FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

 X  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE   ACT OF 1934

For the quarterly period ended June 17, 2006 (24 weeks)

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE   ACT OF 1934

For the transition period from            to          

Commission file number 1-1183

                                                                               PepsiCo, Inc.                                                                               

(Exact name of registrant as specified in its charter)

North Carolina	13-1584302
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

700 Anderson Hill Road, Purchase, New York	10577
(Address of Principal Executive Offices)	(Zip Code)

                                914-253-2000                                 

(Registrant’s Telephone Number, Including Area Code)

                                                                                        N/A                                                                                        

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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.    YES  X   NO      

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     No X 

Number of shares of Common Stock outstanding as of July 7, 2006:  1,648,680,085

PEPSICO, INC. AND SUBSIDIARIES

INDEX

	Page No.
Part I  Financial Information
Item 1.  Condensed Consolidated Financial Statements
Condensed Consolidated Statement of Income – 12 and 24 Weeks Ended June 17, 2006 and June 11, 2005	3
Condensed Consolidated Statement of Cash Flows – 24 Weeks Ended June 17, 2006 and June 11, 2005	4
Condensed Consolidated Balance Sheet – June 17, 2006 and December 31, 2005	5-6
Condensed Consolidated Statement of Comprehensive Income – 12 and 24 Weeks Ended June 17, 2006 and June 11, 2005	7
Notes to Condensed Consolidated Financial Statements	8-15
Item 2.  Management’s Discussion and Analysis – Financial Review	16-26
Report of Independent Registered Public Accounting Firm	27
Item 4.  Controls and Procedures	28
Part II  Other Information
Item 1.    Legal Proceedings	29
Item 1A. Risk Factors	29
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 4.    Submission of Matters to a Vote of Security Holders	31
Item 6.    Exhibits	32

2

PART I  FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(in millions except per share amounts, unaudited)

	12 Weeks Ended		24 Weeks Ended
	6/17/06	6/11/05	6/17/06	6/11/05
Net Revenue	$8,599	$7,697	$15,804	$14,282
Cost of sales	3,809	3,314	6,988	6,184
Selling, general and administrative expenses	2,992	2,790	5,639	5,229
Amortization of intangible assets	36	37	67	66
Operating Profit	1,762	1,556	3,110	2,803
Bottling equity income	176	156	260	221
Interest expense	(59)	(53)	(121)	(103)
Interest income	26	28	71	51
Income before income taxes	1,905	1,687	3,320	2,972
Provision for income taxes	547	493	943	866
Net Income	$1,358	$1,194	$  2,377	$  2,106
Net Income Per Common Share
Basic	$0.82	$0.71	$1.43	$1.25
Diluted	$0.80	$0.70	$1.41	$1.23
Cash Dividends Declared Per Common Share	$0.30	$0.26	$0.56	$0.49

See accompanying Notes to the Condensed Consolidated Financial Statements.

3

PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions, unaudited)

	24 Weeks Ended
	6/17/06	6/11/05
Operating Activities
Net income	$ 2,377	$ 2,106
Depreciation and amortization	610	588
Stock-based compensation expense	128	147
Excess tax benefits from share-based payment arrangements	(64)	–
Cash payments for merger-related costs and restructuring charges	–	(19)
Pension and retiree medical plan contributions	(60)	(78)
Pension and retiree medical plan expenses	248	204
Bottling equity income, net of dividends	(220)	(159)
Deferred income taxes and other tax charges and credits	14	66
Change in accounts and notes receivable	(753)	(587)
Change in inventories	(396)	(282)
Change in prepaid expenses and other current assets	(29)	12
Change in accounts payable and other current liabilities	–	(206)
Change in income taxes payable	(6)	549
Other, net	(19)	22
Net Cash Provided by Operating Activities	1,830	2,363
Investing Activities
Snack Ventures Europe (SVE) minority interest acquisition	–	(750)
Capital spending	(708)	(478)
Sales of property, plant and equipment	23	42
Other acquisitions and investments in noncontrolled affiliates	(434)	(214)
Cash proceeds from sale of The Pepsi Bottling Group (PBG) stock	180	107
Divestitures	–	3
Short-term investments, by original maturity
More than three months – purchases	(9)	(42)
More than three months – maturities	20	24
Three months or less, net	897	(1,144)
Net Cash Used for Investing Activities	(31)	(2,452)
Financing Activities
Proceeds from issuances of long-term debt	109	13
Payments of long-term debt	(135)	(85)
Short-term borrowings, by original maturity
More than three months – proceeds	14	44
More than three months – payments	(229)	(10)
Three months or less, net	(1,285)	902
Cash dividends paid	(863)	(774)
Share repurchases – common	(1,469)	(1,240)
Share repurchases – preferred	(5)	(11)
Proceeds from exercises of stock options	697	590
Excess tax benefits from share-based payment arrangements	64	–
Net Cash Used for Financing Activities	(3,102)	(571)
Effect of Exchange Rate Changes on Cash and Cash Equivalents	6	(25)
Net Decrease in Cash and Cash Equivalents	(1,297)	(685)
Cash and Cash Equivalents – Beginning of year	1,716	1,280
Cash and Cash Equivalents – End of period	$    419	$    595

See accompanying Notes to the Condensed Consolidated Financial Statements.

4

PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions)

	(Unaudited)
	6/17/06	12/31/05
Assets
Current Assets
Cash and cash equivalents	$     419	$  1,716
Short-term investments	2,259	3,166
Accounts and notes receivable, less allowance: 6/06 – $77, 12/05 – $75	4,104	3,261
Inventories
Raw materials	865	738
Work-in-process	228	112
Finished goods	1,007	843
	2,100	1,693
Prepaid expenses and other current assets	648	618
Total Current Assets	9,530	10,454
Property, Plant and Equipment	17,821	17,145
Accumulated Depreciation	(8,884)	(8,464)
	8,937	8,681
Amortizable Intangible Assets, net	548	530
Goodwill	4,271	4,088
Other Nonamortizable Intangible Assets	1,156	1,086
Nonamortizable Intangible Assets	5,427	5,174
Investments in Noncontrolled Affiliates	3,509	3,485
Other Assets	3,475	3,403
Total Assets	$31,426	$31,727

Continued on next page.

5

PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET (continued)

(in millions except per share amounts)

	(Unaudited)
	6/17/06	12/31/05
Liabilities and Shareholders’ Equity
Current Liabilities
Short-term obligations	$  1,161	$  2,889
Accounts payable and other current liabilities	6,184	5,971
Income taxes payable	449	546
Total Current Liabilities	7,794	9,406
Long-term Debt Obligations	2,542	2,313
Other Liabilities	4,430	4,323
Deferred Income Taxes	1,427	1,434
Total Liabilities	16,193	17,476
Commitments and Contingencies
Preferred Stock, no par value	41	41
Repurchased Preferred Stock	(114)	(110)
Common Shareholders’ Equity
Common stock, par value 1 2/3 cents per share:
Authorized 3,600 shares, issued 6/06 and 12/05 – 1,782 shares	30	30
Capital in excess of par value	552	614
Retained earnings	22,563	21,116
Accumulated other comprehensive loss	(902)	(1,053)
	22,243	20,707
Less: repurchased common stock, at cost:
6/06 – 133 shares, 12/05 – 126 shares	(6,937)	(6,387)
Total Common Shareholders’ Equity	15,306	14,320
Total Liabilities and Shareholders’ Equity	$31,426	$31,727

See accompanying Notes to the Condensed Consolidated Financial Statements.

6

PEPSICO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT

OF COMPREHENSIVE INCOME

(in millions, unaudited)

	12 Weeks Ended		24 Weeks Ended
	6/17/06	6/11/05	6/17/06	6/11/05
Net Income	$1,358	$1,194	$2,377	$2,106
Other Comprehensive Income/(Loss)
Currency translation adjustment	107	(190)	172	(176)
Cash flow hedges, net of tax:
Net derivative (losses)/gains	(16)	11	(12)	23
Reclassification of (gains)/losses to net income	(1)	1	(7)	9
Unrealized loss on securities, net of tax	(3)	(1)	(6)	(4)
Other	–	2	4	4
	87	(177)	151	(144)
Comprehensive Income	$1,445	$1,017	$2,528	$1,962

See accompanying Notes to the Condensed Consolidated Financial Statements.

7

PEPSICO, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation and Our Divisions

Basis of Presentation

Our Condensed Consolidated Balance Sheet as of June 17, 2006, the Condensed Consolidated Statements of Income and Comprehensive Income for the 12 and 24 weeks ended June 17, 2006 and June 11, 2005, and the Condensed Consolidated Statement of Cash Flows for the 24 weeks ended June 17, 2006 and June 11, 2005 have not been audited. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation. The results for the 12 and 24 weeks are not necessarily indicative of the results expected for the year.

Our significant interim accounting policies include the recognition of a pro rata share of certain estimated annual sales incentives, and certain advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate. Raw materials, direct labor and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw material handling facilities, are included in cost of sales. The costs of moving, storing and delivering finished product are included in selling, general and administrative expenses.

Bottling equity income includes our share of the net income or loss of our noncontrolled bottling affiliates and the impact of any changes in our ownership interests in these affiliates. Bottling equity income includes pre-tax gains on our sale of PBG stock of $56 million and $106 million in the 12 and 24 weeks ended June 17, 2006, respectively, and pre-tax gains of $35 million and $64 million in the 12 and 24 weeks ended June 11, 2005, respectively.

The following information is unaudited. Tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless noted and are based on unrounded amounts. Certain reclassifications were made to prior year amounts to conform to the 2006 presentation. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

8

Our Divisions

	12 Weeks Ended		24 Weeks Ended
	6/17/06	6/11/05	6/17/06	6/11/05
Net Revenue
FLNA	$2,567	$2,373	$  4,960	$  4,636
PBNA	2,505	2,218	4,496	4,002
PI	3,154	2,756	5,532	4,877
QFNA	373	350	816	767
	$8,599	$7,697	$15,804	$14,282
Operating Profit
FLNA	$   634	$   594	$1,203	$1,133
PBNA	626	555	1,054	970
PI	546	452	917	759
QFNA	115	113	266	258
Total division	1,921	1,714	3,440	3,120
Corporate	(159)	(158)	(330)	(317)
	$1,762	$1,556	$3,110	$2,803
			6/17/06	12/31/05
Total Assets
FLNA			$  6,257	$  5,948
PBNA			6,895	6,316
PI			10,920	9,983
QFNA			988	989
Total division			25,060	23,236
Corporate			3,188	5,331
Investments in bottling affiliates			3,178	3,160
			$31,426	$31,727

9

Intangible Assets

	6/17/06	12/31/05
Amortizable intangible assets, net
Brands	$1,130	$1,054
Other identifiable intangibles	263	257
	1,393	1,311
Accumulated amortization	(845)	(781)
	$   548	$   530

The change in the book value of nonamortizable intangible assets is as follows:

		Balance   12/31/05		Acquisitions		Translation   & Other		Balance   6/17/06
FLNA
Goodwill	$	145	$	–	$	6	$	151
PBNA
Goodwill		2,164		–		3		2,167
Brands		59		–		–		59
		2,223		–		3		2,226
PI
Goodwill		1,604		104		70		1,778
Brands		1,026		–		70		1,096
		2,630		104		140		2,874
QFNA
Goodwill		175		–		–		175
Corporate
Pension intangible		1		–		–		1
Total goodwill		4,088		104		79		4,271
Total brands		1,085		–		70		1,155
Total pension intangible		1		–		–		1
	$	5,174	$	104	$	149	$	5,427

10

Stock-Based Compensation

On January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) 123R, Share-Based Payment, under the modified prospective method. Since we had previously accounted for our stock-based compensation plans under the fair value provisions of SFAS 123, our adoption did not significantly impact our financial position or our results of operations. Under SFAS 123R, actual tax benefits recognized in excess of tax benefits previously established upon grant are reported as a financing cash inflow. Prior to adoption, such excess tax benefits were reported as an increase to operating cash flows.

We account for our employee stock options, which include grants under our executive program and broad-based SharePower program, under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. All stock option grants have an exercise price equal to the fair market value of our common stock on the date of grant and generally have a 10-year term. The fair value of stock option grants is amortized to expense over the vesting period, generally three years. Executives who are awarded long-term incentives based on their performance are offered the choice of stock options or restricted stock units (RSUs). Executives who elect RSUs receive one RSU for every four stock options that would have otherwise been granted. Senior officers do not have a choice and are granted 50% stock options and 50% RSUs. RSU expense is based on the fair value of PepsiCo stock on the date of grant and is amortized over the vesting period, generally three years. Each RSU is settled in a share of our stock after the vesting period. Vesting of RSU awards for senior officers is contingent upon the achievement of pre-established performance targets. As of June 17, 2006, 37 million shares were available for future stock-based compensation grants.

For the 12 weeks, we recognized stock-based compensation expense of $60 million in 2006 and $70 million in 2005, as well as related income tax benefits recognized in earnings of $17 million and $20 million, respectively. For the 24 weeks, we recognized stock-based compensation expense of $128 million in 2006 and $147 million in 2005, as well as related income tax benefits recognized in earnings of $36 million and $41 million, respectively. For the 12 weeks, stock-based compensation cost of $1 million in 2006 and $1 million in 2005 was capitalized in connection with our Business Process Transformation (BPT) initiative. For the 24 weeks, stock-based compensation cost of $2 million in 2006 and $2 million in 2005 was capitalized in connection with our BPT initiative.

Our weighted average Black-Scholes fair value assumptions are as follows:

	24 Weeks Ended
	6/17/06	6/11/05
Expected life	6 yrs.	6 yrs.
Risk free interest rate	4.5%	3.8%
Expected volatility(a)	18%	24%
Expected dividend yield	1.9%	1.8%

^(a) Reflects movements in our stock price over the most recent historical period equivalent to the

expected life.

11

A summary of option activity for the 24 weeks ended June 17, 2006 is presented below:

Our Stock Option Activity^(a)

	Options	Average Price(b)	Average Life (years)(c)	Aggregate Intrinsic Value(d)
Outstanding at January 1, 2006	150,149	$42.03
Granted	11,786	57.50
Exercised	(11,438)	38.18
Forfeited/expired	(845)	47.40
Outstanding at March 25, 2006	149,652	43.48
Granted	166	57.81
Exercised	(6,965)	37.54
Forfeited/expired	(750)	49.02
Outstanding at June 17, 2006	142,103	$43.80	5.75	$2,254,878
Exercisable at June 17, 2006	102,894	$40.71	4.78	$1,948,253

(a)	Options are in thousands and include options previously granted under Quaker plans. No additional options or shares may be granted under the Quaker plans.
(b)	Weighted-average exercise price.
(c)	Weighted-average contractual life remaining.
(d)	In thousands.

A summary of RSU activity for the 24 weeks ended June 17, 2006 is presented below:

Our RSU Activity^(a)

	RSUs	Average Intrinsic Value(b)	Average Life (years)(c)	Aggregate Intrinsic Value(d)
Outstanding at January 1, 2006	5,669	$50.70
Granted	2,576	57.54
Converted	(62)	49.70
Forfeited/expired	(159)	50.30
Outstanding at March 25, 2006	8,024	52.88
Granted	103	58.27
Converted	(54)	49.85
Forfeited/expired	(151)	52.54
Outstanding at June 17, 2006	7,922	$53.01	1.85	$472,967

__________________________________________

(a) RSUs are in thousands.

(b) Weighted-average intrinsic value at grant date.

(c) Weighted-average contractual life remaining.

(d) In thousands.

12

Other Stock-Based Compensation Data

	12 Weeks Ended		24 Weeks Ended
	6/17/06	6/11/05	6/17/06	6/11/05
Stock Options
Weighted-average fair value of options granted	$13.06	$13.76	$12.77	$13.48
Total intrinsic value of options exercised(a)	$153,585	$198,340	$389,655	$337,876
RSUs
Total intrinsic value of RSUs converted(a)	$3,194	$1,418	$6,873	$2,648

__________________________

(a) In thousands.

As of June 17, 2006, there was $431 million of total unrecognized compensation cost related to nonvested share-based compensation grants. This unrecognized compensation is expected to be recognized over a weighted-average period of 1.7 years.

Pension and Retiree Medical Benefits

The components of net periodic benefit cost for pension and retiree medical plans are as follows:

	12 Weeks Ended
	Pension				Retiree Medical
	6/17/06        6/11/05		6/17/06        6/11/05		6/17/06        6/11/05
	U.S.		International
Service cost	$ 56	$ 49	$ 14	$   8	$11	$  9
Interest cost	73	67	15	14	17	18
Expected return on plan assets	(90)	(79)	(18)	(17)	–	–
Amortization of prior service cost/(benefit)	1	1	–	–	(3)	(2)
Amortization of experience loss	38	24	6	4	5	6
Total expense	$ 78	$ 62	$ 17	$   9	$30	$31
	24 Weeks Ended
	Pension				Retiree Medical
	6/17/06        6/11/05		6/17/06        6/11/05		6/17/06        6/11/05
	U.S.		International
Service cost	$ 112	$ 98	$ 26	$ 16	$22	$18
Interest cost	146	135	30	28	34	36
Expected return on plan assets	(180)	(159)	(36)	(34)	–	–
Amortization of prior service cost/(benefit)	2	2	–	–	(6)	(4)
Amortization of experience loss	76	48	12	8	10	12
Total expense	$ 156	$ 124	$ 32	$ 18	$60	$62

13

Net Income Per Common Share

The computations of basic and diluted net income per common share are as follows:

	12 Weeks Ended
	6/17/06		6/11/05
	Income	Shares(a)	Income	Shares(a)
Net income	$1,358		$1,194
Preferred shares:
Dividends	(1)		–
Redemption premium	(2)		(5)
Net income available for common shareholders	$1,355	1,652	$1,189	1,676
Basic net income per common share	$0.82		$0.71
Net income available for common shareholders	$1,355	1,652	$1,189	1,676
Dilutive securities:
Stock options and RSUs(b)	–	35	–	34
ESOP convertible preferred stock	3	2	5	2
Diluted	$1,358	1,689	$1,194	1,712
Diluted net income per common share	$0.80		$0.70
	24 Weeks Ended
	6/17/06		6/11/05
	Income	Shares(a)	Income	Shares(a)
Net income	$2,377		$2,106
Preferred shares:
Dividends	(1)		(1)
Redemption premium	(4)		(9)
Net income available for common shareholders	$2,372	1,654	$2,096	1,677
Basic net income per common share	$1.43		$1.25
Net income available for common shareholders	$2,372	1,654	$2,096	1,677
Dilutive securities:
Stock options and RSUs(b)	–	36	–	33
ESOP convertible preferred stock	5	2	10	2
Diluted	$2,377	1,692	$2,106	1,712
Diluted net income per common share	$1.41		$1.23

^(a) Weighted average common shares outstanding.

^(b) There were no out-of-the-money options for the 12 or 24 weeks in 2006 or for the 12 weeks in 2005. Options to purchase 6.0 million shares for the 24 weeks in 2005 were not included in the calculation of earnings per share because these options were out-of-the-money. Out-of-the-money options had an average exercise price of $53.77 for the 24 weeks in 2005.

14

Debt Obligations and Commitments

In the second quarter, we entered into a new unsecured revolving credit agreement which enables us to borrow up to $1.5 billion subject to customary terms and conditions. Funds borrowed under this agreement may be used for general corporate purposes, including supporting our outstanding commercial paper issuances. The agreement terminates in May 2011 and replaces our previous $2.1 billion of credit facilities. As of June 17, 2006, we have reclassified $1.4 billion of short-term debt to long-term based on our intent and ability to refinance on a long-term basis.

Supplemental Cash Flow Information

	24 Weeks Ended
	6/17/06	6/11/05
Interest paid	$113	$88
Income taxes paid, net of refunds	$935	$252
Acquisitions(a):
Fair value of assets acquired	$492	$ 784
Less: Cash paid and debt assumed	(434)	(964)
Add: Minority interest eliminated	–	208
Liabilities assumed	$  58	$   28

(a) In 2005, these amounts include the impact of our first quarter acquisition of General Mills, Inc.’s 40.5% ownership interest in SVE for $750 million.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements.

15

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

FINANCIAL REVIEW

Our discussion and analysis is an integral part of understanding our financial results. Also refer to Basis of Presentation and Our Divisions in the Notes to the Condensed Consolidated Financial Statements. Tabular dollars are presented in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless noted, and are based on unrounded amounts. Percentage changes are based on unrounded amounts.

Our Critical Accounting Policies

Sales Incentives and Advertising and Marketing Costs

We offer sales incentives through various programs to our customers and to consumers. These incentives are recorded as a reduction of the sales price of our products. Certain sales incentives are recognized at the time of sale while other incentives, such as bottler funding and customer volume rebates, are recognized during the year incurred, generally in proportion to revenue, based on annual targets. Anticipated payments are estimated based on historical experience with similar programs and require management judgment with respect to estimating customer participation and performance levels. Differences between estimated expenses and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. In addition, certain advertising and marketing costs are also recognized during the year incurred, generally in proportion to revenue.

Income Taxes

In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on our expected annual income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. The IRS audits of our tax returns for the years 1998 through 2002 may be concluded in 2006. Significant or unusual items are separately recognized in the quarter in which they occur.

Stock-Based Compensation

On January 1, 2006, we adopted SFAS 123R under the modified prospective method. Since we had previously accounted for our stock-based compensation plans under the fair value provisions of SFAS 123, our adoption did not significantly impact our financial position or our results of operations. Under SFAS 123R, actual tax benefits recognized in excess of tax benefits previously established upon grant are reported as a financing cash inflow. Prior to adoption, such excess tax benefits were reported as an increase to operating cash flows.

We account for our employee stock options under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. All stock option grants have an exercise price equal to the fair market value of our common stock on the date of grant and generally have a 10-year term. The fair value of stock option grants is amortized to expense over the vesting period, generally three years. RSU expense is based on the fair value of PepsiCo stock on the date of grant and is amortized over the vesting period, generally three years.

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Expected volatility reflects movements in our stock price over the most recent historical period equivalent to the expected life.

For our 2006 Black-Scholes assumptions and other stock-based compensation required disclosures, see Stock-Based Compensation in the Notes to the Condensed Consolidated Financial Statements.

Recent Accounting Pronouncements

In July 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements.

Our Business Risks

We discuss expectations regarding our future performance, such as our business outlook, in our annual and quarterly reports, press releases, and other written and oral statements. These “forward-looking statements” are based on currently available competitive, financial and economic data and our operating plans. They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from our expectations. We undertake no obligation to update any forward-looking statement.

Our operations outside of the United States generate approximately 40% of our net revenue. As a result, we are exposed to foreign currency risks, including unforeseen economic changes and political unrest. During the 24 weeks, net favorable foreign currency contributed slightly to net revenue growth, primarily due to increases in the Canadian dollar, Brazilian real and the Mexican peso, partially offset by declines in the euro and the British pound. Currency declines which are not offset could adversely impact our future results.

While there is continued pricing pressure on our raw materials and energy costs, we expect to be able to mitigate the impact of these increased costs through our hedging strategies and ongoing productivity initiatives.

Cautionary statements included in Management’s Discussion and Analysis and in Item 1A. in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 should be considered when evaluating our trends and future results.

Results of Operations – Consolidated Review

In the discussions of net revenue and operating profit below, “effective net pricing” reflects the year-over-year impact of discrete pricing actions, sales incentive activities and mix resulting from selling varying products in different package sizes and in different countries.

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Volume

Since our divisions each use different measures of physical unit volume, a common servings metric is necessary to reflect our consolidated physical unit volume. For the 12 weeks, total servings increased 9%, with worldwide beverages growing 10% and worldwide snacks growing 8%. For the 24 weeks, total servings increased 8%, with worldwide beverages growing 9% and worldwide snacks growing 6%.

We discuss volume for our beverage businesses on a bottler case sales (BCS) basis in which all beverage volume is converted to an 8 ounce case metric. A portion of our volume is sold by our bottlers, and that portion is based on our bottlers’ sales to retailers and independent distributors. The remainder of our volume is based on our shipments to customers. BCS is reported to us by our bottlers on a monthly basis. Our second quarter beverage volume includes PBNA bottler sales for April and May and PI bottler sales for March, April, and May.

Consolidated Results

Total Net Revenue and Operating Profit

	12 Weeks Ended			24 Weeks Ended
	6/17/06	6/11/05	Change	6/17/06	6/11/05	Change
Total net revenue	$8,599	$7,697	12%	$15,804	$14,282	11%
Operating profit
FLNA	$   634	$   594	7%	$1,203	$1,133	6%
PBNA	626	555	13%	1,054	970	9%
PI	546	452	21%	917	759	21%
QFNA	115	113	2%	266	258	3%
Corporate unallocated	(159)	(158)	1%	(330)	(317)	4%
Total operating profit	$1,762	$1,556	13%	$3,110	$2,803	11%
Total operating profit margin	20.5%	20.2%	0.3	19.7%	19.6%	0.1

12 Weeks

Net revenue increased 12% primarily reflecting higher volume and positive effective net pricing across all divisions. The volume gains contributed over 6 percentage points to net revenue growth and the effective net pricing contributed 4 percentage points. The impact of acquisitions contributed 1 percentage point to net revenue growth.

Total operating profit increased 13% and margin increased 0.3 percentage points. The operating profit performance reflects leverage from the revenue growth, partially offset by the impact of higher raw material and energy costs.

Corporate unallocated expenses increased 1%. This increase primarily reflects higher costs associated with our BPT initiative which contributed 6 percentage points, partially offset by lower

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employee-related costs and net gains from certain mark-to-market derivatives which reduced corporate unallocated expenses by 3 percentage points and 2 percentage points, respectively. Corporate departmental expenses contributed almost 1 percentage point to the increase.

24 Weeks

Net revenue increased 11% primarily reflecting higher volume and positive effective net pricing across all divisions. The volume gains contributed 6 percentage points to net revenue growth and the effective net pricing contributed over 3 percentage points. The impact of acquisitions contributed 1 percentage point to net revenue growth.

Total operating profit increased 11% and margin increased 0.1 percentage points. The operating profit performance reflects leverage from the revenue growth, partially offset by the impact of higher raw material and energy costs.

Corporate unallocated expenses increased 4%. This increase primarily reflects higher costs associated with our BPT initiative which contributed 5 percentage points, higher employee-related costs which contributed 3 percentage points, and net losses from certain mark-to-market derivatives which contributed 2 percentage points to the increase. These increases were partially offset by the absence of foundation contributions made in the prior year which reduced corporate unallocated expenses by 3 percentage points. In 2006, corporate unallocated expenses also reflect a gain of $11 million related to the revaluation of an asset held for sale. Corporate departmental expenses were flat.

Other Consolidated Results

	12 Weeks Ended			24 Weeks Ended
	6/17/06	6/11/05	Change	6/17/06	6/11/05	Change
Bottling equity income	$176	$156	13%	$260	$221	18%
Interest expense, net	$(33)	$(25)	32%	$(50)	$(52)	(4)%
Tax rate	28.7%	29.3%		28.4%	29.1%
Net income	$1,358	$1,194	14%	$2,377	$2,106	13%
Net income per common share – diluted	$0.80	$0.70	15%	$1.41	$1.23	14%

12 Weeks

Bottling equity income increased 13% primarily reflecting a $56 million pre-tax gain on our sale of PBG stock in the quarter, which compared favorably to a $35 million pre-tax gain in the prior year.

Net interest expense increased 32% primarily reflecting lower cash balances and higher average rates on our borrowings, partially offset by the impact of higher interest rates on our investments.

The tax rate decreased 0.6 percentage points compared to prior year primarily reflecting changes in our concentrate sourcing around the world, which is taxed at lower rates.

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Net income increased 14% and the related net income per share increased 15%. These increases primarily reflect our solid operating profit growth, the increased gains on our sale of PBG stock and the decrease in our effective tax rate. Net income per share was also favorably impacted by our share repurchases.

24 Weeks

Bottling equity income increased 18% primarily reflecting a $106 million pre-tax gain on our sale of PBG stock, which compared favorably to a $64 million pre-tax gain in the prior year.

Net interest expense decreased 4% primarily reflecting higher interest rates on our investments, mostly offset by the impact of lower investment balances and higher average rates on our borrowings.

The tax rate decreased 0.7 percentage points compared to prior year primarily reflecting changes in our concentrate sourcing around the world, which is taxed at lower rates.

Net income increased 13% and the related net income per share increased 14%. These increases primarily reflect our solid operating profit growth, the increased gains on our sale of PBG stock and the decrease in our effective tax rate. Net income per share was also favorably impacted by our share repurchases.

Results of Operations – Division Review

The results and discussions below are based on how our Chief Executive Officer monitors the performance of our divisions. For additional information on our divisions, see Our Divisions in the Notes to the Condensed Consolidated Financial Statements.

Net Revenue 12 Weeks Ended	FLNA	PBNA	PI	QFNA	Total
Q2, 2006	$2,567	$2,505	$3,154	$373	$8,599
Q2, 2005	$2,373	$2,218	$2,756	$350	$7,697
% Impact of:
Volume	3%	8%(a)	8%(a)	3%	6%
Effective net pricing	3	4	4	3	4
Foreign exchange	1	1	–	1	–
Acquisitions/divestitures	1	–	3	–	1
% Change(b)	8%	13%	14%	7%	12%

(a) For beverages sold to our bottlers, net revenue volume growth is based on our concentrate shipments and equivalents.

(b) Amounts may not sum due to rounding.

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Net Revenue 24 Weeks Ended	FLNA		PBNA	PI	QFNA	Total
Q2, 2006	$4,960		$4,496	$5,532	$816	$15,804
Q2, 2005	$4,636		$4,002	$4,877	$767	$14,282
% Impact of:
Volume	2.5	%	8%(a)	8%(a)	3%	6%
Effective net pricing	3		4	3	3	3
Foreign exchange	1		0.5	–	1	–
Acquisitions/divestitures	0.5		–	2	–	1
% Change(b)	7	%	12%	13%	7%	11%

(a) For beverages sold to our bottlers, net revenue volume growth is based on our concentrate shipments and equivalents.

(b) Amounts may not sum due to rounding.

Frito-Lay North America

	12 Weeks Ended			24 Weeks Ended
	6/17/06	6/11/05	Change	6/17/06	6/11/05	Change
Net revenue	$2,567	$2,373	8%	$4,960	$4,636	7%
Operating profit	$634	$594	7%	$1,203	$1,133	6%

12 Weeks

Net revenue grew 8% reflecting volume growth of 4% and positive effective net pricing due to salty snack pricing actions and favorable mix. Favorable Canadian exchange rates also contributed almost 1 percentage point to net revenue growth. Pound volume grew primarily due to double-digit growth in Dips, Sun Chips and Chewy granola bars, high-single-digit growth in trademark Tostitos and low-single-digit growth in trademark Lay’s potato chips. These volume gains were partially offset by a mid-single-digit decline in trademark Doritos. Overall, salty snacks revenue grew 7% with volume growth of 3.5%, and other macro snacks revenue grew 16% with volume growth of 10%. The Stacy’s Pita Chip Company (Stacy’s) acquisition contributed over 0.5 percentage points to volume growth and almost 1 percentage point to revenue growth.

Operating profit grew 7% primarily reflecting the revenue growth. This growth was partially offset by higher commodity costs, primarily cooking oil and energy, and the impact of a favorable casualty insurance actuarial adjustment recorded in the prior year.

Smart Spot eligible products represented approximately 16% of net revenue. These products experienced double-digit revenue growth, while the balance of the portfolio had mid-single-digit revenue growth.

24 Weeks

Net revenue grew 7% reflecting volume growth of 3% and positive effective net pricing due to salty snack pricing actions and favorable mix. Favorable Canadian exchange rates also contributed almost 1 percentage point to net revenue growth. Pound volume grew primarily due to double-digit growth in Chewy granola bars and Sun Chips, high-single-digit growth in Dips, mid-single-digit growth in trademark Tostitos and double-digit growth in Quakes rice cakes and Multipack. These

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volume gains were partially offset by a mid-single-digit decline in trademark Doritos. Overall, salty snacks revenue grew 6% with volume growth of 2%, and other macro snacks revenue grew 14% with volume growth of 11%. The Stacy’s acquisition contributed approximately 0.5 percentage points to both revenue and volume growth.

Operating profit grew 6% primarily reflecting the revenue growth. This growth was partially offset by higher commodity costs, primarily cooking oil and energy, and the impact of a favorable casualty insurance actuarial adjustment recorded in the prior year.

Smart Spot eligible products represented approximately 16% of net revenue. These products experienced double-digit revenue growth, while the balance of the portfolio had mid-single-digit revenue growth.

PepsiCo Beverages North America

	12 Weeks Ended			24 Weeks Ended
	6/17/06	6/11/05	Change	6/17/06	6/11/05	Change
Net revenue	$2,505	$2,218	13%	$4,496	$4,002	12%
Operating profit	$626	$555	13%	$1,054	$970	9%

12 Weeks

Net revenue grew 13% and BCS volume grew 8%. The volume increase was driven by a 23% increase in non-carbonated beverages, partially offset by a 1% decline in carbonated soft drinks (CSDs). The non-carbonated portfolio performance was driven by double-digit growth in Gatorade, trademark Aquafina, Lipton ready-to-drink teas, Tropicana juice drinks and Propel. Tropicana Pure Premium experienced a mid-single-digit increase in volume. The decline in CSDs reflects a low-single-digit decline in trademark Pepsi, partially offset by a low-single-digit increase in trademark Mountain Dew and a mid-single-digit increase in trademark Sierra Mist. Across the brands, both regular and diet CSDs experienced low-single-digit declines.

Net revenue also benefited from positive effective net pricing which reflected the strength of non-carbonated beverages, partially offset by more-favorable settlements of trade spending accruals in 2005. Favorable Canadian foreign exchange rates contributed nearly one percentage point to net revenue growth.

Operating profit increased 13% which reflects the net revenue growth, partially offset by higher energy and raw material costs, primarily orange juice and PET resin. The impact of a favorable insurance settlement of $29 million was mostly offset by the more-favorable settlements of trade spending accruals in 2005.

Smart Spot eligible products represented over 70% of net revenue. These products experienced double-digit revenue growth, while the balance of the portfolio grew in the low-single-digit range.

24 Weeks

Net revenue grew 12% and BCS volume grew 6%. The volume increase was driven by a 21% increase in non-carbonated beverages, partially offset by a 1% decline in CSDs. The non-

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carbonated portfolio performance was driven by double-digit growth in Gatorade, trademark Aquafina, Tropicana juice drinks, Lipton ready-to-drink teas and Propel. Tropicana Pure Premium experienced a low-single-digit increase in volume. The decline in CSDs reflects a low-single-digit decline in trademark Pepsi, partially offset by low-single-digit increases in both trademark Mountain Dew and trademark Sierra Mist. Across the brands, both regular and diet CSDs experienced low-single-digit declines.

Net revenue also benefited from positive effective net pricing which reflected the strength of non-carbonated beverages, partially offset by more-favorable settlements of trade spending accruals in 2005. Favorable Canadian foreign exchange rates contributed approximately one-half of a percentage point to net revenue growth.

Operating profit increased 9%, which reflects the net revenue growth, partially offset by higher energy and raw material costs, primarily orange juice and PET resin. The impact of a favorable insurance settlement of $29 million was fully offset by the more-favorable settlements of trade spending accruals in 2005.

Smart Spot eligible products represented over 70% of net revenue. These products experienced double-digit revenue growth, while the balance of the portfolio grew in the mid-single-digit range.

PepsiCo International

	12 Weeks Ended			24 Weeks Ended
	6/17/06	6/11/05	Change	6/17/06	6/11/05	Change
Net revenue	$3,154	$2,756	14%	$5,532	$4,877	13%
Operating profit	$546	$452	21%	$917	$759	21%

12 Weeks

International snacks volume grew 11%, reflecting growth of 18% in the Europe, Middle East & Africa region, 6% in the Latin America region and 14% in the Asia Pacific region. The acquisition of a business in Poland in early 2006 increased the Europe, Middle East & Africa region volume growth by 4 percentage points. The acquisition of a business in Australia increased the Asia region volume by 2 percentage points. Cumulatively, acquisitions contributed 2 percentage points to the reported total PepsiCo International snack volume growth rate. Broad-based gains reflected high-single-digit growth at Sabritas in Mexico and double-digit growth in Russia, Turkey, Egypt and Australia.

Beverage volume grew 10%, reflecting growth of 12% in the Europe, Middle East & Africa region, 11% in the Asia Pacific region and 7% in the Latin America region. Acquisitions contributed 1 percentage point to the Europe, Middle East & Africa region volume growth rate and almost 1 percentage point to the reported total PepsiCo International beverage volume growth rate. Broad-based increases were led by double-digit growth in the Middle East, China, Argentina, Thailand and Russia, and mid-single-digit growth in Mexico. CSDs grew at a high-single-digit rate while non-carbonated beverages grew at a double-digit rate.

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Net revenue grew 14%, primarily as a result of the broad-based volume growth and favorable effective net pricing. Acquisitions contributed 3 percentage points of growth. Foreign currency had no impact on the growth rate.

Operating profit grew 21% driven primarily by the net revenue growth, slightly offset by increased raw material costs. Acquisitions and foreign currency had no impact on the growth rate.

24 Weeks

International snacks volume grew 9%, reflecting growth of 17% in the Europe, Middle East & Africa region, 4% in the Latin America region and 15% in the Asia Pacific region. The acquisition of a business in Poland in early 2006 increased the Europe, Middle East & Africa region volume growth by 4 percentage points. The acquisition of a business in Australia increased the Asia region volume by 2 percentage points. Cumulatively, acquisitions contributed 1 percentage point to the reported total PepsiCo International snack volume growth rate. The overall gains reflected mid-single-digit growth at both Sabritas in Mexico and Walkers in the United Kingdom, and double-digit growth in Russia, Turkey, Egypt and Australia.

Beverage volume grew 12%, reflecting growth of 13% in the Europe, Middle East & Africa region, 15% in the Asia Pacific region and 9% in the Latin America region. Acquisitions contributed 1.5 percentage points to the Europe, Middle East & Africa region volume growth rate and almost 1 percentage point to the reported total PepsiCo International beverage volume growth rate. Broad-based increases were led by double-digit growth in China, the Middle East, Argentina, Thailand and Venezuela, and mid-single-digit growth in Mexico. CSDs and non-carbonated beverages each grew at a double-digit rate.

Net revenue grew 13%, primarily as a result of the broad-based volume growth and favorable effective net pricing. Acquisitions contributed 2 percentage points of growth. Foreign currency had no impact on the growth rate.

Operating profit grew 21%, driven primarily by the net revenue growth, slightly offset by increased raw material costs. Acquisitions and foreign currency each had a slightly favorable impact on the growth rate.

Quaker Foods North America

	12 Weeks Ended			24 Weeks Ended
	6/17/06	6/11/05	Change	6/17/06	6/11/05	Change
Net revenue	$373	$350	7%	$816	$767	7%
Operating profit	$115	$113	2%	$266	$258	3%

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12 Weeks

Net revenue increased 7% and volume increased 3%. The volume increase reflects high-single-digit growth in Oatmeal, double-digit growth in Life cereal and high-single-digit growth in Cap’n Crunch cereal. This increase was partially offset by a high-single-digit decline in Rice-A-Roni. Higher effective net pricing contributed nearly 3 percentage points of revenue growth reflecting favorable product mix, partially offset by the impact of more favorable settlements of trade spending accruals in 2005. Favorable Canadian foreign exchange rates contributed approximately 1 percentage point to net revenue growth.

Operating profit increased 2% primarily reflecting the net revenue growth. This growth was partially offset by increased cost of sales, primarily due to higher raw material and energy costs, as well as the impact of more favorable settlements of trade spending accruals in 2005.

Smart Spot eligible products represented approximately half of net revenue and had double-digit revenue growth. The balance of the portfolio experienced a low-single-digit decline.

24 Weeks

Net revenue grew 7% and volume increased almost 3%. The volume increase reflects mid-single-digit growth in Oatmeal, double-digit growth in Life cereal and low-single-digit growth in Cap’n Crunch cereal, Pasta Roni and Rice-A-Roni. Higher effective net pricing contributed approximately 3 percentage points of growth primarily reflecting favorable product mix. Favorable Canadian foreign exchange rates contributed approximately 1 percentage point to net revenue growth.

Operating profit increased 3% primarily reflecting the net revenue growth. This growth was partially offset by increased cost of sales primarily due to higher raw material and energy costs.

Smart Spot eligible products represented approximately half of net revenue and had double-digit revenue growth. The balance of the portfolio experienced a low-single-digit increase.

OUR LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

During the 24 weeks, our operations provided $1.8 billion of cash primarily reflecting our solid business results. Our operating cash flow in 2006 also reflects a tax payment of $420 million related to our repatriation of international cash in 2005 in connection with the American Jobs Creation Act (AJCA).

Investing Activities

During the 24 weeks, we used $31 million for our investing activities, driven by capital spending of $708 million and acquisitions of $434 million, which were offset by net sales of short-term investments of $908 million and proceeds from our sale of PBG stock of $180 million. Capital spending reflects our increased investments in support of our ongoing BPT initiative and our North

25

American Gatorade business, as well as increased investments in manufacturing capacity to support growth in our China snack and beverage operations.

We anticipate net capital spending of approximately $2.2 billion in 2006, which is above our long-term target of approximately 5% of net revenue.

Financing Activities

During the 24 weeks, we used $3.1 billion, primarily reflecting common share repurchases and net repayments of short-term borrowings of $1.5 billion each. Dividend payments of $863 million were largely offset by stock option proceeds of $697 million.

Management Operating Cash Flow

We focus on management operating cash flow as a key element in achieving maximum shareholder value, and it is the primary measure we use to monitor cash flow performance. However, it is not a measure provided by accounting principles generally accepted in the U.S. Since net capital spending is essential to our product innovation initiatives and maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As such, we believe investors should also consider net capital spending when evaluating our cash from operating activities. The table below reconciles net cash provided by operating activities as reflected in our Condensed Consolidated Statement of Cash Flows to our management operating cash flow.

	24 Weeks Ended
	6/17/06	6/11/05
Net cash provided by operating activities	$1,830	$2,363
Capital spending	(708)	(478)
Sales of property, plant and equipment	23	42
Management operating cash flow	$1,145	$1,927

In the current year, management operating cash flow reflects our tax payment of $420 million related to our repatriation of international cash in 2005 in connection with the AJCA, as well as increased capital spending. During 2006, we expect to return approximately all of our management operating cash flow to our shareholders through dividends and share repurchases. However, see “ Risk Factors” in Item 1A. and “ Our Business Risks” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 for certain factors that may impact our operating cash flows.

Debt Obligations and Commitments

See Debt Obligations and Commitments in the Notes to the Condensed Consolidated Financial Statements.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

PepsiCo, Inc.:

We have reviewed the accompanying Condensed Consolidated Balance Sheet of PepsiCo, Inc. and Subsidiaries as of June 17, 2006, the related Condensed Consolidated Statements of Income and Comprehensive Income for the twelve and twenty-four weeks ended June 17, 2006 and June 11, 2005, and the Condensed Consolidated Statements of Cash Flows for the twenty-four weeks ended June 17, 2006 and June 11, 2005. These interim condensed consolidated financial statements are the responsibility of PepsiCo, Inc.’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheet of PepsiCo, Inc. and Subsidiaries as of December 31, 2005, and the related Consolidated Statements of Income, Common Shareholders’ Equity and Cash Flows for the year then ended not presented herein; and in our report dated February 24, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying Condensed Consolidated Balance Sheet as of December 31, 2005, is fairly stated, in all material respects, in relation to the Consolidated Balance Sheet from which it has been derived.

/s/ KPMG LLP

New York, New York

July 13, 2006

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ITEM 4.  Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

In addition, there were no changes in our internal control over financial reporting during our second fiscal quarter of 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

ITEM 1. Legal Proceedings

We are party to a variety of legal proceedings arising in the normal course of business, including the matters discussed below. While the results of proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect on our consolidated financial statements, results of operations or cash flows.

On April 30, 2004, we announced that Frito-Lay and Pepsi-Cola Company received notification from the Securities and Exchange Commission (the “SEC”) indicating that the SEC staff was proposing to recommend that the SEC bring a civil action alleging that a non-executive employee at Pepsi-Cola and another at Frito-Lay signed documents in early 2001 prepared by Kmart acknowledging payments in the amount of $3 million from Pepsi-Cola and $2.8 million from Frito-Lay. Kmart allegedly used these documents to prematurely recognize the $3 million and $2.8 million in revenue. Frito-Lay and Pepsi-Cola have cooperated fully with this investigation and provided written responses to the SEC staff notices setting forth the factual and legal bases for their belief that no enforcement actions should be brought against Frito-Lay or Pepsi-Cola.

Based on an internal review of the Kmart matters, no officers of PepsiCo, Pepsi-Cola or Frito-Lay are involved. Neither of these matters involves any allegations regarding PepsiCo’s accounting for its transactions with Kmart or PepsiCo’s financial statements.

ITEM 1A. Risk Factors

There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

A summary of our common stock repurchases (in millions, except average price per share) during the second quarter under the $7 billion repurchase program authorized by our Board of Directors and publicly announced on March 29, 2004, and expiring on March 31, 2007, is set forth in the following table. All such shares of common stock were repurchased pursuant to open market transactions.

Issuer Purchases of Common Stock

Period	(a) Total Number of Shares Repurchased	(b) Average Price Paid Per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares that may Yet Be Purchased Under the Plans or Programs
3/25/06				$1,175
3/26/06 – 4/22/06	4.6	$58.00	4.6	(269)
				906
4/23/06 – 5/20/06	5.3	58.58	5.3	(306)
				600
5/21/06 – 6/17/06	3.8	59.94	3.8	(230)
Total	13.7	$58.76	13.7	$370

In addition, PepsiCo repurchases shares of its convertible preferred stock from an employee stock ownership plan (ESOP) fund established by Quaker in connection with share redemptions by ESOP participants. The following table summarizes our convertible preferred share repurchases during the second quarter:

Issuer Purchases of Convertible Preferred Stock

Period	(a) Total Number of Shares Repurchased	(b) Average Price Paid Per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares that may Yet Be Purchased Under the Plans or Programs
3/25/06
3/26/06 – 4/22/06	–	$         –	N/A	N/A
4/23/06 – 5/20/06	4,100	291.73	N/A	N/A
5/21/06 – 6/17/06	3,900	300.53	N/A	N/A
Total	8,000	$296.02	N/A	N/A

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

The following matters were submitted to a vote of security holders at PepsiCo’s Annual Meeting of Shareholders held on May 3, 2006.

Election of Directors

Nominee	For	Withheld
John F. Akers	1,395,181,699	39,744,822
Robert E. Allen	1,395,136,840	39,789,681
Dina Dublon	1,411,648,847	23,277,674
Victor J. Dzau, MD	1,412,091,447	22,835,074
Ray L. Hunt	1,407,540,019	27,386,502
Alberto Ibargüen	1,412,270,652	22,655,869
Arthur C. Martinez	1,408,345,280	26,581,241
Indra K. Nooyi	1,365,167,195	69,759,326
Steven S Reinemund	1,396,791,262	38,135,259
Sharon Percy Rockefeller	1,396,325,381	38,601,140
James J. Schiro	1,412,667,781	22,258,740
Franklin A. Thomas	1,397,425,694	37,500,827
Cynthia M. Trudell	1,412,483,092	22,443,429
Daniel Vasella	1,412,467,677	22,458,844
Michael D. White	1,399,292,660	35,633,861

The fifteen directors listed above were elected to a one-year term expiring in 2007.

Description of Proposals

	For	Against	Abstain	Broker Non- Votes
Ratification of appointment of KPMG LLP as independent registered public accounting firm	1,399,607,964	25,516,845	9,801,712
Political Contributions	34,560,413	1,022,017,322	108,686,358	269,662,428
Charitable Contributions	61,689,445	998,868,523	104,706,125	269,662,428

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ITEM 6.  Exhibits

See Index to Exhibits on page 34.

32

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned.

	PepsiCo, Inc.
	(Registrant)
Date:      July 13, 2006	/S/ PETER A. BRIDGMAN
	Peter A. Bridgman
	Senior Vice President and
	Controller
Date:      July 13, 2006	/S/ ROBERT E. COX
	Robert E. Cox
	Vice President, Deputy General
	Counsel and Assistant Secretary
	(Duly Authorized Officer)

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INDEX TO EXHIBITS

ITEM 6 (a)

EXHIBITS

Exhibit 10.1	U.S. $1,500,000,000 Five-Year Credit Agreement Dated as of May 22, 2006 among PepsiCo, Inc., as Borrower, the Lenders named therein, and Citibank, N.A., as Administrative Agent
Exhibit 12	Computation of Ratio of Earnings to Fixed Charges
Exhibit 15	Letter re: Unaudited Interim Financial Information
Exhibit 31	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

34