ITEM 2        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

In the third quarter of 2003, sales from continuing operations reached $557.6 million, a 16.8% increase above the third quarter of 2002. Sales benefited from the 2003 acquisition of the Zatarain’s and Uniqsauces businesses, which accounted for 7.9% of the increase.

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Higher volumes, particularly in the U.S. consumer business, added 5.3%, and favorable foreign exchange rates contributed an additional 3.9% to sales.

Earnings per share from continuing operations for the third quarter were $0.28 compared to $0.24 in the third quarter of 2002, an increase of 16.7%. In addition to strong sales performance, gross profit margin from continuing operations (gross profit as a percentage of net sales) increased to 38.1% for the quarter due primarily to the growth in our higher margin consumer business sales. Operating expenses were adversely impacted by higher benefit costs, distribution expense and increased promotion and advertising support behind new products and seasonal items. Special charges, primarily related to the consolidation of facilities in Canada, were $1.3 million. In the third quarter, the results of the Company’s joint venture in Mexico improved as compared to a difficult performance in the first half of 2003. As a result, third quarter income from unconsolidated operations equaled last year’s level. The $0.04 increase in third quarter earnings per share from continuing operations was a direct result of increased operating income.

On August 12, 2003, the Company completed the sale of substantially all the operating assets of its packaging segment (Packaging) to the Kerr Group, Inc.  Packaging manufactures certain products used for packaging the Company’s spices and seasonings as well as packaging products used by manufacturers in the vitamin, drug and personal care industries.  Under the terms of the sale agreement, Packaging was sold for $142.5 million and included the assumption of all normal trade liabilities.  Of the $142.5 million, $132.5 million was paid in cash and the remaining $10.0 million will be paid over five years based on Packaging meeting certain performance objectives. The final purchase price is also subject to a working capital adjustment and other contingencies related to the performance of certain customer contracts.  The Company recorded a net gain on the sale of Packaging of $11.6 million (net of income taxes of $8.0 million) in the third quarter of 2003.  Included in this gain is a net pension and post retirement curtailment gain of $3.6 million.  The contingent consideration associated with the sale of Packaging will be recognized in the future as an adjustment to the gain based on the performance criteria established.  The Company also entered into a multi-year, market priced, supply agreement with the acquiring company.

On July 1, 2003 the Company sold the assets of Jenks Sales Brokers (Jenks), a division of the Company’s wholly owned U.K. subsidiary, to Jenks’ senior management for $5.8 million in cash.  Jenks provides sales and distribution services for other consumer product companies and was previously reported as a part of the Company’s consumer segment.  The Company recorded a net loss on the sale of Jenks of $2.0 million (net of an income tax benefit of $0.4 million) in the third quarter of 2003.

Beginning in the third quarter of 2003, the operating results of Packaging and Jenks have been reported as “Income from discontinued operations” in the condensed consolidated statement of income in accordance with the provisions of SFAS No. 144, “Accounting for the

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Impairment or Disposal of Long-Lived Assets”.  Prior periods have been reclassified, including the reallocation of certain overhead charges to other business segments.  Interest expense has been allocated to discontinued operations based on the ratio of the net assets of the discontinued operations to the total net assets of the Company. The condensed consolidated balance sheet and condensed consolidated statement of cash flows have also been reclassified to separately present the assets, liabilities and cash flows of the discontinued operations.

On June 4, 2003, the Company completed the purchase of Zatarain’s, the leading New Orleans style food brand in the United States, for $180.0 million in cash funded with commercial paper borrowings.  With annualized sales of approximately $100 million in the United States, Zatarain’s manufactures and markets flavored rice and dinner mixes, seafood seasonings, and many other products that add flavor to food.  The excess purchase price over the estimated fair value of the net assets purchased was $169.5 million.  The allocation of the purchase price is based on preliminary estimates, subject to revision, after appraisals have been finalized. Revisions to the allocation, which may be significant, will be reported as changes to various assets and liabilities, including goodwill and other intangible assets.  As of August 31, 2003, the goodwill balance included the entire excess purchase price of the Zatarain’s acquisition, as the valuation of specific intangible assets has not yet been completed.  We expect the valuation to result in a significant value for non-amortizable brands.  We do not anticipate significant amounts to be allocated to amortizable intangible assets and, therefore, the amount of intangibles amortization is not expected to be material to the results of operations in future periods.

On January 9, 2003, the Company acquired the Uniqsauces business, a condiment business based in Europe, for $19.5 million in cash.  With annualized sales of approximately $40-$45 million, Uniqsauces manufactures and markets condiments to retail grocery and food service customers, including quick service restaurants.

For the third quarter, sales from continuing operations for McCormick’s consumer business rose 28.8% compared to the same period of 2002. Excluding the net impact of foreign exchange, which accounted for 5.6% of the increase, sales rose 23.2%.  The acquisition of Zatarain’s and Uniqsauces contributed 13.8% of the sales increase. In local currency, consumer sales rose 31.6% in the Americas, 9.0% in Europe and 5.8% in the Asia/Pacific region. Sales from the Company’s

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acquisition of Zatarain’s accounted for about one-half of the increase in the Americas. Also contributing to this unusual increase was a comparison to a sales decline of 4.0% in the Americas in the third quarter of 2002. This decline resulted from higher customer purchases in the second quarter of 2002 in anticipation of the Company’s implementation of new systems under the Beyond 2000 program. For the consumer business in Europe, sales from the Uniqsauces acquisition drove the increase for the quarter. In all regions, distribution of new products contributed to sales growth.  For the nine months ended August 31, 2003, total consumer sales increased 16.4% compared to 2002.  The acquisitions of Zatarain’s and Uniqsauces contributed 5.4% of the sales increase, and the impact of foreign exchange added another 6.2%.  The remaining increase resulted from increased distribution of new products.

Third quarter operating income from continuing operations for the consumer business increased 38.2% compared to the same period of 2002. Operating income margin (operating income as a percentage of sales) increased to 16.1% in the third quarter of 2003 from 15.0% in the comparable period last year.  This increase resulted from higher margins of Zatarain’s products and higher sales of other consumer businesses.  This was offset by higher operating costs including pension and post-retirement costs, distribution expenses and an increase in the investment in brand advertising and promotion of 27.4% in support of new products and seasonal items.  For the nine months ended August 31, 2003, operating income for the consumer business increased 14.5%.  This increase was driven by increased sales partially offset by the higher operating costs discussed above.  Operating income margin for the nine months ended August 31, 2003 decreased to 15.5% from 15.8% in the comparable period last year.

For the third quarter of 2003, industrial sales increased 7.4% versus the same period last year. Excluding the net impact of foreign exchange, which accounted for 2.5% of the increase, sales rose 4.9%.  The acquisition of Uniqsauces in 2003 contributed 3.3% of the sales increase. In local currency, industrial sales increased 0.3% in the Americas, 26.5% in Europe and 7.3% in the Asia/Pacific region. In the Americas, an increase in sales of new and existing products to quick service restaurants was offset by lower sales to food processors. A portion of this sales reduction related to lower pricing in response to a decrease in certain raw material costs. In addition, sales to broadline distributors were relatively flat in the quarter. In Europe, over 80% of the increase was driven by sales from Uniqsauces. The remaining increase was based on strong sales to restaurant customers and manufacturers of snack seasoning products. For the nine months ended August 31, 2003, industrial sales increased 5.8%.  The

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acquisition of Uniqsauces in 2003 contributed 2.7% of the sales increase, and the net impact of foreign exchange added another 2.4%.  Volume increases were partially offset by the effects of lower pricing and product mix discussed above.

In the third quarter of 2003, industrial business operating income decreased 5.4% compared to the same period of 2002. Operating income margin decreased to 9.9% in the third quarter of 2003 from 11.2% in the comparable period last year.  Operating income was impacted by the higher cost of vanilla, higher pension and benefit costs and a less favorable mix of sales. Year-to-date, operating income for the industrial business has increased 3.8% versus the prior year as a result of the items mentioned above.  Operating income margin for the nine months ended August 31, 2003 decreased to 9.9% from 10.1% in the comparable period last year.

RESULTS OF OPERATIONS - COMPANY

Gross profit margin on continuing operations for the third quarter was 38.1%, 1.5% above last year. In the consumer business, gross profit margin increased due to the addition of the higher margin Zatarain’s business and targeted price increases.  In the industrial business, gross profit margin decreased mainly due to the higher cost of vanilla beans and a less favorable mix of sales.  The factors noted in the third quarter also impacted the nine months ended August 31, 2003, improving the Company’s gross profit margin 0.8% to 38.0% from 37.2% in the comparable period last year.

Selling, general and administrative expenses from continuing operations increased in the third quarter and nine months ended August 31, 2003, as compared to the same periods of last year in both dollars and as a percentage of net sales.  These increases were primarily due to higher benefit costs, increased advertising and promotional costs and increased distribution expenses.  The increase in benefit costs is mainly due to higher pension and post-retirement costs in 2003 compared to the same periods of 2002. In the consumer business, advertising and promotional expense increased in support of seasonal items and the launch of several new products.  The increase in distribution expenses is primarily due to the addition of higher distribution costs with the acquisition of the Zatarain’s business, higher fuel costs and higher costs during the consolidation of facilities in Canada.

Pension expense for 2003 is expected to increase approximately 75% over the 2002 expense of $15.2 million.  The increase in pension expense in 2003 is primarily due to a decrease in the discount rate from 7.25% to 7.0%, a decrease in the long-term rate of return from 10.0% to 9.0%, the adoption of a more recent mortality rate at the end of 2002 and the less than expected investment return experienced in 2001 and 2002.

Interest expense from continuing operations increased in the third quarter of 2003 compared to the same period last year.  This increase was driven by higher average debt levels resulting from the acquisition of the Zatarain’s business in the third quarter of 2003.  For the nine months ended August 31, 2003, interest expense from continuing operations decreased versus the comparable period of last year.  This decrease was due to favorable short-term interest rates in 2003 and

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lower average debt levels in the first half of 2003 prior to the purchase of Zatarain’s.

“Other income, net” increased to $7.3 million for the nine months ended August 31, 2003 compared to $1.0 million for the comparable period last year.  This increase was principally due to $5.4 million of interest income recorded in the second quarter of 2003 from the settlement of the Ducros purchase price adjustment.  The remainder of the $55.4 million payment was recorded as a reduction to goodwill.

The effective tax rate from continuing operations for the quarter and nine months ended August 31, 2003, was 32.0% and 30.9%, respectively, versus 31.9% and 31.0% for the quarter and nine months ended August 31, 2002.

Income from unconsolidated operations for the quarter was unchanged when compared to the third quarter of 2002.  Income from unconsolidated operations decreased 31.5% for the nine months ended August 31, 2003 when compared to the same period last year.  This decline is mainly attributable to diminished performance in the McCormick de Mexico joint venture during the first half of 2003.  This business continues to experience profit pressure from aggressive competition, higher raw material costs and a weak Peso versus the prior year.

Income from discontinued operations for the quarter was $1.7 million, which included one month of the operating results of Jenks and two and one half months of the operating results of Packaging.  Year to date income from discontinued operations was $4.8 million, which included seven months of the operating results of Jenks as well as eight and one half months of the operating results of Packaging.  Income from discontinued operations for the quarter and year to date were higher in 2003 when compared to the same period in 2002 mainly due to higher operating losses from Jenks during 2002.  Also included in discontinued operations for the three and nine months ended August 31, 2003 was a net gain on the sale of discontinued operations of $9.6 million.  This consists of the gain on the sale of Packaging of $11.6 million partially offset by the loss on the sale of Jenks of $2.0 million.  All amounts included in income from discontinued operations are net of income taxes.

SPECIAL CHARGES

During the three and nine months ended August 31, 2002, the Company recorded special charges related to continuing operations of $2.8 million ($2.5 million after tax) and $4.7 million ($3.8 million after tax), respectively.  The costs recorded in 2002 were part of the streamlining actions announced in the fourth quarter of 2001, but could not be accrued at that time.  These actions included the write-off of an investment in an industry purchase consortium, costs of the consolidation of manufacturing in Canada, and the closure of a U.S. distribution center.

During the three and nine months ended August 31, 2003, the Company recorded special charges related to continuing operations of $1.3 million ($0.9 million after tax) and $1.9 million ($1.3 million

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after tax), respectively.  The costs recorded in 2003 primarily include additional costs associated with the consolidation of production facilities in Canada.  These expenses were classified as special charges in the consolidated statement of income.

See Footnote 3 to the Condensed Consolidated Financial Statements for more information regarding the Company’s 2001 restructuring plan.

MARKET RISK SENSITIVITY

Foreign Exchange Risk

The fair value of the Company’s portfolio of forward and option contracts was an unrealized loss of $2.3 million as of August 31, 2003, compared to an unrealized loss of $0.9 million as of August 31, 2002 and $0.5 million as of November 30, 2002. The notional value of the Company’s portfolio of forward and option contracts was $38.4 million as of August 31, 2003, up from $32.3 million as of August 31, 2002 and $27.0 million as of November 30, 2002.  The increase since November 30, 2002 was mainly due to increased foreign exchange contracts covering Canadian dollar exposures.

Interest Rate Risk

The Company manages its interest rate exposure by entering into both fixed and variable rate debt.  In addition, the Company may enter into interest rate derivatives to achieve a cost effective mix of fixed and variable rate indebtedness.

As of August 31, 2003, the Company had $75 million of outstanding interest rate swap contracts to pay a fixed rate of interest of 6.35%. In return, under these swap contracts, the Company will receive a variable rate of interest, based on the six-month LIBOR, for the period from 2001 through 2011 .  The net effect of the interest rate swap contracts effectively fixes the interest rate of $75 million of commercial paper at 6.35%.  As of August 31, 2003 the fair value of these swap contracts was an unrealized loss of $9.2 million compared to an unrealized loss of $10.7 million in the same period last year and an unrealized loss of $11.3 million as of November 30, 2002.  The Company has designated these outstanding interest rate swap contracts as cash flow hedges of the variable interest rate risk associated with $75 million of commercial paper.  The unrealized gain or loss on these swap contracts is recorded in other comprehensive income, as the Company intends to maintain the commercial paper outstanding and hold these swap contracts until maturity.  Realized gains or losses are reflected in interest expense in the applicable period.  Hedge ineffectiveness associated with these hedges was not material in the quarter.

On August 12, 2003, the Company entered into interest rate swap contracts for a total notional amount of $100 million to receive interest at 6.4% and pay a variable rate of interest based on six-month LIBOR. The Company designated these swaps, which expire on February 1, 2006, as fair value hedges of the changes in fair value of $100 million of the $150 million 6.4% fixed rate Medium Term Note (MTN) maturing on February 1, 2006.  As of August 31, 2003, the fair value of these swap contracts was a loss of $1.2 million, which is

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offset by a corresponding gain on the hedged debt. No hedge ineffectiveness is recognized in the condensed consolidated statement of income as the interest rate swaps’ provisions match the applicable provisions of the debt.

Credit Risk

The customers of the consumer business are predominantly food retailers and food wholesalers.  Recently, consolidations in these industries have created larger customers, some of which are highly leveraged.  This has increased the Company’s exposure to credit risk.  Several customers over the past two years have filed for bankruptcy protection; however, these bankruptcies have not had a material effect on the Company’s results. The Company feels that the risks have been adequately provided in its bad debt allowance.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

As of August 31, 2003, there has not been a material change in the Company’s contractual obligations and commercial commitments outside of the ordinary course of business except as otherwise disclosed in Footnote 2 and Footnote 9 to the Condensed Consolidated Financial Statements regarding acquisitions and dispositions of businesses.

LIQUIDITY AND FINANCIAL CONDITION

In the condensed consolidated statement of cash flows, the changes in operating assets and liabilities are presented excluding the effects of changes in foreign currency exchange rates as these do not reflect actual cash flows.  Accordingly, the amounts in the condensed consolidated statement of cash flows do not agree with changes in the operating assets and liabilities that are presented in the condensed consolidated balance sheet.  In addition, the cash flows from operating, investing and financing activities are presented excluding the effects of discontinued operations.

In the condensed consolidated statement of cash flows, net cash provided by continuing operating activities was $18.9 million for the nine months ended August 31, 2003 compared to $38.3 million provided in the nine months ended August 31, 2002.  Increased inventory levels in 2003 were primarily responsible for this decrease in operating cash flow.  The Company has made a strategic decision to carry a larger than normal inventory of vanilla beans in 2003 in order to be in a position to meet the demands of its customers as the availability of quality beans has declined significantly. The Company has also added inventory of new products to support recent launches of new branded consumer products. In addition to the effect of the increased inventory levels, accounts payable and accrued liabilities also experienced a larger decrease when compared to the previous year due to the timing of normal operating liabilities.  This decrease in accounts payable and accrued liabilities was partially offset by a larger decrease in accounts receivable as compared to the corresponding period of the prior year due to continued improvement in our collection efforts.

Cash flows related to continuing investing activities used cash of

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$58.3 million in the first nine months of 2003 versus $83.2 million in the comparable period of 2002.  Net capital expenditures (capital expenditures less proceeds from sale of fixed assets) decreased to $47.1 million in 2003 compared to $82.7 million last year.  The decrease in net capital expenditures is mainly due to higher capital expenditures in 2002 when spending related to the Beyond 2000 project was at its peak.  Cash paid for the acquisitions of the Zatarain’s and Uniqsauces businesses during 2003 was $199.5 million.  Cash received from the sale of the packaging and Jenks businesses during 2003 was $138.3 million.  We also received $55.4 million from the Ducros purchase price adjustment, of which, $5.4 million represented interest and is included in cash flows from continuing operating activities.

Cash flows from financing activities were $2.4 million during the nine months ended August 31, 2003 compared to $24.6 million in the same period last year.  Short-term borrowings increased by $66.4 million during the nine months ended August 31, 2003.  The Company used commercial paper borrowings to finance the $180.0 million purchase price of the Zatarain’s acquisition.  These borrowings were partially paid off with the $132.5 million of proceeds from the sale of Packaging.  The remaining increase in short-term borrowings resulted from normal working capital requirements. During 2003, the Company issued common stock for $24.6 million related to the Company’s stock compensation plans.  In addition, the Company acquired 1,675,000 shares for $40.6 million under the share repurchase plan. As of August 31, 2003, there was $102.0 million remaining under the Company’s $250.0 million share repurchase program.  Without any significant acquisition activity, the Company expects to complete this program by mid 2004.  Anticipating this completion, the Company’s Board of Directors authorized a plan for the repurchase of an additional $300 million shares.  The Company expects this new program to extend into 2006.

The Company’s ratio of debt-to-total capital (total capital includes interest bearing debt, minority interest and shareholders’ equity) was 47.0% as of August 31, 2003, down from 54.3% at August 31, 2002 and 49.2% at November 30, 2002.  This decrease from prior year was primarily the result of a reduction in short-term borrowings in addition to an increase in shareholders’ equity due to fluctuations in foreign exchange rates as well as earnings in excess of dividends.  During the period, the Company’s short-term debt varies; however, it is usually lower at the end of a quarter.  The average short-term borrowings outstanding for the quarter ended August 31, 2003 and 2002 was $389.8 million and $310.2 million, respectively.

The reported values of the Company’s assets and liabilities have been significantly affected by fluctuations in foreign exchange rates between periods.  During the nine months ended August 31, 2003, the exchange rates for the Euro, British pound sterling, Canadian dollar and Australian dollar were substantially higher than the same period last year and at year-end.  Exchange rate fluctuations resulted in an increase in accounts receivable of approximately $15.0 million, inventory of approximately $10.0 million, goodwill of approximately $38.4 million and other comprehensive income of approximately $60.1 million since August 31, 2002.

Management believes that internally generated funds and its

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existing sources of liquidity under its credit facilities are sufficient to meet current and anticipated financing requirements over the next 12 months.  The Company’s availability of cash under its credit facilities has not materially changed since year-end. If the Company were to undertake an acquisition that requires funds in excess of its existing sources of liquidity, it would look to sources of funding from additional credit facilities or equity issuances.

ACCOUNTING AND DISCLOSURE CHANGES

In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 generally requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan.  The Company has adopted SFAS No. 146 as of December 1, 2002.  There was no material effect upon adoption of this statement.

In December 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”  Interpretation No. 45 requires that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee.  This interpretation is applicable on a prospective basis to guarantees issued or modified after December 31, 2002.  The Company has adopted Interpretation No. 45 as of December 1, 2002 and there was no material effect upon adoption of this statement.  The Company will continue to evaluate the impact of Interpretation No. 45 on newly contracted guarantees.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.”  Interpretation No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both.   Currently, entities are generally consolidated by a company that has a controlling financial interest through ownership of a majority voting interest in the entity.  The Company will be required to adopt Interpretation No. 46 in the first quarter of 2004.  Upon adoption, the Company will be required to consolidate the lessor of a leased distribution center as more fully described in Note 7 to the Condensed Consolidated Financial Statements.  The Company is also evaluating what effects, if any, the adoption of Interpretation No. 46 will have on its accounting for investments in joint ventures.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation - Transition and Disclosure.”  SFAS No. 148 amends the transition and disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation.”  This statement is effective for financial statements for fiscal years ending after December 15, 2002 and for interim periods beginning after December 15, 2002.  As permitted by SFAS No. 148, the Company uses the intrinsic value method to account for stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock

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Issued to Employees,” and related interpretations.  Accordingly, no compensation expense has been recognized for the Company’s stock options since all options granted had an exercise price equal to the market value of the underlying stock on the grant date. The impact of adopting SFAS No. 148 was to provide additional disclosure in the Accounting Policies footnote to the Condensed Consolidated Financial Statements.

CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

In preparing the financial statements in accordance with accounting principles generally accepted in the United States, management is required to make estimates and assumptions that have an impact on the assets, liabilities, revenue, and expense amounts reported.  These estimates can also affect supplemental information disclosures of the Company, including information about contingencies, risk, and financial condition.  The Company believes, given current facts and circumstances, its estimates and assumptions are reasonable, adhere to accounting principles generally accepted in the United States, and are consistently applied.  Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates and estimates may vary as new facts and circumstances arise.  The Company makes routine estimates and judgments in determining the net realizable value of accounts receivable, inventory, fixed assets, and prepaid allowances.  Management believes the Company’s most critical accounting estimates and assumptions are in the following areas:

Customer Contracts

In several of its major markets, the consumer segment sells its products by entering into annual or multi-year contracts with its customers.  These contracts include provisions for items such as sales discounts, marketing allowances and performance incentives.  The discounts, allowances, and incentives are expensed based on certain estimated criteria such as sales volume of indirect customers, customers reaching anticipated volume thresholds, and marketing spending.  The Company routinely reviews these criteria, and makes adjustments as facts and circumstances change.

Goodwill Valuation