UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended Feb. 28, 2005

or

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

Commission file number 001-16167

MONSANTO COMPANY

(314) 694-1000
(Registrant’s telephone number, including area code)

     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 þ No o

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 268,177,416 shares of Common Stock, $0.01 par value, outstanding as of April 4, 2005.

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The Statement of Consolidated Operations of Monsanto Company and subsidiaries for the three months and six months ended Feb. 28, 2005, and Feb. 29, 2004, the Condensed Statement of Consolidated Financial Position as of Feb. 28, 2005, and Aug. 31, 2004, the Statement of Consolidated Cash Flows for the six months ended Feb. 28, 2005, and Feb. 29, 2004, and related Notes to Consolidated Financial Statements follow. In Part I of this Form 10-Q, references to quarters and years are on a fiscal year basis, unless otherwise specified or apparent from the context.

Unless otherwise indicated, “Monsanto” and “the company” are used interchangeably to refer to Monsanto Company or to Monsanto Company and its consolidated subsidiaries, as appropriate to the context. Monsanto includes the operations, assets and liabilities that were previously the agricultural business of Pharmacia Corporation (Pharmacia), which is now a subsidiary of Pfizer Inc. Unless otherwise indicated, “earnings (loss) per share” and “per share” mean diluted earnings (loss) per share. In the notes to the consolidated financial statements, all dollars are expressed in millions, except per share amounts. Trademarks owned or licensed by Monsanto or its subsidiaries are shown in all capital letters. Unless otherwise indicated, references to “ROUNDUP herbicides” mean ROUNDUP branded and other branded glyphosate-based herbicides, excluding all lawn-and-garden herbicides; references to “ROUNDUP and other glyphosate-based herbicides” mean both branded and non-branded glyphosate-based herbicides, excluding all lawn-and-garden herbicide products.

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Statement of Consolidated Operations

The accompanying notes are an integral part of these consolidated financial statements.

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Condensed Statement of Consolidated Financial Position

The accompanying notes are an integral part of these consolidated financial statements.

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Statement of Consolidated Cash Flows

See Note 14 — Supplemental Cash Flow Information — for further details.

The accompanying notes are an integral part of these consolidated financial statements.

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Monsanto Company is a leading global provider of agricultural products for farmers. Monsanto produces leading seed brands, including DEKALB and ASGROW, and develops biotechnology traits that assist farmers in controlling insects and weeds. Monsanto provides other seed companies with genetic material and biotechnology traits for their seed brands. The company also makes ROUNDUP herbicide and other herbicides. Monsanto’s seeds, biotechnology trait products and herbicides provide growers with solutions that improve productivity and reduce the costs of farming. Monsanto also provides lawn-and-garden herbicide products for the residential market and animal agricultural products focused on improving dairy cow productivity and swine genetics.

Monsanto manages its business in two segments: Seeds and Genomics, and Agricultural Productivity. The Seeds and Genomics segment consists of the global seeds and traits businesses and genetic technology platforms. The Agricultural Productivity segment consists of the crop protection products (ROUNDUP and other glyphosate-based herbicides and selective chemistries), animal agriculture businesses and lawn-and-garden herbicide products. In second quarter 2005, the company committed to a plan to sell the environmental technologies businesses. In fiscal year 2004, the company announced plans to exit the European breeding and seed business for wheat and barley and to discontinue the plant-made pharmaceuticals program, and the assets associated with the company’s European wheat and barley business were sold. As a result of these exit plans, financial data for these businesses has been presented as discontinued operations as outlined below. See Note 17 — Discontinued Operations — for further details. The financial statements have been restated and prepared in compliance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). Accordingly, for the three months and six months ended Feb. 28, 2005, and Feb. 29, 2004, the Statement of Consolidated Operations has been conformed to this presentation. Also, as of Feb. 28, 2005, the Condensed Statement of Consolidated Financial Position has been conformed to this presentation. The European wheat and barley business and the plant-made pharmaceuticals program were previously reported as part of the Seeds and Genomics segment, and the environmental technologies businesses were previously reported as part of the Agricultural Productivity segment.

Monsanto includes the operations, assets and liabilities that were previously the agricultural business of Pharmacia, which is now a subsidiary of Pfizer. Unless otherwise indicated, “Monsanto” and “the company” are used interchangeably to refer to Monsanto Company or to Monsanto Company and its consolidated subsidiaries, as appropriate to the context.

The accompanying consolidated financial statements have not been audited but have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. This Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements as presented in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2004, and Monsanto’s Report on Form 10-Q for the quarterly period ended Nov. 30, 2004. Financial information for the first six months of fiscal year 2005 should not be annualized because of the seasonality of the company’s business.

Certain prior-period amounts have been reclassified to conform with the current-year presentation. These reclassifications include a net sales and cost of goods sold reclassification related to outward freight costs. The company typically pays the freight costs for transporting finished products to customers and has historically recorded these costs as a reduction of net sales. Following the guidance of Emerging Issues Task Force Issue 00-10, Accounting for Shipping and Handling Fees and Costs, the company has reclassified outward freight on sales, resulting in an increase in previously reported net sales with a corresponding increase in cost of goods sold.

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In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R replaced SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and superseded Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123R will require compensation cost related to share-based payment transactions to be recognized in the financial statements. As permitted by SFAS 123, Monsanto elected to follow the guidance of APB 25, which allowed companies to use the intrinsic value method of accounting to value their share-based payment transactions with employees. Based on this method, Monsanto did not recognize compensation expense in its financial statements as the stock options granted had an exercise price equal to the fair market value of the underlying common stock on the date of the grant. SFAS 123R requires measurement of the cost of share-based payment transactions to employees at the fair value of the award on the grant date and recognition of expense over the requisite service or vesting period. SFAS 123R requires implementation using a modified version of prospective application, under which compensation expense for the unvested portion of previously granted awards and all new awards will be recognized on or after the date of adoption. SFAS 123R also allows companies to adopt SFAS 123R by restating previously issued financial statements, basing the amounts on the expense previously calculated and reported in their pro forma footnote disclosures required under SFAS 123. The provisions of SFAS 123R will be adopted by Monsanto using the modified prospective method beginning Sept. 1, 2005.

In December 2004, the FASB issued FASB Staff Position No. 109-1, Application of FASB Statement No. 109 (SFAS 109), Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (FSP 109-1). FSP 109-1 clarifies that the manufacturer’s deduction provided for under the American Jobs Creation Act of 2004 (AJCA) should be accounted for as a special deduction in accordance with SFAS 109 and not as a tax rate reduction. The adoption of FSP 109-1 will have no impact on Monsanto’s results of operations or financial position for fiscal year 2005 because the manufacturer’s deduction is not available to Monsanto until fiscal year 2006. The company is currently evaluating the effect that the manufacturer’s deduction will have in subsequent years. The FASB also issued FASB Staff Position No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP 109-2). The AJCA introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FSP 109-2 provides accounting and disclosure guidance for the repatriation provision. Although FSP 109-2 is effective immediately, until the Treasury Department or Congress provides additional clarifying language on key elements of the repatriation provision, the amount of foreign earnings that may be repatriated by Monsanto cannot be determined. See Note 8 — Income Taxes — for additional disclosures in accordance with FSP 109-2.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs — an amendment of ARB No. 43, Chapter 4 (SFAS 151), to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as current period charges and to require the allocation of fixed production overhead to the costs of conversion based on the normal capacity of the production facilities. SFAS 151 is effective prospectively for inventory costs incurred during fiscal years beginning after June 15, 2005. The company does not believe the adoption of SFAS 151 will have a material impact on its financial statements.

In May 2004, the FASB issued FASB Staff Position No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-2), which superseded FSP 106-1. FSP 106-2 provides authoritative guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act), which was signed into law on Dec. 8, 2003, and specifies the disclosure requirements for employers who have adopted FSP 106-2. The Act introduced a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare. Final regulations necessary to implement the Act were released in January 2005. However, additional guidance is anticipated to clarify several areas, including those that would specify the manner in which actuarial equivalency must be determined and the evidence required to demonstrate actuarial equivalency. FSP 106-2 was effective for Monsanto’s first quarter of fiscal year 2005. Monsanto has estimated a reduction of the postretirement benefit obligation of approximately $19 million. The reduction in annual benefit cost is estimated at approximately $3 million, of which $1.5 million was recorded in

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the first half of 2005. Additional guidance and interpretations of the law could require the company to change previously reported information.

In September 2004, Monsanto acquired the canola seed businesses of Advanta Seeds (Advanta) from Advanta B.V., including the Advanta Seeds brand in Canada and the Interstate Seed brand in the United States, for $50 million in cash (net of cash acquired). The addition of these canola seed businesses reinforces Monsanto’s commitment to the canola industry and is intended to strengthen Monsanto’s ability to bring continued technology innovations to canola growers. The transaction was completed on Sept. 8, 2004, from which time the operating results of this acquisition were included in the company’s consolidated financial statements. Advanta’s business operations and employees were integrated into the Seeds and Genomics segment upon acquisition.

In first quarter 2005, Monsanto formed American Seeds, Inc. (ASI), a holding company established to support regional seed businesses with capital, genetics and technology investments. In November 2004, ASI acquired Channel Bio Corp. (Channel Bio), for $104 million in cash (net of cash acquired) and $15 million in assumed liabilities that were paid in second quarter 2005. Channel Bio is a U.S. seed company that sells, markets and distributes corn and soybean seeds through three brands: Crow’s Hybrid Corn Company, Midwest Seed Genetics, Inc. and Wilson Seeds. The acquisition of Channel Bio is expected to provide Monsanto with additional opportunity for growth by accelerating the delivery of technology advances through Channel Bio’s strong customer relationships, local brands and quality service. The transaction was completed on Nov. 15, 2004, from which time the operating results of this acquisition were included in the company’s consolidated financial statements. As part of ASI, Channel Bio’s business operations were added to the Seeds and Genomics segment results upon acquisition.

The purchase price allocations for Advanta and Channel Bio as of Feb. 28, 2005, were preliminary and are summarized in the aggregate in the following table. Pro forma information related to these acquisitions is not included because the impact of these acquisitions, either individually or in the aggregate, on the company’s consolidated results of operations was not considered to be significant.

These acquisitions were accounted for as purchase transactions, and accordingly, the assets and liabilities of the acquired entities were recorded at their estimated fair values at the dates of the acquisitions. In addition to the purchase price amounts stated above, the company paid transaction costs of $4 million and recorded estimated integration costs of $2 million. The primary items that generated the goodwill were Channel Bio’s direct-to-farmer distribution network, the value of the acquired assembled workforces, and the premium paid by the company for the right to control the businesses acquired. None of the goodwill is deductible for tax purposes.

The acquired identifiable intangible assets of $42 million have a weighted-average useful life of approximately 10 years. The intangible assets that make up that amount include acquired biotechnology intellectual property of $23 million to be amortized on a straight-line basis over lives ranging from four to seven years, germplasm of $10 million to be amortized on a straight-line basis over 20 years, and trademarks and other intangibles of $9 million to be amortized on a straight-line basis

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over lives ranging from four to 12 years. Charges of $12 million were recorded in research and development (R&D) expenses in first quarter 2005 for the write-off of acquired in-process R&D (IPR&D). Management believed that the technological feasibility of the IPR&D was not established and that the research had no alternative future uses. Accordingly, the amounts allocated to IPR&D were required to be expensed immediately under generally accepted accounting principles.

Acquisitions Closing Subsequent to Feb. 28, 2005

In second quarter 2005, Monsanto announced that it signed a definitive agreement to acquire Seminis, Inc. (Seminis) for $1.4 billion in cash and assumed debt. The transaction was completed on March 23, 2005, from which time the operating results of this acquisition will be included in the company’s consolidated financial statements. Marinet Investments, LLC, which prior to the closing was a holder of co-investment rights in Seminis, elected to reduce the cash payment to which it was entitled upon completion of the transaction by $50 million in exchange for a contingent payment of up to $125 million based on the achievement of certain cumulative net sales targets over the thirty-six month period ending Sept. 30, 2007. The cash portion of the acquisition was funded with cash on hand plus commercial paper borrowings of $600 million issued in March 2005. Commercial paper borrowings were also issued in April 2005 to fund the assumed debt, which has an estimated fair value of approximately $390 million. Seminis is the global leader in the vegetable and fruit seed industry, and its brands are among the most recognized in the vegetable and fruit segment of the agricultural industry. Seminis supplies more than 3,500 seed varieties to commercial fruit and vegetable growers, dealers, distributors and wholesalers in more than 150 countries around the world. The acquisition of Seminis is expected to provide Monsanto with opportunity for growth in the vegetable and fruit seed industry. From a technology perspective, Monsanto intends to continue to focus on developing improved products via advanced breeding techniques for the Seminis business.

In second quarter 2005, Monsanto announced that it signed a definitive agreement to acquire Emergent Genetics, Inc. (Emergent) for $300 million. With its STONEVILLE and NEXGEN brands, Emergent is the third largest cotton seed company in the United States, has the two leading cotton seed brands in India and has a solid presence in several other smaller cotton-growing markets around the world. The addition of the Emergent brands completes a strategic cotton germplasm and traits platform modeled on the company’s leading corn and soybean strategy, and is expected to provide Monsanto with opportunities to deliver breeding advances and biotechnology traits in the cotton seed market. The transaction was completed on April 5, 2005, from which time the operating results of this acquisition will be included in the company’s consolidated financial statements. The cash portion of the acquisition was funded with $284 million of commercial paper borrowings issued in April 2005. Debt of $16 million was also assumed in the transaction. Emergent’s business operations and employees will be added to the Seeds and Genomics segment results.

In third quarter 2005, ASI acquired NC+ Hybrids, Inc. (NC+ Hybrids), for $40 million in cash. NC+ Hybrids is a U.S. seed company that sells, markets and distributes hybrid corn seed. The acquisition of NC+ Hybrids continues the ASI strategy of accelerating the delivery of technology advances to farmers through strong customer relationships, local brands and quality service. The transaction was completed on March 1, 2005, from which time the operating results of this acquisition will be included in the company’s consolidated financial statements. As part of ASI, NC+ Hybrids’ business operations and employees will be added to the Seeds and Genomics segment results.

As of the filing date of this report, it was not practicable to disclose the amounts assigned to each major asset and liability caption or amount of IPR&D for the Seminis, Emergent and NC+ Hybrids acquisitions as the valuation of assets and the preliminary purchase price allocations had not been completed.

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Restructuring charges were recorded in the Statement of Consolidated Operations as follows:

(1)		The $8 million of restructuring charges for the six months ended Feb. 28, 2005, was split by segment as follows: $7 million in the Seeds and Genomics segment (recorded in the three months ended Feb. 28, 2005) and $1 million in the Agricultural Productivity segment.
(2)		The restructuring charges for the three months and six months ended Feb. 29, 2004, were offset by $1 million and $2 million, respectively, in restructuring reversals related to the 2000 restructuring plan.
(3)		The $21 million of income tax benefit for the six months ended Feb. 28, 2005, includes $20 million related to tax losses incurred on the sale of the European wheat and barley business. See below for further discussion.
(4)		The three months and six months ended Feb. 29, 2004, contain restructuring charges related to discontinued businesses (see Note 17 — Discontinued Operations). These restructuring charges were recorded in discontinued operations.

Fiscal Year 2004 Restructuring Plan

On Oct. 15, 2003, Monsanto announced plans to continue to reduce costs primarily associated with its agricultural chemistry business as that sector matures globally. These plans included: (1) reducing costs associated with the company’s ROUNDUP herbicide business, (2) exiting the European breeding and seed business for wheat and barley, and (3) discontinuing the plant-made pharmaceuticals program. In fiscal year 2004, total restructuring charges related to these actions were $165 million pretax ($105 million aftertax). Additionally, the approved plan included the impairment of goodwill in the global wheat business of $69 million (see Note 7 — Goodwill and Other Intangible Assets). In the first half of fiscal year 2005, the company incurred charges of $8 million pretax ($7 million aftertax) to complete the restructuring actions under this plan. No further actions are planned in 2005 related to this plan.

Second quarter fiscal year 2005 pretax restructuring charges of $7 million were related to the Seeds and Genomics segment. Pretax restructuring charges of $8 million for the first six months of fiscal year 2005 were comprised of $7 million related to the Seeds and Genomics segment and $1 million related to the Agricultural Productivity segment. The restructuring charges of $7 million recorded during second quarter 2005 included impairments incurred as a result of office closures and anticipated asset sales in South Africa and the United States. The office closure actions began in fiscal year 2004, and additional write-downs were required in fiscal year 2005 based on revised estimates of losses on dispositions of certain facilities in these countries.

In first quarter 2005, Monsanto recorded a deferred tax benefit of $106 million, of which $20 million was recorded in continuing operations and the remaining $86 million was recorded in discontinued operations. The $20 million tax benefit recorded in continuing operations was related to the impairment of goodwill in the global wheat business as part of the fiscal year 2004 restructuring plan. As such, the benefit amount recorded in continuing operations is reflected in the table above. See Note 8 — Income Taxes — and Note 17 — Discontinued Operations — for further discussion of the $86 million tax benefit recorded in discontinued operations.

Second quarter fiscal year 2004 pretax charges of $47 million were comprised of $11 million related to the Seeds and Genomics segment ($10 million in continuing operations and $1 million in discontinued operations) and $36 million related

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to the Agricultural Productivity segment. These charges included $26 million pretax related to work force reductions, $20 million pretax in asset impairments, and $1 million pretax in costs associated with facility closures. First half of fiscal year 2004 pretax charges of $110 million were comprised of $67 million related to the Seeds and Genomics segment ($33 million in continuing operations and $34 million in discontinued operations) and $43 million related to the Agricultural Productivity segment. These charges included $46 million pretax related to work force reductions, $62 million pretax in asset impairments (excluding the $69 million impairment of goodwill), and $2 million pretax in costs associated with facility closures.

Charges incurred in connection with the fiscal year 2004 restructuring plan were accounted for under SFAS 144 and SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). The company’s written human resource policies are indicative of an ongoing benefit arrangement in respect to severance packages. Benefits paid pursuant to an ongoing benefit arrangement are specifically excluded from the scope of SFAS 146 and should be accounted for in accordance with the accounting pronouncement applicable to the company’s arrangement. Monsanto accounted for its severance packages under SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, which addresses the accounting for other employee benefits.

The following table displays a roll forward of the liability established for restructuring expense from Sept. 1, 2004, to Feb. 28, 2005:

In April 2002, Monsanto established a revolving financing program to provide financing of up to $500 million for selected customers through a third-party specialty lender. Under the financing program, Monsanto originates customer loans on behalf of the lender, which is a special purpose entity (SPE) that Monsanto consolidates, pursuant to Monsanto’s credit and other underwriting guidelines approved by the lender. Monsanto services the loans and provides a first-loss guarantee of up to $100 million. Following origination, the lender transfers the loans to multi-seller commercial paper conduits through a nonconsolidated qualifying special purpose entity (QSPE). Monsanto accounts for this transaction as a sale, in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.

Monsanto has no ownership interest in the lender, in the QSPE, or in the loans. However, because Monsanto substantively originates the loans through the SPE (which it consolidates) and partially guarantees and services the loans, Monsanto accounts for the program as if it were the originator of the loans and the transferor selling the loans to the QSPE.

Monsanto records its guarantee liability at a value that approximates fair value (except that it does not discount credit losses because of the short term of the loans), primarily related to expected future credit losses. Monsanto does not recognize any servicing asset or liability because the servicing fee is adequate compensation for the servicing activities. Discounts on the sale of the customer loans and servicing revenues collected and earned were not significant during the first half of fiscal years 2005 and 2004.

Proceeds from customer loans sold through the financing program totaled $60 million for the first six months of fiscal year 2005 and $124 million for the first six months of fiscal year 2004. These proceeds are included in the net cash provided by operations in the Statement of Consolidated Cash Flows. The loan balance outstanding as of Feb. 28, 2005, and Aug. 31, 2004, was less than $1 million and $222 million, respectively. The first-loss guarantee will be in place throughout the financing program. Loans are considered delinquent when payments are 31 days past due. If a customer fails to pay an obligation when due, Monsanto would incur a liability to perform under the first-loss guarantee. As of Feb. 28, 2005, and Aug. 31, 2004, less than $1 million of loans sold through this financing program were delinquent. As of Feb. 28, 2005, and

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Aug. 31, 2004, Monsanto recorded its guarantee liability at less than $1 million, based on the company’s historical collection experience with these customers and the company’s current assessment of credit exposure. Adverse changes in the actual loss rate would increase the liability. If Monsanto is called upon to make payments under the first-loss guarantee, it would have the benefit under the financing program of any amounts subsequently collected from the customer.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), and amended it by issuing FIN 46R in December 2003. The SPE is included in Monsanto’s consolidated financial statements. Because QSPEs are excluded from the scope of FIN 46R and Monsanto does not have the unilateral right to liquidate the QSPE, this interpretation does not have an effect on Monsanto’s accounting for the customer financing program.

Components of inventories were:

In first quarter 2004, the company’s decision to exit the European wheat and barley business required an evaluation for potential impairment of goodwill and other intangible assets related to the company’s global wheat business. Fair value calculations using a discounted cash flow methodology indicated a potential goodwill impairment, which required the company to perform the second step of the goodwill impairment test. The second step of the impairment assessment was completed during the quarter ended Nov. 30, 2003, and resulted in the $69 million impairment of goodwill specific to the wheat reporting unit. The fiscal year 2004 annual goodwill impairment test was performed as of March 1, 2004, and no indications of goodwill impairment existed as of that date.

Changes in the net carrying amount of goodwill for the first half of fiscal year 2005, by segment, are as follows:

Information regarding the company’s other intangible assets is as follows:

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The increases in other intangible assets during the first half of fiscal year 2005 primarily resulted from the acquisitions of Advanta and Channel Bio. See Note 3 — Business Combinations — for further discussion of these acquisitions.

Total amortization expense of other intangible assets was $28 million in second quarter of fiscal year 2005 and $31 million in second quarter of fiscal year 2004. Total amortization expense of other intangible assets for the six months ended Feb. 28, 2005, and Feb. 29, 2004, was $55 million and $62 million, respectively (exclusive of $27 million amortization expense for the six months ended Feb. 29, 2004, included in discontinued operations). Estimated intangible asset amortization expense for each of the five succeeding fiscal years has not changed significantly from the amounts disclosed in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2004.

The sale of the European wheat and barley business in fiscal year 2004 generated a tax loss deductible in either the United Kingdom or the United States. As of Aug. 31, 2004, a deferred tax asset had not been recorded for the tax loss incurred in the United States because of the existence of a number of uncertainties. These uncertainties diminished with the enactment of the American Jobs Creation Act of 2004 (AJCA) on Oct. 22, 2004. As a result, Monsanto recorded a deferred tax benefit of $106 million in first quarter 2005. Of this tax benefit, $20 million was recorded in continuing operations related to the impairment of goodwill in the global wheat business recorded in first quarter 2004. The remaining $86 million recorded in discontinued operations was primarily related to the goodwill impairment loss at the date of adoption of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), on Jan. 1, 2002, which was recorded as a cumulative effect of a change in accounting principle. The recognition of this tax benefit in the United States effectively precludes Monsanto from claiming any U.K. benefit for the U.K. tax loss. Accordingly, the U.K. deferred tax asset of $71 million, which had a full valuation allowance against it, was written off during first quarter 2005.

The AJCA created a temporary incentive for U.S. multinationals to repatriate accumulated earnings outside the United States by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. Monsanto may elect to apply this provision to qualifying earnings repatriations in either the remainder of fiscal year 2005 or in fiscal year 2006. As of Feb. 28, 2005, Monsanto has not recorded deferred taxes on foreign earnings because any taxes on dividends would be substantially offset by foreign tax credits or because Monsanto intends to reinvest those earnings indefinitely. Due to the complexity of the repatriation provision, the company is still evaluating the effects of this provision on its plan for repatriation of foreign earnings and does not expect to be able to complete this evaluation until after Congress or the Treasury Department provides additional guidance clarifying key elements of the provision. The range of possible amounts that the company is currently considering eligible for repatriation is between zero and $500 million. As of Feb. 28, 2005, the related potential range of income tax cannot be reasonably estimated.

Monsanto’s business and activities expose it to a variety of market risks, including risks related to changes in commodity prices for seed inventories purchased from growers, foreign-currency exchange rates, interest rates and, to a lesser degree, security prices and natural gas prices. These financial exposures are monitored and managed by the company as an integral part of its market risk management program. This program recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results. Monsanto’s overall objective in holding derivatives is to minimize the risks by using the most effective methods to eliminate or reduce the effects of these exposures. Monsanto accounts for its derivatives in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 149, Amendment of Statement 133 Derivative Instruments and Hedging Activities.

The company hedges a portion of its net investment in Brazilian subsidiaries and reported after-tax losses of less than $1 million in the second quarter of fiscal year 2005 and $3 million in the second quarter of fiscal year 2004. The company recorded after-tax losses of $8 million and $6 million in the first half of fiscal year 2005 and fiscal year 2004, respectively. These losses are included in accumulated other comprehensive loss.

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The majority of Monsanto’s employees are covered by noncontributory pension plans sponsored by the company. The company also provides certain postretirement health care and life insurance benefits for retired employees through insurance contracts.

In December 2003, the FASB issued SFAS No. 132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, which enhanced the required disclosures about pension plans and other postretirement benefit plans, but did not change the measurement or recognition principles for those plans. The statement requires additional interim and annual disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans.

The company’s net periodic benefit cost for pension benefits, and health care and other postretirement benefits include the following components:

Monsanto contributed $60 million to its pension plan in the six months ended Feb. 28, 2005. Monsanto did not make any contribution to its pension plan in second quarter fiscal year 2005, and as of Feb. 28, 2005, management does not plan to make additional contributions to the company’s pension plan in fiscal year 2005. However, pending management’s assessment of 2005 results of operations, the company may reassess planned contributions to its pension plan. In the three months and six months ended Feb. 29, 2004, pension plan contributions were $125 million and $150 million, respectively.

As permitted by current accounting literature, the company has elected to follow the guidance of APB 25 for measuring and recognizing its stock-based transactions with employees. Accordingly, no compensation expense was recognized in relation to any of the Monsanto option plans in which Monsanto employees participate. For further details, please see the disclosures in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2004.

Had stock-based compensation expense for these plans been determined based on the fair value consistent with the method of SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure, which amends SFAS 123, Accounting for Stock-Based Compensation, Monsanto’s net income and net income per share would have been adjusted to the pro forma amounts indicated as follows:

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As discussed in Note 2 — New Accounting Standards, SFAS 123R was issued in December 2004, which replaced SFAS 123. SFAS 123R is effective for Monsanto beginning Sept. 1, 2005.

Comprehensive income (loss) includes all nonshareowner changes in equity and consists of net income (loss), foreign currency translation adjustments, unrealized gains and losses on available-for-sale securities, additional minimum pension liability adjustments, and accumulated derivative gains or losses on cash flow hedges not yet realized. Information regarding comprehensive income (loss) is as follows:

The components of accumulated other comprehensive loss are as follows:

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Basic earnings (loss) per share (EPS) was computed using the weighted-average number of common shares outstanding during the period shown in the table below. Diluted EPS was computed taking into account the effect of dilutive potential common shares, as shown in the table below. Potential common shares consist of stock options using the treasury stock method and are excluded if their effect is antidilutive. Dilutive potential common shares noted below exclude stock options of less than 0.1 million and 2.4 million for the three months ended Feb. 28, 2005, and Feb. 29, 2004, respectively, and less than 0.1 million and 2 million for the six months ended Feb. 28, 2005, and Feb. 29, 2004, respectively. These potential common shares were excluded because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

The effect of exchange rate changes on cash and cash equivalents was not material. Cash payments for interest and taxes were as follows:

On July 31, 2003, the Executive Committee of the board of directors authorized the purchase of up to $500 million of the company’s common stock over a three-year period. Through Feb. 28, 2005, the company had purchased 10 million shares for $340 million.

Solutia Inc.: The following discussion provides new and updated information regarding proceedings related to Solutia Inc. (Solutia). Other information with respect to Solutia matters appears in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2004, and Report on Form 10-Q for the quarterly period ended Nov. 30, 2004.

As described in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2004, and Report on Form 10-Q for the quarterly period ended Nov. 30, 2004, pursuant to the Sept. 1, 2000, Separation Agreement between Monsanto and Pharmacia, as amended (Separation Agreement), Monsanto was required to indemnify Pharmacia for liabilities that Solutia assumed from Pharmacia under a Distribution Agreement entered into between those companies in connection with the spinoff of Solutia on Sept. 1, 1997, as amended (Distribution Agreement), to the extent that Solutia fails to pay, perform or discharge those liabilities. Those liabilities are referred to as “Solutia’s Assumed Liabilities.” Solutia’s Assumed Liabilities may include, among others, litigation, environmental remediation, and certain retiree liabilities relating to individuals who were employed by Pharmacia prior to the Solutia spinoff.

The following updates some of the proceedings related to Solutia’s bankruptcy:

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•	The stay of all litigation agreed to by all parties in the bankruptcy proceedings remains in force and effect, subject to any party’s right to issue a termination notice. As of the filing date of this report, no termination notice has been issued by any party.
•	The proof of claim filed by Monsanto on Nov. 29, 2004, remains effective. On Feb. 4, 2005, Solutia, the Creditors’ Committee, Monsanto and Pharmacia agreed that Monsanto and Pharmacia may amend their initial proofs of claim and file additional claims through May 1, 2005.
•	On March 7, 2005, the Official Committee of Equity Security Holders filed a Complaint and Objection to Claim against Monsanto and Pharmacia, objecting to the claims filed by Monsanto and Pharmacia against Solutia on the grounds that Solutia was undercapitalized at its inception, Pharmacia failed to disclose the full extent of the potential legacy liabilities at the time of Solutia’s spinoff, and Solutia’s indemnity obligations to Pharmacia and Monsanto are unduly burdensome. The Complaint and Objection to Claim seeks, among other things, to (i) recharacterize Monsanto’s and Pharmacia’s claims as equity interests and subordinate these equity interests; (ii) disallow and expunge any claims of Monsanto and Pharmacia related to the spinoff; (iii) obtain a declaration that the provisions of the Distribution Agreement requiring Solutia to assume the legacy liabilities and requiring Solutia to indemnify Monsanto and Pharmacia were unconscionable and may be avoided; and (iv) allocate all liability for claims related to environmental contamination allegedly caused by Pharmacia to Monsanto and Pharmacia and obtain a declaration that Solutia is entitled to an implied indemnity in contract or in tort from Pharmacia and Monsanto for any liability of Solutia arising from the legacy liabilities of Pharmacia. A responsive pleading in the litigation is due May 24, 2005.

Both immediately prior to and since its Chapter 11 filing, Solutia has failed to perform its obligations relating to some of Solutia’s Assumed Liabilities. Monsanto believes Solutia is required to meet its obligations unless and until those obligations are discharged by the Bankruptcy Court. However, in order to protect Pharmacia’s and Monsanto’s interests until that issue is resolved, pursuant to Monsanto’s obligation to indemnify Pharmacia and on an interim basis, Monsanto has assumed the management and defense of certain third-party tort litigation and funded some of Solutia’s environmental obligations. In the process of managing such litigation and environmental liabilities, and through Monsanto’s involvement in the bankruptcy process, Monsanto determined that it was probable that Monsanto would incur some expenses related to third-party tort litigation and environmental liabilities and that the amount of certain of these expenses could be reasonably estimated. In December, Monsanto determined that it was appropriate to establish a reserve for such expenses based on the best estimates by Monsanto’s management with input from its legal and other outside advisors. Accordingly, a charge in the amount of $284 million (the “Solutia-related charge” or the “charge”) was recorded in Monsanto’s first quarter fiscal 2005 results. As of Feb. 28, 2005, $256 million was recorded in the Statement of Consolidated Financial Position ($54 million in current liabilities and $202 million in other liabilities).

A portion of the $284 million charge was discounted, using a risk-free discount rate of 3.5 percent. The remaining portion of the charge was not subject to discounting because of uncertainties in the timing of cash outlay or was paid during first quarter fiscal year 2005. In second quarter 2005, interest expense of $1 million was recognized for the accretion of the discounted amount. The following table provides a detailed summary of the discounted and undiscounted amounts included in the charge.

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Monsanto believes that the Solutia-related charge represents the discounted cost that Monsanto would expect to incur in connection with these litigation and environmental matters. Monsanto expects to pay for these potential liabilities over time as the various legal proceedings are resolved and remediation is performed at the various environmental sites. Actual costs to Monsanto may differ materially from this estimate. Further, additional litigation or environmental matters that are not reflected in the charge may arise in the future, and Monsanto may also manage, settle, or pay judgments or damages with respect to litigation or environmental matters in order to mitigate contingent potential liability and protect Pharmacia and Monsanto, if Solutia refuses to do so.

The degree to which Monsanto may ultimately be responsible for the particular matters reflected in the charge or other of Solutia’s Assumed Liabilities is uncertain. The charge may not reflect all potential liabilities that Monsanto may incur in connection with Solutia’s bankruptcy and does not reflect any insurance reimbursements or any recoveries Monsanto might receive through the bankruptcy process. Solutia has not filed a plan of reorganization, and thus any projection of the outcome of Monsanto’s claims remains uncertain, but it is possible that Monsanto could receive equity in any reorganized Solutia in the course of any eventual resolution of the bankruptcy process. However, discussions between and among the various parties involved in the Solutia bankruptcy are continuing, and any formal reorganization plan must ultimately be affirmed by several constituencies and the Bankruptcy Court.

In addition to the Solutia-related charge, Monsanto has incurred legal and other costs related to the Chapter 11 proceeding and its Solutia-related indemnification obligations to Pharmacia. These costs are expensed as incurred, because the potential future costs to Monsanto to protect its interests cannot be reasonably estimated. The legal and other costs, together with the Solutia-related charge recorded in first quarter 2005, are reflected in the Statement of Consolidated Operations as Solutia-related expenses.

Solutia Litigation Obligations: Included in the Solutia-related charge are amounts related to certain of Solutia’s third-party tort litigation, including the defense of lawsuits involving PCBs, and other chemical and premises liability litigation. The following discussion provides new and updated information regarding the significant third-party tort proceedings reflected in the Solutia-related charge. Other information with respect to such proceedings appears in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2004, and Report on Form 10-Q for the quarterly period ended Nov. 30, 2004.

Seventeen PCB cases are now pending in Mississippi seeking damages for personal injury and/or property damage caused by exposure to PCBs, including compensatory and punitive damages, in unspecified amounts. All of these cases were filed in state court in Hinds County or Copiah County. Sixteen of the cases were filed by approximately 1,654 plaintiffs who are either present or former employees of an electrical transformer manufacturing facility located in Crystal Springs, Mississippi, or present or former residents of the Crystal Springs community. All 16 of the cases were removed to the U.S. District Court for the Southern District of Mississippi. In each case, the plaintiffs filed motions to return the case to state court. These motions were denied in all cases. No trial dates have been set in any of the cases. In addition, on Dec. 30, 2003, a wrongful death case was filed against Monsanto in the Circuit Court of Hinds County on behalf of three beneficiaries for damages allegedly arising from their decedent’s exposure to PCBs in the course of his work as an electrician in the Ingalls shipyard in

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Pascagoula, Mississippi. The case was removed to federal court, and a motion to return the case to state court was later denied by the federal court. The case is set for a trial beginning on Nov. 1, 2005.

Miscellaneous receivables of $78 million remain recorded as of Feb. 28, 2005 ($27 million was recorded in miscellaneous receivables and $51 million was recorded in other assets), for the anticipated insurance reimbursement for a portion of the settlement amount paid by Monsanto in connection with the global settlement of the Abernathy and Tolbert cases, which is described in our Report on Form 10-K for the fiscal year ended Aug. 31, 2004.

Solutia Environmental Obligations: Included in the Solutia-related charge are amounts related to certain of Solutia’s environmental liabilities, particularly expenses for environmental remediation of sites Solutia never owned or operated and sites beyond the property lines of Solutia’s current or former operations. Below is a description of the significant environmental matters reflected in the charge.

In May 2002, the U.S. Environmental Protection Agency (EPA) sent Monsanto and Solutia a “notice of potential liability and offer to negotiate for removal action” regarding dioxin in the Kanawha River in Putnam and Kanawha counties, West Virginia, which was premised on Pharmacia’s former operations at its Nitro, West Virginia, manufacturing facility. The EPA, Monsanto and Pharmacia have negotiated a consent order under which Monsanto is preparing an Engineering Evaluation/Cost Analysis Report, which will contain the results of Monsanto’s investigation of dioxin contamination in the Kanawha River, the sources of such contamination, an evaluation of removal options, and a recommended approach to removing or otherwise addressing the contaminated sediments.

Based on Solutia’s failure to perform its environmental obligations, on March 25, 2004, Monsanto, acting on behalf of Pharmacia, entered into an arrangement with the EPA and Solutia to perform certain environmental obligations at the Sauget, Illinois, and Anniston, Alabama sites under existing orders where both Solutia and Pharmacia are named parties. As a part of this arrangement, Monsanto has agreed with the EPA to perform certain remedial work until Monsanto invokes a 60-day notice of termination provision, which Monsanto has not invoked.

Other Litigation: The following discussion provides new and updated information regarding Monsanto’s litigation, except litigation related to Solutia, which is discussed above. Other information with respect to such litigation appears in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2004, and Report on Form 10-Q for the quarterly period ended Nov. 30, 2004. Monsanto is defending and prosecuting litigation in its own name. Monsanto is also defending and prosecuting certain cases that were brought in Pharmacia’s name and for which Monsanto assumed responsibility under the Separation Agreement. Such matters relate to a variety of issues. Some of the lawsuits seek damages in very large amounts, or seek to restrict the company’s business activities. While the ultimate liabilities resulting from such lawsuits and claims may be significant to profitability in the period recognized, management does not anticipate they will have a material adverse effect on Monsanto’s consolidated financial position or liquidity.

On June 3, 1999, AgrEvo Environmental Health, n/k/a Aventis Environmental Science (AgrEvo) filed a suit in the U.S. District Court for the Southern District of New York against The Scotts Miracle-Gro Co. (Scotts), f/k/a The Scotts Company, and Pharmacia seeking damages and injunctive relief for alleged antitrust violations by Scotts and Pharmacia and alleged tortious interference of contract by Pharmacia that included a supply agreement for the active ingredient for the Finale® consumer herbicide. AgrEvo claims that Scotts’ subsequent agreement to become the exclusive sales and marketing agent for Pharmacia’s ROUNDUP lawn-and-garden business violated its agreement with AgrEvo and that Pharmacia and Scotts agreed that Scotts would divest Finale® to a weaker competitor in connection with the ROUNDUP deal. Pursuant to its obligation under the Separation Agreement, Monsanto is defending Pharmacia in this matter. On Oct. 25, 2004, the court granted Monsanto summary judgment on the state law claims but denied the defendants’ motions for summary judgment on the antitrust claims. This case was settled between Monsanto and AgrEvo, and all claims against Monsanto were dismissed with prejudice on Jan. 31, 2005.

Guarantees: As disclosed in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2004, Monsanto provides guarantees to certain banks that provide loans to Monsanto customers in Brazil. Due to the seasonal nature of Monsanto’s business, the level of customer loans with these banks and the related Monsanto guarantees has increased since Aug. 31, 2004. As a result, the maximum potential amount of future payments under these guarantees is approximately $61 million as of Feb. 28, 2005. Based on the company’s current assessment of credit exposure, Monsanto has recorded a liability of less

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than $1 million related to these guarantees. Monsanto’s recourse under these guarantees is limited to the customer, and it is not currently estimable.

Except as described above, there have been no significant changes to guarantees made by Monsanto since Aug. 31, 2004. Disclosures regarding these guarantees made by Monsanto can be found in Note 22 — Commitments and Contingencies — of the notes to consolidated financial statements contained in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2004. Disclosure regarding the guarantee Monsanto provides to a specialty finance company for certain customer loans can be found in Note 5 — Customer Financing Program — of this Form 10-Q. Information regarding Monsanto’s indemnification obligations to Pharmacia under the Separation Agreement relating to Solutia’s Assumed Liabilities can be found above.

Monsanto manages its business in two segments: Seeds and Genomics, and Agricultural Productivity. The Seeds and Genomics segment consists of the global seeds and related traits businesses and biotechnology platforms. The Agricultural Productivity segment consists of crop protection products (ROUNDUP and other glyphosate-based herbicides and selective chemistries), animal agriculture businesses and lawn-and-garden herbicide products. Sales between segments were not significant. Segment data is presented in the table that follows.

(1)	Represents net sales from continuing operations.
(2)	EBIT is defined as earnings before interest and taxes; see the following table for reconciliation. Earning is intended to mean net income as presented in the Statement of Consolidated Operations under generally accepted accounting principles.
(3)	Does not include the $69 million impairment of goodwill in the first half of fiscal year 2004.

A reconciliation of EBIT to net income for each period follows:

(1) Includes the income tax provision from continuing operations and the income tax benefit from discontinued operations.

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In second quarter 2005, the company committed to a plan to sell its environmental technologies businesses that met the “held for sale” criteria under SFAS 144. The environmental technologies businesses provide engineering, procurement and construction management services, and sell proprietary equipment and process technologies. The company has determined that these businesses are no longer consistent with its strategic business goals. In April 2005, the company announced that it signed a non-binding letter of intent to sell the environmental technologies businesses to the management of the businesses in a management buyout. The parties are working on a definitive agreement for the transaction, which is targeted to close by the end of fiscal year 2005.

As discussed in Note 4 — Restructuring, in first quarter 2004, Monsanto announced plans to (1) exit the European breeding and seed business for wheat and barley and (2) discontinue the plant-made pharmaceuticals program. As a result of these plans and the plan to sell the environmental technologies businesses, certain financial data for these businesses has been presented as discontinued operations in accordance with SFAS 144. Accordingly, for the three months and six months ended Feb. 28, 2005, and Feb. 29, 2004, the Statement of Consolidated Operations has been conformed to this presentation. Also, as of Feb. 28, 2005, the Condensed Statement of Consolidated Financial Position has been conformed to this presentation. The European wheat and barley business and the plant-made pharmaceuticals program were previously reported as part of the Seeds and Genomics segment, and the environmental technologies businesses were previously reported as part of the Agricultural Productivity segment.

The company evaluated the carrying amount of the environmental technologies businesses net assets as of Feb. 28, 2005, in accordance with SFAS 144, and determined that the net assets were not impaired primarily based on discussions with third parties concerning strategic alternatives for the businesses. This assessment is subject to change based on future developments related to selling the businesses. The assets and liabilities of the environmental technologies businesses are shown in the table below. As of Feb. 28, 2005, there were no remaining assets and liabilities of the European wheat and barley and plant-made pharmaceuticals businesses.

The following amounts related to the environmental technologies businesses, European wheat and barley business and the plant-made pharmaceuticals program have been segregated from continuing operations and reflected as discontinued operations:

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In fiscal year 2004, the sale of assets associated with the European wheat and barley business to Rodez, France-based RAGT Genetique, S.A. (RAGT) was finalized. This divestiture resulted in a net loss of approximately $3 million before taxes recorded in loss from operations of discontinued businesses, after accounting for currency translation adjustments and transactional costs. The divestiture also generated a tax loss that was recognized as a tax benefit in the United States. In first quarter 2005, Monsanto recorded a deferred tax benefit of $106 million, of which $20 million was recorded in continuing operations, and the remaining $86 million was recorded in discontinued operations. The tax benefit of $86 million recorded in discontinued operations was primarily related to the wheat reporting unit goodwill impairment loss at the date of adoption of SFAS 142 on Jan. 1, 2002, which was recorded as a cumulative effect of a change in accounting principle. See Note 4 for discussion of the $20 million tax benefit recorded in continuing operations and Note 8 — Income Taxes — for further discussion of the tax benefit.

Effective March 11, 2005, Monsanto finalized a 364-day $1 billion revolving credit facility. This facility will be used for general corporate purposes, which may include working capital, acquisitions, capital expenditures, refinancing and commercial paper backstop (e.g., the revolving credit facility could serve as a back-up to repay commercial paper borrowings upon maturity). The company’s existing five-year $1 billion revolving credit facility will remain in place. (Discussion of this facility can be found in Note 12 — Debt and Other Credit Arrangements — of the notes to consolidated financial statements contained in Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2004.) The terms and conditions of the new $1 billion revolving credit facility are substantially similar to the existing $1 billion revolving credit facility.

Subsequent to Feb. 28, 2005, Monsanto completed transactions to acquire Seminis, Emergent and NC+ Hybrids. In connection with the Seminis and Emergent acquisitions, commercial paper borrowings of $600 million were issued in March 2005 and $680 million in April 2005. See Note 3 — Business Combinations — for further discussion of the acquisitions.

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Background

Monsanto Company is a leading global provider of agricultural products for farmers. We produce leading seed brands, including DEKALB and ASGROW, and we develop biotechnology traits that assist farmers in controlling insects and weeds. We provide other seed companies with genetic material and biotechnology traits for their seed brands. We also make ROUNDUP herbicide and other herbicides. Our seeds, biotechnology trait products and herbicides provide growers with solutions that improve productivity and reduce the costs of farming. We also provide lawn-and-garden herbicide products for the residential market and animal agricultural products focused on improving dairy cow productivity and swine genetics. Unless otherwise indicated, “Monsanto,” “the company,” “we,” “our,” and “us” are used interchangeably to refer to Monsanto Company and its consolidated subsidiaries, as appropriate to the context.

We manage our business in two segments: Seeds and Genomics, and Agricultural Productivity. The Seeds and Genomics segment consists of the global seeds and traits businesses, and genetic technology platforms. The Agricultural Productivity segment consists of our crop protection products (ROUNDUP and other glyphosate-based herbicides and selective chemistries), animal agriculture businesses and lawn-and-garden herbicide products. In second quarter 2005, we committed to a plan to sell the environmental technologies businesses. In fiscal year 2004, we announced plans to exit the European breeding and seed business for wheat and barley and to discontinue the plant-made pharmaceuticals program, and the assets associated with our European wheat and barley business were sold. As a result of these exit plans, financial data for these businesses has been presented as discontinued operations as outlined below. See Note 17 — Discontinued Operations — for further details. The financial statements have been restated and prepared in compliance with the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly, for the three months and six months ended Feb. 28, 2005, and Feb. 29, 2004, the Statement of Consolidated Operations has been conformed to this presentation. Also, as of Feb. 28, 2005, the Condensed Statement of Consolidated Financial Position has been conformed to this presentation. The European wheat and barley business and the plant-made pharmaceuticals program were previously reported as part of the Seeds and Genomics segment, and the environmental technologies businesses were previously reported as part of the Agricultural Productivity segment.

Certain prior-period amounts have been reclassified to conform with the current-year presentation. These reclassifications include a net sales and cost of goods sold reclassification related to outward freight costs. We typically pay the freight costs for transporting finished products to customers and have historically recorded these costs as a reduction of net sales. Following the guidance of Emerging Issues Task Force Issue 00-10, Accounting for Shipping and Handling Fees and Costs, the company has reclassified outward freight on sales, resulting in an increase in previously reported net sales with a corresponding increase in cost of goods sold for all periods reported herein.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with Monsanto’s consolidated financial statements and the accompanying notes. This Report on Form 10-Q should also be read in conjunction with Monsanto’s Report on Form 10-K for the fiscal year ended Aug. 31, 2004, and Monsanto’s Report on Form 10-Q for the quarterly period ended Nov. 30, 2004. Financial information for the first six months of fiscal year 2005 should not be annualized because of the seasonality of our business. Unless otherwise noted, all amounts and analyses are based on continuing operations. The notes to the consolidated financial statements that are referenced throughout MD&A are included in Part I — Item 1 — Financial Statements — of this Report on Form 10-Q.

Financial Measures

EBIT is defined as earnings before interest and taxes. Earnings is intended to mean net income as presented in the Statement of Consolidated Operations under generally accepted accounting principles. EBIT is the primary operating performance measure for our two business segments. We believe that EBIT is useful to investors and management to demonstrate the operational profitability of our segments by excluding interest and taxes, which are generally accounted for across the entire company on a consolidated basis. EBIT is also one of the measures used by Monsanto management in determining resource allocations within the company. See Note 16 — Segment Information — for a reconciliation of EBIT to net income for the three months and six months ended Feb. 28, 2005, and Feb. 29, 2004.

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We also provide information regarding free cash flow, an important liquidity measure for Monsanto. We define free cash flow as the total of net cash provided or required by operations and provided or required by investing activities. We believe that free cash flow is useful to investors and management as a measure of the ability of our business to generate cash. This cash can be used to meet business needs and obligations, to reinvest in the company for future growth, or to return to our shareowners through dividend payments or share repurchases. Free cash flow is also used by management as one of the performance measures in determining incentive compensation. See the “Financial Condition, Liquidity, and Capital Resources — Cash Flow” section of MD&A for a reconciliation of free cash flow.

Return on capital (ROC) means net income (without the effect of certain items noted below) exclusive of after-tax interest expenses, divided by the average of the beginning year and ending year net capital employed. The items excluded from net income are restructuring charges and discontinued operations for both years; the Solutia-related charge, tax benefit on the loss from the European wheat and barley business and purchase accounting adjustments (primarily acquired in-process research and development expenses) in 2005; and the goodwill impairment in 2004. After-tax interest expense is calculated by multiplying interest expense — net by 38 percent, which represents the estimated combined federal and state statutory tax rates for the United States. The net capital employed is defined as total shareowners’ equity plus short-term and long-term debt, less cash and cash equivalents in excess of $125 million (cash for ongoing business operations). We believe ROC is useful to investors and management as a measure of how effectively the company utilizes capital to generate earnings. ROC is expected to be useful for Monsanto to improve the utilization of capital invested in the company, to maximize the potential value of assets, and to identify and fund the highest earning investments.

The presentation of EBIT, free cash flow and ROC information is intended to supplement investors’ understanding of our operating performance and liquidity. Our EBIT, free cash flow and ROC measures may not be comparable to other companies’ EBIT, free cash flow and ROC measures. Furthermore, these measures are not intended to replace net income (loss), cash flows, financial position, or comprehensive income (loss), as determined in accordance with accounting principles generally accepted in the United States.

Executive Summary

Consolidated Operating Results — Net sales increased $411 million in the three-month comparison and $464 million in the six-month comparison. For both periods, we experienced sales improvements in corn and soybean traits in the United States, and corn seed in the United States and Europe. Additionally, in the first half of 2005, sales of cotton traits in Australia increased. Sales of ROUNDUP and other glyphosate-based herbicides improved in all major world areas in the quarter-to-quarter comparison. In the first half of 2005, higher ROUNDUP and other glyphosate-based herbicide sales in Brazil, the Europe-Africa region and the Asia-Pacific region more than offset lower sales of ROUNDUP herbicides in the United States. Total company gross profit as a percent of sales increased 3 percentage points in both the three-month and six-month comparisons primarily because of the 2005 price increase for our ROUNDUP READY soybean and corn traits in the United States, and increased trait penetration and growth in stacked traits, particularly in U.S. corn. Operating expenses were flat in the quarter-over-quarter comparison, and decreased 11 percent, or $105 million, in the first half of 2005 because of the global wheat goodwill impairment and higher restructuring charges recorded in the first half of 2004. We recorded a charge of $284 million, or $0.67 per share, associated with certain liabilities in connection with the Solutia bankruptcy in first quarter 2005 (see Note 15 — Commitments and Contingencies). Also, in first quarter 2005, we recorded a deferred tax benefit of $106 million, or $0.39 per share, as a result of the loss incurred on the European wheat and barley business (see Note 8 — Income Taxes). Of this tax benefit, $20 million was recorded in continuing operations, and $86 million was recorded in discontinued operations. Net income in second quarter 2005 was $1.37 per share compared with $0.57 per share in the prior-year second quarter. Net income in the first half of 2005 was $1.23 per share compared with $0.21 per share in the prior-year comparable period. For further details, see the “Results of Operations,” the “Seeds and Genomics Segment,” and the “Agricultural Productivity Segment” sections of MD&A.

Financial Condition, Liquidity, and Capital Resources — For the first half of 2005, net cash provided by operations was $453 million compared with $217 million in the comparable prior-year first half. Net cash provided by investing activities was $47 million in 2005, and net cash required by investing activities was $146 million in 2004. As a result, our free cash flow as defined in the “Overview — Financial Measures” section of MD&A was $500 million in the first half of 2005 compared with $71 million in the same period a year ago. In the first half of 2004, we contributed $400 million toward the PCB litigation settlement. The timing of our purchases and maturities of short-term investments favorably affected the six-month comparison by $320 million. In first quarter 2005, we formed American Seeds, Inc. (ASI), which acquired Channel Bio Corp. (Channel Bio), and we acquired the North American canola seed businesses of Advanta Seeds (Advanta) from Advanta B.V.

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These acquisitions required a cash outlay of $173 million. In third quarter 2005, we completed three acquisitions: Seminis Inc. (Seminis), Emergent Genetics, Inc. (Emergent) and NC+ Hybrids Inc. (NC+ Hybrids, acquired by ASI). Seminis, the largest of the three, is the global leader in the vegetable and fruit seed industry.

Total debt outstanding decreased $347 million between Aug. 31, 2004, and Feb. 28, 2005, primarily because certain medium-term notes matured in the first half of 2005. Further, in March 2005, we finalized a 364-day $1 billion revolving credit facility to be used for general corporate purposes. We borrowed commercial paper of $600 million in March 2005 and $680 million in April 2005 to fund the Seminis and Emergent acquisitions. See the “Financial Condition, Liquidity, and Capital Resources” section of MD&A for a more detailed discussion of the items in this section.

Outlook — We are continuing to evolve to a company led by its strengths in seeds and biotechnology traits as a means of delivering value to our customers. We aim to continually improve our products in order to maintain market leadership and to support near-term performance. We are focused on innovation, especially in biotechnology, which we expect to deliver through solving problems in new ways for farmers. Our current research-and-development strategy and commercial priorities are focused on bringing our farmer customers second-generation traits, on delivering multiple solutions in one seed (“stacking”), and on developing pipeline products. Our capabilities in biotechnology research are generating a rich product pipeline that is expected to drive long-term growth. We aspire to bring new solutions to our customers’ unmet needs, for example crops with improved oil and protein composition and with drought tolerance. The viability of our product pipeline depends in part on the speed of regulatory approvals globally. As a key determinant of our ability to launch new products, we have focused on aspects of the process we can control. This has resulted in programs such as the Brazil value capture system, which was launched in southern Brazil last year given the continuing uncertainty in the regulatory and legal environment. In March 2005, Brazil’s President signed a biosafety bill into law which establishes the regulatory process for the approval of biotech crops. The implementation of our point-of-delivery payment system in the past year laid the groundwork for ensuring that we capture value on biotech crops grown in Brazil. The legalization of biotechnology in Brazil should make our system more effective and allow Brazil to be a greater contributor to revenue in seeds and traits in the coming years.

As discussed in the previous section, we completed three acquisitions in third quarter 2005. While delivering earnings growth and generating free cash for our base business, we were also evaluating acquisition opportunities to expand our growth proactively. Seminis is well positioned to capitalize on the fast-growing vegetable and fruit segment of the agriculture industry, and the acquisition expands our ability to grow. Further, the addition of Emergent completes a strategic cotton germplasm and traits platform modeled on our branded and licensing strategies for corn and soybeans. Over the next year, we plan to focus on three areas: accelerating the potential growth of these new businesses, executing our business plan, and strengthening our balance sheet.

Concurrent with this activity in the Seeds and Genomics segment, we are focused on reducing the costs associated with our agricultural chemistry business as that sector matures globally. ROUNDUP agricultural herbicides remain the market leader; however, the mix of our glyphosate products sold reflects the increased competitive dynamics of the marketplace.

We are required to indemnify Pharmacia for Solutia’s Assumed Liabilities (defined in Note 15), to the extent that Solutia fails to pay, perform or discharge those liabilities. Prior to and following its filing for bankruptcy protection, Solutia has disclaimed responsibility for some of Solutia’s Assumed Liabilities. See Note 15 and Part II — Item 1 — Legal Proceedings for further details. Accordingly, in first quarter 2005, we recorded a charge of $284 million for estimated litigation and environmental liabilities we expect to incur in connection with Solutia’s bankruptcy. The charge may not reflect all potential liabilities that we may incur in connection with Solutia’s bankruptcy and does not reflect any insurance reimbursement or any recoveries we might receive through the bankruptcy process.

See the “Outlook” section of MD&A for a more detailed discussion of certain of the opportunities, challenges and risks we have identified for our business.

In October 2004, we announced that ROC would be a new financial measure for Monsanto starting in fiscal year 2005. We intend to improve ROC through continued optimization of the ROUNDUP business, while accelerating the seeds and traits businesses. Additionally, we expect our compounded annual earnings per share growth rate to somewhat increase in fiscal year 2005 from the fiscal year 2004 earnings per share base, excluding restructuring charges and discontinued operations for both years; the Solutia-related charge, tax benefit on the loss from the European wheat and barley business and purchase accounting adjustments (primarily acquired in-process research and development expenses) in 2005; and the goodwill impairment in 2004. We expect the earnings per share growth to be driven by greater acreage penetration of biotech traits, the

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use of more than one trait per acre, and pricing flexibility in our seeds and traits businesses. The factors described in the “Cautionary Statements: Risk Factors Regarding Forward-Looking Statements” section of MD&A represent continuing risks to this expectation.