July 2006 and Senior Vice President of Sara Lee Corporation since August 2006. From April 2005 through July 2006, Mr. van Oers served as Chief Financial Officer and a member of the Board of Management of Sara Lee International, and from September 2003 to April 2005, he served as Regional Vice President and President of Douwe Egberts Coffee Systems International. Mr. van Oers joined Sara Lee in 1996 and has served in various positions of increasing responsibility, including as President of Douwe Egberts Coffee Systems Netherlands B.V. from 2000 to 2003, General Manager of Operations for Douwe Egberts Netherlands from 1999 to 2000, and Vice President of Finance, Administration and Information Technology of Douwe Egberts Netherlands from 1996 to 1999. Before joining Sara Lee, van Oers held various positions with Chicopee B.V., a subsidiary of Johnson & Johnson, and was an auditor with Coopers & Lybrand and Deloitte Haskins & Sells.

Roderick A. Palmore, Age 55. 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.

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 “Investor Relations—Financial/SEC Information”) as soon as reasonably practicable after such documents are electronically filed with or furnished to the SEC. These documents also are made available to read and copy at

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the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the Public Reference Room by contacting the SEC at 1-800-SEC-0330. Reports filed with the SEC are also made available on its Web site at www.sec.gov.

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 “About Sara Lee-Corporate Governance”

• Corporate Governance Guidelines, under “About Sara Lee-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 “About Sara Lee-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 “About Sara Lee-Board of Directors-Committee Charters”

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

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, at 3500 Lacey Road, Downers Grove, Illinois, 60515-5424 or by calling (630) 598-8100.

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 2007 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 2007 Annual Report to Stockholders are filed as Exhibit 13 to this Form 10-K, and full copies of Sara Lee’s 2007 Annual Report to Stockholders and Proxy Statement will be available, on or about September 14, 2007, on Sara Lee’s Web site, www.saralee.com, under “Investor Relations—Financial/SEC Information.”

Financial Information About Industry Segments

For financial reporting purposes, Sara Lee’s businesses are divided into six business segments: North American Retail Meats, North American Retail Bakery, Foodservice, International Beverage, International Bakery, and Household and Body Care. 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 Sara Lee’s 2007 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 International, B.V., a Netherlands limited liability company headquartered in Utrecht, the Netherlands (“Sara Lee International”). Sara Lee International has responsibility for managing the International Beverage, International Bakery and worldwide Household and Body Care divisions of Sara Lee. Household and Body Care’s operations are conducted by subsidiaries in over 40 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 2007 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 2007 Annual Report to Stockholders is incorporated herein by reference.

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Item 1A. 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 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. The risk factors described below could have a material impact on Sara Lee’s business.

Our inability to achieve targeted cost reductions or realize anticipated benefits from the conversion to a common IT system could adversely affect our results of operations and financial condition.

Our future success and earnings growth depends in part on our ability to be efficient in the manufacture and distribution of our products in highly competitive markets. In order to improve operational efficiency, we have launched a number of continuous improvement initiatives and have invested significant amounts to implement a common information technology system across the organization. Our failure to generate significant cost savings and margin improvement through our continuous improvement initiatives could adversely affect our profitability and weaken our competitive position. If the transition to our common information technology system is disruptive to our business or if the system does not perform as we anticipate, we could experience transaction errors, processing inefficiencies, and the loss of sales and customers, which could cause our business and results of operations to suffer.

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

The branded food industry is intensely competitive. To maintain and increase our existing market in this highly competitive environment, we may need to increase expenditures for promotions and advertising and introduce 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 increasing 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.

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

We use many different types of commodities and inputs in our various businesses, including beef, pork, coffee, wheat, cotton, corn, corn syrup, soybean and corn oils, butter and sugar. The commodities we use may experience price volatility due to factors beyond our control, such as 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 directly impact our business by increasing the costs of raw material used to make our products and the costs of

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inputs to manufacture, package and ship our products. In the past few years, the prices of commodities and other inputs have increased significantly. We use commodity financial instruments to hedge some commodity prices, but not at significant levels. If, as a result of consumer sensitivity to pricing or otherwise, we are not able to increase our product prices to significantly offset increased raw material costs, or if unit volume sales are significantly reduced due to price increases, it could have a negative impact on our profitability.

We must leverage our brand value propositions to remain competitive and maintain profitability during economic downturns.

In many product categories, we compete not only with other widely advertised branded products, but also with private label products that generally are sold at lower prices. Consumers’ willingness to purchase our products will depend upon our ability to offer brand value propositions—selling products that consumers perceive as higher value at economical prices. This depends on maintaining consumer perception that our products are of a higher quality and provide higher value than less expensive alternatives. If the difference in quality between our brands and private label products narrows, or if there is a perception of such a narrowing, consumers may choose not to buy our products at prices that are profitable for us. Furthermore, in periods of economic uncertainty, consumers tend to purchase more private label or other economy brands, which could result in a reduction in the volume of sales of our higher margin products, or a shift in our product mix to lower margin offerings.

We own a significant amount of intangible assets and goodwill, and we may be required to take additional write downs in connection with impairment of some of these intangible assets or goodwill.

As of June 30, 2007, Sara Lee had $1.04 billion of intangible assets, including trademarks, customer relationships, software and certain contractual relationships, and $2.72 billion of goodwill, which together comprise 31% of our total assets. Of the intangible assets, 92% have a finite life and are amortized over a weighted average life of 20 years and 8% 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 with indefinite lives that are not subject to amortization is conducted at least once a year, and also if events or changes in circumstances indicate that the carrying value of the goodwill or intangible assets may not be recoverable. As part of our annual impairment review in fiscal 2007, we also concluded that it was reasonably likely (i.e., more than remote but less than probable) that certain other reporting units may become impaired in future periods. These reporting units include a bakery operation in Europe with $454 million of goodwill, a meat business in Mexico with $23 million of goodwill and a beverage business in Poland with $70 million of goodwill. Although management does not believe that impairment is probable, if the performance of these reporting units and brands does not continue to improve, a future impairment could result for a portion or all of this goodwill. Future events, including declines in operating or cash flows, adverse changes in the business climate or changes in the expectation that an asset group will be disposed of prior to the end of its useful life, may require us to recognize increased levels of future intangible amortization, or incur charges to recognize the impairment of certain other assets.

If our food products become adulterated or misbranded, we might need to recall those items and may experience product liability claims if consumers are injured.

Most of our products are sold for human consumption or personal use, which involves a number of legal risks. We may need to recall some of our products if they become adulterated or misbranded. We also may be subject to liability if our products or operations violate applicable laws or regulations or in the event our products cause injury, illness or death. A widespread product recall could result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our products, which could have a material adverse effect on our

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business results and the value of our brands. We also could be the target of claims that our advertising is false or deceptive under U.S. federal and state laws as well as foreign laws, including consumer protection statutes of some states. Even if a product liability or consumer fraud claim is unsuccessful or is without merit, the negative publicity surrounding such assertions regarding our products could adversely affect our reputation and brand image.

Our pension costs could substantially increase as a result of volatility in the equity markets or interest rates, or as a result of how the terms of two plans are interpreted.

As of the latest measurement date in March 2007, the projected benefit obligation of Sara Lee’s defined benefit pension plans was $4.93 billion and total assets in such plans were $4.35 billion. 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, in April 2006 we signed an agreement with the trustees of the Sara Lee U.K. Pension Plan in which we agreed to fully fund certain U.K. pension obligations by 2015. Under the terms of this agreement, Sara Lee will increase annual pension funding of the U.K. plans to 32 million British pounds through 2015; however, the annual payments may be increased 20% if Sara Lee ceases to maintain specified credit ratings. After 2015, Sara Lee has agreed to keep the U.K. plan fully funded in accordance with local funding standards. 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. A significant increase in our pension funding requirements could have a negative impact on our results of operations.

In addition, Sara Lee is a participating employer in several pension plans for the benefit of certain Food and Beverage employees. In fiscal 2007, the Pension Benefit Guaranty Corporation determined that one of these plans, the American Bakers Association Retirement Plan, is a multi-employer plan rather than an aggregate of single-employer pension plans. If this determination ultimately is upheld, Sara Lee could be required to contribute toward the total underfunding in the Plan, rather than just fund benefits for Sara Lee employee-participants. With respect to a second plan, Sara Lee’s status in a multi-employer pension plan is under review to determine whether Sara Lee’s restructuring of a plant triggered partial withdrawal liability with respect to the pension plan. See Note 16, “Contingent Liabilities,” to the Consolidated Financial Statements contained in Sara Lee’s 2007 Annual Report to Stockholders for more information regarding these two matters. Sara Lee is vigorously defending its rights in both situations; however, an unfavorable outcome with respect to one or both plans could have a negative impact on our results of operations.

The global nature of our business creates volatility in our 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 dispositions, and the portion of the income of foreign subsidiaries that we expect to remit to the U.S. We have disposed of several significant businesses in the past two years, which could increase our ongoing tax rate. In particular, the spin-off of our Branded Apparel Americas/Asia business on September 5, 2006 could increase the effective tax rate of Sara Lee’s remaining business. Our branded apparel business historically has had a lower effective tax rate than the remainder of our businesses and generated a significant amount of operating cash flow. The elimination of this cash flow has required us, and will continue to require us, to remit a greater portion of foreign earnings to the U.S. than we have historically, which has resulted in higher levels of tax expense and cash taxes paid.

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Changes in our relationships 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 and the rise in hard discounters in Europe. 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.

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. Several prominent issues in the United States and Europe have been concerns relating to “mad cow” disease, foot-and-mouth disease and the avian flu. 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 North American meats business. Outbreaks of livestock disease may also result in import and export restrictions.

New or more stringent governmental regulations could adversely affect our business.

Food production and marketing are highly regulated by a variety of federal, state, local and foreign agencies. Changes in laws or regulations that impose additional regulatory requirements on us, such as recent requirements regarding the labeling of trans-fat content, could increase our cost of doing business or restrict our actions, causing our results of operations to be adversely affected. In addition, food safety practices and procedures in the meat processing industry recently have been subject to more intense scrutiny and oversight and future outbreaks of diseases among cattle, poultry or pigs could lead to further governmental regulation. Increased governmental regulation resulting in changes in industry practices could increase our costs and reduce our margins.

We are 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 2007, we generated approximately 71% of our operating segment income outside of the United States. In addition, 61% of our total assets are located outside of the United States and we use non-U.S. third-party suppliers for inventory and distribution services. 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;

• 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

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• 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.

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

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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.

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 1B. Unresolved Staff Comments

None.

Item 2. Properties

Sara Lee’s corporate and North American headquarters are located in approximately 625,000 square feet of leased facilities in and around Chicago, Illinois. In addition, Sara Lee operates more than 300 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.

Food & Beverage (includes North American Retail Meats and North American Retail Bakery)
United States facilities (31 states)	approximately 12.4 million square feet
International facilities	approximately 2.2 million square feet in Mexico
Foodservice
United States facilities (18 states)	approximately 3.2 million square feet
International facilities	no facilities
Sara Lee International (includes International Beverage, International Bakery and Household and Body Care)
United States facilities (1 state)	approximately 20,000 square feet
International facilities	approximately 9.3 million square feet

Australia	Hungary	Poland
Belgium	India	Portugal
Brazil	Indonesia	South Africa
China	Italy	Spain
Czech Republic	Kenya	Thailand
Denmark	Malaysia	United Kingdom
France	The Netherlands	Zambia
Germany	Philippines	Zimbabwe
Greece

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Item 3. Legal Proceedings

As described in Sara Lee’s annual report on Form 10-K for the fiscal year ended July 1, 2006, 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 May 13, 2003. Subsequently, seven other putative class action lawsuits were filed in the United States District Court for the Northern District of Illinois, Eastern Division. The complaints name Sara Lee, C. Steven McMillan, former Chairman, President and Chief Executive Officer of Sara Lee, and Lambertus M. de Kool, Executive Vice President and Chief Financial and Administrative Officer of Sara Lee, as defendants. Each of the foregoing actions were consolidated in a single proceeding captioned In re Sara Lee Securities Litigation on July 18, 2003. Judge Charles R. Norgle appointed co-lead plaintiffs and class counsel, who filed their consolidated amended complaint on January 20, 2004. The complaint alleges a class period from August 1, 2002 to April 24, 2003, and asserts that the defendants misstated or omitted material adverse facts regarding Sara Lee’s business, 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 class to purchase the stock at artificially inflated prices. The plaintiffs seek relief under Sections 10(b) and 20(a) of the United States Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

On October 19, 2005, defendants filed a motion for judgment on the pleadings based on the plaintiffs’ failure to adequately plead loss causation. The motion was fully briefed at the end of November 2005. On July 10, 2006, the motion was granted and the case has been dismissed. The Court found that plaintiffs failed to allege and prove that defendants’ misrepresentations and other fraudulent conduct proximately caused plaintiffs’ economic losses. On July 24, 2006, plaintiffs moved for relief from final judgment and for leave to amend the consolidated amended complaint under Federal Rules 15(a), 59(e), and 60(b). Sara Lee believes that the allegations stated in the proposed amended consolidated amended complaint remain without merit. Briefing on plaintiffs’ motion was completed on October 13, 2006, and the Company is awaiting the Court’s ruling. The Company intends to continue to defend the action vigorously.

Also as described in Sara Lee’s annual report on Form 10-K for the fiscal year ended July 2, 2005, 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. These purported derivative actions have been consolidated. The Company believes that plaintiffs’ allegations are without merit and intends to continue to defend this action vigorously.

In addition, Sara Lee is a participating employer in the American Bakers Association Retirement Plan (the “ABA Plan”). In 1979, the Pension Benefit Guaranty Corporation (the “PBGC”) determined that the ABA Plan was an aggregate of single-employer pension plans, rather than a multiple-employer pension plan for purposes of Title IV of ERISA. Under the express terms of the ABA Plan’s governing documents, Sara Lee’s contributions can only be used to pay for benefits of its own employee-participants. In May 2006, the Company filed suit against the ABA Plan and its Trustees in the United States District Court for the District of Columbia, alleging that the ABA Plan’s terms had been violated by allowing other participating employers to maintain negative trust balances (thus using Sara Lee’s and other participating employer’s assets to pay the benefits of other employer’s employee-participants). The suit is styled: Sara Lee Corporation, et al. v. ABA Plan, et al.; Case No. 06-CV-0819-HHK. Sara Lee is one of the primary employer-participants in the ABA Plan. Currently, it is our belief that other employer participants have an underfunding liability to the ABA Plan of approximately $60 million. It is uncertain whether such employer participants with negative balances will be able to fund their liabilities.

On August 8, 2006, the PBGC published its determination on the status of the ABA Plan, and rescinded its 1979 determination, in which it found the ABA Plan to be an aggregate of single-employer plans. Sara Lee

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amended its initial complaint to add a cause of action against the PBGC challenging the legality of the PBGC’s 2006 determination. The PBGC’s position, if upheld, will inure to its financial benefit by allowing the PBGC to avoid assuming a substantial portion of the ABA Plan’s underfunding – such underfunding under the PBGC’s 2006 determination may now be shared by remaining ABA Plan employer-participants with positive balances, which includes Sara Lee.

The PBGC moved for summary judgment on Sara Lee’s claim. Argument on the PBGC’s motion has been heard and we await a decision by the District of Columbia Court. Until a ruling is issued, no discovery or other briefing is likely to occur. Sara Lee believes that the PBGC’s 2006 determination is without merit and will continue to vigorously defend the position that Sara Lee is responsible only for the obligations related to its current and former employees who participate in the ABA Plan.

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.

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PART II

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

Sara Lee’s common stock is traded on the exchanges listed on the cover page of this Annual Report on Form 10-K. The principal market in the United States for the common stock is the New York Stock Exchange (“NYSE”). As of August 4, 2007, Sara Lee had approximately 75,150 holders of record of its common stock. Information regarding market prices on the NYSE 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 Sara Lee’s 2007 Annual Report to Stockholders is incorporated herein by reference.

For information regarding securities authorized for issuance under Sara Lee’s equity compensation plans, see Item 12.

Issuer Purchases of Equity Securities

The following table outlines Sara Lee’s purchases of shares of its common stock during the fourth quarter of fiscal 2007.

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 1, 2007 to May 5, 2007	0		—	0	55,589,988
May 6, 2007 to June 2, 2007	7,372,650	$	17.56	7,372,650	48,217,338
June 3, 2007 to June 30, 2007	3,699,200	$	17.80	3,699,200	44,518,138
Total	11,071,850		—	11,071,850	—

(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. On August 4, 2005, Sara Lee announced that its Board of Directors had increased the number of shares authorized under this program by an additional 100 million shares. There is no expiration date for the program.

Item 6. Selected Financial Data

Financial information for Sara Lee for the five fiscal years ended June 30, 2007 that appears under the heading “Financial Summary” in Sara Lee’s 2007 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 Sara Lee’s 2007 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 Sara Lee’s 2007 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 Sara Lee’s 2007 Annual Report to Stockholders is incorporated herein by reference.

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Item 8. Financial Statements and Supplementary Data

The Consolidated Financial Statements and related Notes to Financial Statements of Sara Lee contained in Sara Lee’s 2007 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

(a) 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 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”). Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective.

(b) 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 in Sara Lee’s 2007 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.

(c) Changes in Internal Control over Financial Reporting

During the Company’s fiscal quarter ended June 30, 2007, except as described below, there were no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

During the fourth quarter of fiscal 2007, the Company utilized external third party resources to augment its internal control over financial reporting with respect to the accounting for income taxes. The Company plans to continue to use these external resources during fiscal 2008 until such time as the Company completes its review of the design of its control procedures in this area to identify process improvements and technology solutions.

Also during the fourth quarter of fiscal 2007, the Company continued to prepare to implement SAP software as a common platform on a global basis. As appropriate, the Company is modifying the design and documentation of its internal control processes and procedures to reflect these changes and to supplement and complement existing internal control over financial reporting.

Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers, and Corporate Governance

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.” Information with respect to Sara Lee’s executive officers is contained at the end of Part I of this Annual Report under the caption “Executive Officers of Sara Lee.”

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 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 “About Sara Lee-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 will not be deemed to be filed with the SEC.

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.

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Equity Compensation Plan Information Table

The following table provides information as of June 30, 2007 regarding the number of shares of Sara Lee common stock that may be issued under Sara Lee’s equity compensation plans. On September 5, 2006, Sara Lee spun off its branded apparel business into an independent publicly traded company named Hanesbrands Inc. In connection with the spin-off, Sara Lee’s Compensation and Employee Benefits Committee adjusted the number of shares and the exercise price, if applicable, of all outstanding options, performance stock units and restricted stock units so that the economic value of each outstanding award after the spin-off was equivalent to the economic value of that award before the spin-off. The same adjustment was made to the number of shares available under each existing plan and any share limits contained in the plans. The adjustments were made in accordance with the terms of the relevant equity plan. The number of shares and the exercise price of options, performance stock units and restricted stock units reported in the table, and the share numbers in the narrative related to the table, reflect these adjustments.

Plan Category (1)	(a)  Number of securities  to be issued upon exercise of outstanding options, warrants and rights		(b) Weighted-average  exercise price of outstanding options,  warrants and rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	47,508,662	(2)(3)		$18.627(2)(3)	83,663,759	(4)
Equity compensation plans not approved by security holders (5)	1,970,550	(6)	$	19.3153	6,589,676	(7)
Total	49,479,212				90,253,435

(1) The table does not include information regarding Sara Lee’s 401(k) Plan. As of June 30, 2007, there were approximately 17.2 million shares of common stock held in this plan.

(2) Includes options issued in connection with Sara Lee’s acquisition of The Earthgrains Company. Upon consummation of this acquisition, all outstanding options to purchase common stock of Earthgrains were converted into options to purchase shares of Sara Lee common stock; however Sara Lee cannot grant any additional awards under the Earthgrains plan. As of June 30, 2007, there were outstanding options to acquire 138,079 shares of Sara Lee common stock, at a weighted average exercise price of $8.72, which had been converted from the Earthgrains options.

(3) Includes 6,132,047 restricted stock units that were outstanding on June 30, 2007 under Sara Lee’s 1995 and 1998 Long-Term Incentive Stock Plans. Restricted stock unit awards do not have an exercise price because their value is dependent upon the achievement of certain performance goals or continued employment over a period of time, and may be settled only for shares of common stock on a one-for-one basis. Also includes 31,208 phantom stock units outstanding under Sara Lee’s deferred compensation program for non-employee directors, which units may be settled only for shares of common stock on a one-for-one basis. Accordingly, the restricted stock units and the phantom stock units have been disregarded for purposes of computing the weighted-average exercise price.

(4) Of these shares, 42,245,221 shares are available for issuance under the 1998 Long-Term Incentive Stock Plan (the “1998 Plan”) and 40,656,000 shares are available for issuance under the 2002 Long-Term Incentive Stock Plan (the “2002 Plan”). Both the 1998 Plan and the 2002 Plan authorize grants in the form of stock options, stock appreciation rights, restricted stock, restricted stock units or a combination thereof. The maximum number of shares of common stock that may be granted as restricted stock or issued in settlement of restricted stock units or upon the exercise of incentive stock options is 23.23 million shares under the 1998 Plan and 22.1 million shares under the 2002 Plan. Under both the 1998 Plan and the 2002 Plan, the maximum number of shares of common stock that may be issued to any person in any calendar year is 2.3 million shares, excluding any awards made with respect to the calendar year in which such person begins service as the Chief Executive Officer of Sara Lee, in which case the maximum number of

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shares is 4.6 million shares. The number of shares remaining available for future issuances assumes that, with respect to outstanding restricted stock units, the vesting criteria will be achieved at the maximum level.

(5) The following plans have not been approved by Sara Lee stockholders: Employee Option & Share Plan for Employees in the Netherlands, Executive Deferred Compensation Plan, U.K. Savings Incentive Plan, Share 2000 Global Stock Plan and Share 2003 Global Stock Plan. The material terms of each of these plans are described following the table.

(6) Includes 1,648,906 shares to be issued upon exercise of outstanding options and rights granted under the Employee Option & Share Plan for Employees in the Netherlands, Share 2000 Global Stock Plan and Share 2003 Global Stock Plan. Also includes 321,644 phantom stock units outstanding under the Executive Deferred Compensation Plan, which units may be settled only for shares of common stock on a one-for-one basis.

(7) Consists of shares remaining available for future awards under the Employee Option & Share Plan for Employees in the Netherlands and the U.K. Savings Incentive Plan.

Sara Lee has obtained stockholder approval of all of its significant equity compensation plans. Set forth below is a brief description of the material features of each Sara Lee equity compensation plan that was adopted without the approval of Sara Lee’s stockholders and that was in effect as of June 30, 2007.

Employee Option & Share Plan for Employees in the Netherlands (the “Netherlands Plan”)

The terms of the Netherlands Plan were designed to conform to generally accepted criteria for broad-based employee stock plans in the Netherlands, including the legal, tax and accounting regulations of the Netherlands. Under the Plan, Sara Lee employees who have been employed in the Netherlands for at least 12 months may purchase immediately vested, five-year options to acquire shares of Sara Lee common stock. The purchase price of each option is equal to 7.5% of the aggregate exercise price of the option, which equals the value of the option for Netherlands tax purposes. The exercise price of each option granted under the Netherlands Plan equals 100% of the fair market value of Sara Lee common stock on the date of grant. An option may be exercised at any time during the five years following the grant date. The Plan specifies a minimum and a maximum number of options that a participant may purchase in any year.

The Netherlands Plan authorizes the issuance of up to 5.8 million shares of common stock and, as of June 30, 2007, approximately 4.9 million shares remained available for future awards.

Executive Deferred Compensation Plan

Sara Lee’s Executive Deferred Compensation Plan permits officers of Sara Lee to defer salary, bonus and long-term incentive payments into either an interest bearing or stock equivalent account. Deferrals in the stock equivalent account are valued as if each deferral were invested in Sara Lee common stock as of the deferral date, and are paid out only in shares of Sara Lee common stock, on a one-for-one basis, at future dates specified by the participant. Deferrals in the interest account accrue interest at a rate set at the beginning of each plan year based on the current cost to Sara Lee of issuing five-year maturity debt. Stock equivalent units do not have voting rights, but are credited with dividend equivalents. The dividend equivalents are paid when shares are issued to the participant. As of June 30, 2007, there were 321,644 stock equivalents outstanding in the stock equivalent accounts under this Plan.

U.K. Savings Incentive Plan (the “U.K. SIP”)

The U.K. SIP, which was approved by the Board of Directors in June 2002, provides Sara Lee employees located in the United Kingdom the opportunity to purchase Sara Lee common stock on a pre-tax basis through payroll deductions. Under the U.K. SIP, there are four three-month offering periods during each calendar year, beginning on the first Monday (or next succeeding business day, if Monday is a holiday) of each February, May, August and November. For each offering period, participating employees purchase shares of Sara Lee common

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stock at a price equal to the lower of the fair market value of Sara Lee common stock on the first day of the offering period or the fair market value of Sara Lee common stock on the last day of the offering period. The fair market value is equal to the average of the highest and lowest quoted selling price per share of Sara Lee common stock on the New York Stock Exchange. For each six shares purchased by a participant, Sara Lee will make a matching contribution of one share to the participant’s account. So long as shares are held in a U.K. SIP account, dividends paid on such shares will be used by the trustee to purchase additional shares of common stock for the participants’ accounts. Participants may sell or transfer shares purchased in the U.K. SIP at any time; however, matching shares contributed by Sara Lee cannot be sold or transferred for three years.

The U.K. SIP authorizes the issuance of up to 1,742,400 shares of common stock and, as of the end of fiscal year 2007, 1,650,500 shares remain to be issued under the plan. The shares purchased by participants under the U.K. SIP come from authorized but unissued shares of Sara Lee common stock. The U.K. SIP is administered by the Compensation and Employee Benefits Committee of Sara Lee’s Board of Directors, which may delegate its responsibilities to Sara Lee’s Senior Vice President of Human Resources. In the event of a change of control (as defined in the Plan) of Sara Lee, the trustee of the Plan may vote or exchange Sara Lee shares held in the Plan for the acquisition consideration, on the same terms as other Sara Lee stockholders.

Share 2000 Global Stock Plan

The Share 2000 Global Stock Plan (the “Share 2000 Plan”) is a broad-based plan adopted in 1997 to enable Sara Lee to make a special stock option grant to its non-officer employees world-wide. On August 28, 1997 (after giving affect to the December 1998 stock-split), Sara Lee granted an option to purchase no more than 200 shares of common stock each, at an exercise price of $20.53 per share, under the Share 2000 Plan to approximately 60,000 Sara Lee employees. The exercise price of the options equaled the average of the high and low sales price of a share of Sara Lee common stock on the New York Stock Exchange on the date of grant. The options generally vested over three years after the date of grant. No additional options may be granted under the Share 2000 Plan and, on August 28, 2007, almost all of the outstanding options granted under the Share 2000 Plan expired.

Share 2003 Global Stock Plan

The Share 2003 Global Stock Plan (the “Share 2003 Plan”) is a broad-based plan that was adopted in 2000 to enable Sara Lee to make a special stock option grant to managerial level Sara Lee employees resident in various countries, excluding the United States. On April 27, 2000, Sara Lee granted an option to purchase 116 shares of common stock, at an exercise price of $15.47 per share, under the Share 2003 Plan to approximately 15,000 Sara Lee employees. The exercise price of the options equaled the average high and low sales prices of a share of Sara Lee common stock on the New York Stock Exchange on the date of grant per share. The options generally vest over three years after the date of grant and expire on April 27, 2010. As of June 30, 2007, no additional options may be granted under the Share 2003 Plan and 164,669 shares remain reserved for issuance upon exercise of outstanding options.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information set forth in the Proxy Statement under the headings “Corporate Governance–Director Independence” and “Corporate Governance–Review of Transactions with Related Persons” 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.

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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 Sara Lee’s 2007 Annual Report to Stockholders are incorporated herein:

(a) 1. Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Income—Years ended July 2, 2005, July 1, 2006 and June 30, 2007

Consolidated Balance Sheets—July 1, 2006 and June 30, 2007

Consolidated Statements of Common Stockholders’ Equity—For the period July 3, 2004 to June 30, 2007

Consolidated Statements of Cash Flows—Years ended July 2, 2005, July 1, 2006 and June 30, 2007

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.

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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.

August 29, 2007

SARA LEE CORPORATION
By:	/s/    RICHARD A. HOKER
	Richard A. Hoker
	Controller (Principal Accounting Officer)

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 August 29, 2007.

Signature	Title
/s/    BRENDA C. BARNES         Brenda C. Barnes	Chairman of the Board and Chief Executive Officer (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/    RICHARD A. HOKER         Richard A. Hoker	Controller (Principal Accounting Officer)
/s/    CHRISTOPHER B. BEGLEY         Christopher B. Begley	Director
/s/    VIRGIS W. COLBERT         Virgis W. Colbert	Director
/s/    JAMES S. CROWN         James S. Crown	Director
/s/    LAURETTE T. KOELLNER         Laurette T. Koellner	Director
/S/    WILLIE D. DAVIS         Willie D. Davis	Director
/s/    CORNELIS J.A. VAN LEDE         Cornelis J.A. van Lede	Director
/s/    SIR IAN M.G. PROSSER         Sir Ian M.G. Prosser	Director
/s/    ROZANNE L. RIDGWAY         Rozanne L. Ridgway	Director
/s/    JONATHAN P. WARD         Jonathan P. Ward	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 June 28, 2007
(4)	1. 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. Supplemental Benefit Plan, as amended	Exhibit 10.5 to Report on Form 10-K for Fiscal Year ended June 28, 1997
	*2. Performance-Based Annual Incentive Plan	Exhibit A to Proxy Statement dated September 20, 1995
	*3. 1995 Long-Term Incentive Stock Plan, as amended	Exhibit 10.16 to Report on Form 10-K for Fiscal Year ended June 28, 1997
	*4. 1995 Non-Employee Director Stock Plan, as amended	Exhibit 10(8) to Report on Form 10-K for Fiscal Year ended July 3, 1999
	*5. 1998 Long-Term Incentive Stock Plan	Exhibit A to Proxy Statement dated September 21, 1998
	*6. 2002 Long-Term Incentive Stock Plan	Exhibit A to Proxy Statement dated September 25, 2002
	*7. Executive Deferred Compensation Plan	Exhibit 10.12 to Report on Form 10-K for Fiscal Year ended July 3, 1999
	*8. Second Amendment to Executive Deferred Compensation Plan	Exhibit 10.13 to Report on Form 10-K for Fiscal Year ended July 1, 2000
	*9. Severance Plans For Corporate Officers, as amended	Exhibit 10.11 to Report on Form 10-K for Fiscal Year ended July 1, 2006
	*10. 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
	*11. U.K. Savings Incentive Plan	Exhibit 10.18 to Report on Form 10-K for Fiscal Year ended June 28, 2003
	*12. Share 2000 Global Stock Plan	Exhibit 10.27 to Report on Form 10-K for Fiscal Year ended June 29, 2002
	*13. 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
	*14. 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

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		Incorporation by Reference
	*15. Termination Agreement dated June 15, 2007 between Adriaan Nühn and Sara Lee Corporation and Sara Lee/DE N.V.
	*16. 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
	*17. Sara Lee Corporation 1999 Non-Employee Director Stock Plan, as Amended and Restated
	*18. Retention & Recognition Program for Individuals at “C” Level and Below	Exhibit 10.32 to Report on Form 10-K for Fiscal Year ended July 2, 2005
	*19. Long-Term Restricted Stock Unit Grant program for Fiscal Years 2006 – 2008	Exhibit 10.34 to Report on Form 10-K for Fiscal Year ended July 2, 2005
	*20. Form of 1998 Long-Term Incentive Stock Plan Stock Option Grant Notice and Agreement	Exhibit 10.36 to Report on Form 10-K for Fiscal Year ended July 2, 2005
	*21. Form of Restricted Stock Unit Grant Notice & Agreement for FY 2006-08 LTRSU	Exhibit 10.35 to Report on Form 10-K for Fiscal Year ended July 2, 2005
	*22. Long-Term Restricted Stock Unit Grant program for Fiscal Years 2007-2009	Exhibit 10.31 to Report on Form 10-K for Fiscal Year ended July 1, 2006
	*23. Form of Restricted Stock Unit Grant Notice & Agreement for FY 07-09 LTRSU	Exhibit 10.32 to Report on Form 10-K for Fiscal Year ended July 1, 2006
	*24. FY2007 Form of Stock Option Grant Notice and Agreement	Exhibit 10.33 to Report on Form 10-K for Fiscal Year ended July 1, 2006
(12)	1. Computation of Ratio of Earnings to Fixed Charges
(13)	Portions of Sara Lee’s 2007 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
(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.

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Report of Independent Registered Public Accounting Firm on

Financial Statement Schedule

To the Board of Directors and Stockholders of

Sara Lee Corporation

Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated August 27, 2007 appearing in the 2007 Annual Report to Stockholders 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 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

August 27, 2007

Schedule II

Sara Lee Corporation and Subsidiaries

VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended July 2, 2005, July 1, 2006 and June 30, 2007

	Balance at Beginning of Year		Provision Charged to Costs and Expenses		Write-offs(1) /Allowances Taken			Other Additions (Deductions)			Balance at End of Year
(in millions)
For the Year Ended July 2, 2005
Allowances for bad debts	$	40	$	8	$	(15	)	$	—		$	33
Other receivable allowances		44		47		(51	)		3			43
Total	$	84	$	55	$	(66	)	$	3		$	76
For the Year Ended July 1, 2006
Allowances for bad debts	$	33	$	4	$	(10	)	$	1		$	28
Other receivable allowances		43		43		(46	)		(6	)		34
Total	$	76	$	47	$	(56	)	$	(5	)	$	62
For the Year Ended June 30, 2007
Allowances for bad debts	$	28	$	—	$	(3	)	$	5		$	30
Other receivable allowances		34		28		(24	)		16			54
Total	$	62	$	28	$	(27	)	$	21		$	84

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

EX-3.(B)

Exhibit (3)(b)

SARA LEE CORPORATION

BYLAWS,

AS AMENDED JUNE 28, 2007

TABLE OF CONTENTS

	Page
ARTICLE I — Meetings of Stockholders	1
Section 1 — Annual Meeting	1
Section 2 — Special Meetings	1
Section 3 — Place of Meetings	3
Section 4 — Notice of Meeting	3
Section 5 — Record Date	4
Section 6 — Quorum	4
Section 7 — Organization of Meeting	4
Section 8 — Voting	5
Section 9 — Voting of Stock by Certain Holders	5
Section 10 — Nominations and Proposals by Stockholders	5
ARTICLE II — Board of Directors	8
Section 1 — Function and Number of Directors	8
Section 2 — Election	8
Section 3 — Chairman	9
Section 4 — Vacancies	9
Section 5 — Annual Meeting	9
Section 6 — Regular Meetings	9
Section 7 — Special Meetings	9
Section 8 — Emergency Meetings	9
Section 9 — Notice	9

Section 10 — Quorum; Voting	10
Section 11 — Informal Actions	10
Section 12 — Participation in Meetings by Conference Telephone	10
Section 13 — Compensation	10
Section 14 — Ratification	10
ARTICLE III — Committees of the Board of Directors	11
Section 1 — Standing Committees and Membership	11
Section 2 — Selection; Term; Removal	11
Section 3 — Meetings; Quorum; Minutes	11
Section 4 — Authority of Committees	11
Section 5 — Executive Committee	12
Section 6 — Other Committees	12
ARTICLE IV — Officers	12
Section 1 — Officers	12
Section 2 — Election and Qualification	12
Section 3 — The Chairman of the Board	12
Section 4 — The President	13
Section 5 — The Vice Chairman and Vice Presidents	13
Section 6 — Chief Financial Officer	13
Section 7 — General Counsel	13
Section 8 — Secretary	13
Section 9 — Treasurer	13
Section 10 — Controller	14

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Section 11 — Assistant Secretaries and Assistant Treasurers	14
ARTICLE V — Indemnification and Advance of Expenses for Directors and Officers	14
Section 1 — Right to Indemnification	14
Section 2 — Change in Control	14
Section 3— Time for Payment Enforcement	15
Section 4 — General	15
Section 5 — Effective Time	15
Section 6 — Further Action	16
ARTICLE VI — Fiscal Year and Dividends	16
Section 1 — Fiscal Year	16
Section 2 — Dividends	16
ARTICLE VII — Corporate Documents	16
Section 1 — Execution of Negotiable Instruments	16
Section 2 — Execution of Other Documents	16
ARTICLE VIII — Seal	17
Section 1 — Contents	17
Section 2 — Affixing Seal	17
ARTICLE IX — Stock	17
Section 1 — Certificates	17
Section 2 — Transfers	17
Section 3 — Registration	18
Section 4 — Record Date	18

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Section 5 — Recognition of Holder	18
Section 6 — Replacement Certificates	18
Section 7 — Fractional Stock; Issuance of Units	18
ARTICLE X — Waiver of Notice	19
ARTICLE XI—Making, Altering or Repealing Bylaws	19
Section 1 — Power Vested in Board of Directors	19
Section 2 — Scope of Bylaws	19

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ARTICLE I

Meetings of Stockholders

Section 1. Annual Meeting. An annual meeting of the stockholders of the Corporation for the election of directors and the transaction of any other business as may properly come before the meeting shall be held on the last Thursday in October in each year at a time fixed by the Board of Directors (or if such day is a legal holiday, then on the next succeeding business day which is not a holiday) or on any other business day set by the Board of Directors during the 31-day period beginning with the 15th day before the last Thursday in October. Any business of the Corporation may be transacted at any such annual meeting without being specifically designated in the notice of such meeting, except such business as is specifically required by the Maryland General Corporation Law (the “MGCL”) to be stated in such notice.

Section 2. Special Meetings. (a) General. The Board of Directors, the Chairman of the Board of Directors or the President may call a special meeting of the stockholders. Subject to subsection (b) of this Section 2, a special meeting of stockholders shall also be called by the Secretary of the Corporation upon the written request of the stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.

(b) Stockholder Requested Special Meetings.

(1) Any stockholder of record seeking to have stockholders request a special meeting shall, by sending written notice to the Secretary (the “Record Date Request Notice”) by registered mail, return receipt requested, request the Board of Directors to fix a record date to determine the stockholders entitled to request a special meeting (the “Request Record Date”). The Record Date Request Notice shall set forth the purpose of the meeting and the matters proposed to be acted on at it, shall be signed by one or more stockholders of record as of the date of signature (or their duly authorized agents), shall bear the date of signature of each such stockholder (or duly authorized agent) and shall set forth all information relating to each such stockholder that must be disclosed in solicitations of proxies for election of directors in an election contest (even if an election contest is not involved), or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-11 thereunder. Upon receiving the Record Date Request Notice, the Board of Directors may fix a Request Record Date. The Request Record Date shall not precede and shall not be more than 10 days after the close of business on the date on which the resolution fixing the Request Record Date is adopted by the Board of Directors. If the Board of Directors, within 10 days after the date on which a valid Record Date Request Notice is received, fails to adopt a resolution fixing the Request Record Date and make a public announcement of such Request Record Date, the Request Record Date shall be the close of business on the 10th day after the date on which such Record Date Request Notice is received by the Secretary.

(2) In order for any stockholder to request a special meeting, one or more written requests for a special meeting signed by stockholders of record (or their duly authorized agents) as of the Request Record Date entitled to cast not less than a majority (the “Special Meeting Percentage”) of all of the votes entitled to be cast at such meeting (the “Special Meeting Request”) shall be delivered to the Secretary. In addition, the Special Meeting Request shall set forth the purpose of the meeting and the matters

proposed to be acted on at it (which shall be limited to the matters set forth in the Record Date Request Notice received by the Secretary), shall bear the date of signature of each such stockholder (or duly authorized agent) signing the Special Meeting Request, shall set forth the name and address, as they appear in the Corporation’s stock ledger, of each stockholder signing such request (or on whose behalf the Special Meeting Request is signed) and the class and number of shares of stock of the Corporation which are owned of record and beneficially by each such stockholder, shall be sent to the Secretary by registered mail, return receipt requested, and shall be received by the Secretary within 60 days after the Request Record Date. Any requesting stockholder may revoke his, her or its request for a special meeting at any time by written revocation delivered to the Secretary.

(3) The Secretary shall inform the requesting stockholders of the reasonably estimated cost of preparing and mailing the notice of meeting (including the Corporation’s proxy materials). The Secretary shall not be required to call a special meeting upon stockholder request and such meeting shall not be held unless, in addition to the documents required by paragraph (2) of this Section 2(b), the Secretary receives payment of such reasonably estimated cost prior to the mailing of any notice of the meeting.

(4) Except as provided in the next sentence, any special meeting shall be held at such date and time as may be designated by the Chairman of the Board of Directors, Board of Directors or President, whoever has called the meeting. In the case of any special meeting called by the Secretary upon the request of stockholders (a “Stockholder Requested Meeting”), such meeting shall be held at such date and time as may be designated by the Board of Directors; provided, however, that the date of any Stockholder Requested Meeting shall be not more than 90 days after the record date for such meeting (the “Meeting Record Date”); and provided further that if the Board of Directors fails to designate, within 10 days after the date that a valid Special Meeting Request is actually received by the Secretary (the “Delivery Date”), a date and time for a Stockholder Requested Meeting, then such meeting shall be held at 2:00 p.m. local time on the 90^th day after the Meeting Record Date or, if such 90^th day is not a Business Day (as defined below), on the first preceding Business Day; and provided further that in the event that the Board of Directors fails to designate a place for a Stockholder Requested Meeting within 10 days after the Delivery Date, then such meeting shall be held at the principal executive office of the Corporation. In fixing a date for any special meeting, the Chairman of the Board of Directors, Board of Directors or the President, whoever has called the meeting, may consider such factors as he, she or it deems relevant within the good faith exercise of business judgment, including, without limitation, the nature of the matters to be considered, the facts and circumstances surrounding any request for meeting and any plan of the Board of Directors to call an annual meeting or a special meeting. In the case of any Stockholder Requested Meeting, if the Board of Directors fails to fix a Meeting Record Date that is a date within 30 days after the Delivery Date, then the close of business on the 30^th day after the Delivery Date shall be the Meeting Record Date.

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(5) If at any time as a result of written revocations of requests for the special meeting, stockholders of record (or their duly authorized agents) as of the Request Record Date entitled to cast less than the Special Meeting Percentage shall have delivered and not revoked requests for a special meeting, the Secretary may refrain from mailing the notice of the meeting or, if the notice of the meeting has been mailed, the Secretary may revoke the notice of the meeting at any time before 10 days before the meeting if the Secretary has first sent to all other requesting stockholders written notice of such revocation and of the intention to revoke the notice of the meeting. Any request for a special meeting received after a revocation by the Secretary of a notice of a meeting shall be considered a request for a new special meeting.

(6) The Chairman of the Board of Directors, the President or the Board of Directors may appoint regionally or nationally recognized independent inspectors of elections to act as the agent of the Corporation for the purpose of promptly performing a ministerial review of the validity of any purported Special Meeting Request received by the Secretary. For the purpose of permitting the inspectors to perform such review, no such purported request shall be deemed to have been received by the Secretary until the earlier of (i) five Business Days after receipt by the Secretary of such purported request and (ii) such date as the independent inspectors certify to the Corporation that the valid requests received by the Secretary represent at least a majority of the issued and outstanding shares of stock that would be entitled to vote at such meeting. Nothing contained in this paragraph (6) shall in any way be construed to suggest or imply that the Corporation or any stockholder shall not be entitled to contest the validity of any request, whether during or after such five Business Day period, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation).

(7) For purposes of these Bylaws, “Business Day” shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of Illinois are authorized or obligated by law or executive order to close.

Section 3. Place of Meetings. Except as otherwise provided in Section 2(b)(4) of this Article I, all meetings of the stockholders shall be held at such place as set by the Board of Directors.

Section 4. Notice of Meeting. Not less than 10 days nor more than 90 days before the date of each stockholders’ meeting, the Secretary shall give, to each stockholder entitled to vote at the meeting and to each other stockholder entitled to notice of the meeting, written notice stating the time and place of the meeting and, in the case of a special meeting or if otherwise required by the MGCL, the purpose for which the meeting is called, either by mail, by presenting it to the stockholder personally, by leaving it at the stockholder’s residence or usual place of business or by transmitting the notice to the stockholder in any other manner permitted by Maryland law. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage thereon prepaid, addressed to the stockholder at the stockholder’s address as it appears on the records of the Corporation. Pursuant to Section 7 of this Article I, a meeting of stockholders convened on the date for which it was called may be adjourned from time to time and place to place without further notice to a date not more than 120 days after the original record date.

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Section 5. Record Date. Except as provided in Section 2(b)(4) of this Article I, the record date for the determination of the stockholders entitled to notice of and to vote at any meeting of stockholders and for other purposes shall be the date fixed by the Board of Directors pursuant to Article IX, Section 4 of these Bylaws.

Section 6. Quorum. At any meeting of stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting shall constitute a quorum. If, however, such quorum shall not be present at any meeting of the stockholders, the chairman of the meeting shall have the power to adjourn the meeting from time to time to a date not more than 120 days after the original record date without further notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified.

The stockholders present either in person or by proxy, at a meeting which has been duly called and convened, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.

Section 7. Organization of Meeting. At every meeting of stockholders, the Chairman of the Board, if there be one, shall serve as chairman of the meeting and conduct the meeting or, in the case of a vacancy in the office or absence of the Chairman of the Board, one of the following officers present shall serve as chairman of the meeting and conduct the meeting in the order stated: the President, the Vice Chairman of the Board, if there be one or, if there be more than one, the Vice Chairmen in order of seniority, the Executive Vice Presidents in their order of seniority, or, in the absence of such officers, a chairman chosen by the stockholders entitled to cast a majority of the votes which all stockholders present in person or by proxy are entitled to cast, shall serve as chairman. The Secretary, or, in the Secretary’s absence, an Assistant Secretary, or in the absence of both the Secretary and Assistant Secretaries, a person appointed by the chairman of the meeting shall serve as secretary of the meeting. In the event that the Secretary presides at a meeting of the stockholders, an Assistant Secretary shall record the minutes of the meeting. The order of business and all other matters of procedure at any meeting of stockholders shall be determined by the chairman of the meeting. The chairman of the meeting may prescribe such rules, regulations and procedures and take such action as, in the discretion of such chairman, are appropriate for the proper conduct of the meeting, including, without limitation, (a) restricting admission to the time set for the commencement of the meeting; (b) limiting attendance at the meeting to stockholders of record of the Corporation entitled to vote at the meeting, their duly authorized proxies or other such persons as the chairman of the meeting may determine; (c) limiting participation at the meeting on any matter to stockholders of record of the Corporation entitled to vote on such matter, their duly authorized proxies or other such persons as the chairman of the meeting may determine; (d) limiting the time allotted to questions or comments by participants; (e) determining when the polls should be opened and closed for voting; (f) maintaining order and security at the meeting; (g) removing any stockholder who refuses to comply with meeting procedures, rules or guidelines as established by the chairman of the meeting; (h) recessing or adjourning the meeting to a later date, time and place announced at the meeting by the chairman; and (i) complying with any state and local laws and regulations concerning safety and security. Unless otherwise determined by the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

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Section 8. Voting. Except as otherwise provided by the MGCL or the charter of the Corporation (the “Charter”), at all meetings of the stockholders, each stockholder entitled to vote at such meeting shall be entitled to (a) one vote upon each matter submitted to a vote at such meeting for each share of common stock of the Corporation owned of record by such stockholder and (b) such voting rights, if any, as are provided in the Charter with respect to any series of preferred stock of the Corporation owned of record by such stockholder. A stockholder may vote the shares of stock owned of record by such stockholder either in person or by proxy. Every proxy shall be executed and dated by the stockholder of record or the duly authorized agent of such stockholder in any manner authorized by law. Each proxy shall be filed with the Secretary of the Corporation at or prior to the meeting. No proxy shall be valid more than 11 months after its date, unless otherwise provided in the proxy. A majority of all the votes cast at any meeting of stockholders at which a quorum is present shall be sufficient to approve any matter which may properly come before the meeting, unless the MGCL, or the Charter provides otherwise.

Section 9. Voting of Stock by Certain Holders. Notwithstanding any other provision of the Charter or these Bylaws, Title 3, Subtitle 7 of the Maryland General Corporation Law (or any successor statute) shall not apply to any acquisition by any person of shares of stock of the Corporation. This section may be repealed, in whole or in part, at any time, whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any prior or subsequent control share acquisition.

Section 10. Nominations and Proposals by Stockholders.

(a) Annual Meetings of Stockholders.

(1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation’s notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record both at the time of giving of notice provided for in this Section 10(a) and at the time of the annual meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 10(a).

(2) For nominations for election to the Board of Directors or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 10, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for action by the stockholders. Commencing with the 2007 annual meeting, to be timely, a stockholder’s notice shall set forth all information required under this Section 10 and shall be delivered to the Secretary at the principal executive office of the Corporation not earlier than the 150th day nor later than 5:00 P.M., Central Time, on the 120th day prior to the first anniversary of the date of mailing of the notice for the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is advanced or delayed by more than 30 days from the first anniversary of the date of the preceding year’s annual meeting, notice by the stockholder to be

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timely must be so delivered not earlier than the 150th day prior to the date of such annual meeting and not later than 5:00 P.M., Central Time, on the later of the 120th day prior to the date of such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of a postponement of the mailing of the notice for such annual meeting or of an adjournment or postponement of an annual meeting to a later date or time commence a new time period for the giving of a stockholder’s notice as described above. A stockholder’s notice to be proper must set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director (A) the name, age, business address and residence address of such person, (B) the class, series and number of any shares of stock of the Corporation that are beneficially owned or owned of record by such person, (C) the date or dates such shares were acquired and the investment intent of such acquisition, and (D) all other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest (even if an election contest is not involved), or is otherwise required, in each case pursuant to Regulation 14A (or any successor provision) under the Exchange Act and the rules thereunder (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and any Stockholder Associated Person (as defined below), individually or in the aggregate, including any anticipated benefit to the stockholder or the Stockholder Associated Person therefrom; (iii) as to the stockholder giving the notice and any Stockholder Associated Person, the class, series and number of all shares of stock of the Corporation which are owned by such stockholder and by such Stockholder Associated Person, if any, and the nominee holder for, and number of, shares owned beneficially but not of record by such stockholder and by any such Stockholder Associated Person; (iv) as to the stockholder giving the notice and any Stockholder Associated Person covered by clauses (ii) or (iii) of this paragraph (2) of this Section 10(a), the name and address of such stockholder, as they appear on the Corporation’s stock ledger, and current name and address, if different, and of such Stockholder Associated Person; and (v) to the extent known by the stockholder giving the notice, the name and address of any other stockholder supporting the nominee for election or reelection as a director or the proposal of other business on the date of such stockholder’s notice.

(3) Notwithstanding anything in this subsection (a) of this Section 10 to the contrary, in the event the number of directors to be elected to the Board of Directors is increased, and there is no public announcement of such action or specifying the size of the increased Board of Directors at least 100 days prior to the first anniversary of the date of mailing of the notice for preceding year’s annual meeting, a stockholder’s notice required by this Section 10(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if the notice is delivered to the Secretary at the principal executive office of the Corporation not later than 5:00 P.M., Central Time, on the tenth day immediately following the day on which such public announcement is first made by the Corporation.

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(4) For purposes of this Section 10, “Stockholder Associated Person” of any stockholder shall mean (i) any person controlling, directly or indirectly, or acting in concert with, such stockholder, (ii) any beneficial owner of shares of stock of the Corporation owned of record or beneficially by such stockholder and (iii) any person controlling, controlled by or under common control with such Stockholder Associated Person.

(b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected (i) pursuant to the Corporation’s notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any stockholder of the Corporation who is a stockholder of record both at the time of giving of notice provided for in this Section 10(b) and at the time of the special meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 10(b). In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by paragraph (a)(2) of this Section 10 shall be delivered to the Secretary at the principal executive office of the Corporation not earlier than 5:00 P.M., Central Time, on the 150^th day prior to such special meeting and not later than 5:00 P.M., Central Time, on the later of the 120^th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of a postponement or adjournment of a special meeting to a later date or time commence a new time period for the giving of a stockholder’s notice as described above.

(c) General.

(1) If information submitted pursuant to this Section 10 by any stockholder proposing a nominee for election as a director or any proposal for other business at a meeting of stockholders shall be inaccurate to any material extent, such information may be deemed not to have been provided in accordance with this Section 10. Upon written request by the Secretary, the Board of Directors or any committee thereof, any stockholder proposing a nominee for election as a director or any proposal for other business at a meeting of stockholders shall provide, within seven Business Days of delivery of such request (or such other period as may be specified in such request), written verification, satisfactory in the discretion of the Board of Directors, any committee thereof or any authorized officer of the Corporation, to demonstrate the accuracy of any information submitted by the stockholder pursuant to this Section 10. If a stockholder fails to provide such written verification within such period, the information as to which written verification was requested may be deemed not to have been provided in accordance with this Section 10.

(2) Only such persons who are nominated in accordance with the procedures set forth in this Section 10 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 10. The chairman of the meeting shall have the power and duty to

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determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 10 and, if any proposed nomination or business is not in compliance with this Section 10, to declare that such defective nomination or proposal be disregarded.

(3) For purposes of this Section 10, (a) the “date of mailing of the notice” shall mean the date of the proxy statement for the solicitation of proxies for election of directors and (b) “public announcement” shall mean disclosure (i) in a press release either transmitted to the principal securities exchange on which shares of the Corporation’s common stock are traded or reported by a recognized news service or (ii) in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to the Exchange Act.

(4) Notwithstanding the foregoing provisions of this Section 10, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 10. Nothing in this Section 10 shall be deemed to affect any right of a stockholder to request inclusion of proposals in, nor the right of the Corporation to omit a proposal from, the Corporation’s proxy statement pursuant to Rule 14a-8 (or any successor provision) under the Exchange Act.

ARTICLE II

Board of Directors

Section 1. Function and Number of Directors. The business and affairs of the Corporation shall be managed under the direction of a Board of Directors. The majority of the Board of Directors may, from time to time, fix or alter the number of directors; provided, however, that the number of directors comprising the Board of Directors shall be no less than three or more than 25. The tenure of office of any director shall not be affected by any alteration in the number of directors. Any director may resign at any time upon written notice to the Chairman or the Secretary.

Section 2. Election. The directors shall be elected at the annual meeting of the stockholders and shall hold office until the next annual meeting of the stockholders and until their successors are elected and qualify. Each director shall be elected by a majority of the votes cast with respect to the director at any meeting for the election of directors at which a quorum is present; provided that if, as of a date that is fourteen (14) days in advance of the date the Corporation files its definitive proxy statement with the Securities and Exchange Commission (regardless of whether or not the proxy statement thereafter is revised or supplemented), the number of nominees exceeds the number of directors to be elected, then each director shall be elected by a plurality of the votes cast in person or by proxy at any such meeting. For purposes of this Section 2, a “majority” of the votes cast means that the number of votes “for” a director nominee exceeds the number of votes “against” that director nominee.

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Section 3. Chairman. The Chairman of the Board of Directors shall preside at all meetings of the Board of Directors, and, in his or her absence, the Vice Chairman or, if there be more than one, the Vice Chairmen in order of seniority, and, in absence of any such Vice Chairman, a director designated by the Board of Directors.

Section 4. Vacancies. If for any reason any or all the directors cease to be directors, such event shall not terminate the Corporation or affect these Bylaws or the powers of the remaining directors hereunder (even if fewer than three directors remain). Except as may be provided by the Board of Directors in setting the terms of any class or series of preferred stock, any vacancy on the Board of Directors may be filled only by a majority of the remaining directors, even if the remaining directors do not constitute a quorum. Any director elected to fill a vacancy shall serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies.

Section 5. Annual Meeting. An annual meeting of the Board of Directors shall be held at the same place and on the same day as and immediately before or after the annual meeting of stockholders for the purpose of electing the officers of the Corporation, the appointment of the committees of the Board of Directors and for the transaction of any other business.

Section 6. Regular Meetings. Regular meetings of the Board of Directors shall be held at such places and times as may be fixed from time to time by the Board of Directors, without call or notice.

Section 7. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, any Vice Chairman or the President, upon their own motions, or by the Secretary upon the written request of a majority of the directors. At least two days’ written notice shall be given of all special meetings.

Section 8. Emergency Meetings. Emergency meetings of the Board of Directors may be called at any time by the Chairman of the Board after notice by personal delivery or by telephone, facsimile transmission or courier to each director at his or her business or residence address. At least four hours’ notice shall be given of all emergency meetings. The quorum for an emergency meeting shall be three-quarters of all of the directors.

Section 9. Notice. Notice of any special meeting of the Board of Directors shall be delivered personally or by telephone, electronic mail, facsimile transmission, United States mail or courier to each director at his or her business or residence address. Notice of any special meeting by personal delivery, by telephone or a facsimile transmission shall be given at least two days prior to the meeting. Notice of any special meeting by mail shall be given at least five days prior to the meeting and shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. Telephone notice shall be deemed to be given when the director is personally given such notice in a telephone call to which he or she is a party. Facsimile transmission notice shall be deemed to be given upon completion of the transmission of the message to the number given to the Corporation by the director and receipt of a completed answer-back indicating receipt. Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be stated in the notice, unless specifically required by statute or these Bylaws.

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Section 10. Quorum; Voting. At any and all regular and special meetings of the Board of Directors, one-third of the duly elected and qualified directors shall constitute a quorum, unless there are only three directors, in which case two directors shall constitute a quorum; but if at any meeting of the Board of Directors there be less than a quorum present, the directors at the meeting may, without further notice, adjourn the same, from time to time, for a period not exceeding 10 days at any one time, until a quorum is in attendance. The action of a majority of the directors present at a meeting at which a quorum is present is the action of the Board of Directors.

Section 11. Informal Actions. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting, if a consent in writing or by electronic transmission to such action is given by all the members of the Board of Directors or such committee, as the case may be, and filed with the minutes of proceedings of the Board of Directors or such committee.

Section 12. Participation in Meetings by Conference Telephone. Members of the Board of Directors or of any committee thereof may participate in a meeting of the Board of Directors or any committee by means of conference telephone or similar communications equipment if all persons participating in the meeting can hear each other. Such participation shall constitute presence in person at such meeting.

Section 13. Compensation. Directors shall be paid such compensation, including retainers and fees for attendance at meetings of the Board of Directors and its committees, as shall be determined from time to time by the vote of the Board of Directors. No compensation for service as a director shall be paid to officers or employees of the Corporation or any subsidiary of the Corporation.

Section 14. Ratification. Any transaction questioned in any stockholders’ derivative proceeding on the ground of lack of authority, defective or irregular execution, adverse interest of director, officer or stockholder, non-disclosure, miscomputation, or the application of improper principles or practices of accounting may be ratified before or after judgment, by the Board of Directors (excluding any director who is a party to such proceeding) or by the stockholders if less than a quorum of directors is qualified; and, if so ratified, shall have the same force and effect as if the questioned transaction had been originally duly authorized, and said ratification shall be binding upon the Corporation and its stockholders and shall constitute a bar to any claim or execution of any judgment in respect of such questioned transaction.

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ARTICLE III

Committees of the Board of Directors

Section 1. Standing Committees and Membership. The standing committees of the Board of Directors shall be the Executive Committee, Finance Committee, Audit Committee, Compensation and Employee Benefits Committee, Corporate Governance, Nominating and Policy Committee and Qualified Legal Compliance Committee. Subject to these Bylaws, the number of members of each committee shall be fixed by the Board of Directors from time to time by resolution. The members of each such committee shall be elected by the Board of Directors from among the members of the Board of Directors; provided, however, that in the absence of a member or members at a meeting of a standing committee, the members present at any meeting of such committee (whether or not a quorum is present) may appoint directors who are not members of such committee to act in the place or places of such absent member or members in order to constitute a quorum at such meeting. A director may concurrently serve on more than one of such committees. Only a director who is an “independent director,” determined in accordance with the Listed Company Manual of the New York Stock Exchange, shall be eligible to serve as a member of the Audit Committee, the Compensation and Employee Benefits Committee or the Corporate Governance, Nominating and Policy Committee. The membership of the Qualified Legal Compliance Committee shall consist of the members of the Audit Committee of the Board and the chairperson of the Corporate Governance, Nominating and Policy Committee.

Section 2. Selection; Term; Removal. The members of each of the standing committees of the Board of Directors and the chairperson thereof shall be elected at the regular annual meeting of the Board of Directors, or at such other time as may be fixed from time to time by the Board of Directors, and shall hold office until the next such regular annual meeting of the Board of Directors and until their respective successors are elected and qualified; provided, however, that vacancies during the year on any standing committee shall be filled by the Board of Directors. The chairperson of the Corporate Governance, Nominating and Policy Committee shall serve as the chairperson of the Qualified Legal Compliance Committee.

Section 3. Meetings; Quorum; Minutes. Each standing committee of the Board of Directors shall from time to time meet at such time and place as shall be directed by the chairperson of each committee and, in his or her absence, by the Chairman of the Board of Directors, or in his or her absence, by the President. A majority of all the members of each such committee (including directors appointed to act at any meeting of a standing committee in the place of absent members thereof as provided in Section 1 above) shall constitute a quorum for that committee meeting and the action of such quorum shall be taken as the action of the committee. Each committee shall keep minutes of its proceedings and actions and shall submit a report thereof at the next regular meeting of the Board of Directors. The Executive Committee, Finance Committee and Qualified Legal Compliance Committee can only act upon the vote of a majority of all members of each such committee.

Section 4. Authority of Committees. No committee shall have the authority to perform any act which may not be delegated to a committee under the MGCL. If the Board of Directors has given general authorization for the issuance of stock providing for or establishing a method or procedure for determining the maximum number of shares to be issued, a committee of the Board, in

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accordance with that general authorization or any stock option or other plan or program adopted by the Board, may fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors under Sections 2-203 and 2-204 of the MGCL. The Board of Directors shall have the power at any time to change the members of any committee so designated, to fill vacancies or to dissolve any such committee.

Section 5. Executive Committee. The Executive Committee shall consist of not less than three directors and shall perform such duties and exercise such powers as may be directed or delegated by the Board of Directors. Between meetings of the Board of Directors, the Executive Committee may exercise any and all powers of the Board of Directors in the management of the business and affairs of the Corporation with the same effect as if exercised by the Board of Directors, and the exercise of such powers shall be conclusive of the fact that the Executive Committee had full authority to exercise such powers, subject, however, to the limitations of authority specifically set forth in Section 4 of this Article III of these Bylaws.

Section 6. Other Committees. The powers and duties of committees other than the Executive Committee shall be determined from time to time by the Board of Directors.

ARTICLE IV

Officers

Section 1. Officers. The officers of the Corporation shall include the Chairman of the Board of Directors, President, such Vice Chairmen of the Board of Directors, Executive Vice Presidents, Senior Vice Presidents and Vice Presidents, as the Board of Directors shall from time to time elect, Chief Financial Officer, General Counsel, Secretary, Treasurer and Controller and such Assistant Secretaries and Assistant Treasurers or other officers as the Chairman or the Board of Directors shall from time to time, appoint or elect with such powers and duties as the Chairman or the Board may deem necessary or appropriate. In addition, the Chairman or the Vice Chairman of the Board, or the President of the Corporation may appoint as officers of the Corporation employees with executive authority within an operating division of the Corporation and may designate for such officers titles that appropriately reflect their positions and responsibilities.

Section 2. Election and Qualification. Except as otherwise provided herein, the officers shall be elected by, and shall hold office at the pleasure of, the Board of Directors. None of the officers, except the Chairman of the Board and any Vice Chairman need be members of the Board of Directors. Any two of the offices set forth in Section 1 of this Article IV may, at the discretion of the Board of Directors, be held by the same person, except that a person may not serve concurrently as both the President and a Vice President of the Corporation and the Chairman of the Board may hold only the additional office of President.

Section 3. The Chairman of the Board. The Chairman of the Board of Directors shall be the Chief Executive Officer of the Corporation and, subject to the direction of the Board of Directors and to the committees of the Board of Directors, shall have general charge of the management of the business and affairs of the Corporation, unless another individual is designated by the Board of Directors as Chief Executive Officer of the Corporation. The Chairman shall preside at all meetings of the stockholders and of the Board of Directors.

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Section 4. The President. The President shall perform such duties as may be assigned to him or her by the Board of Directors or the Chairman of the Board.

Section 5. The Vice Chairman of the Board and Vice Presidents. Each Vice Chairman, Executive Vice President, Senior Vice President or Vice President shall perform such duties and have such authority as shall be assigned to him or her by the Chairman of the Board, subject to the approval of the Board of Directors. In the absence of the Chairman of the Board, the Vice Chairman, or if there be more than one, the Vice Chairmen in order of seniority, shall become the acting Chairman of the Board and, while retaining his or her duties as Vice Chairman, shall assume the duties of the Chairman of the Board, unless the Board of Directors shall otherwise determine.

Section 6. Chief Financial Officer. The Chief Financial Officer shall have general supervision of all financial matters relating to the Corporation (including its subsidiaries and affiliates), including the raising of capital, financial risk management and review of the Corporation’s financial condition. The Chief Financial Officer shall perform such other duties and have such authority as may be assigned to her or him by the Board of Directors, the Chairman of the Board or the President.

Section 7. General Counsel. The General Counsel shall have general supervision of all legal matters relating to the Corporation (including its subsidiaries and affiliates), including litigation by and against the Corporation, preparation of documents relating to transactions to which the Corporation is a party, advice to the Board of Directors and management concerning legal issues affecting the Corporation and retention of counsel to represent the Corporation. The General Counsel shall perform such other duties and have such authority as may be assigned to her or him by the Board of Directors, the Chairman of the Board or the President.

Section 8. Secretary. The Secretary shall issue or cause to be issued notices for all meetings of the stockholders or Board of Directors and its committees, shall keep minutes of such meetings and shall have charge of the seal and corporate books and records. The Secretary shall supervise all matters relating to the Securities and Exchange Commission and the stock exchanges on which the securities of the Corporation are listed. The Secretary shall perform such other duties as pertain to his or her office as the Chairman of the Board may direct. In the absence of the Secretary from any meetings of the stockholders or Board of Directors, the record of the proceedings shall be kept and authenticated by such person as may be appointed for that purpose by the chairman of the meeting.

Section 9. Treasurer. The Treasurer shall have charge and custody of the funds, securities and other valuable effects of the Corporation (including its subsidiaries and affiliates) and shall keep full and accurate accounts of all receipts and disbursements. The Treasurer shall deposit all moneys to the credit of the Corporation in such banks or depositories as he or she shall designate subject to the control of the Board of Directors or the Finance Committee. The Treasurer shall cause disbursement of the funds of the Corporation as may be required in the conduct of business. Whenever required to do so, the Treasurer shall render an account of all his or her transactions as Treasurer of the Corporation.

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Section 10. Controller. The Controller shall be the Chief Accounting Officer of the Corporation and shall be responsible for maintenance of the financial records and the internal accounting systems of the Corporation (including its subsidiaries and affiliates) and for the conduct and surveillance of general corporate accounting procedures. The Controller shall supervise the preparation of the Corporation’s financial statements and other financial reports and statistics as required by management and governmental agencies and shall perform such other duties as the Chief Financial Officer of the Corporation or the Board of Directors may from time to time prescribe.

Section 11. Assistant Secretaries and Assistant Treasurers. The Assistant Secretaries and Assistant Treasurers shall perform such duties as the Board of Directors or the Secretary or Treasurer, respectively, may from time to time prescribe or require. In the absence or disability of the Secretary or Treasurer, the Assistant Secretaries or Assistant Treasurers, as the case may be, shall, in the order of their seniority or as otherwise directed by the Board of Directors, perform the duties and have the powers of the Secretary and Treasurer, respectively. The Board of Directors may, in its discretion, confer upon any Assistant Secretary or Assistant Treasurer any power of the Secretary or Treasurer, respectively, to be exercised jointly with or independently of the Secretary or Treasurer, respectively, as the Board of Directors may from time to time determine.

ARTICLE V

Indemnification and Advance of Expenses

for Directors and Officers

Section 1. Right to Indemnification. To the maximum extent permitted by Maryland law in effect from time to time, the Corporation shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any individual who is a present or former director or officer of the Corporation or a subsidiary thereof and who is made a party to the proceeding by reason of his or her service in that capacity or (b) any individual who, while a director or officer of the Corporation and at the request of the Corporation, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his or her service in that capacity. The Corporation may, with the approval of its Board of Directors, provide such indemnification and advance for expenses to a person who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation.

Section 2. Change in Control. In the event of a change in control of the Corporation, any person claiming a right to be indemnified or to an advance of expenses by the Corporation may have his right to be indemnified or to an advance of expenses and the extent of indemnification and advance of expenses to which he is entitled determined by independent legal counsel selected by a

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committee composed of all of the continuing directors, or in the event there are no continuing directors, by independent legal counsel selected by the person claiming indemnification or advance of expenses, with the approval of the chief executive officer of the Corporation, which approval will not be unreasonably withheld. As used in this section, “continuing director” shall mean a director who was a member of the Board of Directors prior to the change in control and who is not an Acquiring Person (as such term is defined in the Rights Agreement, dated March 26, 1998, between the Corporation and First Chicago Trust Company of New York, Rights Agent, as amended), and is not and was not an affiliate or associate of an Acquiring Person or a representative or nominee of an Acquiring Person or of any such affiliate or associate. As used in this Article V, “change in control” shall mean any change in the Board of Directors of the Corporation, resulting in continuing directors constituting less than a majority of the Board of Directors.

Section 3. Time for Payment Enforcement. Any indemnification, or payment of expenses in advance of the final disposition of any proceeding, shall be made promptly, and in any event within 60 days, upon the written request of the director or officer entitled to indemnification (the “Indemnified Party”). The right to indemnification and advance of expenses hereunder shall be enforceable by the Indemnified Party in any court of competent jurisdiction, if (i) the Corporation denies such request, in whole or in part, or (ii) no disposition thereof is made within 60 days. The Indemnified Party’s costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation.

Section 4. General. The indemnification and advance of expenses provided by this Article V (a) shall not be deemed exclusive of any other rights to which a person seeking indemnification or advance of expenses may be entitled under any law (common or statutory), or any agreement, vote of stockholders or disinterested directors or other provision that is not contrary to law, both as to action in his or her official capacity and as to action in another capacity while holding office or while employed by or acting as agent for the Corporation, (b) shall continue in respect of all events occurring while a person was a director or officer after such person has ceased to be a director or officer (including after a change in control of the Corporation), and (c) shall inure to the benefit of the estate, heirs, executors and administrators of such person. All rights to indemnification and advance of expenses hereunder shall be deemed to be a contract between the Corporation and each director or officer of the Corporation who serves or served in such capacity at any time while this Article V is in effect.

Section 5. Effective Time. This Article V shall be effective from and after the date of its adoption and shall apply to all proceedings arising prior to or after such date, regardless of whether relating to facts or circumstances occurring prior to or after such date. Neither the amendment nor repeal of this Article, nor the adoption or amendment of any other provision of the Charter or Bylaws inconsistent with this Article, shall apply to or affect in any respect the applicability of this Article with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.

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Section 6. Further Action. The Board of Directors may take such action as is necessary to carry out the provisions of this Article V and is expressly empowered to adopt, approve and amend from time to time such resolutions or contracts implementing such provisions or such further arrangements for indemnification or advance for expenses as may be permitted by law.

ARTICLE VI

Fiscal Year and Dividends

Section 1. Fiscal Year. The fiscal year of the Corporation shall end on the Saturday nearest to June 30 of each year and commence on the next day.

Section 2. Dividends. The Board of Directors from time to time may authorize and declare, in accordance with the provisions and limitations of the MGCL and of the Charter, dividends on the shares of the Corporation in cash, property or stock of the Corporation.

ARTICLE VII

Corporate Documents

Section 1. Execution of Negotiable Instruments. All checks, drafts, notes and other negotiable instruments relating to the Corporation or any division of the Corporation shall be reviewed and executed in accordance with the requirements set forth from time to time by the Chairman of the Board.

Section 2. Execution of Other Documents. (a) In General. Any contract, conveyance, lease, power of attorney and other agreement or document not in the ordinary course of business of the Corporation shall be signed by any one of the Chairman of the Board, the President, an Executive Vice President, a Senior Vice President or a Vice President. However, the Board of Directors may provide otherwise and, in certain circumstances set forth by the Board of Directors, the Finance Committee and the Audit Committee may provide otherwise. Subject to Section 2(b) of this Article VII, Section 1 of this Article VII and any policies of the Corporation, any contract, conveyance, lease, power of attorney or other agreement or document in the ordinary course of business may be signed by (i) any employee authorized by any policy of the Corporation in effect at the time the document is executed or (ii) any officer.

(b) Transaction Principally Involving Divisions. The chief executive officer or president of a division of the Corporation (as appointed by the Board of Directors, the Chairman or Vice Chairman of the Board or the President of the Corporation) may sign any contract, conveyance, lease, power of attorney or other agreement or document principally involving the division of which he or she is chief executive officer or president. An executive vice president, a senior vice president or a vice president of a division of the Corporation (as appointed by the Board of Directors, the Chairman or Vice Chairman of the Board or the President of the Corporation, or the chief executive officer or president of the division) may sign any contract, conveyance, lease, power of attorney or other agreement or document principally involving the division of which he or she is an executive vice president, senior vice president or vice president. If no such officers are appointed for a division, its managing director or general manager or other person exercising principal supervisory authority for the business and affairs of the division may sign such contract, conveyance, lease, power of attorney or other agreement or document.

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(c) Construction and Interpretation. Nothing in this Section 2 of this Article VII may be construed or interpreted to limit the authority of the Chairman of the Board under Section 1 of this Article VII.

(d) Execution in Multiple Capacities. No officer shall execute, acknowledge or verify any instrument or document on behalf of the Corporation in more than one capacity, if such instrument or document is required by law or by these Bylaws to be executed, acknowledged or verified by two or more officers.

ARTICLE VIII

Seal

Section 1. Contents. The seal of the Corporation shall be circular in form and include the words “SARA LEE CORPORATION - MARYLAND - 1941” inscribed thereon. The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof.

Section 2. Affixing Seal. Whenever the Corporation is permitted or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word “(SEAL)” adjacent to the signature of the person authorized to execute the document on behalf of the Corporation.

ARTICLE IX

Stock

Section 1. Certificates. The Corporation may issue some or all of the shares of any or all of the Corporation’s classes or series of stock without certificates if authorized by the Board of Directors. The issuance of shares in uncertificated form shall not affect shares already represented by a certificate until the certificate is surrendered to the Corporation. Unless otherwise determined by the Board of Directors, each stockholder, upon written request to the secretary of the Corporation, shall be entitled to a certificate or certificates which shall represent and certify the number of shares of each class of stock held by him in the Corporation. In the event that the Corporation issues shares of stock represented by certificates, such certificates shall be in such form as prescribed by the Board of Directors and contain the statements and information and be executed in the manner required by the MGCL. In the event that the Corporation issues shares of stock without certificates, the Corporation shall provide to the record holders of such shares, for so long as the same is required by the MGCL, a written statement of the information required by the MGCL to be included on stock certificates. There shall be no differences in the rights and obligations of stockholders based on whether or not their shares are represented by certificates.

Section 2. Transfers. All transfers of stock shall be made on the books of the Corporation, by the holder of the shares, in person or by his or her attorney, in such manner as the Board of Directors or any officer of the Corporation may prescribe and, if such shares are certificated, upon surrender of certificates duly endorsed. Notwithstanding the foregoing, transfers of shares of any class of stock will be subject in all respects to the charter of the Corporation and all of the terms and conditions contained therein.

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Section 3. Registration. The Board of Directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issuance and registration of shares of stock, and certificates representing the same, if any, including the appointment from time to time of transfer agents and registrars. An original or duplicate stock ledger containing the names and addresses of all stockholders and the number of shares of each class held by each stockholder shall be maintained by the transfer agent or agents of the Corporation, if any, at the principal business office of the Corporation or at such other office or agency as the Board of Directors, the Chairman of the Board or the President shall prescribe.

Section 4. Record Date. The Board of Directors shall have authority from time to time to fix a date of not less than 10 days and not more than 90 days preceding the date of any meeting of stockholders, any dividend payment date, or any date for the allotment of rights, as a record date for the determination of stockholders who are entitled to notice of or to vote at such meeting, or entitled to receive such dividend or rights, as the case may be. Only stockholders of record on such date shall be entitled to notice of or to vote at such meeting, or to receive such dividend or rights, as the case may be; provided, however, that unless the Board of Directors shall fix such date, such record date for determining the stockholders entitled to notice of and to vote at such meeting, or entitled to receive such dividend or rights, as the case may be, shall be the 30th day before the date of such stockholders’ meeting or the date of such dividend payment or allotment of rights.

Section 5. Recognition of Holder. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the MGCL.

Section 6. Replacement Certificates. Any officer of the Corporation may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, destroyed, stolen or mutilated, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, destroyed, stolen or mutilated; provided, however, if such shares have ceased to be certificated, no new certificate shall be issued unless requested in writing by such stockholder. Unless otherwise determined by an officer of the Corporation, the owner of such lost, destroyed, stolen or mutilated certificate or certificates, or his or her legal representative, shall be required, as a condition precedent to the issuance of a new certificate or certificates, to give the Corporation a bond in such sums as it may direct as indemnity against any claim that may be made against the Corporation.

Section 7. Fractional Stock; Issuance of Units. The Board of Directors may cause the Corporation to (i) issue fractional stock, (ii) eliminate a fractional interest by rounding off to a full share of stock, (iii) arrange for the disposition of a fractional share by the person entitled to it, (iv) pay cash for the fair value of a fractional share of stock as determined as of the time when the person entitled to receive it is determined, or (v) provide for the issuance of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the charter or these Bylaws, the Board of Directors may issue units consisting of different securities of the Corporation. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Board of Directors may provide that for a specified period securities of the Corporation issued in such unit may be transferred on the books of the Corporation only in such unit.

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ARTICLE X

Waiver of Notice

Whenever any notice of the time, place or purpose of any meeting of stockholders, Board of Directors or committee of the Board of Directors is required to be given under the MGCL, the Charter or these Bylaws, a waiver thereof in writing, signed by the person entitled to such notice and filed with the records of the meeting, whether before or after the holding thereof, or actual attendance at the meeting in person or, in the case of stockholders only, a duly executed and delivered proxy, shall satisfy any requirement for notice to such person.

ARTICLE XI

Making, Altering or Repealing Bylaws

Section 1. Power Vested in Board of Directors. The Board of Directors shall have the exclusive power and right to make, alter or repeal any or all Bylaws of the Corporation at any time or from time to time.

Section 2. Scope of Bylaws. The Bylaws may contain any provision not inconsistent with the MGCL or the Charter for the regulation and management of the affairs of the Corporation.

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EX-10.15

Exhibit 10.15

Termination Agreement

The undersigned:

1. the public limited company Sara Lee/DE N.V. with its corporate seat in Joure and having offices in Utrecht, hereinafter referred to as the “Company”, duly represented by C.J.A, van Lede, chairman of Supervisory Board of Company,

2. the public limited company Sara Lee Corporation, with its corporate seat in Downers Grove (IL), United States, hereinafter referred to as “SLC”, duly represented by Dan Ryan, Senior Vice President, Compensation and Benefits of SLC, and

3. Mr. A. Nühn, residing at Burgemeester s’Jacoblaan 24, 1401 BR Bussum, hereinafter referred to as the “Employee”

Whereas:

As a consequence of the restructuring plan of Company, the parties have reached the conclusion that respective employment agreements between the Employee and the Company and SLC should end in the manner provided in, and subject to, the terms of this agreement.

Have agreed as follows:

1. The Employee’s contract of employment with both the Company and SLC will terminate as of 1 January 2008 by mutual consent.

2. The employee shall resign as managing director (“bestuurder”) of the Company and other group companies (if any) as of 31 December 2007, which resignation the Company and other group companies shall accept. Immediately upon such resignation, the Company will secure the registration thereof with the Dutch Trade Register and any other relevant trade register abroad (if any).

3. Based on the information now available to the Company, the Employee will be discharged for his management of the Company and the group companies during the following Company shareholders meeting.

4. The Directors & Officers insurance will continue to apply for acts etc. of Employee until 31 December 2007.

5. In connection with the termination of the employment agreement the Company and SLC shall jointly pay to the Employee a redundancy payment of a gross amount of EUR 3,201,665. This amount will be allocated and paid by the Company and SLC on a pro rata basis in accordance with the split payroll that is currently in place.

6. The Company and SLC shall agree to pay this redundancy payment in accordance with the Employee’s reasonable preferences to minimise taxes and tax withholding, provided that this will be (i) in compliance with applicable laws and (ii) does not result in higher costs and/or a significant administrative bourdon for the Company and/or SLC. For the avoidance of doubt, it is agreed that a payment, partially or in whole, by way of a premium for an annuity (stamrecht) to a for that matter qualifying insurance company, including an incorporate annuity vehicle (“stamrecht-B.V.”), shall not be considered as causing a administrative bourdon for the Company and/or SLC.

7. The Company and SLC shall pay the redundancy payment by January 31, 2008 provided that the Employee’s payment instructions are received timely and are found to be in compliance with article 6 hereof.

8. On termination of the employment agreement, the Employee shall receive a correct final payment. All holidays accrued until the termination date will be considered used.

9. During a period of 26.75 months following the termination of the employment contract, the Employee shall continue to participate in the current Dutch Employee pension plans. During these 26.75 months the Company shall continue to pay the employer’s contribution to this pension plan. In case of continued participation by the Employee, the Employee shall continue to pay the employee contribution that is currently due by the Employee.

10. At any moment before or during the 26.75 months of continued pension participation, the Employee may elect to cancel such participation as per the end of a calendar month. If the Employee so elects, in lieu of continued participation in the pension plants as provided for in article 9 above he will be entitled to an additional gross payment by the Company. Such gross payment shall be equal to the value of Company’s contribution for the number of months that the Company would – in the absence of a cancellation as per this article 10 – have continued the Employee’s participation in the pension plans. The value of the Company’s contribution for 26.75 months is set at EUR 329,014. The amount so calculated shall be payable within 45 days of the cancellation or – if the cancellation is exercised before the end of the employment agreement - at the time of the payment of the redundancy payment as mentioned in article 7 hereof.

11. The Company and SLC shall pay the Employee a supplemental compensation payment contingent upon a successful completion of objectives related to the Sara Lee International reorganization in the amount of EUR 300,000. The bonus will be contingent upon the Central Works Council accepting the reorganization as described in the request for advice dated March 20 2007 by way of positive advice, or neutral/negative advice with acceptance of the decision of the Company to execute the reorganization as planned without a procedure before the “Business Chamber” of the Court of appeal of Amsterdam. If due, the bonus will be paid out to the Employee together with and at the time of the payment of the redundancy payment as mentioned in article 7 hereof.

2

12. The Employee will be released from his day-to-day duties and activities after the CWC Advice has been received in accordance with article 11 hereof and the restructuring has been completed. Such completion will take place promptly after the Company has made the decision (in accordance with article 11 hereof) to execute the reorganization. It is foreseen that the Employee’s duties and activities in connection with the completion of the restructuring will be limited to the immediate finalization of pending activities and the orderly transition of his tasks, projects and files that cannot be immediately finalized.

13. The Employee is allowed to use the company car until 8 January, 2008.

14. The Employee shall return the company car provided to him together with the car keys, vehicle registration certificates, and all other related accessories and documents, to the Company’s office not later than on 8 January, 2008.

15. The Employee shall not be entitled to any further award of RSUs during the remainder of his employment contract.

16. The Company and SLC will pay the Employee a bonus-payment for the active services period through, at the latest, 31 December 2007 of EUR 330,345 gross. Such bonus shall be paid out to the Employee together with and at the time of the payment of the redundancy payment as mentioned in article 7 hereof.

17. The Company shall contribute up to EUR 11,538 (exclusive of VAT), to the legal fees (including tax advice) incurred by the Employee in connection with the termination of the employment agreement. To that effect, the attorney of the Employee may make up a note of charges to that amount in the name of the Company, which note will then be paid by the Company.

18. Schedule 1 lists the stock options that have been granted to the Employee as of 1 June 2007. During the 26,75 month period after the termination date (the “Severance Period”), Employee’s stock options and RSUs (if any) shall continue to vest and shall also be eligible for exercise in accordance with the terms and conditions of the stock option agreements in force between Employee, the Company and SLC. During the Severance Period, Employee’s stock options shall continue to be governed by all of the terms and conditions of the stock option agreements in force between Employee, the Company and SLC. Following the end of the Severance Period, Employee shall be treated as a retired participant under the Company’s and/or SLC’s stock option plans. As a retired participant, Employee’s then outstanding stock options will continue to vest and may be exercised until the earlier of (i) the expiration date of the option or (ii) five years following the date on which the Severance Period ends; provided, however, that with respect to any options granted on or after 27 January 2000, such options may be exercised at any time prior to the expiration date of the option. Further details on the Employee’s retirement status and his right in connection therewith are shown in schedule 2 to this agreement.

3

19. The Employee is eligible for financial counseling services with the person or entity of his choosing during the Severance Period. The total value of these services is capped at € 32,729 and may be reimbursed to or paid on behalf of the Employee anytime during the 26.75 months following the termination of the Employee’s employment contract.

20. Each party shall refrain from disclosing this agreement, or any details of the negotiations that led to the agreement, in any way to any third party, except insofar as a disclosure obligation arises from a statutory provision. Parties may share this agreement with their respective counsel and attorneys, provided such counsel or attorney is bound by professional confidentiality obligations.

21. After the employment agreement ends, the current confidentiality clause and non-compete clause set out in the employment agreement will stay in force. Notwithstanding the foregoing, the Chief Executive Officer of SLC will promptly review any request by the Employee to waive the application of such non-compete clause with respect to a specific opportunity available to the Employee (provided that SLC shall be under no obligation to grant such a waiver).

22. In the event the Employee’s respective employment agreements with the Company and SLC shall end as a result of the death of the Employee, the termination conditions of this agreement shall not apply. In that case, all financial arrangements currently in place for the Employee’s surviving relatives (including but not limited to widows pension) shall in that case be applied as if this agreement were not entered into.

23. The Company and SLC will provide positive reference when so requested by the Employee.

24. After the signing of this termination agreement, the parties shall not exercise any rights against one another in connection with the employment agreement and the termination thereof or on any other basis, other than the rights and obligations under this agreement.

The parties hereby grant each other full and final discharge from any claims and obligations other than those referred to in this agreement.

25. The Employee will not disparage or criticize, orally or in writing, the business, products, policies, decisions, directors, officers or employees of the Company or any of its operating divisions or affiliates to any person. The Company will not disparage or criticize the Employee to any person or entity.

26. This agreement cannot be dissolved in part or in whole.

27. This termination agreement will be governed by the laws of the Netherlands. In relation to any legal action or proceedings arising out of or in connection with this agreement each of the parties submits to the exclusive jurisdiction of the competent courts in the Netherlands.

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in evidence whereof:

this agreement is signed in duplicate in the manner set out below.

/s/ C.J.A. van Lede

Sara Lee/DE NV

Date: 15 June 2007

/s/ Dan Ryan

Sara Lee Corporation

Date: 4 June 2007

/s/ Adriaan Nühn

Mr A. Nühn

Date: 15 June 2007

5

Schedule 2

Adriaan Nuhn

Term: 12/31/07

• January 27, 2005 grant of 30,996 restricted share units under the Retention LTRSU - distribute 30,996 shares after 1/27/08.

• August 25, 2005 grant of 37,154 restricted share units under the LTRSU FY06 - FY08 (12,385 units remaining to be distributed) - distribute 12,385 shares after 8/31/08.

• August 31, 2006 grant of 47,149 restricted share units under the EMLTIP FY07 - FY09. - distribute shares after 8/31/09. The actual number of shares distributed will be based on the achievement of the FY07 - FY09 EMLTIP performance measures. Shares not distributed shall be forfeited.

6

	Sara Lee Corporation
Personnel Grant Status	ID: 36-2089049
	3500 Lacey Road
	Downers Grove, IL 60515

AS OF 6/1/2007

Adriaan Nuhn

Board of Management

Vleutensevaart 100

Utrecht, IL Netherlands 3532 AD

S T O C K O P T I O N S

Number	Grant Date	Expiration Date	Plan	Type	Granted	Price		Exercised	Vested	Unvested	Outstanding	Exercisable
00009747	8/26/1999	8/26/2009	8USA	NQ	19,166	$	19.5044	0	19,166	0	19,166	19,166
00009749	8/30/2001	8/30/2011	8USA	NQ	77,362	$	18.8318	0	77,362	0	77,362	77,362
00009751	8/30/2001	8/30/2011	8STP	NQ	21,373	$	18.8318	0	21,373	0	21,373	21,373
00009959	2/20/2002	4/27/2010	00	NQ	42,029	$	18.3497	0	42,029	0	42,029	42,029
00009960	2/20/2002	4/27/2010	8USA	NQ	11,156	$	18.3497	0	11,156	0	11,156	11,156
00010324	8/27/2002	8/27/2007	8USA	NQ	155	$	17.9838	0	155	0	155	155
00010325	8/28/2002	8/28/2007	8USA	NQ	40,349	$	17.6739	0	40,349	0	40,349	40,349
00010326	8/27/2002	8/27/2007	8STP	NQ	562	$	17.9838	0	562	0	562	562
00010327	8/28/2002	8/28/2007	8STP	NQ	145,506	$	17.6739	88,100	145,506	0	57,406	57,406
00013591	10/10/2002	4/27/2010	00	NQ	8,670	$	18.5864	0	8,670	0	8,670	8,670
00013592	10/10/2002	4/27/2010	00	NQ	32,735	$	18.5864	0	32,735	0	32,735	32,735
00013593	10/10/2002	4/27/2010	8USA	NQ	2,404	$	18.5864	0	2,404	0	2,404	2,404
00013594	10/10/2002	4/27/2010	8STP	NQ	9,077	$	18.5864	0	9,077	0	9,077	9,077
00013902	1/30/2003	1/30/2013	8STP	NQ	3,740	$	16.7054	0	3,740	0	3,740	3,740
U0013902	1/30/2003	1/30/2013	8USA	NQ	2,068	$	16.7054	0	2,068	0	2,068	2,068
00014196	6/10/2003	6/10/2008	8USA	NQ	33,073	$	21.1045	0	33,073	0	33,073	33,073
00014202	6/10/2003	6/10/2008	8STP	NQ	59,854	$	21.1045	0	59,854	0	59,854	59,854
00014217	6/16/2003	6/16/2008	8STP	NQ	7,855	$	21.1045	0	7,855	0	7,855	7,855
00014224	6/16/2003	6/16/2008	8USA	NQ	4,340	$	21.1045	0	4,340	0	4,340	4,340
00016171	8/29/2002	8/29/2012	8STP	NQ	33,689	$	15.9607	22,459	33,689	0	11,230	11,230
00016172	8/29/2002	8/29/2012	8USA	NQ	12,774	$	15.9607	8,515	12,774	0	4,259	4,259
00016184	2/2/2004	8/29/2012	8USA	NQ	3,926	$	18.2722	0	3,926	0	3,926	3,926
00016325	2/2/2004	8/29/2012	00	NQ	10,548	$	18.2722	0	10,548	0	10,548	10,548
00016329	2/2/2004	4/27/2010	00	NQ	41,848	$	18.2722	0	41,848	0	41,848	41,848
00016330	2/2/2004	4/27/2010	8USA	NQ	11,282	$	18.2722	0	11,282	0	11,282	11,282
00016668	6/9/2004	8/26/2009	00	NQ	16,337	$	20.0413	0	16,337	0	16,337	16,337

Page 1

	Sara Lee Corporation
Personnel Grant Status	ID: 36-2089049
	3500 Lacey Road
	Downers Grove, IL 60515

AS OF 6/1/2007

Adriaan Nuhn

Board of Management

Vleutensevaart 100

Utrecht, IL Netherlands 3532 AD

S T O C K O P T I O N S

Number	Grant Date	Expiration Date	Plan	Type	Granted	Price		Exercised	Vested	Unvested	Outstanding	Exercisable
00018447	11/4/2004	8/29/2012	00	NQ	3,808	$	19.9811	0	3,808	0	3,808	3,808
00018448	11/4/2004	8/29/2012	00	NQ	10,047	$	19.9811	0	10,047	0	10,047	10,047
00018449	11/4/2004	8/28/2007	00	NQ	64,558	$	19.9811	0	64,558	0	64,558	64,558
00018699	12/14/2004	8/28/2007	00	NQ	18,331	$	20.7989	0	18,331	0	18,331	18,331
00018987	1/27/2005	8/26/2009	8STP	NQ	69,115	$	19.7443	0	69,115	0	69,115	69,115
00018989	1/27/2005	8/26/2009	8STP	NQ	9,433	$	26.8896	0	9,433	0	9,433	9,433
00019207	1/27/2005	8/26/2009	8USA	NQ	5,212	$	26.8896	0	5,212	0	5,212	5,212
00019464	8/25/2005	8/25/2015	8STP	NQ	81,367	$	16.8216	0	27,122	54,245	81,367	27,122
U0019464	8/25/2005	8/25/2015	8USA	NQ	44,958	$	16.8216	0	14,986	29,972	44,958	14,986
B0000709	8/31/2006	8/31/2016	8STP	NQ	103,254	$	14.3165	0	0	103,254	103,254	0
BU000709	8/31/2006	8/31/2016	8USA	NQ	57,053	$	14.3165	0	0	57,053	57,053	0
Totals					1,119,014			119,074	874,490	244,524	999,940	755,416

Page 2

EX-10.17

Exhibit 10.17

SARA LEE CORPORATION

1999 NON-EMPLOYEE DIRECTOR STOCK PLAN

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 the closing selling price per Share on the New York Stock Exchange Composite Transactions Tape on the determination date, provided that if there are no sales of Shares reported on such date, the Fair Market Value of a Share on such date shall be deemed equal to the closing selling price of a 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.

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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.

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 July 2, 2007 each person who is a Non-Employee Director on that date shall be granted a whole number of Restricted Stock Units determined by dividing $37,500 by the Fair Market Value of a Share on that date. Thereafter, on the first business day of each calendar year (the “Annual Grant Date”), beginning with calendar year 2008, 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.

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(b) A Non-Employee Director who is first elected or begins to serve as a Non-Employee Director between Annual Grant Dates (other than a Non-Employee Director who is first elected or begins to serve between July 1, 2007 and January 1, 2008) 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. A Non-Employee Director who is first elected or begins to serve as a Non-Employee Director between July 1, 2007 and January 1, 2008 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 (iv) dividing $37,500 by the Fair Market Value of a Share on the date of grant (v) multiplying the quotient by a fraction the numerator of which is the number of whole or partial months between the date of grant and January 1, 2008 and the denominator of which is six and (vi) rounding the result up the nearest whole number of Shares

(c) On July 2, 2007 in addition to the Restricted Stock Units granted under Section 8.3(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 25% of the Non-Employee Director’s Committee Retainer by the Fair Market Value of a Share on July 2, 2007. On each Annual Grant Date occurring after July 2, 2007, 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”).

(d) If the amount of a Non-Employee Director’s Committee Retainer increases between Annual Grant Dates (for this purpose July 2, 2007 shall be considered an Annual Grant Date), 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 (six in the case of any increase that occurs between July 1, 2007 and January 1, 2008) 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(f) below) (for this purpose July 2, 2007 shall be considered an Annual Grant Date), 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

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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 Grant Date and the denominator of which is 12 (six in the case of any increase that occurs between July 1, 2007 and January 1, 2008) and (ii) rounding the result up the nearest whole number of Shares.

(f) If any Non-Employee Director ceases to be a Director of the Corporation between Annual Grant Dates (for this purpose July 2, 2007 shall be considered an Annual Grant Date) other than by reason of death or disability, such Non-Employee Director shall forfeit a number of the Restricted Stock Units and Committee RSUs, if any, granted to the Non-Employee Director on or after the immediately preceding Annual Grant Date determined by multiplying the total number of Restricted Stock Units and Committee RSUs granted to the Non-Employee Director under Sections 8.1(a), (b), (c) and/or (d) on such immediately preceding Annual Grant Date or subsequent grant date by a ratio the number of which is the number of months from the immediately preceding Annual Grant Date or subsequent grant date through the end of the month in which the Non-Employee Director ceases to be a Director and the denominator of which is 12 (six in the case of a Non-Employee Director who ceases to be a Director between July 1, 2007 and January 1, 2008).

(g) In determining the number of Restricted Stock Units under this Section 8.1, all calculations shall be rounded up to 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 date on which such Restricted Stock Units were awarded and Restricted Stock Units granted on or after January 1, 2008 shall vest in full on the one year anniversary of the date on 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 (i) due to death or disability, 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, or (ii) for any other reason, then all Restricted Stock Units held by such Non-Employee Director, after applying the forfeiture provisions of Section 8.1(f), 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.

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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.

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 (including for this purpose, July 2, 2007), Shares shall be granted to each Non-Employee Director who, prior to such 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 (six-month period in the case of July 1, 2007) 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 no later than the thirtieth day 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

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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 and in the case of a Non-Employee Director who is first elected or begins to serve as a Non-Employee Director, the election must be made prior to the thirtieth day following the date the Non-Employee Director is first elected or begins to serve as a Non-Employee Director. 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 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.

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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,

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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 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.

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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 change in the capital structure of the Corporation (including but not limited to a stock split, reverse stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination or exchange of securities, spin-off, split-off, liquidation or other distribution of any or all of the assets of the Corporation to stockholders, other than normal cash dividends) or any change in any rights attendant to any class of authorized securities of the Corporation (an “Adjustment Event”) , the Committee shall make proportionate adjustments with respect to the number and class of securities available under the Plan, the number and class of securities subject to each outstanding Restricted Stock Unit and Committee RSU Award, and the number and class of securities representing a Share equivalent in the Share Equivalent Account under the Deferral Program to reflect such Adjustment Event and to maintain each outstanding Award’s or Share Equivalent Account interest’s intrinsic and fair value; provided, that the Committee shall retain discretion with respect to how any such proportionate adjustment shall be made. 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 and amended on January 25, 2007 and April 26, 2007.

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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.

A-1

(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 a 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.

(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.

A-2

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

A-3

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.

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

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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 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.

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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 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 on the later of the day they are first elected or begin service as a Non-Employee Director or the date on which Deferral Program materials and election forms are mailed to them. 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 on 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 period of service for which the Annual Retainer or Committee Cash Retainer payment relates and in no event will the date specified by the Committee with respect to an Award Deferral be later than the end of the second Program Year preceding the Program Year in which the Award vests. In the case of the first year in which the Non-Employee Director becomes eligible to participate, such election must be made prior to the thirtieth day following the date the Non-Employee Director becomes eligible to participate and if made after the date the Non-Employee Director is first elected to or begins service on the Board such election may be made with respect to not more that 90% of the Annual Retainer, Committee Cash Retainer and any Award for the Non-Employee Director’s first year of service.

B-1

(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 a 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.

(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 first 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-2

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-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

B-3

deemed invested in the Interest Account on the Valuation Date or such final payment date. The rate of interest to be credited for a Program 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-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.

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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-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.

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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-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.

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EX-12.1

EXHIBIT 12.1

SARA LEE CORPORATION AND SUBSIDIARIES

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(In millions except ratios)

	Years Ended
	June 30, 2007(1)			July 1, 2006(2)
Fixed charges:
Interest expense	$	265		$	305
Interest portion of rental expense		45			47
Total fixed charges before capitalized interest and preference security dividends of consolidated subsidiaries		310			352
Preference security dividends of consolidated subsidiaries		—			—
Capitalized interest		20			20
Total fixed charges	$	330		$	372
Earnings available for fixed charges:
Income before income taxes from continuing operations	$	419		$	193
Less undistributed (loss) income in minority-owned companies		(1	)		—
Add minority interest in majority-owned subsidiaries		(5	)		10
Add amortization of capitalized interest		11			11
Add fixed charges before capitalized interest and preference security dividends of consolidated subsidiaries		310			352
Total earnings available for fixed charges	$	734		$	566
Ratio of earnings to fixed charges		2.2			1.5

(1) During fiscal 2007, the corporation recorded a pretax charge of $95 million in connection with certain restructuring activities. Also during fiscal 2007, the corporation recognized an impairment charge of $172 million and $120 million of contingent sales proceeds from the disposal of its European tobacco business in 1999.

(2) During fiscal 2006, the corporation recorded a pretax charge of $86 million in connection with certain restructuring activities. Also during fiscal 2006, the corporation recognized an impairment charge of $193 million and $114 million of contingent sales proceeds from the disposal of its European tobacco business in 1999.

EX-13

Financial Summary

Dollars in millions except per share data	June 30, 20071			July 1, 20062			July 2, 20053			July 3, 20044,5			June 28, 20036
Results of operations
Continuing operations
Net sales	$	12,278		$	11,460		$	11,346		$	11,255		$	10,250
Operating income7		556			422			946			1,017			791
Income before income taxes		419			192			746			823			584
Income		426			31			615			550			554
Effective tax rate8		(1.6	)%		83.5	%		17.6	%		33.1	%		5.2	%
Income per share of common stock
Basic	$	0.58		$	0.04		$	0.78		$	0.70		$	0.70
Diluted		0.57			0.04			0.77			0.69			0.68
Income from discontinued operations		62			123			104			722			620
Gain on sale of discontinued operations		16			401			–			–			–
Net income		504			555			719			1,272			1,174
Net income per share of common stock
Basic		0.68			0.72			0.91			1.61			1.49
Diluted		0.68			0.72			0.90			1.59			1.44
Financial position
Total assets	$	12,190		$	14,660		$	14,540		$	15,044		$	15,974
Total debt9		4,267			5,948			4,633			5,277			6,262
Per common share
Dividends	$	0.40		$	0.79		$	0.78		$	0.75		$	0.615
Book value at year-end		3.61			3.22			3.48			3.52			2.44
Market value at year-end		17.40			16.02			19.65			23.17			18.44
Shares used in the determination of net income per share
Basic (in millions)		741			766			789			788			781
Diluted (in millions)		743			768			796			798			812
Other information10
Net cash flow from operating activities	$	492		$	1,265		$	1,349		$	1,979		$	1,828
Depreciation		420			541			570			561			532
Media advertising expense		342			433			452			425			460
Total advertising and promotion expense		622			886			930			922			950
Capital expenditures		631			625			538			530			746
Common stockholders of record		76,000			82,000			87,000			91,000			95,000
Number of employees		52,000			109,000			143,000			150,000			146,000

Note: The amounts above include the impact of certain significant items. Significant items include exit activities, asset and business dispositions, impairment charges, transformation charges, accelerated depreciation and amortization, hurricane losses, curtailment gains and a change in the vacation policy. Further details of these items are included in the Financial Review on pages 3 and 5.

¹ In 2007, the impact of significant items decreased income from continuing operations before income taxes and income from continuing operations by $418 and $70, respectively.

² In 2006, the impact of significant items decreased income from continuing operations before income taxes and income from continuing operations by $468 and $220, respectively.

³ In 2005, the impact of significant items decreased income from continuing operations before income taxes by $54 and increased income from continuing operations by $169.

⁴ 53-week year.

⁵ In 2004, the impact of significant items, excluding the impact of the 53rd week, decreased income from continuing operations before income taxes and income from continuing operations by $11 and $5, respectively.

⁶ In 2003, the impact of significant items decreased income from continuing operations before income taxes and income from continuing operations by $24 and $12, respectively.

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

⁸ The corporation’s effective tax rate declined in 2007 to a tax benefit of 1.6% primarily as a result of the recognition of certain tax benefits from the sale of a subsidiary and the reduction of certain tax obligations from the finalization of certain tax regulatory examinations and the lapsing of certain statutes in multiple jurisdictions. The corporation’s effective tax rate in 2006 increased to 83.5% as the corporation recognized a $529 tax charge as a result of the decision to repatriate certain current and prior year earnings of certain foreign subsidiaries for which repatriation was previously considered to be indefinitely postponed.

⁹ In 2007, the corporation utilized proceeds from its disposition activities to pay down substantially all of its notes payable obligations. At the end of 2006, the corporation did not utilize cash on the balance sheet to repay outstanding notes payable borrowings as it had done at the end of 2005 and in earlier years. At the end of 2005 and in earlier years, the corporation scheduled certain notes payable obligations, primarily in the form of short-term commercial paper, to mature prior to the end of the year. Further information on these borrowings is included in the Liquidity section of the Financial Review.

¹⁰ Financial amounts include results for both businesses reported in continuing operations and discontinued operations.

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 following should be noted regarding the information presented below:

Discontinued Operations – In September 2006, the corporation spun off its Branded Apparel Americas/Asia business by distributing common stock of the business to holders of Sara Lee common stock. The Branded Apparel Americas/Asia business is now known as Hanesbrands Inc. (Hanesbrands). The dividend to shareholders represented 100% of the common stock of Hanesbrands outstanding at the time of the spin off. The results of the corporation’s Branded Apparel Americas/Asia business has been reported as a discontinued operation as a result of the spin off of this business. In the corporation’s 2006 annual report, the corporation’s Direct Selling, U.S. Retail Coffee, European Branded Apparel, European Nuts and Snacks, U.K. Apparel, U.S. Meat Snacks, and European Meats businesses had previously been reported as discontinued operations. The results of operations of all of these businesses through the date of sale are presented as a separate line in the Consolidated Statements of Income. Prior to disposition, the assets and liabilities of discontinued operations are aggregated and reported on separate lines of the Consolidated Balance Sheets. Prior periods have been reclassified to conform with this presentation. Further information regarding discontinued operations can be found in Note 4 to the Consolidated Financial Statements, titled “Discontinued Operations.”

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 2007, 2006 and 2005 were 52-week years. 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 – 2007 Compared With 2006

• Operating Results by Business Segment – 2007 Compared With 2006

• Review of Consolidated Results of Operations – 2006 Compared With 2005

• Operating Results by Business Segment – 2006 Compared With 2005

• Financial Condition

• Liquidity

• Risk Management

• Significant Accounting Policies and Critical Estimates

• Issued but Not Yet Effective Accounting Standards

• Forward-Looking Information

Overview

2007 – During 2007, net sales increased by 7.1%, reflecting the positive impact of foreign currency rates and improved results at each of the corporation’s business segments. The strengthening of foreign currencies versus the U.S. dollar increased sales by 2.9%, while the impact of business acquisitions net of dispositions increased net sales by 0.6%.

Income from continuing operations before income taxes in 2007 was $419 million, an increase of $227 million from 2006, composed of the following:

•    The gross margin increased by $291 million due to the favorable impact of changes in foreign currency, savings from continuous improvement programs and an improved product mix. The gross margin percent declined by 0.2%. The gross margin percent declined in each business segment except North American Retail Bakery, primarily due to the impact of higher commodity and energy prices and competitive market conditions.

•    Selling, general and administrative (SG&A) expenses in 2007 were $175 million higher than in the comparable period of the prior year, primarily due to higher media advertising and promotion expense, higher distribution and selling expense and the impact of changes in foreign currency. These higher costs were partially offset by the benefits from cost reduction initiatives and lower costs of the corporation’s transformation program in the current year.

•    The corporation recognized a $172 million pretax impairment charge in 2007 and a $193 million pretax impairment charge in 2006. In addition, net charges for exit activities, asset and business dispositions were $95 million and $86 million in 2007 and 2006, respectively. In total, charges for impairments, exit activities, asset and business dispositions in 2007 were $12 million less than 2006 amounts.

•    Contingent sale proceeds of $120 million associated with the prior sale of a business were received in 2007, which were $6 million more than were received in 2006.

•    Net interest expense in 2007 decreased by $93 million versus 2006, primarily due to lower average debt levels and higher interest income partially offset by higher average interest rates.

Income taxes declined by $168 million in 2007 from an expense of $161 million in 2006 to a benefit of $7 million in 2007. This decline is primarily a result of the corporation recognizing certain net tax benefits in the current year from the

2     Sara Lee Corporation and Subsidiaries

sale of a subsidiary, and the reduction of certain contingent tax obligations resulting from the finalization of certain tax regulatory examinations and reviews, and the lapsing of certain statutes in multiple jurisdictions.

As a result of the $227 million increase in income from continuing operations before income taxes and the $168 million decline in the related income tax expense, income from continuing operations increased by $395 million.

During 2007, the corporation recognized $62 million of net income from the operating results of discontinued operations and an after-tax gain of $16 million from the disposition of discontinued operations. During 2006, the corporation

recognized $123 million of net income from discontinued operations, which included impairment charges of $338 million and an after-tax gain of $401 million from the disposition of discontinued operations. In total, the corporation recognized $446 million less of income in 2007 related to discontinued operations than in 2006.

Net income decreased by $51 million, or 9.4%, while diluted earnings per share in 2007 decreased by $0.04, or 5.6% reflecting lower average shares outstanding during 2007 as a result of the corporation’s share repurchases. The following table sets out the significant items that impacted the results of the corporation in 2007 and 2006.

Impact of Significant Items on Income

From Continuing Operations and Net Income

	Year Ended June 30, 2007												Year Ended July 1, 2006
In millions except per share data	Pretax Impact			Tax			Net Income			Diluted EPS Impact 1			Pretax Impact			Tax			Net Income			Diluted EPS Impact 1
Income from continuing operations	$	419		$	7		$	426		$	0.57		$	192		$	(161	)	$	31		$	0.04
Net income							$	504		$	0.68								$	555		$	0.72
Significant items affecting comparability of income from continuing operations and net income:
(Charges for) income from exit activities, asset and business dispositions and impairment charges:
(Charges for) income from exit activities	$	(107	)	$	37		$	(70	)	$	(0.09	)	$	(166	)	$	55		$	(111	)	$	(0.14	)
Income from (charges for) asset and business disposition activities		12			(2	)		10			0.01			80			(28	)		52			0.07
Impairment charges		(172	)		27			(145	)		(0.19	)		(193	)		73			(120	)		(0.16	)
Subtotal		(267	)		62			(205	)		(0.28	)		(279	)		100			(179	)		(0.23	)
(Charges) income in cost of sales and SG&A expenses:
Transformation charges		(119	)		42			(77	)		(0.10	)		(159	)		55			(104	)		(0.13	)
Hurricane losses		–			–			–			–			(5	)		2			(3	)		–
Accelerated depreciation		(32	)		12			(20	)		(0.03	)		(39	)		14			(25	)		(0.03	)
Change in vacation policy		–			–			–			–			14			(5	)		9			0.01
Impact of significant items on income from continuing operations before income taxes		(418	)		116			(302	)		(0.41	)		(468	)		166			(302	)		(0.39	)
Significant tax matters affecting comparability:
Deferred tax valuation allowance charge		–			(27	)		(27	)		(0.04	)		–			36			36			0.05
Tax benefit on disposition of a business		–			169			169			0.23			–			–			–			–
Contingent tax obligation adjustment		–			67			67			0.09			–			332			332			0.43
Change in estimated tax		–			21			21			0.03			–			–			–			–
Tax on repatriation of prior years’ earnings		–			–			–			–			–			(291	)		(291	)		(0.38	)
Other tax adjustments, net		–			2			2			–			–			5			5			0.01
Impact of significant items on income from continuing operations		(418	)		348			(70	)		(0.10	)		(468	)		248			(220	)		(0.29	)
Significant items impacting discontinued operations:
European Branded Apparel impairment		–			–			–			–			(179	)		47			(132	)		(0.17	)
U.S. Retail Coffee impairment		–			–			–			–			(44	)		5			(39	)		(0.05	)
U.K. Apparel impairment		–			–			–			–			(34	)		–			(34	)		(0.04	)
European Meats impairment		–			–			–			–			(125	)		–			(125	)		(0.16	)
U.S. Meat Snacks impairment		–			–			–			–			(12	)		4			(8	)		(0.01	)
Charges for exit activities and transformation expenses		–			–			–			–			(13	)		5			(8	)		(0.01	)
European Meats curtailment gain		–			–			–			–			11			(3	)		8			0.01
Contingent tax adjustments		–			–			–			–			–			(24	)		(24	)		(0.03	)
Tax benefit from Direct Selling		–			–			–			–			–			50			50			0.07
Gain on the sale of discontinued operations, net		5			11			16			0.02			466			(65	)		401			0.52
Impact of significant items on net income	$	(413	)	$	359		$	(54	)	$	(0.07	)	$	(398	)	$	267		$	(131	)	$	(0.17	)

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.

Sara Lee Corporation and Subsidiaries     3

2006 – During 2006, net sales increased by 1.0% despite the negative impact of foreign currency and the disposition of certain businesses after the start of 2005. The weakening of foreign currencies versus the U.S. dollar decreased sales by 1.1%, while the impact of the business dispositions, net of acquisitions, reduced net sales by 0.5%.

Income from continuing operations before income taxes in 2006 decreased by $554 million and was composed of the following:

•    The gross margin declined by $116 million, due to a 1.4% decline in the gross margin percent. The gross margin percent declined in each business segment except North American Retail Meats, primarily due to the impact of commodity and energy prices and competitive market conditions.

•    Selling, general and administrative (SG&A) expenses in 2006 were $169 million higher than in the comparable period of the prior year, primarily due to costs of the corporation’s transformation program. These costs, totaling $149 million, include accelerated depreciation on facilities that will be exited, relocation and recruiting costs relating to the centralization of the corporation’s management team and costs associated with the implementation of the new information technology systems, partially offset by a credit from a change in the vacation policy.

•    In 2006, the corporation recognized a $193 million charge for the impairment of intangible assets. In addition, net charges for exit activities, asset and business dispositions were $86 million and $43 million in 2006 and 2005, respectively. In total, charges for impairments, exit activities, asset and business dispositions in 2006 were $236 million greater than in 2005.

•    Contingent sale proceeds of $114 million associated with the prior sale of a business were received in 2006, which was $3 million less than were received in 2005.

•    Net interest expense in 2006 increased by $30 million versus 2005, primarily due to higher average interest rates and lower interest income.

Income tax expense from continuing operations increased by $30 million in 2006, from $131 million in 2005 to $161 million in 2006, as the corporation recognized charges to repatriate earnings of foreign subsidiaries, which was partially offset by tax credits from the finalization of certain foreign tax audits.

As a result of the $554 million decline in income from continuing operations before income taxes and the $30 million increase in the related income tax expense, income from continuing operations declined by $584 million.

During 2006, the corporation recognized $123 million of net income from discontinued operations and an after-tax gain of $401 million from the sale of discontinued operations. Included in the $123 million of net income from operations are after tax impairment charges of $338 million. During 2005, the corporation recognized net income of $104 million from discontinued operations, which included after tax impairment charges of $291 million.

Net income decreased by $164 million, or 22.7%, while diluted earnings per share in 2006 decreased by $0.18, or 20.0%. The following table sets out the significant items that impacted the results of the corporation in 2006 and 2005.

4     Sara Lee Corporation and Subsidiaries

Impact of Significant Items on Income

From Continuing Operations and Net Income

	Year Ended July 1, 2006												Year Ended July 2, 2005
In millions except per share data	Pretax Impact			Tax			Net Income			Diluted EPS Impact 1			Pretax Impact			Tax			Net Income			Diluted EPS Impact 1
Income from continuing operations	$	192		$	(161	)	$	31		$	0.04		$	746		$	(131	)	$	615		$	0.77
Net income							$	555		$	0.72								$	719		$	0.90
Significant items affecting comparability of income from continuing operations and net income:
(Charges for) income from exit activities, asset and business dispositions and impairment charges:
(Charges for) income from exit activities	$	(166	)	$	55		$	(111	)	$	(0.14	)	$	(70	)	$	22		$	(48	)	$	(0.06	)
Income from (charges for) asset and business disposition activities		80			(28	)		52			0.07			27			(9	)		18			0.02
Impairment charges		(193	)		73			(120	)		(0.16	)		–			–			–			–
Subtotal		(279	)		100			(179	)		(0.23	)		(43	)		13			(30	)		(0.04	)
(Charges) income in cost of sales and SG&A expenses:
Transformation charges		(159	)		55			(104	)		(0.13	)		(9	)		3			(6	)		(0.01	)
Hurricane losses		(5	)		2			(3	)		–			–			–			–			–
Accelerated depreciation and amortization		(39	)		14			(25	)		(0.03	)		(30	)		8			(22	)		(0.03	)
Change in vacation policy		14			(5	)		9			0.01			–			–			–			–
Curtailment gain		–			–			–			–			28			(10	)		18			0.02
Impact of significant items on income from continuing operations before income taxes		(468	)		166			(302	)		(0.39	)		(54	)		14			(40	)		(0.05	)
Significant tax matters affecting comparability:
Deferred tax valuation allowance charge		–			36			36			0.05			–			–			–			–
Contingent tax obligation adjustment		–			332			332			0.43			–			185			185			0.23
Tax on repatriation of prior years’ earnings		–			(291	)		(291	)		(0.38	)		–			–			–			–
Other tax adjustments, net		–			5			5			0.01			–			24			24			0.03
Impact of significant items on income from continuing operations		(468	)		248			(220	)		(0.29	)		(54	)		223			169			0.21
Significant items impacting discontinued operations:
European Branded Apparel impairment		(179	)		47			(132	)		(0.17	)		(305	)		43			(262	)		(0.33	)
U.S. Retail Coffee impairment		(44	)		5			(39	)		(0.05	)		(45	)		16			(29	)		(0.04	)
U.K. Apparel impairment		(34	)		–			(34	)		(0.04	)		–			–			–			–
European Meats impairment		(125	)		–			(125	)		(0.16	)		–			–			–			–
U.S. Meat Snacks impairment		(12	)		4			(8	)		(0.01	)		–			–			–			–
Charges for exit activities and transformation expenses		(13	)		5			(8	)		(0.01	)		(53	)		20			(33	)		(0.04	)
European Meats curtailment gain		11			(3	)		8			0.01			–			–			–			–
Contingent tax adjustments		–			(24	)		(24	)		(0.03	)		–			163			163			0.21
Tax benefit (expense) from Direct Selling		–			50			50			0.07			–			(50	)		(50	)		(0.06	)
Gain on the sale of discontinued businesses		466			(65	)		401			0.52			–			–			–			–
Impact of significant items on net income	$	(398	)	$	267		$	(131	)	$	(0.17	)	$	(457	)	$	415		$	(42	)	$	(0.06	)

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.

Sara Lee Corporation and Subsidiaries     5

Cash Flow – The corporation’s cash flow statements include amounts related to discontinued operations through the date of disposal. The discontinued operations had a significant impact on the cash flows from operating, investment and financing activities during 2007, 2006 and 2005.

Cash from Operating Activities

The cash generated from operating activities was $492 million in 2007, $1,265 million in 2006 and $1,349 million in 2005. The most significant reason for the decline in cash from operating activities was the disposition of a number of businesses which are reported as discontinued operations.

The cash from operating activities generated by continuing and discontinued operations is summarized in the following table:

	2007		2006		2005
Cash from operating activities:
Continuing operations	$	404	$	410	$	527
Discontinued operations		88		855		822
Total	$	492	$	1,265	$	1,349

Changes in current assets and liabilities resulted in the usage of $527 million of cash in 2007, versus a usage of $44 million in 2006. In 2007, the primary changes in working capital which impacted cash flow from operations were a $270 million decline in accrued liabilities; a $212 million decline in accrued taxes; a $106 million increase in inventories; and a $93 million increase in accounts payable.

Cash From Investment Activities

The corporation received $568 million from investment activities in 2007 and $365 million in 2006. In 2005, $232 million of cash was used in investment activities. A significant amount of cash was received in each period from the disposition of businesses and assets as well as the collection of amounts related to prior business dispositions. In total, $1,224 million, $1,101 million and $307 million were received in 2007, 2006 and 2005, respectively. The corporation spent $631 million for the purchase of property, equipment, computer software, and intangibles in 2007, which was $6 million and $93 million higher than the amounts spent in 2006 and 2005, respectively.

Cash from Financing Activities

Net cash used in financing activities was $913 million in 2007, $41 million in 2006 and $1,215 million during 2005. In each period, significant amounts of cash were both received from borrowings of debt and used to repay debt. On a net basis, the corporation received $759 million in 2007 and $1,098 million in 2006 from borrowings of debt, while in 2005, the corporation repaid $516 million of debt. Purchases of common stock, net of cash received from issuances during 2007, 2006 and 2005 were $648 million, $534 million and

$235 million, respectively. The corporation paid dividends of $374 million in 2007, $605 million in 2006 and $464 million in 2005.

Further information and details regarding the performance of the corporation and its business segments follows.

Description of the Business Segments

The corporation’s structure is organized around the following six business segments:

•    North American Retail Meats – sells a variety of packaged meat products to retail customers in North America.

•    North American Retail Bakery – sells a variety of bakery products to retail customers in North America and includes the corporation’s U.S. Senseo retail coffee business.

•    Foodservice – sells a variety of meat, bakery and beverage products to foodservice customers in North America.

•    International Beverage – sells coffee and tea products in major markets around the world, including Europe, Australia and Brazil.

•    International Bakery – sells a variety of bakery and dough products to retail and foodservice customers in Europe and Australia.

•    Household and Body Care – sells products in four primary categories: body care, air care, shoe care and insecticides.

The following is a description of each of the business segments. In September 2006, the corporation spun off its apparel operations in the Americas/Asia, which comprised its Branded Apparel segment. Upon completion of the spin off, the results of the Branded Apparel segment were reported as a discontinued operation and the historical financial statements were reclassified to conform to this presentation.

North American Retail Meats – sells a variety of packaged meat products to retail customers in North America. Products include hot dogs and corn dogs, breakfast sausages and sandwiches, smoked and dinner sausages, premium deli and luncheon meats, bacon 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. During 2007, 89% of the segment’s sales were generated in the U.S., while the remaining sales were generated in Mexico. Sales are made in the retail channel to supermarkets, warehouse clubs and national chains. Sales are generally transacted through Sara Lee’s own sales force and outside brokers. The major brands under which North American Retail Meats sells its products include Hillshire Farm, Ball Park, Jimmy Dean, Sara Lee, Bryan, State Fair,

6     Sara Lee Corporation and Subsidiaries

Kahn’s and Best’s Kosher in the U.S. and Kir, Zwan, Duby, and DonFer in Mexico. Seasonality in the North American Retail Meats segment is balanced by the diverse offering of products that tends 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 North American Retail 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. The meats business in Mexico is regulated by Mexican authorities in a similar fashion.

North American Retail Bakery – sells a variety of bakery products to retail customers in North America. Products include a wide variety of fresh and frozen baked products and specialty items, including bread, buns, bagels, rolls, muffins, specialty bread, frozen pies, cakes, cheesecakes and other desserts. The North American Retail Bakery segment includes the results of the corporation’s Senseo retail coffee business in the U.S. The primary raw materials include wheat flour, sugar, corn syrup, butter, fruit, eggs and cooking oils, which are purchased from independent suppliers. The North American Retail 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. Substantially all of the segment’s sales are generated in the U.S. Sales are made in the retail channel to supermarkets, warehouse clubs and national chains. Sales are generally made through Sara Lee’s sales force and independent wholesalers. The North American Retail Bakery segment offers delivery directly to retail customer stores and warehouses through its direct store delivery system, which maintains approximately 4,400 delivery routes. The major brands under which North American Retail Bakery sells its products include Sara Lee, Earth Grains, Grant’s Farm, Colonial, Rainbo, Holsum, IronKids, Mother’s, Sunbeam, Healthy Choice and Chef Pierre. Certain brands are used under licensing arrangements. Sales of products sold under these licensing arrangements represent less than 7% of total North American Retail Bakery sales. Seasonality in the North American Retail Bakery segment is balanced by the diverse offering of products that tends to offset the seasonal changes in demand. For example, sales of buns increase in the warm summer months, and sales of 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 North American Retail 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.

Foodservice – sells a variety of meat, bakery and beverage products to foodservice customers in North America. Products include hot dogs and corn dogs, breakfast sausages and sandwiches, smoked and dinner sausages, premium deli and luncheon meats, bacon, meat snacks, cooked and dry hams, bread, buns, bagels, rolls, muffins, specialty bread, refrigerated dough, frozen pies, cakes, cheesecakes, roast, ground and liquid coffee, cappuccinos, lattes, teas and a variety of sauces, dressings and condiments. The primary raw materials for these products include a wide variety of items, including pork, turkey, beef, chicken, wheat flour, sugar, corn syrup, butter, fruit, eggs, cooking oils and green coffee beans that are purchased from independent vendors and farmers. The Foodservice 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. During 2007, virtually all of the segment’s sales were generated in the U.S. Sales are made in the foodservice channel to distributors, restaurants, hospitals and other large institutions. The Foodservice segment also offers direct delivery of beverage products to restaurants and warehouses through its direct delivery system. Unit volumes in the Foodservice segment are generally a function of consumer eating patterns outside of the home. Seasonality in the Foodservice segment is balanced by a diverse offering of products to meet the consumer’s seasonal eating patterns. The Foodservice segment competes with other international, national, regional and local companies in each of the product groups and its products are generally regulated by various U.S. government agencies, such as the U.S. Department of Agriculture and the Food and Drug Administration.

International Beverage – sells coffee and tea products in certain markets around the world, including 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 around 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

Sara Lee Corporation and Subsidiaries     7

markets. Eighty-four percent of the segment’s sales in 2007 were generated in Western and Central Europe, 12% in Brazil and 4% in Australia. Sales are made in both the retail channel to supermarkets, warehouse clubs and national chains, and in the foodservice channel to distributors. The International Beverage segment also offers direct delivery to restaurants and warehouses through its direct delivery system. In Europe, some of the more prominent brands are Douwe Egberts, Senseo, Maison du Café, Marcilla, Merrild and Pickwick, 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 the International Beverage segment competes with other international and regional companies. Consumer preferences as to the blend or flavor and convenience of their purchases continue to change, with differing preferences in various countries and locations around the world.

International Bakery – sells a variety of bakery and dough products to retail and foodservice customers in Europe and Australia. Products include a variety of bread, buns, rolls, specialty bread, refrigerated dough, frozen desserts and ice cream. The primary raw materials include wheat flour, sugar, corn syrup, butter, fruit, eggs, milk and cooking oils, which are purchased from independent suppliers. The International 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. During 2007, 86% of the segment’s sales were generated in Western Europe, while the remaining sales were generated in Australia. Sales are made in the retail channel to supermarkets, warehouse clubs and national chains and in the foodservice channel to distributors and other institutions. Sales are generally made through Sara Lee’s sales force and independent wholesalers. The International Bakery segment offers delivery directly to retail customer stores and warehouses through its direct store delivery system. The major brands under which International Bakery sells its products include Bimbo, CroustiPate, Ortiz, BonGateaux and Sara Lee. Seasonality in the International Bakery segment is balanced by the diverse offering of products that tends to offset the seasonal changes in demand. The bakery business is highly competitive, with an emphasis on product quality, innovation and value. New product innovations drive growth in this segment. The International Bakery segment competes with other international, national, regional and local companies in each of the product groups.

Household and Body Care – sells products in four primary 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. Sixty-nine percent of the segment’s sales in 2007 were generated in Western and Central Europe, 21% in the Asia Pacific region, 5% in the U.S. and the remaining portion of the segment’s sales were generated primarily in Africa. The Household and Body Care 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 and Body Care business is highly competitive, with an emphasis on innovation, quality and value, and Sara Lee competes with other international and regional companies.

Business Transformation Plan

In February 2005, the corporation announced a transformation plan designed to improve performance and better position the corporation for long-term growth. The plan involved significant changes in the corporation's organizational structure and

portfolio changes involving the disposition of a significant portion of the corporation's business which are substantially completed. It also includes a number of actions to improve operational efficiency. Following is a summary of the status of these actions and the cumulative cost of the plan.

Organization Structure – The corporation announced plans to locate the management of its North American businesses along with substantially all of its corporate staff in a single site in suburban Chicago. Substantially all of these relocation activities have been completed. In addition, management has announced that it will centralize its research and development activities for North America in a permanent site in suburban Chicago before the end of fiscal 2009.

In Europe, the corporation continues to execute plans to centralize management into a single location per country or region. Each centralized location will be supported by a shared services organization that will provide back office functions. In addition, the corporation has taken steps to eliminate a layer of senior level employees managing its European operations.

Portfolio Changes – The corporation disposed of certain businesses in order to concentrate financial and management

8     Sara Lee Corporation and Subsidiaries

resources on a smaller number of entities that are better positioned for increased growth. A total of eight businesses have been reported as discontinued operations and historical results have been reclassified. The disposition of all of these businesses took place in fiscal 2006 and 2007 and a complete description of the actions taken is presented in the notes accompanying these financial statements.

The discontinued operations which have been disposed of provided a significant portion of the corporation's cash flow from operating activities in fiscal 2006 and 2007. In addition, a significant portion of the cash provided by the discontinued operations was generated domestically, and the elimination of this source of funding required the corporation to repatriate a greater portion of cash generated outside of the U.S., which in turn resulted in higher income tax expense, and cash tax payments.

Improving Operational Efficiency – The third element of the transformation plan involves initiatives to improve the operational efficiency of the corporation. Key elements of this initiative include:

•    Significant investments to improve information technology systems and processes. This is primarily related to the cost of implementing a standardized information technology platform in the North American operations, outsourcing certain processing functions, and re-engineering various business processes. It is anticipated that from 2008 to 2010, the expenditures for these information technology initiatives will be approximately $74 million.

•    The corporation is conducting a review of the management reporting and legal entities which it maintains. The objective of this review is to rationalize the number of entities and thereby reduce administrative and other costs. These actions may result in charges for severance and gains or losses resulting from the realization of amounts recognized in the cumulative translation adjustment account.

•    The corporation continues to review the operational efficiency of its manufacturing, distribution and administrative staff functions. To date, a number of actions have been taken to reduce the corporation's workforce and close leased and owned facilities. In addition, the corporation has recognized increased levels of depreciation expense as a result of decisions to close a number of facilities, a substantial portion of which are involved in the production of meat products in the U.S. Exit activities taken to date are quantified and fully described in the notes accompanying these financial statements. It is anticipated that there will be fewer exit activities as the corporation completes its transformation program. As a result, the level of increased depreciation related to the decision to close facilities should decline.

Costs and Savings – The following table summarizes the pretax costs (income) of the above actions. Amounts related to continuing and discontinued operations are included in this table.

(In millions, except employee data)	Total			Fiscal 2007			Fiscal 2006			Last Six Months Fiscal 2005
Continuing Operations:
Exit costs – primarily severance	$	343		$	107		$	166		$	70
Income from business and asset dispositions		(119	)		(12	)		(80	)		(27	)
Transformation activities:
Information technology costs		92			50			42			–
Accelerated depreciation and amortization		101			32			39			30
Relocation, recruiting and retention		94			31			61			2
Consulting		43			10			27			6
Curtailment gain – workforce reduction		(28	)		–			–			(28	)
Other		44			28			15			1
Impairment charges1		243			50			193			–
Discontinued operations:
Transformation and exit activities		66			–			13			53
Impairment charges		744			–			394			350
Curtailment gain		(11	)		–			(11	)		–
Gains on sale of businesses/other		(471	)		(5	)		(466	)		–
Total	$	1,141		$	291		$	393		$	457
Employees to be terminated		6,809			2,658			2,381			1,770

¹ Excludes $122 million of fiscal 2007 impairment charges which are unrelated to actions undertaken as part of the transformation plan. The $122 million includes impairment charges for beverage operations in Brazil and Austria as well as a Household and Body Care operation in Zimbabwe.

The savings resulting from these actions were $160 million and $62 million in 2007 and 2006, respectively. The incremental benefits resulting from the ongoing exit and business transformation activities are a significant factor in the operating performance of the continuing businesses.

Sara Lee Corporation and Subsidiaries     9

Review of Consolidated Results of Operations – 2007 Compared With 2006

In millions	2007			2006			Dollar Change			Percent Change
Net sales	$	12,278		$	11,460		$	818		7.1	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	–		$	(312	)	$	312
Acquisitions/dispositions		134			54			80
Total	$	134		$	(258	)	$	392
Operating income	$	556		$	422		$	134		31.9	%
Increase/(decrease) in operating income from
Receipt of contingent sale proceeds	$	120		$	114		$	6
Changes in foreign currency exchange rates		–			(39	)		39
Exit activities, asset and business dispositions		(95	)		(86	)		(9	)
Transformation restructuring charges		(119	)		(159	)		40
Accelerated depreciation		(32	)		(39	)		7
Impairment charges		(172	)		(193	)		21
Hurricane losses		–			(5	)		5
Change in vacation policy		–			14			(14	)
Acquisitions/dispositions		4			8			(4	)
Total	$	(294	)	$	(385	)	$	91

Net Sales – Consolidated net sales increased $818 million, or 7.1%, in 2007 over 2006, to $12,278 million. Changes in foreign currency, particularly in the European euro and British pound, increased reported net sales by 2.9%, or $312 million. The net impact of acquisitions and dispositions in 2007 versus 2006 increased net sales by $80 million, or 0.6%. The remaining net sales increase was $426 million, or 3.6%. Each business segment reported higher net sales versus the prior year – the majority of the sales increase was driven by higher net sales in the North American Retail Meats, International Beverage and Household and Body Care business segments, resulting primarily from higher volumes and an improved sales mix. See the discussion of operating results by business segment for further details on each of the business segments.

Unit Volumes – Unit volumes in the North American Retail Meats segment increased 1%, as increases in the U.S. in both retail and commodity meats were partially offset by declines in Mexico. In the North American Retail Bakery segment, unit volumes declined 4% as declines in unbranded fresh bread products were only partially offset by increases in frozen bakery products and single serve retail coffee products. Unit volumes for branded fresh bakery products were unchanged. Unit volumes declined 2% in the Foodservice segment as

declines in beverage and bakery products offset higher unit sales of meat products. In the International Beverage segment, unit volumes increased 2% with increases in Brazil and the retail and foodservice channels in Europe. In the International Bakery segment, unit volumes increased 2% with higher volumes in fresh and refrigerated dough products in Europe and in Australia. The unit volumes for the four core categories of the Household and Body Care segment increased 6% in 2007, with growth in each category – body care, shoe care, air care and insecticides.

Gross Margin Percent – The gross margin percent for the corporation declined by 0.2% in 2007, from 38.7% in 2006 to 38.5% in 2007. The gross margin percent declined in each business segment with the exception of North American Retail Bakery, which was up 0.2%. The gross margin percent was negatively impacted by higher commodity and energy costs and inflation, which was partially offset by price increases.

Selling, General and Administrative Expenses –

In millions	2007		2006		Dollar Change		Percent Change
SG&A expenses in the business segment results:
Media advertising and promotion	$	581	$	539	$	42	7.9	%
Other		3,035		2,925		110	3.8
Total business segments		3,616		3,464		152	4.4
Amortization of identifiable intangibles		67		62		5	8.4
General corporate expenses		340		322		18	5.5
Total	$	4,023	$	3,848	$	175	4.6	%

Total selling, general and administrative (SG&A) expenses increased $175 million, or 4.6%, in 2007 over the prior year. Changes in foreign currency exchange rates, primarily in the European euro, increased SG&A expenses by $119 million, or 3.2%. Therefore, the remaining increase in SG&A expenses was $56 million, or 1.4%. Measured as a percent of sales, SG&A expenses decreased from 33.6% in 2006 to 32.8% in 2007. SG&A expenses as a percent of sales declined in each of the business segments with the exception of North American Retail Meats and International Beverage.

Each of the corporation’s business segments experienced costs related to the corporation’s transformation activities. Transformation expenses are recognized in SG&A expenses in the business segments and in general corporate expenses and generally include accelerated depreciation on facilities that will be exited, relocation and recruiting expenses related to the centralization of the corporation’s management team and costs associated with the disposition of various businesses.

10     Sara Lee Corporation and Subsidiaries

Total SG&A expenses reported in the business segments increased by $152 million, or 4.4%, between 2006 and 2007, primarily due to higher media advertising and promotion expenditures, higher distribution and selling costs and the impact of changes in foreign currency partially offset by the benefits of cost savings initiatives and lower costs associated with the corporation’s transformation program. Amortization of intangibles increased by $5 million in 2007 versus 2006. General corporate expenses, which are not allocated to the individual business segments, increased by $18 million, or 5.5%, primarily due to unfavorable foreign currency results, partially offset by lower transformation expenses and a decrease in corporate office and administrative expenses.

As more fully described in Note 4 to the Consolidated Financial Statements, “Discontinued Operations,” the corporation has reported its U.K. Apparel business as a discontinued operation. The corporation’s sale of the U.K. Apparel business resulted in the corporation retaining the pension plan for its U.K. employees and its related liabilities and certain other liabilities for workers’ compensation claims. As a result, the corporation reflects the net periodic pension costs associated with these plans in general corporate expenses in all periods presented. Pension expense related to these U.K. pension plans increased by $6 million in 2007 versus 2006.

Transformation Actions and Other Significant Items – The reported results for 2007 and 2006 reflect amounts recognized for actions associated with the corporation’s ongoing business transformation program and other significant amounts. These amounts include the following:

Business Transformation Costs – These include costs to retain and relocate existing employees, recruit new employees, third-party consulting costs associated with transformation efforts and incremental depreciation costs associated with decisions to close facilities at dates sooner than originally anticipated. In addition, the business transformation effort has resulted in the corporation eliminating certain employee benefits that has reduced costs and positively impacted reported results.

Impairment Charges – These costs are included on a separate line of the Consolidated Statements of Income and represent charges for the impairment of fixed assets, intangibles assets, goodwill and investments held by the corporation. During 2007 and 2006, impairment charges were recognized in the North American Retail Meats, North American Retail Bakery, International Beverage, International Bakery and Household and Body Care segments. Additional details regarding these impairment charges are discussed below and in Note 3 to the Consolidated Financial Statements, titled “Impairment Charges.”

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

Storm Costs – Operating results were negatively impacted in 2006 as a result of Gulf Coast hurricane damages.

The following is a summary of the transformation actions and other significant items that have impacted 2007 and 2006.

In millions	2007			2006
Cost of sales
Accelerated depreciation	$	31		$	30
Hurricane losses		–			2
Transformation costs		10			5
Selling, general and administrative expenses
Impairment charges		172			193
Transformation costs		109			154
Accelerated depreciation		1			9
Hurricane losses		–			3
Change in vacation policy		–			(14	)
Charges for (income from)
Exit activities		107			166
Asset and business dispositions		(12	)		(80	)
Impact on income from continuing operations before income taxes		418			468
Income tax benefit		(116	)		(166	)
Impact on income from continuing operations	$	302		$	302

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

In millions	2007		2006
North American Retail Meats	$	113	$	48
North American Retail Bakery		48		208
Foodservice		11		20
International Beverage		139		16
International Bakery		18		44
Household and Body Care		17		28
Impact on the business segments		346		364
General corporate expenses		72		104
Impact on income from continuing operations before income taxes	$	418	$	468

Sara Lee Corporation and Subsidiaries     11

2007 – The amount recognized in “Cost of sales,” as noted in the table above, consists of $31 million of accelerated depreciation on facilities and equipment targeted for disposal in the North American Retail Meats, North American Retail Bakery, Foodservice, International Beverage and Household and Body Care segments and $10 million of other transformation expenses. The amounts recognized in “Selling, general and administrative expenses” include impairment charges of $172 million to recognize the impairment of goodwill and certain owned and licensed trademarks in the International Beverage segment, plant and equipment in the North American Retail Meats segment, trademarks in the North American Retail Bakery segment and an investment in the Household and Body Care segment, a charge of $109 million for actions related to the corporation’s transformation plan, and a $1 million charge for accelerated depreciation. The corporation recognized a $95 million charge related to exit activities, asset and business dispositions during 2007. The $95 million charge consists of a $107 million charge for exit activities and a net $12 million of income related to asset and business dispositions. The $107 million charge for exit activities consists of a $99 million charge for management’s approved actions related to the termination of 2,658 employees, a $13 million charge for the exit of certain noncancelable lease and other contractual obligations, a $1 million charge related to the abandonment of certain capitalized software, partially offset by $6 million of exit activities that were completed for amounts more favorable than originally estimated. The $12 million of income from asset and business dispositions includes a $23 million gain primarily related to the disposition of an office building and a manufacturing and administrative facility. This gain was partially offset by a $11 million charge for costs associated with the disposition of businesses. The net impact of these actions was to decrease income from continuing operations before income taxes and income from continuing operations by $418 million and $302 million, respectively, and reduce diluted EPS by $0.41.

As noted above, the corporation recognized pretax impairment charges of $172 million in 2007, which includes a pretax charge to recognize the impairment of $92 million of goodwill and $26 million of trademarks in the International Beverage segment, $34 million of property in the North American Retail Meats segment, $16 million of trademarks in the North American Retail Bakery segment and the impairment of $4 million related to an investment in Zimbabwe.

As part of the corporation’s annual impairment review, the corporation also concluded that it was reasonably likely that certain other reporting units may become impaired in future periods. The term “reasonably likely” refers to an occurrence that is more than remote but less than probable in the

judgment of management. These reporting units include a bakery operation in Europe with $454 million of goodwill, a meat business in Mexico with $23 million of goodwill and a beverage business in Poland with $70 million of goodwill. While the fair value of these operations or brands either approximates or exceeds the carrying value at the present time and management does not believe that impairment is probable, the performance of these businesses and brands requires continued improvement in future periods to sustain their carrying value. If the performance of these reporting units and brands does not continue to improve, a future impairment could result for a portion or all of the goodwill or trademark amounts noted previously. The largest of these operations is the corporation’s bakery operation in Europe with $454 million of goodwill. The fair value of the reporting unit exceeds the carrying value at the end of 2007. Holding the other valuation assumptions constant, a downward shift in future operating profits in excess of 6% across all periods from projected levels would indicate that the carrying value of the business may be in excess of the fair value. The amount of any impairment is dependent on the performance of the business or brand which is dependent upon a number of variables which cannot be predicted with certainty.

As a result of the corporation’s transformation program, the corporation has recognized a liability at the end of 2007 of approximately $165 million that relates primarily to future severance and other lease and contractual commitments. A significant portion of the remaining accrued balance that relates to severance matters will be paid out within the next two years and a significant portion of the remaining accrued balance that relates to lease and other contractual liabilities will be paid out within the next five years.

2006 – The amount recognized in “Cost of sales,” as noted in the previous table, consists of $30 million of accelerated depreciation on facilities and equipment targeted for disposal in the North American Retail Meats, North American Retail Bakery, Foodservice, International Beverage and Household and Body Care segments, $2 million of losses as a result of Gulf Coast hurricanes and $5 million of other transformation expenses. The amounts recognized in “Selling, general and administrative expenses” include an impairment charge of $193 million to recognize the impairment of certain owned and licensed trademarks in the North American Retail Bakery and International Bakery segments, a charge of $154 million for actions related to the corporation’s transformation plan, a $9 million charge for accelerated depreciation, and $3 million of losses from Gulf Coast hurricanes, which was partially offset by $14 million of income resulting from a change in the corporation’s vacation policy for U.S. employees. The corporation recognized an $86 million charge

12     Sara Lee Corporation and Subsidiaries

related to exit activities, asset and business dispositions during 2006. The $86 million charge consists of a $166 million charge for exit activities and a net $80 million of income related to asset and business dispositions. The $166 million charge for exit activities consists of a $159 million charge for management’s approved actions related to the termination of 1,873 employees, a $14 million charge for the exit of certain owned and leased facilities and the abandonment of certain capitalized software, partially offset by $7 million of exit activities that were completed for amounts more favorable than originally estimated. The $80 million of income from asset and business dispositions includes a $119 million gain related to the sale of working capital of a European rice product line, certain European skin care and sunscreen assets, certain assets related to the French and Belgian Nuts and Snacks business, a minority investment in a foreign operation and certain other asset dispositions. This gain was partially offset by a $39 million charge to prepare businesses for disposition. The net impact of these actions was to decrease income from continuing operations before income taxes and income from continuing operations by $468 million and $302 million, respectively, and reduce diluted EPS by $0.39.

These actions are more fully described in Note 19 to the Consolidated Financial Statements, “Exit and Disposal Activities”. As a result of exit activities taken since the beginning of 2005, and transformation actions taken since the beginning of the transformation plan in 2005, the corporation’s cost structure was reduced and efficiency was improved. The following table summarizes the actual savings from these actions.

In millions	Actual Savings Recognized in 2007		Actual Savings Recognized in 2006
Restructuring Actions Approved in:
2005	$	56	$	35
2006		99		27
2007		5		–
	$	160	$	62

Receipt of Contingent Sale Proceeds – The corporation sold its European cut tobacco business in 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 2007 and 2006 payments passed in the first quarters of each of the respective years and the corporation received the payments. The 2007 payment was equivalent to $120 million and the 2006 payment was equivalent to $114 million, based upon respective exchange rates on the date of receipt. These amounts were recognized in the corporation’s earnings when received and the payments increased diluted earnings per share from continuing operations in 2007 and 2006 by $0.16 and $0.15, respectively, when they were recognized.

Net Interest Expense – This expense decreased by $93 million in 2007 to $137 million. The decrease was a result of lower debt levels and higher interest income partially offset by higher average interest rates.

Income Tax Expense – The effective tax rate on continuing operations in 2007 and 2006 was impacted by a number of significant items that are shown in the reconciliation of the corporation’s effective tax rate to the U.S. statutory rate in Note 23 to the Consolidated Financial Statements. The corporation recognized a tax benefit on continuing operations of $7 million in 2007, or an effective tax rate of (1.6%). The corporation’s effective tax rate includes a tax charge of $194 million to repatriate to the U.S. the earnings of certain foreign subsidiaries. Additionally, the effective tax rate was impacted by net tax benefits during the year related to unusual or infrequently occurring items. The most significant of these items are as follows:

•    The corporation sold the shares of a subsidiary in the first quarter of 2007, which resulted in a $169 million tax benefit.

•    Contingent tax obligations were reduced by $67 million after statutes in multiple jurisdictions lapsed and certain audits and reviews were completed.

•    After considering the lower profit expectations of a Brazilian coffee operation, the corporation concluded that it was necessary to adjust the valuation allowances on the deferred tax balances in the Brazilian tax jurisdiction, which resulted in a $27 million charge for the fiscal year.

•    The taxes provided on the fiscal 2006 earnings of the corporation were reduced by $21 million, primarily as a result of a change in the estimated cost of repatriating $1.7 billion of cash from multiple foreign jurisdictions.

•    The corporation’s global mix of earnings, the tax characteristics of the corporation’s income and the benefit from certain foreign jurisdictions having lower tax rates also reduced the corporation’s tax expense during the period.

In 2006, the corporation recognized tax expense of $161 million, or an effective tax rate of 83.5% as the corporation recognized a $529 million tax charge to repatriate to the U.S. approximately $1.7 billion of cash related to current and prior

Sara Lee Corporation and Subsidiaries     13

year earnings of certain foreign subsidiaries previously deemed to be permanently invested. Of the $529 million charge, $291 million relates to earnings of prior years. This charge was partially offset by a $332 million credit related to the favorable outcome of certain foreign tax audits and reviews that were completed during the period and a $36 million benefit due to a change in a valuation allowance.

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 spin off of the Branded Apparel Americas/Asia business that was completed in 2007 may result in an increase in the corporation’s effective tax rate in future years as the operations that were spun off had, historically, a lower effective tax rate than the remainder of the business and generated a significant amount of operating cash flow. The elimination of this cash flow has required 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 resulted in higher levels of tax expense and cash taxes paid.

•    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.

•    Facts and circumstances may change that cause the corporation to revise the conclusions on the ability to realize certain net operating losses and other deferred tax attributes.

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 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 Earnings Per Share (EPS) from Continuing Operations – Income from continuing operations in 2007 was $426 million, which was $395 million higher than the prior year. The increase in

income from continuing operations was primarily due to the following factors:

•    The gross margin increased by $291 million, due to the favorable impacts of changes in foreign currency, savings from continuous improvement programs and an improved product mix, partially offset by a 0.2% decline in the gross margin percent. The gross margin percent declined in each business segment except North American Retail Bakery, primarily due to the impact of higher commodity and energy prices and competitive market conditions.

•    SG&A expenses in 2007 were $175 million higher than in the comparable period of the prior year primarily due to higher media advertising and promotion expense, higher distribution and selling expense and the impact of changes in foreign currency, partially offset by the benefits of cost savings initiatives and a reduction in the cost of the corporation’s transformation program. SG&A expenses as a percent of sales decreased from 33.6% in 2006 to 32.8% in 2007.

•    The corporation recognized a $172 million and $193 million pretax impairment charge in 2007 and 2006, respectively. In addition, net charges for exit activities, asset and business dispositions in 2007 and 2006 were $95 million and $86 million, respectively. In total, charges for impairments, exit activities, asset and business dispositions in 2007 were $12 million less than in 2006.

•    The corporation recognized $6 million more of contingent sale proceeds from a prior disposition in 2007 than in 2006 due to changes in foreign currency.

•    Net interest expense decreased by $93 million in 2007 due to a decrease in average borrowing levels and higher interest income.

•    Income tax expense decreased by $168 million in 2007 versus 2006.

Diluted EPS from continuing operations increased from $0.04 in 2006 to $0.57 in 2007. The increase in diluted EPS from continuing operations in 2007 was favorably impacted by lower average shares outstanding during 2007 compared to 2006. During 2007, the corporation repurchased 42 million shares of common stock.

14     Sara Lee Corporation and Subsidiaries

Discontinued Operations – This includes the results of the corporation’s Direct Selling, U.S. Retail Coffee, European Branded Apparel, European Nuts and Snacks, U.K. Apparel, U.S. Meat Snacks, European Meats and Branded Apparel Americas/Asia businesses. The following summarizes the results of the discontinued operations for 2007 and 2006:

In millions	2007			2006			Dollar Change			Percent Change
Net sales	$	901		$	7,079		$	(6,178	)	(87.3	)%
Income from operations before income taxes	$	92		$	142		$	(50	)
Income tax benefit (expense) on income from operations		(30	)		(19	)		(11	)
Gain on sale of discontinued operations		5			466			(461	)
Income taxes on gain on sale of discontinued operations		11			(65	)		76
Net income (loss) from discontinued operations	$	78		$	524		$	(446	)

Results of Discontinued Operations – Net sales of the discontinued operations decreased by $6,178 million in 2007 as compared to 2006. The corporation completed the sales of the Direct Selling, U.S. Retail Coffee, European Branded Apparel, European Nuts and Snacks, U.K. Apparel and the U.S. Meat Snacks businesses during 2006. Therefore, no sales were reported in 2007 and less than 12 months of sales were included in 2006. Additionally, the European Meats and Branded Apparel Americas/Asia businesses were disposed of in early 2007 and as such there were less than 12 months of sales in 2007. The income before income taxes decreased by $49 million in 2007 as a result of there being less than a full 12 months of results in 2007 and 2006 due to the timing of the dispositions, as noted above. During 2006, the corporation recognized the following pretax impairment charges related to the discontinued operations: a $179 million charge related to European Branded Apparel, a $44 million charge related to U.S. Retail Coffee, a $34 million charge related to the U.K. Apparel business, a $125 million charge related to the European Meats business and a $12 million charge related to the U.S. Meat Snacks business. Further details regarding these charges can be found in Note 4 to the Consolidated Financial Statements, “Discontinued Operations.”

The effective tax rate of the pretax income recognized in discontinued operations was 33.0% in 2007 and 13.2% in 2006. The tax rate in 2006 was impacted by several factors: first, the impairment charges included $158 million of non-deductible goodwill; second, certain of the impairment charges and operating losses are in tax jurisdictions in which the corporation was unable to recognize a tax benefit; and finally, the closing of the Direct Selling sales transaction

resulted in the corporation receiving certain tax benefits in the current period for foreign taxes incurred in 2005.

The corporation’s discontinued operations impacted the cash flows of the corporation as summarized in the table below.

In millions – Increase/(decrease)	2007			2006
Discontinued operations impact on:
Cash flow from operating activities	$	88		$	855
Cash flow used in investing activities		(35	)		(311	)
Cash flow from (used in) financing activities		(67	)		(567	)
Net cash impact of discontinued operations	$	(14	)	$	(23	)
Cash balance of discontinued operations:
At start of period	$	14		$	37
At end of period		–			14
(Decrease) increase in cash of discontinued operations	$	(14	)	$	(23	)

Gain on Sale of Discontinued Operations – The corporation completed the disposition of the European Meats and Branded Apparel Americas/Asia businesses in early 2007, and completed certain postclosing adjustments related to the completed transactions and recognized a pretax and after-tax gain of $5 million and $16 million, respectively. The corporation completed the sales of Direct Selling, U.S. Retail Coffee, European Branded Apparel, U.K. Apparel, European Nuts and Snacks and U.S. Meat Snacks businesses during 2006 and recognized a pretax and after-tax gain of $466 million and $401 million, respectively. Further details regarding these transactions are included in Note 4 to the Consolidated Financial Statements, “Discontinued Operations.”

Consolidated Net Income and Diluted Earnings Per Share (EPS) – Net income of $504 million in 2007 was $51 million, or 9.4%, lower than reported in 2006. The decline in net income was primarily due to the $446 million decline in results related to the discontinued operations partially offset by the $395 million increase in income from continuing operations. Diluted EPS decreased from $0.72 in 2006 to $0.68 in 2007, a decline of 5.6%.

Sara Lee Corporation and Subsidiaries     15

Operating Results by Business Segment – 2007 Compared With 2006

Operating results by business segment in 2007 compared with 2006 are as follows:

	Net Sales						Income From Continuing Operations Before Income Taxes
In millions	2007			2006			2007			2006
North American Retail Meats	$	2,638		$	2,534		$	79		$	149
North American Retail Bakery		1,998			1,871			(2	)		(197	)
Foodservice		2,197			2,179			139			116
International Beverage		2,617			2,320			317			388
International Bakery		799			742			38			20
Household and Body Care		2,042			1,827			272			216
Total business segments		12,291			11,473			843			692
Intersegment sales		(13	)		(13	)		–			–
Total net sales and operating segment income		12,278			11,460			843			692
Amortization of intangibles		–			–			(67	)		(62	)
General corporate expenses		–			–			(340	)		(322	)
Contingent sale proceeds		–			–			120			114
Total net sales and operating income		12,278			11,460			556			422
Net interest expense		–			–			(137	)		(230	)
Net sales and income from continuing operations before income taxes	$	12,278		$	11,460		$	419		$	192

A discussion of each business segment’s sales and operating segment income is presented below. The change in unit volume for each business segment that is shown in the following tables excludes the impact of acquisitions and dispositions, if any.

The intangible amortization in the table above relates to trademarks and customer relationships. Software amortization is recognized in the earnings of the segments.

General corporate expenses increased primarily due to unfavorable foreign currency results partially offset by lower costs associated with the transformation and lower corporate office and administrative expenses as compared to the prior year.

North American Retail Meats

In millions	2007			2006			Dollar Change			Percent Change
Change in unit volume										1	%
Net sales	$	2,638		$	2,534		$	104		4.1	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	–		$	4		$	(4	)
Acquisition/dispositions		18			–			18
Total	$	18		$	4		$	14
Operating segment income	$	79		$	149		$	(70	)	(46.8	)%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	–		$	–		$	–
Exit activities, asset and business dispositions		(35	)		(15	)		(20	)
Transformation charges		(17	)		(21	)		4
Impairment charge		(34	)		–			(34	)
Acquisition/dispositions		(2	)		–			(2	)
Vacation accrual		–			3			(3	)
Accelerated depreciation		(27	)		(15	)		(12	)
Total	$	(115	)	$	(48	)	$	(67	)

Unit volumes in 2007 in the North American Retail Meats segment increased 1% as compared to 2006, consisting of increases of 4% in the U.S. retail meats and 1% in U.S. commodity meats partially offset by a 10% decline in Mexico.

Net sales in the North American Retail Meats segment increased by $104 million, or 4.1%, to $2,638 million in 2007 from $2,534 million in the prior year. During 2007, the weakening of the Mexican peso decreased reported net sales by $4 million, or 0.2%. Sales of businesses acquired net of business dispositions since the beginning of fiscal 2006 increased net sales by $18 million, or 0.7%. The remaining net sales increase of $90 million, or 3.6%, was primarily due to increases in U.S. retail unit volumes and a favorable product mix.

The North American Retail Meats gross margin percent decreased from 29.7% in 2006 to 29.1% in 2007, primarily due to higher commodity and labor costs partially offset by improved manufacturing efficiencies.

Operating segment income in the North American Retail Meats segment declined by $70 million from $149 million in 2006 to $79 million in 2007. Changes in foreign currency exchange rates did not have a significant impact on reported operating segment income. The net impact of exit activities, accelerated depreciation, transformation expenses and an impairment charge decreased operating segment income by $113 million in 2007, while during 2006, the corporation recognized a net charge of $48 million from exit activities, transformation charges, accelerated depreciation and a

16     Sara Lee Corporation and Subsidiaries

change in vacation accrual. The net impact of these actions reduced operating segment income by $65 million, or 44.5%. The impact of businesses acquired after the beginning of 2006 decreased operating segment income by $2 million, or 0.9%. The remaining operating segment income decline was $3 million, or 1.3%, compared to the same period of the prior year as the favorable impact of higher volumes, an improved product mix, savings from continuous improvement programs and a reduction in pension, postretirement and other benefit plan costs were offset by higher commodity costs and higher media advertising and promotion, distribution and administrative costs.

North American Retail Bakery

In millions	2007			2006			Dollar Change			Percent Change
Change in unit volume										(4	)%
Net sales	$	1,998		$	1,871		$	127		6.8	%
Increase/(decrease) in net sales from
Acquisitions	$	106		$	–		$	106
Operating segment loss	$	(2	)	$	(197	)	$	195		99.1	%
Increase/(decrease) in operating segment loss from
Exit activities, asset and business dispositions	$	(8	)	$	(7	)	$	(1	)
Transformation charges		(21	)		(18	)		(3	)
Impairment charge		(16	)		(179	)		163
Curtailment gain		–			–			–
Acquisitions		7			–			7
Vacation accrual		–			3			(3	)
Accelerated depreciation		(3	)		(7	)		4
Total	$	(41	)	$	(208	)	$	167

The North American Retail Bakery segment also includes the results of the corporation’s Senseo retail coffee business in the U.S.

Net unit volumes in the North American Retail Bakery segment declined 4% during 2007, primarily as a result of a decline in unbranded U.S. fresh bread business, particularly with certain private label customers, which was partially offset by increases in sales of frozen bakery products.

Net sales in the North American Retail Bakery segment increased $127 million, or 6.8%, over the comparable prior year period. Acquisitions completed after the start of fiscal 2006 increased sales by $106 million, or 5.7%, during the period. The remaining increase in net sales of $21 million, or 1.1%, was primarily attributable to certain selling price increases to offset higher costs, which was partially offset by lower unit volumes.

The gross margin percent in the North American Retail Bakery segment increased 0.2% from 46.2% in 2006 to 46.4% in 2007, as higher pricing, savings from continuous improvement programs and an improved product mix were only partially offset by higher costs for commodities and employee costs.

The North American Retail Bakery segment reported an operating segment loss of $2 million in 2007 as compared to a loss of $197 million in 2006. Both 2007 and 2006 were impacted by some or all of the following: an impairment charge, exit activities, transformation expenses, accelerated depreciation, and a change in an employee vacation policy as shown in the previous table. In 2007, the North American Retail Bakery segment recognized total expenses of $48 million for impairment charges, exit activities, transformation expenses and accelerated depreciation, while in 2006, the segment recognized $208 million of net charges from the combination of an impairment charge, exit activities, transformation expenses, accelerated depreciation and a change in vacation accrual. The net impact of these items in 2007 versus 2006 increased operating segment income by $160 million. Operating segment income in 2007 increased by $7 million related to income from acquisitions after the start of fiscal 2006. The remaining operating segment income increase of $28 million was primarily attributable to improved pricing and product mix, the benefits of continuous improvement programs, lower media advertising and promotion spending, and a reduction in pension and postretirement benefit plan costs partially offset by higher commodity and labor costs.

Foodservice

In millions	2007			2006			Dollar Change			Percent Change
Change in unit volume										(2	)%
Net sales	$	2,197		$	2,179		$	18		0.8	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	–		$	(1	)	$	1
Operating segment income	$	139		$	116		$	23		20.2	%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	–		$	–		$	–
Exit activities, asset and business dispositions		(7	)		(8	)		1
Transformation charges		(3	)		(8	)		5
Hurricane losses		–			(5	)		5
Vacation accrual		–			4			(4	)
Accelerated depreciation		(1	)		(4	)		3
Total	$	(11	)	$	(21	)	$	10

Sara Lee Corporation and Subsidiaries     17

Net unit volumes in the Foodservice segment declined 2% during the period as increases for meat products were offset by declines in beverage and bakery products.

Net sales in the Foodservice segment increased $18 million, or 0.8% over the comparable prior year period. Changes in foreign currency, primarily the Canadian dollar, increased net sales by $1 million. There were no acquisitions or dispositions that impacted net sales during the period. The remaining net sales increase of $17 million, or 0.8%, was primarily due to certain price increases to cover higher commodity costs.

The gross margin percent in the Foodservice segment decreased 0.9%, from 27.2% in 2006 to 26.3% in 2007, primarily from higher commodity and employee costs, partially offset by certain price increases and savings from continuous improvement programs.

Operating segment income in the Foodservice segment increased by $23 million, or 20.2%, from $116 million in 2006 to $139 million in 2007. In 2007, exit activities, transformation expenses and accelerated depreciation totaled $11 million, while in 2006, the segment reported a net charge of $21 million for exit activities, transformation expenses, accelerated depreciation, hurricane losses and a change in vacation accrual. The net impact of these items increased operating segment income by $10 million, or 8.6%. The remaining operating segment income increased by $13 million, or 11.5%, primarily from the savings from continuous improvement initiatives, higher pricing and a reduction in pension and postretirement benefit plan costs partially offset by higher commodity costs.

International Beverage

In millions	2007			2006			Dollar Change			Percent Change
Change in unit volume										2	%
Net sales	$	2,617		$	2,320		$	297		12.8	%
Increase/(decrease) in net sales from Changes in foreign currency exchange rates	$	–		$	(162	)	$	162
Dispositions		–			51			(51	)
Total	$	–		$	(111	)	$	111
Operating segment income	$	317		$	388		$	(71	)	(18.4	)%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	–		$	(28	)	$	28
Exit activities, asset and business dispositions		(12	)		3			(15	)
Transformation charges		(8	)		(16	)		8
Impairment charges		(118	)		–			(118	)
Dispositions		–			8			(8	)
Accelerated depreciation		(1	)		(3	)		2
Total	$	(139	)	$	(36	)	$	(103	)

Net unit volumes in the International Beverage segment increased 2% compared to the prior year period, as unit volumes for retail coffee products increased 2% while foodservice coffee unit volumes increased less than 1%. Roast and ground coffee retail unit volumes increased in both Europe and Brazil.

Net sales in the International Beverage segment increased by $297 million, or 12.8%, to $2,617 million in 2007. Within the segment, the impact of foreign currency changes, particularly in the European euro, increased reported net sales by $162 million, or 7.6%. Dispositions completed after the start of 2006 reduced net sales by $51 million, or 2.5%, during the year. The remaining net sales increase of $186 million, or 7.7%, compared to the comparable period of the prior year was primarily due to an improved product mix, higher unit volumes and unit selling prices that increased as the corporation passed on certain raw material cost increases to the customer.

The gross margin percent in the International Beverage segment decreased 0.5% from 43.5% in 2006 to 43.0% in 2007, primarily as a result of higher raw material and labor costs that were not fully passed along to the customer in the form of higher selling prices.

Operating segment income for the International Beverage segment decreased $71 million, or 18.4%, to $317 million in 2007. Changes in foreign currency exchange rates increased operating segment income by $28 million, or 7.7%. The International Beverage segment recognized $139 million of net charges in 2007 related to impairment charges, transformation charges, exit activities and accelerated depreciation, while in 2006, $16 million in charges was recognized. The net impact of these items decreased operating segment income by $123 million, or 31.3%. The impact of businesses disposed of after the beginning of 2006 decreased operating segment income by $8 million, or 2.2%. The remaining operating segment income increase was $32 million, or 7.4%, primarily from higher unit volumes, an improved product mix and lower pension costs, partially offset by higher selling and administrative costs and higher media advertising and promotion expense.

18     Sara Lee Corporation and Subsidiaries

International Bakery

In millions	2007			2006			Dollar Change		Percent Change
Change in unit volume									2	%
Net sales	$	799		$	742		$	57	7.8	%
Increase/(decrease) in net sales from Changes in foreign currency exchange rates	$	–		$	(51	)	$	51
Operating segment income	$	38		$	20		$	18	91.3	%
Increase/(decrease) in operating segment income from Changes in foreign currency exchange rates	$	–		$	(5	)	$	5
Exit activities, asset and business dispositions		(14	)		(25	)		11
Transformation charges		(4	)		(5	)		1
Impairment charge		–			(14	)		14
Total	$	(18	)	$	(49	)	$	31

Net unit volumes in the International Bakery segment increased 2% in 2007 as compared to 2006, with increases in shipments of dough products and fresh bread in Europe and frozen baked goods in Australia.

Net sales in the International Bakery segment increased $57 million, or 7.8%, over the comparable prior year period. There were no acquisitions or dispositions that impacted the International Bakery segment during the period. The impact of foreign currency changes, particularly in the European euro, increased reported net sales by $51 million, or 7.0%. The remaining net sales increase of $6 million, or 0.8%, was primarily a result of the higher unit volumes and price increases to offset certain cost increases.

The gross margin percent in the International Bakery segment declined 1.8%, from 41.8% in 2006 to 40.0% in 2007, primarily due to an unfavorable product mix and the impact of higher commodity costs.

Operating segment income in the International Bakery segment increased by $18 million, or 91.3%, from $20 million in 2006 to $38 million in 2007. The impact of changes in foreign currency exchange rates increased operating segment income by $5 million, or 5.8%. In 2007, the International Bakery segment recognized $18 million of charges related to exit activities and transformation expenses and recognized $44 million of charges in 2006. The net impact of these charges increased operating segment income by $26 million, or 104.0%. The remaining decline in operating segment income of $13 million, or 18.5%, was primarily due to an unfavorable product mix and higher commodity, energy and employee costs.

Household and Body Care

In millions	2007			2006			Dollar Change			Percent Change
Change in unit volume										6	%
Net sales	$	2,042		$	1,827		$	215		11.8	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	–		$	(102	)	$	102
Acquisitions/dispositions		10			3			7
Total	$	10		$	(99	)	$	109
Operating segment income	$	272		$	216		$	56		25.7	%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	–		$	(11	)	$	11
Exit activities, asset and business dispositions		–			(1	)		1
Transformation charges		(13	)		(19	)		6
Impairment charge		(4	)		–			(4	)
Accelerated depreciation		–			(8	)		8
Acquisitions/dispositions		(1	)		–			(1	)
Total	$	(18	)	$	(39	)	$	21

Unit volumes in the Household and Body Care segment for the four core categories – shoe care, body care, air care and insecticides – increased 6% in 2007, with increases in all four categories.

Net sales in the Household and Body Care segment increased $215 million, or 11.8%, in 2007 to $2,042 million. The impact of changes in foreign currency exchange rates increased reported net sales by $102 million, or 5.9%, primarily due to changes in the European euro and British pound. The impact of acquisitions, net of product lines that had been disposed of after the start of 2006 increased net sales by $7 million or 0.4%. The remaining net sales increase of $106 million, or 5.5%, was primarily due to higher unit volumes and an improved product mix.

The gross margin percent in the Household and Body Care segment decreased 0.1%, from 49.9% in 2006 to 49.8% in 2007, primarily due to lower pricing in a competitive marketplace and higher costs associated with new product introductions.

Operating segment income increased $56 million, or 25.7%, to $272 million in 2007. Changes in foreign currency exchange rates increased operating segment income by $11 million, or 5.2%. In 2007, the Household and Body Care segment recognized $17 million of charges for transformation costs and an impairment. During 2006, the Household and Body Care segment recognized $28 million in charges for exit activities, transformation costs and accelerated depreciation.

Sara Lee Corporation and Subsidiaries     19

The change in transformation charges, exit activities, an impairment charge and accelerated depreciation between 2006 and 2007 increased operating segment income by $11 million, or 7.7%. The 2007 period included $1 million of losses from acquisitions after the start of 2006, which reduced operating segment income by 0.5%. The remaining operating segment income increased by $35 million, or 13.3%, primarily from the increase in unit volumes, the favorable impact of cost saving initiatives and a reduction in pension costs.

Review of Consolidated Results of Operations –

2006 Compared With 2005

In millions	2006			2005			Dollar Change			Percent Change
Net sales	$	11,460		$	11,346		$	114		1.0	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	–		$	114		$	(114	)
Acquisitions/dispositions		38			96			(58	)
Total	$	38		$	210		$	(172	)
Operating income	$	422		$	946		$	(524	)	(55.4	)%
Increase/(decrease) in operating income from
Receipt of contingent sale proceeds	$	114		$	117		$	(3	)
Changes in foreign currency exchange rates		–			29			(29	)
Exit activities, asset and business dispositions		(86	)		(43	)		(43	)
Transformation restructuring charges		(159	)		(9	)		(150	)
Curtailment gain		–			28			(28	)
Accelerated depreciation		(39	)		(21	)		(18	)
Accelerated amortization of intangibles		–			(9	)		9
Impairment charges		(193	)		–			(193	)
Hurricane losses		(5	)		–			(5	)
Change in vacation policy		14			–			14
Acquisitions/dispositions		2			18			(16	)
Total	$	(352	)	$	110		$	(462	)

Net Sales – Consolidated net sales increased $114 million, or 1.0%, in 2006 over 2005, to $11,460 million. Changes in foreign currency, particularly in the European euro and British pound, decreased reported net sales by 1.1%, or $114 million. The net impact of acquisitions and dispositions in 2006 versus 2005 reduced net sales by $58 million, or 0.5%. The remaining net sales increase of $286 million, or 2.6%, primarily resulted from increases in net sales in the North American Retail Meats segment, driven by higher unit volumes and an improved product mix; in the International Beverage

segment, driven by an improved product mix and higher selling prices to cover higher costs; in the Foodservice segment, resulting from higher unit selling prices as the segment passed along higher costs; and in the North American Retail Bakery segment, due to higher product pricing.

Unit Volumes – Unit volumes in the North American Retail Meats segment increased 5%, with increases coming in both the U.S. and Mexico. Increased sales of branded fresh bread products and the corporation’s single serve retail coffee products were offset by declines in unbranded fresh bread and frozen bakery products resulting in a unit volume decline of 1% versus the prior year in the North American Retail Bakery segment. Unit volumes were unchanged in the Foodservice segment as declines in beverage products offset higher unit sales of meat and bakery products. In the International Beverage segment, unit volumes declined less than 1% as volumes in the retail channel were unchanged and volumes in the foodservice channel declined 1%. In the International Bakery segment, unit volumes declined 1% as declines for fresh and frozen products in Europe and Australia were only partially offset by increases in dough products in Europe. The unit volumes for the four core categories of the Household and Body Care segment were unchanged in 2006, as growth in the body care and shoe care categories were offset by declines in the air care and insecticides categories.

Gross Margin Percent – The gross margin percent for the corporation declined by 1.4% in 2006, from 40.1% in 2005 to 38.7% in 2006, as the North American Retail Meats segment experienced higher gross margins, while the remaining segments experienced lower gross margins. The gross margin percent was negatively impacted by higher commodity and energy costs, lower volumes, and an unfavorable product mix in certain segments. The gross margin percent in the North American Retail Meats segment increased 1.4% during the year as the segment experienced increased unit volumes, a favorable product mix and lower raw material commodity costs.

    Selling, General and Administrative Expenses –

In millions	2006		2005		Dollar Change			Percent Change
SG&A expenses in the business segment results:
Media advertising and promotion	$	539	$	554	$	(15	)	(2.9	)%
Other		2,925		2,812		113		4.0
Total business segments		3,464		3,366		98		2.9
Amortization of identifiable intangibles		62		67		(5	)	(7.8	)
General corporate expenses		322		246		76		31.1
Total	$	3,848	$	3,679	$	169		4.6	%

20     Sara Lee Corporation and Subsidiaries

Total selling, general and administrative (SG&A) expenses increased $169 million, or 4.6%, in 2006 over the prior year. Changes in foreign currency exchange rates, primarily in the European euro, decreased SG&A expenses by $49 million, or 1.4%. Therefore, the remaining increase in SG&A expenses was $218 million, or 6.0%. Measured as a percent of sales, SG&A expenses increased from 32.4% in 2005 to 33.6% in 2006. SG&A expenses as a percent of sales increased in each of the business segments with the exception of International Beverage.

Each of the corporation’s business segments experienced costs related to the corporation’s transformation activities. Transformation expenses are recognized in SG&A expenses in the business segments and in general corporate expenses and generally include accelerated depreciation on facilities that will be exited, relocation and recruiting expenses related to the centralization of the corporation’s management team and costs associated with the disposition of various businesses.

Total SG&A expenses reported in the business segments increased by $98 million, or 2.9%, between 2005 and 2006, primarily due to costs associated with the corporation’s transformation program. Amortization of intangibles decreased by $5 million in 2006 versus 2005. General corporate expenses, which are not allocated to the individual business segments, increased by $76 million, or 31.1%, primarily due to higher transformation expenses, a $16 million increase in corporate office and administrative expenses and $20 million of non-recurring income in the prior year related to the favorable resolution of a withholding tax obligation partially offset by favorable foreign currency results as compared to the prior year.

As more fully described in Note 4 to the Consolidated Financial Statements, “Discontinued Operations,” the corporation has reported its U.K. Apparel business as a discontinued operation. The corporation’s sale of the U.K. Apparel business resulted in the corporation retaining the pension plan for its U.K. employees and its related liabilities and certain other liabilities for workers’ compensation claims. As a result, the corporation has recognized the service costs related to these retained plans in the operations of the discontinued business and the remaining net periodic pension costs associated with these plans in general corporate expenses in all periods presented.

Transformation Actions and Other Significant Items – The reported results for 2006 and 2005 reflect amounts recognized for actions associated with the corporation’s ongoing business transformation program and other significant amounts. These amounts include the following:

Business Transformation Costs – These include costs to retain and relocate existing employees, recruit new

employees, third-party consulting costs associated with transformation efforts and incremental depreciation costs associated with decisions to close facilities at dates sooner than originally anticipated. In addition, the business transformation effort has resulted in the corporation eliminating certain employee benefits that has reduced costs and positively impacted reported results.

Impairment Charges – These costs are included on a separate line of the Consolidated Statements of Income and in 2006 represent charges for the impairment of intangible assets in the North American Retail Bakery and International Bakery segments. The corporation has focused marketing support on a fewer number of larger brands and plans to exit certain other brands. The corporation conducted impairment reviews for the trademarks utilized in these segments and recognized impairment charges during 2006. Additional details regarding these impairment charges are discussed below and in Note 3 to the Consolidated Financial Statements, titled “Impairment Charges.”

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

Storm Costs – Operating results were negatively impacted in 2006 as a result of Gulf Coast hurricane damages.

Sara Lee Corporation and Subsidiaries     21

The following is a summary of the transformation and other significant items that have impacted 2006 and 2005.

In millions	2006			2005
Cost of sales
Accelerated depreciation	$	30		$	21
Hurricane losses		2			–
Transformation costs		5			–
Curtailment gain from bakery workforce reduction		–			(28	)
Selling, general and administrative expenses
Impairment charges		193			–
Accelerated depreciation and amortization of intangibles		9			9
Transformation charges		154			9
Hurricane losses		3			–
Change in vacation policy		(14	)		–
Charges for (income from)
Exit activities		166			70
Asset and business dispositions		(80	)		(27	)
Impact on income from continuing operations before income taxes		468			54
Income tax benefit		(166	)		(14	)
Impact on income from continuing operations	$	302		$	40

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

In millions	2006		2005
North American Retail Meats	$	48	$	(31	)
North American Retail Bakery		208		(6	)
Foodservice		20		(2	)
International Beverage		16		32
International Bakery		44		5
Household and Body Care		28		9
Impact on the business segments		364		7
General corporate expenses		104		38
Accelerated amortization of intangibles		–		9
Impact on income from continuing operations before income taxes	$	468	$	54

2006 – The amount recognized in “Cost of sales,” as noted in the table above, consists of $30 million of accelerated depreciation on facilities and equipment targeted for disposal in the North American Retail Meats, North American Retail Bakery, Foodservice, International Beverage and Household and Body Care segments, $2 million of losses as a result of Gulf Coast hurricanes and $5 million of other transformation expenses. The amounts recognized in “Selling, general and administrative expenses” include an impairment charge of $193 million to recognize the impairment of certain owned

and licensed trademarks in the North American Retail Bakery and International Bakery segments, a charge of $154 million for actions related to the corporation’s transformation plan, a $9 million charge for accelerated depreciation, and $3 million of losses from Gulf Coast hurricanes, which was partially offset by $14 million of income resulting from a change in the corporation’s vacation policy for U.S. employees. The corporation recognized an $86 million charge related to exit activities, asset and business dispositions during 2006. The $86 million charge consists of a $166 million charge for exit activities and a net $80 million of income related to asset and business dispositions. The $166 million charge for exit activities consists of a $159 million charge for management’s approved actions related to the termination of 1,873 employees, a $14 million charge for the exit of certain owned and leased facilities and other assets, partially offset by $7 million of exit activities that were completed for amounts more favorable than originally estimated. The $80 million of income from asset and business dispositions includes a $119 million gain related to the sale of working capital of a European rice product line, certain European skin care and sunscreen assets, certain assets related to the French and Belgian Nuts and Snacks business, a minority investment in a foreign operation and certain other asset dispositions. This gain was partially offset by a $39 million charge to prepare businesses for disposition. The net impact of these actions was to decrease income from continuing operations before income taxes and income from continuing operations by $468 million and $302 million, respectively, and reduce diluted EPS by $0.39.

2005 – The following is a summary of the actions that impacted the corporation in 2005. The amount recognized on the line titled “Cost of sales,” as noted in the previous table above, consists of a $28 million curtailment gain from the termination of certain North American Retail Bakery employees, which was partially offset by a $21 million charge for accelerated depreciation on certain facilities and equipment to be disposed of in the North American Retail Bakery, Foodservice and Household and Body Care segments. SG&A expenses include an $18 million net charge, which includes a $9 million charge for accelerated amortization for the cost to abandon certain North American Retail Bakery intangible assets and a $9 million charge for transformation costs. The line titled “Net charges for exit activities, asset and business dispositions” includes a $43 million net charge that consists of the following components: $70 million net charge for certain exit activities and a net $27 million gain from certain asset and business disposition actions. The $70 million charge for exit activities includes the following components: a $73 million charge relates to certain severance actions related to the planned termination of 739

22     Sara Lee Corporation and Subsidiaries

employees, a $6 million charge relates to certain lease exit and other contractual costs and $9 million of income relates to certain exit activities that were completed for amounts more favorable than originally estimated. The $27 million net gain from asset and business disposition actions includes the following components: $61 million of income relates to the disposition of trademarks and working capital related to a noncore skin care product line, certain trademarks and other assets of the corporation’s canned meats business and income from prior business dispositions. Partially offsetting these amounts is a $34 million charge related to the costs of evaluating certain asset and business dispositions. The net impact of these actions was to decrease income from continuing operations before income taxes and income from continuing operations by $54 million and $40 million, respectively, which reduced diluted earnings per share from continuing operations during the period by $0.05 per share.

Receipt of Contingent Sale Proceeds – The corporation sold its European cut tobacco business in 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 2006 and 2005 payments passed in the first quarters of each of the respective years and the corporation received the payments. The 2006 payment was equivalent to $114 million and the 2005 payment was equivalent to $117 million based upon respective exchange rates on the date of receipt. These amounts were recognized in the corporation’s earnings when received and the payments increased diluted earnings per share from continuing operations in both 2006 and 2005 by $0.15 when they were recognized.

Net Interest Expense – This expense increased by $30 million in 2006, to $230 million. The increase was a result of higher average interest rates on outstanding debt and a $10 million decrease in interest income due in part to the corporation’s repatriation of cash from foreign jurisdictions in early 2006. These funds had previously been invested in short-term investments.

Income Tax Expense – The effective tax rate on continuing operations in 2006 and 2005 was impacted by a number of significant items that are shown in the reconciliation of the

corporation’s effective tax rate to the U.S. statutory rate in Note 23 to the Consolidated Financial Statements, titled “Income Taxes.” The corporation recognized tax expense on continuing operations of $161 million in 2006, or an effective tax rate of 83.5%, which was impacted by a number of significant items. The most significant of these items are as follows:

•    The corporation recognized a $529 million tax expense as a result of the decision to repatriate approximately $1.7 billion of cash related to current and prior years earnings of certain foreign subsidiaries for which repatriation was considered to be indefinitely postponed. Of the $529 million charge, $291 million relates to earnings of prior years.

•    The corporation completed during the period certain foreign tax audits and reviews and recognized a benefit of $332 million during the period.

In 2005, the corporation recognized tax expense of $131 million or an effective tax rate of 17.6%. This tax expense includes a $228 million charge to repatriate earnings of certain foreign subsidiaries of the corporation, of which $48 million related to the repatriation of income from certain controlled foreign corporations under the American Jobs Creation Act of 2004. The charge for the repatriation of earnings was partially offset by a $185 million tax benefit related to the finalization of certain foreign tax audits and reviews.

Income from Continuing Operations and Diluted Earnings Per Share (EPS) from Continuing Operations – Income from continuing operations in 2006 was $31 million, which was $584 million, or 94.8%, less than the prior year. The decline in income from continuing operations was primarily due to the following factors:

•    The corporation’s gross margin declined by $116 million, primarily as a result of higher commodity costs related to coffee products and higher energy costs. This resulted in a lower gross profit margin percent.

•    SG&A expenses in 2006 increased by $169 million over the comparable period of the prior year primarily due to costs associated with the corporation’s transformation plan and higher distribution costs primarily related to higher energy and employee costs. SG&A expenses as a percent of sales increased from 32.4% in 2005 to 33.6% in 2006.

•    In 2006, the corporation recognized a charge of $86 million for exit activities, asset and business dispositions, while in 2005, the corporation recognized a charge of $43 million.

•    In 2006, the corporation recognized an impairment charge of $193 million related to certain intangible assets in the North American Retail Bakery and International Bakery segments.

Sara Lee Corporation and Subsidiaries     23

•    The corporation recognized $3 million less of contingent sale proceeds from a prior disposition in 2006 than in 2005.

•    Due to an increase in average borrowing rates and lower interest income, net interest expense increased by $30 million in 2006.

•    Income tax expense increased by $30 million in 2006 versus 2005.

Diluted EPS from continuing operations decreased from $0.77 in 2005 to $0.04 in 2006, a decrease of 94.8%. Diluted EPS in 2006 was favorably impacted by lower average shares outstanding in 2006 than in 2005. During 2006, the corporation repurchased 30.1 million shares of common stock.

Discontinued Operations – This includes the results of the corporation’s Direct Selling, U.S. Retail Coffee, European Branded Apparel, European Nuts and Snacks, U.K. Apparel, U.S. Meat Snacks, European Meats and Branded Apparel Americas/Asia businesses. The following summarizes the results of the discontinued operations for 2006 and 2005:

In millions	2006			2005			Dollar Change			Percent Change
Net sales	$	7,079		$	8,380		$	(1,301	)	(15.5	)%
Income from operations before income taxes	$	142		$	243		$	(101	)
Income tax expense on income from operations		(19	)		(139	)		120
Gain on sale of discontinued operations		466			–			466
Income taxes on gain on sale of discontinued operations		(65	)		–			(65	)
Net income (loss) from discontinued operations	$	524		$	104		$	420

Results of Discontinued Operations – Net sales of the discontinued operations decreased by $1,301 million, or 15.5%, in 2006 as compared to 2005. The corporation completed the sales of the Direct Selling, U.S. Retail Coffee, European Branded Apparel, European Nuts and Snacks, U.K. Apparel and the U.S. Meat Snacks businesses during 2006. Therefore, 12 months of comparable sales were not included in 2006. Additionally, the remaining two businesses reported in discontinued operations, Branded Apparel Americas/Asia and European Meats, reported lower sales in 2006 as compared to 2005. The income before income taxes decreased by $101 million in 2006, as the corporation recognized $394 million of impairment charges in 2006, which was $44 million higher than the impairment charges in the prior year; certain businesses have been sold and a full 12 months of results are therefore not included in the current

year period; and the European Meats business reported lower profitability during the period. These declines were partially offset by the Branded Apparel Americas/Asia business, which reported higher income in 2006. During 2006, the corporation recognized the following pretax impairment charges: a $179 million charge related to European Branded Apparel, a $44 million charge related to U.S. Retail Coffee, a $34 million charge related to the U.K. Apparel business, a $125 million charge related to the European Meats business and a $12 million charge related to the U.S. Meat Snacks business. Further details regarding these charges can be found in Note 3 to the Consolidated Financial Statements, titled “Impairment Charges.”

The effective tax rate of the pretax income recognized in discontinued operations in 2006 of 13.2% was due to several factors: first, the impairment charges included $158 million of non-deductible goodwill; second, certain of the impairment charges and operating losses are in tax jurisdictions in which the corporation cannot recognize a tax benefit; and finally, the closing of the Direct Selling sale transaction resulted in the corporation receiving certain tax benefits in the current period for foreign taxes incurred in 2005.

The corporation’s discontinued operations impacted the cash flows of the corporation as summarized in the table below.

In millions – Increase/(decrease)	2006			2005
Discontinued operations impact on:
Cash flow from operating activities	$	855		$	822
Cash flow used in investing activities		(311	)		(102	)
Cash flow from (used in) financing activities		(567	)		(718	)
Effect of foreign exchange rates on cash		–			(6	)
Net cash impact of discontinued operations	$	(23	)	$	(4	)
Cash balance of discontinued operations:
At start of period	$	37		$	41
At end of period		14			37
(Decrease) increase in cash of discontinued operations	$	(23	)	$	(4	)

Gain on Sale of Discontinued Operations – The corporation completed the sales of Direct Selling, U.S. Retail Coffee, European Branded Apparel, U.K. Apparel, European Nuts and Snacks and U.S. Meat Snacks businesses during 2006 and recognized a pretax and after-tax gain of $466 million and $401 million, respectively. Further details regarding these transactions are included in Note 4 to the Consolidated Financial Statements, “Discontinued Operations.”

Consolidated Net Income and Diluted Earnings Per Share – Net income of $555 million in 2006 was $164 million, or 22.7%, lower than reported in 2005. The decline in net income was primarily due to the $584 million decline in

24     Sara Lee Corporation and Subsidiaries

income from continuing operations partially offset by the net income from discontinued operations and the gain from the sale of discontinued operations. Diluted EPS decreased from $0.90 in 2005 to $0.72 in 2006, a decline of 20.0%.

Operating Results by Business Segment – 2006 Compared With 2005

Operating results by business segment in 2006 compared with 2005 are as follows:

	Net Sales						Income From Continuing Operations Before Income Taxes
In millions	2006			2005			2006			2005
North American Retail Meats	$	2,534		$	2,440		$	149		$	179
North American Retail Bakery		1,871			1,812			(197	)		(4	)
Foodservice		2,179			2,142			116			171
International Beverage		2,320			2,288			388			416
International Bakery		742			768			20			70
Household and Body Care		1,827			1,927			216			310
Total business segments		11,473			11,377			692			1,142
Intersegment sales		(13	)		(31	)		–			–
Total net sales and operating segment income		11,460			11,346			692			1,142
Amortization of intangibles		–			–			(62	)		(67	)
General corporate expenses		–			–			(322	)		(246	)
Contingent sale proceeds		–			–			114			117
Total net sales and operating income		11,460			11,346			422			946
Net interest expense		–			–			(230	)		(200	)
Net sales and income from continuing operations before income taxes	$	11,460		$	11,346		$	192		$	746

A discussion of each business segment’s sales and operating segment income is presented below. The change in unit volume for each business segment that is shown in the following tables excludes the impact of acquisitions and dispositions, if any.

The intangible amortization in the table above relates to trademarks and customer relationships. Software amortization is recognized in the earnings of the segments.

General corporate expenses increased primarily due to the costs associated with the transformation, higher corporate office and administrative expenses, partially offset by favorable foreign currency results as compared to the prior year.

North American Retail Meats

In millions	2006			2005			Dollar Change			Percent Change
Change in unit volume										5	%
Net sales	$	2,534		$	2,440		$	94		3.9	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	–		$	(9	)	$	9
Acquisition/dispositions		5			45			(40	)
Total	$	5		$	36		$	(31	)
Operating segment income	$	149		$	179		$	(30	)	(17.0	)%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	–		$	–		$	–
Exit activities, asset and business dispositions		(15	)		34			(49	)
Transformation charges		(21	)		(3	)		(18	)
Acquisition/dispositions		–			4			(4	)
Vacation accrual		3			–			3
Accelerated depreciation		(15	)		–			(15	)
Total	$	(48	)	$	35		$	(83	)

Unit volumes in 2006 in the North American Retail Meats segment for processed meats increased 5% as compared to 2005, consisting of increases of 5% in the U.S. and 8% in Mexico.

Net sales in the North American Retail Meats segment increased by $94 million, or 3.9%, to $2,534 million in 2006 from $2,440 million in the prior year. During 2006, the strengthening of the Mexican peso increased reported net sales by $9 million, or 0.4%. Sales of businesses acquired net of business dispositions since the beginning of fiscal 2005 reduced net sales by $40 million, or 1.7%. The remaining net sales increase of $125 million, or 5.2%, was primarily due to increases in unit volumes and a favorable product mix partially offset by certain price reductions in the U.S. market.

The North American Retail Meats gross margin percent increased from 28.3% in 2005 to 29.7% in 2006 primarily from the benefit of lower commodity costs and improved manufacturing efficiencies, which were partially offset by higher energy and packaging costs and certain price reductions.

Operating segment income in North American Retail Meats decreased by $30 million, or 17.0%, from $179 million in 2005 to $149 million in 2006. Changes in foreign currency exchange rates did not have a significant impact on reported operating segment income. The net impact of exit activities, accelerated depreciation, transformation expenses and a change in vacation policy decreased operating segment income by $48

Sara Lee Corporation and Subsidiaries     25

million in 2006, while during 2005, the corporation recognized income from exit activities, net of transformation charges, of $31 million. The net impact of these actions reduced operating segment income by $79 million, or 49.2%. The impact of businesses acquired and disposed of after the beginning of 2005 decreased operating segment income by $4 million, or 4.0%. The remaining operating segment income increase of $53 million, or 35.9%, as compared to the same period of the prior year is primarily the result of a $63 million increase in gross margin, plus the impact of a $4 million decrease in media advertising costs, partially offset by higher energy, selling and administrative costs.

North American Retail Bakery

In millions	2006			2005			Dollar Change			Percent Change
Change in unit volume										(1	)%
Net sales	$	1,871		$	1,812		$	59		3.2	%
Increase/(decrease) in net sales from
Acquisitions	$	33		$	–		$	33
Operating segment loss	$	(197	)	$	(4	)	$	(193	)	NM	%
Increase/(decrease) in operating segment loss from
Exit activities, asset and business dispositions	$	(7	)	$	–		$	(7	)
Transformation charges		(18	)		(2	)		(16	)
Impairment charges		(179	)		–			(179	)
Curtailment gain		–			13			(13	)
Acquisition		2			–			2
Vacation accrual		3			–			3
Accelerated depreciation		(7	)		(5	)		(2	)
Total	$	(206	)	$	6		$	(212	)

The North American Retail Bakery segment also includes the results of the corporation’s Senseo retail coffee business in the U.S.

Net unit volumes in the North American Retail Bakery segment declined 1% during 2006, primarily as a result of the decision to exit certain lower margin U.S. fresh bread

business, particularly with certain private label customers, and a decline in shipments of frozen bakery products, which was partially offset by increases in sales of branded fresh bread products.

Net sales in the North American Retail Bakery segment increased $59 million, or 3.2%, over the comparable prior year period. An acquisition completed after the start of fiscal 2005 increased sales by $33 million, or 1.8%, during the period. The remaining increase in net sales of $26 million, or 1.4%, was primarily attributable to certain selling price increases to partially offset higher costs and a favorable product mix.

The gross margin percent in the North American Retail Bakery segment decreased 0.5% from 46.7% in 2005 to 46.2% in 2006, as higher pricing and improved product mix increased the gross margin dollars, which was offset by higher costs for energy and packaging materials and employee costs that reduced the gross margin percent.

Operating segment income in the North American Retail Bakery segment decreased by $193 million, from a loss of $4 million in 2005 to a loss of $197 million in 2006. Both 2006 and 2005 were impacted by some or all of the following: an impairment charge, exit activities, transformation expenses, accelerated depreciation, a curtailment gain and a change in an employee vacation policy as shown in the previous table. In 2006, the North American Retail Bakery segment recognized total expenses of $208 million for impairment charges, exit activities, transformation expenses, accelerated depreciation and the change in vacation policy, while in 2005, the segment recognized $6 million of income from the combination of a curtailment gain, transformation expenses and accelerated depreciation. The net impact of the impairment charge, exit activities, transformation expenses, accelerated depreciation, curtailment gain and the vacation policy change in 2006 versus 2005 decreased operating segment income by $214 million. Operating segment income in 2006 increased by $2 million related to income from a business that was acquired after the start of fiscal 2005. The remaining operating segment income increase of $19 million was primarily attributable to improved pricing and product mix that led to higher gross margin dollars and a lower cost structure as a result of prior restructuring actions.

26     Sara Lee Corporation and Subsidiaries

Foodservice

In millions	2006			2005			Dollar Change			Percent Change
Change in unit volume										–	%
Net sales	$	2,179		$	2,142		$	37		1.7	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	–		$	(2	)	$	2
Dispositions		–			2			(2	)
Total	$	–		$	–		$	–
Operating segment income	$	116		$	171		$	(55	)	(31.9	)%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	–		$	–		$	–
Exit activities, asset and business dispositions		(8	)		(7	)		(1	)
Transformation charges		(8	)		–			(8	)
Curtailment gain		–			15			(15	)
Disposition		–			1			(1	)
Hurricane losses		(5	)		–			(5	)
Vacation accrual		4			–			4
Accelerated depreciation		(4	)		(6	)		2
Total	$	(21	)	$	3		$	(24	)

Net unit volumes in the Foodservice segment were flat during the period as increases for meats and bakery products were offset by declines in beverage products.

Net sales in the Foodservice segment increased $37 million, or 1.7% over the comparable prior year period. Changes in foreign currency, primarily the Canadian dollar, increased net sales by $2 million. The 2005 period includes sales of $2 million from businesses that have been disposed of after the start of 2005, which decreased net sales by 0.1%. The remaining net sales increase of $37 million, or 1.8%, was primarily due to certain price increases to cover higher commodity costs.

The gross margin percent in the Foodservice segment decreased 1.5%, from 28.7% in 2005 to 27.2% in 2006, primarily from higher commodity, energy and employee costs, an unfavorable sales mix and a curtailment gain that was reflected in the prior year.

Operating segment income in the Foodservice segment decreased by $55 million, or 31.9%, from $171 million in 2005 to $116 million in 2006. Both 2006 and 2005 were impacted by some or all of the following: transformation and exit activity charges, accelerated depreciation, a curtailment gain, hurricane losses and a change in the vacation policy. In 2006, exit activities, transformation expenses, accelerated depreciation and hurricane losses net of the impact of the change in vacation policy totaled $21 million, while in 2005,

the segment experienced a net gain of $2 million from a curtailment gain, partially offset by charges for exit activities and accelerated depreciation. The net impact of these items decreased operating segment income by $23 million, or 12.4%. The impact of businesses disposed of after the beginning of 2005 decreased operating segment income by $1 million, or 0.4%. The remaining operating segment income declined by $31 million, or 19.2%, primarily from the impact of lower gross margins and higher fuel costs.

International Beverage

In millions	2006			2005			Dollar Change			Percent Change
Change in unit volume										–	%
Net sales	$	2,320		$	2,288		$	32		1.3	%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	–		$	39		$	(39	)
Dispositions		–			20			(20	)
Total	$	–		$	59		$	(59	)
Operating segment income	$	388		$	416		$	(28	)	(6.6	)%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	–		$	17		$	(17	)
Exit activities, asset and business dispositions		3			(29	)		32
Transformation charges		(16	)		(3	)		(13	)
Disposition		–			3			(3	)
Accelerated depreciation		(3	)		–			(3	)
Total	$	(16	)	$	(12	)	$	(4	)

Net unit volumes in the International Beverage segment were unchanged compared to the prior year period, as unit volumes for retail coffee products were unchanged while foodservice coffee unit volumes declined 1%. Roast and ground coffee retail unit volumes declined in Europe but increased in Brazil. In Europe, a continuing competitive marketplace, particularly from private label competitors, negatively impacted unit volumes, while in Brazil, lower prices and geographic expansion contributed to the increase.

Net sales in the International Beverage segment increased by $32 million, or 1.3%, to $2,320 million in 2006. Within the segment, the impact of foreign currency changes, particularly in the European euro, decreased reported net sales by $39 million, or 1.8%. Dispositions completed after the start of 2005 reduced net sales by $20 million, or 0.9%, during the year. The remaining net sales increase of $91 million, or 4.0%, compared to the comparable period of the prior year was primarily due to unit selling prices that increased as the corporation passed on certain raw material cost increases to

Sara Lee Corporation and Subsidiaries     27

the customer and a favorable product mix.

The gross margin percent in the International Beverage segment decreased 3.4% from 46.9% in 2005 to 43.5% in 2006 primarily as a result of higher raw material costs that were not fully passed along to the customer in the form of higher selling prices.

Operating segment income for the International Beverage segment decreased $28 million, or 6.6%, to $388 million in 2006. Changes in foreign currency exchange rates decreased operating segment income by $17 million, or 3.7%. The International Beverage segment recognized $16 million of net charges in 2006 related to transformation, exit activities and accelerated depreciation, while in 2005, $32 million in charges were recognized. The net impact of these items increased operating segment income by $16 million, or 3.2%. The impact of businesses disposed of after the beginning of 2005 decreased operating segment income by $3 million, or 0.6%. The remaining operating segment income decrease was $24 million, or 5.5%, primarily from lower gross margins, partially offset by lower media advertising and promotion, and benefits from the corporation’s transformation actions.

International Bakery

In millions	2006			2005			Dollar Change			Percent Change
Change in unit volume										(1	)%
Net sales	$	742		$	768		$	(26	)	(3.3	)%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	–		$	29		$	(29	)
Total	$	–		$	29		$	(29	)
Operating segment income	$	20		$	70		$	(50	)	(72.1	)%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	–		$	3		$	(3	)
Exit activities, asset and business dispositions		(25	)		(5	)		(20	)
Transformation charges		(5	)		–			(5	)
Impairment charge		(14	)		–			(14	)
Total	$	(44	)	$	(2	)	$	(42	)

Net unit volumes in the International Bakery segment declined 1% in 2006 as compared to 2005, as increases in shipments of dough products in Europe were offset by declines in fresh bread shipments in Europe and frozen baked goods in Australia.

Net sales in the International Bakery segment decreased $26 million, or 3.3%, over the comparable prior year period.

There were no acquisitions or dispositions that impacted the International Bakery segment during the period. The impact of foreign currency changes, particularly in the European euro, decreased reported net sales by $29 million, or 3.8%. The remaining net sales increase of $3 million, or 0.5%, was primarily a result of price increases to offset certain cost increases and increased volumes for refrigerated dough products.

The gross margin percent in the International Bakery segment in 2006 declined 0.3%, from 42.1% in 2005 to 41.8% in 2006, primarily due to the impact of higher costs and lower volumes.

Operating segment income in the International Bakery segment decreased by $50 million, or 72.1%, from $70 million in 2005 to $20 million in 2006. The impact of changes in foreign currency exchange rates decreased operating segment income by $3 million, or 3.5%. In 2006, the International Bakery segment recognized $44 million of charges related to the impairment of intangibles, exit activities and transformation expenses and recognized $5 million of charges in 2005. The net impact of these charges reduced operating segment income by $39 million, or 56.5%. The remaining decline in operating segment income of $8 million, or 12.1%, was primarily due to higher promotion costs and higher energy and employee costs.

Household and Body Care

In millions	2006			2005			Dollar Change			Percent Change
Change in unit volume										–	%
Net sales	$	1,827		$	1,927		$	(100	)	(5.2	)%
Increase/(decrease) in net sales from
Changes in foreign currency exchange rates	$	–		$	57		$	(57	)
Dispositions		–			29			(29	)
Total	$	–		$	86		$	(86	)
Operating segment income	$	216		$	310		$	(94	)	(30.3	)%
Increase/(decrease) in operating segment income from
Changes in foreign currency exchange rates	$	–		$	9		$	(9	)
Exit activities, asset and business dispositions		(1	)		1			(2	)
Transformation charges		(19	)		(1	)		(18	)
Accelerated depreciation		(8	)		(9	)		1
Dispositions		–			10			(10	)
Total	$	(28	)	$	10		$	(38	)

28     Sara Lee Corporation and Subsidiaries

Unit volumes in the Household and Body Care segment for the four core categories – shoe care, body care, air care and insecticides – were unchanged in 2006, as declines in air care, due to a competitive marketplace in Europe, and insecticides were offset by increases for body care and shoe care products.

Net sales in the Household and Body Care segment declined $100 million, or 5.2%, in 2006 to $1,827 million. The impact of changes in foreign currency exchange rates decreased reported net sales by $57 million, or 2.9%, primarily due to changes in the European euro and British pound. The 2005 period includes sales of $29 million from product lines that had been disposed of after the start of 2005, which reduced net sales by 1.5%. The remaining net sales decrease of $14 million, or 0.8%, was primarily due to lower air care unit volumes and lower average selling prices due to a competitive marketplace.

The gross margin percent in the Household and Body Care segment decreased 1.7%, from 51.6% in 2005 to 49.9% in 2006, due to lower pricing in a competitive marketplace, the decline in air care unit volumes and an unfavorable sales mix.

Operating segment income decreased $94 million, or 30.3%, to $216 million in 2006. Changes in foreign currency exchange rates reduced operating segment income by $9 million, or 2.4%. In 2006, the Household and Body Care segment recognized $28 million of charges for exit activities, transformation costs and accelerated depreciation. During 2005, the Household and Body Care segment recognized $9 million in charges for accelerated depreciation, exit activities and transformation costs. The change in transformation charges, exit activities and accelerated depreciation between 2005 and 2006 reduced operating segment income by $19 million, or 7.0%. The 2005 period included $10 million of income from certain product lines that were disposed of after the start of 2005, which reduced operating segment income by 2.5%. The remaining operating segment income declined by $56 million, or 18.4%, primarily from the decline in unit volumes for air care and gross margins.

Financial Condition

The corporation’s cash flow statements include amounts related to discontinued operations through the date of disposal. The discontinued operations had a significant impact on the cash flows from operating, investing and financing activities during 2007, 2006 and 2005.

Cash from Operating Activities – The cash generated from operating activities was $492 million in 2007, $1,265 million in 2006 and $1,349 million in 2005. The most significant reason for the decline in cash from operating activities was

the disposition of a number of businesses which are reported as discontinued operations as the discontinued operations generated a substantial portion of the cash from operating activities in 2006 and 2005.

The cash from operating activities generated by continuing and discontinued operations is summarized in the following table:

	2007		2006		2005
Cash from operating activities:
Continuing operations	$	404	$	410	$	527
Discontinued operations		88		855		822
Total	$	492	$	1,265	$	1,349

The Branded Apparel Americas/Asia and the European Meats businesses, which were disposed of in the first quarter of 2007, generated all of the cash from operating activities related to discontinued operations in 2007 and a significant portion of the 2006 and 2005 amounts as well.

Changes in current assets and liabilities resulted in the usage of $527 million of cash in 2007, versus a usage of $44 million in 2006 and $531 million in 2005. In 2007, the primary changes in working capital which impacted cash flow from operations were:

•    Accrued liabilities, other than income taxes, declined by $270 million as cash contributions to pension and postretirement plans exceeded the net periodic benefit costs of the plans by $70; prior to their disposal, $29 million of cash was used to reduce accrued liabilities of discontinued operations; and the remainder of the reduction in accrued liabilities resulted from cash expenditures exceeding expenses for various operating expenses.

•    Accrued taxes declined by $212 million primarily as a result of $378 million of cash tax payments.

•    $106 million of cash was used to pay for increases in inventories in the corporation’s segments.

•    Partially offsetting the above items is an increase in accounts payable which generated cash of $93 million.

In 2006, the corporation reduced inventories which generated $108 million of cash, which was offset by $132 million of additional cash that was used to fund various accrued liabilities and other current assets. In 2005, the corporation used $531 million of cash to fund working capital including $199 million to fund higher accounts receivable, $331 million to fund higher payments for accrued liabilities and accrued taxes.

Cash from Investment Activities – The corporation received $568 million from investment activities in 2007 and $365 million in 2006, while in 2005, $232 million of cash was used in investment activities.

Sara Lee Corporation and Subsidiaries     29

Net cash (used in) generated from investment activities is split between continuing and discontinued as follows:

	2007			2006			2005
Cash from (used in) investment activities:
Continuing operations	$	603		$	676		$	(130	)
Discontinued operations		(35	)		(311	)		(102	)
Total	$	568		$	365		$	(232	)

A significant amount of cash was received in each period from the disposition of businesses and assets as well as the collection of amounts related to prior business dispositions. In total, $1,224 million, $1,101 million and $307 million were received in 2007, 2006 and 2005, respectively.

During 2007, the corporation completed the disposition of Hanesbrands and the European Meats businesses. The net assets of businesses disposed of included certain intercompany loans payable which were paid shortly after the businesses were disposed of. The corporation received $688 million of cash in total from the settlement of these notes receivable – $450 million of cash received was related to the Hanesbrands disposition and $238 million was related to the European Meats disposition. The corporation also received $346 million in proceeds primarily related to the disposition of the European Meats business and received $120 million in contingent proceeds from the sale of the corporation’s tobacco product line. The $6 million increase in contingent proceeds versus the prior year was due to changes in foreign currency.

In 2006, cash proceeds from dispositions of businesses and assets were $1,101 million. The $1,101 million received in 2006 includes proceeds from the sale of the Direct Selling, U.S. Retail Coffee, European Branded Apparel, European Nuts and Snacks, U.K. Apparel and U.S. Meat Snacks businesses that are reported in discontinued operations, the sale of certain working capital, trademarks and assets related to certain suncare and rice product lines, proceeds from the sale of an investment in a foreign company and contingent sale proceeds from the sale of the corporation’s tobacco product line. In 2005, the corporation received $307 million in proceeds from the sale of trademarks, working capital and fixed assets, the largest portion of which was related to a canned and shelf-stable meat and poultry business, and the receipt of the contingent tobacco sale proceeds.

The corporation spent $631 million, $625 million and $538 million for the purchase of property, equipment, computer software and intangibles in 2007, 2006, and 2005, respectively. The increase in 2007 and 2006 is due in part to an increase in expenditures for certain information technology assets and for certain costs for the corporation’s new headquarters facility in Downers Grove, Illinois and other facilities that are being used to centralize management. The

corporation expects capital expenditures for property and equipment to decline to approximately $550 million in 2008 due to lower projected expenditures related to leasehold improvements and the purchase of certain information technology assets.

In 2006, the corporation used $78 million of cash for the purchase of certain businesses, the largest of which was Butter-Krust Baking, a Mid-Atlantic fresh bread and baking company for $53 million.

In 2007, the corporation used $647 million of cash to invest in short-term investments and received $647 million of cash from maturing short-term investments.

Cash From Financing Activities – Net cash used in financing activities was $913 million in 2007, $41 million in 2006 and $1,215 million in 2005.

Net cash (used) generated from financing activities is split between continuing and discontinued operations in the following table:

	2007			2006			2005
Cash (used in) received from financing activities:
Continuing operations	$	(846	)	$	526		$	(497	)
Discontinued operations		(67	)		(567	)		(718	)
Total	$	(913	)	$	(41	)	$	(1,215	)

Significant items impacting the cash used in financing activities are discussed below.

Prior to being spun off by the corporation, Hanesbrands borrowed $2,600 million from a group of banks. Net of loan origination fees, Hanesbrands received $2,558 million of cash proceeds, and this amount is included in the corporation’s borrowings of long-term debt. Using a portion of the proceeds received from the borrowing, Hanesbrands paid a dividend of $1,950 million to the corporation. Immediately following this dividend, the corporation distributed to stockholders of record one share of Hanesbrands common stock for every eight shares of Sara Lee common stock held. A total of $650 million of cash remained on the Hanesbrands balance sheet at the spin off date.

Including the borrowing made by Hanesbrands prior to the spin off noted above, the corporation had total long-term borrowings of $2,895 million during 2007 and used these proceeds to repay short-term borrowings and maturing long-term debt, repurchase common stock and pay dividends.

Short-Term Borrowings – During 2007, the corporation had net repayments of short-term borrowings of $1,720 million versus net borrowings of $1,528 million in 2006 and $178 million in 2005. In 2007, the corporation utilized a combination of cash on hand and the proceeds from the

30     Sara Lee Corporation and Subsidiaries

borrowing of long-term debt noted above to fund the repayments in 2007.

At the end of 2006, the corporation did not utilize cash on the balance sheet to repay outstanding notes payable borrowings as it had done at the end of 2005. At the end of 2005, the corporation scheduled certain notes payable obligations, primarily in the form of short-term commercial paper, to mature prior to the end of the year. Cash on hand in various operating units in different geographic locations was utilized to repay these commitments when they matured. At the beginning of the subsequent quarter, issuances of commercial paper were made and cash was returned to the corporation’s operating locations. Shortly before the end of 2005, using cash on hand, the corporation repaid $2,080 million of outstanding notes payable. That is, notes payable and cash would have been higher at the end of 2005 by $2,080 million had the cash repayments not been made. As a result of the decision not to utilize cash on hand to repay outstanding notes payable, the corporation had $2,231 million of cash on the balance sheet at the end of 2006 and higher borrowings of short-term debt are reflected in the corporation’s cash flow statement as a financing activity.

Long-Term Borrowings – During 2007, the corporation had net borrowings of long-term debt of $2,479 million versus net repayments of long-term borrowings of $430 million in 2006 and $694 million in 2005. As noted above, prior to the spin off, Hanesbrands borrowed $2,558 million, which is included in the $2,479 million of net borrowings in 2007. In 2006 and 2005, the corporation utilized a combination of cash on hand and short-term borrowings to repay maturing long-term debt.

Issuances of Common Stock – Cash generated from the issuance of common stock declined from $161 million in 2005 to $27 million in 2006 and $38 million in 2007 as the corporation eliminated the 15% discount that was offered to employees to purchase shares through the corporation’s employee stock purchase program and a lower current stock price reduced the number of employee stock option exercises.

Purchases of Common Stock – The corporation expended $686 million to repurchase shares of its common stock in 2007, versus $561 million and $396 million in 2006 and 2005, respectively. 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 2007, the corporation repurchased 41.7 million shares of its common stock. At June 30, 2007, the corporation had approximately 44.5 million shares remaining on its existing share authorization. The corporation intends to repurchase additional shares in 2008 with a total value of $315 million. These repurchases will be influenced by market conditions and other factors.

Cash Dividends – Dividends paid during 2007 were $374 million, as compared to the $605 million paid in 2006 and $464 million paid in 2005. Due to the timing of the corporation’s year end and the dividend payment date, three dividend payments were included in 2005 and four payments in 2006 and 2007. The decline in the dividends paid in 2007 versus the prior year was primarily due to the reduction in the annual dividend rate, after the spin off of Hanesbrands, from $0.79 per share in 2006 to $0.40 per share in 2007.

Liquidity

Notes Payable – Notes payable decreased from $1,776 million in 2006 to $33 million in 2007 as the corporation used cash proceeds from the disposition of businesses and cash on hand to repay notes payable. The corporation had cash and cash equivalents on the balance sheet at the end of 2007 and 2006 of $2,520 million and $2,231 million, respectively.

Debt and Minority Interest – The corporation’s total long-term debt increased $62 million in 2007, to $4,234 million at June 30, 2007, from $4,172 million at July 1, 2006, primarily due to the impact of changes in foreign exchange rates on foreign denominated debt.

The corporation’s total long-term debt of $4,234 million is due to be repaid as follows: $1,431 million in 2008, $513 million in 2009, $49 million in 2010, $20 million in 2011, $1,120 million in 2012 and $1,101 million thereafter. Of the amounts that are due to be repaid in 2008, approximately $881 matures in the first quarter, $6 million matures in the second quarter, $82 million matures in the third quarter, $442 million matures in the fourth quarter and the remainder matures throughout the year. Debt obligations due to mature in the next year are expected to be satisfied with cash on hand, operating cash flows or with additional borrowings.

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 60.7% fixed-rate debt as of June 30, 2007, as compared with 42.5% as of July 1, 2006. The increase in fixed-rate debt at the end of 2007 versus the end of 2006 is due to the repayment of a substantial portion of the corporation’s notes payable. 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.

Pension Plans – As shown in Note 20 to the Consolidated Financial Statements, titled “Defined Benefit Pension Plans,” the funded status of the corporation’s defined benefit pension plans is defined as the amount the projected benefit obligation exceeds the plan assets. The underfunded status of

Sara Lee Corporation and Subsidiaries     31

the plans is $580 million at the end of fiscal 2007 as compared to $810 million at the end of fiscal 2006.

The corporation adopted the provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (FAS 158),” which requires the recognition of the funded status of defined pension and postretirement plans in the statement of financial position. The funded status is measured as the difference between the fair market value of the plan assets and the benefit obligation. For a defined benefit pension plan, the benefit obligation is the projected benefit obligation. Any overfunded status should be recognized as an asset and any underfunded status should be recognized as a liability. As part of the initial recognition of the funded status, any transitional asset/(liability), prior service cost (credit) or actuarial (gain)/loss that has not yet been recognized as a component of net periodic cost should be recognized in the Accumulated Other Comprehensive Loss section of the Consolidated Statements of Common Stockholders’ Equity, net of tax. Accumulated Other Comprehensive Loss will be adjusted as these amounts are subsequently recognized as a component of net periodic benefit costs in future periods. The method of calculating net periodic benefit cost under FAS 158 is the same as under existing practices. The impact of adopting FAS 158 is outlined in Note 2 to the Consolidated Financial Statements.

The corporation expects to contribute $205 million of cash to its pension plans in 2008 as compared to $191 million in 2007, $331 million in 2006 and $348 million in 2005. The 2008 contributions are for pension plans of continuing operations and pension plans where the corporation has agreed to retain the pension liability after certain business dispositions were completed. The historical plan contributions for 2006 and 2005 include contributions of $7 million and $99 million, respectively, for plans which have been disposed of as part of a subsequent business disposition. 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. As a result, the actual funding in 2008 may be materially different from the estimate.

During 2006, the corporation entered into an agreement to fully fund certain U.K. pension obligations by 2015. The anticipated 2008 contributions reflect the amounts agreed upon with the trustees of these U.K. plans. Under the terms of this agreement, the corporation will increase annual pension funding of the U.K. plans to 32 million British pounds through 2015. Subsequent to 2015, the corporation has agreed to keep the U.K. plans fully funded in accordance with local

funding standards. 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. If at any time prior to January 1, 2016, Sara Lee Corporation ceases having a credit rating equal to or greater than the following ratings, the annual pension funding of these U.K. plans will increase by 20%: Standard & Poor’s minimum credit rating of “BBB-,” Moody’s Investors Service minimum credit rating of “Baa3” and FitchRatings minimum credit rating of “BBB-.” The corporation’s credit ratings are above these levels and are discussed below in this Liquidity section.

The corporation sold a branded apparel business in the U.K. and retained certain of the pension obligations of this business. This specific plan was not included in the funding agreement noted above. An agreement was reached with the trustees of this retained plan that annuities would be purchased to settle the related obligations. Upon the settlement of this obligation, the corporation will need to recognize in earnings any unrecognized actuarial gains or losses related to this plan. It is projected that the plan to be settled will have an unrecognized actuarial loss of approximately $20 million at the end of 2008, assuming no changes in foreign exchange rates. At the present time, the corporation expects that annuities will be purchased and the pension obligation will be settled in either late 2008 or 2009. The impact of the settlement on the corporation’s earnings will depend upon the amount of the unrecognized actuarial loss at the settlement date. As of the end of 2007, plan assets exceeded the plan obligations. At the present time, the corporation does not anticipate that additional cash contributions to the plan will be needed to settle the obligation.

Repatriation of Foreign Earnings and Income Taxes – As a result of the decision to spin off Hanesbrands and the disposition of a number of significant European operations, the level of cash necessary to finance the domestic operations and the portion of earnings deemed to be indefinitely reinvested outside the U.S. was modified at the end of 2006. The following points are relevant to this decision:

•    The Hanesbrands business that was spun off historically generated a significant amount of cash from operations within the U.S. and this cash was used to service the corporation’s debt, as well as pay dividends and support domestic capital requirements. As a result of the spin off, the corporation anticipates that it will repatriate a larger portion of the earnings of its foreign subsidiaries than has historically been the case.

32     Sara Lee Corporation and Subsidiaries

•    The corporation also concluded that a lower level of cash needed to be retained outside the U.S. than historically had been the case. The cash requirements outside the U.S. were based upon projected working capital and capital expenditure requirements as well as amounts needed to fund pension obligations.

The tax costs associated with the anticipated return of the earnings of foreign subsidiaries are recognized as the amounts are earned. However, the corporation pays the tax liability upon completing the repatriation action.

The corporation’s annual effective tax rate for 2007 includes a charge of $194 million for the repatriation of current year foreign earnings to the U.S. At the end of 2007, the corporation had recognized a deferred tax liability of approximately $420 million for the repatriation of prior year and current year earnings. These remaining deferred tax amounts will be settled subject to finalization of future repatriation actions in 2008 as is discussed below. When further repatriation actions are completed, the amount of cash taxes that are paid could also increase. The funding of these tax payments will be made with cash generated from operations, dispositions and short-term borrowings.

Proceeds From the Spin Off of Hanesbrands and Restrictions on the Use of the Proceeds – As more fully described in Note 4, “Discontinued Operations” to the Consolidated Financial Statements, the spin off of the Hanesbrands business was completed as a tax-free transaction for both the corporation and its shareholders. As part of the spin off, the corporation received a dividend from Hanesbrands of $1.95 billion. To maintain the tax-free nature of the transaction, the $1.95 billion the corporation received as a dividend from Hanesbrands is restricted and can only be used by the corporation for the repayment of outstanding debt, repurchase of the corporation’s common stock, and the payment of dividends to shareholders. At the end of 2007, the corporation had $124 million of cash remaining that is available for these restricted uses.

Cash and Equivalents, Short-Term Investments and Cash Flow – The corporation’s cash balance of $2,520 million at the end of 2007 was invested in interest-bearing bank deposits that are redeemable on demand by the corporation. A significant portion of cash and equivalents are held by the corporation’s subsidiaries outside of the U.S. A portion of these balances will be used to fund future working capital and other funding requirements as follows.

Subsequent to year end, during the first quarter of 2008, the corporation repatriated to the U.S. $1.4 billion of accumulated earnings of foreign subsidiaries. This dividend in isolation requires the payment of approximately $420 million of cash taxes over the remainder of 2008. However, other

income or losses generated by the business will impact the total amount of cash taxes that are paid in any period. When future repatriation actions are finalized, the deferred taxes related to these repatriation actions will become due and will be paid over the course of the fiscal year after the dividend has been paid.

The corporation has also recognized amounts for transformation and other restructuring charges and at the end of 2007 recognized a liability of approximately $165 million that relates primarily to future severance and other lease and contractual payments. These amounts will be paid when the obligation becomes due, and the corporation expects a significant portion of these amounts will be paid in 2008. The anticipated 2008 payments of cash taxes and severance associated with previously recognized exit activities will have a significant negative impact on cash from operating activities.

Dividend – Annual dividend amounts paid per share by the corporation were $0.40 in 2007, $0.79 in 2006 and $0.78 in 2005. Future dividends are determined by the corporation’s Board of Directors and are not guaranteed.

Credit Facilities and Ratings – The corporation has a $1.85 billion five-year revolving credit facility available which management considers sufficient to satisfy its operating requirements. This facility expires in December 2011 and the pricing under this facility is based upon the corporation’s current credit rating. At June 30, 2007, the corporation had not borrowed under the facility and the facility does not mature or terminate upon a credit rating downgrade. The facility contains 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 June 30, 2007, the corporation’s interest coverage ratio was 6.0 to 1.0. The corporation previously maintained a three-year $1.35 billion credit facility that was terminated by the corporation, prior to its maturity, as the facility was deemed no longer necessary after the spin off of the Hanesbrands business was completed.

The corporation’s credit ratings by Standard & Poor’s, Moody’s Investors Service and FitchRatings, as of June 30, 2007, were as follows. Moody's Investors Service and FitchRatings have the corporation's long-term credit rating classified as having a negative outlook.

	Senior Unsecured Obligations	Short-term Borrowings
Standard & Poor’s	BBB+	A-2
Moody’s Investors Service	Baa1	P-2
FitchRatings	BBB+	F-2

Sara Lee Corporation and Subsidiaries     33

Changes in the corporation’s credit ratings result in changes in the corporation’s borrowing costs. 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 historically high degree of liquidity. A downgrade of the corporation’s short-term credit rating to “A-3” (S&P rating) or “P-3” (Moody’s rating) would place the corporation in a commercial paper market that would contain significantly less market liquidity than it currently operates in with a rating of “A-2” or “P-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.

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: $99 million in 2008, $78 million in 2009, $61 million in 2010, $49 million in 2011, $38 million in 2012 and $113 million thereafter. The corporation is also 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: $25 million in 2008, $24 million in 2009, $21 million in 2010, $17 million in 2011, $15 million in 2012 and $67 million thereafter.

Future Contractual Obligations and Commitments – During 2007, the corporation exited a U.S. meat production plant that included a hog slaughtering operation. Certain purchase contracts for the purchase of live hogs at this facility were not exited or transferred after the closure of the facility. These contracts represent the purchase of approximately 2.5 million hogs over periods of time that range from 3 to 5 years. Under the terms of these contracts, the corporation will continue to purchase these live hogs and therefore, the corporation has entered into a hog sales contract under which these hogs will be sold to another slaughter operator. The corporation’s purchase price of these hogs is generally based on the price of corn products, and the corporation’s selling price for these hogs is generally based on USDA posted hog prices. Divergent movements in these indices will result in either gains or losses on these hog transactions. Expected losses from the sale of these hogs are recognized when the loss is probable of occurring. At the end of 2007, based on current market pricing, the corporation deemed that it was not probable that material future near-term losses would occur. The contractual commitment for these purchases is included in the table below.

34     Sara Lee Corporation and Subsidiaries

The corporation has no material unconditional purchase obligations as defined by SFAS No. 47, “Disclosure of Long-Term Purchase Obligations.” The following table aggregates information on the corporation’s contractual obligations and commitments:

			Payments Due by Fiscal Year
In millions	Total		2008		2009		2010		2011		2012		Thereafter
Long-term debt	$	4,234	$	1,431	$	513	$	49	$	20	$	1,120	$	1,101
Interest on debt obligations1		1,364		178		141		124		122		71		728
Operating lease obligations		438		99		78		61		49		38		113
Purchase obligations2		3,273		1,656		745		437		217		182		36
Other long-term liabilities3		1,081		246		115		98		249		84		289
Subtotal		10,390		3,610		1,592		769		657		1,495		2,267
Contingent lease obligations4		169		25		24		21		17		15		67
Total5	$	10,559	$	3,635	$	1,616	$	790	$	674	$	1,510	$	2,334

¹ Interest obligations on floating rate debt instruments are calculated for future periods using interest rates in effect at the end of 2007. See Note 12 to the Consolidated Financial Statements for further details on the corporation’s long-term debt.

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; and maintenance and other professional services where, as of the end of 2007, 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 2007 an obligation did not exist. An example of these includes situations where purchasing decisions for these future periods have not been made at the end of 2007. 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 2008 pension contribution of $205 million and the projected payment for long-term liabilities recorded on the balance sheet for deferred compensation, restructuring costs, deferred income, sales and other incentives. The projected pension contributions in 2008 and beyond include an annual pension contribution of 32 million British pounds through 2015 related to the terms of an agreement to fully fund certain U.K. pension obligations. The corporation has employee benefit obligations consisting of pensions and other postretirement benefits including medical; other than the projected 2008 pension contribution of $205 million and the U.K. funding amounts, noted previously, pension and postretirement obligations including any contingent amounts that may be due related to multi-employer pension plans, 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.

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. A significant portion of these amounts relates to leases operated by Coach, Inc. At June 30, 2007, the corporation has not recognized a contingent lease liability on the Consolidated Balance Sheets 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 Sheets and in the related notes. Amounts exclude any payments related to deferred tax balances including any tax related to future repatriation of foreign earnings. See Note 23 to the corporation’s Consolidated Financial Statements regarding income taxes for further details.

Sara Lee Corporation and Subsidiaries     35

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 $32 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.

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. In most cases, alternative sources of supply are available for inventory products that are manufactured or purchased from these foreign locations. 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 to adverse changes in foreign exchange rates. The corporation’s exposure to foreign exchange rates exists primarily with the European euro, British pound, Swiss franc, Canadian dollar, Hungarian forint, Russian ruble and Australian dollar 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, sugar, natural gas and diesel fuel. 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

36     Sara Lee Corporation and Subsidiaries

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. Foreign exchange value at risk includes the net assets invested in foreign locations. 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
2007
Interest rates	$	11.1	$	8.9	1 day	95	%
Foreign exchange		8.6		9.1	1 day	95	%
2006
Interest rates	$	10.1	$	11.5	1 day	95	%
Foreign exchange		14.1		12.3	1 day	95	%

Decreases in foreign exchange value at risk amounts in 2007 were primarily due to reduced levels of hedging activities in the current year that resulted in a smaller number of foreign exchange derivatives owned by the corporation at the end of 2007. Additionally, during 2007 the corporation repatriated certain accumulated earnings of foreign subsidiaries that decreased the amount of foreign denominated assets.

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 2007 and 2006, the potential change in fair value of commodity derivative instruments, assuming a 10% change in the underlying commodity price, was $11 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 most likely to occur. 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. If such changes have material impact on the annual results of operations or financial position, the impact is disclosed in Management’s Discussion and Analysis (MD&A) and/or the footnotes to the financial statements. The disclosures below also note situations in which it is reasonably likely that future financial results could be impacted by changes in these estimates and assumptions. The term “reasonably likely” refers to an occurrence that is more than remote but less than probable in the judgment of management. To the extent that management has estimated a range of reasonably likely outcomes they are provided below.

Sales Recognition and Incentives – Sales are recognized when title and risk of loss pass to the customer. Based upon historical collection statistics and current customer information, the corporation estimates the most likely amount of cash to be collected from these accounts. These estimates are reviewed each quarter and adjusted based upon actual experience. The reserves for uncollectible trade receivables are disclosed and trade receivables due from customers that the corporation considers highly leveraged are presented in Note 18 to the Consolidated Financial Statements, titled “Financial Instruments and Risk Management Interest Rate and Currency Swaps.” The corporation has a significant

Sara Lee Corporation and Subsidiaries     37

number of individual accounts receivable and a number of factors outside of the corporation’s control that impact the collectibility of a receivable. It is reasonably likely that actual collection experience will vary from the assumptions and estimates made at the end of each accounting period.

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 are used in estimating the most likely cost of current incentive programs. These estimates are reviewed each quarter and adjusted based upon actual experience and other available information. The corporation has a significant number of trade incentive programs and a number of factors outside of the corporation’s control impact the ultimate cost of these programs. It is reasonably likely that actual experience will vary from the assumptions and estimates made at the end of each accounting period.

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 most likely 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 reasonably likely that market factors and other conditions underlying the valuation of inventory may change in the future and result in further reserve requirements or increased gross margins on the disposition of inventory. 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.

Recognition and Reporting of Business Dispositions – When a decision to dispose of a business component is made, it is necessary to evaluate the future reporting of the component within the financial statements and determine whether the net assets of that business are recoverable. The following summarizes the significant accounting policies and judgments associated with a decision to dispose of a business.

Discontinued Operations – The operating results of a business component are reported as discontinued if its operations and cash flows can be clearly distinguished from the rest of the business, the operations have been sold or are classified as held for sale, there will be no continuing involvement in the operation after the disposal date and

certain other criteria are met. Significant judgments are involved in determining whether a business component meets the criteria for discontinued operation reporting and the period in which these criteria are met. Note 4 to the Consolidated Financial Statements, titled “Discontinued Operations,” sets out the factors used in reporting discontinued operations. Given that our business disposition program is substantially complete, management does not consider it reasonably likely for the conclusions reached on these items to change.

If a business component is reported as a discontinued operation, the results of operations through the date of sale are presented on a separate line of the income statement. Any gain or loss recognized upon the disposition of a discontinued operation is also reported on a separate line of the income statement. Prior to disposition, the assets and liabilities of discontinued operations are aggregated and reported on separate lines of the balance sheet.

Gains and losses related to the sale of business components that do not meet the discontinued operation criteria are reported in continuing operations and if significant are separately discussed in Note 19 to the Consolidated Financial Statements, titled “Exit and Disposal Activities.”

Businesses Held for Sale – In order to be considered held for sale, several criteria, including the probable disposition of the business within one year, and an active marketing effort must be achieved. Upon being classified as held for sale, the recoverability of the carrying value of a business must be assessed. Evaluating the recoverability of the assets of a business classified as held for sale follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill, intangible assets not subject to amortization and other assets are assessed. After the valuation process is completed, the held-for-sale business is reported at the lower of its carrying value or fair value less cost to sell. The carrying value of a held-for-sale business includes the portion of the cumulative translation adjustment related to the operation.

There are inherent uncertainties associated with these judgments and estimates and it is reasonably likely that impairment charges can change from period to period. Note 3 to the Consolidated Financial Statements discloses the impairment charges recognized by the corporation and the factors that caused these charges. It is also reasonably likely that the sale of a business can result in the recognition of an impairment that differs from that anticipated prior to the closing date.

Businesses Held for Use – If a decision to dispose of a business is made and the held-for-sale criteria are not met, the business is considered held for use and its assets are evaluated for recoverability in a defined order. First, assets

38     Sara Lee Corporation and Subsidiaries

other than goodwill, property and intangibles are evaluated. This is followed by a review of property and intangibles subject to amortization and finally, goodwill. In evaluating the recoverability of property and intangible assets subject to amortization in a held-for-use business, the carrying value of the business is first compared to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the operation. If the carrying value exceeds the undiscounted expected cash flows, it is necessary to determine if an impairment exists. An impairment exists if the carrying value of the business exceeds its fair value.

There are inherent uncertainties associated with these judgments and estimates and it is reasonably likely that impairment charges can change from period to period. Note 3 to the Consolidated Financial Statements discloses the impairment charges recognized by the corporation and the factors that caused these charges. It is also reasonably likely that the sale of a business can result in the recognition of an impairment that differs from that anticipated in a review conducted prior to the closing date. Given that our business disposition program is substantially complete, management does not consider it reasonably likely for the conclusions reached on these items to change.

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 net property is 5.8 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.

Note 19 to the Consolidated Financial Statements sets out the impact of the corporation’s decisions to exit the use of property in advance of previously anticipated useful lives. Given the corporation’s ongoing efforts to improve operating efficiency, it is reasonably likely that future restructuring actions could result in decisions to dispose of other assets before the end of their useful life and it is reasonably likely that the impact of these decisions would result in impairment and other related costs including employee severance that in the aggregate, would be significant.

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 June 30, 2007, the net book value of trademarks and other identifiable intangible assets was $1,037 million, of which $950 million is being amortized. The anticipated amortization over the next five years is $438 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 intangible asset 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.

Sara Lee Corporation and Subsidiaries     39

There are inherent assumptions and estimates used in developing future cash flows requiring management's judgment in applying these judgments and estimates to the analysis of intangible asset impairment including projecting revenues, interest rates, the cost of capital, royalty rates and tax rates. Many of the factors used in assessing fair value are outside the control of management and it is reasonably likely that assumptions and estimates will change in future periods. These changes can result in future impairments. Note 3 to the Consolidated Financial Statements sets out the impact of charges taken to recognize the impairment of intangible assets and the factors which led to changes in estimates and assumptions. As described earlier in this Financial Review, the corporation has also concluded that it was reasonably likely that certain other reporting units may become impaired in future periods. These reporting entities include a bakery operation in Europe with $110 million of trademarks, a beverage business in Poland with $6 million of trademarks and a meat business in Mexico with $32 million of trademarks.

Goodwill – Goodwill is not amortized but is subject to periodic assessments of impairment. At June 30, 2007, the corporation has $2,722 million of goodwill on its books. Of this total, $1,726 million is related to bakery operations that are included in the North American Retail Bakery, Foodservice and International Bakery segments. 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 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 assumptions and estimates used in developing future cash flows requiring management's judgment in applying these assumptions and estimates to the analysis of goodwill impairment including projecting revenues

and profits, interest rates, the cost of capital and tax rates. Many of the factors used in assessing fair value are outside the control of management and it is reasonably likely that assumptions and estimates can change in future periods. These changes can result in future impairments. Note 3 to the Consolidated Financial Statements sets out the impact of charges taken to recognize the impairment of goodwill and the factors which led to changes in estimates and assumptions. As described earlier in this Financial Review, the corporation has also concluded that it was reasonably likely that certain other reporting units may become impaired in future periods. The term “reasonably likely” refers to an occurrence that is more than remote but less than probable in the judgment of management. These reporting entities include a bakery operation in Europe with $454 million of goodwill, a beverage business in Poland with $70 million of goodwill and a meat business in Mexico with $23 million of goodwill.

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.

There are inherent judgments in estimating the fair value of assets and liabilities acquired in a business combination and it is reasonably likely that the estimates and assumptions used in determining fair value will change in future periods. Such changes can result in the recognition of impairment charges.

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

40     Sara Lee Corporation and Subsidiaries

settlements. Consulting actuaries make a significant number of estimates and assumptions in determining the cost to settle these claims and many of the factors used are outside the control of the corporation. Accordingly, it is reasonably likely that these assumptions and estimates may change and these changes may impact future financial results.

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. Note 23 to the Consolidated Financial Statements, titled “Income Taxes,” sets out the factors that caused the corporation’s effective tax rate to vary from the statutory rate and certain of these factors result from finalization of tax audits and review and changes in estimates and assumptions regarding tax obligations and benefits.

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, the ability to realize certain net operating losses 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 likely that these items may impact income tax expense, net income and liquidity in future periods.

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 2007, 2006 and 2005 that were

equivalent to $120 million, $114 million and $117 million, respectively. Any future contingent payments received will be recognized in the corporation’s earnings on a separate line in the income statement when received. The future receipt of any payments is dependent upon factors outside of the control of the corporation, including legislation in foreign countries, and the corporation cannot predict such actions.

Stock Compensation – The corporation issues restricted stock units (RSUs) and stock options to employees in exchange for employee services. See Note 7 to the Consolidated Financial Statements regarding stock-based compensation for further information on these awards. The cost of RSUs and stock option awards is equal to the fair value of the award at the date of grant, and compensation expense is recognized for those awards earned over the service period. Certain of the RSUs vest based upon the employee achieving certain defined performance measures. During the service period, management estimates the number of awards that will meet the defined performance measures. With regard to stock options, at the date of grant, the corporation determines the fair value of the award using the Black-Scholes option pricing formula. Management estimates the period of time the employee will hold the option prior to exercise and the expected volatility of the corporation’s stock, each of which impacts the fair value of the stock options. The corporation does not believe that it is reasonably likely that changes in the estimates and assumptions associated with prior grants will have a material impact on future operating results.

Defined Benefit Pension Plans – See Note 20 to the Consolidated Financial Statements, titled “Defined Benefit Pension Plans,” for information regarding plan obligations, plan assets and the measurements of these amounts, as well as the net periodic benefit cost and the reasons for changes in this cost.

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

Sara Lee Corporation and Subsidiaries     41

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.

Net periodic benefit costs for the corporation’s defined benefit pension plans were $141 million in 2007, $181 million in 2006 and $199 million in 2005, and the projected benefit obligation was $4,926 million at the end of 2007 and $4,904 million at the end of 2006.

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 2007. The sensitivities reflect the impact of changing one assumption at a time and are specific to base conditions at the end of 2007. 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	2008 Net Periodic Benefit Cost			2007 Projected Benefit Obligation
Discount rate:	1% increase	$	(44	)	$	(705	)
	1% decrease		87			863
Asset return:	1% increase		(43	)		–
	1% decrease		43			–

The corporation’s defined benefit pension plans had a net actuarial loss of $746 million in 2007 and $982 million at the end of 2006. At June 30, 2007, the unamortized actuarial loss is reported in the “Accumulated other comprehensive loss” line of the Consolidated Balance Sheet as a result of the adoption of SFAS 158. The change in the net actuarial loss was due to the following factors:

• The reduction in the net actuarial loss in 2007 was primarily due to an increase in the discount rate used to measure plan obligations and the amortization of the opening deferred loss, partially offset by plan assets earning a return that was less than the assumed long-term rate of return.

• The decrease in the net actuarial loss in 2006 was primarily due to plan assets earning a return that exceeded the assumed long-term rate of return, reductions in domestic benefits and the amortization of the opening deferred loss.

The corporation makes periodic cash contributions to its defined benefit pension plans. In 2008, the corporation expects to contribute $205 million of cash to these plans as compared to $191 million in 2007 and $331 million in 2006.

As indicated above, changes in the bond yields, expected future returns on assets, and other assumptions can have a material impact upon the funded status and the net periodic benefit cost of defined benefit pension plans. It is reasonably likely that changes in these external factors will result in changes to the assumptions used by the corporation to measure plan obligations and net periodic benefit cost in future periods.

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.

Accounting for Uncertainty in Income Taxes – In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN48), which outlines how companies should reflect uncertain tax positions in the financial statements and expands disclosures relating to these tax positions. Under the provisions of FIN 48, an uncertain tax amount should be recognized in the financial statements if it is more likely than not that the company’s tax position will prevail and the tax amount recognized should not exceed the amount that is probable of being paid or collected. FIN 48 becomes effective for the corporation in fiscal 2008. The corporation is currently evaluating the provisions of this new standard.

Accounting for Defined Benefit Pension and Other Postretirement Plans – In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” an amendment of FASB Statements Nos. 87, 88, 106, and 132(R). In accordance with the provisions of SFAS 158, a portion of the requirements have been adopted in 2007 and the remainder will be adopted in 2009 as described below. SFAS 158 requires an employer to recognize the funded status of defined benefit pension and other postretirement benefit plans as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income in shareholders’ equity. The company has recognized the funded status of its defined benefit pension and other postretirement benefit plans and provided the required disclosures as of the end of fiscal 2007.

SFAS 158 also requires consistent measurement of plan assets and benefit obligations as of the date of the fiscal year end statement of financial position. This provision is effective

42     Sara Lee Corporation and Subsidiaries

for the corporation in 2009, with early adoption permitted. As the corporation currently measures the assets and obligations of its defined benefit pension plans and postretirement medical plans as of March 31 of each year, the adoption of this portion of the standard will require a change in the plan measurement date to the fiscal year end. At this time, the corporation does not anticipate early adoption of this requirement. Until those measurements are completed, the corporation cannot assess the impact of adopting this portion of SFAS 158.

Fair Value Measurements – In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 establishes a common definition of fair value, provides a framework for measuring fair value under U.S. GAAP and expands disclosure requirements about fair value measurements. SFAS No. 157 is effective for the corporation at the beginning of fiscal 2009. The corporation is currently evaluating the provisions of this new standard and has not determined the impact of adopting it at this time.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS 159 is effective for the corporation in fiscal 2009. The corporation is currently evaluating the provisions of this new standard and has not determined the impact of adopting at this time.

Forward-Looking Information

This document contains certain forward-looking statements, including the anticipated costs and benefits of restructuring and transformation 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, projected capital expenditures, cash tax payments, pension settlement amounts and effective tax rates. 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. 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, its largest customer, including changes in the level of inventory these customers maintain; and (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; and (vii) changes in regulations that impose additional requirements on Sara Lee, such as recent requirements regarding the labeling of trans-fat content;

• Sara Lee’s international operations, such as (viii) impacts on reported earnings from fluctuations in foreign currency exchange rates, particularly the European euro, given Sara Lee’s significant concentration of business in Western Europe; (ix) Sara Lee’s generation of a high percentage of its revenues from businesses outside the U.S. and costs to remit these foreign earnings into the U.S. to fund Sara Lee’s domestic operations; and (x) 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 (xi) Sara Lee’s ability to generate margin improvement through continuous improvement initiatives and transitioning the entire organization to a common information technology system and the risk that the transition to a common information technology system will be disruptive to the business; (xii) Sara Lee’s ability to achieve planned cash flows from capital expenditures and acquisitions, particularly its worldwide bakery business, and the impact of changing interest rates and the cost of capital on the discounted value of those planned cash flows, which could impact

Sara Lee Corporation and Subsidiaries     43

future impairment analyses; (xiii) credit ratings issued by the three major credit rating agencies and the impact these ratings have on Sara Lee’s cost to borrow funds and access to capital/debt markets; (xiv) 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 Sara Lee transacts business; (xv) changes in Sara Lee’s multi-employer pension liability; and (xvi) 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 2007, 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.

44     Sara Lee Corporation and Subsidiaries

Consolidated Statements of Income

	Years Ended
Dollars in millions except per share data	June 30, 2007			July 1, 2006			July 2, 2005
Continuing operations
Net sales	$	12,278		$	11,460		$	11,346
Cost of sales		7,552			7,025			6,795
Selling, general and administrative expenses		4,023			3,848			3,679
Net charges for exit activities, asset and business dispositions		95			86			43
Impairment charges		172			193			–
Contingent sale proceeds		(120	)		(114	)		(117	)
Interest expense		265			305			285
Interest income		(128	)		(75	)		(85	)
		11,859			11,268			10,600
Income from continuing operations before income taxes		419			192			746
Income tax (benefit) expense		(7	)		161			131
Income from continuing operations		426			31			615
Discontinued operations
Net income from discontinued operations, net of tax expense of $30, $19 and $139		62			123			104
Gain on sale of discontinued operations, net of tax (benefit) expense of $(11), $65 and $0		16			401			–
Net income	$	504		$	555		$	719
Net income from continuing operations per share of common stock
Basic	$	0.58		$	0.04		$	0.78
Diluted	$	0.57		$	0.04		$	0.77
Net income per share of common stock
Basic	$	0.68		$	0.72		$	0.91
Diluted	$	0.68		$	0.72		$	0.90

The accompanying Notes to Financial Statements are an integral part of these statements.

Sara Lee Corporation and Subsidiaries     45

Consolidated Balance Sheets

Dollars in millions except share data	June 30, 2007		July 1, 2006
Assets
Cash and equivalents	$	2,520	$	2,231
Trade accounts receivable, less allowances of $84 in 2007 and $62 in 2006		1,307		1,216
Inventories
Finished goods		719		603
Work in process		34		38
Materials and supplies		297		278
		1,050		919
Current deferred income taxes		468		–
Other current assets		298		256
Assets of discontinued operations held for disposal		–		2,235
Total current assets		5,643		6,857
Other noncurrent assets		194		109
Property
Land		108		106
Buildings and improvements		1,421		1,314
Machinery and equipment		3,555		3,377
Construction in progress		232		230
		5,316		5,027
Accumulated depreciation		2,870		2,708
Property, net		2,446		2,319
Trademarks and other identifiable intangibles, net		1,037		1,049
Goodwill		2,722		2,774
Deferred income taxes		146		–
Assets held for sale		2		1
Assets of discontinued operations held for disposal		–		1,551
	$	12,190	$	14,660

The accompanying Notes to Financial Statements are an integral part of these balance sheets.

46     Sara Lee Corporation and Subsidiaries

	June 30, 2007			July 1, 2006
Liabilities and Stockholders’ Equity
Notes payable	$	33		$	1,776
Accounts payable		1,075			1,022
Accrued liabilities
Payroll and employee benefits		641			814
Advertising and promotion		389			413
Taxes other than payroll and income		65			62
Income taxes payable and current deferred taxes		75			320
Other		592			667
Current maturities of long-term debt		1,431			366
Liabilities of discontinued operations held for disposal		–			921
Total current liabilities		4,301			6,361
Long-term debt		2,803			3,806
Pension obligation		662			231
Deferred income taxes		587			54
Other liabilities		1,161			1,329
Liabilities of discontinued operations held for disposal		–			367
Minority interest in subsidiaries		61			63
Common stockholders’ equity
Common stock: (authorized 1,200,000,000 shares; $0.01 par value) Issued and outstanding – 724,432,686 shares in 2007 and 760,980,168 shares in 2006		7			8
Capital surplus		–			62
Retained earnings		3,485			3,855
Unearned stock of ESOP		(123	)		(137	)
Accumulated other comprehensive loss		(754	)		(1,339	)
Total common stockholders’ equity		2,615			2,449
	$	12,190		$	14,660

Sara Lee Corporation and Subsidiaries     47

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 July 3, 2004	$	2,796		$	8		$	104		$	4,390		$	(170	)	$	(1,536	)
Net income		719			–			–			719			–			–		$	719
Translation adjustments, net of tax of $14		62			–			–			–			–			62			62
Minimum pension liability, net of tax of $(21)		(87	)		–			–			–			–			(87	)		(87	)
Comprehensive income																			$	694
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		2,732			8			79			4,361			(155	)		(1,561	)
Net income		555			–			–			555			–			–		$	555
Translation adjustments, net of tax of $(43)		70			–			–			–			–			70			70
Minimum pension liability, net of tax of $96		180			–			–			–			–			180			180
Net unrealized gain (loss) on qualifying cash flow hedges, net of tax of $(18)		(28	)		–			–			–			–			(28	)		(28	)
Comprehensive income																			$	777
Dividends		(611	)		–			–			(611	)		–			–
Stock issuances – restricted stock		55			–			55			–			–			–
Stock option and benefit plans		33			–			33			–			–			–
Tax benefit related to stock-based compensation		1			–			1			–			–			–
Share repurchases and retirements		(561	)		–			(107	)		(454	)		–			–
ESOP tax benefit, redemptions and other		23			–			1			4			18			–
Balances at July 1, 2006		2,449			8			62			3,855			(137	)		(1,339	)
Adjustment to apply SAB No. 108		58			–			–			53			–			5
Net income		504			–			–			504			–			–		$	504
Translation adjustments, net of tax of $(48)		504			–			–			–			–			504			504
Minimum pension liability, net of tax of $1		143			–			–			–			–			143			143
Net unrealized gain (loss) on qualifying cash flow hedges, net of tax of $20		34			–			–			–			–			34			34
Comprehensive income																			$	1,185
Adjustment to apply SFAS No. 158, net of tax impact of $(49)		(168	)		–			–			–			–			(168	)
Dividends		(298	)		–			–			(298	)		–			–
Spin off of Hanesbrands, Inc. business		(29	)		–			–			(96	)		–			67
Stock issuances – restricted stock		29			–			29			–			–			–
Stock option and benefit plans		47			–			47			–			–			–
Tax benefit related to stock-based compensation		1			–			1			–			–			–
Share repurchases and retirements		(686	)		(1	)		(139	)		(546	)		–			–
ESOP tax benefit, redemptions and other		27			–			–			13			14			–
Balances at June 30, 2007	$	2,615		$	7		$	–		$	3,485		$	(123	)	$	(754	)

The accompanying Notes to Financial Statements are an integral part of these statements.

48     Sara Lee Corporation and Subsidiaries

Consolidated Statements of Cash Flows

Dollars in millions	June 30, 2007			July 1, 2006			July 2, 2005
Operating Activities
Net income	$	504		$	555		$	719
Less: Cash received from contingent sale proceeds		(120	)		(114	)		(117	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		420			541			570
Amortization of intangibles		119			160			181
Impairment charges		172			587			350
Net gain on business dispositions		(29	)		(589	)		(69	)
(Decrease) increase in deferred taxes		(138	)		112			186
Other		91			57			60
Changes in current assets and liabilities, net of businesses acquired and sold
Decrease (increase) in trade accounts receivable		18			(14	)		(199	)
(Increase) decrease in inventories		(106	)		108			8
(Increase) decrease in other current assets		(50	)		(65	)		(9	)
Increase (decrease) in accounts payable		93			(10	)		–
(Decrease) in accrued liabilities		(270	)		(67	)		(197	)
(Decrease) increase in accrued taxes		(212	)		4			(134	)
Net cash from operating activities		492			1,265			1,349
Investment Activities
Purchases of property and equipment		(529	)		(615	)		(526	)
Purchases of software and other intangibles		(102	)		(10	)		(12	)
Acquisitions of businesses and investments		–			(78	)		(2	)
Dispositions of businesses and investments		346			868			86
Cash received from loans receivable		688			33			–
Cash received from contingent sale proceeds		120			114			117
Cash used in derivative transactions		(25	)		(33	)		1
Cash used to invest in short-term investments		(647	)		–			–
Cash received from maturing short-term investments		647			–			–
Sales of assets		70			86			104
Net cash from (used in) investment activities		568			365			(232	)
Financing Activities
Issuances of common stock		38			27			161
Purchases of common stock		(686	)		(561	)		(396	)
Borrowings of long-term debt		2,895			37			339
Repayments of long-term debt		(416	)		(467	)		(1,033	)
Short-term borrowings (repayments), net		(1,720	)		1,528			178
Cash transferred to Hanesbrands, Inc. in spin off		(650	)		–			–
Payments of dividends		(374	)		(605	)		(464	)
Net cash used in financing activities		(913	)		(41	)		(1,215	)
Effect of changes in foreign exchange rates on cash		128			86			(7	)
Increase (decrease) in cash and equivalents		275			1,675			(105	)
Add: Cash balance of discontinued operations at beginning of the year		14			37			41
Less: Cash balance of discontinued operations at end of the year		–			(14	)		(37	)
Cash and equivalents at beginning of year		2,231			533			634
Cash and equivalents at end of year	$	2,520		$	2,231		$	533

The accompanying Notes to Financial Statements are an integral part of these statements.

Sara Lee Corporation and Subsidiaries     49

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 or Sara Lee) 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 and household and body care products. 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 and body care products are primarily sold through the retail channel.

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 (GAAP) in the U.S. The results of the corporation’s Direct Selling, U.S. Retail Coffee, European Branded Apparel, European Nuts and Snacks, U.K. Apparel, U.S. Meat Snacks, European Meats and Branded Apparel Americas/Asia businesses are reported as discontinued operations in all 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, assumptions used in the determination of the funded status and annual expense of pension and postretirement employee benefit plans, and the volatility, expected lives and forfeiture rates for stock compensation instruments granted to employees. Actual results could differ from these estimates.

The corporation’s fiscal year ends on the Saturday closest to June 30. Fiscal years 2007, 2006 and 2005 were 52-week years. Unless otherwise stated, references to years relate to fiscal years.

Discontinued Operations – The results of the corporation’s Branded Apparel Americas/Asia business has been reported as a discontinued operation as a result of a spin off. The

corporation’s Direct Selling, U.S. Retail Coffee, European Branded Apparel, European Nuts and Snacks, U.K. Apparel, U.S. Meat Snacks, and European Meats businesses had previously been reported as discontinued operations in the corporation’s 2006 annual report. The results of operations of all of these businesses through the date of sale are presented as discontinued operations in the Consolidated Statements of Income. Prior to disposition, the assets and liabilities of discontinued operations are aggregated and reported on separate lines of the Consolidated Balance Sheets. Prior periods have been reclassified to reflect this presentation.

Accounting Changes – Adoption of Staff Accounting Bulletin No. 108 – In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement for the purpose of a materiality assessment. SAB 108 requires that misstatements be measured under the dual approach which requires that errors be evaluated under the rollover method and the iron curtain method. Under the rollover method, the amount of the error in the current period is evaluated against current period income, including the reversing effects of prior year misstatements. Under the iron curtain method, the error is quantified by evaluating the total error in the balance sheet as of the end of the current period. The corporation adopted SAB 108 in the fourth quarter of 2007.

The transition provisions of SAB 108 permit a company to correct prior year misstatements that were not material to any prior years under the rollover method, but are material under the dual method of SAB 108, by adjusting the carrying amounts of assets and liabilities as of the beginning of 2007, with a net adjustment to retained earnings or cumulative translation adjustment.

The corporation adopted SAB 108 and adjusted certain balances in the accompanying Consolidated Financial Statements at the beginning of 2007. The aggregated impact of the adjustments at the beginning of 2007 was an increase in retained earnings of $53, an increase in accumulated other comprehensive income of $5, and an adjustment to deferred or accrued income taxes of $58. This increase consists of the following items:

• a $12 increase in retained earnings to reflect decreases in tax rates in certain foreign jurisdictions and the impact these rate changes had on deferred tax balances;

• a $2 decrease in retained earnings to establish valuation allowances against certain foreign deferred tax assets for which recoverability was unlikely;

50     Sara Lee Corporation and Subsidiaries

• a $21 increase in retained earnings to recognize differences between financial and income tax reporting that were not completed on a timely basis;

• a net $22 increase in retained earnings to recognize increases in deferred tax balances related to certain sold entities. These balances consist of $43 related to reductions in deferred tax liabilities that were not properly recognized upon the impairment of certain intangible assets and ($21) that related to a deferred tax asset that was recognized upon the sale of an entity in excess of the amount that would be realized;

• a $5 million increase in accumulated other comprehensive income to recognize the foreign currency translation impact of certain items, including those noted above.

The impact of these misstatements on net income originating in 2006, 2005 and in prior years was ($16), $11 and $63, respectively.

Cash Flows – In the corporation’s cash flow statements for 2006 and 2005, the corporation has revised the presentation of the following items from prior years:

• During 2007, the corporation expanded the usage of certain derivative instruments that utilize the mark-to-market accounting model and has classified the cash payments on these derivatives as investment activities. $33 of cash payments and $1 of cash receipts were generated on similar derivative transactions in the comparable periods of 2006 and 2005, respectively, and were reclassified to conform to the current year presentation.

• During 2006, $33 of cash received from the collection of a note receivable from a disposed business was initially reported as being from financing activities. The 2006 statement of cash flows has been revised to report this within investment activities.

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 Interpretation No. 46(R) (FIN 46(R)) 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.

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.

Sales Recognition and Incentives – Sales are recognized when title and risk of loss pass to the customer. Sales are recognized as the net amount to be received after deducting estimated amounts for sales incentives, trade allowances and product returns. 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.

Volume-Based Incentives – These incentives typically involve rebates or refunds of a specified amount of cash only if the reseller reaches a specified level of sales. Under incentive programs of this nature, the corporation estimates the incentive and allocates a portion of the incentive to reduce 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

Sara Lee Corporation and Subsidiaries     51

Notes to Financial Statements

Dollars in millions except per share data

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 as expense 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” line in the Consolidated Statements of Income. Total media advertising expense for continuing operations was $324 in 2007, $303 in 2006 and $337 in 2005.

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.

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.

Shipping and Handling Costs – The corporation recognizes shipping and handling costs in the “Selling, general and administrative expenses” line of the Consolidated Statements of Income and recognized $684 in 2007.

Inventory Valuation – Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. 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.

Recognition and Reporting of Planned Business Dispositions – When a decision to dispose of a business component is made, it is necessary to determine how the results will be presented within the financial statements and whether the net assets of that business are recoverable. The following summarizes the significant accounting policies and judgments associated with a decision to dispose of a business.

Discontinued Operations – A discontinued operation is a business component that meets several criteria. First, it must be possible to clearly distinguish the operations and cash flows of the component from other portions of the business. Second, the operations need to have been sold or classified as held for disposal. Finally, after the disposal, the cash flows of the component must be eliminated from continuing operations and the corporation may not have any significant continuing involvement in the business. Significant judgments are involved in determining whether a business component meets the criteria for discontinued operation reporting and the period in which these criteria are met.

If a business component is reported as a discontinued operation, the results of operations through the date of sale are presented on a separate line of the income statement. Interest on corporate level debt is not allocated to discontinued operations. Any gain or loss recognized upon the disposition of a discontinued operation is also reported on a separate line of the income statement. Prior to disposition, the assets and liabilities of discontinued operations are aggregated and reported on separate lines of the balance sheet.

Gains and losses related to the sale of business components that do not meet the discontinued operation criteria are reported in continuing operations and separately disclosed if significant.

Businesses Held for Disposal – In order for a business to be classified as held for disposal, several criteria must be achieved. These criteria include, among others, an active program to market the business and locate a buyer, as well as the probable disposition of the business within one year. Upon being classified as held for disposal, the recoverability of the carrying value of a business must be assessed. Evaluating the recoverability of the assets of a business classified as held for disposal follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill, intangible assets not subject to amortization and other assets are assessed. After the valuation process is completed, the held for disposal business is reported at the lower of its carrying value or fair value less cost to sell. The carrying value of a held for disposal business includes the portion of the cumulative translation adjustment related to the operation.

Businesses Held for Use – If a decision to dispose of a business is made and the held for disposal criteria are not met, the business is considered held for use and its assets are evaluated for recoverability in the following order: assets other than goodwill, property and intangibles; property and intangibles subject to amortization; and finally, goodwill. In

52     Sara Lee Corporation and Subsidiaries

evaluating the recoverability of property and intangible assets subject to amortization, in a held for use business, the carrying value of the business is first compared to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the operation. If the carrying value exceeds the undiscounted expected cash flows, then an impairment is recognized if the carrying value of the business exceeds its fair value.

There are inherent judgments and estimates used in determining future cash flows and it is possible that additional impairment charges may occur in future periods. In addition, the sale of a business can result in the recognition of a gain or loss that differs from that anticipated prior to the closing date.

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 are 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. Leasehold improvements are capitalized and amortized over the shorter of the remaining lease term or remaining economic useful life. 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 $20, $20 and $9 in 2007, 2006 and 2005, 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 the carrying amount exceeds the estimated future undiscounted cash flows then 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 using discounted estimated future cash flows.

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 disposal. In order for an asset to be classified as held for disposal, 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. The corporation capitalizes direct costs of materials and services used in the development and purchase of internal-use 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 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 the recoverability of property, plant and equipment. Identifiable intangible assets not subject to amortization are assessed for impairment at least 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 estimated 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 assumptions and judgments required in 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

Sara Lee Corporation and Subsidiaries     53

Notes to Financial Statements

Dollars in millions except per share data

allocated to more than one reporting unit, the 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 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 is necessary and 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 at a point in time. There are inherent assumptions and judgments required in 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 – On July 3, 2005, the corporation adopted the provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (SFAS No. 123(R)), using the modified prospective method. SFAS No. 123(R) requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards. Under the modified prospective method of adopting SFAS No. 123(R), the corporation recognized compensation cost for all share-based payments granted after July 3, 2005, plus any awards granted to employees prior to July 3, 2005 that remained unvested at that time. Under this method of adoption, no restatement of prior periods was made. The impact of adopting SFAS No. 123(R) did not have a significant impact on income from continuing operations, income before income taxes, net income, cash flow from operations or earnings per share during 2006. Upon the adoption of SFAS No. 123(R), the corporation utilized the alternative transition method of FASB Staff Position 123(R)-C and determined that no pool of excess tax benefits existed at the date of adoption.

Prior to July 3, 2005, the corporation recognized the cost of 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 required 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 expense for substantially all of the corporation’s equity-based awards was measured under APB No. 25 on the date the shares were granted. Under APB No. 25, no compensation expense has been recognized for stock options, replacement stock options and shares sold under the Employee Stock Purchase Plan. Compensation expense was recognized under APB No. 25 for the cost of restricted share unit awards granted to employees.

During 2005, 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 SFAS No. 123, “Accounting for Stock-Based Compensation,” the corporation’s net income and earnings per share would have been impacted, as shown in the following table.

	2005
Reported net income	$	719
Plus – stock-based employee compensation included in reported net income, net of related tax effects		50
Less – total stock-based employee compensation expense determined under the fair-value method for all awards, net of related tax effects		(68	)
Pro forma net income	$	701
Earnings per share:
Basic – as reported	$	0.91
Basic – pro forma	$	0.89
Diluted – as reported	$	0.90
Diluted – pro forma	$	0.88

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 includes 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 affects 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

54     Sara Lee Corporation and Subsidiaries

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.

Defined Benefit, Postretirement and Life-Insurance Plans – In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158)”, which requires the recognition of the funded status of defined pension and postretirement plans in the statement of financial position. The funded status is measured as the difference between the fair market value of the plan assets and the benefit obligation. For a defined benefit pension plan, the benefit obligation is the projected benefit obligation; for any other defined benefit postretirement plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation. Any overfunded status should be recognized as an asset and any underfunded status should be recognized as a liability. As part of the initial recognition of the funded status, any transitional asset/(liability), prior service cost (credit) or actuarial (gain)/loss that has not yet been recognized as a component of net periodic cost should be recognized in the accumulated other comprehensive loss section of the Consolidated Statements of Common Stockholders’ Equity, net of tax. Accumulated other comprehensive loss will be adjusted as these amounts are subsequently recognized as a component of net periodic benefit costs in future periods.

The method of calculating net periodic benefit cost under SFAS 158 is the same as under existing practices. SFAS 158 prescribes additional disclosure requirements including the

classification of the current and noncurrent components of plan liabilities, as well as the disclosure of amounts included in Accumulated Other Comprehensive Loss that will be recognized as a component of net periodic benefit cost in the following year.

The recognition of the funded status requirement and certain disclosure provisions of SFAS 158 are effective for the corporation as of the end of 2007. Retrospective application of SFAS 158 is not permitted. The initial incremental recognition of the funded status under SFAS 158 that is reflected upon adoption in the Accumulated Other Comprehensive Loss section of Common Stockholders’ Equity was an after tax charge to equity of $168.

SFAS 158 also requires the consistent measurement of plan assets and benefit obligations as of the date of the fiscal year end statement of financial position. This provision is effective for the corporation in 2009, with early adoption permitted. As the corporation currently uses a plan measurement date of March 31 for all of its benefit plans, the adoption of this portion of the standard will require a change in the plan measurement date to fiscal year end. At this time, the corporation does not anticipate early adoption of this requirement.

The impact of adopting the provisions of SFAS 158 on the components of the Consolidated Balance Sheet as of June 30, 2007 are as follows:

	Before Application of SFAS 158			Adjustment Increases/ (Decreases)			After Application of SFAS 158
Other noncurrent assets	$	121		$	73		$	194
Deferred tax asset		97			49			146
Total assets		12,068			122			12,190
Accrued liabilities – payroll and employee benefits		845			(204	)		641
Total current liabilities		4,505			(204	)		4,301
Pension obligation		58			604			662
Other liabilities		1,271			(110	)		1,161
Accumulated other comprehensive loss		(586	)		(168	)		(754	)
Total common stockholders’ equity		2,783			(168	)		2,615
Total liabilities and equity		12,068			122			12,190

Sara Lee Corporation and Subsidiaries     55

Notes to Financial Statements

Dollars in millions except per share data

Financial Instruments – The corporation uses financial instruments, including forward exchange, options, 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 uses either hedge accounting or mark-to-market accounting for its derivative instruments. In 2007, the corporation adopted a policy to use mark-to-market accounting for foreign currency derivatives due to the high cost of using hedge accounting and maintaining hedge documentation.

Under hedge accounting, 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, 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 the “Selling, general and administrative expenses” line in the Consolidated Statements of Income.

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 to match the gain or loss on the derivative to the loss or gain on 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.

Mark-to-Market or Natural Hedge – A derivative that is not declared as a hedge in one of the categories above is accounted for under mark-to-market accounting and referred to as a mark-to-market or natural hedge. Changes in the fair value of the derivative declared as a mark-to-market or natural hedge are recognized in the Consolidated Statements of Income to act as an economic hedge against changes in the values of another item or transaction. Forward exchange contracts are recorded as mark-to-market or 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.” Mark-to-market or natural hedges also apply to derivatives that do not qualify for treatment under hedge accounting. For derivatives designated as mark-to-market or natural hedges, changes in their fair value are reported in earnings in either the “Cost of sales” or “Selling, general and administrative expenses” lines of the Consolidated Statements of Income where the underlying transaction that is being hedged is recorded.

56     Sara Lee Corporation and Subsidiaries

Cash Flow Presentation – The settlement of derivative contracts related to the purchase of inventory, commodities or other hedged items that utilize hedge accounting are reported in the Consolidated Statements of Cash Flows as an operating cash flow, while those derivatives that utilize the mark-to-market or natural hedge accounting model are reported in investing activities. Fixed to floating rate swaps are reported as a component of interest expense and therefore are reported in cash flow from operating activities similarly to how cash interest payments are reported. The portion of the gain or loss on a cross currency fixed to fixed swap that offsets the change in the value of interest expense is recognized in cash flow from operations, while the gain or loss on the swap that is offsetting the change in value of the debt is classified as a financing activity in the Consolidated Statement of Cash Flows.

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. The undiscounted obligation associated with these claims is accrued based on estimates obtained from consulting actuaries. 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. Accrued reserves were $153 and $132 as of June 30, 2007 and July 1, 2006, respectively.

Business Acquisitions – 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.

Substantially all consideration associated with business acquisitions involves the payment of cash. These amounts are disclosed in the Consolidated Statements of Cash Flows.

Note 3 – Impairment Charges

In announcing its business transformation in 2005, the corporation indicated its intent to dispose of certain business units and reduce the number of brands utilized in its bakery operations. As this plan developed and was implemented, the corporation recognized a number of impairment charges. During 2007, changes in local governmental regulations and economic conditions, as well as efforts to improve efficiency

and long-term profitability, resulted in the corporation recognizing additional impairment charges. The impact of these charges on continuing and discontinued operations is summarized in the following table.

2007	Pretax Impairment Charge			Tax Benefit		After Tax Charge
Impairment charges recognized in continuing operations
North American Retail Meats	$	(34	)	$	12	$	(22	)
North American Retail Bakery		(16	)		6		(10	)
International Beverage		(118	)		9		(109	)
Household and Body Care		(4	)		–		(4	)
Total impairment charges recognized	$	(172	)	$	27	$	(145	)

2006	Pretax Impairment Charge			Tax Benefit		After Tax Charge
Impairment charges recognized in continuing operations
Impairment of intangible assets in the following segments:
North American Retail Bakery	$	(179	)	$	68	$	(111	)
International Bakery		(14	)		5		(9	)
Total impairment charges recognized in continuing operations		(193	)		73		(120	)
Impairment charges recognized in discontinued operations
European Branded Apparel		(179	)		47		(132	)
U.S. Retail Coffee		(44	)		5		(39	)
U.K. Apparel		(34	)		–		(34	)
U.S. Meat Snacks		(12	)		4		(8	)
European Meats		(125	)		–		(125	)
Total impairment charges recognized in discontinued operations		(394	)		56		(338	)
Total impairment charges recognized	$	(587	)	$	129	$	(458	)

2005	Pretax Impairment Charge			Tax Benefit		After Tax Charge
Impairment charges recognized in discontinued operations
European Branded Apparel	$	(305	)	$	43	$	(262	)
U.S. Retail Coffee		(45	)		16		(29	)
Total impairment charges recognized	$	(350	)	$	59	$	(291	)

The following is a discussion of each impairment charge.

Impairment Charges Recognized in Continuing Operations –

2007 – North American Retail Meats Property – During the second quarter of 2007, management completed an analysis of the manufacturing activities being conducted at a facility that is part of the North American Retail Meats segment. As a result of this analysis, the corporation concluded that operations at this facility would be substantially reduced in order to improve efficiency and long-term profitability. Certain of the activities performed at the location have been

Sara Lee Corporation and Subsidiaries     57

Notes to Financial Statements

Dollars in millions except per share data

transferred to more efficient third-party suppliers and others have been eliminated as part of the shutdown of this plant. These actions are consistent with the corporation’s previously announced transformation plan. Based upon the results of a third-party appraisal and internal estimates of cash flows to be generated through the date of disposition, the corporation concluded that it was necessary to recognize an impairment charge of $34 for this asset group in 2007. The after tax impact of this impairment loss is $22.

North American Retail Bakery Trademarks – As part of the corporation’s transformation plan to improve operating efficiency and profitability, the North American Retail Bakery business continues to focus its marketing, advertising and promotion spending on a select number of brands. As a result of these plans, the company assessed the recoverability of certain trademarks impacted by this strategy. The company determined that the undiscounted cash flows over the remaining lives of the trademarks did not recover the carrying value of the assets. Therefore, the company calculated the estimated fair value of the trademarks using a relief from royalty savings method and recorded an impairment charge of $16 for the difference between fair value and carrying value. The after tax impact of the trademark impairment loss was $10.

International Beverage Goodwill and Trademarks – The corporation recognized a $118 pretax impairment charge in its International Beverage operations to record the impairment of $92 of goodwill and $26 of trademarks. No tax benefit was recognized on the goodwill impairment loss. The after tax impact of the trademark impairment loss is $17.

Goodwill Impairment – The corporation tests the goodwill associated with each of its reporting units for impairment in the second quarter of each year. As part of this review, the corporation concluded that the carrying amounts of its Brazilian and Austrian coffee reporting units exceeded their respective fair values. As a result, the corporation compared the implied fair value of the goodwill in each reporting unit with the carrying value and concluded that a $92 impairment loss needed to be recognized. Of this amount, $86 relates to the Brazilian reporting unit and $6 relates to the Austrian reporting unit. The impairment loss recognized equals the entire remaining amount of goodwill in each reporting unit. In prior years, the corporation had recognized goodwill impairment losses of $23 and $1 for the Brazilian and Austrian reporting units, respectively.

The Brazilian coffee operation has experienced a sustained decline in profitability due to a highly competitive market in which the business operates. In management’s judgment, the Brazilian market has experienced a significant amount of price competition as a result of general economic conditions, and consumers have been unwilling to pay the premium prices previously anticipated. As a result of the sustained underperformance of this business, management revised its future cash flow expectations in the second quarter. These revised future cash flow expectations, along with comparable fair value information from the recent sale of a coffee business of comparable size and profitability, resulted in the corporation lowering its estimate of fair value of the business in the 2007 impairment review. Similarly, the underperformance of the Austrian business in recent periods led the corporation to lower its forecasted future cash flow expectations and resultant estimate of fair value.

Trademark Impairment – In conjunction with the actions resulting in the impairment of the Brazilian goodwill, the corporation assessed the realization of its long-lived assets associated with this held-for-use asset grouping. The primary asset in this asset group was determined to be trademarks, which had a carrying value of $47 and are being amortized over 10 years. Using the anticipated undiscounted cash flows of the asset group, the corporation concluded that the asset group was not fully recoverable. As a result of this evaluation, the corporation concluded that the carrying value of the trademarks exceeded the fair value by $26. The fair value of the trademarks was estimated using the royalty savings method.

After considering the lower future profit expectations for the Brazilian operations, the corporation concluded that it was also necessary to recognize a $27 valuation reserve on the net deferred tax assets related to the Brazilian tax jurisdiction as the realization of such tax assets was not reasonably assured. This charge is reported as tax expense in the Consolidated Statements of Income.

Household and Body Care – The corporation owns and operates a manufacturing plant in Zimbabwe. In 2007, changes in local governmental regulations in Zimbabwe include severe foreign exchange restrictions which inhibit the corporation from declaring dividends and repatriating earnings from the local operation. Based on these severe foreign exchange restrictions and general economic uncertainty in this economy, the corporation has considered the investment in the local business impaired, recognized a pretax and after tax impairment charge in the third quarter of 2007 for $4, and deconsolidated the business at the end of the third quarter of 2007. The remaining investment in these operations will be recorded as a cost basis investment and has a value of less than $1.

58     Sara Lee Corporation and Subsidiaries

In conjunction with the annual impairment review of goodwill and indefinite lived intangible assets, the corporation concluded that the fair value of certain Household and Body Care trademarks exceeded their carrying value. However, sales for these trademarks, having a carrying value of $99, had been declining. Based on these sales declines, the corporation decided to begin amortizing these trademarks over periods ranging from 5 to 20 years.

2006 – North American Retail and International Bakery Trademarks – As part of the transformation plan, the operating management of the bakery business was changed at the start of 2006 and new long-range plans were developed for the U.S. and European businesses in preparation for the start of 2007. In order to improve the efficiency and profitability of the U.S. operations, it was decided to eliminate certain regional brands, reduce the marketing, advertising and promotion spending behind other regional brands, and place more resources behind those brands with greater penetration of the domestic market. A greater portion of future research and development spending would also be focused on these larger brands. Similar decisions were made regarding the European business. These decisions impacted the anticipated future sales and cash flows of certain brands. All trademarks of the corporation’s bakery operations have been subject to amortization and the corporation conducted an impairment review of the trademarks impacted by these decisions. A third-party appraisal was used to determine the fair value of the trademarks considered to be impaired. The fair value of the trademarks was determined using the royalty savings method and pretax impairment charges of $179 and $14 were recognized in the North American Retail Bakery and International Bakery segments, respectively. The after tax impact of these impairment charges is $111 and $9, respectively. In addition, the decision to exit the use of certain trademarks within the next two years reduced the amortizable lives of these assets.

Impairment Charges Recognized in Discontinued Operations – After announcing its intent to dispose of certain businesses in 2005, the corporation assessed the reporting and recoverability of these operations in each quarter through the date of sale. Several significant charges were recognized and reported on the line labeled “Net (loss) income from discontinued operations, net of tax (benefit) expense” of the Consolidated Statements of Income. Note 2 to the Consolidated Financial Statements describes the accounting policies and significant judgments related to planned business dispositions. The following is a description of the facts and circumstances leading to the impairment charges and how these amounts were determined.

European Branded Apparel – 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 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 after tax impact of the impairment loss was $262. The assets of this reporting unit were classified as held for use at the close of 2005, and the corporation indicated that it was evaluating alternative courses of action.

In September 2005, the corporation’s board of directors authorized management to negotiate and enter into a definitive agreement to sell this business, and the corporation entered into an exclusive negotiating period with a prospective buyer. The business was classified as held for disposal and reported as a discontinued operation in the first quarter of 2006. Utilizing the agreed upon sale price, the corporation conducted an impairment review of the business and recognized a pretax impairment charge of $179 in the first quarter of 2006. The after tax impact of the impairment loss was $132. The sale of this business closed in the third quarter of 2006 and further information regarding this sale can be found in Note 4 to the Consolidated Financial Statements, “Discontinued Operations.”

U.S. Retail Coffee – In 2005, 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 were part of a larger U.S. coffee reporting unit that also provides coffee 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. The after tax impact of the impairment loss was $29.

During the first quarter of 2006, the corporation began to actively market the assets of the U.S. Retail Coffee business, classified the asset group as held for disposal and allocated a portion of the goodwill associated with the U.S. coffee reporting unit to the retail coffee asset group to be sold. In October 2005, the corporation announced that it had entered into an agreement to sell the U.S. Retail Coffee business for

Sara Lee Corporation and Subsidiaries     59

Notes to Financial Statements

Dollars in millions except per share data

$83. As a result of allocating the goodwill to the U.S. Retail Coffee business to be sold, and utilizing the agreed upon selling price of the business, the corporation recognized an impairment charge of $44 in the first quarter of 2006 to record the impairment of $29 of goodwill and $15 of other long-lived assets. No tax benefit was recognized on the goodwill impairment and a $5 tax benefit was recognized on the other long-lived assets. The U.S. Retail Coffee business was sold in December 2005.

U.K. Apparel – During 2005, steps were taken to market and identify potential buyers for the U.K. Apparel business. As part of this process, the corporation concluded that it would need to reach an agreement with the trustees of the U.K. pension plans regarding how the pension obligation would be funded prior to finalizing a decision to dispose of the apparel business. In the second quarter of 2006, the future funding of the U.K. plans was resolved with plan trustees and the corporation concluded that it would sell these operations while retaining the pension and certain other obligations of the business. At this time, the corporation also concluded that it would dispose of this business in two separate sales transactions; one being the Courtaulds operations and the other being the corporation’s ownership interest in several Sri Lankan ventures that supply a portion of the Courtaulds inventory needs. As a result of this activity, at the end of the second quarter of 2006, the corporation concluded that both businesses were held for disposal, reported them as discontinued operations and recognized an impairment loss of $1 to write down the carrying value of the Courtaulds business to zero with no tax benefit.

In the third quarter of 2006, the corporation concluded that it would be necessary to leave cash and a higher amount of working capital in the Courtaulds business to complete the sale. This resulted in the recognition of a $33 impairment charge for the business in the third quarter with no tax benefit. A gain was anticipated on the disposition of the Sri Lankan ventures. In June 2006, the corporation closed on the sale of the Courtaulds business and the Sri Lankan ventures. Further information regarding the sale of these businesses can be found in Note 4 to the Consolidated Financial Statements, “Discontinued Operations.”

U.S. Meat Snacks – During the second quarter of 2006, the corporation’s management began evaluating a plan to dispose of its domestic meat snacks business. In the third quarter of 2006, management approved the planned disposition of this business, concluded that it was held for disposal and reported it as a discontinued operation. Also during the third quarter of

2006, the corporation entered into an agreement to sell this operation for $9, which was less than the carrying value of the business. As a result of these developments, the goodwill of the business was evaluated for impairment under SFAS No. 142. The determination of the implied fair value of the goodwill utilized the selling price and involved a number of estimates, including the assessment of the fair value of the property and the intangible assets of the business. As a result of this evaluation, the corporation recognized a goodwill impairment charge of $12 pretax and $8 after tax. After the recognition of the goodwill impairment, the fair value of the business exceeded its carrying value. In June 2006, the corporation closed on the sale of this business and further information can be found in Note 4 to the Consolidated Financial Statements, “Discontinued Operations.”

European Meats – During 2006, the corporation initiated steps to sell this business, received a series of nonbinding offers and entered into discussions with various third parties who had expressed an interest in acquiring the business. As the process progressed, the nonbinding bids submitted by prospective buyers declined and at the end of the second quarter of 2006, management concluded that it was not probable that the business would be sold and indicated that it was evaluating alternatives to maximize shareholder value. The business was considered to be held for use at the end of the second quarter of 2006 and the assets were evaluated for impairment. The undiscounted cash flows expected to result from the operation and disposition of the business, as well as the fair value of the business, exceeded the carrying value of the business and no impairment was recognized for any of the assets evaluated. The nonbinding bids received from prospective buyers were used in the determination of the fair value of the business.

During the third quarter of 2006, discussions with prospective buyers resumed and revised nonbinding offers were received. At the end of the third quarter of 2006 the corporation concluded that it was probable that the business would be sold in the next year. The business was classified as held for disposal and reported as a discontinued operation. The carrying value of the business, including the related portion of the cumulative translation adjustment, was determined to exceed its fair value and the corporation evaluated the recoverability of the long-lived assets. The measurement process utilized the third-party offers received for the business and involved a number of judgments including estimates of the fair value of the property and amortizable intangible assets of the business. As a result of the evaluation, the corporation recognized a $125 goodwill impairment charge with no tax benefit. In June 2006, the corporation entered into a definitive agreement to sell this

60     Sara Lee Corporation and Subsidiaries

business to Smithfield Foods, and in August 2006, the transaction closed. See Note 4, “Discontinued Operations,” for further information on the sale of this operation.

Note 4 – Discontinued Operations

As part of the corporation’s transformation plan, steps were taken to dispose of eight businesses that are reported as discontinued operations. At the end of 2007, each of these businesses had been disposed of. The amounts in the tables below reflect the operating results of the businesses reported as discontinued operations. The impact of the impairments discussed in Note 3 to the Consolidated Financial Statements, “Impairment Charges”, is included in these operating results. Gains and losses related to the disposal of these discontinued operations are excluded from the following tables; however, they are discussed further below.

2007

	Net Sales		Pretax Income		Income
European Meats	$	114	$	7	$	3
Branded Apparel Americas/Asia		787		85		59
Total	$	901	$	92	$	62

2006

	Net Sales		Pretax Income (Loss)			Income (Loss)
Direct Selling	$	202	$	14		$	54
U.S. Retail Coffee		122		(46	)		(39	)
European Branded Apparel		641		(186	)		(153	)
European Nuts and Snacks		54		8			3
U.K. Apparel		437		(69	)		(71	)
U.S. Meat Snacks		25		(14	)		(9	)
European Meats		1,114		(57	)		(41	)
Branded Apparel Americas/Asia		4,484		491			379
Total	$	7,079	$	141		$	123

2005

	Net Sales		Pretax Income (Loss)			Income (Loss)
Direct Selling	$	473	$	55		$	(12	)
U.S. Retail Coffee		213		(39	)		(33	)
European Branded Apparel		1,184		(302	)		(296	)
European Nuts and Snacks		64		7			3
U.K. Apparel		558		–			(1	)
U.S. Meat Snacks		30		(1	)		(1	)
European Meats		1,176		90			(22	)
Branded Apparel Americas/Asia		4,682		433			466
Total	$	8,380	$	243		$	104

Results of Discontinued Operations – Net sales of discontinued operations were $901 in 2007, $7,079 in 2006 and $8,380 in 2005; a full year of results for the European Meats and Branded Apparel Americas/Asia businesses was not included in 2007 as each of the businesses was sold in the first quarter of the fiscal year. The 2006 results also did not include a full year of results as the corporation completed the sale of the remaining discontinued operations during the year.

The corporation reported income from discontinued operations of $62 in 2007, $123 in 2006 and $104 in 2005. The corporation recognized after tax impairment charges of $338 in 2006 and $291 in 2005, which reduced income from discontinued operations and are more fully described in Note 3 to the Consolidated Financial Statements, “Impairment Charges.” Additionally in 2005, the corporation’s businesses that are reported as discontinued operations reported lower operating results than in the prior year, which was primarily attributable to the European Branded Apparel and U.K. Apparel businesses. In the European Meats business in 2005, the corporation recognized a tax charge of $86 associated with the accumulated earnings of this business that were no longer considered permanently invested.

Sara Lee Corporation and Subsidiaries     61

Notes to Financial Statements

Dollars in millions except per share data

Gain on the Sale of Discontinued Operations – During 2007, the corporation sold two businesses and in 2006 the corporation sold the remaining six of the eight businesses reported as discontinued operations. The gains recognized in 2007 and 2006 are summarized in the following tables. A further discussion of each disposition follows.

2007

	Pretax Gain (Loss) on Sale			Tax (Charge)/ Benefit			After Tax Gain (Loss)
European Meats	$	18		$	(1	)	$	17
Branded Apparel Americas/Asia		(23	)		6			(17	)
Philippines portion of European Branded Apparel		8			(2	)		6
Other		2			8			10
Total	$	5		$	11		$	16

2006

	Pretax Gain on Sale		Tax (Charge)/ Benefit			After Tax Gain
Direct Selling	$	327	$	(107	)	$	220
U.S. Retail Coffee		5		(2	)		3
European Branded Apparel		45		41			86
European Nuts and Snacks		66		4			70
U.K. Apparel		22		–			22
U.S. Meat Snacks		1		(1	)		–
Total	$	466	$	(65	)	$	401

Businesses Sold in 2007

European Meats – In June 2006, the corporation entered into a definitive agreement to sell its European Meats business. The transaction closed in August 2006 after receiving European regulatory approval and the corporation recognized a pretax and after tax gain of $18 and $17, respectively. The capital gain related to this transaction was offset by capital losses on other disposition transactions. A total of $337 of cash proceeds was received from the disposition of the business and an additional $238 was received from the repayment of an obligation to the corporation, which was included in the net assets sold.

The sale agreement provided for working capital and other customary postclosing adjustments relating to the assets transferred. The corporation has not had any significant continuing involvement in the business after the disposal date and does not expect any material direct cash inflows or outflows with the sold entity. Prior to the change in the corporation’s reportable segments in 2006, the European Meats business had been reported within the Meats segment.

Branded Apparel Americas/Asia – In February 2005, as part of its transformation plan, the corporation announced its intent to spin off the corporation’s apparel business in the Americas/Asia. This business is referred to as Branded Apparel Americas/Asia. In preparation for the spin off, the corporation incorporated Hanesbrands Inc., a Maryland corporation to which it transferred the assets and liabilities that relate to the Branded Apparel Americas/Asia business. On September 5, 2006, Hanesbrands borrowed $2,600 from a group of banks. Net of loan origination fees, Hanesbrands received $2,558 of cash proceeds. Using a portion of the proceeds received from the borrowing, Hanesbrands paid a dividend of $1,950 to the corporation. Immediately following this dividend payment, Sara Lee distributed to each stockholder of record one share of Hanesbrands common stock for every eight shares of Sara Lee common stock held. The spin off was tax free on a U.S. tax basis to the corporation and its shareholders.

After the spin off was completed, Hanesbrands paid $450 to the corporation to settle the note payable it had with Sara Lee Corporation. In addition, the corporation recognized as expense $23 of investment banker and other fees as a direct result of this transaction. The after tax loss recognized on these fees was $17. These amounts are recognized as part of the net gain on disposal of discontinued operations in 2007.

The corporation and Hanesbrands entered into a transitional services agreement to provide for the orderly separation of the two businesses and transition of various functions and processes. The terms of the agreement apply to specific functions or actions including certain accounting, payroll and tax processing, information technology services, and other services that will be performed for certain periods of time, which in each case is less than one year. The majority of these services had been completed by the end of 2007. The corporation has no significant continuing involvement in this business after the disposal date and does not expect any material direct cash inflows or outflows with this business.

Subsequent to the spin off date, the corporation has completed certain postclosing adjustments, tax reporting and other postclosing reconciliations in various areas, including completing the split of the corporation’s pension plans and the determination under ERISA rules of the relevant asset split to each plan. Further postclosing tax adjustments may occur after certain future tax reporting requirements are completed. The net assets of the Hanesbrands business distributed were $29 and this amount is reflected as a dividend in the corporation’s Consolidated Statements of Common Stockholders’ Equity.

Prior to the change in the corporation’s reportable segments in 2006, the Branded Apparel Americas/Asia business had been reported within the Branded Apparel segment.

62     Sara Lee Corporation and Subsidiaries

Philippines Portion of European Branded Apparel – Substantially all of the European Branded Apparel business was sold in February 2006 and is further described below under the heading “Businesses Sold in 2006”. When this business was sold, certain operations in the Philippines were awaiting local governmental approval to legally transfer the assets. Under the terms of the sale agreement, the buyer of this business assumed financial responsibility for all of the operations, including the Philippines business, even though legal transfer of the Philippines assets had not been completed. In September 2006, upon receiving local government approval, the corporation completed the legal transfer of the assets and recognized in 2007 a pretax and after tax gain of $8 and $6, respectively. Under the terms of the sale agreement of the business, the buyer assumed financial responsibility for the Philippines business in February 2006 upon the initial closing of the sale transaction. As such, no financial results for the Philippines business are included in the results of the corporation after that date.

The corporation has no significant continuing involvement in this business after the disposal date and does not expect any material direct cash inflows or outflows with the sold entity. Prior to the change in the corporation’s reportable segments in 2006, the Philippines portion of the European Branded Apparel business had been reported within the Branded Apparel segment.

Other – During 2007, the corporation completed certain postclosing adjustments which included certain working capital adjustments related to the assets transferred, finalized certain related tax reporting and completed certain financial and tax reporting adjustments related to the U.K. Apparel and Direct Selling businesses that were sold in 2006. As a result of these adjustments, the corporation recognized a pretax and after tax gain in discontinued operations of $2 and $10, respectively.

Businesses Sold in 2006

Direct Selling – On August 10, 2005, the corporation announced that it had entered into a definitive agreement to sell this business, and in December 2005, the corporation completed the sale of substantially all of the operations to Tupperware Corporation except certain operations located in the Philippines. After receiving local governmental approval in June 2006, the corporation completed and recognized the sale of the Philippines operations. The net pretax and after tax gain recognized on the sale of the Direct Selling business was $327 and $220, respectively, and the corporation received the following consideration:

• $420, which consists of $464 of cash received less $44 of cash that was included in the net assets transferred to the buyer.

• The liabilities transferred to the buyer included a $33 obligation to a retained foreign subsidiary of the corporation. Subsequent to the closing, the buyer remitted cash to the corporation to settle this obligation. The payment of this obligation is reflected in the investment activities section of the Consolidated Statements of Cash Flows.

• Subsequent to the closing, the buyer paid $93 to settle certain Sara Lee tax obligations that were directly related to the sale transaction.

The sale agreement provided for working capital and other customary postclosing adjustments relating to the assets transferred. After the sale, the corporation has not had any continuing involvement in the business and has not had any material direct cash inflows or outflows with the sold entity. Prior to the change in the corporation’s reportable segments in 2006, the Direct Selling business had been reported within the Household Products segment.

U.S. Retail Coffee – In the first quarter of 2006, the corporation announced that it had entered into an agreement to sell its U.S. Retail Coffee business, and the transaction closed in the second quarter of 2006. The corporation received $82 of cash at closing and recognized a pretax and after tax gain of $5 and $3, respectively.

Prior to the change in the corporation’s reportable segments, the U.S. Retail Coffee business had been reported within the Beverage segment.

European Branded Apparel – During the third quarter of 2006, the corporation sold substantially all of the European Branded Apparel business. Using foreign exchange rates on the date of the transaction, the corporation received cash proceeds of $117 and recognized a pretax and after tax gain of $45 and $86, respectively. Although an impairment charge was recognized in the first quarter of 2006, the working capital of the business declined through the date of sale and a gain was recognized. The tax benefit recognized on the transaction resulted from a capital loss that the corporation was able to carry back against a capital gain recognized in a prior transaction. The definitive sale agreement provides for the sale of certain operations in the Philippines which were sold in 2007 and discussed above under the heading “Businesses Sold in 2007”.

Under the terms of the transaction, the corporation can receive additional cash proceeds if the buyer receives cash distributions as a result of certain events such as the sale of the business, the payment of dividends or redemption of capital or loans. Distributions of available cash from the sold business will be made in the following order:

• The buyer will first receive any amounts owed as a result of working capital and other purchase price adjustments.

Sara Lee Corporation and Subsidiaries     63

Notes to Financial Statements

Dollars in millions except per share data

• After the purchase price adjustments are satisfied, the corporation will receive 49% of the next 200 million euros of cash distributions.

• If additional cash is distributed, the corporation may receive between 15% and 25% of these amounts.

If any amounts are received, they will be recognized in income when the cash is received. The corporation has no continuing involvement in the business after the date of sale and does not expect any material direct cash inflows or outflows with the sold entity.

Under the terms of the sale agreement, the corporation retained certain of the pension obligations of this business. As a result of an agreement reached with the trustees of a retained plan, it was agreed that annuities would be purchased to settle the related obligations. Upon the settlement of these obligations, the corporation will need to recognize in earnings any unrecognized actuarial gains or losses related to this plan. As of the end of 2007, the plan to be settled had an unrecognized actuarial loss of $28. At the present time, the corporation expects that annuities will be purchased and the pension obligation will be settled in either late 2008 or 2009. The impact of the settlement on the corporation’s earnings will depend upon the amount of the unrecognized actuarial loss at the settlement date. As of the end of 2007, plan assets exceeded the plan obligations. At the present time, the corporation does not anticipate that additional cash contributions to the plan will be needed to settle the obligation.

The European Branded Apparel business was previously reported in the corporation’s Branded Apparel segment.

European Nuts and Snacks – During the first quarter of 2006, steps were taken to market and dispose of the European Nuts and Snacks business, and the business was classified as held for disposal and reported as a discontinued operation. During the second quarter of 2006, the corporation entered into a definitive agreement to sell its European Nuts and Snacks business for 130 million euros and the corporation closed this transaction in June 2006. The Nuts and Snacks business in the Netherlands is separately reported and its operations and cash flows are identifiable. As a result, this component of the business is reported as a discontinued operation. The Nuts and Snacks operations in France and Belgium are integrated into the corporation’s other operations in these countries and share common distribution, sales and administrative functions. Since the operations and cash flows of these businesses could not be clearly distinguished from the retained businesses, the operating results of the

businesses continue to be included in continuing operations. As a result of this business being reported in both discontinued and continuing operations, the gain on the sale of business is also reported in discontinued and continuing operations. The sale of the Nuts and Snacks business in the Netherlands generated a pretax and after tax gain of $66 and $70, respectively, and is reported in discontinued operations. An additional pretax and after tax gain of $41 and $27, respectively, related to the French and Belgian operations is recognized in continuing operations.

The sale agreement provided for working capital and other customary postclosing adjustments relating to the assets transferred. The corporation has not had any significant continuing involvement in this business after it was sold and does not expect to have any material direct cash inflows or outflows with the sold entity.

Prior to the change in segments in the corporation’s reportable segments, this business was previously reported in the Beverage segment.

U.K. Apparel – The U.K. Apparel business was sold in June 2006 in two transactions, with one buyer purchasing certain manufacturing operations in Sri Lanka and a separate buyer purchasing the Courtaulds operations centered in the U.K. The corporation recognized a pretax and after tax gain of $22 from selling the U.K. Apparel operations which was primarily related to the sale of the Sri Lankan operations. The gain on these sales was not subject to tax.

The sale agreement provided for working capital and other customary postclosing adjustments relating to the assets transferred. In 2005, these businesses were reported as part of the Branded Apparel segment.

Under the terms of the sale agreement, the corporation retained certain pension obligations associated with the U.K. Apparel business that was sold. The service cost of $12 in 2006 was recognized in discontinued operations and the remaining components of the net periodic benefit cost of these plans of $36 and $46 for 2007 and 2006, respectively, are recorded in “Selling, general and administrative expenses” in the Consolidated Statements of Income.

U.S. Meat Snacks – In March 2006, the corporation entered into a definitive agreement to sell its U.S. Meat Snacks business for $9. In June 2006, the corporation closed this transaction and recognized a pretax gain of $1 that was primarily offset by taxes. In 2005, this business was reported as part of the Sara Lee Meats segment.

64     Sara Lee Corporation and Subsidiaries

Net Assets Held for Disposal – At the end of 2007, all discontinued operations had been disposed of. The following table summarizes the net assets held for disposal at the close of 2006. These assets relate to the European Meats and Branded Apparel Americas/Asia businesses.

	July 1, 2006
Cash and short-term investments	$	14
Trade accounts receivable		680
Inventories		1,367
Other current assets		174
Total current assets held for disposal		2,235
Property		831
Trademarks and other intangibles		287
Goodwill		279
Other assets		154
Total assets held for disposal	$	3,786
Notes payable	$	7
Accounts payable		344
Accrued expenses and other current liabilities		570
Total current liabilities held for disposal		921
Other liabilities		367
Cumulative translation adjustment of businesses held for disposal		(229	)
Total liabilities and cumulative translation adjustment held for disposal	$	1,059

Note 5 – Common Stock

Changes in outstanding shares of common stock for the past three years were:

Shares in thousands	2007		2006		2005
Beginning balances	760,980		785,895		793,924
Stock issuances
Stock option and benefit plans	2,556		1,613		9,379
Business acquisitions	–		–		7
Restricted stock plans	2,514		3,481		700
Reacquired shares	(41,730	)	(30,072	)	(18,293	)
Other	113		63		178
Ending balances	724,433		760,980		785,895

Common stock dividends and dividend-per-share amounts declared on outstanding shares of common stock were $296 and $0.40 in 2007, $605 and $0.79 in 2006 and $614 and $0.78 in 2005. The corporation is incorporated in the state of Maryland and under those laws repurchased shares are retired as repurchased.

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			Pension Liability Adjustment			Accumulated Other Comprehensive Income
Balance at July 3, 2004	$	(793	)	$	(14	)	$	(729	)	$	(1,536	)
Other comprehensive income (loss) activity		62			–			(87	)		(25	)
Balance at July 2, 2005		(731	)		(14	)		(816	)		(1,561	)
Other comprehensive income (loss) activity		70			(28	)		180			222
Balance at July 1, 2006		(661	)		(42	)		(636	)		(1,339	)
Spin off of Hanesbrands, Inc.		5			4			58			67
Adjustment to apply SAB No. 108		5			–			–			5
Adjustment to initially apply SFAS No. 158		–			–			(168	)		(168	)
Other comprehensive income (loss) activity		504			34			143			681
Balance at June 30, 2007	$	(147	)	$	(4	)	$	(603	)	$	(754	)

During 2007, the corporation recognized an expense of $229 on the sale of discontinued operations related to the recognition of cumulative translation adjustment amounts for the sold businesses.

Note 7 – Stock-Based Compensation

The corporation has various stock option, employee stock purchase and stock award plans. At June 30, 2007, 90.3 million shares were available for future grant in the form of options, restricted shares or stock appreciation rights.

On September 5, 2006, the corporation completed the spin off of its Branded Apparel Americas/Asia business to shareholders. Under the provisions of SFAS No. 123(R), the corporation reflected the impact of the equity restructuring on outstanding options and restricted stock units by increasing the number of options or stock units and reducing the exercise price of the options to preserve the economic value that existed at the time of the spin off. In conjunction with this modification, the corporation recognized a charge of $2.

Sara Lee Corporation and Subsidiaries     65

Notes to Financial Statements

Dollars in millions except per share data

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 and expense is recognized in accordance with the provisions of FASB Interpretation No. 28 (FIN 28). 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:

	2007		2006		2005
Weighted average expected lives	6.1 years		6.1 years		3.5 years
Weighted average risk-free interest rate	4.8	%	4.3	%	3.3	%
Range of risk-free interest rates	4.7 – 4.9	%	4.2 – 4.3	%	2.8 – 4.0	%
Weighted average expected volatility	22.3	%	26.2	%	23.2	%
Range of expected volatility	21.5 – 22.4	%	25.2 – 26.4	%	20.9 – 24.5	%
Dividend yield	2.8	%	4.2	%	3.5	%

The corporation uses historical volatility for a period of time that is comparable to the expected life of the option to determine volatility assumptions. The corporation discontinued the granting of replacement options at the beginning of 2006. As a result of this change, the corporation utilizes the simplified method outlined in SEC Staff Accounting Bulletin No. 107 to estimate expected lives for options granted during the period.

A summary of the changes in stock options outstanding under the corporation’s option plans during 2007 is presented below:

Shares in thousands	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Options outstanding at July 1, 2006	49,023		$	21.96	3.1	$	3
Spin off adjustment	7,919
Options outstanding at July 1, 2006	56,942		$	18.91	3.1	$	3
Granted	2,263			14.42
Exercised	(2,476	)		14.60
Canceled/expired	(13,735	)		19.84
Options outstanding at June 30, 2007	42,994		$	18.65	3.2	$	21
Options exercisable at June 30, 2007	38,987		$	18.98	2.7	$	13

At July 1, 2006 and July 2, 2005, the number of options exercisable was 54,323 and 59,970, respectively, with weighted average exercise prices of $18.99 and $19.14, respectively. The weighted average grant date fair value of options granted during 2007, 2006 and 2005 was $3.23, $4.01 and $2.78, respectively. The total intrinsic value of options exercised during 2007, 2006 and 2005 was $5, $2 and $46, respectively. The fair value of options that vested during 2007 and 2006 was $3 and $6, respectively. The corporation received cash from the exercise of stock options during 2007 of $36. As of June 30, 2007, the corporation had $4 of total unrecognized compensation expense related to stock option plans that will be recognized over the weighted average period of 0.62 years.

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. During 2006, the corporation eliminated the 15% discount on shares acquired through the ESPP for all U.S. employees and continued to offer the discount for certain European employees. During 2007, the corporation eliminated the 15% discount for the remaining European employees. Under the plan, the corporation sold 40,770, 851,085 and 1,630,014 shares to employees in 2007, 2006 and 2005, respectively. Compensation expense is calculated for the fair value of the employees’ purchase rights using the Black-Scholes model. Assumptions include an expected life of one-fourth of a year and weighted average risk-free interest rates of 5.5% in 2007, 3.8% in 2006 and 2.3% in 2005. 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 2007, 2006 and 2005 was $3.18, $3.42 and $4.05, respectively. Effective in May 2007, the corporation’s board of directors terminated the ESPP.

66     Sara Lee Corporation and Subsidiaries

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 parameters, the RSUs are generally converted into shares of the corporation’s common stock on a one-for-one basis and issued to the employees. A substantial portion of all RSUs vest solely upon continued future 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 on the date of grant, and compensation is recognized over the period during which the employees provide the requisite service to the corporation. Compensation expense is recognized in accordance with the provisions of FIN 28. A summary of the changes in the stock unit awards outstanding under the corporation’s benefit plans during 2007 is presented below:

Shares in thousands	Shares		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Nonvested share units at July 1, 2006	6,217		$	20.48	0.81	$	100
Spin off adjustment	1,005
Nonvested share units at July 1, 2006	7,222		$	17.63	0.81	$	100
Granted	3,128			14.39
Vested	(3,772	)		17.57
Forfeited	(446	)		16.08
Nonvested share units at June 30, 2007	6,132		$	16.13	1.34	$	107
Exercisable share units at June 30, 2007	159		$	16.42	3.68	$	3

The total fair value of share-based units that vested during 2007 and 2006 was $66 and $82, respectively. As of June 30, 2007, the corporation had $34 of total unrecognized compensation expense related to stock unit plans that will be recognized over the weighted average period of 1.96 years.

Expense Recognized for All Stock-Based Compensation – For all share-based payments during 2007, the corporation recognized total compensation expense of $41 and recognized a tax benefit of $10. The corporation will satisfy the requirement for common stock for share-based payments by issuing shares out of authorized but unissued common stock.

Note 8 – Employee Stock Ownership Plans (ESOP)

The corporation maintains an ESOP that holds common stock of the corporation and provides a retirement benefit for nonunion domestic employees. During 2007, 2006 and 2005, the Sara Lee ESOP unallocated common stock received total dividends of $3 or $0.40 per share, $7 or $0.79 per share

and $8 or $0.78 per share, respectively. The purchase of the original 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, and only loans from the corporation to the ESOP remain. 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 $11 in 2007 and 2006 and $7 in 2005. Payments to the Sara Lee ESOP were $19 in 2007, $20 in 2006 and $12 in 2005.

Note 9 – Preferred Stock Purchase Rights

The corporation had a rights agreement, pursuant to which each outstanding share of the corporation’s common stock had attached to it one-half of a preferred stock purchase right entitling its holder to purchase from the corporation Series A Junior Participating Preferred Stock upon the occurrence of certain triggering events. The rights plan expired on September 1, 2006, and the Preferred Stock Purchase Rights ceased to exist.

Note 10 – Minority Interest in Subsidiaries

Minority interest in subsidiaries in 2007 consists of the equity interest of minority investors in consolidated subsidiaries of the corporation. The corporation’s consolidated minority interest income of $5 in 2007 and minority interest expense of $10 in 2006 and $8 in 2005 is recorded in “Selling, general and administrative expenses” in the Consolidated Statements of Income.

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 35.2 million shares of common stock at June 30, 2007, 46.0 million shares of common stock at July 1, 2006 and 26.7 million shares of common stock at July 2, 2005 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 antidilutive.

Sara Lee Corporation and Subsidiaries     67

Notes to Financial Statements

Dollars in millions except per share data

The following is a reconciliation of net income to net income per share – basic and – diluted for the years ended June 30, 2007, July 1, 2006 and July 2, 2005:

Shares in millions	2007		2006		2005
Income from continuing operations	$	426	$	31	$	615
Income from discontinued operations		62		123		104
Gain on sale of discontinued operations		16		401		–
Net income	$	504	$	555	$	719
Average shares outstanding – basic		741		766		789
Dilutive effect of stock option and stock award plans		2		2		7
Diluted shares outstanding		743		768		796
Income from continuing operations per share
– Basic	$	0.58	$	0.04	$	0.78
– Diluted	$	0.57	$	0.04	$	0.77
Income from discontinued operations per share
– Basic	$	0.10	$	0.68	$	0.13
– Diluted	$	0.10	$	0.68	$	0.13
Net income per share
– Basic	$	0.68	$	0.72	$	0.91
– Diluted	$	0.68	$	0.72	$	0.90

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	2007			2006
Senior debt – fixed rate
6.125% notes	2008	$	806		$	759
10.2% Mexican peso notes	2008 – 2013		36			34
6.0% – 6.95% medium-term notes	2008		227			252
2.75% notes	2008		300			300
7.05% – 7.40% notes	2008		75			75
6.5% notes	2009		150			150
7.26% – 7.71% notes	2010		25			25
6.25% notes	2012		1,110			1,110
3.875% notes	2013		500			500
10% zero coupon notes	2014		10			9
10% – 14.25% zero coupon notes	2015		44			39
6.125% notes	2033		500			500
Total senior fixed rate			3,783			3,753
Senior debt – variable rate
Euro denominated – euro interbank offered rate (EURIBOR) plus .10%	2009		336			316
Total senior debt			4,119			4,069
Obligations under capital lease			68			66
Other debt			65			70
Total debt			4,252			4,205
Unamortized discounts			(7	)		(8	)
Hedged debt adjustment to fair value			(11	)		(25	)
Total long-term debt			4,234			4,172
Less current portion			1,431			366
		$	2,803		$	3,806

Payments required on long-term debt during the years ending 2008 through 2012 are $1,431, $513, $49, $20 and $1,120, respectively. The corporation made cash interest payments of $270, $314 and $305 in 2007, 2006 and 2005, respectively.

Note 13 – Leases

The corporation leases certain facilities, equipment and vehicles under agreements that are classified as either operating or 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 gross book value of capital lease assets included in property at June 30, 2007 and July 1, 2006 was $138 and $136, respectively. The net book value of capital lease assets included in property at June 30, 2007 and July 1, 2006 was $68 and $66, respectively.

68     Sara Lee Corporation and Subsidiaries

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 June 30, 2007 were as follows:

	Capital Leases			Operating Leases
2008	$	21		$	99
2009		16			78
2010		13			61
2011		10			49
2012		8			38
Thereafter		16			113
Total minimum lease payments		84		$	438
Amounts representing interest		(16	)
Present value of net minimum payments		68
Current portion		17
Noncurrent portion	$	51

Depreciation expense of capital lease assets was $27 in 2007, $26 in 2006 and $29 in 2005. Rental expense under operating leases was $133 in 2007, $138 in 2006 and $120 in 2005.

Contingent Lease Obligation – The corporation is contingently liable for leases on property operated by others. At June 30, 2007, 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 $169. The minimum annual rentals under these leases are $25 in 2008, $24 in 2009, $21 in 2010, $17 in 2011, $15 in 2012 and $67 thereafter. The two largest components of these amounts relate to a number of retail store leases operated by Coach, Inc. and certain leases related to the corporation’s U.K. Apparel operations that have been sold. Coach, Inc. 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 2007 was $13. 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 a $1.85 billion credit facility that had an annual fee of 0.08% as of June 30, 2007. This agreement supports commercial paper borrowings and other financial instruments. Selected data on the corporation’s short-term obligations follow:

	2007			2006			2005
Maximum month-end borrowings	$	1,348		$	1,928		$	2,870
Average borrowings during the year		286			1,648			2,512
Year-end borrowings		33			1,776			153
Weighted average interest rate during the year		5.6	%		4.3	%		2.3	%
Weighted average interest rate at year-end		6.7			5.2			4.0

Note 15 – Sale of Accounts Receivable

During 2005, the corporation terminated its receivables sale program, and no receivables were sold under this program at the end of 2005.

Note 16 – Contingencies

Contingent Asset – The corporation sold its European cut tobacco business in 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 July 15, 2009. 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 2007, 2006 and 2005 payments passed in the first quarter of each fiscal year and the corporation received the annual payments. The 2007 annual payment was equivalent to $120, the 2006 annual payment was equivalent to $114 and the 2005 payment was equivalent to $117 based upon the respective exchange rates on the dates of receipt. These amounts were recognized in the corporation’s earnings when received. The payments increased diluted earnings per share by $0.16 in 2007 and $0.15 in 2006 and 2005.

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,

Sara Lee Corporation and Subsidiaries     69

Notes to Financial Statements

Dollars in millions except per share data

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 the 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.

Aris – Since 1995, three complaints have been filed on behalf of employees of a former subsidiary of the corporation known as Aris Philippines, Inc. (Aris) alleging unfair labor practices associated with Aris’ termination of manufacturing operations in the Philippines. Each of these three complaints includes allegations with the same issues and facts. With regard to two of these complaints, Aris prevailed in the administrative hearings held in the Philippines. Although implicated in these complaints, the corporation was not a party. The third complaint is a consolidation of cases filed in the Republic of the Philippines, Department of Labor and Employment and the National Labor Relations Commission (NLRC) from 1998 through July 1999 by individual complainants. On December 11, 1998, the third complaint was amended to name the corporation as a party. The case is styled: Emelinda Mactlang, et al. v. Aris Philippines, Inc., et al. In the underlying proceedings during 2006, the arbitrator ruled against the corporation and awarded the plaintiffs $60 in damages and fees. The corporation appealed this administrative ruling. On December 19, 2006, the NLRC issued a ruling setting aside the arbitrator’s ruling, and remanded the case to the arbitrator for further proceedings. The complainants and the corporation have filed motions for reconsideration – the corporation seeking reconsideration of the ruling to remand to the arbitrator. The corporation believes that the plaintiffs’ claims are without merit; however, no assurance can be given that this matter will not have a material adverse impact on the corporation’s financial position, results of operations or cash flows.

American Bakers Association (ABA) Retirement Plan – The corporation is a participating employer in the American Bakers Association Retirement Plan. In 1979, the Pension Benefit Guaranty Corporation (PBGC) determined that the ABA plan was an aggregate of single-employer pension plans, rather than a multi-employer plan. Under the express terms of the ABA plan’s governing documents, the corporation’s contributions can only be used to pay for the benefits of its own employee-participants. Based upon the PBGC determination and the advice of counsel, the corporation has

accounted for this plan as a multiple employer plan and recognized its obligations under the plan as if it participated in a single-employer defined benefit plan under the provisions of Statement of Financial Accounting Standards No. 87, “Employers Accounting for Pensions.”

In 2007, the PBGC rescinded its 1979 determination and concluded that the ABA plan was a multi-employer plan in which the participating parties share in the plan underfunding. The other major participant in the ABA plan is a bankrupt third party that is seeking an injunction to enforce the PBGC determination made earlier this year. The PBGC has indicated that the obligations associated with the bankrupt third-party plan participants are approximately $60 and there are no assets to fund these obligations. The corporation has initiated litigation seeking to overturn the 2007 PBGC litigation and intends to vigorously defend the position that it is responsible only for the obligations related to its current and former employees. The corporation believes that the PBGC’s 2007 determination is without merit; however, no assurance can be given that this matter will not have a material adverse impact on the corporation’s financial position, results of operations or cash flows.

Multi-Employer Pension Plans – The corporation participates in multi-employer pension plans that provide retirement benefits to employees covered by certain collective bargaining agreements. The Multi-employer Pension Plan Amendments Act includes the potential for the corporation to be assessed a partial withdrawal liability if business changes cause a cessation of contributions to a plan and a series of other factors exist. The corporation has been contacted by a multi-employer pension fund regarding a plant closing and at the present time no assessment has been made by the fund. However, an assessment may be made in the future. If an assessment is made by the fund, the corporation intends to dispute the matter, but would be required to pay the assessment amount under ERISA rules while the dispute is resolved. No assurances can be given that this matter will not have a material impact on the corporation’s financial position, results of operations or cash flows.

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 matters such 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

70     Sara Lee Corporation and Subsidiaries

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 June 30, 2007, the maximum potential amount of future payments that the corporation could be required to make if all the current operators default is $169. This contingent obligation is more completely described in Note 13 to the Consolidated Financial Statements, “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 $32. 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. 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 that 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.

			Weighted Average Interest Rates2
	Notional Principal1		Receive		Pay
Interest Rate Swaps
2007 Receive fixed – pay variable	$	1,315	5.1	%	6.0	%
2006 Receive fixed – pay variable		1,316	5.1		5.8
2005 Receive fixed – pay variable		1,644	4.8		4.4
Currency Swaps
2007 Receive fixed – pay fixed	$	755	5.1	%	5.0	%
2006 Receive fixed – pay fixed		711	5.1		5.0
2005 Receive fixed – pay fixed		680	5.1		5.0

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, Swiss franc, Canadian dollar, British pound, Hungarian forint, Russian ruble and Australian dollar.

The corporation uses commodity forwards and options to hedge commodity price risk. The principal commodities hedged by the corporation include hogs, beef, natural gas, diesel fuel, coffee 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 used in continuing operations 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

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Notes to Financial Statements

Dollars in millions except per share data

requirement date of the hedged transaction, generally within one year.

	2007			2006			2005
Foreign Currency – Bought (Sold)
European euro	$	16		$	88		$	1,537
British pound		(151	)		(66	)		110
Swiss franc		10			25			137
Canadian dollar		(10	)		(6	)		61
Hungarian forint		255			188			170
Russian ruble		(47	)		(14	)		(15	)
Australian dollar		(36	)		2			(1	)
Other		(43	)		(49	)		52

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 relating to continuing operations to sell foreign currency, in U.S. dollars:

	2007		2006		2005
Foreign Currency – Sold
European euro	$	8	$	547	$	548
Australian dollar		9		–		–

The following table summarizes the net derivative gains or losses deferred into accumulated other comprehensive income and reclassified to earnings in 2007, 2006 and 2005:

	2007			2006			2005
Net accumulated derivative gain (loss) deferred at beginning of year	$	(42	)	$	(14	)	$	(14	)
Deferral of net derivative gain (loss) in accumulated other comprehensive income		29			(38	)		(10	)
Spin off of Hanesbrands		4			–			–
Reclassification of net derivative (gain) loss to income		5			10			10
Net accumulated derivative gain (loss) at end of year	$	(4	)	$	(42	)	$	(14	)

At June 30, 2007, the maximum maturity date of any cash flow hedge was 6.0 years (principally two currency swaps that mature in 2012 and 2013), 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 losses from accumulated other comprehensive income of $1 at the time the underlying hedged transactions are realized. In 2007 and 2006, hedge ineffectiveness was insignificant. During 2005, the corporation recognized an expense of $7 for hedge ineffectiveness related to cash flow

hedges, which is recorded in the “Selling, general and administrative expenses” line of the Consolidated Statements of Income. In 2007, 2006 and 2005, 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 2007 and 2006, a net loss of $77 and $70, respectively, arising from effective hedges of net investments has 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 June 30, 2007 and July 1, 2006. The fair value of the remaining financial instruments recognized in continuing operations on the Consolidated Balance Sheets of the corporation at the respective year-ends were:

	2007			2006
Long-term debt, including current portion	$	4,197		$	4,116
Interest rate swaps		(18	)		(30	)
Currency swaps		(216	)		(206	)
Foreign currency forwards and options		7			(47	)
Commodity forwards and options		7			(1	)

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 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 and commodity forwards and options is based upon information 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 continuously monitored. While the corporation may be exposed to credit losses in the event of nonperformance by these counterparties, it does not

72     Sara Lee Corporation and Subsidiaries

anticipate material losses because of these control procedures.

Trade accounts receivable due from customers that the corporation considers highly leveraged were $109 at June 30, 2007 and $116 at July 1, 2006. The financial position of these businesses has been considered in determining allowances for doubtful accounts.

Note 19 – Exit and Disposal Activities

In February 2005, the corporation announced a transformation plan designed to improve the corporation’s performance and better position it for long-term growth. Since the announcement, a number of actions have been initiated and substantially completed, resulting in the recognition of certain exit, disposal and other transformation costs. The following is a description of those actions and their related financial impact. In addition, the corporation has taken other actions in prior periods to restructure certain business operations. These actions and their related status are also described below.

The reported results for 2007, 2006 and 2005 reflect amounts recognized for exit, disposal, transformation and other restructuring actions, including the impact of certain activities that were completed for amounts more favorable than previously estimated. The impact of these activities on income from continuing operations before income taxes is summarized as follows:

	2007			2006			2005
Exit activities	$	113		$	173		$	79
Asset and business disposition actions		(12	)		(80	)		(27	)
Transformation and other restructuring activities		151			184			11
		252			277			63
Adjustments to charges recognized in prior years		(6	)		(7	)		(9	)
Reduction in income from continuing operations before income taxes	$	246		$	270		$	54

The following table illustrates where the costs (income) associated with these actions are recognized in the Consolidated Statements of Income of the corporation:

	2007			2006			2005
Cost of sales:
Accelerated depreciation	$	31		$	30		$	21
Curtailment gain from bakery workforce reduction		–			–			(28	)
Transformation costs		10			5			–
		41			35			(7	)
Selling, general and administrative expenses:
Transformation costs		109			154			9
Vacation policy change		–			(14	)		–
Accelerated depreciation		1			9			–
Accelerated amortization of intangibles		–			–			9
		110			149			18
Net charges for:
Exit activities		107			166			70
Asset and business dispositions		(12	)		(80	)		(27	)
		95			86			43
Reduction in income from continuing operations before income taxes		246			270			54
Income tax benefit		(89	)		(91	)		(14	)
Reduction in income from continuing operations	$	157		$	179		$	40
Impact on diluted EPS from continuing operations	$	0.21		$	0.23		$	0.05

The impact of these actions on the corporation’s business segments and general corporate expenses is summarized as follows:

	2007		2006		2005
North American Retail Meats	$	79	$	48	$	(31	)
North American Retail Bakery		31		29		(6	)
Foodservice		12		15		(2	)
International Beverage		21		16		32
International Bakery		18		30		5
Household and Body Care		13		28		9
Decrease in business segment income		174		166		7
Increase in general corporate expenses		72		104		38
Accelerated amortization of intangibles		–		–		9
Total	$	246	$	270	$	54

2007 Exit, Disposal and Transformation Activities – As part of the transformation plan, the corporation approved a series of actions in 2007 to exit certain defined business activities, dispose of certain business assets and lower its cost structure. A net charge of $252 was recognized for these approved actions. Each of these actions was to be completed

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Notes to Financial Statements

Dollars in millions except per share data

within a 12-month period after being approved. The composition of the $252 net charge is as follows:

Amounts Recognized in “Net charges for exit activities, asset and business dispositions” line of the Consolidated Statements of Income –

• $99 of the net charge is for the cost associated with terminating 2,658 employees and providing them with severance benefits in accordance with benefit plans previously communicated to the affected employee group or with local employment laws. The specific location of these employees is summarized in a table contained in this note.

• $13 of the net charge relates to the cost to exit certain noncancelable lease and other contractual obligations. These costs relate primarily to the exit of the former corporate headquarters, two administrative buildings for the Foodservice and Household and Body Care segments, and a packaging facility for the Foodservice segment. These spaces have all been exited. Also included in the net charge are costs to exit certain contractual commitments with third-party vendors.

• $1 of the net charge is related to the loss recognized with the decision to abandon certain capitalized software in the International Beverage segment. With the corporation’s initiative to improve information and technology systems under the transformation plan, certain software was identified as no longer being viable in the new environment. As a result, this software was abandoned and written off in 2007.

• $12 of the net charge relates to the net gain realized on various asset and business disposition actions. Included in this net gain is a $23 gain related to completed transactions in the International Bakery and Household and Body Care business segments and the disposal of certain corporate assets. The most significant of these are a $14 gain on the sale of a Spanish office building and a $4 gain on the sale of an Australian manufacturing and administrative facility. The total cash proceeds from these asset dispositions were $31. Offsetting these gains are $11 of net charges consisting primarily of costs associated with the disposal of businesses.

Amounts Recognized in “Cost of sales” and “Selling, general and administrative expenses” lines of the Consolidated Statements of Income –

• $32 of the net charge is related to accelerated depreciation recognized on certain assets targeted for disposal. Of the $32 total charge, $31 is reflected in the “Cost of sales” line and relates to the disposal of three manufacturing facilities and various manufacturing equipment for the North American Retail Meats, North American Retail Bakery, Foodservice, International Beverage and Household and Body Care segments. As of the end of 2007, all of the manufacturing facilities have been closed and one of these has been disposed of. For the manufacturing equipment, most of the equipment has ceased being used and is in the process of being disposed of. All of the remaining equipment is expected to be taken out of service within the next year. The remaining $1 of accelerated depreciation is reflected in the “Selling, general and administrative expenses” line and relates primarily to the closure of an administrative facility for the North American Retail Bakery segment. This facility was closed during 2007.

• $119 of the net charge relates to various costs associated with the corporation’s ongoing transformation plan. Of this amount, $10 is recognized in the “Cost of sales” line and $109 is recognized in the “Selling, general and administrative expenses” line. These costs are primarily included in the following categories:

Employee-Related Costs – As part of the transformation plan, the corporation decided to centralize the management of its North American and European operations. As a result of this action, costs were incurred to relocate employees, recruit new employees and pay retention bonuses in order to preserve business continuity.

Information Technology Costs – In order to improve operational efficiency, the corporation decided to implement common information technology systems across the organization. Costs associated with assessing current systems, the evaluation of alternatives, and process re-engineering were expensed as incurred.

Consulting Costs – The corporation engaged a number of third-party consultants to assist in the development of strategic operating and financial plans, as well as to provide employee training and assistance in implementing the transformation plan.

74     Sara Lee Corporation and Subsidiaries

The following table summarizes the net charges taken for the exit, disposal and transformation activities approved during 2007 and the related status as of June 30, 2007. The accrued amounts remaining as of the end of 2007 represent

those cash expenditures necessary to satisfy remaining obligations. The majority of the cash payments to satisfy the accrued costs are expected to be paid in the next two years.

	Exit and Disposal Costs Recognized			Non-Cash Credits and (Charges)			Asset and Business Disposition Gains		Cash Payments			Accrued Costs as of June 30, 2007
Employee termination and other benefits	$	99		$	–		$	–	$	(31	)	$	68
Noncancelable lease and other contractual obligations		13			–			–		(2	)		11
Losses on abandonment of assets		1			(1	)		–		–			–
Asset and business disposition actions		(12	)		–			23		(11	)		–
Accelerated depreciation		32			(32	)		–		–			–
Transformation costs		119			(12	)		–		(100	)		7
	$	252		$	(45	)	$	23	$	(144	)	$	86

The following table summarizes the employee terminations by location and business segment.

Number of Employees	North American Retail Meats	North American Retail Bakery	Foodservice	International Beverage	International Bakery	Household and Body Care	Corporate	Total
United States	1,600	332	225	–	–	–	17	2,174
Mexico	4	–	–	–	–	–	–	4
Europe	–	–	–	73	118	97	–	288
South America	–	–	–	192	–	–	–	192
	1,604	332	225	265	118	97	17	2,658
As of June 30, 2007:
Actions completed	1,522	198	138	141	72	40	15	2,126
Actions remaining	82	134	87	124	46	57	2	532
	1,604	332	225	265	118	97	17	2,658

2006 Exit, Disposal and Restructuring Activities – As part of the transformation plan, the corporation approved a series of actions in 2006 to exit certain defined business activities, dispose of certain business assets and lower its cost structure. Each of these activities was to be completed within a 12-month period after being approved. A net charge of $277 was recognized for these approved actions. During 2007, certain of these actions were completed for amounts more favorable than originally estimated. As a result, costs previously accrued were adjusted and resulted in a net increase of $3 to income from continuing operations before income taxes in 2007. The $3 consists of a net credit of $6 for employee termination benefits and resulted from the actual costs to settle termination obligations varying from the original estimates and certain employees originally targeted for termination not being severed as originally planned. Offsetting this credit is a $3 increase to noncancelable lease and other contractual obligations, which resulted from the determination that the actual costs to settle certain of these lease obligations were more than originally estimated.

The $277 of net charges recognized in 2006 consisted of the following:

Amounts Recognized in “Net charges for exit activities, asset and business dispositions” line of the Consolidated Statements of Income –

• $159 of the net charge was for the cost associated with terminating 1,873 employees and providing them with severance benefits in accordance with benefit plans previously communicated to the affected employee group or local employment laws. The specific locations of these employees are summarized in a table contained in this note. As of the end of 2007, all of the employees had been terminated.

• $8 of the net charge is for the cost of certain noncancelable lease and other contractual obligations. The lease costs relate primarily to the exit of an administrative building for the North American Retail Meats segment, the exit of various retail bakery stores and a commission payment made to a third party to sublease a leased facility for the Foodservice segment. The other contractual

75     Sara Lee Corporation and Subsidiaries

Notes to Financial Statements

Dollars in millions except per share data

obligations relate to the costs to terminate contracts with various Italian sales agents in the Household and Body Care segment. As of the end of 2007, the administrative building and the retail bakery spaces had been exited, the commission payment made and the contracts with sales agents terminated.

• $6 of the net charge is related to the loss recognized with the decision to abandon certain capitalized software in the International Beverage segment. With the corporation’s initiative to improve information and technology systems under the transformation plan, certain software was identified as no longer being viable in the new environment. As a result, this software was abandoned and written off in 2006.

• $80 of the net charge relates to the net gain realized on various asset and business disposition actions. Included in this amount is a net $119 gain related to completed transactions in the International Beverage, International Bakery and Household and Body Care business segments, as well as the disposal of certain corporate assets and minority interest investments. The most significant of these transactions was a $53 gain on the sale of working capital related to a European rice product line, a $28 gain on the sale of European skin care and sun care assets, and a $14 loss on the sale of a European cake plant. In addition, the corporation recognized a gain on the sale of certain assets of the French and Belgian Nuts and Snacks operation of $41. The remaining gain related to Nuts and Snacks is reported in discontinued operations. The total cash proceeds from these asset dispositions were $215. Offsetting this net gain is $39 of professional fees incurred in connection with preparing businesses for disposition.

Amounts Recognized in “Cost of sales” and “Selling, general and administrative expenses” lines of the Consolidated Statements of Income –

• $39 of the net charge was related to accelerated depreciation recognized on certain assets targeted for disposal. Of the $39 total charge, $30 is reflected in the “Cost of sales” line and relates to the disposal of four manufacturing facilities and related equipment for the North American Retail Bakery, International Beverage and Household and Body Care segments, and equipment from various manufacturing sites for the North American Retail Meats, North American Retail Bakery and Foodservice segments. Of the four manufacturing facilities, the three owned facilities had been closed as of the end of 2006 and two of these have since been sold. The fourth facility

was leased and had been exited. For the U.S. manufacturing equipment, all of the equipment has ceased being used. Additional accelerated depreciation was recognized on this equipment during 2007. The remaining $9 of accelerated depreciation is reflected in the “Selling, general and administrative expenses” line. This charge was related to the accelerated depreciation recognized on various assets for four administrative offices in the North American Retail Meats, North American Retail Bakery and Foodservice segments and the corporate headquarters. One of these facilities was owned and the remaining three offices were leased. As of the end of 2007, the owned facility has been sold and the three leased offices have been exited.

• $159 of the net charge relates to various costs associated with the corporation’s ongoing transformation plan. Of this amount $5 is recognized in the “Cost of sales” line and $154 is recognized in the “Selling, general and administrative expenses” line. These expenses consisted primarily of employee-related costs, information technology costs and consulting costs, all of which were previously described in this note.

• $14 of the net charge relates to income recognized as a result of the corporation’s decision to modify its vacation policy for U.S. employees during 2006. This change resulted in the forfeiture of certain vacation benefits that had been previously earned by employees. This credit is reflected in the “Selling, general and administrative expenses” line.

76     Sara Lee Corporation and Subsidiaries

The following table summarizes the net charges taken for the exit, disposal and restructuring actions approved during 2006 and the related status as of June 30, 2007. The accrued amounts remaining as of the end of 2007 represent

those cash expenditures necessary to satisfy remaining obligations. The majority of the cash payments to satisfy the accrued costs are expected to be paid in the next year.

	Exit and Disposal Costs Recognized			Non-Cash Credits and (Charges)			Asset and Business Disposition Gains		Cash Payments			Change in Estimate			Accrued Costs as of June 30, 2007
Employee termination and other benefits	$	159		$	–		$	–	$	(93	)	$	(6	)	$	60
Noncancelable lease and other contractual obligations		8			–			–		(8	)		3			3
Losses on the abandonment of assets		6			(6	)		–		–			–			–
Asset and business disposition actions		(80	)		–			119		(39	)		–			–
Accelerated depreciation		39			(39	)		–		–			–			–
Transformation costs		159			(26	)		–		(132	)		–			1
Vacation policy change		(14	)		14			–		–			–			–
	$	277		$	(57	)	$	119	$	(272	)	$	(3	)	$	64

The following table summarizes the employee terminations by location and business segment. All actions have been completed.

Number of Employees	North American Retail Meats	North American Retail Bakery	Foodservice	International Beverage	International Bakery	Household and Body Care	Corporate	Total
United States	328	271	94	–	–	2	25	720
Canada	–	–	–	–	–	1	–	1
Europe	–	–	–	675	138	182	1	996
Australia	–	–	–	38	17	73	–	128
Asia	–	–	–	–	–	28	–	28
	328	271	94	713	155	286	26	1,873

2005 Exit, Disposal and Restructuring Activities – As part of the transformation plan, the corporation approved a series of actions in 2005 to exit certain defined business activities, dispose of certain business assets and lower its cost structure. Each of these activities was to be completed within a 12-month period after being approved. A net charge of $63 was recognized for these approved actions. During 2006, certain of these obligations were satisfied 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 2006. This credit is 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.

The $63 of net charges recognized in 2005 consisted of the following:

Amounts Recognized in “Net charges for exit activities, asset and business dispositions” line of the Consolidated Statements of Income –

• $73 of the net charge was for the cost associated with terminating 739 employees and providing them with

severance benefits in accordance with existing benefit plans or local employment laws. The specific locations of these employees are summarized in a table contained in this note.

• $6 of the net charge was for the cost of certain noncancelable contractual obligations related to the exit of a German distribution agreement for the International Beverage segment. As of the end of 2006, the distribution agreement had been terminated.

• $27 of the net charge was related to the net gains realized on various asset and business disposition actions. Included in this amount is $61 of gains related to completed transactions in the North American Retail Meats and Household and Body Care 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 product line sold primarily in the U.S. The total cash proceeds from these asset dispositions were $84. Offsetting these gains is $34 of professional fees incurred in connection with evaluating certain future business dispositions.

Sara Lee Corporation and Subsidiaries     77

Notes to Financial Statements

Dollars in millions except per share data

Amounts Recognized in “Cost of sales” and “Selling, general and administrative expenses” lines of the Consolidated Statements of Income –

• $28 of the net charge was 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 shown in the “Cost of sales” line.

• $21 of the net charge was related to the accelerated depreciation recognized on certain assets that were targeted for disposal. This amount is reflected in the “Cost of sales” line and relates to the disposal of six manufacturing facilities and certain manufacturing equipment in the North American Retail Bakery, Foodservice and Household and Body Care business segments. As of the end of 2007, 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.

• $9 of the net charge was related to the accelerated amortization recognized on certain bakery intangibles. During 2005, decisions were made to abandon certain regional bakery trademarks and customer relationships. These actions had been completed by the end of 2005 and there is no remaining carrying value for these assets. This charge is reflected in the “Selling, general and administrative expenses” line.

• $9 of the net charge was for various transformation costs, which included professional fees associated with the transformation plan and various costs associated with employee relocation and recruiting efforts. This charge is reflected in the “Selling, general and administrative expenses” line.

The following table summarizes the net charges taken for the exit, disposal and restructuring actions approved during 2005 and the related status as of June 30, 2007. The accrued amounts remaining as of the end of 2007 represent those cash expenditures necessary to satisfy remaining obligations. The cash payments to satisfy the accrued costs are expected to be paid in the next year.

	Exit and Disposal Costs Recognized			Non-Cash Credits and (Charges)			Asset and Business Disposition Gains		Cash Payments			Change in Estimate			Accrued Costs as of June 30, 2007
Employee termination and other benefits	$	73		$	–		$	–	$	(56	)	$	(2	)	$	15
Noncancelable lease and other contractual obligations		6			–			–		(6	)		–			–
Asset and business disposition actions		(27	)		–			61		(34	)		–			–
Curtailment gains on benefit plans		(28	)		28			–		–			–			–
Accelerated depreciation		21			(21	)		–		–			–			–
Accelerated amortization		9			(9	)		–		–			–			–
Transformation costs		9			–			–		(9	)		–			–
	$	63		$	(2	)	$	61	$	(105	)	$	(2	)	$	15

The following table summarizes the employee terminations by location and business segment. All actions have been completed.

Number of Employees	North American Retail Meats	North American Retail Bakery	Foodservice	International Beverage	International Bakery	Household and Body Care	Corporate	Total
United States	23	152	198	–	–	–	10	383
Europe	–	–	–	110	48	137	1	296
Australia	–	–	–	–	–	60	–	60
	23	152	198	110	48	197	11	739

78     Sara Lee Corporation and Subsidiaries

Other Restructuring Actions – In prior periods, the corporation had approved and completed various actions to exit certain defined business activities and lower its cost structure. During 2007, certain adjustments were made to the accrued obligations remaining for these completed actions as a result of reaching final settlements more favorable than originally planned. The adjustments consisted of reductions in accrued termination benefits and other obligations for the North American Retail Meats, North American Retail Bakery, Foodservice and International Beverage business segments, as well as corporate, and resulted in an increase of $3 to income from continuing operations before income taxes. These adjustments are reported in the “Net charges for exit activities, asset and business dispositions” line of the Consolidated Statements of Income.

During 2006, adjustments were made to certain accrued obligations remaining for these completed actions. 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 the North American Retail Bakery, Foodservice, International Beverage and Household and Body Care business segments. These adjustments resulted in an increase of $5 to income from continuing operations before income taxes and are reported in the “Net charges for exit activities, asset and business dispositions” line of the Consolidated Statements of Income.

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, certain noncancelable lease and other contractual obligations and the disposal of certain business assets for the North American Retail Meats, North American Retail Bakery and Foodservice business segments, as well as corporate. These adjustments resulted in an increase of $9 to income from continuing operations before income taxes and are reported in the “Net charges for exit activities, asset and business dispositions” line of the Consolidated Statements of Income.

As of June 30, 2007, the accrued liabilities remaining in the Consolidated Balance Sheet related to these completed actions total $1 and represent certain severance and noncancelable lease obligations. These accrued amounts are expected to be satisfied in cash and will be funded from operations.

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.

On June 30, 2007, the corporation adopted certain of the provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158).” See Note 2 – “Summary of Significant Accounting Policies” for additional information regarding the impact of the adoption of SFAS 158.

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.

The weighted average actuarial assumptions used in measuring the net periodic benefit cost and plan obligations of continuing operations for the three years ending June 30, 2007 were as follows:

	2007		2006		2005
Net periodic benefit cost
Discount rate	5.1	%	5.2	%	5.5	%
Long-term rate of return on plan assets	6.8		6.4		6.6
Rate of compensation increase	3.9		3.9		4.3
Plan obligations
Discount rate	5.4	%	5.1	%	5.2	%
Rate of compensation increase	3.8		3.9		3.9

In determining the discount rate, the corporation utilizes the yield on high-quality fixed-income investments that have an AA bond rating and match the average duration of the pension benefit payments. 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.

Sara Lee Corporation and Subsidiaries     79

Notes to Financial Statements

Dollars in millions except per share data

Net Periodic Benefit Cost and Funded Status – The components of the net periodic benefit cost for continuing operations were as follows:

	2007			2006			2005
Components of defined benefit net periodic benefit cost
Service cost	$	97		$	104		$	106
Interest cost		253			230			224
Expected return on assets		(279	)		(226	)		(203	)
Amortization of
Prior service cost		8			2			2
Net actuarial loss		62			71			70
Net periodic benefit cost	$	141		$	181		$	199

The corporation also recognized settlement, curtailment and termination losses of $12 in 2007 as a result of the termination of certain foreign employees due to plant closures and employee terminations in the U.S. The corporation had settlement and termination losses of $6 and $8 in 2006 and 2005, respectively.

The amount of prior service cost and net actuarial loss that is expected to be amortized from accumulated other comprehensive income and reported as a component of net periodic benefit cost during 2008 is $7 and $34, respectively.

In 2006, the corporation sold its U.K. Apparel business and retained the pension obligations related to that operation. The corporation will no longer incur service costs for the participants in the U.K. Apparel plans after the date of sale. The service cost component incurred prior to the date of sale is recognized in discontinued operations while the remainder of the net periodic benefit cost after the date of sale is recognized in continuing operations.

The net periodic benefit cost of the corporation’s defined benefit pension plans in 2007 was $40 lower than in 2006. This was primarily due to a $53 increase in the expected return on plan assets in 2007 partially offset by higher interest expense. The greater asset return resulted from the fact that plan assets at the start of 2007 were $741 greater than at the start of 2006, and the corporation contributed $191 of cash to the plans during 2007.

The net periodic benefit cost of the corporation’s defined benefit pension plans in 2006 was $18 lower than in 2005. This was primarily due to a $23 increase in the expected return on plan assets in 2006 partially offset by higher interest expense. The greater asset return resulted from the fact that plan assets at the start of 2006 were $304 greater than at the start of 2005, and the corporation contributed $324 of cash to the plans during 2006.

The funded status of defined benefit pension plans at the respective year-ends was as follows:

	2007			2006
Projected benefit obligation
Beginning of year	$	4,904		$	4,483
Service cost		97			114
Interest cost		253			230
Plan amendments		(10	)		91
Acquisitions		–			14
Benefits paid		(201	)		(178	)
Participant contributions		3			5
Actuarial (gain) loss		(367	)		85
Curtailment		(13	)		(49	)
Foreign exchange		260			109
End of year		4,926			4,904
Fair value of plan assets
Beginning of year		4,094			3,353
Actual return on plan assets		143			491
Employer contributions		191			324
Participant contributions		3			5
Benefits paid		(201	)		(174	)
Settlement		(8	)		(4	)
Acquisitions/(dispositions)		(24	)		10
Hanesbrands spin off adjustment		(70	)		–
Foreign exchange		218			89
End of year		4,346			4,094
Funded status	$	(580	)		(810	)
Unrecognized
Prior service cost					90
Net actuarial loss					982
Prepaid benefit cost (liability) recognized				$	262
Amounts recognized on the Consolidated Balance Sheets
Noncurrent asset	$	84		$	11
Accrued liabilities		(2	)		(184	)
Pension obligation		(662	)		(231	)
Accumulated other comprehensive income		–			666
Prepaid benefit cost (liability) recognized	$	(580	)	$	262
Amounts recognized in Accumulated Other Comprehensive Income
Unamortized prior service cost	$	84
Unamortized actuarial loss, net		746
Total	$	830

The underfunded status of the plans declined from $810 in 2006 to $580 in 2007, primarily due to actuarial gains resulting, in part, from an increase in the discount rate and contributions made during the year.

An actuarial analysis under ERISA guidelines was completed to determine the plan assets that related to the

80     Sara Lee Corporation and Subsidiaries

pension plans that were transferred to Hanesbrands Inc. Based on this analysis, the corporation determined that $70 of plan assets in excess of the amount originally estimated would be transferred to Hanesbrands Inc. This additional asset transfer is reflected above as a reduction to the plan assets.

The corporation makes periodic cash contributions to its defined pension plans. The breakdown of the contributions between continuing and discontinued operations is as follows:

	2007		2006		2005
Summary of cash contributions
Continuing operations	$	191	$	324	$	249
Discontinued operations		–		7		99
Total	$	191	$	331	$	348

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 2007 and 2006 were $4,716 and $4,674, 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:

	2007			2006
Projected benefit obligation	$	3,261		$	3,436
Accumulated benefit obligation		3,188			3,330
Fair value of plan assets		2,598			2,540
Plan Assets, Expected Benefit Payments and Funding – The allocation of pension plan assets as of the respective year-end measurement dates is as follows:
	2007			2006
Asset category
Equity securities		43	%		45	%
Debt securities		32			50
Real estate		3			3
Cash and other		22			2
		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 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% of members elected by employees and retirees. This can result in differences compared to the strategies described above. The debt securities of certain plans in the U.K. transitioned into investments that better match the inflation and interest characteristics of the investments with those of the respective pension liabilities. As a result of this transition, a greater amount of assets was invested in cash and other investments at the end of 2007.

Pension assets at the 2007 and 2006 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 June 30, 2007 and expected future service, it is anticipated that the future benefit payments will be as follows: $223 in 2008, $235 in 2009, $226 in 2010, $233 in 2011, $241 in 2012 and $1,313 from 2013 to 2017.

At the present time, the corporation expects to contribute $205 of cash to its pension plans in 2008. During 2006, the corporation entered into an agreement to fully fund certain U.K. pension obligations by 2015. The anticipated 2008 contributions reflect the amounts agreed upon with the trustees of these U.K. plans. Subsequent to 2015, the corporation has agreed to keep the U.K. plans fully funded in accordance with certain local funding standards. 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.

The corporation sold a branded apparel business in the U.K. and retained certain of the pension obligations of this business. This specific plan was not included in the funding agreement noted above. An agreement was reached with the trustees of this retained plan that annuities would be

Sara Lee Corporation and Subsidiaries     81

Notes to Financial Statements

Dollars in millions except per share data

purchased to settle the related obligations. Upon the settlement of this obligation, the corporation will need to recognize in earnings any unamortized actuarial gains or losses related to this plan. As of the end of 2007, the plan to be settled had an unamortized loss of $28. At the present time, the corporation expects that annuities will be purchased and the pension obligation will be settled in either late 2008 or 2009. The impact of the settlement on the corporation’s earnings will depend upon the amount of the unamortized actuarial loss at the settlement date. As of the end of 2007, plan assets exceeded the plan obligations. At the present time, the corporation does not anticipate that additional cash contributions to the plan will be needed to settle the obligation.

Multi-employer Plans – The corporation participates in multi-employer 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 $47 in 2007, $45 in 2006, and $46 in 2005. 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.

On June 30, 2007, the corporation adopted certain of the provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158).” See Note 2 – “Summary of Significant Accounting Policies” for additional information regarding the impact of the adoption of SFAS 158 and the related disclosure requirements.

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 June 30, 2007 were:

	2007		2006		2005
Net periodic benefit cost
Discount rate	5.5	%	5.1	%	5.5	%
Plan obligations
Discount rate	5.7	%	5.5	%	5.1	%
Health-care cost trend assumed for the next year	9.5	%	8.6	%	8.6	%
Rate to which the cost trend is assumed to decline	5.5	%	5.3	%	5.2	%
Year that rate reaches the ultimate trend rate	2015		2010		2010

In determining the discount rate, the corporation utilizes the yield on high-quality fixed-income investments that have an AA bond rating that matches 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	$	2	$	(2	)
Effect on postretirement benefit obligation		23		(20	)

Net Periodic Benefit Cost and Funded Status – The components of the net periodic benefit cost and curtailment gains associated with continuing operations were as follows:

	2007			2006			2005
Components of defined benefit net periodic cost
Service cost	$	8		$	8		$	11
Interest cost		13			14			18
Net amortization and deferral		(22	)		(20	)		(15	)
Net periodic benefit cost (income)	$	(1	)	$	2		$	14
Curtailment gains	$	(2	)	$	(7	)	$	(28	)

The amount of the prior service credits, net actuarial loss and net initial asset that is expected to be amortized from accumulated other comprehensive income and reported as a component of net periodic benefit cost during 2008 is $22 of income, $6 of expense and $2 of income, respectively.

82     Sara Lee Corporation and Subsidiaries

The funded status of postretirement health-care and life-insurance plans related to continuing operations at the respective year-ends were:

	2007			2006
Accumulated postretirement benefit obligation
Beginning of year	$	227		$	299
Service cost		8			8
Interest cost		13			14
Net benefit paid		(19	)		(30	)
Actuarial loss		52			10
Curtailment		(5	)		(15	)
Plan amendments		–			(61	)
Foreign exchange		3			2
End of year		279			227
Fair value of plan assets		1			1
Funded status	$	(278	)		(226	)
Unrecognized
Prior service credit					(209	)
Net actuarial loss					41
Net initial asset					(12	)
Net liability recognized on the Consolidated Balance Sheets				$	(406	)
Amounts recognized on the Consolidated Balance Sheets:
Accrued liabilities	$	(18	)	$	(30	)
Other liabilities		(260	)		(376	)
Total liability recognized	$	(278	)	$	(406	)
Amounts recognized in Accumulated Other Comprehensive Loss:
Unamortized prior service credit	$	(186	)
Unamortized net actuarial loss		86
Unamortized net initial asset		(11	)
Total	$	(111	)

During 2006 and 2005, the corporation amended several of its postretirement medical plans. These amendments eliminated coverage for certain groups and required retirees to bear a greater portion of the cost of the plans. As a result of these actions, the accumulated postretirement benefit obligation declined and the amount of unrecognized negative prior service cost increased.

The reduced benefit levels resulting from the plan amendments and the related impact on the benefit obligation and negative prior service cost are primarily responsible for the reduction in the net periodic benefit cost of these plans in 2007 and 2006. In addition, actions taken by the corporation to reduce employment levels resulted in curtailment gains as the negative prior service cost associated with terminated employees was recognized in the continuing operations of the business.

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 June 30, 2007 and expected future service, it is anticipated that the future benefit payments that will be funded by the corporation will be as follows: $19 in 2008, $19 in 2009, $20 in 2010, $21 in 2011, $22 in 2012 and $114 from 2013 to 2017.

Note 22 – Intangible Assets and Goodwill Intangible Assets –The primary components of the corporation’s intangible assets reported in continuing operations and the related amortization expense are as follows:

2007

	Gross		Accumulated Amortization		Net Book Value
Intangible assets subject to amortization
Trademarks and brand names	$	839	$	277	$	562
Customer relationships		420		165		255
Computer software		342		223		119
Other contractual agreements		30		16		14
	$	1,631	$	681		950
Trademarks and brand names not subject to amortization						87
Net book value of intangible assets					$	1,037

2006

	Gross		Accumulated Amortization		Net Book Value
Intangible assets subject to amortization
Trademarks and brand names	$	729	$	228	$	501
Customer relationships		410		134		276
Computer software		258		178		80
Other contractual agreements		26		13		13
	$	1,423	$	553		870
Trademarks and brand names not subject to amortization						179
Net book value of intangible assets					$	1,049

The amortization expense reported in continuing operations for intangible assets subject to amortization was $115 in 2007, $110 in 2006 and $116 in 2005. 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: $115 in 2008, $103 in 2009, $95 in 2010, $88 in 2011 and $37 in 2012.

Sara Lee Corporation and Subsidiaries     83

Notes to Financial Statements

Dollars in millions except per share data

During 2007, the corporation recognized impairment charges of $26 and $16 related to certain trademarks that are used in the International Beverage and North American Retail Bakery segments, respectively. These charges are more fully described in Note 3 to the Consolidated Financial Statements, “Impairment Charges.” In addition, as a result of the annual impairment review, the corporation concluded that certain trademarks were no longer indefinite-lived and amortization was initiated. Trademarks of $28 and certain other intangible assets of $2 were acquired in 2007 in the Household and Body Care segment.

During 2006, the corporation recognized a $193 impairment charge related to certain trademarks that are used in the North American Retail Bakery and International Bakery segments. These charges are more fully described in Note 3 to the Consolidated Financial Statements, “Impairment Charges.” Trademarks of $12 and certain customer relationships and other contractual agreements of $35 were recognized with the acquisition of a retail meats business in Mexico and a U.S. bakery business.

Goodwill – The goodwill reported in continuing operations associated with each business segment and the changes in those amounts during 2007 and 2006 are as follows:

	North American Retail Meats			North American Retail Bakery		Foodservice		International Beverage			International Bakery		Household and Body Care		Total
Net book value at July 2, 2005	$	116		$	277	$	954	$	260		$	622	$	509	$	2,738
Acquisition		–			17		–		–			–		–		17
Foreign exchange/other		(1	)		–		–		12			–		8		19
Net book value at July 1, 2006		115			294		954		272			622		517		2,774
Impairment		–			–		–		(92	)		–		–		(92	)
Foreign exchange/other		1			–		–		13			–		26		40
Net book value at June 30, 2007	$	116		$	294	$	954	$	193		$	622	$	543	$	2,722

In 2007, non-deductible goodwill of $92 was impaired in the International Beverage segment. Of this amount, $86 relates to the Brazilian reporting unit and $6 relates to the Austrian reporting unit. These charges are more fully described in Note 3 to the Consolidated Financial Statements, “Impairment Charges.”

In 2006, non-deductible goodwill of $17 was recognized in connection with the acquisition of Butter-Krust Baking, a Mid-Atlantic fresh bread and baking company.

84     Sara Lee Corporation and Subsidiaries

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:

	2007		2006		2005
Income from continuing operations before income taxes
United States	(45.4	)%	(250.9	)%	(22.6	)%
Foreign	145.4		350.9		122.6
	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	43.4		274.5		30.6
Finalization of tax reviews and audits	(26.3	)	(172.2	)	(24.8	)
Foreign taxes different than U.S. statutory rate	(13.7	)	15.8		(8.5	)
Valuation allowances	6.2		(18.5	)	–
Benefit of foreign tax credits	(7.3	)	(5.5	)	(6.3	)
Contingent sale proceeds	(10.0	)	(20.8	)	(5.5	)
Tax rate changes	(3.8	)	(2.4	)	(3.2	)
Goodwill impairment	8.0		–		–
Sale of capital assets	(36.3	)	(14.4	)	–
Other, net	3.2		(8.0	)	0.3
Taxes at effective worldwide tax rates	(1.6	)%	83.5	%	17.6	%

The tax expense related to continuing operations in 2007 was $168 lower in 2007 than in 2006 despite a $227 increase in income from continuing operations before income taxes. The decrease is primarily attributable to a reduction in costs associated with the repatriation of earnings from certain foreign subsidiaries and from the corporation recognizing certain tax benefits in 2007 from the sale of a subsidiary and the reduction in certain contingent tax obligations after statutes in multiple jurisdictions lapsed and certain tax regulatory examinations and reviews were completed.

The corporation recognized income tax expense of $194 in 2007 and $529 in 2006 related to certain earnings outside of the U.S. which were not deemed to be indefinitely reinvested. Hanesbrands historically generated a significant amount of cash from operations in the U.S. and this cash was used to service the corporation’s debt, as well as to pay dividends and support domestic capital requirements. As a result of the 2007 spin off of Hanesbrands and the disposition of a number of significant European operations, the level of cash necessary to finance the domestic operations and the cash considered to be permanently invested outside the U.S. was modified at the end of 2006. Aside from the items mentioned above, the corporation intends to continue to invest certain earnings outside of the U.S. and, therefore, has not recognized U.S. tax expense on these earnings. U.S. federal income tax and

withholding tax on these foreign unremitted earnings would be approximately $375 to $400 for 2007 and 2006, respectively.

The 2007 and 2006 tax expense was benefited as a result of the finalization of tax audits in multiple jurisdictions for amounts more favorable than originally anticipated. The U.S. federal income tax returns filed by the corporation through July 3, 2004 have been examined by the U.S. Internal Revenue Service. The corporation continues to have ongoing audits in the U.S. and a number of international jurisdictions.

Current and deferred tax provisions (benefits) were:

	2007						2006					2005
	Current			Deferred			Current		Deferred			Current			Deferred
U.S.	$	18		$	(144	)	$	96	$	256		$	(217	)	$	172
Foreign		127			4			30		(224	)		197			(20	)
State		(4	)		(8	)		23		(22	)		(31	)		30
	$	141		$	(148	)	$	149	$	10		$	(51	)	$	182

Cash payments for income taxes from continuing operations were $378 in 2007, $121 in 2006 and $130 in 2005.

The deferred tax liabilities (assets) at the respective year-ends were as follows:

	2007			2006
Deferred tax (assets)
Pension liability	$	(99	)	$	(39	)
Employee benefits		(129	)		(368	)
Unrealized foreign exchange		(218	)		(185	)
Nondeductible reserves		(188	)		(60	)
Net operating loss and other tax carry forwards		(409	)		(252	)
Other		(73	)		(6	)
Gross deferred tax (assets)		(1,116	)		(910	)
Less valuation allowances		226			81
Net deferred tax (assets)		(890	)		(829	)
Deferred tax liabilities
Property, plant and equipment	$	174		$	235
Intangibles		289			413
Unrepatriated earnings		420			478
Deferred tax liabilities		883			1,126
Total net deferred tax (assets) liabilities	$	(7	)	$	297

Net operating loss and other tax carryforwards expire as follows: $25 in 2009, $24 in 2011, $4 in 2016, $4 in 2020, $40 in 2021, $3 in 2022, and $3 in 2027. There is no expiration date on $276 of net operating loss carry forwards. There are state net operating losses of $30 that begin to expire in 2007 through 2027.

Sara Lee Corporation and Subsidiaries     85

Notes to Financial Statements

Dollars in millions except per share data

Valuation allowances have been established on net operating losses and other deferred tax assets in Germany, the United Kingdom, Brazil and U.S. state jurisdictions as a result of the corporation’s determination that there is less than a 50% likelihood that these assets will be realized.

Note 24 – Business Segment Information

The following are the corporation’s six business segments and the types of products and services from which each reportable segment derives its revenues. In the first quarter of fiscal 2007, the corporation completed the spin off of its branded apparel operations in the Americas/Asia. The Branded Apparel Americas/Asia business was previously reported as a separate segment. This business, which is now known as Hanesbrands Inc. (Hanesbrands), was spun off to the corporation’s shareholders and began being reported as a discontinued operation in the first quarter of fiscal 2007. The spin off of Hanesbrands is more fully described in Note 4, “Discontinued Operations.” In the second quarter of fiscal 2007, the corporation changed the reporting structure of its internal organization, and management responsibility for an operating plant was moved from the International Beverage segment to the Foodservice segment. Prior period results have been reclassified to reflect both the Hanesbrands business as a discontinued operation and the change in operating responsibility for the operating plant from the International Beverage segment to the Foodservice segment.

• North American Retail Meats – sells a variety of meat products to retail customers in North America, 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.

• North American Retail Bakery – sells a wide variety of fresh and frozen baked products and specialty items to retail customers in North America and includes the corporation’s U.S. Senseo retail coffee business. Such products include bread, buns, bagels, rolls, muffins, specialty bread, frozen pies, cakes, cheesecakes and other desserts.

• Foodservice – sells meat, bakery and coffee products to the following customers in North America: broad-line foodservice distributors, restaurants, hospitals and other large institutions.

• International Beverage – sells coffee and tea products to retail and foodservice customers in certain markets around the world, including Europe, Australia and Brazil.

• International Bakery – sells a variety of bakery and dough products to retail and foodservice customers in Europe and Australia.

• Household and Body Care – produces and sells products in four primary product categories: body care, air care, shoe care and insecticides.

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 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies.”

	2007			2006			2005
Sales1,2
North American Retail Meats	$	2,638		$	2,534		$	2,440
North American Retail Bakery		1,998			1,871			1,812
Foodservice		2,197			2,179			2,142
International Beverage		2,617			2,320			2,288
International Bakery		799			742			768
Household and Body Care		2,042			1,827			1,927
		12,291			11,473			11,377
Intersegment		(13	)		(13	)		(31	)
Total	$	12,278		$	11,460		$	11,346
Operating segment income (loss)3,4,5
North American Retail Meats	$	79		$	149		$	179
North American Retail Bakery		(2	)		(197	)		(4	)
Foodservice		139			116			171
International Beverage		317			388			416
International Bakery		38			20			70
Household and Body Care		272			216			310
Total operating segment income		843			692			1,142
Amortization of trademarks and other intangibles 5		(67	)		(62	)		(67	)
General corporate expenses 3,4,5		(340	)		(322	)		(246	)
Contingent sale proceeds		120			114			117
Total operating income		556			422			946
Net interest expense		(137	)		(230	)		(200	)
Income from continuing operations before income taxes	$	419		$	192		$	746

86     Sara Lee Corporation and Subsidiaries

	2007		2006		2005
Assets
North American Retail Meats	$	1,260	$	1,211	$	1,198
North American Retail Bakery		1,255		1,275		1,450
Foodservice		1,746		1,733		1,739
International Beverage		2,886		2,219		1,449
International Bakery		1,485		1,352		1,142
Household and Body Care		2,880		2,406		1,704
		11,512		10,196		8,682
Net assets held for sale		2		1		–
Discontinued operations		–		3,786		5,373
Other6		676		677		485
Total assets	$	12,190	$	14,660	$	14,540
Depreciation
North American Retail Meats	$	108	$	95	$	79
North American Retail Bakery		76		80		89
Foodservice		66		72		65
International Beverage		72		67		75
International Bakery		24		25		25
Household and Body Care		35		42		29
		381		381		362
Discontinued operations		19		147		190
Other		20		13		18
Total depreciation	$	420	$	541	$	570
Additions to long-lived assets
North American Retail Meats	$	207	$	133	$	113
North American Retail Bakery		84		147		35
Foodservice		88		71		69
International Beverage		127		113		107
International Bakery		28		24		25
Household and Body Care		74		44		39
		608		532		388
Other		51		25		19
Total additions to long-lived assets	$	659	$	557	$	407

¹ Includes sales between segments. Such sales are at transfer prices that are equivalent to market value.

² Revenues from one customer represent approximately $1.3 billion, $1.2 billion and $1.0 billion of the corporation’s consolidated revenues in 2007, 2006 and 2005, respectively. Each of the corporation’s business segments sells to this customer.

³ 2007 includes amounts recognized for exit activities, asset and business dispositions, impairment charges, transformation expenses and accelerated depreciation in the Consolidated Statements of Income that impacted operating segment income by: North American Retail Meats – a charge of $113, North American Retail Bakery – a charge of $48, Foodservice – a charge of $11, International Beverage – a charge of $139, International Bakery – a charge of $18, Household and Body Care – a charge of $17, Corporate Office – a charge of $72.

⁴ 2006 includes amounts recognized for exit activities, asset and business dispositions, impairment charges, transformation expenses and accelerated depreciation in the Consolidated Statements of Income that impacted operating segment income by: North American Retail Meats – a charge of $48, North American Retail Bakery – a charge of $208, Foodservice – a charge of $20, International Beverage – a charge of $16, International Bakery – a charge of $44, Household and Body Care – a charge of $28, Corporate Office – a charge of $104.

⁵ 2005 includes amounts recognized for exit activities, asset and business dispositions, transformation expenses and accelerated depreciation in the

Consolidated Statements of Income that impacted operating segment income by: North American Retail Meats – a credit of $31, North American Retail Bakery – a credit of $6, Foodservice – a credit of $2, International Beverage – a charge of $32, International Bakery – a charge of $5, Household and Body Care – a charge of $9, Corporate Office – a charge of $38 and accelerated amortization of intangibles – a charge of $9.

⁶ Principally cash and cash equivalents, certain fixed assets, deferred tax assets and certain other noncurrent assets.

Note 25 – Geographic Area Information

	United States		Spain		Netherlands	Other		Total
2007
Sales	$	6,602	$	871	$1,077	$	3,728	$	12,278
Long-lived assets		4,171		443	630		978		6,222
2006
Sales	$	6,362	$	793	$1,010	$	3,295	$	11,460
Long-lived assets		4,080		392	690		1,013		6,175
2005
Sales	$	6,232	$	840	$1,114	$	3,160	$	11,346
Long-lived assets		4,379		252	446		1,234		6,311

Note 26 – Quarterly Financial Data (Unaudited)

	Quarter
	First		Second			Third		Fourth
2007
Continuing operations
Net sales	$	2,891	$	3,182		$	3,006	$	3,199
Gross profit		1,095		1,210			1,186		1,235
Income (loss)1		255		(57	)		113		115
Income (loss) per common share
– Basic1		0.34		(0.08	)		0.15		0.16
– Diluted1		0.34		(0.08	)		0.15		0.16
Net income (loss)2		333		(62	)		116		117
Net income (loss) per common share
– Basic2		0.44		(0.08	)		0.16		0.16
– Diluted2		0.44		(0.08	)		0.16		0.16
Cash dividends declared		0.1000		0.1000			0.1000		0.1000
Market price
– high		17.11		17.23			17.49		18.15
– low		14.08		16.00			16.00		16.33
– close		16.07		17.03			16.92		17.40

Sara Lee Corporation and Subsidiaries     87

Notes to Financial Statements

Dollars in millions except per share data

	Quarter
	First		Second		Third		Fourth
2006
Continuing operations
Net sales	$	2,763	$	2,974	$	2,754	$	2,969
Gross profit		1,056		1,158		1,060		1,161
Income (loss)3		102		42		79		(192	)
Income (loss) per common share
– Basic3		0.13		0.06		0.10		(0.25	)
– Diluted3		0.13		0.06		0.10		(0.25	)
Net income4		67		438		42		8
Net income per common share
– Basic4		0.09		0.58		0.06		0.01
– Diluted4		0.09		0.57		0.06		0.01
Cash dividends declared		0.1975		0.1975		0.1975		0.1975
Market price
– high		20.95		19.19		19.64		18.82
– low		18.59		17.31		17.33		15.89
– close		18.95		18.90		17.88		16.02

Notes to quarterly table:

The 2006 results have been reclassified to reflect the Hanesbrands business as a discontinued operation.

The quarterly financial data shown above includes the impact of significant items. Significant items include exit activities, asset and business dispositions, impairment charges, transformation charges, accelerated depreciation, hurricane losses, curtailment gains and a change in the vacation policy. Further details of these items are included in the Financial Review on pages 3 and 5. The impact of these items is shown below where negative amounts are charges, and positive amounts are income.

	Quarter
	First			Second			Third			Fourth
2007
1 Impact of significant items on income (loss) from continuing operations	$	132		$	(212	)	$	15		$	(5	)
EPS impact
– Basic		0.17			(0.29	)		0.02			(0.01	)
– Diluted		0.17			(0.29	)		0.02			(0.01	)
2 Impact of significant items on net income (loss)		148			(217	)		18			(4	)
EPS impact
– Basic		0.20			(0.29	)		0.03			(0.01	)
– Diluted		0.19			(0.29	)		0.03			(0.01	)
	Quarter
	First			Second			Third			Fourth
2006
3 Impact of significant items on income (loss) from continuing operations	$	(24	)	$	(63	)	$	(25	)	$	(108	)
EPS impact
– Basic		(0.03	)		(0.08	)		(0.03	)		(0.14	)
– Diluted		(0.03	)		(0.08	)		(0.03	)		(0.14	)
4 Impact of significant items on net income		(196	)		199			(144	)		10
EPS impact
– Basic		(0.25	)		0.26			(0.19	)		0.01
– Diluted		(0.25	)		0.26			(0.19	)		0.01

Note 27 – Subsequent Events

Contingent Sale Proceeds – In July 2007, the corporation received a payment of 95 million euros, as the contingencies had passed related to the 2008 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 $130 and will be recognized in the first quarter of 2008. 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, “Contingencies.”

Debt Maturity – Subsequent to year end, $881 of the corporation’s long-term debt matured and was repaid using cash on hand.

88     Sara Lee Corporation and Subsidiaries

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Sara Lee Corporation

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 June 30, 2007 and July 1, 2006, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2007 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an

understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 2 to the Consolidated Financial Statements, the Company changed the manner in which it accounts for defined benefit pension and other postretirement plans in fiscal 2007.

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.

Chicago, Illinois

August 27, 2007

Sara Lee Corporation and Subsidiaries     89

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 June 30, 2007 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 controls over financial reporting, as defined in Rules 13a–15f and 15d–15f 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 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 June 30, 2007. In making this assessment, the corporation used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission 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 June 30, 2007, the corporation’s internal control over financial reporting was effective.

The corporation’s internal control over financial reporting as of June 30, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report that appears herein.

Brenda C. Barnes

President and Chief Executive Officer

L.M. (Theo) de Kool

Chief Financial and Administrative Officer

90     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 of Formation
EGR CALIFORNIA REGION SUPPORT SERVICES, INC.	California
GALLO SALAME, INC.	California
BRYAN FOODS, INC.	Delaware
CONTINENTAL COFFEE PRODUCTS COMPANY	Delaware
COURTAULDS TEXTILES U.S., 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
INTERNATIONAL AFFILIATES & INVESTMENT LLC	Delaware
SARA LEE – KIWI HOLDINGS, INC.	Delaware
SARA LEE BAKERY GROUP, INC.	Delaware
SARA LEE C&T HOLDINGS, LLC	Delaware
SARA LEE CHAMPION EUROPE, INC.	Delaware
SARA LEE COFFEE LLC	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 LLC	Delaware
SARA LEE INTERNATIONAL FINANCE CORPORATION	Delaware
SARA LEE INTERNATIONAL FUNDING COMPANY L.L.C.	Delaware
SARA LEE INTERNATIONAL INVESTMENT, L.L.C.	Delaware
SARA LEE MEXICANA HOLDINGS INVESTMENT, L.L.C.	Delaware
SARA LEE/DE US LLC	Delaware
SARAMAR, L.L.C.	Delaware
SOUTHERN FAMILY FOODS, L.L.C.	Delaware
SPECIALTY BUYING, INC.	Delaware
WS REAL ESTATE, LLC	Delaware
DJW INCORPORATED	Kentucky
METZ BAKING COMPANY, L.L.C.	Iowa
BUTTER KRUST BAKING COMPANY, INC.	Pennsylvania
EARTHGRAINS REFRIGERATED DOUGH PRODUCTS, L.P.	Texas

Name	Jurisdiction of Formation
NON-UNITED STATES SUBSIDIARIES
SARA LEE APPAREL (AUSTRALASIA) PTY. LTD.	Australia
SARA LEE AUSTRALIA	Australia
SARA LEE AUSTRALIA & NZ PTY. LTD.	Australia
SARA LEE FOOD & BEVERAGE (AUSTRALIA) PTY. LTD.	Australia
SARA LEE FOOD HOLDINGS PTY. LTD.	Australia
SARA LEE FOODSERVICE (AUSTRALIA) PTY. LTD.	Australia
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
SL/DE HOLDINGS (AUSTRALIA) PTY. LTD.	Australia
SANTORA KAFFEE SYSEM GMBH	Austria
SARA LEE HOUSEHOLD AND BODY CARE OSTERREICH GMBH	Austria
BI BELGIUM B.V.B.A.	Belgium
DOUWE EGBERTS COFFEE SYSTEMS N.V.	Belgium
INTRADAL PRODUKTIE BELGIUM NV	Belgium
JACQMOTTE N.V.	Belgium
SARA LEE COFFEE & TEA BELGIUM N.V./S.A.	Belgium
SARA LEE FINANCE BELGIUM B.V.B.A.	Belgium
SARA LEE HOUSEHOLD AND BODY CARE BELGIUM N.V.	Belgium
SARA LEE/DE IMMO N.V.	Belgium
ZWARTE KAT B.V.B.A.	Belgium
CONOPLEX INSURANCE COMPANY LTD.	Bermuda
SARA LEE CAFES DO BRASIL LTDA.	Brazil
SARA LEE FOODSERVICE LTD.	Canada
TANA CANADA, INC.	Canada
FUJIAN SARA LEE CONSUMER PRODUCTS CO. LTD.	China
KIWI BRANDS TIANJIN CO. LTD.	China
NUTRI-METICS INTERNATIONAL (GUANGZHOU) LTD.	China
SARA LEE/DE (CYPRUS) LIMITED	Cyprus
SARA LEE/DE INVESTMENTS (CYPRUS) LIMITED	Cyprus
BALIRNY DOUWE EGBERTS A.S.	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
APD CHEMICALS LIMITED	England
ARIS ISOTONER UK LIMITED	England
ASHE CHEMICAL LIMITED	England
COFFEE COMPLETE LIMITED	England
COURTAULDS TEXTILES (HOLDINGS) LIMITED	England
COURTAULDS TEXTILES LIMITED	England
DOUWE EGBERTS COFFEE SYSTEMS LIMITED	England

2

Name	Jurisdiction of Formation
ELBEO LIMITED	England
IMPORT FOODS SARA LEE LIMITED	England
KIWI (EA) LIMITED	England
KIWI CARIBBEAN LIMITED	England
KIWI HOLDINGS	England
LOVABLE ITALIANA LIMITED	England
MASTER MODELS LIMITED	England
NEW WAY PACKAGED PRODUCTS LIMITED	England
PLAYTEX LIMITED	England
SARA LEE (UK INVESTMENTS) LIMITED	England
SARA LEE ACQUISITION LIMITED	England
SARA LEE BAKERY UK LIMITED	England
SARA LEE COFFEE & TEA UK LIMITED	England
SARA LEE FINANCE UK	England
SARA LEE HOUSEHOLD & BODY CARE UK LIMITED	England
SARA LEE HOUSEHOLD UK LIMITED	England
SARA LEE INVESTMENTS	England
SARA LEE UK HOLDINGS LIMITED	England
SARA LEE UK LIMITED	England
SARA LEE UK PENSION TRUSTEE LIMITED	England
SARA LEE/DE HOLDINGS LIMITED	England
TEMANA INTERNATIONAL LIMITED	England
YARNALL LIMITED	England
ZAMBESI FINANCE	England
BI FRANCE SARL	France
COURTAULDS TEXTILES HOLDING S.A.S.	France
CT DIFFUSION SNC	France
DA+ S.A.S.	France
DEF FINANCE S.N.C.	France
DEF HOLDING S.N.C.	France
EURODOUGH, S.A.S.	France
EURO-RAULET, S.A.S.	France
EUROROL, S.A.S.	France
EUROVITA, S.A.S.	France
KIWI HOLDINGS S.N.C.	France
MAISON DU CAFÉ COFFEE SYSTEMS FRANCE S.N.C.	France
SARA LEE COFFEE & TEA FRANCE S.N.C.	France
SARA LEE FRANCE FINANCE S.A.S.	France
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
ALLSOHL GMBH	Germany
BAMA INTERNATIONAL, a branch of Sara Lee Deutschland GmbH	Germany
COFFENCO INTERNATIONAL GMBH	Germany
DEFACTO DEUTSCHLAND GMBH	Germany

3

Name	Jurisdiction of Formation
FAIRWIND GMBH	Germany
ISCAL GMBH	Germany
JENSEN & GRAF KAFFEESPEZIALITATEN GMBH	Germany
JUSTEPAS GMBH	Germany
MELTONIAN GMBH	Germany
SARA LEE COFFEE & TEA GERMANY GMBH	Germany
SARA LEE DEUTSCHLAND GMBH	Germany
SARA LEE FOODS GERMANY GMBH	Germany
SARA LEE GERMANY GMBH	Germany
SARA LEE HOUSEHOLD & BODY CARE, a branch of Sara Lee Deutschland GmbH	Germany
SARA LEE/DE HOLDING GMBH	Germany
YOURSTEP GMBH	Germany
FORSEL CONSUMER A.E.	Greece
SARA LEE COFFEE AND TEA HELLAS S.A.	Greece
SARA LEE HELLAS A.E.	Greece
SARA LEE HOLDINGS HELLAS E.P.E.	Greece
NUTRI-METICS INTERNATIONAL (HONG KONG) LIMITED	Hong Kong
SARA LEE HONG KONG LTD.	Hong Kong
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 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
LINNYSHAW INSURANCE LIMITED	Isle Of Man
EURODOUGH ITALIA SRL	Italy
SARA LEE HOUSEHOLD AND BODY CARE ITALY S.P.A.	Italy
KIWI CARIBBEAN LTD.	Jamaica
SARA LEE HOUSEHOLD AND BODY CARE 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
HOMESAFE PRODUCTS (M) SDN. BHD.	Malaysia
KIWI MANUFACTURING SDN. BHD.	Malaysia
SARA LEE MALAYSIA SDN. BHD.	Malaysia
SARA LEE SOUTH EAST ASIA SDN BHD	Malaysia
2476230 MALTA LIMITED	Malta

4

Name	Jurisdiction of Formation
SARA LEE MAURITIUS HOLDING PTE LTD.	Mauritius
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
MEXICAN TRADERS 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 HOUSEHOLD AND BODY CARE DE MEXICO S. DE R.L. DE C.V.	Mexico
AVORY SHLAIN COSMETICS (NAMIBIA) PTY. LTD.	Namibia
BARO BESTUURSMAATSCHAPPIJ B.V.	Netherlands
BEHEERSMAATSCHAPPIJ BEVEM B.V.	Netherlands
BETKE HOLLANDSCHE CACAPORDUCTEN EXPORT MAATSCHAPPIJ B.V.	Netherlands
BIOTEX BV	Netherlands
BUTTRESS B.V.	Netherlands
COOPERATIEVE DOUWE EGBERTS FINANCE U.A.	Netherlands
COOPERATIEVE SARA LEE HOUSEHOLD AND BODY CARE FINANCE B.V.	Netherlands
DECAF B.V.	Netherlands
DEFACTO B.V.	Netherlands
DEJ INTERNATIONAL RESEARCH COMPANY B.V.	Netherlands
DETREX B.V.	Netherlands
DETREX NEDERLAND B.V.	Netherlands
DOUWE EGBERT KOFFIE & KADO B.V.	Netherlands
DOUWE EGBERTS (Y) B.V.	Netherlands
DOUWE EGBERTS BELEGGINGSMAATSCHAPPIJ 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 TREATMENT & SUPPLY B.V.	Netherlands
DOUWE EGBERTS GLOBAL NETWORK B.V.	Netherlands
DOUWE EGBERTS NEDERLAND B.V.	Netherlands
DOUWE EGBERTS RHO BV	Netherlands
DOUWE EGBERTS SIGMA BV	Netherlands
DOUWE EGBERTS VAN NELLE PARTICIPATIONS B.V.	Netherlands
EARTHGRAINS EUROPEAN HOLDINGS, C.V.	Netherlands
EARTHGRAINS EUROPEAN INVESTMENTS, B.V.	Netherlands
EURAGRAL B.V.	Netherlands
FIHOMIJ B.V.	Netherlands
I. TAS EZN B.V.	Netherlands
INTEC B.V.	Netherlands
KIWI EUROPEAN HOLDINGS B.V.	Netherlands
KONINKLIJKE DOUWE EGBERTS B.V.	Netherlands

5

Name	Jurisdiction of Formation
LODA B.V.	Netherlands
MARANDER ASSURANTIE COMPAGNIE B.V.	Netherlands
MEINDERSMA B.V.	Netherlands
NATRENA B.V.	Netherlands
SARA LEE B.A. 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 PARTICIPATIES B.V.	Netherlands
SARA LEE HOUSEHOLD & BODY CARE NEDERLAND B.V.	Netherlands
SARA LEE HOUSEHOLD & BODY CARE RESEARCH, a branch of Sara Lee Household & Body Care International B.V.	Netherlands
SARA LEE HOUSEHOLD AND BODY CARE INTERNATIONAL B.V.	Netherlands
SARA LEE INTERNATIONAL BV	Netherlands
SARA LEE INTERNATIONAL HOLDINGS BV	Netherlands
SARA LEE INTIMATES NEDERLAND B.V.	Netherlands
SARA LEE INVESTMENTS GREECE B.V.	Netherlands
SARA LEE/DE FINANCE B.V.	Netherlands
SARA LEE/DE INVESTMENTS B.V.	Netherlands
SARA LEE/DE N.V.	Netherlands
SARAMAR EUROPE B.V.	Netherlands
TANA 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
SARA LEE (NZ) LTD.	New Zealand
SARA LEE FOODSERVICE (NZ) LTD.	New Zealand
SARA LEE GROUP (N.Z.) LTD.	New Zealand
SARA LEE HOLDINGS (NZ) LTD.	New Zealand
KIWI (NIGERIA) LIMITED	Nigeria
KAFFEHUSET FRIELE A/S	Norway
SARA LEE HOUSEHOLD & BODY CARE NORGE AS	Norway
SARA LEE CANADA HOLDINGS LIMITED	Nova Scotia
PERVEZ INDUSTRIAL CORPORATION PTE. LTD.	Pakistan
CAVITE HORIZONS HOLDING, INC.	Philippines
METROLAB INDUSTRIES, INC.	Philippines
SARA LEE PHILIPPINES INC.	Philippines
BAMA POLSKA SP. Z.O.O.	Poland

6

Name	Jurisdiction of Formation
PRZEDIEBIORSTWO PRIMA SA	Poland
SARA LEE HOUSEHOLD AND BODY CARE POLAND SP.Z.O.O.	Poland
BIMBO-PRODUCTOS ALIMENTARES SOCOEDADE UNIPESSOAL, LIMITADA	Portugal
DOUWE EGBERTS PORTUGAL—PRODUTOS ALIMENTARES LDA.	Portugal
SARA LEE HOUSEHOLD AND BODY CARE PORTUGAL, PRODUTOS DE CONSUMO LDA	Portugal
SARA LEE/DE ESPANA, PORTUGUESE BRANCH	Portugal
DOUW EGBERTS RUSSBRANDS Z.A.O.	Russian Federation
SARA LEE EXPORT B.V. (REP. OFFICE)	Russian Federation
SARA LEE SINGAPORE PTE LTD.	Singapore
SARA LEE SLOVAKIA, S.R.O.	Slovak Republic
SARA LEE (SOUTH AFRICA) PTY LTD.	South Africa
SOUTH AFRICAN GOSSARD (PROPRIETARY) LIMITED	South Africa
BIMBO, S.A.	Spain
BIMBO-MARTINEZ COMERCIAL, S.L.	Spain
CATDES, 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 CAFES A LA CREMA J. MARCILLA Y CAFES SOLEY, S.L.	Spain
SARA LEE FINANCE SPAIN S.L.	Spain
SARA LEE HOUSEHOLD AND BODY CARE ESPANA, S.L.	Spain
SARA LEE IBERIA, S.L.	Spain
SARA LEE SOUTHERN EUROPE, S.L.	Spain
GODREJ SARA LEE LANKA PVT. LTD.	Sri Lanka
SARA LEE HOUSEHOLD & BODY CARE LANKA PVT. LTD.	Sri Lanka
MERRILD COFFEE SYSTEMS SVERIGE AB	Sweden
OPUS HEALTH CARE AB	Sweden
SARA LEE HOUSEHOLD & BODY CARE SVERIGE AB	Sweden
SARA LEE INTIMATES SCANDINAVIA AB	Sweden
DECOTRADE AG	Switzerland
PRODUCT SUPPLIERS A.G.	Switzerland
SARA LEE HOUSEHOLD AND BODY CARE SCHWEIZ AG	Switzerland
TELEC A.G.	Switzerland
KIWI (THAILAND) LTD	Thailand
SARA LEE (THAILAND) LTD.	Thailand
SARA LEE COFFEE & TEA (THAILAND) LTD.	Thailand
GROMTEX S.A.R.L.	Tunisia
KRS S.A.R.L.	Tunisia
P.T.X. TUNISIE S.A.R.L.	Tunisia
SARA LEE HOUSEHOLD AND BODY CARE (TURKEY), REP. OFFICE	Turkey
SARA LEE HOUSEHOLD & BODY CARE UGANDA LTD.	Uganda
UNINEX S.A.	Uruguay

7

Name	Jurisdiction of Formation
SARA LEE RETIREMENT PTY. LTD.	Victoria
SARA LEE HOUSEHOLD AND BODY CARE ZAMBIA LTD.	Zambia
KIWI BRANDS (PRIVATE) LIMITED	Zimbabwe
SARA LEE HOUSEHOLD AND BODY CARE ZIMBABWE PTE LTD.	Zimbabwe

8

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, 33-63715, 33-63717, 333-17987, 333-41427, 333-71839, 333-91345, 333-67442, 333-68958, 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 27, 2007 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Stockholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated August 27, 2007 relating to the financial statement schedule, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

August 27, 2007

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, certify that:

1. I have reviewed this annual report on Form 10-K of Sara Lee Corporation for the fiscal year ended June 30, 2007.

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: August 29, 2007

/s/ Brenda C. Barnes,

Chairman of the Board and Chief Executive Officer

2

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, certify that:

1. I have reviewed this annual report on Form 10-K of Sara Lee Corporation for the fiscal year ended June 30, 2007.

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: August 29, 2007

/s/ L.M. (Theo) de Kool,

Executive Vice President and Chief Financial and Administrative Officer

2

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 June 30, 2007 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 results of operations of the Company.

Dated: August 29, 2007

/s/ Brenda C. Barnes,

Chairman of the Board 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 June 30, 2007 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 results of operations of the Company.

Dated: August 29, 2007

/s/ L.M. (Theo) de Kool,

Executive Vice President and Chief Financial and Administrative Officer