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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

OR

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-225

KIMBERLY-CLARK CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (972) 281-1200

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

The aggregate market value of the registrant’s common stock held by non-affiliates on June 30, 2003 (based on the closing stock price on the New York Stock Exchange) on such date was approximately $26.4 billion.

As of February 19, 2004, there were 501,547,379 shares of the Corporation’s common stock outstanding.

Documents Incorporated By Reference

Certain information contained in the definitive Proxy Statement for the Corporation’s Annual Meeting of Stockholders to be held on April 29, 2004 is incorporated by reference into Part III hereof.

Table of Contents

KIMBERLY-CLARK CORPORATION

TABLE OF CONTENTS

Table of Contents

PART I

Kimberly-Clark Corporation was incorporated in Delaware in 1928. As used in Items 1, 2, 3, 6, 7, 7A, 8 and 9A of this Form 10-K, the term “Corporation” refers to Kimberly-Clark Corporation and its consolidated subsidiaries. In the remainder of this Form 10-K, the terms “Kimberly-Clark” or “Corporation” refer only to Kimberly-Clark Corporation. For financial information by business segment and geographic area, and information about principal products and markets of the Corporation, reference is made to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and to Item 8, Note 15 to the Consolidated Financial Statements.

Recent Developments.    The Corporation is a global health and hygiene company focused on building its personal care, consumer tissue and business-to-business operations. Since 1999, the Corporation has completed approximately 20 acquisitions, each of which was accounted for as a purchase, in its core businesses and 3 strategic divestitures, including the following transactions:

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In January 2004, the Corporation announced changes to reorganize its personal care and consumer tissue businesses into two separate North Atlantic personal care and consumer tissue groups and to put its operations in developing and emerging markets into one group. The Corporation’s business-to-business segment will now include its North American pulp operations. In addition, the wet wipes business will be part of the personal care segment instead of the consumer tissue segment. The Corporation will continue to have three global businesses led by individuals who have the accountability and the authority to make global decisions. This new structure is expected to help increase the Corporation’s speed in translating consumer and customer insights into innovative products, streamlining decision making and helping to deliver cost reductions on a sustainable basis.

On February 25, 2004, the Corporation announced that it was evaluating the potential tax-free spin-off of its Neenah Paper and Technical Paper businesses, along with its pulp and timber assets in Pictou, Nova Scotia and Terrace Bay, Ontario (the “Pulp and Paper Spin-Off”). The transaction is subject to approval by the Board of Directors and, if approved, is expected to occur in the second half of 2004. See the Business Outlook section in Item 7 for additional information regarding the Pulp and Paper Spin-Off.

Description of the Corporation.    The Corporation is principally engaged in the manufacturing and marketing of a wide range of health and hygiene products around the world. Most of these products are made from natural or synthetic fibers using advanced technologies in fibers, nonwovens and absorbency.

The Corporation is organized into operating segments based on product groupings. These operating segments have been aggregated into three reportable global business segments: Personal Care; Consumer Tissue; and Business-to-Business. Each reportable segment is headed by an executive officer who reports to the Chief Executive Officer and is responsible for the development and execution of global strategies to drive growth and profitability of the Corporation’s worldwide personal care, consumer tissue and business-to-business operations. These strategies include global plans for branding and product positioning, technology and research and development programs, cost reductions including supply chain management, and capacity and capital investments for each of these businesses. The principal sources of revenue in each of our global business segments are described below. Revenue, profit and total assets of each reportable segment are described in the financial statements contained in Item 8 of this Form 10-K.

The Personal Care segment manufactures and markets disposable diapers, training and youth pants and swimpants; feminine and incontinence care products; and related products. Products in this segment are primarily for household use and are sold under a variety of brand names, including Huggies, Pull-Ups, Little Swimmers, GoodNites, Kotex, Lightdays, Depend, Poise and other brand names.

The Consumer Tissue segment manufactures and markets facial and bathroom tissue, paper towels and napkins for household use; wet wipes; and related products. Products in this segment are sold under the Kleenex, Scott, Cottonelle, Viva, Andrex, Scottex, Hakle, Page, Huggies and other brand names.

The Business-to-Business segment manufactures and markets facial and bathroom tissue, paper towels, wipers and napkins for away-from-home use; health care products such as surgical gowns, drapes, infection control products, sterilization wraps, disposable face masks and exam gloves, respiratory products, and other

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disposable medical products; printing, premium business and correspondence papers; specialty and technical papers; and other products. Products in this segment are sold under the Kimberly-Clark, Kleenex, Scott, Kimwipes, WypAll, Surpass, Safeskin, Tecnol, Ballard and other brand names. Certain products in this segment are being evaluated as part of the Pulp and Paper Spin-Off described above in Recent Developments.

Products for household use are sold directly, and through wholesalers, to supermarkets, mass merchandisers, drugstores, warehouse clubs, variety and department stores and other retail outlets. Products for away-from-home use are sold through distributors and directly to manufacturing, lodging, office building, food service and health care establishments and other high volume public facilities. Health care products are primarily sold to distributors, converters and end-users. Paper products are sold directly to users, converters, manufacturers, publishers and printers, and through paper merchants, brokers, sales agents and other resale agencies. Paper products are being evaluated as part of the Pulp and Paper Spin-Off described above in Recent Developments.

Approximately 13 percent, 12 percent and 11 percent of net sales were to Wal-Mart Stores, Inc. in 2003, 2002 and 2001, respectively, primarily in the Personal Care and Consumer Tissue businesses.

Patents and Trademarks.    The Corporation owns various patents and trademarks registered domestically and in many foreign countries. The Corporation considers the patents and trademarks which it owns and the trademarks under which it sells certain of its products to be material to its business. Consequently, the Corporation seeks patent and trademark protection by all available means, including registration.

Raw Materials.    Superabsorbent materials are important components in disposable diapers, training and youth pants and incontinence care products. Polypropylene and other synthetics and chemicals are the primary raw materials for manufacturing nonwoven fabrics, which are used in disposable diapers, training and youth pants, wet wipes, feminine pads, incontinence and health care products, and away-from-home wipers.

Cellulose fiber, in the form of kraft pulp or fiber recycled from recovered pulp, is the primary raw material for the Corporation’s tissue and paper products and is an important component in disposable diapers, training pants, feminine pads and incontinence care products.

Most recovered paper and synthetics are purchased from third parties. Pulp and recycled fiber are produced by the Corporation and purchased from others. The Corporation considers the supply of such raw materials to be adequate to meet the needs of its businesses. See “Factors That May Affect Future Results—Raw Materials.”

The Corporation owns or controls approximately 5.9 million acres of forestland in Canada, principally as a fiber source for pulp production, which is consumed internally for tissue products. Approximately 1.0 million acres in the province of Nova Scotia are owned by the Corporation, and approximately 4.9 million acres, principally in the province of Ontario, are held under long-term Crown rights or leases. As part of the Pulp and Paper Spin-Off described above, the Corporation is evaluating divesting its interest in the Canadian forestlands.

Competition.    For a discussion of the competitive environment in which the Corporation conducts its business, see “Factors That May Affect Future Results—Competitive Environment.”

Research and Development.    A major portion of total research and development expenditures is directed toward new or improved personal care, tissue and health care products and nonwoven materials. Consolidated research and development expense was $280.6 million in 2003, $289.0 million in 2002 and $295.3 million in 2001.

Environmental Matters.    Total worldwide capital expenditures for voluntary environmental controls or controls necessary to comply with legal requirements relating to the protection of the environment at the Corporation’s facilities are expected to be approximately $20 million in 2004 and $23 million in 2005. Of these

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amounts, approximately $11 million in 2004 and $2 million in 2005 are expected to be spent at facilities in the U.S. For facilities outside of the U.S., capital expenditures for environmental controls are expected to be approximately $9 million in 2004 and $21 million in 2005.

Total worldwide operating expenses for environmental compliance are expected to be approximately $162 million in 2004 and $165 million in 2005. Operating expenses for environmental compliance with respect to U.S. facilities are expected to be approximately $84 million in both 2004 and 2005. Operating expenses for environmental compliance with respect to facilities outside the U.S. are expected to be approximately $78 million in 2004 and $81 million in 2005. Operating expenses include pollution control equipment operation and maintenance costs, governmental payments, and research and engineering costs.

Total environmental capital expenditures and operating expenses are not expected to have a material effect on the Corporation’s total capital and operating expenditures, consolidated earnings or competitive position. However, current environmental spending estimates could be modified as a result of changes in the Corporation’s plans, changes in legal requirements or other factors.

Employees.    In its worldwide consolidated operations, the Corporation had nearly 62,000 employees as of December 31, 2003.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Certain matters discussed in this Form 10-K, or documents a portion of which are incorporated herein by reference, concerning, among other things, the business outlook, including new product introductions, cost savings, anticipated financial and operating results, strategies, contingencies and contemplated transactions of the Corporation, constitute forward-looking statements and are based upon management’s expectations and beliefs concerning future events impacting the Corporation. There can be no assurance that these events will occur or that the Corporation’s results will be as estimated.

The assumptions used as a basis for the forward-looking statements include many estimates that, among other things, depend on the achievement of future cost savings and projected volume increases. In addition, many factors outside the control of the Corporation, including the prices of the Corporation’s raw materials, potential competitive pressures on selling prices or advertising and promotion expenses for the Corporation’s products, and fluctuations in foreign currency exchange rates, as well as general economic conditions in the markets in which the Corporation does business, also could impact the realization of such estimates.

The following factors, as well as factors described elsewhere in this Form 10-K, or in other SEC filings, among others, could cause the Corporation’s future results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Corporation.

Such factors are described in accordance with the provisions of the Private Securities Litigation Reform Act of 1995, which encourages companies to disclose such factors.

Competitive Environment.    The Corporation experiences intense competition for sales of its principal products in its major markets, both domestically and internationally. The Corporation’s products compete with widely advertised, well-known, branded products, as well as private label products, which are typically sold at lower prices. The Corporation has several major competitors in most of its markets, some of which are larger and more diversified than the Corporation. The principal methods and elements of competition include brand recognition and loyalty, product innovation, quality and performance, price, and marketing and distribution

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capabilities. Inherent risks in the Corporation’s competitive strategy include uncertainties concerning trade and consumer acceptance, the effects of recent consolidations of retailers and distribution channels, and competitive reaction. Aggressive competitive reaction may lead to increased advertising and promotional spending by the Corporation in order to maintain market share. Increased competition with respect to pricing would reduce revenue and could have an adverse impact on the Corporation’s financial results. In addition, the Corporation relies on the development and introduction of new or improved products as a means of achieving and/or maintaining category leadership. In order to maintain its competitive position, the Corporation must develop technology to support its products.

Cost Savings Strategy.    The Corporation’s anticipated cost savings are expected to result from reducing material costs and manufacturing waste and realizing productivity gains and distribution efficiencies in each of its business segments. The Corporation’s strategic investments in its information systems should also allow further cost savings through streamlining of its back office operations. There can be no assurance that such cost savings will be achieved.

Raw Materials.    Cellulose fiber, in the form of kraft pulp or recycled fiber from recovered pulp, is used extensively in the Corporation’s tissue and paper products and is subject to significant price fluctuations due to the cyclical nature of the pulp markets. Recycled fiber accounts for approximately 28 percent of the Corporation’s overall fiber requirements. On a worldwide basis, the Corporation’s internally manufactured pulp supplies approximately 40 percent of its virgin fiber requirements.

The Corporation still intends to reduce its level of pulp integration, when market conditions permit, and such a reduction in pulp integration, if accomplished, could increase the Corporation’s commodity price risk. If the Pulp and Paper Spin-Off described above in Recent Developments occurs, it would significantly reduce the level of the Corporation’s pulp integration. Specifically, increases in pulp prices could adversely affect the Corporation’s earnings if selling prices for its finished products are not adjusted or if such adjustments significantly trail the increases in pulp prices. Derivative instruments have not been used to manage these risks.

Polymer resins, principally polypropylene, are used extensively in the Corporation’s products, such as diapers, training and youth pants, and incontinence care products. Polymer resins, which are principally derived from petroleum, may be subject to price fluctuations. The Corporation purchases polymer resins from a number of suppliers. Significant increases in resin prices could adversely affect the Corporation’s earnings if selling prices for its finished products are not adjusted or if adjustments significantly trail the increases in resin prices.

Energy Costs.    The Corporation’s manufacturing operations utilize electricity, natural gas and petroleum-based fuels. To insure that it uses all forms of energy cost-effectively, the Corporation maintains ongoing energy efficiency improvement programs at all of its manufacturing sites and also provides expert staff assistance to operating units in negotiating favorable utility and other energy supply agreements. The Corporation’s contracts with energy suppliers vary as to price, payment terms, quantities and duration. Kimberly-Clark’s energy costs are also affected by various market factors including the availability of supplies of particular forms of energy, energy prices and local and national regulatory decisions. There can be no assurance that the Corporation will be fully protected against substantial changes in the price or availability of energy sources. Derivative instruments are used to hedge natural gas price risk when management deems it prudent to do so.

Volume Forecasting.    The Corporation’s anticipated financial results reflect forecasts of future volume increases in the sales of its products. Challenges in such forecasting include anticipating consumer preferences, estimating sales of new products, estimating changes in population characteristics (such as birth rates and changes in per capita income), anticipating changes in technology and competitive responses and estimating the

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acceptance of the Corporation’s products in new markets. As a result, there can be no assurance that the Corporation’s volume increases will occur as estimated.

Foreign Market Risks.    Because the Corporation and its equity companies have manufacturing facilities in 41 countries and their products are sold in more than 150 countries, the Corporation’s results may be substantially affected by foreign market risks. The Corporation is subject to the impact of economic and political instability in developing countries. The extremely competitive situation in European personal care and tissue markets, and the challenging economic environments in Argentina, Brazil, Colombia, Mexico, Venezuela and developing countries in eastern Europe, Asia and elsewhere in Latin America, may slow the Corporation’s sales growth and earnings potential. In addition, the Corporation is subject to the strengthening and weakening of various currencies against each other and versus the U.S. dollar. Transaction exposure, arising from transactions and commitments denominated in non-local currency, is selectively hedged through foreign currency forward, option and swap contracts. See Item 7A, “Management’s Discussion and Analysis—Risk Sensitivity”. Translation exposure for the Corporation with respect to foreign operations is generally not hedged. There can be no assurance that the Corporation will be fully protected against substantial foreign currency fluctuations.

Contingencies.    The costs and other effects of pending litigation and administrative actions against the Corporation cannot be determined with certainty. Although management believes that no such proceedings will have a material adverse effect on the Corporation, there can be no assurance that the outcome of such proceedings will be as expected. See Item 3, “Legal Proceedings”.

One of the Corporation’s North American tissue mills has an agreement to provide its local utility company a specified amount of electric power for each of the next 15 years. In the event that the mill was shut down, the Corporation would be required to continue to operate the power generation facility on behalf of its owner, the local utility company. The net present value of the cost to fulfill this agreement as of December 31, 2003 is estimated to be approximately $100 million. Management considers the probability of closure of this mill to be remote.

AVAILABLE INFORMATION

The Corporation makes available financial information, news releases and other information on the Corporation’s Web site at www.kimberly-clark.com. There is a direct link from the Web site to the Corporation’s Securities and Exchange Commission filings via the EDGAR database, where the Corporation’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge as soon as reasonably practicable after the Corporation files such reports and amendments with, or furnishes them to, the Securities and Exchange Commission. Stockholders may also contact Stockholder Services, P.O. Box 612606, Dallas, Texas 75261-2606 or call 972-281-1521 to obtain a hard copy of these reports without charge.

Management believes that the Corporation’s production facilities are suitable for their purpose and adequate to support its businesses. The extent of utilization of individual facilities varies, but they generally operate at or near capacity, except in certain instances such as when new products or technology are being introduced or when mills are being shut down. Various facilities contain pollution control, solid waste disposal and other equipment which have been financed through the issuance of industrial revenue or similar bonds and are held by the Corporation under lease or installment purchase agreements.

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The principal facilities of the Corporation (including the Corporation’s equity companies) and the products or groups of products made at such facilities are as follows:

World Headquarters Location

Dallas, Texas

Operating Segments and Geographic Headquarters

Roswell, Georgia

Neenah, Wisconsin

Milsons Point, Australia

Seoul, Korea

Reigate, United Kingdom

Administrative Centers

Knoxville, Tennessee

Brighton, United Kingdom

Worldwide Production and Service Facilities

United States

Alabama

Mobile—tissue products

Arizona

Tucson—health care products

Arkansas

Conway—feminine care and incontinence care products and nonwovens

Maumelle—wet wipes and nonwovens

California

Fullerton—tissue products

Connecticut

New Milford—diapers and tissue products

Georgia

LaGrange—nonwovens

Idaho

Pocatello—respiratory care and gastroenterology products

Kentucky

Owensboro—tissue products

Michigan

Munising—technical papers

Mississippi

Corinth—nonwovens, wipers and towels

Hattiesburg—tissue products

North Carolina

Hendersonville—nonwovens

Lexington—nonwovens

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Oklahoma

Jenks—tissue products

Pennsylvania

Chester—tissue products

South Carolina

Beech Island—diapers, wet wipes and tissue products

Tennessee

Loudon—tissue products

Texas

Del Rio—health care products

Fort Worth—health care products

Paris—diapers and training, youth and swim pants

San Antonio—personal cleansing products and systems

Utah

Draper—respiratory care and gastroenterology products

Ogden—diapers

Washington

Everett—tissue products, wipers and pulp

Wisconsin

Marinette—tissue products

Neenah—diapers, training pants, feminine care and incontinence care products,

    business and correspondence papers and nonwovens

Whiting—business and correspondence papers

Outside the United States

Argentina

Bernal—tissue products

Pilar—feminine care and incontinence care products

San Luis—diapers

Australia

Albury—nonwovens

Ingleburn—diapers

Lonsdale—diapers and feminine care and incontinence care products

Millicent—pulp and tissue products

Tantanoola—pulp

Warwick Farm—tissue products

Bahrain

Belgium

Duffel—tissue products

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Bolivia

La Paz—tissue products

Santa Cruz—tissue products

Brazil

Bahia—tissue products

Correia Pinto—tissue products

Cruzeiro—tissue products

Mogi das Cruzes—tissue products

Porto Alegre—feminine care products

Suzano—diapers, wet wipes and incontinence care products

Canada

Huntsville, Ontario—tissue products and wipers

New Glasgow, Nova Scotia—pulp

St. Hyacinthe, Quebec—feminine care and incontinence care products

Terrace Bay, Ontario—pulp

China

Beijing—feminine care products and diapers

Chengdu—feminine care products

Guangzhou—tissue products

Nanjing—feminine care products

Shanghai—tissue products

Wuhan—feminine care products

Colombia

Barbosa—notebooks, business and correspondence papers and wipers

Puerto Tejada—tissue products

Tocancipa—diapers and feminine care products

Costa Rica

Belen—tissue products

Cartago—diapers and feminine care and incontinence care products

Czech Republic

Jaromer—diapers and incontinence care products

Litovel—feminine care products

Dominican Republic

Santo Domingo—tissue products

Ecuador

Babahoyo—tissue products

Mapasingue—tissue products, diapers and feminine care products

El Salvador

Sitio del Niño—tissue products

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France

Rouen—tissue products

Villey-Saint-Etienne—tissue products

Germany

Forchheim—feminine care and incontinence care products

Koblenz—tissue products

Mainz—tissue products

Reisholz—tissue products

Honduras

Villanueva—health care products

India

Indonesia

Jakarta—tissue products

Israel

Afula—diapers and feminine care and incontinence care products

Hadera—tissue products

Nahariya—tissue products

Italy

Alanno—tissue products

Patrica—diapers

Romagnano—tissue products

Villanovetta—tissue products

Korea

Anyang—feminine care products, diapers and tissue products

Kimcheon—tissue products and nonwovens

Taejon—feminine care products, diapers and nonwovens

Malaysia

Kluang—tissue products, feminine care products and diapers

Mexico

Acuña—health care products

Empalme—health care products

Magdalena—health care products

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Nogales—health care products

Peru

Puente Piedra—tissue products

Villa—diapers and feminine care and incontinence care products

Philippines

San Pedro, Laguna—feminine care products, diapers, tissue products and specialty papers

Poland

Klucze—tissue products

Puerto Rico

Toa Alta—diapers

Saudi Arabia

Singapore

Tuas—diapers

Slovak Republic

Piestany—health care products

South Africa

Cape Town—tissue, feminine care and incontinence care products

Springs—tissue products and diapers

Spain

Aranguren—tissue products

Arceniega—tissue products and personal cleansing products and systems

Calatayud—diapers

Salamanca—tissue products

Telde, Canary Islands—tissue products

Switzerland

Balsthal—tissue products and specialty papers

Niederbipp—tissue products

Reichenburg—tissue products

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Taiwan

Chung Li—tissue products, feminine care products and diapers

Hsin-Ying—tissue products

Ta-Yuan—tissue products

Thailand

Hat Yai—disposable gloves

Pathumthani—feminine care products, diapers and tissue products

Samut Prakarn—tissue products

Turkey

Istanbul—diapers

United Kingdom

Barrow—tissue products

Barton-upon-Humber—diapers and nonwovens

Flint—tissue products and nonwovens

Northfleet—tissue products

Venezuela

Maracay—tissue products and diapers

Vietnam

Binh Duong—feminine care products

Hanoi—feminine care products

The following is a brief description of certain legal and administrative proceedings to which the Corporation or its subsidiaries is a party or to which the Corporation’s or its subsidiaries’ properties are subject. In management’s opinion, none of the legal and administrative proceedings described below, individually or in the aggregate, is expected to have a material adverse effect on the Corporation’s business, financial condition or results of operations.

As of December 31, 2003, Safeskin was a party to product liability lawsuits seeking monetary damages, in most cases of an unspecified amount. Safeskin is typically one of several defendants who manufacture or sell natural rubber latex gloves. These lawsuits allege injuries ranging from dermatitis to severe allergic reactions caused by the residual chemicals or latex proteins in gloves worn by health care workers and other individuals while performing their duties. Safeskin has referred the defense of these lawsuits to its insurance carriers and management believes its insurance coverage is adequate for these types of claims.

As of December 31, 2003, the Corporation, along with many other nonaffiliated companies, was a party to lawsuits with allegations of personal injury resulting from asbestos exposure on the defendants’ premises and allegations that the defendants manufactured, sold, distributed or installed products which cause asbestos-related lung disease. These general allegations are often made against the Corporation without any apparent evidence or identification of a specific product or premises of the Corporation. The Corporation has denied the allegations and raised numerous defenses in all of these asbestos cases. All asbestos claims have been tendered to the Corporation’s insurance carriers for defense and indemnity. The financial statements reflect appropriate accruals for the Corporation’s portion of the costs estimated to be incurred in connection with resolving these claims.

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The Corporation is subject to routine litigation from time to time, which, individually or in the aggregate, is not expected to have a material adverse effect on the Corporation’s business, financial condition or results of operations.

Environmental Matters

The Corporation is subject to federal, state and local environmental protection laws and regulations with respect to its business operations and is operating in compliance with, or taking action aimed at ensuring compliance with, such laws and regulations. Compliance with these laws and regulations is not expected to have a material adverse effect on the Corporation’s business, financial condition or results of operations.

The Corporation has been named a potentially responsible party under the provisions of the federal Comprehensive Environmental Response, Compensation and Liability Act, or analogous state statutes, at a number of waste disposal sites, none of which, individually or in the aggregate, in management’s opinion, is likely to have a material adverse effect on the Corporation’s business, financial condition or results of operations.

No matters were submitted to a vote of security holders during the fourth quarter of 2003.

The names and ages of the executive officers of the Corporation as of February 24, 2004, together with certain biographical information, are as follows:

Robert E. Abernathy, 49, was elected Group President—Developing and Emerging Markets effective January 19, 2004. He is responsible for the Corporation’s businesses in Asia, Latin America, Eastern Europe, the Middle East and Africa and the Environment and Energy organization. Mr. Abernathy joined the Corporation in 1982. His past responsibilities in the Corporation have included operations and major project management in North America. He was appointed Vice President—North American Diaper Operations in 1992; Managing Director of Kimberly-Clark Australia Pty. Limited in 1994; and Group President of the Corporation’s Business-to-Business segment in 1998.

Mark A. Buthman, 43, was elected Senior Vice President and Chief Financial Officer in 2003. Mr. Buthman joined the Corporation in 1982. He has held various positions of increasing responsibility in the operations, finance and strategic planning areas of the Corporation. Mr. Buthman was appointed Vice President of Finance in 2002 and Vice President of Strategic Planning and Analysis in 1997.

Thomas J. Falk, 45, was elected Chairman of the Board and Chief Executive Officer in 2003 and President and Chief Executive Officer in 2002. Prior to that, he served as President and Chief Operating Officer since 1999. Mr. Falk previously had been elected Group President—Global Tissue, Pulp and Paper in 1998, where he was responsible for the Corporation’s global tissue businesses. Earlier in his career, Mr. Falk had responsibility for the Corporation’s North American Infant Care, Child Care and Wet Wipes businesses. Mr. Falk joined the Corporation in 1983 and has held other senior management positions in the Corporation. He has been a director of the Corporation since 1999. He also serves on the board of directors of Centex Corporation and the University of Wisconsin Foundation, and serves as a trustee of the Boys & Girls Clubs of America.

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Steven R. Kalmanson, 51, was elected Group President—North Atlantic Personal Care effective January 19, 2004. He is responsible for the Corporation’s global personal care segment, and its North American Sales, Marketing Services and Supply Chain and Logistics organizations. Mr. Kalmanson joined the Corporation in 1977. His past responsibilities have included various marketing and business management positions within the consumer products businesses. He was appointed President, Adult Care in 1990; President, Child Care in 1991; President, Family Care in 1995; and Group President of the Corporation’s Consumer Tissue segment in 1996.

W. Dudley Lehman, 52, was elected Group President—Business-to-Business effective January 19, 2004. He is responsible for the Corporation’s global Business-to-Business segment, which includes the K-C Professional Tissue and Wiper business, the Health Care business, Nonwovens manufacturing, Research and Sales functions, the Technical Paper business, the Neenah Paper business and the Pulp business. Mr. Lehman joined the Corporation in 1976 and held various marketing positions in the infant care and feminine care businesses before becoming Director of Training Pants in 1988. He was appointed President of the Child Care Sector in 1990; President of the Infant Care Sector in 1991; and Group President of the Infant Care and Child Care Sectors in 1995. Mr. Lehman is a director of Snap-on Incorporated.

Ronald D. Mc Cray, 46, was elected Senior Vice President—Law and Government Affairs effective July 1, 2003. His responsibilities include the Corporation’s legal affairs, internal audit and government relations activities. Mr. Mc Cray joined the Corporation in 1987 as Senior Attorney. He was appointed Senior Counsel in 1993 and Vice President and Chief Counsel in 1996. He was elected Vice President and Secretary in 1999 and Vice President, Associate General Counsel and Secretary in 2001. He is a director of Knight-Ridder, Inc.

Robert P. van der Merwe, 51, was elected Group President—North Atlantic Consumer Tissue effective January 19, 2004. He is responsible for the Corporation’s global consumer tissue segment, and its European Marketing Services, Integrated Supply Chain and Customer Management organizations. Mr. van der Merwe joined the Corporation in 1980 as Brand/Marketing Manager in South Africa. In 1985, he became Director of World Support Group—Personal Care. From 1987 to 1993, Mr. van der Merwe left the Corporation to become Managing Director of Xerox’s Southern African operations. He returned to the Corporation in 1994 as Director of Global Projects and became Director of the World Support Group—Personal Care in 1995. He became President of the Adult Care Sector later that year and was appointed President—Feminine Care Sector in 1997. He was appointed President—Kimberly-Clark Europe in 1998 and was elected Group President—Kimberly-Clark Europe, Middle East & Africa in 1998.

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The dividend and market price data included in Item 8, Note 17 to the Consolidated Financial Statements is incorporated in this Item 5 by reference.

Quarterly dividends have been paid continually since 1935. Dividends are paid on or about the second business day of January, April, July and October. The Automatic Dividend Reinvestment service of EquiServe Trust Company, N.A. is available to Kimberly-Clark stockholders of record. The service makes it possible for Kimberly-Clark stockholders of record to have their dividends automatically reinvested in common stock and to make additional cash investments up to $3,000 per quarter.

Kimberly-Clark common stock is listed on the New York, Chicago and Pacific stock exchanges. The ticker symbol is KMB.

As of February 19, 2004, the Corporation had 36,870 holders of record of its common stock.

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Introduction

This management’s discussion and analysis of financial condition and results of operations is intended to provide investors with an understanding of the Corporation’s past performance, its financial condition and its prospects. We will discuss and provide our analysis of the following:

Overview of Business and 2003 Results

The Corporation is a global health and hygiene company with manufacturing facilities in 38 countries and its products are sold in more than 150 countries. The Corporation’s products are sold under such well-known brands as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend. In managing this global business, the Corporation’s management believes that developing new and improved products, responding effectively to competitive challenges, obtaining and maintaining leading market shares, controlling costs, and managing currency and commodity risks are important to the long-term success of the Corporation. In the discussion and analysis of our results of operations and other related information we will refer to these factors.

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Aggressive competitive actions by our competitors in 2002 and 2003 have required that we increase promotional spending in order to maintain our market shares. We expect our competitors to continue to be aggressive in 2004.

During 2003, we continued to face intense competition in most of our markets. In particular, the diaper and pants categories in North America and Europe were affected by the competitive pricing and package sizing pressures that began in late 2002. In addition to lower net selling prices, our consumer tissue businesses were also adversely affected by higher materials input costs. Despite these challenges, we achieved improved results in 2003:

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Overview of Business Segments

The Corporation is organized into operating segments based on product groupings. These operating segments have been aggregated into three reportable global business segments: Personal Care; Consumer Tissue; and Business-to-Business. Each reportable segment is headed by an executive officer who reports to the Chief Executive Officer and is responsible for the development and execution of global strategies to drive growth and profitability of the Corporation’s worldwide personal care, consumer tissue and business-to-business operations. These strategies include global plans for branding and product positioning, technology and research and development programs, cost reductions including supply chain management, and capacity and capital investments for each of these businesses. The principal sources of revenue in each of our global business segments are described below. The accounting policies of our reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements.

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Results of Operations and Related Information

In this section, we discuss and analyze our 2003 net sales, operating profit and other information relevant to an understanding of our 2003 results of operations. In this discussion and analysis, we compare our 2003 results to 2002, and our 2002 results to 2001. In each of those discussions, we focus first on our consolidated results, and then discuss the results of each of our reportable segments.

Analysis of Consolidated Net Sales—Three Years Ended December 31, 2003

By Business Segment

Commentary:

2003 versus 2002

Consolidated net sales increased 5.8 percent over 2002. In addition to favorable currency effects of about 4 percent, higher sales volumes of more than 2 percent more than offset slightly lower net selling prices. The favorable currency effects, primarily in Europe and Australia, were tempered by unfavorable currency effects in

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Latin America. Slightly less than one-half of the increased sales volumes were due to the consolidation, in August 2003, of Klabin Kimberly S.A., (“Klabin”), the Corporation’s former equity affiliate—Brazil’s largest tissue manufacturer, and the February 2003 acquisition of the Klucze tissue business in Poland.

Market Shares

Shown below are our U.S. market shares for key categories for full years 2001 through 2003:

Net sales in Europe increased about 10 percent as favorable currency effects more than offset 4 percent lower sales volumes due to aggressive competitive consumer promotion activity. Lower diaper sales volumes were partially offset by increased sales volumes for incontinence care products and training pants. In Latin America, net sales declined about 9 percent. Net selling prices increased more than 5 percent but were more than offset by lower sales volumes, primarily in the Caribbean region, largely because of weak economic conditions in the Dominican Republic and unfavorable currency effects in Brazil and Venezuela. Net sales in Asia increased nearly 12 percent driven by favorable currency effects and higher sales volumes in Australia.

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2002 versus 2001

Consolidated net sales increased 2.1 percent over 2001. Unfavorable currency effects reduced net sales about 1 percent. These unfavorable currency effects, primarily in Argentina and Venezuela, were partially offset by favorable currency effects in Europe. Sales volumes increased approximately 5 percent, including the acquisition of majority ownership of Kimberly-Clark Australia Pty. Ltd. (“KCA”) effective July 1, 2001, which contributed about one-third of the gain. Net selling prices decreased about 2 percent, primarily due to higher promotional spending in North America in the personal care and consumer tissue segments.

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Analysis of Consolidated Operating Profit—Three Years Ended December 31, 2003

By Business Segment

By Geographic Area

Commentary:

2003 versus 2002

Consolidated operating profit decreased 2.1 percent due to higher promotional spending, increased fiber, distribution and energy costs, increased pension expense of approximately $140 million and a higher level of expenses in other income (expense), net that more than offset the benefits of cost reduction programs of about $190 million, favorable currency effects and increased sales volumes. Each of the three business segments incurred more than $40 million of the higher pension costs. Operating profit as a percentage of net sales decreased from 18.2 percent in 2002 to 16.8 percent in 2003.

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In 2002, the Corporation recorded charges of approximately $44 million related to business improvement and other programs. Charges related to the plans to streamline manufacturing and administrative operations in Latin America and Europe totaled $14.3 million and $19.1 million, respectively, and consisted principally of employee severance of $16.8 million and asset write-off and disposal costs of $8.4 million. The Corporation also recorded charges of approximately $4 million for employee severance to complete actions that had been initiated in 2001 and approximately $4 million for a one-time national security tax levied on all corporations in Colombia.

The above 2002 charges were recorded in the business segments as follows: personal care $14.8 million; consumer tissue $21.8 million; business-to-business $7.6 million. On a geographic basis, these charges are included as follows: North America $6.8 million; Europe $19.1 million; Asia, Latin America and other $18.3 million. These charges are included in the consolidated income statement as follows: cost of products sold—$19.9 million, consisting principally of employee severance and asset write-off costs; marketing, research and general expenses—$24.3 million, consisting principally of severance, training and other integration costs in Europe.

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2002 versus 2001

Consolidated operating profit increased 5.4 percent. Operating profit as a percentage of net sales increased from 17.6 percent in 2001 to 18.2 percent in 2002.

In 2002, the Corporation incurred higher net pension costs for its defined benefit plans of approximately $52 million compared with 2001.

In accordance with Statement of Financial Accounting Standards (“SFAS”) 142, Goodwill and Other Intangible Assets, the Corporation ceased amortizing goodwill in 2002. Goodwill amortization by segment in 2001 was: personal care $16.0 million; consumer tissue $14.6 million and business-to-business $58.8 million. By geographic region, goodwill amortization in 2001 was: North America $57.8 million; Europe $9.2 million and Asia, Latin America and other $22.4 million.

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Operating profit in 2001 included charges totaling nearly $167 million, principally for asset write-off and disposal costs of $107 million, employee severance costs of $26 million, contract termination costs of $15 million and costs to assimilate acquired businesses of $13 million. In November 2001, the Corporation announced plans for the streamlining of manufacturing operations in Latin America, including the shutdown of four small, older plants, as well as the closure of a technical paper mill in North America. Total cash charges for these plans were $18.4 million, including a one-time $11 million payment to settle a vendor contract agreement in North America. Noncash costs for these plans recorded in the fourth quarter totaled $66.7 million, including the write-off of the assets associated with the technical paper mill that was closed in December 2001. Also included in those plans was the write-off of excess manufacturing equipment in North America of approximately $14 million. These plans were substantially completed prior to the end of 2002. Also included in the $167 million of charges were workforce severance costs of about $6 million and asset write-off and disposal costs of approximately $34 million to streamline personal care operations in North America and China. These programs were completed during 2001. As part of the integration of acquired businesses, including Linostar, S.p.A. (“Linostar”) in Italy, S-K Corporation (“S-K”) in Taiwan, and Safeskin, costs totaling approximately $13 million related to assimilating these operations, such as changing packaging and labeling and duplicative labor costs, were expensed as incurred.

The above charges were recorded in the business segments as follows: personal care $76.8 million; consumer tissue $39.2 million; business-to-business $51.4 million. On a geographic basis these charges are included as follows: North America $109.5 million; Europe $12.6 million; Asia, Latin America and other $45.3 million. These charges are included in the consolidated income statement as follows: cost of products sold—$141.7 million, consisting principally of asset write-off and disposal costs and severance costs; marketing, research and general expenses—$25.7 million, consisting principally of severance costs for administrative employees in Europe and certain costs related to the business integrations.

In 2002, we established a team to investigate and to pursue actions to recover these losses. In the second quarter of 2002, evidence was discovered to suggest fraud by at least one employee of our affiliates and possibly several others in connection with the tax credit purchases. We determined that the remaining purchased tax credits were invalid and that the collateral backing them was worthless. We had previously concluded, during the December 2001 review, based on the advice of our outside advisors that these credits represented legitimate tax credits. Accordingly, in the second quarter of 2002, we recorded a charge of $26.5 million to other expense for losses associated with these tax credits. We have no remaining financial exposure for purchased tax credits.

We have implemented various corrective actions to prevent this matter from recurring in the future, including terminating all the employees responsible for the decisions to purchase these tax credits.

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We have also filed civil and criminal actions against a former employee; third parties (i.e., intermediaries who sold or arranged for our affiliates’ purchase of tax credits); tax credit sellers; and legal counsel associated with the purchase of the tax credits.

In addition, we have restricted the affiliates’ purchasing authority and control procedures have been re-emphasized. Personnel changes have been made to strengthen the affiliates’ organizations and their internal control compliance.

Additional Income Statement Commentary

Synthetic Fuel Partnership

In April 2003, the Corporation entered into an agreement whereby it acquired a 49.5 percent minority interest in a synthetic fuel partnership. The partnership is a variable interest entity that will become subject to the requirements of Financial Accounting Standards Board (“FASB”) Interpretation FIN 46 (Revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of ARB 51, (“FIN 46R”) as of March 31, 2004. The transaction was subject to the receipt of a favorable private letter ruling from the Internal Revenue Service (the “IRS”) confirming that the synthetic fuel produced by the partnership is eligible for synthetic fuel tax credits. The partnership received the favorable letter ruling on October 31, 2003. The partnership’s test procedures are in compliance with the requirements outlined by the IRS. These tax credits are not available for synthetic fuel produced after 2007.

The production of synthetic fuel results in pretax losses. In 2003, these pretax losses totaled $105.5 million and are reported as nonoperating expense on the Corporation’s income statement. The production of synthetic fuel results in tax credits as well as tax deductions for the nonoperating losses, which reduce the Corporation’s income tax expense. In 2003, the Corporation’s participation in the synthetic fuel partnership resulted in $94.1 million of tax credits, and the nonoperating losses generated an additional $37.2 million of tax benefits, which combined to reduce the Corporation’s income tax provision by $131.3 million. The tax benefits and credits related to the operation of the partnership increased net income by $25.8 million or $.05 per share. The tax credits are shown as a reconciling item in the Corporation’s reconciliation of the U.S. statutory rate to its effective income tax rate in Note 13 to the Consolidated Financial Statements.

Because the partnership has received the favorable private letter ruling from the IRS and because the partnership’s test procedures conform to IRS procedures, the Corporation believes its loss exposure under the synthetic fuel partnership is minimal. Application of FIN 46R to this entity is not expected to have a material effect on the Corporation’s consolidated financial statements.

2003 versus 2002

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2002 versus 2001

Sales of Principal Products

Approximately 13 percent, 12 percent and 11 percent of net sales were to Wal-Mart Stores, Inc. in 2003, 2002 and 2001, respectively, primarily in the Personal Care and Consumer Tissue businesses.

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Liquidity and Capital Resources

Cash Flow Commentary:

Contractual Obligations:

The following table presents the Corporation’s total contractual obligations for which cash flows are fixed or determinable.

Commentary:

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The table does not include anticipated payments related to the synthetic fuel partnership described above. The Corporation will only make such payments if the partnership produces synthetic fuel in future years. The Corporation estimates that it will make payments of $130 million in 2004, $100 million in both 2005 and 2006, and $60 million in 2007.

A consolidated financing subsidiary of the Corporation has issued preferred securities that are in substance perpetual and are callable by the subsidiary in November 2008 and each 20-year anniversary thereafter. Management currently anticipates extending the call date of these securities in November 2008 and therefore they are not included in the above table (see Financing Commentary below for additional detail regarding these securities).

Investing Commentary:

During the first quarter of 2003, the Corporation purchased the Klucze tissue business in Poland. This acquisition is consistent with the Corporation’s strategy of growing its global consumer tissue business and will provide it with a strong platform to expand its business in Central and Eastern Europe. The allocation of the purchase price to the fair value of assets and liabilities acquired was completed in 2003 and resulted in recognition of goodwill and other intangible assets of approximately $20 million.

During the third quarter of 2003, the Corporation acquired an additional 49 percent interest in Kimberly-Clark Peru S.A. and the remaining 50 percent interest in its tissue joint venture in Brazil (Klabin Kimberly S.A.). The cost of these acquisitions totaled approximately $200 million. These acquisitions were a result of the partners in each of the ventures exercising their options to sell their ownership interest to the Corporation. As of December 31, 2003, the preliminary allocation of the purchase price resulted in approximately $150 million of goodwill being recorded on these acquisitions. The allocation of the purchase price to the fair value of assets and liabilities acquired is currently in process and will be completed by the second quarter of 2004.

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Financing Commentary:

In addition, during 2002 and 2003, .1 million shares at a cost of $8.1 million and .2 million shares at a cost of $8.4 million, respectively, were purchased in connection with the exercise of employee stock options.

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In August 2003, the Corporation issued $500 million of 5.0% Notes due August 15, 2013. The proceeds were used to redeem other notes, as described below, and retire commercial paper. In connection with the borrowing, the Corporation entered into an interest rate swap agreement maturing on August 15, 2013 with a counterparty under which the difference between fixed- and floating-rate interest amounts calculated on a $300 million notional amount is exchanged on a quarterly basis. The floating rate is 3-month average LIBOR plus 4.4 basis points. The swap agreement will permit the Corporation to maintain its desired ratio of fixed and floating-rate borrowings. During June and July 2003, the Corporation issued redemption notices on $200 million of 7 7/8% and $200 million of 7.0% debentures, respectively. The costs associated with redeeming the debentures, totaling $18.4 million, were recorded in the third quarter of 2003. Also in the third quarter of 2003, the Corporation terminated a $400 million fixed-to-floating interest rate swap it had entered into in March 2002 in connection with the issuance of $400 million of 4 1/2% Notes maturing in July 2005. The gain on the terminated swap will be amortized to earnings over the remaining life of the debt issue.

In August 2003, the Corporation repurchased $45 million of industrial revenue bonds.

On December 29, 2003, the Corporation announced the repurchase of $40 million of industrial revenue development bonds to be effective February 2, 2004. At December 31, 2003, the Corporation classified the $40 million as debt payable within one year and reduced long-term debt by that same amount.

Variable Interest Entities

The Corporation has variable interests in the following financing and real estate entities and a synthetic fuel partnership (see Synthetic Fuel Partnership).

Financing Entities

The Corporation holds a significant variable interest in two financing entities that were used to monetize long-term notes received from the sale of certain nonstrategic timberlands and related assets, which were sold in 1999 and 1989 to nonaffiliated buyers. These transactions qualified for the installment method of accounting for income tax purposes and met the criteria for immediate profit recognition for financial reporting purposes contained in SFAS 66, Accounting for Sales of Real Estate. These sales involved notes receivable with an aggregate face value of $617 million and a fair value of approximately $593 million at the date of sale. The notes receivable are backed by irrevocable standby letters of credit issued by money center banks, which aggregated $617 million at December 31, 2003.

Because the Corporation desired to monetize the $617 million of notes receivable and continue the deferral of current income taxes on the gains, in 1999 the Corporation transferred the notes received from the 1999 sale to a noncontrolled financing entity, and in 2000 it transferred the notes received from the 1989 sale to another

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noncontrolled financing entity. The Corporation has minority voting interests in each of the financing entities (collectively, the “Financing Entities”). The transfers of the notes and certain other assets to the Financing Entities were made at fair value, were accounted for as asset sales and resulted in no gain or loss. In conjunction with the transfer of the notes and other assets, the Financing Entities became obligated for $617 million in third-party debt financing. A nonaffiliated financial institution has made substantive capital investments in each of the Financing Entities, has majority voting control over them and has substantive risks and rewards of ownership of the assets in the Financing Entities. The Corporation also contributed intercompany notes receivable aggregating $662 million and intercompany preferred stock of $50 million to the Financing Entities, which serve as secondary collateral for the third-party lending arrangements. In the unlikely event of default by both of the money center banks that provided the irrevocable standby letters of credit, the Corporation could experience a maximum loss of $617 million under these arrangements.

The Corporation has not consolidated the Financing Entities because it is not the primary beneficiary of either entity. Rather, it will continue to account for its ownership interests in these entities using the equity method of accounting. The Corporation retains equity interests in the Financing Entities for which the legal right of offset exists against the intercompany notes. As a result, the intercompany notes payable have been offset against the Corporation’s equity interests in the Financing Entities for financial reporting purposes.

See Financing Commentary above for a description of the Corporation’s Luxembourg-based financing subsidiary, which is consolidated because the Corporation is the primary beneficiary of the entity.

Real Estate Entities

The Corporation holds a significant variable interest in certain real estate entities that will become subject to the requirements of FIN 46R as of March 31, 2004. Following is a description of these real estate entities. In 1994, the Corporation began participating in the U.S. affordable and historic renovation real estate markets. Investments in these markets are encouraged by laws enacted by the United States Congress and related federal income tax rules and regulations. Accordingly, these investments generate income tax credits and tax losses that are used to reduce the Corporation’s income tax liabilities. The Corporation has invested in these markets through (i) partnership arrangements in which it is a limited partner, (ii) limited liability companies (“LLCs”) in which it is a nonmanaging member and (iii) investments in various funds in which the Corporation is one of many noncontrolling investors. These entities borrow money from third parties generally on a nonrecourse basis and invest in and own various real estate projects.

The Corporation is still evaluating the effect of FIN 46R on its real estate entities. If the Corporation is determined to be the primary beneficiary of any of these real estate entities, it will consolidate such entity as of March 31, 2004. In the December 31, 2003 financial statements, the Corporation has accounted for its interests in the real estate entities by the equity method of accounting or by the effective yield method, as appropriate, and has accounted for the related income tax credits and other tax benefits as a reduction in the income tax provision. As of December 31, 2003, the Corporation had a net equity of $132.5 million in its nonconsolidated real estate entities. Income tax credits totaling approximately $115 million will be claimed on the Corporation’s income tax returns through December 31, 2003. As of December 31, 2003, total permanent financing debt for the nonconsolidated entities was $284 million. A total of $31.2 million of the permanent financing debt is guaranteed by the Corporation and the remainder of this debt is not supported or guaranteed by the Corporation. Except for the guaranteed portion, permanent financing debt is secured solely by the properties and is nonrecourse to the Corporation. From time to time, temporary interim financing is guaranteed by the Corporation. In general, the Corporation’s interim financing guarantees are eliminated at the time permanent financing is obtained. At December 31, 2003, $7.5 million of temporary interim financing associated with these nonconsolidated real estate entities was guaranteed by the Corporation.

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If the Corporation’s investments in these real estate entities were to be disposed of at their carrying amounts, a portion of the tax credits may be recaptured and may result in a charge to earnings. As of December 31, 2003, this recapture risk is estimated to be $57 million. The Corporation has no current intention of disposing of these investments during the recapture period, nor does it anticipate the need to do so in the foreseeable future in order to satisfy any anticipated liquidity need. Accordingly, the recapture risk is considered to be remote.

At December 31, 2003, the Corporation’s maximum loss exposure for its real estate entities is estimated to be $228 million and was composed of its net equity in these entities of $132.5 million, its permanent financing guarantees of $31.2 million, its interim financing guarantees of $7.5 million and the income tax credit recapture risk of $57 million. Management believes the likelihood of loss on these projects is not material due to the current economic returns on these projects.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from these estimates, and changes in these estimates are recorded when known. The critical accounting policies used by management in the preparation of the Corporation’s consolidated financial statements are those that are important both to the presentation of the Corporation’s financial condition and results of operations and require significant judgments by management with regard to estimates used. The critical judgments by management relate to consumer and trade promotion and rebate accruals, pension benefits, retained insurable risks, excess and obsolete inventory, allowance for doubtful accounts, useful lives for depreciation and amortization, future cash flows associated with impairment testing for goodwill and long-lived assets and for determining the primary beneficiary of variable interest entities, deferred tax assets and potential income tax assessments, and contingencies. The Corporation’s critical accounting policies have been reviewed with the Audit Committee of the Board of Directors.

Promotion and Rebate Accruals

Among those factors affecting the accruals for promotions and rebates are estimates of the number of consumer coupons that will be redeemed, the type and number of activities within promotional programs between the Corporation and its trade customers and the quantity of products distributors have sold to specific customers. Generally, we base our estimates for consumer coupon costs on historical patterns of coupon redemption, influenced by judgments about current market conditions such as competitive activity in specific product categories. Estimates of trade promotion liabilities for promotional program costs incurred, but unpaid, are generally based on estimates of the quantity of customer sales, timing of promotional activities and forecasted costs for activities within the promotional programs. Settlement of these liabilities sometimes occurs in periods subsequent to the date of the promotion activity. Trade promotion programs include introductory marketing funds such as slotting fees, cooperative marketing programs, temporary price reductions, favorable end of aisle or in-store product displays and other activities conducted by the customers to promote the Corporation’s products. Promotion accruals as of December 31, 2003 and 2002 were $222.0 million and $227.7 million, respectively. Rebate accruals as of December 31, 2003 and 2002 were $136.4 million and $159.5 million, respectively.

Pension Benefits

The Corporation and its subsidiaries in North America and the United Kingdom have defined benefit pension plans (the “Principal Plans”) and/or defined contribution retirement plans covering substantially all regular employees. Certain other subsidiaries have defined benefit pension plans or, in certain countries,

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termination pay plans covering substantially all regular employees. The funding policy for the qualified defined benefit plans in North America and the defined benefit plans in the United Kingdom is to contribute assets to fully fund the accumulated benefit obligation (“ABO”). Subject to regulatory and tax deductibility limits, any funding shortfall will be eliminated over a reasonable number of years. Nonqualified U.S. plans providing pension benefits in excess of limitations imposed by the U.S. income tax code are not funded. Funding for the remaining defined benefit plans outside the U.S. is based on legal requirements, tax considerations, investment opportunities, and customary business practices in such countries.

Consolidated pension expense for defined benefit pension plans was $168 million in 2003 compared with $32 million for 2002. Pension expense is calculated based upon a number of actuarial assumptions applied to each of the defined benefit plans. The weighted-average expected long-term rate of return on pension fund assets used to calculate pension expense was 8.42 percent in 2003 compared with 9.19 percent in 2002 and will be 8.32 percent in 2004. The expected long-term rate of return on pension fund assets was determined based on several factors, including input from our pension investment consultants and projected long-term returns of broad equity and bond indices. We also considered our U.S. plan’s historical 10-year and 15-year compounded annual returns of 10.1 percent and 10.3 percent, respectively, which have been in excess of these broad equity and bond benchmark indices. We anticipate that on average the investment managers for each of the plans comprising the Principal Plans will generate annual long-term rates of return of at least 8.5 percent. Our expected long-term rate of return on the assets in the Principal Plans is based on an asset allocation assumption of about 70 percent with equity managers, with expected long-term rates of return of approximately 10 percent, and 30 percent with fixed income managers, with an expected long-term rate of return of about 6 percent. We regularly review our actual asset allocation and periodically rebalance our investments to our targeted allocation when considered appropriate. Also, when deemed appropriate, we execute hedging strategies using index options and futures to limit the downside exposure of certain investments by trading off upside potential above an acceptable level. We executed such hedging strategies in 2003, 2002 and 2001. No hedging instruments are currently in place beyond January 2004. We will continue to evaluate our long-term rate of return assumptions at least annually and will adjust them as necessary.

We determine pension expense on the fair value of assets rather than a calculated value that averages gains and losses (“Calculated Value”) over a period of years. Investment gains or losses represent the difference between the expected return calculated using the fair value of assets and the actual return based on the fair value of assets. We recognize the variance between actual and expected gains and losses on pension assets in pension expense more rapidly than we would if we used a Calculated Value for plan assets. As of December 31, 2003, the Principal Plans had cumulative unrecognized investment losses and other actuarial losses of approximately $1.6 billion. These unrecognized net losses may increase our future pension expense if not offset by (i) actual investment returns that exceed the assumed investment returns, or (ii) other factors, including reduced pension liabilities arising from higher discount rates used to calculate our pension obligations, or (iii) other actuarial gains, including whether such accumulated actuarial losses at each measurement date exceed the “corridor” determined under SFAS 87, Employers’ Accounting for Pensions.

The discount (or settlement) rate that we utilize for determining the present value of future pension obligations generally has been based in the U.S. on the yield reported for the long-term AA-rated corporate bond indexes, converted to an equivalent one-year compound basis. From time-to-time, and most recently at December 31, 2002, we validated this practice by assembling a hypothetical portfolio of high-quality debt securities where the portfolio cash flows correspond to expected future benefit payments. We use similar techniques for establishing the discount rates for our non-U.S. Principal Plans. The weighted-average discount rate for the Principal Plans decreased to 5.97 percent at December 31, 2003 from 6.68 percent at December 31, 2002.

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We estimate that our consolidated pension expense will approximate $180 million in 2004. This estimate reflects the effect of the actuarial losses and is based on an expected weighted-average long-term rate of return on assets in the Principal Plans of 8.50 percent, a weighted-average discount rate for the Principal Plans of 5.97 percent and various other assumptions. Pension expense beyond 2004 will depend on future investment performance, the Corporation’s contributions to the pension trusts, changes in discount rates and various other factors related to the covered employees in the plans.

If the expected long-term rate of return on assets for our Principal Plans was lowered by 0.25 percent, our annual pension expense would increase by approximately $9 million. If the discount rate assumptions for these same plans were reduced by 0.25 percent, our annual pension expense would increase by approximately $13 million and our December 31, 2003 minimum pension liability would increase by about $142 million.

The fair value of the assets in our defined benefit plans increased from $3.4 billion at December 31, 2002 to $4.0 billion at December 31, 2003, primarily due to investment gains and plan contributions exceeding payments for pension benefits and plan expenses. Lower discount rates have caused the projected benefit obligations (the “PBO”) of the defined benefit plans to exceed the fair value of plan assets by approximately $1.2 billion at December 31, 2003, compared with approximately $1.0 billion at December 31, 2002. Primarily due to the lower discount rates, the ABO of our defined benefit plans exceeded plan assets by about $.8 billion at the end of 2003. At the end of 2002, the ABO exceeded the fair value of plan assets by about $.7 billion. On a consolidated basis, the Corporation contributed about $184 million to pension trusts in 2003 compared with $126 million in 2002. In addition, the Corporation made direct benefit payments of $29.7 million in 2003 compared to $12.2 million in 2002. We estimate that the Corporation will contribute about $100 million to pension trusts in 2004.

The discount rate used for each country’s pension obligation is identical to the discount rate used for that country’s other postretirement obligation. The discount rates displayed for the two types of obligations for the Corporation’s consolidated operations may appear different due to the weighting used in the calculation of the two weighted-average discount rates.

Retained Insurable Risks

We retain selected insurable risks, primarily related to property damage, workers compensation, and product, automobile and premises liability based upon historical loss patterns and management’s judgment of cost effective risk retention. Accrued liabilities for incurred but not reported events, principally related to workers compensation and automobile liability, are based upon loss development factors provided to us by our external insurance brokers.

Excess and Obsolete Inventory

We require all excess, obsolete, damaged or off-quality inventories including raw materials, in-process, finished goods, and spare parts to be adequately reserved for or to be disposed of. Our process requires an ongoing tracking of the aging of inventories to be reviewed in conjunction with current marketing plans to ensure that any excess or obsolete inventories are identified on a timely basis. This process requires judgments be made about the salability of existing stock in relation to sales projections. The evaluation of the adequacy of provision for obsolete and excess inventories is performed on at least a quarterly basis. No provisions for future anticipated obsolescence, damage or off-quality inventories are made.