The Company Campbell Soup Company (“Campbell” or the “company”), together with its consolidated subsidiaries, is a global manufacturer and marketer of high quality, branded, convenience food products. Campbell was incorporated as a business corporation under the laws of New Jersey on November 23, 1922; however, through predecessor organizations, it traces its heritage in the food business back to 1869. The company’s principal executive offices are in Camden, New Jersey 08103-1799.

On June 24, 2004, the company announced a series of initiatives designed to improve the company’s sales growth and the quality and growth of its earnings. These include the following:

•		The elimination of approximately 400 positions worldwide, which resulted in a pre-tax charge of $23 million, or three cents per share, in the fourth quarter of fiscal 2004;
•		The implementation of a new sales and distribution system for the company’s business in Australia, converting from a direct store delivery system to a central warehouse system. As a result of this new system, over 200 positions are expected to be eliminated, with most of the terminations occurring in fiscal 2005. The company recorded a pre-tax charge of $9 million, or two cents per share, in the fourth quarter of fiscal 2004 related to this new system;
•		The implementation of a new SAP enterprise-resource planning system in North America. The project is planned for the next three years and is expected to cost approximately $125 million; and
•		An expanded focus on convenience and availability as the primary sources of incremental future revenue growth, along with an increased emphasis on “wellness” initiatives.

See also “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and the Consolidated Financial Statements (and the Notes thereto).

Through fiscal 2004, the company’s operations were organized and reported in four segments: North America Soup and Away From Home, North America Sauces and Beverages, Biscuits and Confectionery, and International Soup and Sauces. The segments are discussed in greater detail below.

North America Soup and Away From Home The North America Soup and Away From Home segment comprises the retail soup and Away From Home business in the U.S. and Canada. The U.S. retail business includes the Campbell’s brand condensed and ready-to-serve soups and Swanson broths. The segment includes the company’s total business in Canada, which comprises Habitant and Campbell’s soups, Prego pasta sauce and V8 juices. The Away From Home operations represent the distribution of products such as Campbell’s soups, Campbell’s

specialty entrees, beverage products, other prepared foods and Pepperidge Farm products through various food service channels in North America.

North America Sauces and Beverages The North America Sauces and Beverages segment includes U.S. retail sales for Prego pasta sauces, Pace Mexican sauces, Franco-American canned pastas and gravies, V8 vegetable juices, V8 Splash juice beverages, and Campbell’s tomato juice, as well as the total of all businesses in Mexico and other Latin American and Caribbean countries. The company operates this segment and the North America Soup and Away From Home operations under an integrated supply chain organization, in which these operations share substantially all manufacturing, warehouse, distribution and sales activities.

Biscuits and Confectionery The Biscuits and Confectionery segment includes all retail sales of Pepperidge Farm cookies, crackers, breads and frozen products in the United States, Arnott’s biscuits and crackers in Australia and Asia Pacific, Arnott’s Snackfoods salty snacks in Australia, and Godiva chocolates worldwide.

International Soup and Sauces The International Soup and Sauces segment comprises operations outside of North America, including Erasco and Heisse Tasse soups in Germany, Liebig and Royco soups and Lesieur sauces in France, Campbell’s and Batchelors soups, OXO stock cubes and Homepride sauces in the United Kingdom, Devos Lemmens mayonnaise and cold sauces and Campbell’s and Royco soups in Belgium, Blå Band soups and sauces in Sweden, and McDonnells and Erin soups in Ireland. In Asia Pacific, operations include Campbell’s soup and stock and Swanson broths across the region.

Ingredients The ingredients required for the manufacture of the company’s food products are purchased from various suppliers. While all such ingredients are available from numerous independent suppliers, raw materials are subject to fluctuations in price attributable to a number of factors, including changes in crop size, cattle cycles, government-sponsored agricultural programs, import and export requirements and weather conditions during the growing and harvesting seasons. Ingredient inventories are at a peak during the late fall and decline during the winter and spring. Since many ingredients of suitable quality are available in sufficient quantities only at certain seasons, the company makes commitments for the purchase of such ingredients during their respective seasons. At this time, the company does not anticipate any material restrictions on availability or shortages of ingredients that would have a significant impact on the company’s businesses. For information relating to the impact of inflation on the company, see “Management’s Discussion and Analysis of Results of Operations and Financial Condition.”

Customers In the United States, Canada, Europe and the Asia Pacific region, sales solicitation activities are conducted by the company’s own sales force and through broker and distributor

arrangements. In the United States and Canada, the company’s products are generally resold to consumers in retail food chains, mass discounters, mass merchandisers, club stores, convenience stores, drug stores and other retail establishments. In Europe, the company’s products are generally resold to consumers in retail food chains, mass discounters and other retail establishments. In the Asia Pacific region, the company’s products are generally resold to consumers through retail food chains, convenience stores, vending machines and other retail establishments. Godiva’s products are sold generally through a network of company-owned retail boutiques in North America, Europe, and Asia, franchised third-party retail boutique operators in Europe, third-party distributors in Europe and Asia, and major retailers, including finer department stores and duty-free shops, worldwide. Godiva’s products are also sold through catalogs and on the Internet, although these sales are primarily limited to North America. The company makes shipments promptly after receipt and acceptance of orders.

The company’s largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 13% of the company’s consolidated net sales during fiscal 2004 and 12% during fiscal 2003. All of the company’s segments sold products to Wal-Mart Stores, Inc. or its affiliates.

Trademarks and Technology The company owns over 6,900 trademark registrations and applications in over 160 countries and believes that its trademarks are of material importance to its business. 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. The company believes that its principal brands, including Campbell’s, Erasco, Liebig, Pepperidge Farm, V8, Pace, Prego, Swanson, Batchelors, Arnott’s, and Godiva, are protected by trademark law in the company’s relevant major markets. In addition, some of the company’s products are sold under brands that have been licensed from third parties.

Although the company owns a number of valuable patents, it does not regard any segment of its business as being dependent upon any single patent or group of related patents. In addition, the company owns copyrights, both registered and unregistered, and proprietary trade secrets, technology, know-how processes, and other intellectual property rights that are not registered.

Competition The company experiences worldwide competition in all of its principal products. This competition arises from numerous competitors of varying sizes, including producers of generic and private label products, as well as from manufacturers of other branded food products, which compete for trade merchandising support and consumer dollars. As such, the

number of competitors cannot be reliably estimated. The principal areas of competition are brand recognition, quality, price, advertising, promotion and service.

Working Capital For information relating to the company’s cash and other working capital items, see “Management’s Discussion and Analysis of Results of Operations and Financial Condition.”

Research and Development During the last three fiscal years, the company’s expenditures on research activities relating to new products and the improvement and maintenance of existing products were $93 million in 2004, $88 million in 2003 and $79 million in 2002. The increase in research and development spending in 2004 is primarily due to currency fluctuations. The increase from 2002 to 2003 was consistent with previously announced investment initiatives designed to drive top line growth and improve the company’s cost position. The company conducts this research primarily at its headquarters in Camden, New Jersey, although important research is also undertaken in various other locations inside and outside the United States.

Environmental Matters The company has programs for the operation and design of its facilities that meet or exceed applicable environmental rules and regulations. The company’s capital expenditures during fiscal 2004 were $288 million, of which approximately $5 million was for compliance with environmental laws and regulations in the United States. The company further estimates that approximately $6 million of the capital expenditures anticipated during fiscal 2005 will be for compliance with such environmental laws and regulations. The company believes that continued compliance with existing environmental laws and regulations will not have a material effect on capital expenditures, earnings or the competitive position of the company. Additional information regarding the company’s environmental matters is set forth in “Legal Proceedings.”

Employees At August 1, 2004, there were approximately 24,000 full-time employees of the company.

Financial Information For information with respect to revenue, operating profitability and identifiable assets attributable to the company’s business segments and geographic areas, see Note 4 to the Consolidated Financial Statements.

Company Website The company’s primary corporate website can be found at www.campbellsoupcompany.com. The company makes available free of charge at this website (under the “Investor Center – Financial Reports – SEC Financial Reports” caption) all of its reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including its annual report on Form 10-K, its quarterly reports on Form 10-Q and its Current Reports on Form 8-K. These reports are made available on the website as soon as reasonably practicable after their filing with, or furnishing to, the Securities and Exchange Commission.

The company’s principal executive offices and main research facilities are company-owned and located in Camden, New Jersey. The following table sets forth the company’s principal manufacturing facilities and the business segment that primarily uses each of the facilities:

Each of the foregoing manufacturing facilities is company-owned, except that the Woodinville, Washington facility, the Scoresby, Australia facility and portions of the Ashford, United Kingdom facility are subject to leases. The Utrecht, Netherlands facility is subject to a ground lease. The company also operates retail confectionery shops in the United States, Canada, Europe and Asia; retail bakery thrift stores in the United States; and

other plants, facilities and offices at various locations in the United States and abroad, including additional executive offices in Norwalk, Connecticut; Paris, France; and Homebush, Australia.

Management believes that the company’s manufacturing and processing plants are well maintained and are generally adequate to support the current operations of the businesses.

As previously reported, on March 30, 1998, the company effected a spinoff of several of its non-core businesses to Vlasic Foods International Inc. (“VFI”). VFI and several of its affiliates (collectively, “Vlasic”) commenced cases under Chapter 11 of the Bankruptcy Code on January 29, 2001 in the United States Bankruptcy Court for the District of Delaware. Vlasic’s Second Amended Joint Plan of Distribution under Chapter 11 (the “Plan”) was confirmed by an order of the Bankruptcy Court dated November 16, 2001, and became effective on or about November 29, 2001. The Plan provides for the assignment of various causes of action allegedly belonging to the Vlasic estates, including claims against the company allegedly arising from the spinoff, to VFB L.L.C., a limited liability company (“VFB”) whose membership interests are to be distributed under the Plan to Vlasic’s general unsecured creditors.

On February 19, 2002, VFB commenced a lawsuit against the company and several of its subsidiaries in the United States District Court for the District of Delaware alleging, among other things, fraudulent conveyance, illegal dividends and breaches of fiduciary duty by Vlasic directors alleged to be under the company’s control. The lawsuit seeks to hold the company liable in an amount necessary to satisfy all unpaid claims against Vlasic (which VFB estimates in the amended complaint to be $200 million), plus unspecified exemplary and punitive damages. While the ultimate disposition of complex litigation is inherently difficult to assess, the company believes the action is without merit and is defending the case vigorously.

As previously reported, the company received an Examination Report from the Internal Revenue Service on December 23, 2002, which included a challenge to the treatment of gains and interest deductions claimed in the company’s fiscal 1995 federal income tax return, relating to transactions involving government securities. If the proposed adjustment were upheld, it would require the company to pay a net amount of approximately $100 million in taxes, accumulated interest to December 23, 2002, and penalties. Interest will continue to accrue until the matter is resolved. The company believes these transactions were properly reported on its federal income tax return in accordance with applicable tax laws and regulations in effect during the period involved and is challenging these adjustments vigorously. While the outcome of proceedings of this type cannot be predicted with certainty, the company believes that the ultimate outcome of this matter will not have a material impact on the consolidated financial condition or results of operation of the company.

As previously reported, in July 2003, the company began discussions with the Wisconsin Department of Natural Resources (“WDNR”) regarding certain air emissions from the company’s Milwaukee, Wisconsin flavoring and spice mix plant. These emissions may have exceeded limits established pursuant to the

Wisconsin Clean Air Act Program. As a result of these discussions, the company has (i) installed air emission control equipment at a cost of approximately $700 thousand, and (ii) submitted a payment of approximately $50 thousand to the WDNR for additional emission fees. As of August 1, 2004, in addition to the amounts described above, the company incurred costs of approximately $275 thousand related to the evaluation of this issue. While the WDNR may require additional expenditures, the company believes that the WDNR is unlikely to do so and that, in the event that the WDNR does impose such additional expenditures, they would not have a material impact on the consolidated financial condition or results of operation of the company.

As previously reported, on April 22, 2004, the company entered into an Administrative Consent Order (“ACO”) with the New Jersey Department of Environmental Protection (“NJDEP”) to settle alleged violations of the New Jersey Air Pollution Control Act related to certain air emissions from the company’s South Plainfield, New Jersey flavoring and spice mix plant. Under the ACO, the company agreed to (i) modify existing process equipment and to install additional air emission control equipment at a cost of approximately $1.5 million, (ii) pay a $300 thousand penalty, (iii) pay $100 thousand for a supplemental environmental project, and (iv) pay approximately $185 thousand in outstanding air emission fees. The company has complied with its obligations under the ACO, and the company expects the ACO to be officially terminated following an inspection by the NJDEP. The ACO does not constitute an admission of liability by the company.

As previously reported, on July 15, 2003, Pepperidge Farm, Incorporated, an indirect wholly-owned subsidiary of the company, made a submission to the United States Environmental Protection Agency (“EPA”) relating to its use and replacement of certain appliances containing ozone-depleting refrigerants. The submission was made pursuant to the terms of the Ozone-Depleting Substance Emission Reduction Bakery Partnership Agreement (the “EPA Agreement”) entered into by and between Pepperidge Farm and the EPA. Pepperidge Farm executed the EPA Agreement in April 2002 as part of a voluntary EPA-sponsored program relating to the reduction of ozone-depleting refrigerants used in the bakery industry. As a result of the EPA Agreement, as of August 1, 2004, Pepperidge Farm has incurred costs of approximately $4.75 million relating to the evaluation and replacement of certain of its refrigerant appliances. Of this amount, $4 million was incurred in fiscal 2003; the remainder was incurred in fiscal 2004. If the submission is approved by the EPA, in addition to the expenditures previously made, Pepperidge Farm will be required to pay a penalty in the amount of approximately $370 thousand. The company does not expect that the cost of complying with the EPA Agreement will have a material impact on the consolidated financial condition or results of operation of the company.

Douglas R. Conant served as President of Nabisco Foods Company (1995–2001) prior to joining Campbell in 2001.

John A. Doumani served as a Managing Director of Goodman Fielder Limited (1997–1999) prior to joining Campbell in 1999.

M. Carl Johnson, III served as Executive Vice President and President, New Meals Division, Kraft Foods, N.A. (1997–2001) and Member of Kraft Foods Operating Committee (1995–2001) prior to joining Campbell in 2001.

Larry S. McWilliams served as Senior Vice President and General Manager, U.S. Business (1998–2001) of the Minute Maid Company prior to joining Campbell in 2001.

Denise M. Morrison served as Executive Vice President and General Manager, Kraft Snacks division (2001–2003) of Kraft Foods, Inc., Executive Vice President and General Manager, Kraft Confection division (2001) of Kraft Foods, Inc., Senior Vice President, Nabisco DTS (2000) of Nabisco, Inc. and Senior Vice President, Nabisco Food and Sales Integrated Logistics (1998–2000) of Nabisco, Inc. prior to joining Campbell in 2003.

Nancy A. Reardon served as Executive Vice President of Human Resources, Comcast Cable Communications (2002–2004) and Executive Vice President — Human Resources/Corporate Affairs (1997–2002) of Borden Capital Management Partners prior to joining Campbell in 2004.

Mark A. Sarvary served as Chief Executive Officer, J. Crew Group (1999–2002) and President/General Manager, Frozen Foods (1997–1999) of Nestlé USA prior to joining Campbell in 2002.

Robert A. Schiffner served as Senior Vice President and Treasurer (1998–2001) of Nabisco Holdings Corporation prior to joining Campbell in 2001.

David R. White served as Vice President, Product Supply — Global Family Care Business (1999–2004) of The Procter & Gamble Company prior to joining Campbell in 2004.

Doreen A. Wright served as Executive Vice President and Chief Information Officer of Nabisco, Inc. (1999–2001) and Senior Vice President — Operations and Systems, of Prudential Investments (1995–1998) prior to joining Campbell in 2001.

The company has employed Ellen Oran Kaden and Anthony P. DiSilvestro in an executive or managerial capacity for at least five years.

There is no family relationship among any of the company’s executive officers or between any such officer and any director of Campbell. All of the executive officers were elected at the July 2004 meeting of the Board of Directors.

Item 5. Market for Registrant’s Capital Stock, Related Shareowner Matters and Issuer Purchases of Equity Securities

Market for Registrant’s Capital Stock

The company’s capital stock is listed and principally traded on the New York Stock Exchange. The company’s capital stock is also

listed on the Philadelphia Stock Exchange and the SWX Swiss Exchange. On September 21, 2004, there were 32,399 holders of record of the company’s capital stock. The market price and dividend information with respect to the company’s capital stock are set forth in Note 22 to the Consolidated Financial Statements. In September 2004, the company increased the quarterly dividend to be paid in the first quarter of fiscal 2005 to $0.17 per share. Future dividends will be dependent upon future earnings, financial requirements and other factors.

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

Results of Operations

Overview

•		A pre-tax restructuring charge of $32 million ($22 million after tax or $.05 per share) related to a reduction in workforce and the implementation of a distribution and logistics realignment in Australia. (See also the section entitled Restructuring Program and Note 5 to the Consolidated Financial Statements);
•		A pre-tax gain of $16 million ($10 million after tax or $.02 per share) from a settlement of a class action lawsuit involving ingredient suppliers; and
•		A pre-tax gain of $10 million ($6 million after tax or $.02 per share) from a sale of a manufacturing site in California.

The gains were recorded in Other expenses/(income).

Comparisons between 2004 and 2003 of earnings before the cumulative effect of accounting change were also impacted by an increase in sales, favorable currency translation, lower interest expense and a lower tax rate, partially offset by a decline in gross margin as a percentage of sales and higher administrative expenses. In addition, there were 52 weeks in 2004 and 53 weeks in 2003. The additional week contributed approximately $.02 per share to earnings.

In the first quarter 2004, the company acquired certain Australian chocolate biscuit brands for approximately $9 million. These brands are included in the Biscuits and Confectionery segment.

2003 In 2003, earnings before the cumulative effect of accounting change increased 19% to $626 million from $525 million and earnings per share increased 19% to $1.52 from $1.28 in 2002. Comparisons to 2002 were impacted by the adoption of Statement of Financial Accounting Standards (SFAS) No.142 “Goodwill and Other Intangible Assets,” as of the beginning of 2003. In accordance with the provisions of this standard, the company discontinued amortization of goodwill and indefinite-lived intangible assets on a prospective basis

from the date of adoption. Had such amortization been eliminated as of the beginning of 2002, net earnings for 2002 would have been $579 million, or $1.41 per share. The 2002 results included a restructuring charge and related costs of approximately $20 million pre-tax ($.03 per share) associated with the Australian manufacturing reconfiguration. Pre-tax charges of $19 million were classified as Cost of products sold and $1 million were classified as a Restructuring charge. The increase in earnings before the cumulative effect of accounting change in 2003 was primarily related to higher sales during the year, lower interest expense, and a lower effective tax rate compared to 2002, partially offset by higher administrative expenses and higher pension expense. The additional week contributed approximately $.02 per share to earnings in 2003.

In connection with the adoption of SFAS No.142, the company recognized a non-cash charge of $31 million (net of a $17 million tax benefit), or $.08 per share, in the first quarter of 2003 as a cumulative effect of accounting change. This charge related to impaired goodwill associated with the Stockpot business, a food service business acquired in August 1998. See also Note 3 to the Consolidated Financial Statements.

Although SFAS No.142 precludes restatement of prior period results, the 2002 segment operating earnings have been adjusted to reflect the pro forma impact of amortization eliminated under the standard.

During the first quarter ended October 27, 2002, the company acquired two businesses for cash consideration of approximately $170 million and assumed debt of approximately $20 million. The company acquired Snack Foods Limited, a leader in the Australian salty snack category, and Erin Foods, the number two dry soup manufacturer in Ireland. Snack Foods Limited is included in the Biscuits and Confectionery segment. Erin Foods is included in the International Soup and Sauces segment. The businesses have annual sales of approximately $160 million.

Sales Sales increased 6% in 2004 to $7.1 billion from $6.7 billion. The current fiscal year included 52 weeks compared to 53 weeks in 2003. The increase in sales was due to a 2% increase in volume and mix, a 2% increase due to higher selling prices, a 4% increase due to currency, offset by a 2% decrease due to one less week in the fiscal year.

Sales increased 9% in 2003 to $6.7 billion from $6.1 billion. The increase in sales was due to a 1% increase in volume and mix, a 2% increase from the additional week in 2003, a 1% increase due to higher selling prices, a 3% increase from currency, and a 2% increase from the acquisitions of Erin Foods and Snack Foods Limited.

An analysis of net sales by segment follows:

North America Soup and Away From Home sales increased 4% in 2004 versus 2003. The increase in sales was due to a 1% increase from volume and mix, a 1% decrease due to one less week in 2004, a 3% increase from higher net price realization, a 1% decrease due to higher revenue reductions from trade promotion and consumer coupon redemption programs, and a 2% increase from currency. In the U.S., ready-to-serve soup sales increased 8% as volume increased 6%. The ready-to-serve sales performance was driven by the strong performance on the new M’m! M’m! Good! To Go convenience platform including Campbell’s Select and Campbell’s Chunky soups in microwavable bowls, which were introduced this year, and Campbell’s Soup at Hand sippable soups. Condensed soup sales were down 2% on volume declines of 4%. Broth sales increased 6% reflecting volume growth of 5%. Away From Home sales grew slightly primarily due to strong sales of refrigerated soups. The Canadian business reported a sales increase versus prior year due to currency.

The 3% increase in sales from North America Soup and Away From Home in 2003 versus 2002 was due to a 1% increase due to the additional week in 2003, a 1% increase due to lower revenue reductions from trade promotion and consumer coupon redemption programs, and a 1% increase from currency. U.S. wet soup volume increased 2% over the prior year. Ready-to-serve volume increased 8% behind volume gains in Campbell’s Chunky and Campbell’s Select soups, and the launch of Soup at Hand sippable soups in convenient portable microwavable packaging. Swanson broth reported a volume increase of 13% due to successful promotional campaigns for cooking with broth. Condensed soup volume declined 6%. Canada reported growth in soup volume, due in part to the regional introduction of the new Campbell’s Gardennay soup in aseptic packages. Away From Home experienced increased soup volume, offset by declines in lower margin businesses.

North America Sauces and Beverages sales of $1.2 billion in 2004 were equal to 2003. Sales were impacted by a 1% increase from volume and mix, a 2% decrease due to one less week in 2004, and a 1% increase due to lower revenue reductions from trade promotion and consumer coupon redemption programs. Sales were favorably impacted by the growth of beverages, led by sales growth of V8 vegetable juice. Sales of Pace Mexican sauces were equal to 2003. Prego pasta sauces experienced a decline in sales, attributable in part to weakness in the dry pasta category.

The 5% increase in sales from North America Sauces and Beverages in 2003 versus 2002 was due to a 2% increase in volume and mix, a 2% increase due to the additional week in 2003, a 1% increase from higher net price realization and a 1% increase due to lower revenue reductions from trade promotion and consumer coupon redemption programs, offset by a 1% decline due to currency. The sales increase was driven by strong gains in Pace Mexican sauces, Prego brand products, V8 vegetable juices, Campbell’s tomato juice, Latin America, and the introduction of V8 Splash Smoothies. The introduction of Prego Hearty Meat sauces and Pace Mexican Creations sauces contributed to the sales growth. These gains were partially offset by declines in Franco-American canned pasta and gravies.

Biscuits and Confectionery reported a 12% increase in sales in 2004 due to a 4% increase from volume and mix, a 2% decrease due to one less week in 2004, a 2% increase from higher net price realization, a decrease of 1% due to higher revenue reductions from trade promotion and consumer coupon redemption programs, a 2% increase from the acquisition of Snack Foods Limited in Australia, and a 7% increase from currency. The favorable currency impact was attributable primarily to the strengthening of the Australian dollar. Pepperidge Farm contributed to the sales increase as a result of growth in Goldfish crackers and fresh bread. Arnott’s reported a sales increase driven by innovation on the Tim Tam, Shapes and Jatz products and new product offerings in the Snack Right and Salada brands. Godiva Chocolatier’s worldwide sales increased due to improving same store sales trends in North America and increased sales in duty free stores.

Sales from Biscuits and Confectionery increased 18% in 2003 due to a 1% increase in volume and mix, a 2% increase due to the additional week in 2003, a 4% increase from higher net price realization, an 8% increase from the acquisition of Snack Foods Limited in Australia, and a 4% increase from currency, offset by a 1% increase in revenue reductions from trade promotion and consumer coupon redemption programs. The favorable currency impact principally reflected the strengthening of the Australian dollar. Pepperidge Farm reported sales increases in cookies,

crackers, and fresh bread. Arnott’s contributed to the sales increase with growth in the chocolate segment and new products introduced in the year, particularly Snack Right fruit-based low fat biscuits. Godiva Chocolatier’s worldwide sales increased due to growth in Asia, partially offset by continued weakness in same store sales in North America.

International Soup and Sauces reported an increase in sales of 12% in 2004. Improvements in volume and mix added 2% growth offset by a decline of 2% due to one less week in 2004. The favorable impact of currency accounted for a 12% increase. The increase in volume and mix was driven primarily by sales gains in France, Australia, Belgium, and Asia, partially offset by sales declines in the United Kingdom and Germany. In Australia, soup had strong sales and volume growth driven by Campbell’s Country Ladle and Chunky soups.

International Soup and Sauces reported a 14% increase in sales in 2003 due to a 12% increase from currency and a 2% increase from the acquisition of Erin Foods in Ireland. Volume and mix declined 2% offset by a 2% increase due to the additional week in 2003. Strong performance of dry soups in Europe was offset by weakness in the wet soup and sauces businesses in the United Kingdom, France, and Germany. The United Kingdom performance reflected declines in Homepride sauces and Campbell’s soups. Sales in France declined due primarily to aggressive competitive activity. In Germany, a significant portion of the private-label soup business is being discontinued. The Asia Pacific region reported sales growth.

Gross Margin Gross margin, defined as Net sales less Cost of products sold, increased by $49 million in 2004. As a percent of sales, gross margin was 41.1% in 2004, 43.0% in 2003 and 43.9% in 2002. The percentage decrease in 2004 was due to costs associated with quality and packaging improvements (approximately 1 percentage point), mix (approximately 0.7 percentage points), higher pension expense and the impact of acquisitions (approximately 0.3 percentage points), and the impact of inflation and other factors (approximately 2.7 percentage points), partially offset by higher selling prices (approximately 0.9 percentage points) and productivity improvements (approximately 1.9 percentage points). The percentage decrease in 2003 was due to the lower margin structure of acquisitions (approximately 0.5 percentage points), costs associated with transition and startup of the new Pepperidge Farm bakery and with the discontinuance of certain co-packing contracts (approximately 0.3 percentage points), the net impact of mix (approximately 0.3 percentage points) and inflation/quality improvements (approximately 2.7 percentage points), partially offset by the benefits of lower costs related to the Australian manufacturing reconfiguration (approximately 0.3 percentage

points), pricing (approximately 0.7 percentage points) and productivity gains (approximately 1.9 percentage points).

Marketing and Selling Expenses Marketing and selling expenses as a percent of sales were 16.2% in 2004, 17.1% in 2003 and 17.5% in 2002. Marketing and selling expenses increased 1% in 2004. The increase was driven by currency, partially offset by reductions in marketing expenses related to consumer promotion activity and lower media production costs. In 2003, Marketing and selling expenses increased 7% from 2002. The increase was driven by currency and acquisitions (3 percentage points), increased advertising, primarily for V8 Splash Smoothies, V8 juices, and Pace Mexican sauces (3 percentage points) and incremental selling expense due to shelving initiatives and systems upgrades.

Administrative Expenses Administrative expenses as a percent of sales were 7.6% in 2004 and 2003. Administrative expenses increased by 7% in 2004 from 2003. Currency accounted for approximately 4 percentage points of the increase with the balance due to general inflationary increases and costs associated with litigation. In 2003, Administrative expenses increased to 7.6% of Net sales from 7.4% in 2002. Administrative expenses increased by 12% from 2002 to 2003. Currency and acquisitions accounted for approximately 5 percentage points of the increase. The remaining increase was driven by a number of items, including costs associated with litigation, investments in information technology, and an increase in bad debt expense.

Research and Development Expenses Research and development expenses increased $5 million or 6% in 2004 from 2003 primarily due to currency which accounted for approximately 4 percentage points of the increase. Research and development expenses increased $9 million or 11% in 2003 from 2002 due to costs associated with quality improvement initiatives and new product development costs (approximately 8 percentage points) and the impact of currency and acquisitions (approximately 3 percentage points).

Other Expenses/(Income) Other income in 2004 of $13 million included a $16 million gain from the company’s share of a class action settlement involving ingredient suppliers, a $10 million gain on a sale of a manufacturing site, other net income of $4 million, partially offset by a $10 million adjustment to the carrying value of long-term investments in affordable housing partnerships and $7 million in expense from currency hedging related to the financing of international activities.

Other expenses of $28 million in 2003 included a $36 million adjustment to the carrying value of long-term investments in affordable housing partnerships, $15 million in expenses from currency hedging related to the financing of international

activities, partially offset by $16 million of gains on the sales of land and buildings, a $5 million one-time payment for the transfer of the Godiva Chocolatier ice cream license, and other net income of $2 million. The sales of land and buildings relate to the closure of a dry soup plant in Ireland ($8 million) and an Arnott’s plant in Melbourne, Australia ($8 million).

Other expenses of $99 million in 2002 included $78 million in amortization expense, $16 million in adjustments to the carrying value of long-term investments in affordable housing partnerships, $9 million in expenses from currency hedging related to the financing of international activities, partially offset by other net income of $4 million. Approximately $70 million of amortization was eliminated from 2002 results on a pro forma basis upon adoption of SFAS No. 142 in 2003. See also Note 6 to the Consolidated Financial Statements.

In 2003, costs related to stock-based incentive compensation and deferred compensation were reclassified from Other expenses to reflect the costs by function. The prior period was adjusted to conform to the current presentation.

Operating Earnings Segment operating earnings declined 3% in 2004 from 2003. The restructuring charges accounted for 2% of the decline.

As previously noted, operating segment results for 2002 have been restated to reflect the pro forma impact of SFAS No. 142. Consequently, amortization expense of $70 million was eliminated from 2002 operating earnings. Segment operating earnings, on a comparable basis, increased 5% in 2003 from 2002.

An analysis of operating earnings by segment follows:

1

Contributions to earnings by segment include the effect of a pre-tax fourth quarter 2004 restructuring charge of $32 million as follows: North America Soup and Away From Home — $7 million, North America Sauces and Beverages — $3 million, Biscuits and Confectionery — $12 million, International Soup and Sauces — $9 million and Corporate — $1 million.

Earnings from North America Soup and Away From Home declined 5% in 2004 from 2003. The results included restructuring charges of $7 million, which negatively impacted earnings by 1 percentage point. Earnings were negatively impacted by costs associated with quality improvements, higher inflation and trade promotion, and product mix. These factors were partially offset by an increase in sales and productivity improvements.

Earnings from North America Soup and Away From Home in 2003 were even with 2002 earnings. The increase in sales was offset by a decline in gross margin due to quality improvements, packaging improvements and product mix. In addition, costs increased due to shelving initiatives and system upgrades.

Earnings from North America Sauces and Beverages decreased 7% in 2004 from 2003. The results included restructuring charges of $3 million, which negatively impacted earnings by 1 percentage point. The earnings decline also reflected higher costs associated with new product introductions and inflation, partially offset by productivity improvements and lower marketing expenses.

Earnings from North America Sauces and Beverages increased 12% in 2003 from 2002 primarily due to the increase in sales of Pace, V8 Splash and Prego brand products, and an improvement in gross margin.

Earnings from Biscuits and Confectionery increased 2% in 2004 versus 2003. The results included restructuring charges of $12 million, which negatively impacted earnings by 6 percentage points. Currency added 8 percentage points of growth. Earnings growth at Pepperidge Farm, Arnott’s, and Godiva was offset by a decline in the Australian Snackfoods business.

Earnings from Biscuits and Confectionery increased 14% in 2003 compared to 2002. Favorable currency translation accounted for approximately 4 percentage points of the increase. Operating earnings in 2003 were impacted by approximately $10 million of transitional expenses related to the closure of the Pepperidge Farm bakery in Norwalk, Connecticut and startup of the new bakery in Bloomfield, Connecticut. Earnings in 2003 benefited from a $5 million payment to Godiva Chocolatier for the transfer of an ice cream license. Earnings from Arnott’s were impacted by an $8 million gain on sale of the closed facility in Melbourne. This gain was completely offset by start-up costs related to the Australian manufacturing reconfiguration and costs related to the integration of the Snack Foods acquisition. Operating earnings in 2002 included $20 million of costs associated with the Australian manufacturing reconfiguration compared to $1 million in 2003.

Earnings from International Soup and Sauces increased 5% in 2004. Favorable currency translation accounted for approximately 11 percentage points of the increase, partially offset by restructuring charges of $9 million (approximately 7 percentage points).

The 7% increase in 2003 earnings from International Soup and Sauces was primarily due to favorable currency translation, partially offset by $8 million of costs associated with the discontinuance in 2004 of certain co-packing contracts in Europe. Earnings during 2003 were impacted by costs associated with the closure of a dry soup plant in Ireland, offset by a gain on the sale of the closed facility.

Corporate expenses decreased in 2004 primarily due to lower adjustments related to the carrying value of long-term investments in affordable housing partnerships, the gain from the company’s share of a class action lawsuit involving ingredient suppliers, the gain on sale of a manufacturing site in California, lower expenses from currency hedging related to the financing of international investments, partially offset by increases in costs associated with ongoing litigation.

Corporate expenses increased in 2003 primarily due to adjustments recorded to the carrying value of long-term investments in affordable housing partnerships and legal expenses related to ongoing litigation, partially offset by lower stock-related compensation costs.

Nonoperating Items Interest expense declined 6% in 2004 from 2003 primarily due to lower levels of debt.

Interest expense declined 2% in 2003 from 2002 due to lower levels of debt and lower interest rates.

The effective tax rate was 31.7% in 2004, 32.2% in 2003 and 34.2% in 2002, as reported. The reduction in the rate from 2003 to 2004 reflects a lower U.S. tax liability which resulted from an increase in charitable contribution deductions and research and development credits, and the favorable resolution of certain income tax audits. The comparable tax rate for 2002 would be 33.3% based on a pro forma adjustment for the adoption of SFAS No. 142. The reduction from 2002 to 2003 reflects favorable resolution of certain state income tax audits and a reduction of foreign tax expense.

Restructuring Program A restructuring charge of $32 million ($22 million after tax) was recorded in the fourth quarter 2004 for severance and employee benefit costs associated with a worldwide reduction in workforce and with the implementation of a distribution and logistics realignment in Australia. These programs are part of cost savings initiatives designed to improve the company’s operating margins and asset utilization. Approximately 400 positions were eliminated under the reduction in workforce program resulting in a restructuring charge of $23 million. The reductions represent the elimination of layers of management, elimination of redundant positions due to the realignment of operations in North America, and reorganization of the U.S. sales force. Annual pre-tax savings from the reduction are expected to be approximately $40 million beginning in 2005.

The distribution and logistics realignment in Australia represents converting a direct store delivery system to a central warehouse system. A restructuring charge of $9 million was recorded for this program. As a result of this program, over 200 positions will be eliminated due to the outsourcing of the infrastructure. Annual pre-tax benefits are expected to be approximately $10-$15 million beginning in 2008. The cash outflows related to these programs are not expected to have a material adverse effect on the company’s liquidity.

A restructuring charge of $10 million ($7 million after tax) was recorded in the fourth quarter 2001 for severance costs associated with the reconfiguration of the manufacturing network of Arnott’s in Australia. In the second quarter of 2002, the company recorded an additional $1 million restructuring charge related to planned severance actions. Related costs of approximately $1 million and $19 million ($13 million after tax) were recorded in 2003 and 2002, respectively, as Cost of products sold, primarily representing accelerated depreciation on assets to be taken out of service. This program was designed to drive greater manufacturing efficiency resulting from the closure of the Melbourne plant. Approximately 550 jobs were eliminated due to the plant closure. In 2003, the company incurred start-up costs associated with the transition of production. These costs were substantially offset by a gain on the sale of the facility.

See Note 5 to the Consolidated Financial Statements for further discussion of these programs.

Liquidity and Capital Resources

Net cash flows from operating activities provided $744 million in 2004, compared to $873 million in 2003. The reduction was due to higher working capital requirements and an increase in pension fund contributions, partially offset by an increase in earnings. Net cash flows from operating activities provided $873 million in 2003, compared to $1.0 billion in 2002. The 2002 cash flow benefited from a significant reduction in working capital to a low level, which was maintained in 2003. Over the last three years, operating cash flows totaled approximately $3  billion. This cash generating capability provides the company with substantial financial flexibility in meeting its operating and investing needs.

Capital expenditures were $288 million in 2004, $283 million in 2003 and $269 million in 2002. Capital expenditures are projected to be approximately $380 million in 2005. The increase in 2004 was primarily driven by currency. Capital expenditures in 2004 included projects to increase manufacturing capacity for soup, beverages and Goldfish Sandwich Snackers crackers, as well as investments in U.S. sales systems. The increase in 2003 was driven by the Pepperidge Farm bakery and soup quality projects, partially offset by reduced spending in Australia on the manufacturing reconfiguration that was substantially completed in 2002.

Businesses acquired, as presented in the Statements of Cash Flows, primarily represents the acquisition of certain brands from George Weston Foods Limited in Australia in the first quarter of 2004 and the acquisitions of Snack Foods Limited and Erin Foods in the first quarter of 2003. The purchase price adjustment in 2002 related to the European dry soup and sauces acquisition, completed in 2001.

In September 2003, the company issued $300 million ten-year 4.875% fixed-rate notes. The proceeds were used to repay commercial paper borrowings and for other general corporate purposes. While planning for the issuance of these notes, the company entered into treasury lock agreements with a notional value of $100 million that effectively fixed a portion of the interest rate on the debt prior to issuance of the notes. These agreements were settled at a minimal gain upon issuance of the notes, which will be amortized over the life of the notes. In connection with this issuance, the company entered into ten-year interest rate swaps that converted $200 million of the fixed-rate debt to variable.

In September 2003, the company also entered into $100 million five-year interest rate swaps that converted a portion of the 5.875% fixed-rate notes due October 2008 to variable.

In April 2004, the company entered into a $50 million interest rate swap that converted a portion of the 6.9% fixed-rate notes due October 2006 to variable.

In May 2004, the company entered into a $50 million interest rate swap that converted a portion of the 6.9% fixed-rate notes due October 2006 to variable.

Long-term borrowings in 2003 included the issuance of $400 million of ten-year 5% fixed-rate notes due December 2012. The proceeds were used to retire $300 million 6.15% notes and to repay commercial paper borrowings. In connection with this issuance, the company entered into ten-year interest rate swaps that converted $300 million of the fixed-rate debt to variable.

In November 2002, the company terminated interest rate swap contracts with a notional value of $250 million that converted fixed-rate debt (6.75% notes due 2011) to variable and received $37 million. Of this amount, $3 million represented accrued interest earned on the swap prior to the termination date. The remainder will be amortized over the remaining life of the notes as a reduction to interest expense.

Long-term borrowings in 2002 were the result of a series of debt issuances throughout the year. In September 2001, the company issued $300 million seven-year 5.875% fixed-rate notes. The proceeds were used to repay short-term borrowings. While planning for the issuance of these notes, the company entered into interest rate swaps with a notional value of approximately $138 million that effectively fixed a portion of the interest rate

on the debt prior to issuance. These contracts were settled at a loss of approximately $4 million upon issuance of the notes. This loss is being amortized over the life of the notes. In conjunction with the issuance of these notes, the company also entered into a $75 million seven-year interest rate swap that converted fixed-rate debt to variable.

In October 2001, the company issued $300 million two-year variable-rate notes. The proceeds were also used to repay short-term borrowings. In connection with this issuance, the company entered into a $300 million two-year interest rate swap that converted the variable-rate debt to fixed.

In November 2001, the company redeemed $100 million 5.625% fixed-rate notes due in September 2003. The notes were callable at par. This redemption was financed with lower rate commercial paper.

In December 2001, the company issued an additional $200 million of its existing 6.75% fixed-rate notes due February 2011, originally issued in February 2001. These additional notes were priced at a premium to reflect market conditions. The proceeds were used to repay short-term borrowings.

In January 2002, the company repaid $300 million of variable-rate notes due December 2003. The notes were repaid with lower cost short-term borrowings.

In March 2002, the company issued $300 million five-year 5.50% fixed-rate notes. The proceeds were used to repay $228 million variable-rate notes due in December 2003 and short-term borrowings. In connection with this issuance, the company entered into a five-year interest rate swap that converted $100 million of the fixed-rate debt to variable.

In June 2002, the company filed a $1 billion shelf registration statement with the Securities and Exchange Commission to use for future offerings of debt securities. Under the registration statement, the company may issue debt securities from time to time, depending on market conditions. The company intends to use the proceeds to repay short-term debt, to reduce or retire other indebtedness or for other general corporate purposes. As of August 1, 2004, the company had $300 million available for issuance under this registration statement.

Dividend payments were $259 million in 2004 and 2003. Annual dividends declared in 2004, 2003 and 2002 totaled $0.63 per share. The 2004 fourth quarter rate was $0.1575 per share.

The company repurchased 2 million shares at a cost of $56 million during 2004, compared to 1 million shares at a cost of $24 million during 2003 and 200,000 shares at a cost of $5 million in 2002. The company expects to repurchase sufficient shares over time to offset the impact of dilution from shares issued under the company’s stock compensation plans. See “Market For

Registrant’s Capital Stock, Related Shareowner Matters and Issuer Purchases of Equity Securities” for more information.

At August 1, 2004, the company had $810 million of notes payable due within one year and $34 million of standby letters of credit issued on behalf of the company. The company maintained $1.8 billion of committed revolving credit facilities, which were unused at August 1, 2004, except for $34 million of standby letters of credit. Both of these facilities were replaced in September 2004. As part of the replacement, the company entered into a $500 million committed 364-day revolving credit facility, which replaced the existing $900 million 364-day facility that matured in September 2004. The 364-day revolving credit facility contains a one-year term-out feature. The company also entered into a $1 billion revolving credit facility that matures in September 2009, which replaced the existing $900 million revolving credit facility that was scheduled to mature in September 2006. These agreements support the company’s commercial paper program.

The company is in compliance with the covenants contained in its revolving credit facilities and debt securities.

The company believes that foreseeable liquidity, including the resolution of the contingencies described in Note 20 to the Consolidated Financial Statements, and capital resource requirements are expected to be met through anticipated cash flows from operations, management of working capital, long-term borrowings under its shelf registration, and short-term borrowings, including commercial paper. The company believes that its sources of financing are adequate to meet its future liquidity and capital resource requirements. The cost and terms of any future financing arrangements depend on the market conditions and the company’s financial position at that time.

Contractual Obligations and Other Commitments

Contractual Obligations The following table summarizes the company’s obligations and commitments to make future payments under certain contractual obligations. For additional information on debt, see Note 16 to the Consolidated Financial Statements. Operating leases are primarily entered into for warehouse and office facilities, retail store space, and certain equipment. Purchase commitments represent purchase orders and long-term purchase arrangements related to the procurement of ingredients, supplies, machinery, equipment and services. These commitments are not expected to have a material impact on liquidity. Other long-term liabilities primarily represent payments related to deferred compensation obligations and postemployment benefits. For additional information on other long-term liabilities, see Note 17 to the Consolidated Financial Statements.

1		Includes capital lease obligations totaling $9 million, unamortized net premium on debt issuances, unamortized gain on an interest rate swap and a gain on fair-value interest rate swaps. For additional information on debt obligations, see Note 16 to the Consolidated Financial Statements.
2		Interest payments for notes payable, long-term debt and derivative instruments are calculated as follows. For notes payable, interest is based on par values and coupon rates of contractually obligated issuances at fiscal year end. For long-term debt, interest is based on principal amounts and fixed coupon rates at fiscal year end. Interest on fixed-rate derivative instruments is based on notional amounts and fixed interest rates contractually obligated at fiscal year end. Interest on variable-rate derivative instruments is based on notional amounts contractually obligated at fiscal year end and weighted-average rates estimated over the instrument’s life using forward interest rates plus applicable spreads.
3		Represents other long-term liabilities, excluding deferred taxes and minority interest. This table does not include postretirement medical benefits or payments related to pension plans. The company made a $35 million voluntary contribution to a U.S. plan subsequent to August 1, 2004.

Off-Balance Sheet Arrangements and Other Commitments The company guarantees approximately 1,300 bank loans to Pepperidge Farm independent sales distributors by third party financial institutions used to purchase distribution routes. The maximum potential amount of the future payments the company could be required to make under the guarantees is approximately $95 million. The company’s guarantees are indirectly secured by the distribution routes. The company does not believe that it is probable that it will be required to make guarantee payments as a result of defaults on the bank loans guaranteed. See also Note 20 to the Consolidated Financial Statements for information on off-balance sheet arrangements.

Inflation

Inflation during recent years has not had a significant effect on the company. The company mitigates the effects of inflation by pricing and aggressively pursuing cost productivity initiatives, including global procurement strategies, and making capital investments that improve the efficiency of operations.

Market Risk Sensitivity

The principal market risks to which the company is exposed are changes in commodity prices, interest rates and foreign currency exchange rates. In addition, the company is exposed to equity price changes related to certain employee compensation

obligations. The company manages its exposure to changes in interest rates by optimizing the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps in order to maintain its variable-to-total debt ratio within targeted guidelines. International operations, which accounted for approximately 36% of 2004 net sales, are concentrated principally in Australia, Canada, France, Germany and the United Kingdom. The company manages its foreign currency exposures by borrowing in various foreign currencies and utilizing cross-currency swaps and forward contracts. Swaps and forward contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The company does not enter into contracts for speculative purposes and does not use leveraged instruments.

The company principally uses a combination of purchase orders and various short- and long-term supply arrangements in connection with the purchase of raw materials, including certain commodities and agricultural products. The company may also

enter into commodity futures contracts, as considered appropriate, to reduce the volatility of price fluctuations for commodities such as corn, cocoa, soybean meal, soybean oil and wheat. At August 1, 2004 and August 3, 2003, the notional values and unrealized gains or losses on commodity futures contracts held by the company were not material.

The information below summarizes the company’s market risks associated with debt obligations and other significant financial instruments as of August 1, 2004. Fair values included herein have been determined based on quoted market prices. The information presented below should be read in conjunction with Notes 16 and 18 to the Consolidated Financial Statements.

The table below presents principal cash flows and related interest rates by fiscal year of maturity for debt obligations. Variable interest rates disclosed represent the weighted-average rates of the portfolio at the period end. Notional amounts and related interest rates of interest rate swaps are presented by fiscal year of maturity. For the swaps, variable rates are the weighted-average forward rates for the term of each contract.

The company is exposed to foreign exchange risk related to its international operations, including non-functional currency intercompany debt and net investments in subsidiaries.

The table below summarizes the cross-currency swaps outstanding as of August 1, 2004, which hedge such exposures. The notional amount of each currency and the related weighted-average forward interest rate are presented in the Cross-Currency Swaps table.

Cross-Currency Swaps

The cross-currency swap contracts outstanding at August 3, 2003 represented two pay fixed SEK/receive fixed USD swaps with notional values of $31 million and $47 million, a pay fixed EUR/receive fixed USD swap with a notional value of $200 million, and a pay fixed GBP/receive fixed USD swap with a notional value of $200 million. The aggregate fair value of these swap contracts was $(97) million as of August 3, 2003.

The company is also exposed to foreign exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries, including subsidiary debt. The company utilizes foreign exchange forward purchase and sale contracts to hedge these exposures. The following table summarizes the foreign exchange forward contracts outstanding and the related weighted-average contract exchange rates as of August 1, 2004.

Forward Exchange Contracts

The company had an additional $8 million in a number of smaller contracts to purchase or sell various other currencies, such as the Australian dollar, British pound, Canadian dollar, euro, New Zealand dollar and Swiss franc as of August 1, 2004. The aggregate fair value of all contracts was $2 million as of August 1, 2004. Total forward exchange contracts outstanding as of August 3, 2003 were $750 million with a fair value of $4 million.

The company had swap contracts outstanding as of August 1, 2004, which hedge a portion of exposures relating to certain employee compensation liabilities linked to the total return of the Standard & Poor’s 500 Index or to the total return of the company’s capital stock. Under these contracts, the company pays variable interest rates and receives from the counterparty either the Standard & Poor’s 500 Index total return or the total return on company capital stock. The notional value of the contracts that are linked to the return on the Standard & Poor’s 500 Index was $21 million at August 1, 2004 and $10 million at August 3, 2003. The average forward interest rate applicable to the contract, which expires in 2005, was 1.81% at August 1, 2004. The notional value of the contract that is linked to the total return on company capital stock was $13 million at August 1, 2004 and $11 million at August 3, 2003. The average forward interest rate applicable to this contract, which expires in 2005, was 2.22% at August 1, 2004. The fair value of these contracts was a $1 million gain at both August 1, 2004 and August 3, 2003.

The company’s utilization of financial instruments in managing market risk exposures described above is consistent with the prior year. Changes in the portfolio of financial instruments are a function of the results of operations, debt repayment and debt issuances, market effects on debt and foreign currency, and the company’s acquisition and divestiture activities.

Significant Accounting Estimates

The consolidated financial statements of the company are prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. See Note 1 to the Consolidated Financial Statements for a discussion of significant accounting policies. The following areas all require the use of subjective or complex judgments, estimates and assumptions:

Trade and consumer promotion program The company offers various sales incentive programs to customers and consumers, such as cooperative advertising programs, feature price discounts, in-store display incentives and coupons. The recognition of the costs for these programs, which are classified as a reduction of revenue, involves use of judgment related to performance and redemption estimates. Estimates are made based on historical experience and other factors. Actual expenses may differ if the level of redemption rates and performance vary from estimates.

Valuation of long-lived assets Long-lived assets, including fixed assets and intangibles, are reviewed for impairment as events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable. Discounted cash flow analyses are used to assess nonamortizable intangible asset impairment, while undiscounted cash flow analyses are used to assess other long-lived asset impairment. The estimates of future cash flows involve considerable management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance, and economic conditions.

Pension and postretirement medical benefits The company provides certain pension and postretirement benefits to employees and retirees. Determining the cost associated with such benefits is dependent on various actuarial assumptions, including discount rates, expected return on plan assets, compensation increases, turnover rates and health care trend rates. Independent actuaries, in accordance with accounting principles generally accepted in the United States, perform the required calculations to determine expense. Actual results that differ from the actuarial assumptions are generally accumulated and amortized over future periods.

The discount rate is established as of the company’s fiscal year-end measurement date based on high-quality, long-term debt securities. The estimated return on plan assets is a long-term assumption based upon historical experience and expected future performance, considering the company’s current and projected

investment mix. Within any given fiscal period, significant differences may arise between the actual return and the estimated long-term return on plan assets. The value of plan assets, used in the calculation of pension expense, is determined on a calculated method that recognizes 20% of the difference between the actual fair value of assets and the expected calculated method. Gains and losses resulting from differences between actual experience and the assumptions are determined at each measurement date. If the net gain or loss exceeds 10% of the greater of plan assets or liabilities, a portion is amortized into earnings in the following year.

When the fair value of pension plan assets is less than the accumulated benefit obligation, accounting principles generally accepted in the United States require a company to recognize an additional minimal liability. This adjustment is recorded in Other comprehensive income within Shareowners’ Equity. As of August 1, 2004 and August 3, 2003, Shareowners’ Equity includes a minimum liability, net of tax, of $196 million and $210 million, respectively.

Net periodic pension and postretirement medical expense was $65 million in 2004, $43 million in 2003 and $8 million in 2002. The increase in 2004 was primarily due to a lower discount rate and a reduction in the expected return on assets, partially offset by the returns associated with a $50 million voluntary contribution to a U.S. plan. Significant weighted-average assumptions as of the end of the year are as follows:

Estimated sensitivities to the net periodic pension cost are as follows: a 50 basis point reduction in the discount rate would increase expense by approximately $10 million; a 50 basis point reduction in the estimated return on assets assumption would increase expense by approximately $9 million. A one percentage point change in assumed health care costs would increase service and interest cost by approximately $2 million.

Although there were no mandatory funding requirements to the U.S. plans in 2004, the company made a $50 million contribution to a U.S. plan based on expected future funding requirements. Contributions to international plans were $15 million. In 2003, there were no contributions to the U.S. plans and contributions to international plans were $19 million. Subsequent to August 1, 2004, the company made a $35 million voluntary contribution to a U.S. plan in anticipation of future funding requirements.

See also Note 9 to the Consolidated Financial Statements for additional information on pension and postretirement medical expenses.

Income taxes The effective tax rate reflects management’s estimate of the ultimate outcome of various tax audits and issues. In addition, valuation allowances are established for deferred tax assets where the amount of expected future taxable income from operations does not support the realization of the asset.

Recently Issued Accounting Pronouncements

The company adopted SFAS No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets” on July 29, 2002. This standard was effective for the company on a prospective basis. This standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This standard supersedes SFAS No.121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No.30 “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for the disposal of a segment of a business. Long-lived assets are tested for impairment if certain triggers occur. The adoption of this standard did not have a material impact on the financial statements.

In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.146 “Accounting for Exit or Disposal Activities.” The provisions of this standard apply to disposal activities initiated after December 31, 2002. The adoption of this standard did not have a material impact on the financial statements.

In December 2002, the FASB issued SFAS No.148 “Accounting for Stock-Based Compensation — Transition and Disclosure.” This standard amends the transition and disclosure requirements of SFAS No.123 “Accounting for Stock-Based Compensation.” The required disclosures are included in Note 1 to the Consolidated Financial Statements. As permitted by SFAS No.148, the company accounts for stock option grants and restricted stock awards in accordance with APB Opinion No.25 “Accounting for Stock Issued to Employees” and related Interpretations. Accordingly, no compensation expense has been recognized for stock options since all options granted had an exercise price equal to the market value of the underlying stock on the grant date.

In November 2002, FASB Interpretation No.45 (FIN 45) “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” was issued. FIN 45 clarifies the requirements relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after

December 31, 2002. The disclosure provisions are included in Note 20 to the Consolidated Financial Statements.

In January 2003, the FASB issued FIN 46 “Consolidation of Variable Interest Entities, an Interpretation of ARB 51.” This Interpretation addresses consolidation by business enterprises of certain variable interest entities (VIEs). The Interpretation as amended is effective immediately for all enterprises with interests in VIEs created after January 31, 2003. In December 2003, the FASB issued a revised version of FIN 46 (FIN 46R), which clarified the provisions of FIN 46 by addressing implementation issues. FIN 46R must be applied to all entities subject to the Interpretation as of the first interim quarter ending after March 15, 2004. The company has investments of approximately $150 million as of August 1, 2004 consisting of limited partnership interests in affordable housing partnership funds. The company’s ownership ranges from approximately 12% to 19%. The company evaluated the nature of these investments, which were in existence before January 31, 2003, against the provisions of the guidance and determined that such investments do not need to be consolidated in the financial statements.

In May 2003, the FASB issued SFAS No.150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No.150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or “mezzanine” equity, by now requiring those instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS No.150 requires disclosure regarding the terms of those instruments and settlement alternatives. The guidance in SFAS No.150 is generally effective for all financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard did not impact the financial statements.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduced a prescription drug benefit under Medicare Part D and a federal subsidy to sponsors of retirement health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position (FSP) FAS 106-1, the company elected in January to defer recognizing the effects of the Act on accounting for postretirement health care plans until the FASB guidance was finalized.

In May 2004, the FASB issued FSP FAS 106-2, which provides accounting guidance to sponsors of postretirement health care plans that are impacted by the Act. The FSP is effective for interim or annual periods beginning after June 15, 2004. Although detailed regulations necessary to implement the Act have not yet been finalized, the company believes that certain

drug benefits offered under postretirement health care plans will qualify for the subsidy under Medicare Part D. The effects of the subsidy were factored into the 2004 annual year-end valuation. The reduction in the benefit obligation attributable to past service cost was approximately $32 million and has been reflected as an actuarial gain. The reduction in benefit cost for 2005 related to the Act is approximately $5 million.

Recent Developments

As part of the initiatives announced by the company on June 24, 2004, the company will implement a new SAP enterprise-resource planning system in North America. The project is planned for the next three years and is expected to cost approximately $125 million.

Earnings Outlook

On September 13, 2004, the company issued a press release announcing results for 2004 and commented on the outlook for earnings per share for 2005.

Cautionary Factors That May Affect Future Results

This Report contains “forward-looking” statements that reflect the company’s current expectations regarding future results of operations, economic performance, financial condition and achievements of the company. The company tries, wherever possible, to identify these forward-looking statements by using words such as “anticipate,” “believe,” “estimate,” “expect,” “will” and similar expressions. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements reflect the company’s current plans and expectations and are based on information currently available to it. They rely on a number of assumptions regarding future events and estimates which could be inaccurate and which are inherently subject to risks and uncertainties.

The company wishes to caution the reader that the following important factors and those important factors described elsewhere in the commentary, or in the Securities and Exchange Commission filings of the company, could affect the company’s actual results and could cause such results to vary materially from those expressed in any forward-looking statements made by, or on behalf of, the company:

•		the impact of strong competitive response to the company’s efforts to leverage its brand power with product innovation, promotional programs and new advertising, and of changes in consumer demand for the company’s products;
•		the risks in the marketplace associated with trade and consumer acceptance of product improvements, shelving initiatives, and new product introductions;

•		the company’s ability to achieve sales and earnings forecasts, which are based on assumptions about sales volume and product mix and the impact of marketing plans;
•		the company’s ability to realize projected cost savings and benefits, including those contemplated by restructuring programs and other cost-savings initiatives;
•		the company’s ability to successfully manage changes to its business processes, including selling, distribution, product capacity, information management systems and the integration of acquisitions;
•		the increased significance of certain of the company’s key trade customers;
•		the difficulty of predicting the pattern of inventory movements by the company’s trade customers and of predicting changes in the policies of its customers, such as changes in customer inventory levels, pricing and access to shelf space;
•		the impact of fluctuations in the supply and cost of raw materials;
•		the uncertainties of litigation described from time to time in the company’s Securities and Exchange Commission filings;
•		the impact of unforeseen economic changes in currency exchange rates, tax rates, interest rates, equity markets, inflation rates, recession and other external factors over which the company has no control; and
•		the impact of unforeseen business disruptions in one or more of the company’s markets due to political instability, civil disobedience, armed hostilities or other calamities.

This discussion of uncertainties is by no means exhaustive but is designed to highlight important factors that may impact the company’s outlook. The company disclaims any obligation or intent to update forward-looking statements made by the company in order to reflect new information, events or circumstances after the date they are made.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information presented in the section entitled “Management’s Discussion and Analysis of Results of Operations and Financial Condition — Market Risk Sensitivity” is incorporated herein by reference.

Notes to Consolidated Financial Statements

Basis of Presentation The consolidated financial statements include the accounts of the company and its majority-owned subsidiaries. Significant intercompany transactions are eliminated in consolidation. Certain amounts in prior year financial statements were reclassified to conform to the current presentation.

The company’s fiscal year ends on the Sunday nearest July 31. There were 52 weeks in 2004, 53 weeks in 2003 and 52 weeks in 2002.

Revenue Recognition Revenues are recognized when the earnings process is complete. This occurs when products are shipped in accordance with terms of agreements, title and risk of loss transfer to customers, collection is probable and pricing is fixed or determinable.

Beginning in 2002, the company adopted the consensus reached by the Financial Accounting Standards Board’s (FASB) Emerging Issues Task Force (EITF) on Issue No. 01-09 “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products.” Under this consensus, the EITF concluded that certain consumer and trade sales promotion expenses, such as coupon redemption costs, cooperative advertising programs, new product introduction fees, feature price discounts and in-store display incentives, should be classified as a reduction of sales rather than as marketing expenses.

Cash and Cash Equivalents All highly liquid debt instruments purchased with a maturity of three months or less are classified as cash equivalents.

Inventories Substantially all U.S. inventories are priced at the lower of cost or market, with cost determined by the last in, first out (LIFO) method. Other inventories are priced at the lower of average cost or market.

Plant Assets and Other Long-Lived Assets Plant assets are stated at historical cost. Alterations and major overhauls, which extend the lives or increase the capacity of plant assets, are capitalized. Ordinary repairs and maintenance are charged to operating costs. Depreciation provided in Costs and expenses is calculated using the straight-line method over the estimated useful lives of the assets. Buildings and machinery and equipment are depreciated over periods not exceeding 45 years and 15 years, respectively.

The company adopted Statement of Financial Accounting Standards (SFAS) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” on July 29, 2002. This standard was effective for the company on a prospective basis. This standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets such as property, plants, equipment and amortized intangibles. This standard supersedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No. 30 “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for the disposal of a segment of a business. Long-lived assets are tested for impairment if certain triggers occur. The adoption of this standard did not have a material impact on the financial statements.

Derivative Financial Instruments The company uses derivative financial instruments primarily for purposes of hedging exposures to fluctuations in interest rates, foreign currency exchange rates, commodities and equity-linked employee benefit obligations. All derivatives are recognized on the balance sheet at fair value. Changes in the fair value of derivatives are recorded in earnings or other comprehensive income, based on whether the instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. Gains or losses on derivative instruments reported in other comprehensive income are reclassified to earnings in the period in which earnings are affected by the underlying hedged item. The ineffective portion of all hedges is recognized in earnings in the current period. See Note 18 of the Notes to Consolidated Financial Statements for additional information.

Stock-Based Compensation In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation–Transition and Disclosure.” This standard amends the transition and disclosure requirements of SFAS No. 123 “Accounting for Stock-Based Compensation.” As permitted by SFAS No. 148, the company accounts for stock option grants and restricted stock awards in accordance with APB Opinion No. 25 “Accounting for Stock Issued to Employees” and related Interpretations. Accordingly, no compensation expense has been recognized for stock options since all options granted had an exercise price equal to the market value of the underlying stock on the grant date. Restricted stock awards are expensed. See also Note 19 of the Notes to Consolidated Financial Statements. The following table illustrates the effect on net earnings and earnings per share if the company had applied

the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

1

Represents restricted stock expense.

The weighted average fair value of options granted in 2004, 2003 and 2002 was estimated as $5.73, $5.91 and $8.09, respectively. The fair value of each option grant at grant date is estimated using the Black-Scholes option pricing model. The following weighted average assumptions were used for grants in 2004, 2003 and 2002: