SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-5231

McDONALD'S CORPORATION
(Exact name of registrant as specified in its charter)

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

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

        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 ý No o

        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. ý

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

        The aggregate market value of voting stock held by nonaffiliates of the registrant was $36,208,412,413 as of June 30, 2002. The number of shares of common stock outstanding was 1,268,809,982 as of January 31, 2003.

DOCUMENTS INCORPORATED BY REFERENCE.

Part III of this Form 10-K incorporates information by reference from the registrant's 2002 definitive proxy statement which will be filed no later than 120 days after December 31, 2002.

Part I
Item 1. BUSINESS

McDonald's Corporation, the registrant, together with its subsidiaries, is referred to herein as the "Company."

(a)    GENERAL DEVELOPMENT OF BUSINESS

During 2002, there have been no significant changes to the Company's corporate structure or material changes in the Company's method of conducting business.

(b)    FINANCIAL INFORMATION ABOUT SEGMENTS

Segment data for the years ended December 31, 2002, 2001 and 2000 are included in Part II, Item 8, page 34 of this Form 10-K.

(c)    NARRATIVE DESCRIPTION OF BUSINESS

General

The Company operates in the food service industry and primarily operates and franchises quick-service restaurant businesses under the McDonald's brand. These restaurants serve a varied, yet limited, value-priced menu (see Products) in 119 countries around the world.

        The Company also operates other restaurant concepts under its Partner Brands: Boston Market, Chipotle Mexican Grill and Donatos Pizzeria, which are all located primarily in the U.S. In addition, the Company has a minority ownership interest in U.K.-based Pret A Manger. In March 2002, the Company sold its Aroma Café business in the U.K.

        Since McDonald's restaurant business comprises virtually all of the Company's consolidated operating results, this narrative primarily relates to the McDonald's restaurant business, unless otherwise noted.

        All restaurants are operated by the Company or, under the terms of franchise arrangements, by franchisees who are independent entrepreneurs, or by affiliates operating under joint-venture agreements between the Company and local business people.

        The Company's operations are designed to assure consistency and high quality at every McDonald's restaurant. When granting franchises and forming joint-venture agreements, the Company is selective and is not in the practice of franchising to, or partnering with, investor groups or passive investors.

        Under the conventional franchise arrangement, franchisees provide capital by initially investing in the equipment, signs, seating and décor of their restaurant businesses, and by reinvesting in the business over time. The Company shares the investment by generally owning or leasing the land and building. Franchisees contribute to the Company's revenue stream through payment of rent and service fees based upon a percent of sales, with specified minimum payments, along with initial fees. The conventional franchise arrangement typically lasts 20 years and franchising practices are generally consistent throughout the world. A discussion regarding site selection is included in Part I, Item 2, page 4 of this Form 10-K.

        The Company, its franchisees and affiliates purchase food, packaging, equipment, etc., from numerous independent suppliers who have been approved by the Company. The Company has established and strictly enforces high quality standards. The Company has quality assurance labs around the world that work to ensure that our high standards are consistently met. The quality assurance process not only involves ongoing product reviews, but also on-site inspections of suppliers' facilities. Further, there is a Quality Assurance Board, composed of the Company's technical, safety and supply chain specialists, which provides strategic global leadership for all aspects of food quality and safety. In addition, the Company works closely with suppliers to encourage innovation, assure best practices and drive continuous improvement.

        Independently owned and operated distribution centers, also approved by the Company, distribute products and supplies to most McDonald's restaurants. In addition, restaurant personnel are trained in the proper storage, handling and preparation of our products and in the delivery of customer service.

        McDonald's global brand is well known. Marketing, promotional and public relations activities are designed to nurture McDonald's brand image and differentiate the Company from competitors. Marketing and promotional efforts focus on value, food taste and the customer experience. In addition, the Company is focused on being a leader in the area of social responsibility, as the Company believes it is important to give back to the people and communities around the world who are responsible for our success.

Products

McDonald's restaurants offer a substantially uniform menu. In addition, McDonald's tests new products on an ongoing basis.

        McDonald's menu includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Big N' Tasty, Filet-O-Fish and several chicken sandwiches, Chicken McNuggets, french fries, salads, milk shakes, McFlurry desserts, sundaes and soft serve cones, pies, cookies and soft drinks and other beverages. In addition, the restaurants sell a variety of other products during limited-time promotions.

        McDonald's restaurants operating in the U. S. and certain international markets are open during breakfast hours and offer a full- or limited-breakfast menu. Breakfast offerings may include the Egg McMuffin and Sausage McMuffin with Egg sandwiches, hotcakes, biscuit and bagel sandwiches and muffins.

        Chipotle serves gourmet burritos and tacos. Donatos sells pizza, submarine sandwiches and salads. Boston Market is a home-meal replacement concept serving chicken, meatloaf and a variety of other main and side dishes. Pret A Manger is a quick-service food concept that serves mainly prepared and packaged cold sandwiches, snacks and drinks during lunchtime.

Intellectual property

The Company owns valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information, some of which, including "McDonald's," "Ronald McDonald," "Big Mac" and other related marks, are of material importance to the Company's business. The Company also has certain patents on restaurant equipment which, while valuable, are not material to its business.

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Seasonal operations

The Company does not consider its operations to be seasonal to any material degree.

Working capital practices

Information about the Company's working capital practices is incorporated herein by reference to Management's discussion and analysis of financial condition and results of operations for the years ended December 31, 2002, 2001 and 2000 in Part II, Item 7, pages 9 through 22, and the Consolidated statement of cash flows for the years ended December 31, 2002, 2001 and 2000 in Part II, Item 8, page 26 of this Form 10-K.

Customers

The Company's business is not dependent upon a single customer or small group of customers.

Backlog

Company-operated restaurants have no backlog orders.

Government contracts

No material portion of the business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.

Competition

McDonald's restaurants compete with international, national, regional and local retailers of food products. The Company competes on the basis of price, convenience and service and by offering quality food products. The Company's competition in the broadest perspective includes restaurants, quick-service eating establishments, pizza parlors, coffee shops, street vendors, convenience food stores, delicatessens and supermarkets.

        In the U.S., there were about 526,000 restaurants that generated $320 billion in annual sales in 2002. McDonald's restaurant business accounts for 2.6% of those restaurants and 6.3% of the sales. No reasonable estimate can be made of the number of competitors outside the U.S.

Research and development

The Company operates a research and development facility in Illinois. While research and development activities are important to the Company's business, these expenditures are not material. Independent suppliers also conduct research activities for the benefit of the McDonald's System, which includes franchisees and suppliers, as well as the Company, its subsidiaries and joint ventures.

Environmental matters

The Company is not aware of any federal, state or local environmental laws or regulations that will materially affect its earnings or competitive position, or result in material capital expenditures; however, the Company cannot predict the effect on its operations of possible future environmental legislation or regulations. During 2002, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.

Number of employees

During 2002, the Company's average number of employees worldwide, including Company-operated restaurant employees, was approximately 413,000. This includes employees at McDonald's Company-operated restaurants as well as other restaurant concepts operated by the Company.

(d)    FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS

Financial information about foreign and domestic markets is incorporated herein by reference to Management's discussion and analysis of financial condition and results of operations in Part II, Item 7, pages 9 through 22 and Segment and geographic information in Part II, Item 8, page 34 of this Form 10-K.

(e)    AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (Exchange Act). The Company therefore files periodic reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Such reports may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

        Financial and other information can be accessed on the Investor section of the Company's website at www.mcdonalds.com. The Company makes available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies of financial and other information are also available free of charge by calling 1-630-623-7428, or by sending a request to McDonald's Corporation Investor Relations Service Center, McDonald's Plaza, Oak Brook, Illinois 60523.

Item 2. PROPERTIES

The Company identifies and develops sites that offer convenience to customers and long-term sales and profit potential to the Company. To assess potential, the Company analyzes traffic and walking patterns, census data, school enrollments and other relevant data. The Company's experience and access to advanced technology aid in evaluating this information. The Company generally owns the land and building or secures long-term land and building leases for restaurant sites, which ensures long-term occupancy rights and helps control related costs. Restaurant profitability for both the Company and franchisees is important; therefore, ongoing efforts are made to control average development costs through construction and design efficiencies and standardization and by leveraging the Company's global sourcing network. Additional information about the Company's properties is included in

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Management's discussion and analysis of financial condition and results of operations in Part II, Item 7, pages 9 through 22 and in Financial statements and supplementary data in Part II, Item 8, pages 23 through 39 of this Form 10-K.

Item 3. LEGAL PROCEEDINGS

The Company has pending a number of lawsuits which have been filed from time to time in various jurisdictions. These lawsuits cover a broad variety of allegations spanning the Company's entire business. The following is a brief description of the more significant of these categories of lawsuits. In addition, the Company is subject to various federal, state and local regulations that impact various aspects of its business, as discussed below. The Company does not believe that any such claims, lawsuits or regulations will have a material adverse effect on its financial condition or results of operations.

Franchising

A substantial number of McDonald's restaurants are franchised to independent entrepreneurs operating under arrangements with the Company. In the course of the franchise relationship, occasional disputes arise between the Company and its franchisees relating to a broad range of subjects including, but not limited to, quality, service and cleanliness issues, contentions regarding grants or terminations of franchises, franchisee claims for additional franchises or rewrites of franchises, and delinquent payments. Additionally, occasional disputes arise between the Company and individuals who claim they should have been granted a McDonald's franchise.

Suppliers

The Company and its affiliates and subsidiaries do not supply, with minor exceptions outside the U.S., food, paper or related items to any McDonald's restaurants. The Company relies upon numerous independent suppliers that are required to meet and maintain the Company's high standards and specifications. On occasion, disputes arise between the Company and its suppliers on a number of issues including, by way of example, compliance with product specifications and the Company's business relationship with suppliers. In addition, disputes occasionally arise on a number of issues between the Company and individuals or entities who claim that they should be (or should have been) granted the opportunity to supply products or services to the Company's restaurants.

Employees

Thousands of people are employed by the Company and in restaurants owned and operated by subsidiaries of the Company. In addition, thousands of people, from time to time, seek employment in such restaurants. In the ordinary course of business, disputes arise regarding hiring, firing and promotion practices.

Customers

The Company's restaurants serve a large cross-section of the public. In the course of serving so many people, disputes arise as to products, service, accidents, advertising, nutritional and other disclosures as well as other matters typical of an extensive restaurant business such as that of the Company.

Intellectual property

The Company has registered trademarks and service marks, some of which are of material importance to the Company's business. The Company also has certain patents on restaurant equipment which, while valuable, are not material to its business. From time to time, the Company may become involved in litigation to defend and protect its use of its intellectual property.

Government regulations

Local, state and federal governments have adopted laws and regulations involving various aspects of the restaurant business, including, but not limited to, franchising, health, safety, environment, zoning and employment. The Company does not believe that it is in violation of any existing statutory or administrative rules, but it cannot predict the effect on its operations from the issuance of additional requirements in the future.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

None.

THE FOLLOWING ARE THE EXECUTIVE OFFICERS OF THE COMPANY:

        Claire H. Babrowski, 45, is President of McDonald's Asia/Pacific, Middle East and Africa, a position to which she was appointed in June 2001. From January 2000 to June 2001 she was Executive Vice President, Worldwide Restaurant Systems; from June 1998 to January 2000 she was Executive Vice President, U.S. Restaurant Systems; and from May 1997 to June 1998 she was Senior Vice President, U.S. Restaurant Systems. Ms. Babrowski has been with the Company for 25 years.

        Charles H. Bell, 42, is President and Chief Operating Officer, effective January 2003. From June 2001 to December 2002 he was President of McDonald's Europe; from September 1999 to June 2001 he was President of McDonald's Asia/Pacific, Middle East and Africa; and from 1993 to September 1999 he was Managing Director of McDonald's Australia. Mr. Bell has been with the Company for 27 years.

        James R. Cantalupo, 59, is Chairman and Chief Executive Officer, a position to which he was appointed effective January 2003. From January to December 31, 2002 he was Vice Chairman, Emeritus and President, Emeritus. From December 1999 to December 2001 he was Vice Chairman and President. From August 1998 to December 1999 he was Vice Chairman, Chairman and Chief Executive Officer of McDonald's International. From January 1992 to August 1998 he was President and Chief Executive Officer, McDonald's International. Mr. Cantalupo has been with the Company for 29 years.

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        Mats Lederhausen, 39, is President of the Business Development Group, a position to which he was appointed in January 2003. From July 2001 to January 2003 he served as Executive Vice President of Strategy and Corporate Development; from December 2000 to July 2001 he served as Senior Vice President, Corporate Strategy; and from April 1999 to July 2000 he served as Vice President. Before joining McDonald's corporate staff, Mr. Lederhausen was Managing Director and Joint-Venture Partner for Svenska McDonald's Development AB, a subsidiary of the Company. He is no longer Managing Director and Joint-Venture Partner of that subsidiary. Mr. Lederhausen has been with the McDonald's System for 18 years.

        M. Lawrence Light, 61, is Corporate Executive Vice President—Global Chief Marketing Officer. He has served in that position since joining the Company in September 2002. Prior to joining McDonald's, he was President and Chief Executive Officer of Arcature, a brand consultancy. Mr. Light has been with the Company for less than one year.

        Matthew H. Paull, 51, is Corporate Executive Vice President and Chief Financial Officer, a position to which he was elected in July 2001. Prior to that time, he served as Senior Vice President, Corporate Tax and Finance from December 2000 to July 2001; Senior Vice President from January 2000 to December 2000; and Vice President from June 1993 to January 2000. Mr. Paull has been with the Company for 9 years.

        David M. Pojman, 43, is Corporate Senior Vice President—Controller, a position he has held since March 2002. Previously, he served as Vice President and Assistant Corporate Controller from January 2000 to March 2002; and from July 1997 to January 2000 he served as Vice President—International Controller. Mr. Pojman has been with the Company for 20 years.

        Michael J. Roberts, 52, is President—McDonald's USA, a position he has held since June 2001. From July 1997 to June 2001 he was President, West Division. Mr. Roberts has been with the Company for 25 years.

        Eduardo Sanchez, 45, is President—Latin America and Canada Group, a position to which he was appointed in January 2003. Previously, he was President of the Latin America Group from May 1999 to January 2003; and International Relationship Partner for Latin America from November 1995 to May 1999. Mr. Sanchez has been with the Company for 26 years.

        Gloria Santona, 52, is Corporate Senior Vice President, General Counsel and Secretary, a position she has held since June 2001. From December 2000 to June 2001 she was Vice President, U.S. General Counsel and Secretary; and from March 1997 to December 2000 she was Vice President, Deputy General Counsel and Secretary. Ms. Santona has been with the Company for 25 years.

        James A. Skinner, 58, is Vice Chairman. Mr. Skinner was appointed to his current position effective January 2003. Previously, he served as President and Chief Operating Officer of McDonald's Worldwide Restaurant Group from February 2002 to December 2002. Prior to that, he served as President and Chief Operating Officer of McDonald's Europe, Asia/Pacific, Middle East and Africa from June 2001 to February 2002; and President of McDonald's Europe from December 1997 to June 2001. Mr. Skinner has been with the Company for 32 years.

        Russell P. Smyth, 46, is President—McDonald's Europe, a position to which he was appointed in January 2003. Previously, he served as President of Partner Brands from December 2001 to January 2003; International Relationship Partner for Southeast and Central Asia from May 1999 to December 2001; and Vice President of the Latin America Group from July 1996 to May 1999. Mr. Smyth has been with the Company for 19 years.

        Stanley R. Stein, 60, is Executive Vice President, Corporate Human Resources, a position he has held since July 1997. Prior to that time, Mr. Stein served as Senior Vice President. Mr. Stein has been with the Company for 28 years.

Part II

Item 5A. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's common stock trades under the symbol MCD and is listed on the New York and Chicago stock exchanges in the U.S.

        The following table sets forth the common stock price ranges on the New York Stock Exchange composite tape and dividends declared per common share.

        The approximate number of shareholders of record and beneficial owners of the Company's common stock as of January 31, 2003 was estimated to be 1,032,000.

        Given the Company's returns on equity and assets, management believes it is prudent to reinvest a significant portion of earnings back into the business and use excess cash flow for debt repayments and share repurchases. Accordingly, the common stock dividend yield is modest. The Company has paid dividends on common stock for 27 consecutive years through 2002 and has increased the dividend amount at least once every year. Additional dividend increases will be considered after reviewing returns to shareholders, profitability expectations, financing needs and tax treatment of dividends. Dividends are declared and paid on an annual basis. As in the past, future dividends will be declared at the discretion of the Company's Board of Directors.

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Item 5B. EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes information about our equity compensation plans as of December 31, 2002. All outstanding awards relate to our common stock. Shares awarded under all of the following plans may be from the Company's treasury or may be otherwise acquired in the open market.

(1)

Included in this information are the following plans and the related number of securities available for future issuance under these plans as approved by security holders:

2001 Omnibus Stock Ownership Plan. 29,673,065 shares

1992 Stock Ownership Incentive Plan. no shares

1975 Stock Ownership Option Plan. 3,370,942 shares

(2)

The following plans, or the addition of shares to existing plans, not approved by shareholders are as follows:

Directors' Stock Plan. The Plan provides an opportunity for outside directors and senior directors to defer some or all of their annual retainers and Board and Committee meeting fees. In addition, each director receives a credit of $17,500 to his or her plan account at the end of each full year of service, up to a maximum of 10 years. Each director's plan account is credited with a number of shares as though the deferred amounts had been invested in the Company's common stock, and the number of shares is adjusted for dividends paid on the Company's common stock. Upon retirement, or a date specified by the director, the director receives cash payments based on the value of the shares credited to the director's account, in a lump sum or, if the director elects, in installments for a period of up to 15 years. A director may elect to receive payment in the form of shares of common stock.

1999 Non-Employee Director Stock Option Plan. The Plan provided for the granting of stock options to non-employee directors. There were initial stock option grants of 5,000 shares to directors when they joined the board; and an annual stock option grant of 5,000 shares as of the date the director was elected or re-elected at the Company's annual meeting of shareholders. Options have a ten-year term and become exercisable in increments of 33% on the first, second and third anniversary dates of the grant. No future grants will be made under this plan.

The Deferred Income Plan, now part of the Supplemental Profit Sharing and Savings Plan, was adopted to enable participants to defer receipt of all or any portion of their incentive payments and up to 90% of their base pay. Payments under this plan may be in cash or shares. There are 200,000 shares in this plan.

Of the 69,205,034 shares to be issued upon the exercise of outstanding options, 69,011,034 shares were added to the 1992 Stock Ownership Incentive Plan and the 1975 Stock Ownership Option Plan without security holder approval.

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Item 6.    SELECTED FINANCIAL DATA

11-YEAR SUMMARY

(1)

Includes pretax operating charges of $853 million ($700 million after tax or $0.55 per share) primarily related to restructuring markets and eliminating positions, restaurant closings/asset impairment and the write-off of technology costs. (The cash portion of this pretax expense was approximately $100 million after tax.) See page 9 for further details.

(2)

Includes $378 million of pretax operating charges primarily related to the U.S. business reorganization and other global change initiatives, and restaurant closing/asset impairment charges discussed on page 9.

(3)

Includes pretax operating charges of $322 million ($219 million after tax or $0.16 per share) consisting of $162 million of Made For You costs and the $160 million charge related to the home office productivity initiative.

(4)

Includes a net pretax expense of $253 million ($143 million after tax or $0.11 per share) consisting of $378 million of pretax operating charges noted in (2) above and $125 million of net pretax nonoperating income primarily related to a gain on the initial public offering of McDonald's Japan. (The cash portion of this net pretax expense was approximately $100 million after tax.) See page 9 for further details. Net income also reflects an effective tax rate of 29.8 percent, primarily due to the benefit of tax law changes in certain international markets ($147 million).

(5)

In 2002, includes a $98.6 million after-tax charge ($0.08 per share—basic and $0.07 per share—diluted) to reflect the cumulative effect of the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, which eliminates the amortization of goodwill and instead subjects it to annual impairment tests. See page 17 for further discussion. Net income per share, adjusted for the nonamortization provisions of SFAS No. 142, would have been $0.02 higher than the amount reported for 2001 and 2000 and $0.01 higher for 1996-1999.

(6)

Systemwide sales include sales by all restaurants, whether operated by the Company, by franchisees or by affiliates operating under joint-venture agreements. See page 11 for further discussion.

(7)

See page 17 for detail of Systemwide restaurants by geographic segment and Partner Brand.

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Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NATURE OF BUSINESS

The Company operates in the food service industry and primarily operates and franchises quick-service restaurant businesses under the McDonald's brand (McDonald's restaurants). Approximately 80% of McDonald's restaurants and about 75% of the total revenues of McDonald's restaurants are in nine markets: Australia, Brazil, Canada, China, France, Germany, Japan (a 50%-owned affiliate accounted for under the equity method), the United Kingdom and the United States. Throughout this discussion, McDonald's restaurant businesses in these nine markets collectively are referred to as "major markets."

        The Company also operates other restaurant concepts under its Partner Brands: Boston Market, Chipotle Mexican Grill and Donatos Pizzeria. In addition, the Company has a minority ownership in Pret A Manger. In March 2002, the Company sold its Aroma Café business in the U.K.

CONSOLIDATED OPERATING RESULTS

nm

Not meaningful.

STRATEGIC ACTIONS

In 2002, the Company initiated several strategic actions designed to optimize existing restaurant operations and improve the business. These actions were consistent with management's strategy of concentrating its capital and resources on the best near-term opportunities and of avoiding those that distract from restaurant-level execution. They included the restructuring of certain markets, the closing of a significant number of underperforming restaurants, the decision to terminate a long-term technology project, and the consolidation of certain home office facilities and elimination of positions to control costs, streamline operations and reallocate resources.

        In 2001, the Company implemented strategic changes and restaurant initiatives in the U.S. and certain international markets. The changes in the U.S. included streamlining operations by reducing the number of regions and divisions, enabling the Company to combine staff functions and improve efficiency.

        The Company recorded charges and/or gains associated with these actions in 2002 and 2001 as "significant items." Significant items generally represent charges and/or gains for actions or transactions related to the implementation of special initiatives of the Company or items that are unusual or infrequent in nature. The Company does not include these items when reviewing business performance trends,

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because management does not believe these are indicative of ongoing operations.

        The Company recorded $853 million of significant items in 2002 and $253 million of significant items in 2001. All significant items for both years were recorded in other operating expense, except as noted in the discussion that follows.

Significant items—expense/(income)

(1)

See other operating (income) expense, net note to consolidated financial statements on page 32 for a summary of the activity in the related liabilities.

Restructuring charges—restructuring markets and eliminating positions

In 2002, the Company recorded $267 million of pretax charges related to transferring ownership in four countries in the Middle East and Latin America to developmental licensees (approximately 150 restaurants), ceasing operations in three countries in Latin America (approximately 20 restaurants), and eliminating positions (approximately 600 positions, about half of which were in the U.S. and half of which were in international markets), reallocating resources and consolidating certain home office facilities to control costs. Under the developmental license business structure, which the Company successfully employs in more than 25 markets outside the U.S. (approximately 350 restaurants), the licensee owns the business, including the real estate interest. While the Company generally does not have any capital invested in these markets, it receives a royalty based on a percent of sales.

        The 2002 restructuring charges consisted of: $136 million of asset write-offs and losses on the sale of assets and $65 million of costs for leases and other obligations in the markets restructured or exited, $56 million of severance and other employee-related costs, $15 million of lease cancellation and other costs related to the closing of certain home office facilities, and $10 million of payments made to facilitate a change of ownership from U.S. franchisees who have had a history of financial difficulty and consequently were unable to deliver the level of operational excellence needed to succeed in the future. These changes were partially offset by a $15 million reversal of accrued restructuring costs recorded in 2001, primarily due to lower employee-related costs than originally estimated.

        In 2001, the Company recorded $200 million of pretax restructuring charges related to the strategic changes and restaurant initiatives in the U.S. and certain international markets. The initiatives were designed to improve the restaurant experience and included accelerated operations training, restaurant simplification, incentives for outstanding restaurant operations and an enhanced national restaurant evaluation system. In connection with these initiatives, the Company eliminated approximately 850 positions, consisting of 700 positions in the U.S., primarily in the divisions and regions, and 150 positions in international markets.

        The 2001 restructuring charges consisted of: $114 million of severance and other employee-related costs, $69 million of lease cancellation and other costs related to the closing of region and division facilities, and $17 million of other cash costs, primarily consisting of payments made to facilitate a change of ownership from U.S. franchisees who have had a history of financial difficulty and consequently were unable to deliver the level of operational excellence needed to succeed in the future.

Restaurant closings/asset impairment

In 2002, the Company recorded $402 million of pretax charges consisting of: $302 million related to management's decision to close 751 underperforming restaurants (234 were closed in 2002 and 517 will close throughout 2003) primarily in the U.S. and Japan, and $100 million primarily related to the impairment of assets for certain existing restaurants in Europe and Latin America. Most of the restaurants identified for closing had negative cash flows and/or very low annual sales volumes. Also, in many cases they would have required significant capital investment over the next several years to remain financially viable.

        In 2001, the Company recorded $135 million of pretax charges consisting of: $91 million related to the closing of 163 underperforming restaurants in international markets in 2001, a $24 million asset impairment charge due to an assessment of the ongoing impact of Turkey's significant currency devaluation on our business, and $20 million related to the disposition of Aroma Café in the U.K.

        Although restaurant closings occur each year, these 2002 and 2001 restaurant closing charges are identified as "significant items" because they were the result of separate intensive reviews by management in conjunction with other strategic actions.

Technology write-offs and other charges

In 2002, the Company recorded $184 million of pretax charges consisting of: $170 million primarily related to the write-off of software development costs as a result of management's decision to terminate a long-term technology project, and $14 million primarily related to the write-off of receivables and inventory in Venezuela as a result of the temporary closure of all McDonald's restaurants due to the national strike that began in early December. Although the terminated technology project was projected to deliver long-term benefits, it was no longer viewed as the best use of capital in the current environment, as the anticipated Systemwide cost over several years was expected to be in excess of $1 billion.

        In 2001, the Company recorded $55 million of pretax charges consisting of: $18 million primarily related to the write-off of certain technology, $12 million (recorded in nonoperating expense) primarily related to the write-off of a corporate investment, and $25 million primarily related to

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the unrecoverable costs incurred in connection with the theft of winning game pieces from the Company's Monopoly and certain other promotional games over an extended period of time, and the related termination of the supplier of the game pieces. Fifty individuals (none of whom were Company employees) were convicted of conspiracy and/or mail fraud charges.

McDonald's Japan IPO gain

In 2001, McDonald's Japan, the Company's largest market in the Asia/Pacific, Middle East and Africa (APMEA) segment, completed an IPO of 12 million shares. The Company owns 50% of McDonald's Japan, while the Company's founding partner Den Fujita and his family own approximately 26%. The Company recorded a $137 million gain (pre and after tax) in nonoperating income to reflect an increase in the carrying value of its investment as a result of the cash proceeds from the IPO received by McDonald's Japan.

EFFECT OF FOREIGN CURRENCIES ON REPORTED RESULTS

While changing foreign currencies affect reported results, McDonald's lessens exposures, where practical, by financing in local currencies, hedging certain foreign-denominated cash flows and by purchasing goods and services in local currencies.

Effect of foreign currency translation on consolidated reported results—positive/(negative)

        In 2002, foreign currency translation had a minimal impact on the revenue growth rate as the stronger Euro and British Pound were offset by weaker Latin American currencies (primarily the Argentine Peso, Brazilian Real and Venezuelan Bolivar). The operating income growth rate for 2002 was positively impacted by foreign currency translation primarily due to the stronger Euro and British Pound. In 2001, foreign currency translation had a negative impact on the growth rates primarily due to the weaker Euro, British Pound, Australian Dollar, Japanese Yen and Canadian Dollar.

        All information presented in constant currencies excludes the effect of foreign currency translation on reported results except for hyperinflationary economies, whose functional currency is the U.S. Dollar. Constant currency results are calculated by translating the current year results at prior year average exchange rates.

SYSTEMWIDE SALES

Systemwide sales include sales by all restaurants, whether operated by the Company, by franchisees or by affiliates operating under joint-venture agreements. Management believes that Systemwide sales information is useful in analyzing the Company's revenues because franchisees and affiliates pay rent, service fees and/or royalties that generally are based on a percent of sales with specified minimum payments.

Systemwide sales

(1)

Excludes the effect of foreign currency translation on reported sales.

na

Not applicable.

        Restaurant expansion, partly offset by negative comparable sales, drove the consolidated constant currency sales increases in 2002 and 2001.

        Sales in the U.S. increased in 2002 and 2001 due to expansion. Results in 2002 reflected the overall slowdown in the restaurant industry and increased competition.

        The primary contributors to Europe's constant currency sales growth in both years were France and Russia. In addition, the U.K. contributed to the increases in 2002 and 2001, although comparable sales were negative in both years. Europe's results for both years were impacted by negative comparable sales in Germany, where the economy continued to contract. We expect the difficult economic conditions in Germany to continue in the near term. In 2001, despite the Company's outstanding quality and safety record, Europe's results were negatively impacted by consumer confidence issues regarding the European beef supply in several markets.

        Sales results in APMEA declined in 2002 in constant currencies primarily due to negative comparable sales in Japan, which were in part due to continuing weak economic conditions, partly offset by a strong performance in Australia and expansion in China. In 2001, the constant currency sales increase was driven by strong results in China, partly offset by weak results in Japan, Taiwan and Turkey, and weak consumer spending in Australia. Beginning in late 2001 and continuing in 2002, sales were also dampened by consumer confidence issues regarding food safety throughout Japan.

        In Latin America, constant currency sales increased in both 2002 and 2001, despite the fact that many markets continued to be impacted by weak economic conditions. The increase in 2002 was primarily due to positive comparable sales in Brazil and expansion in Mexico, while in 2001 positive comparable sales in Mexico and Venezuela drove the increase.

        The Company expects the weak economic conditions in many markets in APMEA (including Japan) and Latin America to continue in the near term.

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        In Canada, constant currency sales increased in 2002 due to expansion, partly offset by negative comparable sales, while the 2001 constant currency sales increase was driven by positive comparable sales and expansion.

        The sales increase in Partner Brands in 2002 was primarily due to expansion and positive comparable sales at Chipotle. The sales increase in 2001 was primarily due to the acquisition of Boston Market in second quarter 2000. In addition, expansion of Chipotle along with strong comparable sales at Chipotle and Boston Market helped drive the increase in 2001.

Comparable sales—McDonald's restaurants

Average annual sales—McDonald's restaurants

Average sales per restaurant in constant currencies are affected by comparable sales as well as the size, location and number of new restaurants. The number of new restaurants affects average sales because new restaurants typically take a few years to reach long-term sales volumes. In addition, over the last several years more restaurants outside the U.S. have opened in less populated areas and in countries with lower average sales volumes and correspondingly lower average development costs.

Average annual sales—McDonald's restaurants

(1)

McDonald's restaurants in operation at least 13 consecutive months.

(2)

Excludes the effect of foreign currency translation on reported results.

(3)

Satellite restaurants are primarily located in Japan and Canada.

        In 2002, average annual sales per traditional restaurant in the U.S. declined slightly primarily due to negative comparable sales. In Europe, average annual sales per traditional restaurant were relatively flat in constant currencies. In APMEA and Canada, average annual sales per traditional restaurant declined in constant currencies primarily due to negative comparable sales and the impact of new restaurants. In Latin America, average annual sales per traditional restaurant increased slightly in constant currencies due to positive comparable sales. All segments benefited from the closing of underperforming restaurants in 2002 and 2001.

        In 2001, average annual sales per traditional restaurant were relatively flat for the U.S. and Canada in constant currencies. In other segments, negative comparable sales and the significant number of new restaurants, partly offset by the benefit of closing underperforming restaurants, drove the decreases in average annual sales per traditional restaurant.

        Satellite restaurants generally have significantly lower development costs and sales volumes than traditional restaurants. The use of these small, limited-menu restaurants has allowed profitable expansion into areas that otherwise would not be feasible (e.g., discount retail stores and airports). In 2002 and 2001, average annual sales for satellite restaurants increased in the U.S. This was due in part to our continued assessment of the appropriate use of these limited-menu sites and the closing of certain low-volume sites. Outside the U.S., average annual sales for satellite restaurants declined in constant currencies in both years primarily due to negative comparable sales in Japan, where the majority of satellites outside the U.S. are located. In connection with the restaurant closings previously discussed, the Company's Japanese affiliate will close more than 100 satellite restaurants in 2003.

REVENUES

Revenues include sales by Company-operated restaurants and fees from restaurants operated by franchisees or affiliates under joint-venture agreements. These fees include rent, service fees and/or royalties that are based on a percent of sales with specified minimum payments along with initial fees. Fees vary by type of site and investment by the Company and also according to local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise agreements that generally have 20-year terms.

        Revenues grow as sales build in existing restaurants and as new restaurants are added. Menu price changes also affect revenues and sales, but it is impractical to quantify their impact because of different pricing structures, new products, promotions and product-mix variations among restaurants and markets.

        Systemwide sales and revenues may grow at different rates during a given period, primarily due to a change in the mix of Company-operated, franchised and affiliated restaurants. For example, this mix is impacted by purchases and sales of restaurants between the Company and franchisees. Company-operated restaurants generated about 30% of Systemwide sales and about 75% of revenues for all periods presented.

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Revenues

(1)

Excludes the effect of foreign currency translation on reported revenues.

na

Not applicable.

        On a constant currency basis, total revenues increased at a higher rate than Systemwide sales in 2002 primarily due to significantly lower sales from our affiliate in Japan. Under our affiliate structure, we record a royalty in revenues based on a percentage of Japan's sales, whereas all of Japan's sales are included in Systemwide sales. For this reason, Japan's sales decline had a larger negative impact on Systemwide sales than on revenues. In 2001, total revenues increased at a higher rate than Systemwide sales primarily due to the second quarter 2000 acquisition of Boston Market restaurants, which were all Company-operated, and the restructuring of our ownership in the Philippines, effective July 1, 2001. As a result of the restructuring, most of our restaurants in the Philippines are now Company-operated rather than franchised. In addition, revenues in 2001 benefited from an increase in the royalty percent received from our Japanese affiliate, effective January 1, 2001.

        In the U.S., growth rates for Systemwide sales and total revenues were similar in 2002 and 2001. In both periods, Europe's total revenue growth rates were lower than the Systemwide sales growth rates primarily due to a lower percentage of Company-operated restaurants and an increase in rent assistance to franchisees compared with the prior year. APMEA's total revenue growth rates were higher than the Systemwide sales growth rates for both periods primarily due to our affiliate structure in Japan and a higher percentage of Company-operated restaurants, in part due to the restructuring of the Philippines. In addition, the total revenue growth rate in 2001 benefited from an increase in the royalty percent received from our Japanese affiliate. In Latin America, total revenue growth rates were higher than Systemwide sales growth rates for both periods primarily due to a higher percentage of Company-operated restaurants compared with the prior year.

OPERATING INCOME

Consolidated operating income decreased $584 million or 22% in 2002 and $633 million or 19% in 2001; however, significant charges of $853 million in 2002 and $378 million in 2001 were included in operating income. Operating income for both years included higher selling, general & administrative expenses and lower other operating income. Combined operating margin dollars were higher in 2002 than in 2001 and lower in 2001 than in 2000.

        Operating income from the major markets accounted for substantially all of consolidated operating income in 2002, 2001 and 2000.

        The following table presents reported operating income amounts and growth rates along with the growth rates adjusted for foreign currency translation and significant items. Adjusted constant currency operating income is one of the primary measures used to evaluate segment performance, because management believes that adjusted constant currency operating income reflects the most accurate representation of ongoing business operations.

Operating income

(1)

Excludes the effect of foreign currency translation on reported results and the significant items discussed on page 9 and shown in the following tables.

nm

Not meaningful.

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        The following table presents reconciliations of reported operating results to adjusted constant currency operating results by segment for both 2002 and 2001.

Reconciliation of reported operating results to adjusted constant currency operating results