Exhibit 13

Managements Discussion and Analysis of Financial Condition and Results of
Operations

The Gillette Company and Subsidiary Companies

EFFECTS OF MERGER

The proposed merger between The Gillette Company and The Procter &
Gamble Company, described in Note 15, Subsequent Events, in our Notes to Consolidated Financial Statements, if completed, will have material effects on
the forward-looking statements contained in this report. Investors are advised that such forward-looking statements with respect to revenues, earnings,
performance, strategies, prospects, and other aspects of the Companys business are discussed as a combined business in the registration statement
on Form S-4 to be filed with the Securities and Exchange Commission (SEC). INVESTORS ARE URGED TO READ THE REGISTRATION STATEMENT AND ANY
OTHER RELEVANT DOCUMENTS FILED WITH THE SEC, INCLUDING THE JOINT PROXY STATEMENT/PROSPECTUS THAT WILL BE PART OF THE REGISTRATION STATEMENT, BECAUSE
THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.

E X E C U T I V E  
O V E R V I E W

We achieved record results in 2004, with double-digit percentage increases in net
sales, profit from operations, net income, and diluted net income per common share.



Net sales increased 13% to $10.5 billion in 2004,
compared with $9.3 billion in 2003, driven by the ongoing strength of established products and the strong sell-in of new offerings from our Blades and
Razors, Oral Care, Braun, and Personal Care businesses. The impact of foreign currency movement on net sales was a 5% gain, primarily related to Europe
and Asia. Net sales growth was supported by an investment in advertising that grew 40% over 2003 and almost 80% over the recent two-year period. New
Blades and Razors products drove significant growth for both the category and the Company, in spite of increased competition. In addition, Blades and
Razors continued to experience significant consumer trade-up to premium systems and higher performing disposables in developed markets and to
entry-level systems in developing markets in 2004. Our Duracell business delivered strong net sales and profit growth. Duracells net sales
increased due to an unusually active hurricane season in the United States (U.S.), category growth in Europe and developing markets, and the
acquisition of the Nanfu battery company in August 2003. Duracell continued to deliver against the objectives of its North America price-deal
realignment program, introduced in early 2003, as lower pricing was offset by reduced trade and consumer spending. This strategy helped maintain market
share and preserved Duracell pricing, despite the resurgence of lower cost, inferior performing zinc batteries in mass merchandiser channels,
aggressive deflationary pricing activity from price-value alkaline brands, and increased promotional activity by private labels. In addition, continued
manufacturing efficiencies made a significant contribution to increased profit. Oral Care net sales and market share increased, driven by the
introduction of new products, trade-up to premium products, and two acquisitions. Profit from operations was up year-over-year, due to growth in net
sales that reflected favorable product mix, in part due to new product introductions, partially offset by a double-digit percentage increase in
marketing support. Braun posted an increase in net sales that was due to the growth of its core hair removal business, the introduction of new
products, and significant growth in the developing markets of the AMEE region (Africa, Middle East, and Eastern Europe), particularly Russia,
Turkey and the Middle East. Profit from operations was up year-over-year, reflecting favorable product mix that was driven by new product
introductions, offset partly by higher Euro-based costs and a double-digit percentage increase in marketing support. Personal Care posted net sales and
market share growth behind new product launches and trade-up initiatives in the shave preparations business. Growth in profit from operations was the
result of a favorable mix of new products and the positive effect of cost-savings initiatives.




Gross profit increased 16% to $6.2 billion in 2004,
and gross profit margin improved by 1.4 percentage points to 59.3%, compared with 57.9% in 2003. Profit from operations rose 23% in 2004 to $2.5
billion, compared with $2.0 billion in 2003. The profit increase was mainly driven by a shift in mix to higher-margin premium products, manufacturing
efficiencies, and overhead cost-savings programs, partially offset by higher levels of advertising investment.


25

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Income from continuing operations climbed 23%, and
net income 22%, to $1.7 billion in 2004. Net income per common share, diluted, increased 24% to $1.68, compared with $1.35 in 2003, outpacing the
percentage increase in net income due to significant share repurchase activity during the year. Our free cash flow (as defined in Financial Condition
on pages 32 and 33) was $1.7 billion in 2004, compared with $2.3 billion in 2003. The decrease was due to incremental funding of our pension and
retiree medical plans of approximately $350 million and an increase in capital spending of approximately $210 million year-over-year.




On January 27, 2005, we entered into an Agreement
and Plan of Merger with The Procter & Gamble Company (P&G), an Ohio corporation, and Aquarium Acquisition Corp., a wholly owned
subsidiary of P&G. Upon consummation of the merger, each share of our common stock will be converted into the right to receive 0.975 shares of the
P&G common stock. The consummation of the merger is subject to customary conditions, including approval by our shareholders. See Note 15,
Subsequent Events, on pages 7173 in our Notes to Consolidated Financial Statements, for a more complete description of the
Merger and related agreements.


Description of Operating Segments

Our operations consist of five operating segments, each of which operates within
five geographic regions: North America, Europe, AMEE, Asia-Pacific, and Latin America.



Selected geographic net sales data are presented
below.







|              |  |  |  | 2004 |        | 2003 |  | 2002 |      
|------------- |  |  |  | ---- | ------ | ---- |  | ---- | -----
|
|North
America |  |  |  | $    | 3,966  |      |  | $    | 3,708
|Europe        |  |  |  |      | 3,542  |      |  |      | 3,048
|AMEE          |  |  |  |      | 1,175  |      |  |      | 894  
|Asia-Pacific  |  |  |  |      | 1,015  |      |  |      | 918  
|Latin
America |  |  |  |      | 779    |      |  |      | 684  
|Total         |  |  |  | $    | 10,477 |      |  | $    | 9,252

| |  | The Blades and Razors segment, with a global dollar share of
71.5%, is the primary business in terms of share of net sales and profit, representing 42% of our net sales and 63% of our total operating segment
profit from operations in 2004. Our objective is to drive blade and razor market growth and to grow our share of the categorys profit pool by
leveraging our technological leadership position. In 2003, this segment became more competitive due to new premium-priced shaving system entries. We
continued to defend and improve our position in 2004 with new product introductions, increased consumer trade-up to premium systems, trade-up to higher
performing disposables, and trade-up to entry-level systems in developing markets, all supported by higher levels of advertising investment. Net sales
and profit have grown steadily over the past several years, due primarily to new products and the continuing upgrade to higher performing,
premium-priced systems. We launched the M3Power system in the second quarter of 2004 in North America and in the third quarter of 2004 in the United
Kingdom (U.K.), Germany, and Japan. We launched Venus Divine in the first half of 2004 in North America, the U.K., Germany, and Japan. New products are
expected to be a long-term driving force for growth in the business.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Duracell battery business, with sales primarily in North
America and Europe, is our second most significant segment, accounting for 21% and 19% of 2004 net sales and operating segment profit from operations,
respectively. Our objective for Duracell is to maintain market share while generating industry-leading margins. The battery industry has been intensely
competitive for several years, leading to a deflationary pricing environment. Duracell continued to execute its business strategy within the parameters
of its North America price-deal realignment program, introduced in 2003, which resulted in price reductions, partially offset by reduced promotional
activity and the elimination of free cell giveaway programs. To date, the program has been successful, as we have been able to hold market share while
significantly increasing the profitability of the business, despite the resurgence of lower cost, inferior performing zinc batteries in mass
merchandiser channels, aggressive deflationary pricing activity from price-value alkaline brands, and increased promotional activity by private labels.
During 2004, net sales
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | benefited from an unusually active hurricane season in the U.S.
Cost-savings programs and manufacturing efficiencies contributed to the increase in Duracells 2004 profit and margin. In addition, in August
2003, we acquired a majority interest in the Fujian Nanping Nanfu Battery Company, the market share leader in China, to improve the Companys
overall position in China.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Oral Care segment extended its number one dollar share of the
total brushing category by 1.5 share points to 37% in 2004, with the help of an unprecedented level of new product introductions and in spite of strong
competition from other global companies. Oral Care generated 15% and 10% of our net sales and operating segment profit from operations, respectively,
in 2004. The acquisitions of Rembrandt teeth-whitening products and Zooth licensed character-based childrens manual and power brushes, which were
completed during 2004, contributed approximately 4% to net sales. Our objective is to grow our share of the overall profit pool in manual and power
toothbrushes. The dynamics in the oral care industry have changed considerably in recent years, due to the introduction of battery-powered
toothbrushes and new whitening products. Oral Care growth is driven by new product introductions, consumer trade-up within the manual and power
segments and from the manual to the power segment, geographic expansion, and entry into select product areas complementary to our core brushing
business.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Braun business focuses on the hair removal category, with
supporting product lines  such as household products, personal diagnostic appliances, and hair care products  that enable Braun to present
a full product line to the electric appliance distribution channels. The Braun business accounted for 13% and 4% of our net sales and operating segment
profit from operations, respectively, in 2004. Our objective is to focus on the dry shaving market and ensure that each product line will minimally
return greater than its cost of capital. Net sales for Braun have historically been concentrated in Western Europe and Japan, though significant growth
was achieved in developing markets in 2004, particularly in the AMEE region. Growth is driven primarily by the introduction of new products, and we see
shortened product life cycles across the industry. Braun concentrates on meaningful innovation, while also improving its competitive position in
underindexed segments. We have taken critical steps to reshape the business in the last four years, including product rationalization, product sourcing
changes, and manufacturing efficiency improvements. Brauns performance in net sales and profit from operations improved significantly in 2004,
driven in part by the growth of its core dry shaving business and the introduction of new products. Brauns profitability was negatively affected
by higher European-based manufacturing costs, due to the strengthening Euro, and a double-digit percentage increase in marketing support.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Personal Care segment consists primarily of
antiperspirants/deodorants, shave preparations, and skin care products. The business is regional, with sales concentrated in North America and Europe.
In 2004, the Personal Care business accounted for 9% and 4% of our net sales and operating segment profit from operations, respectively. Our objective
is to achieve modest share growth in core businesses and selectively enter adjacent categories to accelerate growth, while increasing operating profit
margins. Growth in the segment comes primarily from new product introductions. Personal Care had a strong year in 2004, as sales increased behind new
products, innovative marketing initiatives, and increased marketing investment. Profit from operations grew significantly, reflecting higher sales and
stepped-up cost reductions.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cost-Savings Programs

Over the past few years, we have focused our efforts on leveraging our capital
investment, reducing costs, and improving business processes to achieve best-in-class status. The cost savings generated have been used mainly to
foster top-line growth by reinvesting in the business through increased advertising and new product development. Strategic decisions were made to
outsource selected manufacturing, distribution, information technology, human resources, and other general and administrative functions. We attempt to
achieve technological leadership at the lowest possible cost by moving to larger, more focused factories. This concentrated-site sourcing
strategy, relative to a multiple-site sourcing strategy, may have an unfavorable effect on other performance indicators, such as inventory
levels. The Functional Excellence program, initiated in 2002, focused on upgrading capabilities and reducing overhead costs throughout the
organization

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and was substantially completed in 2004. Our
Strategic Sourcing Initiative, which is ongoing, applies a disciplined systematic process to reduce the total cost of externally purchased materials,
goods, and services. We are progressing as planned in the execution of our project to realign European blade and razor manufacturing and distribution
to reduce costs and improve operational efficiency and customer service. We will continue to undertake projects to maintain a competitive cost
structure as part of our ongoing operations, including manufacturing streamlining and organizational realignments.


Cash Management Strategy

We generate significant free cash flow (as defined in Financial Condition on pages
32 and 33). Free cash flow of $1.7 billion in 2004 decreased 25% from 2003, primarily due to incremental funding of our pension and retiree
medical plans of approximately $350 million and an increase in capital spending of approximately $210 million year-over-year. During 2004 and 2003, we
continued to address our collection practices and payment terms, resulting in reduced days sales outstanding and extended payables
performance.



We use our free cash flow primarily for payment of
dividends, share repurchases, acquisitions, and debt repayment. We paid dividends of $651 million in 2004. We engaged in significant share repurchases
during 2004, purchasing approximately 25 million shares of our stock for approximately $1.0 billion. We completed two acquisitions during 2004 for a
net purchase price of $117 million to complement the Oral Care business.


R E S U L T S   O F  
O P E R A T I O N S

Selected statement of income data are presented below.






|                                                            |  |  |  |   |        |  |  |  |      |  |  |   |       |  |  | % Increase |     
|----------------------------------------------------------- |  |  |  | - | ------ |  |  |  | ---- |  |  | - | ----- |  |  | ---------- | ----
|
|(millions)                                                  |  |  |  |   |        |  |  |  |      |  |  |   |       |  |  |            |     
|Net
sales                                                   |  |  |  | $ | 10,477 |  |  |  |      |  |  | $ | 9,252 |  |  |            |     
|Impact
of:                                                  |  |  |  |   |        |  |  |  |      |  |  |   |       |  |  |            |     
|Exchange                                                    |  |  |  |   |        |  |  |  |      |  |  |   |       |  |  |            |     
|Volume/mix                                                  |  |  |  |   |        |  |  |  |      |  |  |   |       |  |  |            |     
|Pricing                                                     |  |  |  |   |        |  |  |  |      |  |  |   |       |  |  |            |     
|Gross
profit                                                |  |  |  | $ | 6,213  |  |  |  | 59.3 |  |  | $ | 5,355 |  |  |            | 57.9
|Advertising                                                 |  |  |  | $ | 1,155  |  |  |  | 11.0 |  |  | $ | 827   |  |  |            | 8.9 
|Sales
promotion                                             |  |  |  | $ | 411    |  |  |  | 3.9  |  |  | $ | 376   |  |  |            | 4.1 
|Other
selling, general and administrative (SG&A) expense    |  |  |  | $ | 2,182  |  |  |  | 20.8 |  |  | $ | 2,149 |  |  |            | 23.2
|Total
SG&A expense                                          |  |  |  | $ | 3,748  |  |  |  | 35.8 |  |  | $ | 3,352 |  |  |            | 36.2
|Profit from
operations                                      |  |  |  | $ | 2,465  |  |  |  | 23.5 |  |  | $ | 2,003 |  |  |            | 21.7
|Income from
continuing operations                           |  |  |  | $ | 1,691  |  |  |  | 16.1 |  |  | $ | 1,375 |  |  |            | 14.9
|Net
income                                                  |  |  |  | $ | 1,691  |  |  |  | 16.1 |  |  | $ | 1,385 |  |  |            | 15.0
|Income per
common share from continuing operations, diluted |  |  |  | $ | 1.68   |  |  |  |      |  |  | $ | 1.34  |  |  |            |     
|Net income
per common share, diluted                        |  |  |  | $ | 1.68   |  |  |  |      |  |  | $ | 1.35  |  |  |            |     

Total Company

Net sales for 2004 were $10.5 billion, an increase of 13% versus $9.3 billion in
2003. Favorable foreign exchange, notably in Europe and Asia, contributed 5 percentage points to the net sales gain. Favorable volume/mix contributed
8% to net sales. Pricing was flat, as price increases in Blades and Razors and the

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impact of lower promotional spending at Duracell
were offset by higher promotional spending for merchandising activities in Oral Care and Personal Care. Net sales increased due to new product
introductions, ongoing trade-up to premium-priced products, and the impact of acquisitions. Net sales for 2003 were 9% above those of 2002, of which
the impact of foreign exchange was 5%. The volume/mix increase was 4%. Pricing had no material impact in 2003, as price increases in Blades and
Razors were offset by lower prices resulting from Duracells price-deal realignment program in North America. Net sales in 2003 increased due to
strong sales of new products, including the Mach3Turbo shaving system, Sensor3 disposable razor, and CrossAction Power toothbrush.




Gross profit was $6.2 billion in 2004, $5.4 billion
in 2003, and $4.8 billion in 2002. As a percent of net sales, gross profit was 59.3% in 2004, 57.9% in 2003, and 56.4% in 2002. The improvement in 2004
gross profit was due mainly to strong growth of higher margin new products, trade-up to premium products, the impact of changes in estimates related to
liabilities for promotional programs, and manufacturing cost savings. The improvement in 2003 gross profit was due to favorable product mix,
cost-savings initiatives, and manufacturing efficiencies, which more than offset higher European-based costs due to foreign exchange and $50
million in incremental provisions to realign European blade and razor manufacturing and distribution.




Total selling, general and administrative expenses
amounted to 35.8% of net sales in 2004, compared with 36.2% and 35.5% in 2003 and 2002, respectively. Within selling, general and administrative
expenses, advertising expenses increased 40% to 11.0% of net sales, from 8.9% of net sales in 2003. Sales promotion as a percentage of net sales
declined slightly, compared with 2003. Other selling, general and administrative expenses were down as a percentage of net sales, to 20.8% from 23.2%
in 2003, reflecting cost-reduction efforts and lower Functional Excellence expenses. Functional Excellence expenses were $75 million in 2004, versus
$137 million in 2003. In 2003, most of the increase in selling, general and administrative expenses was driven by higher advertising and sales
promotion spending. Advertising spending increased by double-digit percentages in every segment. Other selling, general and administrative
expenses increased in 2003, but were down as a percentage of net sales. This reduction was achieved through cost-savings initiatives, offset partially
by higher European-based costs, due to the strengthening of local currencies, and incremental pension and Functional Excellence
expenses.




Profit from operations was $2.5 billion in 2004,
representing 23.5% of net sales, compared with $2.0 billion in 2003, or 21.7% of net sales, and $1.8 billion in 2002, or 21.4% of net sales. The 23%
increase in 2004 profit from operations was the result of strong sales growth from new products, a shift in mix to higher-margin premium products,
manufacturing efficiencies, and overhead cost-savings programs, partially offset by higher advertising expenses. The increase in 2003 profit from
operations versus 2002 was driven by strong sales growth from new products, ongoing favorable mix to premium shaving products, and cost-savings
initiatives, offset by higher European-based costs, due to foreign exchange, increased advertising investment, incremental Functional Excellence and
pension expenses, and a provision to realign European blade and razor manufacturing and distribution.




Within nonoperating charges/income, net interest
expense amounted to $37 million in 2004, $42 million in 2003, and $59 million in 2002, reflecting lower average long-term debt levels. The net foreign
transactional exchange impact in 2004 was $35 million of expense, versus $14 million and $16 million of exchange gains in 2003 and 2002, respectively.
The 2004 result was mainly caused by the liquidation of certain international subsidiaries resulting in a reclassification of a non-cash loss to the
Consolidated Statement of Income from the accumulated other comprehensive loss section of the Consolidated Balance Sheet.




The effective income tax rate was 29% in 2004,
compared with rates of 30% in 2003 and 31% in 2002. The reduction in the 2004 effective income tax rate was primarily due to a favorable change in the
mix of earnings to countries taxed at rates lower than the U.S. statutory rate and the favorable resolution of certain outstanding tax issues, offset
in part by the provision for taxes associated with our planned repatriation of $325 million in extraordinary dividends related to the American Jobs
Creation Act of 2004. The reduction in the 2003 effective income tax rate was primarily due to a favorable change in the mix of earnings to countries
taxed at rates lower than the U.S. statutory rate.




Net income increased 22% to $1.7 billion in 2004,
representing 16.1% of net sales, compared with $1.4 billion in 2003, which represented 15.0% of net sales, and $1.2 billion in 2002. Income per common
share, diluted, from continuing operations was $1.68 in 2004, compared with $1.34 in 2003, representing growth of 25%, and $1.14 in 2002. The 2004 and
2003 percentage growth in net


29

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income per common share, diluted, outpaced the
percentage growth in net income, due to share repurchase program activity.


Operating Segments

The following tables summarize key operating metrics for 2004 versus 2003 and for
2003 versus 2002, for each of our five operating segments. Functional Excellence and manufacturing realignment charges are recorded in the relevant
segments.






|Years Ended December 31,       |  |  |  | Blades & Razors |       | Duracell |  | Oral Care |       | Braun |  | Personal Care |       | Unallocated/ Other |  | Total Company
|------------------------------ |  |  |  | --------------- | ----- | -------- |  | --------- | ----- | ----- |  | ------------- | ----- | ------------------ |  | -------------
|(millions,
except percentages) |  |  |  |                 |       |          |  |           |       |       |  |               |       |                    |  |              
|Net sales,
2004                |  |  |  | $               | 4,329 |          |  | $         | 2,232 |       |  | $             | 1,589 |                    |  | $            
|Net sales,
2003                |  |  |  |                 | 3,869 |          |  |           | 2,015 |       |  |               | 1,327 |                    |  |              
|% Incr/(Decr)
vs. 2003         |  |  |  |                 | 12    |          |  |           | 11    |       |  |               | 20    |                    |  |              
|Impact of
exchange             |  |  |  |                 | 5     |          |  |           | 4     |       |  |               | 5     |                    |  |              
|Impact of
volume/mix           |  |  |  |                 | 6     |          |  |           | 6     |       |  |               | 17    |                    |  |              
|Impact of
pricing              |  |  |  |                 | 1     |          |  |           | 1     |       |  |               | (2    | )                  |  |              
|Profit from
operations (PFO)   |  |  |  |                 |       |          |  |           |       |       |  |               |       |                    |  |              
|PFO,
2004                      |  |  |  | $               | 1,629 |          |  | $         | 490   |       |  | $             | 249   |                    |  | $            
|PFO,
2003                      |  |  |  |                 | 1,426 |          |  |           | 348   |       |  |               | 218   |                    |  |              
|% Incr/(Decr)
vs. 2003         |  |  |  |                 | 14    |          |  |           | 41    |       |  |               | 14    |                    |  |              
|PFO as % of
net sales, 2004    |  |  |  |                 | 37.6  |          |  |           | 22.0  |       |  |               | 15.7  |                    |  |              
|PFO as % of
net sales, 2003    |  |  |  |                 | 36.8  |          |  |           | 17.2  |       |  |               | 16.4  |                    |  |              






|Years Ended December 31,       |  |  |  | Blades & Razors |       | Duracell |  | Oral Care |       | Braun |  | Personal Care |       | Unallocated/ Other |  | Total Company
|------------------------------ |  |  |  | --------------- | ----- | -------- |  | --------- | ----- | ----- |  | ------------- | ----- | ------------------ |  | -------------
|(millions,
except percentages) |  |  |  |                 |       |          |  |           |       |       |  |               |       |                    |  |              
|Net sales,
2003                |  |  |  | $               | 3,869 |          |  | $         | 2,015 |       |  | $             | 1,327 |                    |  | $            
|Net sales,
2002                |  |  |  |                 | 3,435 |          |  |           | 1,898 |       |  |               | 1,248 |                    |  |              
|% Incr/(Decr)
vs. 2002         |  |  |  |                 | 13    |          |  |           | 6     |       |  |               | 6     |                    |  |              
|Impact of
exchange             |  |  |  |                 | 6     |          |  |           | 4     |       |  |               | 5     |                    |  |              
|Impact of
volume/mix           |  |  |  |                 | 5     |          |  |           | 5     |       |  |               | 2     |                    |  |              
|Impact of
pricing              |  |  |  |                 | 2     |          |  |           | (3    | )     |  |               | (1    | )                  |  |              
|Profit from
operations (PFO)   |  |  |  |                 |       |          |  |           |       |       |  |               |       |                    |  |              
|PFO,
2003                      |  |  |  | $               | 1,426 |          |  | $         | 348   |       |  | $             | 218   |                    |  | $            
|PFO,
2002                      |  |  |  |                 | 1,299 |          |  |           | 233   |       |  |               | 222   |                    |  |              
|% Incr/(Decr)
vs. 2002         |  |  |  |                 | 10    |          |  |           | 49    |       |  |               | (2    | )                  |  |              
|PFO as % of
net sales, 2003    |  |  |  |                 | 36.8  |          |  |           | 17.2  |       |  |               | 16.4  |                    |  |              
|PFO as % of
net sales, 2002    |  |  |  |                 | 37.8  |          |  |           | 12.3  |       |  |               | 17.8  |                    |  |              

Blades and Razors

Net sales of $4.3 billion in 2004 were 12% higher than in 2003, including a 5%
favorable foreign exchange impact. Volume/mix and pricing were favorable by 6% and 1%, respectively. Net sales growth was driven by successful new
product introductions such as the M3Power, Venus Divine, and Sensor3 systems, ongoing trade-up to premium products, particularly in the AMEE and Latin
America markets, and price increases.



Global Blades and Razors consumer sales grew 10% in
2004, behind significant new product launches, strong growth in developing markets, and favorable foreign exchange. Blades and Razors share of
the global market was 71.5% for the year, five times higher than the nearest competitor. The M3Power launch resulted in a one percentage point market
share increase for the Mach3 family, to 31% of the total market. As a result, the Mach3 franchise alone was larger than all competitive brands
combined. Due in part to the Venus Divine launch, the Venus family achieved a 39% market share of the female blade and razor market, higher than all
competitive female blade and razor products combined. The Prestobarba Excel launch in Latin America contributed to our first blade share
increase


30

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in Latin America in 10 years. The rollout of the
Sensor3 disposable in North America and Europe contributed to a one-point increase in our share of the disposable segment, to 57%.




Profit from operations of $1.6 billion was up 14%
from 2003, and profit margin increased 0.8 percentage points to 37.6%. The growth in profit from operations reflected higher sales from new products,
price increases, and lower overhead costs, partially offset by a double-digit percentage increase in advertising and ongoing costs associated with our
program to realign European manufacturing and distribution.




In 2003, net sales grew 13% and included a 6%
favorable foreign exchange impact. Net sales growth was driven by the strength of premium shaving systems and disposables, as well as several new
product launches, including Mach3Turbo systems in international markets, Sensor3 disposables in North America and Europe, and Prestobarba Excel
disposables in Latin America. Profit from operations of $1.4 billion was up 10% from the prior year, driven by higher net sales. Margin declined one
percentage point to 36.8%, as favorable product mix was more than offset by a double-digit percentage increase in marketing support and a $50 million
charge related to the realignment of European manufacturing and distribution.


Duracell

In 2004, Duracell net sales of $2.2 billion increased 11% versus 2003, including a
4% favorable foreign exchange impact. Net sales gains were driven by strong demand in international markets, particularly AMEE, and incremental
consumption from the unusually active hurricane season in the U.S. Market share in North America held steady year-over-year. The Nanfu battery business
in China, acquired in August 2003, contributed 2% to net sales.



In 2004, profit from operations of $490 million
increased 41%, and profit margin grew by 4.8 percentage points, compared with 2003. The increases were due to higher net sales and significant benefits
from manufacturing efficiencies and overhead reduction programs, partially offset by higher advertising expenses and a $15 million intangible asset
impairment charge related to our right to use a competitors patent that was invalidated by the courts.




In 2003, net sales of $2.0 billion increased 6%
versus 2002, including a 4% favorable impact of foreign exchange. Net sales gains were mainly in North America, due to increased demand related to
homeland security concerns, a blackout in the U.S., and hurricane activity. The addition of the Nanfu battery business in China also contributed to net
sales growth. The net sales increases were partially offset by lower pricing from the price-deal realignment initiative in North America and unmatched
2002 sales related to the carbon zinc battery businesses in South Africa and India, which were divested in late 2002 and early 2003, respectively.
Profit from operations in 2003 of $348 million increased 49%, and profit margin grew by 4.9 percentage points, compared with 2002, due to higher net
sales and significant benefits from cost-savings programs, partially offset by significantly higher advertising expenses.


Oral Care

Oral Care net sales in 2004 of $1.6 billion were 20% higher than in 2003, with
favorable foreign exchange contributing 5%. Net sales gains were driven by new products, ongoing trade-up to premium products, the Rembrandt and Zooth
acquisitions, and strength in almost all regions behind manual toothbrushes. Unprecedented new product activity included the introduction of the
ProfessionalCare 8000 and Sonic Complete power toothbrushes and the Advantage Artica manual toothbrush. Acquisitions added 4% to net sales for the
year.



In 2004, profit from operations of $249 million
increased 14%. The increase was driven by higher net sales from new products and improved product mix, partially offset by a double-digit percentage
increase in advertising, other launch-related expenses, and expenses primarily related to the redesign and rework of two entry-level power
toothbrushes.




In 2003, Oral Care net sales of $1.3 billion were 6%
higher than in 2002, including favorable foreign exchange of 5%. Net sales growth was driven by the success of new products in the manual and power
categories, as well as improved product mix. Growth was dampened by lower consumption and trade destocking of Oral Care products. Profit from
operations in 2003 of $218 million decreased 2%, compared with 2002, and margin was 1.4 percentage points lower. Higher net sales from new products and
improved product mix were more than offset by higher exchange-driven European


31

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manufacturing costs, a significant increase in
marketing expenses to launch new products, and higher warranty-related expenses due, in part, to extended warranties on electronic appliances sold in
Europe.


Braun

Braun 2004 net sales of $1.4 billion were 16% higher than in 2003, with favorable
foreign exchange contributing 6%. Growth was driven by the introduction of new products such as the top-of-the-line Activator mens shaver, the
youth-oriented cruZer3 shaver and styler, and strong demand for the SoftPerfection female epilator. The accelerated performance, which was
led by the AMEE region, particularly Russia, Turkey and the Middle East, was partially offset by comparisons with the unmatched 2003 SARS-related spike
in demand for Thermoscan products.



Profit from operations in 2004 of $95 million
compared with $49 million in 2003. Profit improvement was driven by the higher net sales and a favorable mix towards higher margin products,
particularly male shavers and female epilators, tempered by currency-related increases in European-based manufacturing costs and increased advertising
support.




In 2003, Braun net sales of $1.2 billion climbed 11%
over 2002, with favorable foreign exchange representing 9% of the increase. Growth was driven by household products and Thermoscan thermometers. Profit
from operations in 2003 declined 35% to $49 million. The main drivers were an unfavorable shift in product mix related to weak male shaver segments in
both Europe and Japan, an incremental warranty provision due, in part, to extended warranties on electronic appliances sold in Europe, and the impact
of foreign exchange on European-based manufacturing costs, which more than offset benefits from manufacturing efficiencies and net sales
growth.


Personal Care

In 2004, Personal Care net sales increased 11% versus 2003 to $961 million, with
favorable foreign exchange contributing 4% of the gain. Net sales growth was due to strong demand for new products and trade-up in shave preparations,
particularly in Europe, North America, and AMEE. New product introductions included Gillette Complete Skincare in the U.S., the new side-activated
Right Guard Cool Spray deodorant in the U.S. and U.K., and the launch of Mach3 Gel in the U.K. Global sales and market share growth in the shave
preparations business was driven by increased marketing investment behind our foam-to-gel trade-up initiative in Europe and AMEE.



Profit from operations increased to $95 million for
2004, compared with $73 million in 2003. Profit improvement came from net sales growth associated with new products, improved product mix,
manufacturing and procurement cost savings, and lower overhead costs, which more than offset a double-digit percentage increase in
advertising.




In 2003, Personal Care net sales increased 6% over
those in 2002, with favorable foreign exchange contributing 4% of the increase. Growth was driven by gains in both core businesses  shave
preparations and antiperspirants/deodorants  behind increased marketing investment and new product successes. Profit from operations increased
43% to $73 million in 2003, well above net sales growth, reflecting cost-savings initiatives that were partially offset by increased marketing
investment for new product launches.


Unallocated/Other

In 2004, corporate expenses were less than in the prior year, due in part to the
favorable resolution of a contingency related to unclaimed property in 2004 that was accrued in 2003.

F I N A N C I A L  
C O N D I T I O N



Cash
Flow


Cash provided by operations is our primary source of funds to finance operations,
capital expenditures, share repurchases, and dividend payments. We use our free cash flow, which we define as net cash provided by operating activities
net of additions to and disposals of property, plant and equipment, to measure our liquidity, as well as our ability to fund future growth and to
provide a return to shareholders. Free cash flow is not a measure of the residual cash flow that is available for discretionary expenditures, since we
have certain non-discretionary obligations, such as debt service, that are not deducted from the measure. A reconciliation of free cash flow to the
change in cash and cash equivalents in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP) follows.

32

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|Years Ended December 31,                         |  |  |  | 2004 |        | 2003 |  | 2002 |       
|------------------------------------------------ |  |  |  | ---- | ------ | ---- |  | ---- | ------
|
|Free cash
flow                                   |  |  |  | $    | 1,697  |      |  | $    | 2,277 
|Additions to
property, plant and equipment       |  |  |  |      | 616    |      |  |      | 408   
|Disposals of
property, plant and equipment       |  |  |  |      | (67    | )    |  |      | (45   
|Net cash
provided by operating activities*       |  |  |  |      | 2,246  |      |  |      | 2,640 
|Net cash used
in investing activities*           |  |  |  |      | (1,074 | )    |  |      | (294  
|Net cash used
in financing activities*           |  |  |  |      | (1,199 | )    |  |      | (2,250
|Effect of
foreign exchange rate changes on cash  |  |  |  |      | 3      |      |  |      | 8     
|Net cash used
by discontinued operations         |  |  |  |      |       |      |  |      |      
|Increase
(decrease) in cash and cash equivalents |  |  |  | $    | (24    | )    |  | $    | 104   



*  See
Consolidated Statement of Cash Flows on page 45.




Free cash flow in 2004 was $1.7 billion,
representing 16% of net sales, compared with $2.3 billion in 2003. The impact of higher net income was more than offset by higher capital expenditures
and incremental funding of pension and retiree medical plans of approximately $350 million in 2004.




Net cash provided by operating activities was $2.2
billion in 2004, compared with $2.6 billion in 2003 and $2.1 billion in 2002. The decrease year-over-year is due primarily to higher incremental
pension and retiree medical plan funding of approximately $350 million in 2004. Net working capital was $43 million in 2004, versus $144 million in
2003, and represented 0% of net sales, versus 2% in 2003. Days Sales Outstanding (DSO) decreased to a record low of 24 days from 32 days in 2003,
reflecting strong collection efforts, more favorable payment terms, and timing of fourth-quarter sales. We believe such a low DSO level will be
difficult to sustain in the normal course of business. On an ongoing basis, we expect DSO in the mid-30s. Inventory levels reflected the support
of new product activity for Braun and Oral Care and the planned build-up of safety stock related to our program to realign European blade and razor
manufacturing and distribution. Our long-term target for Days Inventory On Hand (DIOH) is 85 days.




Net cash provided by operating activities for 2003
was $2.6 billion, compared with $2.1 billion in 2002. The 27% increase in 2003 was due primarily to higher profits and a reduction of $453 million in
pension contributions, compared with 2002. Also contributing to the increase were working capital improvements. Overall, net working capital as a
percentage of sales improved to 2%, compared with 8% in 2002. DSO decreased to 32 days from 43 days in 2002, reflecting strong collection efforts and
more favorable payment terms.







|                                       |  |  |  | 2004 |     | 2003 |  | 2002 |     | Favorable/ (Unfavorable) 2004 vs. 2003 |  | Favorable/ (Unfavorable) 2003 vs. 2002
|-------------------------------------- |  |  |  | ---- | --- | ---- |  | ---- | --- | -------------------------------------- |  | --------------------------------------
|Net working
capital as a % of sales(1) |  |  |  |      | 0   |      |  |      | 2   |                                        |  |                                       
|Days Sales
Outstanding (2)             |  |  |  |      | 24  |      |  |      | 32  |                                        |  |                                       
|Days
Inventory On Hand (3)             |  |  |  |      | 111 |      |  |      | 103 |                                        |  |                                       
|Days Payables
Outstanding (4)          |  |  |  |      | 60  |      |  |      | 54  |                                        |  |                                       

|(1) |  | Net working capital is defined as net current assets less net
current liabilities. Net current assets equals current assets less cash, cash equivalents, short-term investments, and current net assets related to
discontinued operations. Net current liabilities equals current liabilities less loans payable and the current portion of long-term debt.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | DSO is defined as net trade receivables divided by average daily
net sales. Average daily sales is calculated by dividing the last three months net sales by 90.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | DIOH is defined as inventory divided by the average daily cost of
sales (12 months cost of sales divided by 365).
|--- |  | ------------------------------------------------------------------------------------------------------------------

|(4) |  | DPO is defined as accounts payable divided by the average daily
cost of sales.
|--- |  | ------------------------------------------------------------------------------

33

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Net cash used in investing activities in 2004
increased to $1.1 billion, compared with $294 million in 2003. Capital spending for 2004 was $616 million, or 6% of net sales. Capital expenditures in
2004 were primarily to support new product programs and the realignment of our European blade and razor manufacturing and distribution. In addition, we
funded two acquisitions, the Rembrandt brand of at-home and professional teeth-whitening products and Zooth, Inc., a leader in licensed character-based
manual and power childrens toothbrushes, totaling $117 million. Capital spending in 2003 and 2002 was $408 million and $405 million, or 4% and 5%
of net sales, respectively.




We primarily utilized cash flow to finance the
repurchase of 24.8 million shares of Company common stock for $1.0 billion and to pay dividends of $651 million. In February 2004, the Company received
$103 million upon the settlement of a currency swap related to a maturing Euro-denominated bond. Net cash used in financing activities during 2004 was
below 2003, due mainly to higher debt repayment and share repurchase activity in 2003.


Debt

Total debt increased by $74 million during 2004, with short-term loans payable
increasing $416 million to $533 million from $117 million at December 31, 2003, partially offset by a decrease in long-term debt (including current
portion) of $342 million, to $2.9 billion at December 31, 2004, compared with $3.2 billion at December 31, 2003. Cash, cash equivalents, and short-term
investments increased by $385 million for the same period. Cash equivalents and short-term investments are invested in highly liquid deposits and
marketable securities of institutions with high credit quality.



Our investment grade long-term credit ratings of
AA from Standard & Poors and Aa3 from Moodys and commercial paper ratings of A1+ from Standard & Poors and P1 from
Moodys have provided a high degree of flexibility in obtaining funds. Our commercial paper program authorizes us to issue up to $1.6 billion in
commercial paper in the U.S. dollar and Euro markets. Our commercial paper program is supported by our revolving credit facility and other sources of
liquidity, primarily our cash flow from operations. At December 31, 2004, there was $443 million outstanding under our commercial paper program,
compared with $55 million at the end of 2003 and $549 million at the end of 2002. The increase in 2004 was due primarily to repayment of long-term debt
issuances. The decrease in 2003 was due primarily to new long-term debt issuances and operating cash flows. On October 12, 2004, we entered into a
364-day basis revolving bank credit facility in the amount of $930 million, expiring October 2005. Liquidity is enhanced through a provision in the
364-day facility that gives us the option to enter into a one-year term loan in an amount up to $930 million. On October 14, 2003, we entered into a
revolving bank credit facility under which up to $288 million is available for five years, expiring October 2008. We believe we have sufficient
alternative sources of funding available to replace our commercial paper program, if necessary.




During 2002, two shelf registration statements were
filed allowing us to offer up to $2.8 billion in debt securities in the U.S. We currently anticipate that the proceeds from the sale of any debt
securities issued in offerings under these shelf registrations will be used to repay commercial paper borrowings and to replace other maturing debt,
although the proceeds may also be used for other corporate purposes, including repurchase of our common stock. At December 31, 2004, $1.9 billion, at
face value, has been issued in offerings under these shelf registrations. At December 31, 2004, a total of $918 million was available under these shelf
registration statements for future debt offerings. All proceeds from these issuances were used to reduce commercial paper borrowings.




With our strong brands, leading market shares,
strong financial condition, and cash-generating capability, we expect to continue to have funds available for growth through both internally generated
cash flow and significant credit resources. We have substantial unused lines of credit and access to worldwide financial markets, which has enabled us
to raise funds at favorable interest rates.




As described in more detail in Note 15, Subsequent
Events, of the Notes to Consolidated Financial Statements, our credit ratings and borrowings rates may be impacted by our pending merger with
The Procter & Gamble Company.


34

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Commitments and Contingencies

We have contractual obligations payable or maturing in the following
years.

|                                                         |  |  |  | 2005 |       | 2006, 2007 |  | 2008, 2009 |       | 2010 and beyond |  | Total
|-------------------------------------------------------- |  |  |  | ---- | ----- | ---------- |  | ---------- | ----- | --------------- |  | -----
|
|Long-term
debt, at face value, including current portion |  |  |  | $    | 550   |            |  | $          | 1,175 |                 |  | $    
|Loans
payable                                            |  |  |  |      | 533   |            |  |            |      |                 |  |      
|Pension and
other retiree benefits (1)                   |  |  |  |      | 192   |            |  |            | 395   |                 |  |      
|Employee
severance and benefits                          |  |  |  |      | 19    |            |  |            | 2     |                 |  |      
|Deferred
compensation                                    |  |  |  |      | 21    |            |  |            | 42    |                 |  |      
|Lease
obligations                                        |  |  |  |      | 83    |            |  |            | 116   |                 |  |      
|Purchase
obligations and other (2)                       |  |  |  |      | 697   |            |  |            | 91    |                 |  |      
|Total                                                    |  |  |  | $    | 2,095 |            |  | $          | 1,821 |                 |  | $    

|(1) |  | Represents future pension payments to comply with local
requirements. Data in the 2010 and beyond column for employee benefit obligations include obligations for 20102014. The projected payments beyond
2014 are not currently determinable.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The amounts indicated in this line primarily reflect future
contractual payments under various take-or-pay arrangements or firm commitments entered into as part of the normal course of business. Commitments made
under take-or-pay obligations represent future purchases in line with expected usage to obtain favorable pricing. While the amounts listed represent
contractual obligations, we do not believe it is likely that the full contractual amount would be paid if the underlying contracts were canceled prior
to maturity. In such cases, we generally are able to negotiate new contracts or cancellation penalties, resulting in a reduced payment. The amounts do
not include obligations related to other contractual purchase obligations that are not take-or-pay arrangements or firm commitments. Such contractual
purchase obligations are primarily purchase orders at fair value that are part of normal operations and are reflected in historical operating cash flow
trends. We do not believe such purchase obligations will adversely affect our liquidity position.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have no material guarantees. We have no material
off balance sheet arrangements or material interests in variable interest entities and none that requires consolidation.


Market Risk

We are subject to market risks, such as changes in currency and interest rates,
which arise from normal business operations. We regularly assess these risks and have established business strategies designed to provide natural
offsets, supplemented by the use of derivative financial instruments, designed to protect against the adverse effects of these and other market
risks.



We use foreign-denominated debt and forward
contracts to hedge the impact of foreign currency changes on our net foreign investments, normally in currencies with low interest rates. Most of our
transactional foreign exchange exposure is managed through centralized cash management. We hedge net residual transactional foreign exchange exposures
primarily through forward contracts.




We manage our mix of fixed and floating rate debt by
entering into interest rate swaps and forward rate agreements. We use primarily floating rate debt, principally achieved through interest rate swaps,
in order to balance interest costs to the impact of inflation on earnings.




More detailed information about the strategies,
policies, and use of derivative financial instruments is provided in Note 7, Financial Instruments and Risk Management Activities, Notes
to Consolidated Financial Statements. We have established policies, procedures, and internal controls governing the use of derivative financial
instruments and do not use them for trading, investment, or other speculative purposes. In addition, our use of derivative instruments is reviewed by
the Finance Committee of the Board of Directors annually. Financial instrument positions are monitored using a value-at-risk model. Value at risk is
estimated for each instrument based on historical volatility of market rates and a 95% confidence level.




Based on our overall evaluation of our market risk
exposures from all of our financial instruments at December 31, 2004 and 2003, a near-term change in market rates would not materially affect our
consolidated financial position, results of our operations, or cash flows.


35

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R E A L I G N M E N T  
P R O G R A M S



Functional
Excellence


In the second quarter of 2002, we began actions associated with our Functional
Excellence initiative, which is described in Note 10 to our Consolidated Financial Statements on pages 59 and 60. We have recorded the
following expenses related to this initiative.






|Years Ended December 31,                    |  |  |  | 2004 |    | 2003 |  | 2002 |    
|------------------------------------------- |  |  |  | ---- | -- | ---- |  | ---- | ---
|
|Functional
Excellence expense recorded in:  |  |  |  |      |    |      |  |      |    
|Cost of goods
sold                          |  |  |  | $    | 27 |      |  | $    | 23 
|Selling,
general and administrative expense |  |  |  |      | 48 |      |  |      | 114
|Total
Functional Excellence expense         |  |  |  | $    | 75 |      |  | $    | 137



We consider the Functional
Excellence initiative substantially complete at the end of 2004. This initiative improved our operating efficiency, downsized and centralized
functions, and decreased costs. Cumulative charges through December 31, 2004, totaled $333 million pre-tax ($236 million after-tax), and total costs
incurred under the initiative will be within the range of the initial estimate of $350$400 million.




Savings from the Functional Excellence initiative
are difficult to estimate, given the nature of the activities, the nature of the benefits that are achieved, and the degree of reinvestment in
activities such as advertising. Overall, we expect the initiative, when completed, to deliver annualized savings of approximately $300 million,
including approximately $250 million in selling, general and administrative expense savings, consistent with our initial estimates.


2003 Manufacturing Realignment Program

During 2003, we announced our program to realign European blade and razor
manufacturing and distribution. The program will significantly reduce our costs, improve operating efficiency, and streamline operations. The program
began in December 2003 and will be completed during 2007. This program is further described in Note 10 to our Consolidated Financial Statements on
page 60.



During 2004 and 2003, we recorded charges of $39
million and $50 million, respectively, to cost of goods sold for this program, related mainly to accelerated depreciation of certain assets, severance
accruals, and costs related to the relocation of equipment between affected locations.




We will continue to review our operations
and undertake projects designed to maintain a competitive cost structure, including workforce rationalization, outsourcing of functions,
and reconfiguration and optimization of our manufacturing network. Such programs may result in plant and facilities consolidations, and we
may incur severance costs, accelerated depreciation expense or impairment charges related to production costs.


C R I T I C A L  
A C C O U N T I N G   P O L I C I E S  
A N D   E S T I M A T E S



Cost-Savings
and Realignment Programs


We record severance-related expenses in accordance with the provisions of SFAS 112,
Employers Accounting for Post-Employment Benefits. Nonemployee-related exit and disposal costs, primarily contract termination costs
and costs to consolidate or close facilities, are accounted for under the provisions of SFAS 146, Accounting for Costs Associated with Exit or
Disposal Activities. We evaluate impairment issues under the provisions of SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. We estimate the expense for these programs, which are approved by senior management, by accumulating detailed estimates of
costs for such plans. This includes the estimated costs of employee severance and related benefits, impairment of property, plant and equipment,
contract termination payments for leases, distributor arrangements and other contractual obligations, and any other qualifying exit costs related to
the exit plan. These estimated costs are grouped by specific projects within the overall plan and are then monitored on a monthly basis by corporate
finance personnel, as well as by finance personnel at each affected geographic location. Such costs represent managements best estimate, but
require assumptions about the programs that may change over time. Estimates are evaluated periodically to determine if a change is required. We had no
material changes in estimates recorded during 2004 or 2003 related to Functional Excellence or other cost-savings programs.

36

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Asset Impairment

Carrying values of goodwill and other intangible assets with indefinite lives are
reviewed annually for possible impairment in accordance with SFAS 142, Goodwill and Other Intangible Assets, which was adopted on January
1, 2002. Our impairment review is based on a discounted cash flow approach at the reporting unit level, which at Gillette is the segment level, that
requires significant management judgment with respect to revenue and expense growth rates, changes in working capital, and the selection and use of an
appropriate discount rate. We use the Strategic Growth Plan, approved by our Board of Directors, for the first three years of our estimate. The use of
different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge.
We use judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as unexpected adverse business
conditions, economic factors, unanticipated technological change or competitive activities, loss of key personnel, and acts by governments and courts
may signal that an asset has become impaired.



Carrying values for long-lived tangible assets and
definite-lived intangible assets are reviewed for possible impairment as circumstances warrant in accordance with SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Impairment reviews are conducted at the judgment of management when we believe that a change in
circumstances in the business or external factors warrants a review. Circumstances such as the discontinuation of a product or product line, a sudden
or consistent decline in the sales forecast for a product, changes in technology or in the way an asset is being used, a history of operating or cash
flow losses, or an adverse change in legal factors or in the business climate, among others, may trigger an impairment review. Our initial impairment
review to determine if an impairment test is required is based on an undiscounted cash flow analysis for asset groups at the lowest level for which
identifiable cash flows exist that are largely independent of the cash flows of other asset groups. The analysis requires management judgment with
respect to changes in technology, the continued success of product lines, future volume, revenue and expense growth rates, and discount
rates.




There were no significant impairment charges
recorded by us during 2004, 2003, or 2002.


Pensions and Retiree Medical Benefits

The costs and obligations of our pension and retiree medical plans are calculated
using many assumptions to estimate the benefits that the employee earns while working, the amount of which cannot be completely determined until the
benefit payments cease. The most significant assumptions, as presented in the Pensions and Other Retiree Benefits note in Notes to Consolidated
Financial Statements, include discount rate, expected return on plan assets, future trends in health care costs, and future pay increases. The
selection of assumptions is based on historical trends and known economic and market conditions at the time of valuation. Actual results may differ
substantially from these assumptions. These differences may significantly impact future pension or retiree medical expenses and obligations.



Annual pension and retiree medical expense is
principally the sum of four components: 1) value of benefits earned by employees for working during the year; and 2) increase in the liability
from interest; less 3) expected return on plan assets; and 4) other gains and losses as described below. The expected return on plan assets is
calculated by applying an assumed long-term rate of return to the fair value of plan assets. In any given year, actual returns can differ significantly
from the expected return. Differences between the actual and expected return on plan assets are combined with gains or losses resulting from the
revaluation of plan liabilities. Plan liabilities are revalued annually, based on updated assumptions and information about the individuals covered by
the plans.




In accordance with U.S. GAAP, unrecognized gains and
losses, such as actual gains or losses on assets that vary from expected returns, are generally amortized over the remaining years that employees are
expected to work. The total unrecognized net losses for all pension and retiree benefit plans were $1.4 billion at December 31, 2004, of which $173
million occurred during 2004, primarily the result of a decrease in discount rates, partially offset by higher than expected returns on plan
assets.




If the fair value of pension plan assets is less
than the accumulated pension benefit obligation, accounting standards require a companys balance sheet to include an additional pension liability
equal to the difference, adjusted for accrued pension cost. The adjustment to record this additional liability is generally charged to other
comprehensive loss in stockholders equity. We recorded after-tax charges


37

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of $2 million and $7 million to other comprehensive loss in 2004
and 2003, respectively, to reflect additional minimum pension liabilities.



We voluntarily contributed $198 million, $72
million, and $525 million to pension plans during 2004, 2003, and 2002, respectively, to reduce the gap in funding between pension assets and
liabilities. In addition, we contributed $228 million, $6 million, and $4 million to our retiree medical programs in 2004, 2003, and 2002,
respectively.




See Note 12 to our Consolidated
Financial Statements, pages 6368, for a complete discussion regarding our pensions and retiree medical
benefits.


Employee Stock Options

As further explained in the Stock Compensation Plans and Capital Stock note in
Notes to Consolidated Financial Statements, stock options are granted to key employees and non-employee directors. Upon vesting, an option becomes
exercisable; that is, the employee or director can purchase a share of our common stock at a price that is equal to the share price on the day of
grant.



SFAS 123, Accounting for Stock-Based
Compensation, permits companies either to continue accounting for stock options under Accounting Principles Board (APB) Opinion 25,
Accounting for Stock Issued to Employees, or to adopt a fair-value-based method to measure compensation cost. Under APB 25, which we have
elected to continue to apply, there is no compensation cost if, on the day of grant, the options exercise price is equal to the share
price.




Under SFAS 123, the fair value of an option is
estimated on grant day, and then expensed evenly over its vesting period. The Summary of Significant Accounting Policies note in Notes to Consolidated
Financial Statements provides the pro forma effects of the fair-value-based method on compensation expense (net of tax), net income, and net income per
common share.




We use the Black-Scholes option valuation model to
estimate the options fair value. The option valuation model requires a number of assumptions, including future stock price volatility and
expected option life (the amount of time until the options are exercised or expire). Expected option life is based on actual exercise activity from
previous option grants. Volatility is calculated based upon stock price movements over the most recent period equal to the expected option life.
Additionally, our share price on grant day influences the option value. The higher the share price, the more the option is worth. Changes in the option
value after grant day are not reflected in pro forma expense.




Changes in these assumptions could significantly
impact the values produced by the option valuation model and, consequently, the pro forma effects reported in the Summary of Significant Accounting
Policies note. If we had elected the SFAS 123 fair-value-based method, net income would have been reduced by $95 million, $99 million, and $111 million
for 2004, 2003, and 2002, respectively.




In December 2004, the Financial Accounting Standards
Board (FASB) issued SFAS 123 (revised 2004), Share-Based Payment. SFAS 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an
alternative. This standard is effective for us on July 1, 2005, with early adoption permitted. We plan to adopt the standard on its effective date. See
page 51 in our Notes to Consolidated Financial Statements for a complete description of the effect of this recent accounting pronouncement and
our plans for implementation.


Accruals for Trade and Consumer Spending

Revenue is recorded net of the costs of trade and consumer spending, which are
recognized as a reduction of revenue at the time of sale. We enter into promotional arrangements, primarily with retail customers, many of whom require
periodic payments based on estimated total-year purchases of our products. Therefore, we are required to estimate these future purchases on a routine
basis in order to properly account for them. In addition, we routinely commit to one-time promotional programs with customers that require us to
estimate the ultimate cost of each promotional program and accrue that cost until paid. We track our commitments for promotional programs and, using
actual experience gained over many years, estimate and record an accrual at the end of each period for the earned, but unpaid, costs of promotional
programs. Management believes that its estimates of promotional accruals fairly represent future commitments.

38

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Taxes

We account for income taxes under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the
enactment date. In certain situations, a taxing authority may challenge positions that we have adopted in our income tax filings. Accordingly, we may
apply different tax treatments for these transactions in our tax return filings than for income tax financial reporting purposes. We assess the
probability of our tax position for such transactions prevailing and may record reserves for those differences in position. These reserves are reviewed
quarterly and are adjusted for utilization or reversed upon resolution of the specific matter or expiration of the statute of limitations. Except as
described in Note 11 to our Consolidated Financial Statements, Income Taxes, we reinvest unremitted earnings of certain foreign operations indefinitely
and, accordingly, we do not provide for income taxes that could result from the remittance of such earnings.

E F F E C T   O F  
R E C E N T   A C C O U N T I N G  
P R O N O U N C E M E N T S

See Note 3 to our Consolidated Financial Statements, pages
51-52, for a complete description of the effect of recent accounting pronouncements.

A N N U A L   N Y S E  
C E O   C E R T I F I C A T I O N

In June 2004, the Company submitted an unqualified Annual CEO
Certification to the New York Stock Exchange as required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.

39

---

M A N A G E M E N T  
R E P O R T   O N   I N T E R N A L  
C O N T R O L   O V E R  
F I N A N C I A L   R E P O R T I N G

The management of The Gillette Company (the Company) is responsible for
establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934. The Companys internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial statements for external purposes in accordance with generally accepted accounting principles. The Companys internal
control over financial reporting includes those policies and procedures that:

| |  | pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide reasonable assurance that the transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Companys assets that could have a material effect on the financial
statements.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Because of inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.




The Companys management assessed the
effectiveness of the Companys internal control over financial reporting as of December 31, 2004. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control  Integrated
Framework.




Based on its assessment using the COSO criteria,
management believes that the Company maintained, in all material respects, effective internal control over financial reporting, as of December 31,
2004.




The Companys independent registered public
accounting firm has issued an attestation report on managements assessment of the Companys internal control over financial reporting. This
report appears on page 41 of the Companys 2004 Annual Report to Shareholders.






March 8,
2005


40

---

Report of Independent Registered Public Accounting Firm

The Gillette Company and Subsidiary Companies





The Board of
Directors and Stockholders The Gillette Company:


We have audited managements assessment, included in the accompanying
Management Report on Internal Control Over Financial Reporting, that The Gillette Company maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our
audit.



We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.




A companys internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.




Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.




In our opinion, managements assessment that
The Gillette Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on criteria established in Internal Control  Integrated Framework issued by COSO. Also, in our opinion, The Gillette Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal Control  Integrated Framework issued by COSO.




We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of The Gillette Company and subsidiary
companies as of December 31, 2004 and 2003, and the related consolidated statements of income, cash flows and stockholders equity for each of the
years in the three-year period ended December 31, 2004, and our report dated March 11, 2005, expressed an unqualified opinion on those
consolidated financial statements.







KPMG LLP Boston, Massachusetts March 11, 2005

41

---

Report of Independent Registered Public Accounting Firm

The Gillette Company and Subsidiary Companies








The Board of
Directors and Stockholders The Gillette Company:


We have audited the accompanying consolidated balance sheet of The Gillette Company
and subsidiary companies as of December 31, 2004 and 2003, and the related consolidated statements of income, cash flows and stockholders equity
for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.




In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of The Gillette Company and subsidiary companies as of
December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.




We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the effectiveness of The Gillette Companys internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal Control  Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our report dated March 11, 2005, expressed an unqualified opinion on managements
assessment of, and the effective operation of, internal control over financial reporting.


KPMG LLP Boston, Massachusetts March 11, 2005

42

---

Consolidated Statement of Income

The Gillette Company and Subsidiary Companies

|Years Ended December 31,                                                                              |  |  |  | 2004 |        | 2003 |  | 2002
|----------------------------------------------------------------------------------------------------- |  |  |  | ---- | ------ | ---- |  | ----
|
|                                                                                                      |  |  |  |      |        |      |  |     
|Net
Sales                                                                                             |  |  |  | $    | 10,477 |      |  | $   
|Cost of
Sales                                                                                         |  |  |  |      | 4,264  |      |  |     
|Gross
Profit                                                                                          |  |  |  |      | 6,213  |      |  |     
|Selling,
General and Administrative Expenses                                                          |  |  |  |      | 3,748  |      |  |     
|Restructuring, Asset Impairment and Other                                                             |  |  |  |      |       |      |  |     
|Profit from
Operations                                                                                |  |  |  |      | 2,465  |      |  |     
|N O N O P E R A T I N G  
C H A R G E S   (INCOME)                                                    |  |  |  |      |        |      |  |     
|Interest
income                                                                                       |  |  |  |      | (17    | )    |  |     
|Interest
expense                                                                                      |  |  |  |      | 54     |      |  |     
|Other charges
(income)  net                                                                          |  |  |  |      | 44     |      |  |     
|                                                                                                      |  |  |  |      | 81     |      |  |     
|Income from
Continuing Operations before Income Taxes                                                 |  |  |  |      | 2,384  |      |  |     
|Income
Taxes                                                                                          |  |  |  |      | 693    |      |  |     
|Income from
Continuing Operations                                                                     |  |  |  |      | 1,691  |      |  |     
|Income from
Discontinued Operations, net of tax                                                       |  |  |  |      |       |      |  |     
|Net
Income                                                                                            |  |  |  | $    | 1,691  |      |  | $   
|N E T   I N C O M E   P E R  
C O M M O N 
S H A R E , B A S I C                                      |  |  |  |      |        |      | 
|Continuing
Operations                                                                                 |  |  |  | $    | 1.69   |      |  | $   
|Discontinued
Operations                                                                               |  |  |  |      |       |      |  |     
|Net
Income                                                                                            |  |  |  | $    | 1.69   |      |  | $   
|N E T   I N C O M E   P E R  
C O M M O N   S H A R E ,  
A S S U M I N G   F U L L  
D I L U T I O N |  |  |  |      |        |      |  |     
|Continuing
Operations                                                                                 |  |  |  | $    | 1.68   |      |  | $   
|Discontinued
Operations                                                                               |  |  |  |      |       |      |  |     
|Net
Income                                                                                            |  |  |  | $    | 1.68   |      |  | $   
|Weighted
average number of common shares outstanding                                                  |  |  |  |      |        |      |  |     
|Basic                                                                                                 |  |  |  |      | 999    |      |  |     
|Assuming full
dilution                                                                                |  |  |  |      | 1,007  |      |  |     

See accompanying Notes to Consolidated Financial Statements.

43

---

Consolidated Balance Sheet

The Gillette Company and Subsidiary Companies

|At December 31,                                                          |  |  |  | 2004 |        | 2003
|------------------------------------------------------------------------ |  |  |  | ---- | ------ | ----
|
|                                                                         |  |  |  |      |        |     
|A S S E T S                                                              |  |  |  |      |        |     
|C u r r e n t   A s s e t s                                              |  |  |  |      |        |     
|Cash and cash
equivalents                                                |  |  |  | $    | 219    |     
|Short-term
investments                                                   |  |  |  |      | 847    |     
|Trade
receivables, less allowances: 2004  $37; 2003  $53               |  |  |  |      | 835    |     
|Other
receivables                                                        |  |  |  |      | 376    |     
|Inventories                                                              |  |  |  |      | 1,291  |     
|Deferred
income taxes                                                    |  |  |  |      | 303    |     
|Other current
assets                                                     |  |  |  |      | 197    |     
|Total Current
Assets                                                     |  |  |  |      | 4,068  |     
|Property,
Plant and Equipment, net                                       |  |  |  |      | 3,747  |     
|Goodwill                                                                 |  |  |  |      | 1,052  |     
|Intangible
Assets, net                                                   |  |  |  |      | 557    |     
|Deferred Income Taxes                                                    |  |  |  |      | 36     |     
|Other
Assets                                                             |  |  |  |      | 1,271  |     
|Total
Assets                                                             |  |  |  | $    | 10,731 |     
|L I A B I L I T I E S   A N D  
S T O C K H O L D E R S  E Q U I T Y    |  |  |  |      |        |     
|C u r r e n t  
L i a b i l i t i e s                                    |  |  |  |      |        |     
|Loans
payable                                                            |  |  |  | $    | 533    |     
|Current
portion of long-term debt                                        |  |  |  |      | 711    |     
|Accounts
payable and accrued liabilities                                 |  |  |  |      | 2,645  |     
|Income
taxes                                                             |  |  |  |      | 289    |     
|Deferred
income taxes                                                    |  |  |  |      | 25     |     
|Total Current
Liabilities                                                |  |  |  |      | 4,203  |     
|Long-Term
Debt                                                           |  |  |  |      | 2,142  |     
|Deferred
Income Taxes                                                    |  |  |  |      | 723    |     
|Other
Long-Term Liabilities                                              |  |  |  |      | 754    |     
|Minority
Interest                                                        |  |  |  |      | 73     |     
|S t o c k h o l d e r s 
E q u i t y                                    |  |  |  |      |        |     
|Common stock,
par value $1 per share                                     |  |  |  |      |        |     
|Authorized:
2,320 shares Issued 2004  1,382 shares; 2003  1,374 shares |  |  |  |      | 1,382  |     
|Additional
paid-in capital                                               |  |  |  |      | 1,521  |     
|Earnings
reinvested in the business                                      |  |  |  |      | 8,376  |     
|Accumulated
other comprehensive loss                                     |  |  |  |      | (760   | )   
|Treasury
stock, at cost: 2004  392 shares; 2003  367 shares            |  |  |  |      | (7,683 | )   
|Deferred
stock-based compensation                                        |  |  |  |      |       |     
|Total
Stockholders Equity                                               |  |  |  |      | 2,836  |     
|Total
Liabilities and Stockholders Equity                               |  |  |  | $    | 10,731 |     

See accompanying Notes to Consolidated Financial Statements.

44

---

Consolidated Statement of Cash Flows

The Gillette Company and Subsidiary Companies

|Years Ended December 31,                                                                                 |  |  |  | 2004 |        | 2003 |  | 2002
|-------------------------------------------------------------------------------------------------------- |  |  |  | ---- | ------ | ---- |  | ----
|
|                                                                                                         |  |  |  |      |        |      |  |     
|OPERATING
ACTIVITIES                                                                                     |  |  |  |      |        |      |  |     
|Income from
continuing operations                                                                        |  |  |  | $    | 1,691  |      |  | $   
|Adjustments
to reconcile income from continuing operations to net cash provided by operating activities: |  |  |  |      |        |      |  |     
|Restructuring
and asset impairment recovery                                                              |  |  |  |      |       |      |  |     
|Depreciation
and amortization                                                                            |  |  |  |      | 610    |      |  |     
|Pension
expense                                                                                          |  |  |  |      | 146    |      |  |     
|Deferred
income taxes                                                                                    |  |  |  |      | 63     |      |  |     
|Other                                                                                                    |  |  |  |      | 9      |      |  |     
|Changes in
assets and liabilities, excluding effects of acquisitions and divestitures:                   |  |  |  |      |        |      |  |     
|Accounts
receivable                                                                                      |  |  |  |      | 123    |      |  |     
|Inventories                                                                                              |  |  |  |      | (89    | )    |  |     
|Accounts
payable and accrued liabilities                                                                 |  |  |  |      | 6      |      |  |     
|Other working
capital items                                                                              |  |  |  |      | 28     |      |  |     
|Funding of
Company benefit plans                                                                         |  |  |  |      | (426   | )    |  |     
|Other
noncurrent assets and liabilities                                                                  |  |  |  |      | 85     |      |  |     
|Net cash
provided by operating activities                                                                |  |  |  |      | 2,246  |      |  |     
|INVESTING
ACTIVITIES                                                                                     |  |  |  |      |        |      |  |     
|Purchases of
short-term investments                                                                      |  |  |  |      | (1,356 | )    |  |     
|Proceeds from
sales of short-term investments                                                            |  |  |  |      | 947    |      |  |     
|Additions to
property, plant and equipment                                                               |  |  |  |      | (616   | )    |  |     
|Disposals of
property, plant and equipment                                                               |  |  |  |      | 67     |      |  |     
|Acquisitions,
net of cash acquired                                                                       |  |  |  |      | (117   | )    |  |     
|Other                                                                                                    |  |  |  |      | 1      |      |  |     
|Net cash used
in investing activities                                                                    |  |  |  |      | (1,074 | )    |  |     
|FINANCING
ACTIVITIES                                                                                     |  |  |  |      |        |      |  |     
|Purchases of treasury stock                                                                              |  |  |  |      | (1,018 | )    |  |     
|Proceeds from
sales of put options                                                                       |  |  |  |      |       |      |  |     
|Proceeds from
exercise of stock options and purchase plans                                               |  |  |  |      | 256    |      |  |     
|Proceeds from
long-term debt                                                                             |  |  |  |      | 346    |      |  |     
|Repayment of
long-term debt                                                                              |  |  |  |      | (646   | )    |  |     
|Increase
(decrease) in loans payable                                                                     |  |  |  |      | 412    |      |  |     
|Dividends
paid                                                                                           |  |  |  |      | (651   | )    |  |     
|Settlements
of debt-related derivative contracts                                                         |  |  |  |      | 102    |      |  |     
|Net cash used
in financing activities                                                                    |  |  |  |      | (1,199 | )    |  |     
|Effect of
Foreign Exchange Rate Changes on Cash                                                          |  |  |  |      | 3      |      |  |     
|Net Cash Used
by Discontinued Operations                                                                 |  |  |  |      |       |      |  |     
|Increase
(Decrease) in Cash and Cash Equivalents                                                         |  |  |  |      | (24    | )    |  |     
|Cash and Cash
Equivalents at Beginning of Year                                                           |  |  |  |      | 243    |      |  |     
|Cash and Cash
Equivalents at End of Year                                                                 |  |  |  | $    | 219    |      |  | $   
|Supplemental
disclosure of cash paid for:                                                                |  |  |  |      |        |      |  |     
|Interest                                                                                                 |  |  |  | $    | 56     |      |  | $   
|Income
taxes                                                                                             |  |  |  | $    | 500    |      |  | $   

See accompanying Notes to Consolidated Financial Statements.

45

---

Consolidated Statement of Stockholders Equity

The Gillette Company and Subsidiary Companies

|                                                  |  |  |  | Common Stock |       | Additional Paid-in Capital |  | Earnings Reinvested |       | Other Comprehensive Income (Loss) |  | Treasury Stock |       | Deferred Stock-Based Compensation |  | Total Stockholders Equity
|------------------------------------------------- |  |  |  | ------------ | ----- | -------------------------- |  | ------------------- | ----- | --------------------------------- |  | -------------- | ----- | --------------------------------- |  | --------------------------
|
|                                                  |  |  |  |              |       |                            |  |                     |       |                                   |  |                |       |                                   |  |                           
|Balance at
December 31, 2001                      |  |  |  | $            | 1,368 |                            |  | $                   | 1,094 |                                   |  | $              | 6,077 |                                   |  | $                         
|Net
income                                        |  |  |  |              |      |                            |  |                     |      |                                   |  |                | 1,216 |                                   |  |                           
|Foreign
currency translation                      |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Pension
adjustment                                |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Cash flow
hedges                                  |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Other
comprehensive loss                          |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Comprehensive
income                              |  |  |  |              |       |                            |  |                     |       |                                   |  |                |       |                                   |  |                           
|Dividends
declared (per share $.65)               |  |  |  |              |      |                            |  |                     |      |                                   |  |                | (685  | )                                 |  |                           
|Stock option
and purchase plans (2.6 shares)      |  |  |  |              | 2     |                            |  |                     | 54    |                                   |  |                |      |                                   |  |                           
|Purchase of
Gillette treasury stock (14.1 shares) |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Proceeds from
sale of put options                 |  |  |  |              |      |                            |  |                     | 15    |                                   |  |                |      |                                   |  |                           
|Contingent
liability of put options               |  |  |  |              |      |                            |  |                     | 34    |                                   |  |                |      |                                   |  |                           
|Balance at
December 31, 2002                      |  |  |  |              | 1,370 |                            |  |                     | 1,197 |                                   |  |                | 6,608 |                                   |  |                           
|Net
income                                        |  |  |  |              |      |                            |  |                     |      |                                   |  |                | 1,385 |                                   |  |                           
|Foreign
currency translation                      |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Pension
adjustment                                |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Cash flow
hedges                                  |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Other
comprehensive loss                          |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Comprehensive
income                              |  |  |  |              |       |                            |  |                     |       |                                   |  |                |       |                                   |  |                           
|Dividends
declared (per share $.65)               |  |  |  |              |      |                            |  |                     |      |                                   |  |                | (660  | )                                 |  |                           
|Stock option
and purchase plans (3.1 shares)      |  |  |  |              | 4     |                            |  |                     | 76    |                                   |  |                |      |                                   |  |                           
|Purchase of
Gillette treasury stock (40.8 shares) |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Deferred
stock-based compensation                 |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Earned
stock-based compensation                   |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Balance at
December 31, 2003                      |  |  |  |              | 1,374 |                            |  |                     | 1,273 |                                   |  |                | 7,333 |                                   |  |                           
|Net
income                                        |  |  |  |              |      |                            |  |                     |      |                                   |  |                | 1,691 |                                   |  |                           
|Foreign
currency translation                      |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Pension
adjustment                                |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Other
comprehensive income                        |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Comprehensive
income                              |  |  |  |              |       |                            |  |                     |       |                                   |  |                |       |                                   |  |                           
|Dividends
declared (per share $.65)               |  |  |  |              |      |                            |  |                     |      |                                   |  |                | (648  | )                                 |  |                           
|Stock option
and purchase plans (8.2 shares)      |  |  |  |              | 8     |                            |  |                     | 248   |                                   |  |                |      |                                   |  |                           
|Purchase of
Gillette treasury stock (24.8 shares) |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Deferred
stock-based compensation                 |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Earned
stock-based compensation                   |  |  |  |              |      |                            |  |                     |      |                                   |  |                |      |                                   |  |                           
|Balance at
December 31, 2004                      |  |  |  | $            | 1,382 |                            |  | $                   | 1,521 |                                   |  | $              | 8,376 |                                   |  | $                         

See accompanying Notes to Consolidated Financial Statements.

46

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Notes to Consolidated Financial Statements

The Gillette Company and Subsidiary Companies

1 .   N A T U R E  
O F   O P E R A T I O N S

The Gillette Company is a global consumer products firm, with manufacturing
operations conducted at 31 facilities in 14 countries. Products are sold in over 200 countries and territories. Gillette is the world leader in male
grooming, a category that includes blades, razors, and shaving preparations, and also in female grooming products, such as wet shaving products and
hair epilation devices. The Company is the world leader in alkaline batteries and manual and power toothbrushes.

2 .   S U M M A R Y  
O F   S I G N I F I C A N T  
A C C O U N T I N G   P O L I C I E S



Basis of
Presentation and Principles of Consolidation


The consolidated financial statements include the accounts of The Gillette Company
and its majority-owned subsidiaries. Intercompany accounts and transactions are eliminated. The Company has no material interests in variable interest
entities and none that requires consolidation.

Use of Estimates

The preparation of the consolidated financial statements and accompanying
disclosures in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that
affect the amounts reported. These estimates are based on managements best knowledge of current events and actions the Company may undertake in
the future. Estimates are used in accounting for, among other items, accruals for cost-savings and realignment programs, pensions and retiree medical
benefits, employee stock options, accruals for trade and consumer spending, useful lives for depreciation and amortization, future cash flows
associated with impairment testing for goodwill, other intangible assets and long-lived assets, deferred tax assets, potential income tax assessments,
accruals for environmental remediation, and other contingencies. Actual results could differ from these estimates.

Cash, Cash Equivalents, and Short-Term Investments

Cash and cash equivalents include cash, time deposits, and marketable securities
that are highly liquid and have maturities of three months or less at date of purchase. Short-term investments include highly liquid marketable
securities with maturities greater than three months at date of purchase. These securities are classified as available for sale and are carried at fair
market value. Unrealized gains and losses are insignificant, as such securities receive variable interest based on current market
rates.



Amounts included in short-term investments were
previously reported as cash and cash equivalents due to their highly liquid nature. These marketable securities have been reclassified to short-term
investments due to their maturity dates, and purchases and sales are included in investing activities in the Consolidated Statement of Cash Flows. See
Note 7, Financial Instruments and Management Activities, for a reconciliation to amounts previously reported.


Revenue Recognition

Revenue from product sales is recognized when the goods are delivered to the
customer, provided that: title and risk of loss have passed to the customer; persuasive evidence of an arrangement exists; the sales price is fixed or
determinable; and collectibility is considered probable. Revenue is recorded net of estimated sales returns and allowances for trade promotions,
coupons, and other discounts, which are recognized as a reduction of revenue at the time of sale.

Shipping and Handling Costs

Under generally accepted accounting principles, shipping and handling costs may be
reported as a component of either cost of sales or selling, general and administrative expenses. The Company formerly reported all such costs related
to outbound freight in the Consolidated Statement of Income as a component of selling, general and administrative expenses. Beginning in 2004, the
Company elected to report the costs related to outbound freight in cost of sales, and this change resulted in reclassifications to the Consolidated
Statement of Income. Cost of sales increased, and gross profit and sell

47

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ing, general and administrative expenses were
reduced by $189 million and $175 million in 2003 and 2002, respectively. Gross profit was reduced as a percentage of net sales from 59.9% to 57.9% and
from 58.5% to 56.4% in 2003 and 2002, respectively. There was no impact on profit from operations, net income, or earnings per share as a result of
this reclassification.


Inventories

Inventories are stated at the lower of cost or market. Cost is determined on a
first-in, first-out (FIFO) basis.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is computed
primarily on a straight-line basis over the estimated useful lives of assets: buildings, 20 to 40 years; building equipment, 10 to 20 years; machinery
and equipment, three to 20 years. Repairs and maintenance are expensed as incurred.

Goodwill and Other Intangible Assets

The Company accounts for intangible assets in accordance with Statement of
Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets, which was adopted by the Company on January 1, 2002. In
accordance with that statement, goodwill and intangible assets with indefinite lives are not amortized, but rather are tested for impairment, at least
annually. Intangible assets with estimable useful lives, consisting primarily of patents, trademarks, software, and other similar items, are amortized
on a straight-line basis over their estimated useful lives, two to 50 years, and are reviewed for impairment in accordance with SFAS 144,
Accounting for the Impairment of Long-Lived Assets.

Impairment of Goodwill, Other Intangible Assets, and Long-Lived
Assets

Goodwill and intangible assets with indefinite lives are tested for impairment, at
least annually, in accordance with the provisions of SFAS 142. The Companys impairment review is based on a discounted cash flow approach, at the
reporting unit level, which at Gillette is the segment level, that requires significant management judgment with respect to revenue and expense growth
rates, changes in working capital, and the selection and use of an appropriate discount rate. The Company uses its judgment in assessing whether assets
may have become impaired between annual impairment tests. Indicators such as unexpected adverse business conditions, economic factors, unanticipated
technological changes or competitive activities, and acts by governments and courts may signal that an asset has become impaired.



Intangible assets with estimable lives and other
long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not
be recoverable in accordance with SFAS 144. Asset groups have been determined based on the lowest level for which identifiable cash flows exist that
are largely independent of the cash flows of other groups. Recoverability of intangible assets with estimable lives and other long-lived assets is
measured by a comparison of the carrying amount of an asset group to future net undiscounted pre-tax cash flows expected to be generated by the asset
group. If these comparisons indicate that the carrying value of an asset group is not recoverable, the impairment loss recognized is the amount by
which the carrying amount of the asset group exceeds the related estimated fair value. Estimated fair value is based on either discounted future
pre-tax operating cash flows or appraised values, depending on the nature of the asset group.




For both impairment tests, the Company determines
the discount rate based on the expected internal rate of return for the related business and does not allocate interest charges to the asset group
being measured. Considerable judgment is required to estimate discounted future operating cash flows.


Environmental

The Company is involved in various environmental remediation and ongoing compliance
activities. As sites are identified and assessed, the Company determines its potential environmental liability. The Company follows the accounting
guidance specified in AICPA Statement of Position 96-1, Environmental Remediation Liabilities. Based on engineering studies and management
judgment, the Company has estimated and accrued for probable future remediation and monitoring costs on an

48

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undiscounted basis. The estimated amounts, which
are not discounted and are exclusive of claims against third parties, are adjusted periodically as assessment and remediation efforts progress and
additional technical or legal information becomes available.


Advertising

Advertising costs are expensed in the year incurred. Advertising was $1.2 billion
in 2004, $827 million in 2003, and $647 million in 2002. For interim reporting purposes, advertising expenses are charged to operations as a percentage
of sales, based on estimated sales and related advertising expense for the full year.

Research and Development

Research and development costs, included in selling, general and administrative
expenses, amounted to $209 million in 2004, $201 million in 2003, and $181 million in 2002.

Financial Instruments

Cash and cash equivalents, short-term investments, trade receivables, investments,
accounts payable, loans payable, and all derivative instruments are carried at fair value. The fair values of cash equivalents, trade receivables,
accounts payable, and loans payable approximate cost. The fair value of investments is based on quoted market prices. The estimated fair values of
derivative instruments are calculated based on market rates. These values represent the estimated amounts the Company would receive or pay to terminate
agreements, taking into consideration current market rates and the current creditworthiness of the counterparties. The fair value of long-term debt,
including the current portion, is estimated based on quoted market prices or rates currently offered to the Company for debt of the same remaining
maturities.

Foreign Currency Translation

Financial statements of operating subsidiaries outside the U.S., other than those
operating in highly inflationary environments, are measured using the local currency as the functional currency. Adjustments from translating these
financial statements into U.S. dollars are accumulated in the equity section of the balance sheet under the caption, Accumulated other
comprehensive loss. For those non-U.S. subsidiaries that are included in the Companys U.S. tax return, these adjustments are net of U.S.
income tax.



For subsidiaries operating in highly inflationary
economies, the U.S. dollar is the functional currency. Therefore, exchange gains and losses for these subsidiaries are included with all other
transactional exchange gains and losses in the Consolidated Statement of Income under the caption, Other charges (income) 
net.


Income Taxes

Income taxes are accounted for under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period of the enactment
date. In certain situations, a taxing authority may challenge positions that the Company has adopted in its income tax filings. Accordingly, the
Company may apply a different tax treatment for these transactions in its tax return filings than for income tax financial reporting purposes. The
Company assesses the probability of its tax position for such transactions prevailing, and may record reserves for those differences in position. These
reserves are reviewed quarterly and are adjusted for utilization or reversed upon resolution of the specific matter or expiration of the statute of
limitations. Except as further discussed in Note 11, Income Taxes, the Company reinvests unremitted earnings of certain foreign operations indefinitely
and, accordingly, does not provide for income taxes that could result from the remittance of such earnings. At December 31, 2004, earnings of such
operations that could result in incremental taxes, if remitted, amounted to $2.2 billion. The tax liability that would arise if these earnings were
remitted would be approximately $611 million if these earnings are remitted other than as qualifying extraordinary dividends as defined in the
repatriation provisions of the American Jobs Creation Act of 2004. See Note 11, Income Taxes, for further discussion.

49

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Stock-Based Compensation

The Company has a long-term incentive plan, which is described more fully in
Note 13, Stock Compensation Plans and Capital Stock. The Company currently accounts for this plan under Accounting Principles Board (APB)
Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. No compensation cost is recorded on the date of stock
option grant, as all options granted under the plan have an exercise price equal to the market value of the underlying common stock. The following
table illustrates the effect on net income and net income per common share if the Company had applied the fair-value-based method of SFAS 123,
Accounting for Stock-Based Compensation, to record expense for stock options.

|Years Ended December 31,                                                                                           |  |  |  | 2004 |       | 2003 |  | 2002
|------------------------------------------------------------------------------------------------------------------ |  |  |  | ---- | ----- | ---- |  | ----
|
|                                                                                                                   |  |  |  |      |       |      |  |     
|Net income,
as reported                                                                                            |  |  |  | $    | 1,691 |      |  | $   
|Add:
Compensation expense included in reported net income, net of related tax effects                              |  |  |  |      | 5     |      |  |     
|Less:
Compensation expense for option awards determined by the fair-value-based method, net of related tax effects |  |  |  |      | (100  | )    |  |     
|Pro forma net
income                                                                                               |  |  |  | $    | 1,596 |      |  | $   
|Net income
per common share                                                                                        |  |  |  |      |       |      |  |     
|Basic                                                                                                              |  |  |  |      |       |      |  |     
|As
reported                                                                                                        |  |  |  | $    | 1.69  |      |  | $   
|Pro
forma                                                                                                          |  |  |  | $    | 1.60  |      |  | $   
|Assuming full
dilution                                                                                             |  |  |  |      |       |      |  |     
|As
reported                                                                                                        |  |  |  | $    | 1.68  |      |  | $   
|Pro
forma                                                                                                          |  |  |  | $    | 1.58  |      |  | $   



For purposes of the pro
forma calculations, compensation expense associated with awards that vest on a graded basis are assumed to be expensed on a straight-line
basis.




The weighted average fair value of options granted
was $12.91 in 2004, $9.01 in 2003, and $11.18 in 2002. The fair value of each option grant for the Companys plan is estimated on the date of the
grant using the Black-Scholes option pricing model, with the following weighted average assumptions.







|Years Ended December 31, |  |  |  | 2004      |      | 2003      |  | 2002     
|------------------------ |  |  |  | --------- | ---- | --------- |  | ---------
|                         |  |  |  |           |      |           |  |          
|Risk-free
interest rates |  |  |  |           | 4.0  | %         |  |          
|Expected
option lives    |  |  |  | 5.5
years |      | 5.5
years |  | 5.5
years
|Expected
volatilities    |  |  |  |           | 30.7 | %         |  |          
|Expected
dividend yields |  |  |  |           | 1.5  | %         |  |          



The tax benefit associated with
the exercise of stock options was $29 million, $11 million, and $18 million in 2004, 2003, and 2002, respectively.


Net Income per Common Share

Basic net income per common share is calculated by dividing net income by the
weighted average number of common shares outstanding. The calculation of diluted net income per common share also assumes conversion of stock options
into common stock. At December 31, 2004, 2003, and 2002, 33 million, 44 million, and 56 million shares of common stock issuable under stock options,
respectively, were not included in the calculation of diluted net income per share because their effects would have been antidilutive.



A reconciliation of the shares used to compute net
income per share, basic and diluted, is shown below. There are no adjustments to the computation of net income for this calculation in 2004, 2003, or
2002.


50

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|Years Ended December 31,              |  |  |  | 2004 |       | 2003 |  | 2002
|------------------------------------- |  |  |  | ---- | ----- | ---- |  | ----
|
|                                      |  |  |  |      |       |      |  |     
|Common
shares, basic                  |  |  |  |      | 999   |      |  |     
|Effect of
dilutive securities:        |  |  |  |      |       |      |  |     
|Stock
options                         |  |  |  |      | 8     |      |  |     
|Common
shares, assuming full dilution |  |  |  |      | 1,007 |      |  |     

Reclassification of Prior Years

Prior-year financial statements have been reclassified to conform to the 2004
presentation.

3 .   E F F E C T  O F 
R E C E N T  A C C O U N T I N G 
P R O N O U N C E M E N T S

In December 2004, the Financial Accounting Standards Board (FASB) issued two FASB
Staff Positions (FSPs), FSP SFAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (the Jobs Creation Act), and FSP SFAS 109-2,
Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provisions Within the American Jobs Creation Act of 2004. Both
FSPs are effective upon issuance.



FSP SFAS 109-1 clarifies that the domestic
manufacturing deduction associated with the Jobs Creation Act should be accounted for as a special deduction (rather than a rate reduction) under SFAS
109. A special deduction is recognized under SFAS 109 as it is earned. This FSP will not have a material impact on the Company.




FSP SFAS 109-2 is intended to provide limited relief
in the application of the indefinite reinvestment criterion of APB 23, Accounting for Income Taxes  Special Areas, due to ambiguities
surrounding the implementation of the Jobs Creation Act. See Note 11, Income Taxes, for further discussion.




On December 16, 2004, the FASB issued SFAS 123 (R),
Share-Based Payment, which is a revision of SFAS 123, Accounting for Stock-Based Compensation. SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative.




SFAS 123(R) must be adopted no later than July 1,
2005. Early adoption is permitted. The Company expects to adopt SFAS 123(R) on July 1, 2005, utilizing the modified retrospective method. The modified
retrospective method requires compensation costs to be recognized beginning with the effective date based on the requirements of SFAS 123(R) for all
(a) share-based payments granted after the effective date and (b) awards granted to employees prior to the effective date of SFAS 123(R) that remain
unvested on the effective date. Amounts for prior years will be restated based on the amounts previously recognized under SFAS 123 for purposes of pro
forma disclosures.




As permitted by SFAS 123, the Company currently
accounts for share-based payments to employees using APB Opinion 25s intrinsic value method and, as such, generally recognizes no compensation
cost for employee stock options. Accordingly, the adoption of SFAS 123(R)s fair value method will have a significant impact on the Companys
results of operations, although it will have no impact on the Companys overall financial position. The impact of the adoption of SFAS 123(R)
cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, when adopted, the impact of
SFAS 123(R) on prior periods, will approximate the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in
the Summary of Significant Accounting Policies note on page 50.




In November 2004, the FASB issued SFAS 151,
Inventory Costs  an amendment of ARB No. 43, Chapter 4, which requires companies to expense abnormal freight, handling costs, or
spoilage in the period incurred and to allocate fixed overhead based on normal capacity, with adjustment if production is abnormally high. This
standard becomes effective for the Company on July 1, 2005, with early adoption permitted. The Company currently accounts for abnormal freight,
handling costs, and spoilage consistent with the standard. The Company plans to adopt the provisions early, on a prospective basis, as they relate to
capitalization of fixed overhead expenses in the first quarter 2005. The Company is currently evaluating the effects of implementing this standard.
Based on a preliminary


51

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analysis, the Company does not expect that there
will be a material effect on 2005 total Company results. There may be an impact on the results of certain quarters at the segment or total Company
level.




In December 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) was enacted. The Act introduced a plan sponsor subsidy based on a percentage of a
beneficiarys annual prescription drug benefits, within defined limits, and the opportunity for a retiree to obtain prescription drug benefits
under Medicare. In May 2004, the FASB issued FSP SFAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, which supersedes FSP SFAS 106-1 of the same title. The Staff Position clarifies the accounting for the
benefits attributable to new government subsidies for companies that provide prescription drug benefits to retirees. As more fully described in Note
12, Pensions and Other Retiree Benefits, the Company elected to defer any accounting for the effects of the Act pursuant to FSP SFAS 106-1
and made that election in the quarter ended December 31, 2003. The Company adopted FSP SFAS 106-2 prospectively, as of July 1, 2004, the beginning of
its third quarter.


4 .  
A C C U M U L A T E D   O T H E R  
C O M P R E H E N S I V E   L O S S

An analysis of accumulated other comprehensive loss follows.






|                                      |  |  |  | ForeignCurrencyTranslation |        | PensionAdjustment |  | CashFlowHedges |      | AccumulatedOtherComprehensiveLoss
|------------------------------------- |  |  |  | -------------------------- | ------ | ----------------- |  | -------------- | ---- | ---------------------------------
|
|                                      |  |  |  |                            |        |                   |  |                |      |                                  
|Balance at
December 31, 2001          |  |  |  | $                          | (1,373 | )                 |  | $              | (56  | )                                
|Change in
period                      |  |  |  |                            | 196    |                   |  |                | (183 | )                                
|Reclassification to earnings, pre-tax |  |  |  |                            |       |                   |  |                |     |                                  
|Income tax
benefit (expense)          |  |  |  |                            | (155   | )                 |  |                | 53   |                                  
|Balance at
December 31, 2002          |  |  |  |                            | (1,332 | )                 |  |                | (186 | )                                
|Change in
period                      |  |  |  |                            | 398    |                   |  |                | (10  | )                                
|Reclassification to earnings, pre-tax |  |  |  |                            | 11     |                   |  |                |     |                                  
|Income tax
benefit (expense)          |  |  |  |                            | 25     |                   |  |                | 3    |                                  
|Balance at
December 31, 2003          |  |  |  |                            | (898   | )                 |  |                | (193 | )                                
|Change in
period                      |  |  |  |                            | 293    |                   |  |                | (3   | )                                
|Reclassification to earnings, pre-tax |  |  |  |                            | 30     |                   |  |                |     |                                  
|Income tax
benefit (expense)          |  |  |  |                            | 7      |                   |  |                | 1    |                                  
|Balance at
December 31, 2004          |  |  |  |                            | (568   | )                 |  |                | (195 | )                                



Net exchange gains or losses
resulting from the translation of assets and liabilities of foreign subsidiaries, except those in highly inflationary economies, are accumulated in a
separate section of stockholders equity. Also included are the effects of foreign exchange rate changes on intercompany balances of a long-term
investment nature and transactions designated as hedges of net foreign investments. The Company recorded pre-tax gains of $293 million in accumulated
foreign currency translation in 2004, due primarily to the strength of the Euro and the U.K. Pound Sterling. The pre-tax gains of $398 million in 2003
were due primarily to the strength of the Euro. Pre-tax gains of $196 million in 2002 were due primarily to strengthening European currencies, which
were partially offset by weakening Latin American currencies.




Included in Other charges (income) 
net in the Consolidated Statement of Income are a net exchange loss of $35 million in 2004, and net exchange gains of $14 million and $16 million
in 2003 and 2002, respectively, for the foreign currency effects of transactions (including translation of hyperinflationary entities) in those years.
In 2004 and 2003, the Company reclassified $30 million and $11 million, respectively, in exchange losses from accumulated other comprehensive loss upon
liquidation of foreign subsidiaries.


52

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5 .  
S U P P L E M E N T A L   B A L A N C E  
S H E E T   I N F O R M A T I O N



Allowance for
Doubtful Accounts




|Years Ended December 31,     |  |  |  | 2004 |     | 2003 |  | 2002
|---------------------------- |  |  |  | ---- | --- | ---- |  | ----
|
|Balance at
beginning of year |  |  |  | $    | 53  |      |  | $   
|Additions                    |  |  |  |      | 11  |      |  |     
|Deductions                   |  |  |  |      | (27 | )    |  |     
|Balance at
end of year       |  |  |  | $    | 37  |      |  | $   

Inventories



|At December 31,            |  |  |  | 2004 |       | 2003
|-------------------------- |  |  |  | ---- | ----- | ----
|
|Raw materials
and supplies |  |  |  | $    | 127   |     
|Work in
process            |  |  |  |      | 244   |     
|Finished
goods             |  |  |  |      | 920   |     
|Total                      |  |  |  | $    | 1,291 |     

Property, Plant and Equipment



|At December 31,                  |  |  |  | 2004 |       | 2003
|-------------------------------- |  |  |  | ---- | ----- | ----
|
|Land                             |  |  |  | $    | 79    |     
|Buildings and
building equipment |  |  |  |      | 1,028 |     
|Machinery and
equipment          |  |  |  |      | 6,728 |     
|                                 |  |  |  |      | 7,835 |     
|Less
accumulated depreciation    |  |  |  |      | 4,088 |     
|Total                            |  |  |  | $    | 3,747 |     







Interest on funds used to finance
construction of significant additions to tangible property and equipment is capitalized and recorded as part of the asset to which it relates and is
amortized over the assets estimated useful life. During 2004, 2003, and 2002, interest costs capitalized were $4 million, $2 million, and $4
million, respectively. Depreciation expense was $588 million, $557 million, and $480 million in 2004, 2003, and 2002, respectively.


Goodwill and Intangible Assets

In the second quarter of 2004, the Company made two acquisitions within the Oral
Care business segment. In April 2004, the Company completed the acquisition of assets associated with the Rembrandt brand of at-home and professional
teeth-whitening products from Den-Mat Corporation. The purchase was not considered a business combination and resulted in the capitalization of
approximately $74 million related to the trademark as an indefinite-lived intangible asset and $7 million related to definite-lived intangible assets.
In June 2004, the Company acquired shares representing all equity interests in Zooth, Inc., a leader in licensed character-based manual and power
childrens toothbrushes. The value of both indefinite-lived and definite-lived intangible assets may be adjusted in future periods, as the
purchase price allocation for the acquisition is not final. The preliminary purchase price allocation resulted in the capitalization of goodwill of $11
million, $4 million related to the trademark as an indefinite-lived intangible asset and $7 million related to definite-lived intangible assets. In
addition to the base purchase price, both acquisitions have a contingent cash consideration component based on certain revenue-based financial metrics.
In total, contingent cash consideration payments are capped at $72 million and are expected to be substantially paid over a period of four years,
starting in 2005.



In August 2003, the Company acquired a majority
interest in Fujian Nanping Nanfu Battery Co., Ltd., a leading battery company in China. The Nanfu business is reported as part of the
Duracell


53

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segment. The Nanfu acquisition resulted in the capitalization of goodwill in
the amount of $31 million and the Nanfu trademark as an indefinite-lived intangible asset for $102 million, as well as other definite-lived intangible
assets.

Total goodwill by segment follows.



|At December 31, |  |  |  | 2004 |       | 2003
|--------------- |  |  |  | ---- | ----- | ----
|
|Blades &
Razors |  |  |  | $    | 137   |     
|Duracell        |  |  |  |      | 653   |     
|Oral
Care       |  |  |  |      | 202   |     
|Braun           |  |  |  |      | 60    |     
|Personal
Care   |  |  |  |      |      |     
|Total           |  |  |  | $    | 1,052 |     

The detail of intangible assets follows.



|                              |  |  |  |  |    | 2004 |  | 2003 |    
|----------------------------- |  |  |  |  | -- | ---- |  | ---- | ---
|
|
|Amortized
Intangible Assets   |  |  |  |  |    |      |  |      |    
|Patents                       |  |  |  |  | 5  |      |  | $    | 65 
|Trademarks                    |  |  |  |  | 9  |      |  |      | 17 
|Endorsements                  |  |  |  |  |   |      |  |      | 61 
|Other                         |  |  |  |  | 16 |      |  |      | 34 
|Total                         |  |  |  |  | 6  |      |  | $    | 177
|Unamortized
Intangible Assets |  |  |  |  |    |      |  |      |    
|Trademarks                    |  |  |  |  |    |      |  | $    | 505
|Pension                       |  |  |  |  |    |      |  |      | 15 
|Total                         |  |  |  |  |    |      |  | $    | 520
|Intangible
Assets, net        |  |  |  |  |    |      |  | $    | 557

|Aggregate
Amortization Expense:  |  |  |  |   |    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|-------------------------------- |  |  |  | - | -- |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|For the Years
ended December 31: |  |  |  |   |    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|2004                             |  |  |  | $ | 22 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|2003                             |  |  |  | $ | 21 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|2002                             |  |  |  | $ | 20 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|Estimated
Amortization Expense:  |  |  |  |   |    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|For the Years
ended December 31: |  |  |  |   |    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|2005                             |  |  |  | $ | 9  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|2006                             |  |  |  | $ | 6  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|2007                             |  |  |  | $ | 6  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|2008                             |  |  |  | $ | 4  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|2009                             |  |  |  | $ | 2  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 

During 2004, the Company recorded an impairment charge of approximately $15 million
related to a Duracell right to use a patent held by a competitor, which was invalidated.

54

---

Other Assets



|At December 31, |  |  |  | 2004 |       | 2003
|--------------- |  |  |  | ---- | ----- | ----
|
|Pensions        |  |  |  | $    | 932   |     
|Benefit
trusts  |  |  |  |      | 193   |     
|Derivatives     |  |  |  |      | 13    |     
|Other           |  |  |  |      | 133   |     
|Total           |  |  |  | $    | 1,271 |     

Accounts Payable and Accrued Liabilities



|At December 31,                   |  |  |  | 2004 |       | 2003
|--------------------------------- |  |  |  | ---- | ----- | ----
|
|Accounts
payable                  |  |  |  | $    | 698   |     
|Advertising
and sales promotion   |  |  |  |      | 595   |     
|Payroll and
payroll taxes         |  |  |  |      | 308   |     
|Dividends
payable on common stock |  |  |  |      | 161   |     
|Other                             |  |  |  |      | 883   |     
|Total                             |  |  |  | $    | 2,645 |     

Other Long-Term Liabilities



|At December 31,        |  |  |  | 2004 |     | 2003
|---------------------- |  |  |  | ---- | --- | ----
|
|Pensions               |  |  |  | $    | 432 |     
|Postretirement medical |  |  |  |      | 67  |     
|Deferred
compensation  |  |  |  |      | 162 |     
|Other                  |  |  |  |      | 93  |     
|Total                  |  |  |  | $    | 754 |     

6 .   D E B T



Loans
Payable




|At December 31,                                          |  |  |  | 2004 |     | 2003
|-------------------------------------------------------- |  |  |  | ---- | --- | ----
|
|U.S. dollar
Commercial Paper (interest at 2.2% and 0.9%) |  |  |  | $    | 443 |     
|Payable to
banks (interest at 3.2% and 3.3%)             |  |  |  |      | 90  |     
|Total                                                    |  |  |  | $    | 533 |     

55

---

Long-Term Debt



|At December 31,                   |  |  |  | 2004 |       | 2003
|--------------------------------- |  |  |  | ---- | ----- | ----
|
|3.25% Euro
notes due 2004         |  |  |  | $    |      |     
|3.75% Notes
due 2004              |  |  |  |      |      |     
|5.75% Notes
due 2005              |  |  |  |      | 205   |     
|4.00% Notes
due 2005              |  |  |  |      | 352   |     
|5.25% Notes
due 2006              |  |  |  |      | 131   |     
|5.00% Notes
due 2006              |  |  |  |      | 310   |     
|4.125% Notes
due 2007             |  |  |  |      | 253   |     
|3.50% Notes
due 2007              |  |  |  |      | 495   |     
|2.875% Notes
due 2008             |  |  |  |      | 299   |     
|2.50% Notes
due 2008              |  |  |  |      | 300   |     
|3.80% Notes
due 2009              |  |  |  |      | 299   |     
|Gillette
CoreNotes due 2012       |  |  |  |      | 52    |     
|Gillette
CoreNotes due 2013       |  |  |  |      | 3     |     
|Floating rate
notes due 2043      |  |  |  |      | 154   |     
|Current
portion of long-term debt |  |  |  |      | (711  | )   
|Total                             |  |  |  | $    | 2,142 |     



The Company has the ability to
issue up to $1.6 billion in commercial paper in the U.S. dollar and Euro markets. The Companys commercial paper program is supported by its
revolving credit facility and other sources of liquidity. In October 2004, the Company entered into a 364-day revolving bank credit facility in the
amount of up to $930 million, expiring in October 2005. In October 2003, the Company entered into a five-year revolving bank credit facility in the
amount of up to $288 million, expiring in October 2008. Under the agreements, the Company has the option to borrow at various interest rates, including
the prime rate, and is required to pay a facility fee of .04% per annum for the 364-day facility and .06% per annum for the five-year facility, based
on the Companys current credit rating. At December 31, 2004 and 2003, there were no borrowings under such agreements. In addition, there are
other unused lines of credit amounting to $206 million at December 31, 2004.




Certain long-term debt instruments contain
prepayment provisions at the option of either the holder of the instruments or the Company. The 3.50% notes due 2007 are redeemable at par, at the
Companys option, on any interest payment date on or after October 15, 2004. Under the Gillette $500 million CoreNotes program, the Company may
periodically offer fixed and floating rate notes in $1,000 increments. At December 31, 2004, the coupon rates of the outstanding notes varied between
4.50% and 4.85%, and the interest payments are made quarterly. The notes mature on various dates in 2012 and 2013 and are redeemable at par, at the
Companys option, on any interest payment date on or after one year from the date of issuance. The $154 million floating rate notes are redeemable
at the option of the holder at various prices on a yearly basis from April 2005 to April 2014 and each third anniversary thereafter to maturity. The
floating rate notes are also redeemable, at the Companys option, at various prices from April 2033 to maturity.




During 2002, two shelf registration statements were
filed allowing the Company to offer up to $2.8 billion in debt securities in the U.S. At December 31, 2004, $1.9 billion has been issued in offerings
under the shelf registrations, representing the 4.125% and 3.50% notes due 2007, the 2.875% and 2.50% notes due 2008, the 3.80% notes due 2009, the
floating rate notes due 2043, and the Gillette CoreNotes due 2012 and 2013. At December 31, 2004, a total of $918 million was available under these
shelf registrations.




Long-term weighted average interest rates were 2.5%
and 1.6% as of December 31, 2004 and 2003, respectively, after giving effect to interest rate hedging instruments. Aggregate maturities of total
long-term debt, excluding $19 million in market value adjustments resulting from debt-related derivatives, for the five years after December 31, 2004,
are $550 million in 2005, $425 million in 2006, $750 million in 2007, $600 million in 2008, and $300 million in 2009.


56

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|7 . |  | F I N A N C I A L  
I N S T R U M E N T S   A N D   R I S K  
M A N A G E M E N T  
A C T I V I T I E S
|--- |  | -------------------------------------------------------------------------------------------------------

The estimated fair values of the Companys financial instruments are recorded
in the consolidated balance sheet as follows.






|                                                         |  |  |  | 2004 |        | 2003
|-------------------------------------------------------- |  |  |  | ---- | ------ | ----
|
|
|Cash, Cash
Equivalents, and Short-Term Investments       |  |  |  |      |        |     
|Cash                                                     |  |  |  | $    | 167    |     
|Money market
funds                                       |  |  |  |      | 2      |     
|Commercial
paper                                         |  |  |  |      | 50     |     
|Total cash
and cash equivalents                          |  |  |  |      | 219    |     
|Marketable
securities                                    |  |  |  |      | 847    |     
|Total
short-term investments                             |  |  |  |      | 847    |     
|Total cash,
cash equivalents, and short-term investments |  |  |  |      | 1,066  |     
|                                                         |  |  |  |      |        |     
|Other Current
Assets                                     |  |  |  |      |        |     
|Derivative
instruments:                                  |  |  |  |      |        |     
|Currency
forwards hedging net investments                |  |  |  | $    | (6     | )   
|Interest rate
swaps                                      |  |  |  |      | 9      |     
|Commodity
swaps                                          |  |  |  |      | 4      |     
|Other
currency forwards and swaps                        |  |  |  |      | 20     |     
|Equity
contracts                                         |  |  |  |      | 1      |     
|                                                         |  |  |  |      | 28     |     
|Other
Assets                                             |  |  |  |      |        |     
|Long-term
investments                                    |  |  |  |      | 193    |     
|Derivative
instruments:                                  |  |  |  |      |        |     
|Interest rate
swaps                                      |  |  |  |      | 10     |     
|Other
currency forwards and swaps                        |  |  |  |      |       |     
|Equity
contracts                                         |  |  |  |      | 3      |     
|Total
derivative instruments                             |  |  |  |      | 13     |     
|Total other
assets                                       |  |  |  |      | 206    |     
|Debt                                                     |  |  |  |      |        |     
|Long-term
debt, including current portion                |  |  |  |      | (2,853 | )   



The Company is subject to market
risks, such as changes in foreign currency and interest rates, which arise from normal business operations. The Company regularly assesses these risks
and has established business strategies to provide natural offsets, supplemented by the use of derivative financial instruments, to protect
against the adverse effects of these and other market risks. The Company has established clear policies, procedures, and internal controls governing
the use of derivatives and does not use them for trading, investment, or other speculative purposes.




At inception, the Company formally designates and
documents whether a financial instrument is a hedge of a specific underlying exposure. The Company formally assesses, both at inception and at least
quarterly on an ongoing basis, whether the financial instruments used in hedging transactions are effective at offsetting changes in either the fair
value or cash flows of the related underlying exposure. Fluctuations in the derivative value generally are offset by changes in the fair value or cash
flows of the exposures being hedged. This offset is driven by the highly effective relationship between the


57

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exposure being hedged and the hedging instrument. Any ineffective portion of
an instruments change in fair value is immediately recognized in earnings.



The Company uses derivative contracts to
efficiently structure its debt in the desired currencies and to manage the mix of fixed to floating interest rates. Forward contracts effectively
convert U.S. dollar commercial paper borrowings into non-U.S. dollar obligations, primarily in foreign currencies with low interest rates. The Company
had forward contracts designated as hedges of the currency changes on the Companys foreign net investments, with fair value losses of $6
million and $2 million at December 31, 2004 and 2003, respectively. Currency effects of the net investment hedges are reflected as a component of
foreign currency translation in accumulated other comprehensive loss to offset the change in the value of the net investment being hedged, and produced
after-tax losses of $3 million, $6 million, and $5 million for the years ended December 31, 2004, 2003, and 2002, respectively. Interest effects of
these hedges are reported in interest expense.




The Company manages its mix of fixed and floating
rate debt by entering into interest rate swaps and forward agreements. The Company uses primarily floating rate debt, principally achieved through
interest rate swaps, in order to match interest costs to the impact of inflation on earnings. The Company manages its mix of fixed to floating rate
debt by entering into interest rate swaps and forward rate agreements. At December 31, 2004 and 2003, the Company had interest rate swaps designated as
fair value hedges with asset fair values of $19 million and $67 million, respectively. These swaps effectively convert certain fixed rate debt into
variable rate debt. The terms of the swaps match the terms of the underlying debt. The changes in the fair values of both the swaps and the debt are
generally recorded as equal and offsetting gains and losses in interest expense. The Company recorded a $1 million after-tax hedge ineffectiveness gain
in interest expense in 2003. There was no impact on earnings due to hedge ineffectiveness for the years ended December 31, 2004 and
2002.




The Company also enters into commodity swaps with
one-year maturities to fix the price of certain forecasted purchases of raw materials used in the manufacturing process. The Company had swaps
designated as cash flow hedges with fair values of $4 million at both December 31, 2004 and 2003. Changes in fair value are recorded in other
comprehensive loss to the extent effective and are charged to cost of sales in the period during which the hedged transaction affects earnings. The
Company recorded in other comprehensive loss a $3 million after-tax gain ($5 million pre-tax) in 2004, a $3 million after-tax gain ($5 million pre-tax)
in 2003, and a $2 million after-tax loss ($3 million pre-tax) in 2002. The Company also reclassified into earnings from accumulated other comprehensive
loss a $2 million after-tax gain ($3 million pre-tax) in 2004, a $1 million after-tax loss ($2 million pre-tax) in 2003, and a $3 million after-tax
loss ($5 million pre-tax) in 2002. The remaining pre-tax gain of $5 million included in accumulated other comprehensive loss at December 31, 2004, will
be credited to cost of sales in 2005. Ineffective amounts had no material impact on earnings for the years ended December 31, 2004, 2003, and
2002.




Most of the Companys transactional foreign
exchange exposure is managed through centralized cash management. The Company hedges net residual transactional foreign exchange exposures, principally
foreign-denominated debt and intercompany balances, through the use of forward contracts and currency swaps that were recorded at their net fair values
of $20 million and $142 million at December 31, 2004 and 2003, respectively. Changes in fair value are recorded in nonoperating charges (income) and
offset gains and losses resulting from the underlying exposures.




The Company also uses derivatives to hedge
equity-linked employee and director compensation. The Company fixes the cost of certain employee-compensation expenses linked to its stock price by
entering into equity swap and option contracts. These contracts were recorded in the consolidated balance sheet at their fair values of $4 million at
both December 31, 2004 and 2003. Changes in fair value are recorded in profit from operations and offset the changes in the value of the underlying
liabilities.




Several major international financial institutions
are counterparties to the Companys financial instruments. It is Company practice to monitor the financial standing of the counterparties and to
limit the amount of exposure with any one institution. In the event of nonperformance by the counterparties to these financial instruments, the Company
is exposed to credit loss generally equal to the amount by which each counterpartys obligations exceed the obligations of the Company.
Management, however, does not anticipate such nonperformance.




With respect to trade receivables, concentration of
credit risk is limited, due to the diverse geographic areas covered by Gillette operations. The Companys largest customer, Wal-Mart Stores, Inc.
and its affiliates, accounted for 13% of consolidated net sales in 2004, 2003, and 2002. These sales


58

---



occurred primarily in North America and were
across all product segments. At December 31, 2004 and 2003, 42% and 43% of the Companys accounts receivable were from customers in North America,
respectively. Wal-Mart Stores, Inc. represented 30% and 23% of the North American accounts receivable at December 31, 2004 and 2003, respectively.
Using the information available, the Company has provided an allowance for doubtful accounts based on estimated bad-debt loss.


8 .  
C O M M I T M E N T S   A N D  
C O N T I N G E N C I E S

Minimum rental commitments under noncancellable operating leases, primarily for
office and warehouse facilities, are $83 million in 2005, $64 million in 2006, $52 million in 2007, $42 million in 2008, $40 million in 2009, and $57
million for years thereafter. Rental expense amounted to $115 million in 2004, $120 million in 2003, and $125 million in 2002.



In the ordinary course of business, the Company
enters into purchase commitments with firm commitment periods or take-or-pay arrangements. Commitments under these arrangements represent future
purchases in line with expected usage and amount to approximately $700 million for 2005 and $200 million for subsequent years.




Approximately 32% of our employees are covered by
collective bargaining agreements (CBAs), of which approximately 13% are covered by CBAs set to expire in 2005. The majority of employees covered by
CBAs are located outside the U.S.




The Company is subject to legal proceedings and
claims arising out of its businesses that cover a wide range of matters, including antitrust and trade regulation, contracts, advertising,
environmental issues, product liability, patent and trademark matters, and taxes. Management, after review and consultation with counsel, considers
that any liability from all of these pending legal proceedings and claims would not materially affect the consolidated financial position, results of
operations, or liquidity of the Company.




The Company expenses environmental remediation costs
when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based upon current law and existing
technologies. Management expects the ultimate resolution of the Companys known environmental contingencies will not have a material impact on the
Companys financial condition, results of operations, or liquidity. Environmental expense is included in cost of sales.


9 .  
D I S C O N T I N U E D  
O P E R A T I O N S

On December 29, 2000, the sale of the Stationery Products business to Newell
Rubbermaid Inc. was finalized. The sale resulted in a loss of $429 million (net of a tax benefit of $102 million), or $.40 per common share, diluted.
The Stationery Products segment was accounted for as a discontinued operation. Accordingly, its operating results are segregated and reported as
discontinued operations in the accompanying consolidated statements of income and cash flows, and related notes.



As of December 31, 2003, the Company had
substantially completed all postdivestiture reorganization activities. Due to lower than anticipated spending, pre-tax recoveries of $15 million ($10
million after-tax) and $10 million ($7 million after-tax) were recorded in discontinued operations in 2003 and 2002, respectively. At December 31,
2004, there were discontinued operations reserves primarily related to environmental matters that are not expected to be settled for many
years.


|1 0 . |  | R E A L I G N M E N T  
P R O G R A M S
|----- |  | ---------------------------------------

Functional Excellence

In the second quarter of 2002, the Company began actions associated with its
Functional Excellence initiative. This initiative affected all business segments and was focused on upgrading capabilities, while reducing overhead
costs by improving processes and eliminating duplication across all functions. Specific program activities included outsourcing certain information
technology functions, implementing new worldwide technology tools and processes, streamlining customer management and marketing programs, and
consolidating financial functions.



Total pre-tax charges under the Functional
Excellence initiative, including employee termination benefits and other costs, were $75 million, $137 million, and $121 million for the 12 months
ended December 31, 2004, 2003, and 2002, respectively. The charges included $27 million, $23 million, and $27 million to cost of sales for 2004, 2003,
and 2002, respectively, and $48 million, $114 million, and


59

---

$94 million to selling, general and administrative expenses for 2004, 2003, and
2002, respectively. Employee-related terminations are intended to be completed within 12 months of accrual. The employee-related termination benefits
are calculated using the Companys long-standing severance formulas and vary on a country-by-country basis, depending on local statutory
requirements and local practices. Other costs include items such as consulting, lease buyouts, project teams, and asset write-downs related to
Functional Excellence programs.



The Company considers the Functional Excellence
initiative to be substantially complete at December 31, 2004. This initiative improved operating efficiency, downsized and centralized functions, and
decreased costs.


2003 Manufacturing Realignment Program

On December 11, 2003, the Company announced a realignment program related to its
European blade and razor manufacturing and distribution. The program will significantly reduce costs, improve operating efficiency, and streamline
manufacturing, packaging, and warehouse operations. The program began in December 2003 and will be completed by 2007. Specific program activities
include the closure of the manufacturing center in Isleworth, U.K., in 2007, and the packaging and distribution operation in Hemel Hempstead, U.K., in
2005. Operations at these units will be shifted to a new manufacturing, packaging, and warehouse facility that is being built in Lodz, Poland. In
addition, all Sensor production from the manufacturing center in Berlin, Germany, will be transferred to the new Polish facility, and stainless steel
double-edge blade and some disposable razor manufacturing will be transferred from the manufacturing center in Jevicko, Czech Republic, to the
manufacturing center in St. Petersburg, Russia. The severance programs being used follow the Companys long-standing severance formulas and may
vary on a country-by-country basis, depending on local statutory requirements and local practices.



The Company recorded charges to cost of goods
sold of $39 million and $50 million for 2004 and 2003, respectively. Costs accrued consisted primarily of severance, based on the amounts that had been
earned as of December 31, 2004, at current service levels and pay rates. Severance payments will span through 2007, when the Isleworth facility will be
completely closed. Other costs primarily include asset write-downs, costs related to the relocation of equipment, and employee pension
benefits.


Functional Excellence and 2003 Manufacturing Realignment Program



|                                    |  |  |  | 2002Provision |     | 2003 Provision |  | 2004 Provision |     | Charges and Uses 2004 |  | Charges and Uses Since Inception |     | Balance Dec. 31,2004
|----------------------------------- |  |  |  | ------------- | --- | -------------- |  | -------------- | --- | --------------------- |  | -------------------------------- | --- | --------------------
|
|
|Functional
Excellence:              |  |  |  |               |     |                |  |                |     |                       |  |                                  |     |                     
|Employee-related
expenses           |  |  |  | $             | 106 |                |  | $              | 120 |                       |  | $                                | 52  |                     
|Other                               |  |  |  |               | 15  |                |  |                | 17  |                       |  |                                  | 23  |                     
|Total
Functional Excellence Program |  |  |  | $             | 121 |                |  | $              | 137 |                       |  | $                                | 75  |                     
|2003
Realignment Program:           |  |  |  |               |     |                |  |                |     |                       |  |                                  |     |                     
|Employee-related expenses:          |  |  |  |               |     |                |  |                |     |                       |  |                                  |     |                     
|Severance
payments                  |  |  |  |               |    |                |  |                | 32  |                       |  |                                  | 10  |                     
|Other
benefits                      |  |  |  |               |    |                |  |                | 6   |                       |  |                                  | 2   |                     
|Asset-related
expenses:             |  |  |  |               |     |                |  |                |     |                       |  |                                  |     |                     
|Asset
write-offs                    |  |  |  |               |    |                |  |                | 5   |                       |  |                                  | 14  |                     
|Loss on sale
of assets              |  |  |  |               |    |                |  |                | 4   |                       |  |                                  | 2   |                     
|Contractual
obligations and other   |  |  |  |               |    |                |  |                | 3   |                       |  |                                  | 11  |                     
|Total 2003
Realignment Program      |  |  |  |               |    |                |  |                | 50  |                       |  |                                  | 39  |                     
|Total                               |  |  |  | $             | 121 |                |  | $              | 187 |                       |  | $                                | 114 |                     

60

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The Company will continue to review its operations
and undertake projects designed to maintain a competitive cost structure, including workforce rationalization, outsourcing of functions,
and reconfiguration and optimization of its manufacturing network. Such programs may result in plant and facilities consolidations, and
the Company may incur severance costs, accelerated depreciation expense or impairment charges related to production costs.

2001 Restructuring Program and Asset Impairment Charges

During 2001, the Company recorded a charge of $63 million associated with the
withdrawal from several noncore businesses and the closing of one factory in the Duracell segment. At December 31, 2002, the Company had completed the
majority of the activity in the 2001 restructuring program. Due to lower than anticipated spending and better than anticipated results on the disposal
of certain assets, including the Vaniqa business, a $39 million pre-tax gain was realized in 2002.

|1 1 . |  | I N C O M E  
T A X E S
|----- |  | -----------------------

Income from continuing operations before income taxes and income tax expense are
summarized below.






|Years Ended December 31,                                    |  |  |  | 2004 |       | 2003 |  | 2002
|----------------------------------------------------------- |  |  |  | ---- | ----- | ---- |  | ----
|
|Income from
continuing operations before income taxes       |  |  |  |      |       |      |  |     
|United
States                                               |  |  |  | $    | 1,144 |      |  | $   
|Foreign                                                     |  |  |  |      | 1,240 |      |  |     
|Total income
from continuing operations before income taxes |  |  |  | $    | 2,384 |      |  | $   
|Current tax
expense                                         |  |  |  |      |       |      |  |     
|Federal                                                     |  |  |  | $    | 320   |      |  | $   
|Foreign                                                     |  |  |  |      | 287   |      |  |     
|State                                                       |  |  |  |      | 23    |      |  |     
|Deferred tax
expense (benefit)                              |  |  |  |      |       |      |  |     
|Federal                                                     |  |  |  |      | 23    |      |  |     
|Federal
 American Jobs Creation Act                        |  |  |  |      | 25    |      |  |     
|Foreign                                                     |  |  |  |      | 17    |      |  |     
|State                                                       |  |  |  |      | (2    | )    |  |     
|Total income
tax expense from continuing operations         |  |  |  | $    | 693   |      |  | $   

A reconciliation of the statutory Federal income tax rate to the Companys
effective tax rate follows.



|Years Ended December 31,                        |  |  |  | 2004 |      | 2003 |  | 2002
|----------------------------------------------- |  |  |  | ---- | ---- | ---- |  | ----
|
|Statutory
Federal tax rate                      |  |  |  |      | 35.0 | %    |  |     
|Taxes on
foreign income                         |  |  |  |      | (7.0 | )    |  |     
|American Jobs
Creation Act of 2004 Repatriation |  |  |  |      | 1.1  |      |  |     
|State taxes
(net of Federal tax benefits)       |  |  |  |      | 0.6  |      |  |     
|Other
differences                               |  |  |  |      | (0.6 | )    |  |     
|Effective tax
rate                              |  |  |  |      | 29.1 | %    |  |     

61

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The components of deferred tax assets and deferred tax liabilities are shown
below.



|At December 31,                                      |  |  |  | 2004 |      | 2003 | 
|---------------------------------------------------- |  |  |  | ---- | ---- | ---- | 
|
|Deferred tax
assets                                  |  |  |  |      |      |      | 
|Advertising
and sales promotion                      |  |  |  | $    | 47   |      | 
|Inventory                                            |  |  |  |      | 63   |      | 
|Miscellaneous
reserves and accruals                  |  |  |  |      | 142  |      | 
|Operating
loss and credit carryforwards              |  |  |  |      | 1    |      | 
|Other
employee-related benefits                      |  |  |  |      | 91   |      | 
|Retiree
medical benefits                             |  |  |  |      | 107  |      | 
|Other                                                |  |  |  |      | 46   |      | 
|Total
deferred tax assets                            |  |  |  | $    | 497  |      | 
|Deferred tax
liabilities                             |  |  |  |      |      |      | 
|American Jobs
Creation Act of 2004 repatriation      |  |  |  | $    | (25  | )    | 
|Pension
benefits                                     |  |  |  |      | (122 | )    | 
|Currency
translation effect of pass-through entities |  |  |  |      | (90  | )    | 
|Intangibles                                          |  |  |  |      | (164 | )    | 
|Property,
plant and equipment                        |  |  |  |      | (466 | )    | 
|Other                                                |  |  |  |      | (39  | )    | 
|Total
deferred tax liabilities                       |  |  |  | $    | (906 | )    | 
|Net deferred
tax liabilities                         |  |  |  | $    | (409 | )    | 

The net deferred tax assets and liabilities included in the consolidated balance
sheet are as follows.



|At December 31,                      |  |  |  | 2004 |      | 2003
|------------------------------------ |  |  |  | ---- | ---- | ----
|
|Current
deferred tax assets          |  |  |  | $    | 303  |     
|Non-current
deferred tax assets      |  |  |  |      | 36   |     
|Current
deferred tax liabilities     |  |  |  |      | (25  | )   
|Non-current
deferred tax liabilities |  |  |  |      | (723 | )   
|Net deferred
tax liabilities         |  |  |  | $    | (409 | )   

In assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based upon the level of historical taxable income
and projections for future taxable income over the periods for which the deferred tax assets are deductible, management believes, as of December 31,
2004, it is more likely than not that the Company will realize the benefits of these deductible differences.



At December 31, 2004, the Company
had net operating loss carryforwards for foreign income tax purposes of $5 million, which are available to offset future taxable income, if any,
through 2007.




On October 22, 2004, the President signed the
American Jobs Creation Act of 2004 (the Act). The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income
earned abroad by providing an 85% dividends-received deduction for certain dividends from controlled foreign corporations. Although the
deduction is subject to a number of limitations and significant uncertainty remains about how to interpret numerous provisions in the Act, the Company
believes that it has the information necessary to make a partial determination of the Acts impact on its repatriation plans. Based on that
determination, the Company plans to repatriate an initial amount of $325 million in extraordinary dividends, as defined in the Act, during 2005 and,
accordingly, has recorded a tax liability of $25 million as of December 31, 2004. However, because of the uncertainty that remains with respect to the
interpretation of certain provisions of the Act, the Company is not yet able to determine whether and to what extent it might repatriate additional
foreign earnings that have not yet been remitted to the U.S. Based on the Companys analysis to date, however, it is reasonably possible that it
may repatriate an additional amount up to $2.3 billion, with a related tax liability ranging up to $173 million.


62

---



Management expects to be able to finalize the
Companys position sometime in 2005 and in connection with the final action of Congress on the pending Technical Corrections
Bill.


|1 2 . |  | P E N S I O N S  
A N D   O T H E R   R E T I R E E  
B E N E F I T S
|----- |  | ---------------------------------------------------------------------

The Company has various retirement programs, including defined benefit, defined
contribution, and other plans, which cover most employees worldwide. Other retiree benefits are health care and life insurance benefits provided to
eligible retired employees, principally in the U.S. The components of net defined benefit expense for continuing operations follow.






|                                         |  |  |  | U.S. Pension Benefits |     | Non-U.S. Pension Benefits |  | Other Retiree Benefits |    
|---------------------------------------- |  |  |  | --------------------- | --- | ------------------------- |  | ---------------------- | ---
|
|
|COMPONENTS OF
NET DEFINEDBENEFIT EXPENSE |  |  |  |                       |     |                           |  |                        |    
|Service
cost-benefits earned             |  |  |  | $                     | 28  |                           |  | $                      | 24 
|Interest cost
on benefit obligation      |  |  |  |                       | 80  |                           |  |                        | 77 
|Estimated
return on assets               |  |  |  |                       | (94 | )                         |  |                        | (81
|Net
amortization                         |  |  |  |                       | 29  |                           |  |                        | 32 
|Plan
curtailments                        |  |  |  |                       |    |                           |  |                        |   
|Plan
settlement                          |  |  |  |                       |    |                           |  |                        |   
|Other                                    |  |  |  |                       |    |                           |  |                        |   
|Net defined
benefit expense              |  |  |  | $                     | 43  |                           |  | $                      | 52 

63

---







The measurement date is December
31 for the Companys principal defined benefit and other retiree benefit plans that make up the majority of plan assets and benefit obligations.
The funded status of the Companys principal defined benefit and other retiree benefit plans and the amounts recognized in the balance sheet
follow.







|                                       |  |  |  | U.S. Pension Benefits |       | Non-U.S. Pension Benefits |  | Other Retiree Benefits
|-------------------------------------- |  |  |  | --------------------- | ----- | ------------------------- |  | ----------------------
|
|
|CHANGE IN
PROJECTED BENEFIT OBLIGATION |  |  |  |                       |       |                           |  |                       
|Balance at
beginning of year           |  |  |  | $                     | 1,371 |                           |  | $                     
|Foreign plan
additions                 |  |  |  |                       |      |                           |  |                       
|Benefit
payments                       |  |  |  |                       | (87   | )                         |  |                       
|Service
cost                           |  |  |  |                       | 28    |                           |  |                       
|Interest
cost                          |  |  |  |                       | 80    |                           |  |                       
|Amendments                             |  |  |  |                       |      |                           |  |                       
|Actuarial
losses                       |  |  |  |                       | 96    |                           |  |                       
|Plan
settlements                       |  |  |  |                       |      |                           |  |                       
|Plan
curtailments                      |  |  |  |                       |      |                           |  |                       
|Special
termination benefits           |  |  |  |                       | 2     |                           |  |                       
|Decrease due
to Medicare subsidy       |  |  |  |                       |      |                           |  |                       
|Currency
adjustment                    |  |  |  |                       |      |                           |  |                       
|Balance at
end of year                 |  |  |  | $                     | 1,490 |                           |  | $                     
|CHANGE IN
FAIR VALUEOF PLAN ASSETS     |  |  |  |                       |       |                           |  |                       
|Balance at
beginning of year           |  |  |  | $                     | 1,111 |                           |  | $                     
|Foreign plan
additions                 |  |  |  |                       |      |                           |  |                       
|Actual return
on plan assets           |  |  |  |                       | 105   |                           |  |                       
|Employer
contribution                  |  |  |  |                       | 59    |                           |  |                       
|Benefit
payments                       |  |  |  |                       | (79   | )                         |  |                       
|Settlement                             |  |  |  |                       |      |                           |  |                       
|Currency
adjustment                    |  |  |  |                       |      |                           |  |                       
|Balance at
end of year                 |  |  |  | $                     | 1,196 |                           |  | $                     

64

---






|                                                        |  |  |  | U.S. Pension Benefits |      | Non-U.S. Pension Benefits |  | Other Retiree Benefits |     
|------------------------------------------------------- |  |  |  | --------------------- | ---- | ------------------------- |  | ---------------------- | ----
|
|
|FUNDED
STATUS                                           |  |  |  |                       |      |                           |  |                        |     
|Projected
benefit obligation in excess of plan assets   |  |  |  | $                     | (294 | )                         |  | $                      | (260
|Unrecognized
prior service cost                         |  |  |  |                       | 17   |                           |  |                        | 20  
|Unrecognized
net transition obligation                  |  |  |  |                       | 1    |                           |  |                        | 1   
|Unrecognized
net loss                                   |  |  |  |                       | 513  |                           |  |                        | 454 
|Adjustment
for contributions after the measurement date |  |  |  |                       |     |                           |  |                        |    
|Net amount
recognized                                   |  |  |  | $                     | 237  |                           |  | $                      | 215 
|AMOUNTS
RECOGNIZEDIN THE BALANCE SHEET                  |  |  |  |                       |      |                           |  |                        |     
|Intangible
assets                                       |  |  |  | $                     | 3    |                           |  | $                      | 4   
|Accumulated
other comprehensive loss                    |  |  |  |                       | 52   |                           |  |                        | 49  
|Prepaid
benefit cost                                    |  |  |  |                       | 330  |                           |  |                        | 300 
|Accrued
benefit cost                                    |  |  |  |                       | (148 | )                         |  |                        | (138
|Net amount
recognized                                   |  |  |  | $                     | 237  |                           |  | $                      | 215 







The accumulated benefit obligation
for all U.S. and non-U.S. defined benefit pension plans was $1.3 billion and $1.7 billion at December 31, 2004, and $1.2 billion and $1.4
billion at December 31, 2003, respectively.




The values for pension plans with accumulated
benefit obligations in excess of plan assets follow.







|                               |  |  |  | U.S. Pension Benefits |     | Non-U.S. Pension Benefits |  |   |     |  | 
|------------------------------ |  |  |  | --------------------- | --- | ------------------------- |  | - | --- |  | 
|
|
|Projected
benefit obligation   |  |  |  | $                     | 216 |                           |  | $ | 188 |  | 
|Accumulated
benefit obligation |  |  |  |                       | 176 |                           |  |   | 165 |  | 
|Fair value of
plan assets      |  |  |  |                       | 33  |                           |  |   | 33  |  | 

Additional Information



|                                                                                |  |  |  | U.S. Pension Benefits |   | Non-U.S. Pension Benefits |  |   |    |  | 
|------------------------------------------------------------------------------- |  |  |  | --------------------- | - | ------------------------- |  | - | -- |  | 
|
|
|Increase
(decrease) in minimum liability included in other comprehensive income |  |  |  | $                     | 3 |                           |  | $ | 13 |  | 

Assumptions



|                              |  |  |  | U.S. Pension Benefits |     | Non-U.S. Pension Benefits |  | Other Retiree Benefits |    
|----------------------------- |  |  |  | --------------------- | --- | ------------------------- |  | ---------------------- | ---
|
|
|Discount
rate                 |  |  |  |                       | 5.8 |                           |  |                        | 6.0
|Rate of
compensation increase |  |  |  |                       | 4.3 |                           |  |                        | 4.1

65

---






|                                         |  |  |  | U.S. Pension Benefits |     | Non-U.S. Pension Benefits |  | Other Retiree Benefits |    
|---------------------------------------- |  |  |  | --------------------- | --- | ------------------------- |  | ---------------------- | ---
|
|
|Discount
rate                            |  |  |  |                       | 6.0 |                           |  |                        | 6.5
|Expected
long-term return on plan assets |  |  |  |                       | 8.5 |                           |  |                        | 8.5
|Rate of
compensation increase            |  |  |  |                       | 4.1 |                           |  |                        | 4.1







The expected long-term return on
assets is a blended rate based on rates for the various countries. In general, the methodology used to determine the rates in each country is reviewed
annually, taking into consideration the respective asset allocation, historical returns on the types of assets held, and the current economic
environment. Based on these studies, equity allocations were lowered in 2003 for several of the Companys largest plans to better match plan
obligations that are increasingly weighted to participants who have retired from the Company. Correspondingly, the expected long-term return on assets
for U.S. and non-U.S. plans is a blended rate based on the target asset allocations of each plan applied principally to historical market returns and
trends. For U.S. pension plans and for other retiree plans, the rate was unchanged at 8.5% in 2004 and 2003, having dropped from 9.0% in 2002. For
non-U.S. pension plans, this rate dropped to 7.1% in 2004 from 7.5% in 2003 and from 7.8% in 2002. For estimation purposes, the Company assumes a
long-term asset mix generally consistent with the investment policy of each funded plan. Changes in the asset mix or investment policy could impact the
amount of recorded pension income or expense, the funded status of the plan, and the need for future cash contributions.







|Assumed health care cost trend rates at December 31,    |  |  |  | 2004 |      | 2003 |  | 2002
|------------------------------------------------------- |  |  |  | ---- | ---- | ---- |  | ----
|(percent)                                               |  |  |  |      |      |      |  |     
|Health care
cost trend rate assumed for next year       |  |  |  |      | 12.0 |      |  |     
|Rate to which
the cost trend rate is assumed to decline |  |  |  |      |      |      |  |     
|(the ultimate
trend rate)                               |  |  |  |      | 5.0  |      |  |     
|Year that the
rate reaches the ultimate trend rate      |  |  |  |      | 2010 |      |  |     







Assumed health care cost trend
rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend
rates would have the following effects.







|                                             |  |  |  | 1-Percentage- Point Increase |    | 1-Percentage- Point Decrease
|-------------------------------------------- |  |  |  | ---------------------------- | -- | ----------------------------
|
|Effect on
total of service and interest cost |  |  |  | $                            | 5  |                             
|Effect on
postretirement benefit obligation  |  |  |  | $                            | 52 |                             

Impact of Medicare Drug Reform

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act
of 2003 was enacted. The Act introduced a plan sponsor subsidy based on a percentage of a beneficiarys annual prescription drug benefits, within
defined limits, and the opportunity for a retiree to obtain prescription drug benefits under Medicare.



In May 2004, the FASB issued FSP SFAS 106-2,
Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act (the Act) of
2003, which supersedes FSP SFAS 106-1 of the same title. The FSP clarifies the accounting for the benefits attributable to new government
subsidies for companies that provide prescription drug benefits to retirees.




The Company elected to defer any accounting for the
effects of the Act pursuant to FSP SFAS 106-1 and made that election in the quarter ended December 31, 2003. The Company adopted FSP SFAS 106-2
prospectively as of July 1, 2004, the beginning of its third quarter. The Company and its actuarial advisors determined that benefits provided by the
plan were at least actuarially equivalent


66

---



to Medicare Part D. The Company remeasured the
effects of the Act on the Accumulated Plan Benefit Obligation as of July 1, 2004. The effect of the federal subsidy to which the Company is entitled
has been estimated as an actuarial gain of $72.8 million. The subsidy had the effect of reducing pre-tax postretirement expense for the period from
adoption, July 1, 2004, through December 31, 2004, by $5.3 million. The components of the decrease in expense were a decrease in the amortization of
the actuarial loss of $2.7 million, a reduction in service cost of $0.4 million, and a reduction in the interest cost on the benefit obligation of $2.2
million.




The assumptions used for 2004 expenses were a
discount rate and health care cost trend rate of 6.0% and 12.0%, respectively. These assumptions were determined to be appropriate as of July 1,
2004.


Plan Assets

Weighted-average allocations by asset category follow.






|                  |  |  |  | U.S. Pension Benefits |     | Non-U.S. Pension Benefits |  | Other Retiree Benefits |    
|----------------- |  |  |  | --------------------- | --- | ------------------------- |  | ---------------------- | ---
|
|
|Equity
securities |  |  |  |                       | 63  |                           |  |                        | 64 
|Debt
securities   |  |  |  |                       | 37  |                           |  |                        | 36 
|Total             |  |  |  |                       | 100 |                           |  |                        | 100







The Companys investment
strategy for defined benefit plans is to utilize broadly diversified and, where appropriate, passive instruments, with an investment mix and risk
profile consistent with plan liabilities. Periodic studies are undertaken to determine the asset mix designed to meet pension obligations at a
reasonable cost to the Company and are consistent with the fiduciary requirements of local pension regulations. The weighted-average target allocation
for U.S. pension plans and for other retiree plans is 60% equity and 40% debt securities. The $200 million in funding in late December for other
retiree plans had not been moved into its target asset allocations as of year-end. The weighted average target allocation for non-U.S. pension plans is
57% equity and 43% debt securities. At December 31, 2004 and 2003, no Gillette common stock was directly held in pension plan or other retiree benefit
plan assets. Debt securities investments consist primarily of government and other investment-grade quality issues.


Cash Flows

Contributions

The Company expects to contribute $40 million to its U.S. pension plans, $41
million to its non-U.S. pension plans, and $10 million to its other postretirement benefit plans in 2005.



The Company continues to monitor financial markets
and other factors that impact plan asset and liability balances. Such factors may influence the Companys decisions regarding contributions to its
pension and other retiree benefit plans in 2005.


Estimated Future Benefit Payments

Benefit payments, which include the effects of expected future service, as
appropriate, are expected to be paid as follows.






|          |  |  |  | U.S. Pension Benefits |     | Non-U.S. Pension Benefits |  | Other Retiree Benefits
|--------- |  |  |  | --------------------- | --- | ------------------------- |  | ----------------------
|
|2005      |  |  |  | $                     | 88  |                           |  | $                     
|2006      |  |  |  |                       | 89  |                           |  |                       
|2007      |  |  |  |                       | 89  |                           |  |                       
|2008      |  |  |  |                       | 90  |                           |  |                       
|2009      |  |  |  |                       | 90  |                           |  |                       
|20102014 |  |  |  | $                     | 456 |                           |  | $                     

67

---

Other Plan Information

The Employee Stock Ownership Plan (ESOP) was established to assist Gillette
employees in financing retiree medical costs. ESOP accounts held by participants reduced the Companys obligations by $169 million at December 31,
2004, and by $120 million at December 31, 2003. Account balances are assumed to have an annual yield of 12%. Retiree health benefit accounts within the
Companys principal domestic pension plan and other benefit trust also will be used to pay these costs. In addition to the defined benefit and
other retiree benefit plans, the Company also sponsors defined contribution plans, primarily covering U.S. employees. The Companys expense for
defined contribution plans totaled $34 million in each of the years 2004, 2003, and 2002.

|1 3 . |  | S T O C K  
C O M P E N S A T I O N   P L A N S  
A N D   C A P I T A L   S T O C K
|----- |  | -----------------------------------------------------------------------------------

At December 31, 2004, the Company had stock-based compensation plans as described
below.

Long Term Incentive Plan

In May 2004, the Companys shareholders approved The Gillette Company 2004
Long-Term Incentive Plan (the Plan), which authorizes the Board of Directors, or a delegate thereof, to grant stock options, stock
appreciation rights, restricted stock units, cash awards, and other stock-based awards. Key employees and non-employee directors of the Company and its
subsidiaries are eligible to participate in the Plan. The Plan became effective on May 20, 2004, and expires on May 19, 2014. The number of shares
authorized for grant under the Plan is 37,380,295, which includes all of the shares of the 1971 stock option plan that remained available on May 20,
2004. There were 28,190,859 shares available for future grants at December 31, 2004. Options granted under the plan and its predecessor may be
incentive stock options or nonqualified options. Outstanding options at December 31, 2004, have 10-year terms.



For options granted to employees after April 16,
1997, one-third of the options vest on each of the first three anniversaries of the stock option award date. One-quarter of the 2 million options
awarded to the Chairman, President and Chief Executive Officer (CEO) on January 19, 2001, vested immediately, and the remainder vested in one-third
increments annually over a three-year period. The 300,000 options granted to the Vice Chairman of the Board on January 19, 2001, vested one-half on the
first anniversary, and one-half on the second anniversary, of the stock option award date. The Plan also permits payment for options exercised using
shares of the Companys common stock.




A summary of the status of the Companys stock
option plan and its predecessor follows.







|                                 |  |  |  | 2004 |        | 2003 |  | 2002 |      
|-------------------------------- |  |  |  | ---- | ------ | ---- |  | ---- | -----
|
|                                 |  |  |  |      |        |      |  |      |      
|Outstanding
at beginning of year |  |  |  |      | 84,956 |      |  | $    | 37.08
|Granted                          |  |  |  |      | 12,678 |      |  |      | 42.51
|Exercised                        |  |  |  |      | (8,359 | )    |  |      | 27.93
|Cancelled                        |  |  |  |      | (3,234 | )    |  |      | 46.32
|Outstanding
at year-end          |  |  |  |      | 86,041 |      |  | $    | 38.42
|Options
exercisable at year-end  |  |  |  |      | 61,756 |      |  |      |      

68

---

The following table summarizes information about fixed stock options
outstanding.



|At December 31, 2004 | 
|-------------------- | 
|
|
|$20                  | 
|31                   | 
|33                   | 
|40                   | 
|50                   | 
|                     | 

Other Stock-Based Compensation

Stock Appreciation Rights (SARs) were awarded to the CEO under an August 2003
amendment to his employment agreement and represented the right to the appreciation in 1 million shares of the Companys common stock for the
period from June 19, 2003, through January 2, 2004. By its terms, the SARs were automatically converted into approximately 108,480 stock units valued
at the fair market value of the Companys common stock on January 2, 2004, which was $36.32. At December 31, 2004, the total value of the
stock units was $5 million. Of this, $4 million and $1 million were earned and recorded as compensation cost in the Companys financial statements
in the years ended December 31, 2004 and 2003, respectively. The stock units earn dividend equivalent units and are subject to market risk until paid.
The stock units vested on January 19, 2005, and are payable in cash, based upon the fair market value of the Companys common stock on their
payment date, one year from the CEOs retirement.

Share Repurchase Program

The Company has two share repurchase programs. All shares in the first program,
which authorized the purchase of up to 150 million shares, have been purchased. The second program authorizes the purchase of up to 50 million shares,
in the open market or in privately negotiated transactions, depending on market conditions and other factors. From the inception of the first program
through December 31, 2002, the Company repurchased 108.2 million shares in the open market for $4.5 billion. The Company repurchased 24.8 million and
40.8 million shares for $1.0 billion and $1.3 billion in 2004 and 2003, respectively. As of December 31, 2004, there were 26.2 million shares remaining
on the second share repurchase program.



In 2002, the Company sold equity put options as an
enhancement to the share repurchase program and earned $15 million in premiums. These options provided the Company with an additional opportunity to
supplement open-market purchases of its common stock if the options expired in the money (the option strike price is greater than the
closing price for Gillette common stock on the expiration date). At December 31, 2004 and 2003, there were no outstanding put options.


Preferred Stock Purchase Rights

At December 31, 2004, the Company had 495 million preferred stock purchase rights
outstanding, representing one-half right for each share of common stock outstanding. Each right may be exercised to purchase one ten-thousandth of a
share of junior participating preferred stock for $225 (Rights Exercise Price). The rights will only become exercisable, or
separately transferable, on the earlier of the tenth business day after the Company announces that a person has acquired 15% or more, or the tenth
business day after a tender offer commences that could result in ownership of more than 15%, of the Companys common stock.



If any person acquires 15% or more of the common
stock (except in an offer for all common stock that has been approved by the Board of Directors), or in the event of certain mergers or other
transactions involving a 15% or more stockholder, each right not owned by that person or related parties will enable its holder to purchase, at the
Rights Exercise Price, common stock (or a combination of common stock and other assets) having double that value. In the event of certain merger
or


69

---



asset sale transactions with another party,
similar terms would apply to the purchase of that partys common stock.




The rights, which have no voting power, expire on
December 14, 2005, subject to extension. Upon approval by the Board of Directors, the rights may be redeemed for $.01 each under certain conditions,
which may change after any person becomes a 15% stockholder.




At December 31, 2004, there were authorized 5
million shares of preferred stock without par value, of which 400,000 Series A shares were reserved for issuance upon exercise of the rights. No shares
were outstanding.


|1 4 . |  | O P E R A T I N G 
S E G M E N T S  A N D  R E L A T E D 
I N F O R M A T I O N
|----- |  | -------------------------------------------------------------------------------

The following table presents certain operating segment information.






|Years Ended December 31, |  |  |  | Blades & Razors |       | Duracell |  | Oral Care |       | Braun |  | Personal Care |       | All Other | Total |  
|------------------------ |  |  |  | --------------- | ----- | -------- |  | --------- | ----- | ----- |  | ------------- | ----- | --------- | ----- | -
|
|2004                     |  |  |  |                 |       |          |  |           |       |       |  |               |       |           |       |  
|Net
sales                |  |  |  | $               | 4,329 |          |  | $         | 2,232 |       |  | $             | 1,589 |           |       | $
|Profit from
operations   |  |  |  |                 | 1,629 |          |  |           | 490   |       |  |               | 249   |           |       |  
|Identifiable
assets      |  |  |  |                 | 3,253 |          |  |           | 2,664 |       |  |               | 1,527 |           |       |  
|Capital
expenditures     |  |  |  |                 | 371   |          |  |           | 45    |       |  |               | 95    |           |       |  
|Depreciation             |  |  |  |                 | 286   |          |  |           | 92    |       |  |               | 92    |           |       |  
|2003                     |  |  |  |                 |       |          |  |           |       |       |  |               |       |           |       |  
|Net
sales                |  |  |  | $               | 3,869 |          |  | $         | 2,015 |       |  | $             | 1,327 |           |       | $
|Profit from
operations   |  |  |  |                 | 1,426 |          |  |           | 348   |       |  |               | 218   |           |       |  
|Identifiable
assets      |  |  |  |                 | 3,124 |          |  |           | 2,761 |       |  |               | 1,287 |           |       |  
|Capital
expenditures     |  |  |  |                 | 203   |          |  |           | 46    |       |  |               | 77    |           |       |  
|Depreciation             |  |  |  |                 | 243   |          |  |           | 113   |       |  |               | 81    |           |       |  
|2002                     |  |  |  |                 |       |          |  |           |       |       |  |               |       |           |       |  
|Net
sales                |  |  |  | $               | 3,435 |          |  | $         | 1,898 |       |  | $             | 1,248 |           |       | $
|Profit from
operations   |  |  |  |                 | 1,299 |          |  |           | 233   |       |  |               | 222   |           |       |  
|Identifiable
assets      |  |  |  |                 | 3,176 |          |  |           | 2,741 |       |  |               | 1,117 |           |       |  
|Capital
expenditures     |  |  |  |                 | 168   |          |  |           | 67    |       |  |               | 69    |           |       |  
|Depreciation             |  |  |  |                 | 225   |          |  |           | 82    |       |  |               | 73    |           |       |  



Each operating segment is
individually managed and has separate financial results that are reviewed by the Companys chief operating decision-maker. Each segment contains
closely related products that are unique to the particular segment. There were no changes to the composition of segments in 2004.




The Blades & Razors segment consists of blades
and razors and is the primary business in terms of share of net sales and profit from operations, representing 42% of Company net sales and 63% of
total operating segment profit in 2004. The Duracell segment, which consists of consumer batteries sold primarily in North America and Europe, is our
second most significant segment, accounting for 21% and 19% of 2004 net sales and operating segment profit from operations. Oral Care contains manual
and power oral care products. The Braun segment contains male and female hair removal, household and hair care appliances, and personal diagnostic
devices, including ear thermometers and blood pressure monitors. The Personal Care segment includes shave preparations, skin care products, and
antiperspirants/deodorants.




Profit from operations is net sales less cost of
sales and selling, general and administrative expenses. In calculating profit from operations for individual operating segments, administrative
expenses incurred at the operating level that are common to more than one segment, and headquarters expenses of an operational nature, are allocated on
a net sales basis. All intercompany transactions, primarily merchandise transfers, have been eliminated.




Profit from operations in the All Other
column includes all unallocated income/expense items. Identifiable assets in the All Other column includes financial instruments managed by
the Corporate


70

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Treasury Department, nonqualified benefit and
compensation trusts, corporate fixed assets, deferred income tax assets, and net assets of discontinued operations. Capital expenditures in the
All Other column are primarily related to research and development initiatives.




The Companys largest customer, Wal-Mart
Stores, Inc. and its affiliates, accounted for 13% of net sales in 2004, 2003, and 2002. These sales occurred primarily in the United States and were
across all product segments.


Net sales by geographic area, based on the location of the customer,
follow.



|Years Ended December 31, |  |  |  | 2004 |        | 2003 |  | 2002
|------------------------ |  |  |  | ---- | ------ | ---- |  | ----
|
|Foreign                  |  |  |  | $    | 6,832  |      |  | $   
|United
States            |  |  |  |      | 3,645  |      |  |     
|                         |  |  |  | $    | 10,477 |      |  | $   



Net property,
plant and equipment by geographic area follows.




|At December 31, |  |  |  | 2004 |       | 2003 |  | 2002
|--------------- |  |  |  | ---- | ----- | ---- |  | ----
|
|Germany         |  |  |  | $    | 773   |      |  | $   
|Other
Foreign   |  |  |  |      | 1,170 |      |  |     
|Total
Foreign   |  |  |  |      | 1,943 |      |  |     
|United
States   |  |  |  |      | 1,804 |      |  |     
|                |  |  |  | $    | 3,747 |      |  | $   

1 5 .   S U B S E Q U E N T  
E V E N T S

On January 27, 2005, The Procter & Gamble Company, an Ohio corporation
(P&G), Aquarium Acquisition Corp., a wholly owned subsidiary of P&G and a Delaware corporation (Merger Sub), and The
Gillette Company, a Delaware corporation (Gillette), entered into an Agreement and Plan of Merger (the Merger Agreement). The
Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into
Gillette (the Merger), with Gillette continuing as the surviving corporation.



In connection with the Merger Agreement, (i)
Gillette and The Bank of New York (the Rights Agent) entered into an amendment (the Rights Agreement Amendment) to the Renewed
Rights Agreement dated as of December 14, 1995, (as amended by Amendment No. 1 thereto dated as of March 25, 2003, the Rights Agreement)
immediately prior to the execution of the Merger Agreement and (ii) Gillette and James M. Kilts, the CEO of Gillette, entered into an amendment (the
Employment Agreement Amendment) to Mr. Kilts Amended and Restated Employment Agreement with the Company dated as of December 23,
2004, (the Employment Agreement) concurrently with the execution of the Merger Agreement.


The Merger Agreement

At the effective time and as a result of the Merger, (i) Gillette will become a
wholly owned subsidiary of P&G and (ii) each share of Gillette common stock will be converted into the right to receive 0.975 shares of the P&G
common stock (the Exchange Ratio). All outstanding Gillette options will be converted into options to purchase shares of P&G common
stock on substantially the same terms and conditions as the Gillette options, with the number of shares of Gillette common stock subject to option, and
the options exercise price, adjusted based on the Exchange Ratio. Such outstanding Gillette options will vest upon the consummation of the
Merger.



Following the effective time of the Merger, James M.
Kilts will become a member of P&Gs Board of Directors.




P&G and Gillette have made customary
representations, warranties and covenants in the Merger Agreement, including, among others, covenants (i) to conduct their respective businesses in
the


71

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ordinary course consistent with past practice
between the execution of the Merger Agreement and consummation of the Merger, (ii) not to engage in certain kinds of transactions during such period,
(iii) subject to certain exceptions, to cause stockholder meetings to be held to consider approval of the Merger and the other transactions
contemplated by the Merger Agreement and (iv) subject to certain exceptions, for their respective Boards of Directors to recommend adoption and
approval by their stockholders of the Merger Agreement and the transactions contemplated by the Merger Agreement. In addition, Gillette has made certain
additional customary covenants, including among others, covenants not to: (i) solicit proposals relating to alternative business combination
transactions or (ii) subject to certain exceptions, enter into discussions concerning or provide confidential information in connection with
alternative business combination transactions.




Consummation of the Merger is subject to customary
conditions, including (i) approval of the holders of Gillette common stock, (ii) approval of the holders of P&G common stock, (iii) absence of any
law or order prohibiting the closing, (iv) expiration or termination of the applicable Hart-Scott-Rodino waiting period and certain other regulatory
approvals, (v) subject to certain exceptions, the accuracy of representations and warranties, (vi) the absence of any material adverse effect with
respect to each partys business and (vii) the delivery of customary opinions from counsel to Gillette and counsel to P&G that the Merger will
qualify as a tax-free reorganization for federal income tax purposes.




The Merger Agreement contains certain termination
rights for both Gillette and P&G, and further provides that, upon termination of the Merger Agreement under specified circumstances, Gillette may
be required to pay P&G a termination fee of $1.9 billion.


The Rights Agreement

Prior to execution of the Merger Agreement, Gillette amended its Rights Agreement
on January 27, 2005, to permit execution of the Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement,
including the Merger, without triggering the separation or exercise of the stockholder rights or any adverse event under the Rights Agreement. In
particular, neither P&G, Merger Sub nor any of their affiliates or associates shall be deemed to be an Acquiring Person (as defined in the Rights
Agreement) solely by virtue of the execution and delivery of the Merger Agreement or the consummation of the Merger or any of the other transactions
contemplated by the Merger Agreement.

Employment Agreement Amendment

In connection with the Merger, on January 27, 2005, Gillette and James M. Kilts
entered into the Employment Agreement Amendment. Although completion of the Merger would otherwise entitle him to terminate his employment, Mr. Kilts
agreed that for one year following the consummation of the Merger he will continue his employment with Gillette, serving as Vice Chairman of P&G,
and reporting to P&Gs Chief Executive Officer. Mr. Kilts also agreed that from the date of the merger agreement and for 18 months after the
consummation of the Merger he would not exercise any stock options or sell any common stock held by him, including all P&G options and common stock
to be issued to him in connection with the conversion in the Merger of his Gillette options and common stock. Mr. Kilts also agreed to extend his
non-competition covenant to three years following termination of his employment.



In consideration of Mr. Kilts agreeing to the
foregoing, upon the consummation of the Merger, P&G will grant Mr. Kilts options to purchase 1,000,000 shares of P&G common stock, which will
vest over a two year period, and will award to Mr. Kilts 150,000 restricted shares of P&G Common Stock upon commencement of his post-employment
non-competition period, which will vest at the end of such non-competition period, subject, in each case, to Mr. Kilts performance under the
Employment Agreement Amendment. While employed, Mr. Kilts will be entitled to participate on a pro rata basis for one year in P&Gs three-year
long-term incentive plan on the same basis as that of P&Gs Chief Executive Officer. During the one-year term of employment, Mr. Kilts will
also receive his base salary and annual bonus, provided that his bonus will be determined in a manner consistent with the bonus for P&Gs
Chief Executive Officer. Mr. Kilts will also receive the other benefits and payments to which he is entitled under his Employment Agreement, including
severance payments which will be paid to him immediately prior to consummation of the Merger.


72

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Other Matters

The Company has in place long-standing employee change-in-control protections,
which include accelerated vesting of options and severance payments. The accompanying Consolidated Financial Statements have been prepared assuming the
Company continues on a stand-alone basis and do not reflect any adjustments or disclosures that may be required upon consummation of the
Merger.



The Companys credit rating agencies have
reaffirmed the Companys short-term borrowing ratings, but have notified the Company that its long-term financing ratings are under review for
possible downgrade due to the pending merger with P&G. The agencies have stated that P&Gs plan to buy back $18 billion to $22
billion of its common stock will result in significantly higher leverage and weaker credit protection measures than for either company on a stand-alone
basis. A downgrade in the Companys credit rating could increase the interest rates paid on future long-term financings.


73

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|1 6 . |  | Q U A R T E R L Y   F I N A N C I A L  
I N F O R M A T I O N   (UNAUDITED)
|----- |  | ---------------------------------------------------------------------------



|                                                        |  |  |  | Three Months Ended |      
|------------------------------------------------------- |  |  |  | ------------------ | -----
|
|
|Net
sales                                               |  |  |  | $                  | 2,235
|Gross
profit                                            |  |  |  |                    | 1,357
|Profit from
operations                                  |  |  |  |                    | 556  
|Income from
continuing operations before income taxes   |  |  |  |                    | 530  
|Net
income                                              |  |  |  |                    | 376  
|Net income
per common share, basic (a)                  |  |  |  |                    | .37  
|Net income
per common share, assuming full dilution (a) |  |  |  |                    | .37  
|Dividends
paid per common share                         |  |  |  |                    | .16  
|Stock price
range:                                      |  |  |  |                    |      
|High                                                    |  |  |  |                    | 39.95
|Low                                                     |  |  |  |                    | 35.01
|2003                                                    |  |  |  |                    |      
|Net
sales                                               |  |  |  | $                  | 1,971
|Gross
profit                                            |  |  |  |                    | 1,153
|Profit from
operations                                  |  |  |  |                    | 380  
|Income from
continuing operations before income taxes   |  |  |  |                    | 376  
|Discontinued
operations, net of tax                     |  |  |  |                    |     
|Net
income                                              |  |  |  |                    | 263  
|Net income
per common share, basic (a)                  |  |  |  |                    |      
|Continuing
operations                                   |  |  |  |                    | .25  
|Discontinued
operations                                 |  |  |  |                    |     
|Net
income                                              |  |  |  |                    | .25  
|Net income
per common share, assuming full dilution (a) |  |  |  |                    |      
|Continuing
operations                                   |  |  |  |                    | .25  
|Discontinued
operations                                 |  |  |  |                    |     
|Net
income                                              |  |  |  |                    | .25  
|Dividends
paid per common share                         |  |  |  |                    | .16  
|Stock price
range:                                      |  |  |  |                    |      
|High                                                    |  |  |  |                    | 32.34
|Low                                                     |  |  |  |                    | 28.00

|(a) |  | Net income per common share is computed independently for each of
the periods presented and, therefore, may not add up to the total for the year.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

74

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Historical Financial Summary

The Gillette Company and Subsidiary Companies



|Years Ended December 31,                                                                                      |  |  |  | 2004 |        | 2003 |  | 2002(a) |        | 2001(b) |  | 2000(c)
|------------------------------------------------------------------------------------------------------------- |  |  |  | ---- | ------ | ---- |  | ------- | ------ | ------- |  | -------
|
|                                                                                                              |  |  |  |      |        |      |  |         |        |         |  |        
|Summary of
Operations                                                                                         |  |  |  |      |        |      |  |         |        |         |  |        
|Net
Sales (e)                                                                                                 |  |  |  | $    | 10,477 |      |  |         | 9,252  |         |  |        
|Profit from
Operations (e)                                                                                    |  |  |  | $    | 2,465  |      |  |         | 2,003  |         |  |        
|Income from
Continuing Operations before Income Taxes                                                         |  |  |  | $    | 2,384  |      |  |         | 1,964  |         |  |        
|Net
Income                                                                                                    |  |  |  | $    | 1,691  |      |  |         | 1,385  |         |  |        
|Adjusted Net
Income, assuming the adoption of SFAS 142 for 20002001                                          |  |  |  | $    | 1,691  |      |  |         | 1,385  |         |  |        
|Weighted
Average Common Shares Outstanding, assuming full dilution                                            |  |  |  |      | 1,007  |      |  |         | 1,024  |         |  |        
|                                                                                                              |  |  |  |      |        |      |  |         |        |         |  |        
|Per Common
Share Data                                                                                         |  |  |  |      |        |      |  |         |        |         |  |        
|Net Income
per Common Share, assuming full dilution                                                           |  |  |  |      |        |      |  |         |        |         |  |        
|Continuing
Operations                                                                                         |  |  |  | $    | 1.68   |      |  |         | 1.34   |         |  |        
|Net
Income                                                                                                    |  |  |  | $    | 1.68   |      |  |         | 1.35   |         |  |        
|Adjusted Net
Income per Common Share, assuming the adoption of SFAS 142 for 20002001, assuming full dilution |  |  |  | $    | 1.68   |      |  |         | 1.35   |         |  |        
|Dividends
Declared per Common Share                                                                           |  |  |  | $    | .65    |      |  |         | .65    |         |  |        
|Stock Price,
December 31                                                                                      |  |  |  | $    | 44.78  |      |  |         | 36.73  |         |  |        
|                                                                                                              |  |  |  |      |        |      |  |         |        |         |  |        
|Balance Sheet
Data                                                                                            |  |  |  |      |        |      |  |         |        |         |  |        
|Net Property,
Plant and Equipment (e)                                                                         |  |  |  | $    | 3,747  |      |  |         | 3,644  |         |  |        
|Total
Assets                                                                                                  |  |  |  | $    | 10,731 |      |  |         | 10,041 |         |  |        
|Total
Debt                                                                                                    |  |  |  | $    | 3,386  |      |  |         | 3,312  |         |  |        
|Stockholders Equity                                                                                          |  |  |  | $    | 2,836  |      |  |         | 2,224  |         |  |        
|                                                                                                              |  |  |  |      |        |      |  |         |        |         |  |        
|Other
Information                                                                                             |  |  |  |      |        |      |  |         |        |         |  |        
|Net Interest
Expense                                                                                          |  |  |  | $    | 37     |      |  |         | 42     |         |  |        
|Depreciation
and Amortization (e)                                                                             |  |  |  | $    | 610    |      |  |         | 578    |         |  |        
|Capital
Expenditures (e)                                                                                      |  |  |  | $    | 616    |      |  |         | 408    |         |  |        
|Employees (e)                                                                                                 |  |  |  |      | 28,700 |      |  |         | 29,400 |         |  |        
|Ratio of
Earnings to Fixed Charges (d)                                                                        |  |  |  |      | 26.4   | x    |  |         | 21.4   | x       |  |        

|(a) |  | In 2002, the gain on the sale of Vaniqa and recovery to the
restructuring reserve increased profit from operations and income from continuing operations before income taxes by $39 million, net income by $27
million, and income from continuing operations per common share, assuming full dilution, by $.02.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | In 2001, charges for restructuring and asset impairment expenses
reduced profit from operations and income before income taxes by $172 million, net income by $135 million, and net income per common share, assuming
full dilution, by $.13.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | In 2000, charges for restructuring and asset impairment expenses
reduced profit from operations and income before income taxes by $572 million, net income by $430 million, and net income per common share, assuming
full dilution, by $.41.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) |  | For purposes of calculating the ratio of earnings to fixed
charges, earnings consist of income from continuing operations before income taxes and fixed charges. Fixed charges consist of interest on
indebtedness, amortization of debt premium, the interest component of rentals, and preferred stock dividend requirements.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) |  | Represents continuing operations.
|--- |  | ---------------------------------

75

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Directors and
Executive Officers

D I R E C T O R S

Edward F.
DeGraan Vice Chairman of the Board

Roger  K.
Deromedi1, 4Chief  Executive  Officer,  Kraft Foods Inc.

Wilbur H. Gantz2, 4Chairman and Chief Executive Officer, Ovation Pharmaceuticals, Inc.

Michael B.
Gifford1, 3Retired Chief Executive Officer, The Rank Organisation Plc

Ray J. Groves1, 3Senior Advisor, Marsh Inc.

Dennis F. Hightower2, 4Retired Chief Executive Officer,
Europe Online Networks, S.A.

Herbert H. Jacobi2, 3, 5Honorary Chairman of the Supervisory Board, HSBC Trinkaus & Burkhardt KGaA

Nancy J.  Karch1, 4
Director  Emeritus,  McKinsey & Company

James M. Kilts
Chairman of the Board

Fred H. Langhammer2, 3
Chairman,  Global  Affairs,  The Estée  Lauder Companies Inc.

Jorge
P. Lemann1, 3Partner, Varbra S.A.

Marjorie M.Yang2, 4
 Chairman and Chief Executive Officer, Esquel Group

E X E C U T I V E  O F F I C E R S

Chairman of the
Board, President and Chief Executive Officer James M. Kilts

Vice Chairman
of the Board Edward F. DeGraan

Senior Vice
Presidents  Michael T. Cowhig  Global Technical and Manufacturing

Charles W.
Cramb Finance

Edward E.
Guillet Human Resources

Peter Klein
Strategy, Business Development and Global Marketing Resources

Kathy S. Lane
Gillette Information Technology

John F.
Manfredi Corporate Affairs

Edward D.
Shirley  Commercial Operations, International

Richard K.
Willard Legal

Vice Presidents
A. Bruce Cleverly  Global Business Management, Oral Care

Joseph F.
Dooley  Commercial Operations, North America

Peter K.
Hoffman  Global Business Management, Blades and Razors

Mark M. Leckie
Global Business Management, Duracell and Braun

Mary Ann Pesce
Global Business Management, Personal Care

Joseph Scalzo
Global Business Management, Personal Care and Global Value Chain

Joseph J.
Schena Controller

1  Audit Committee
2  Compensation and Human Resources Committee
3  Finance Committee
4  Nominating and Corporate Governance Committee
5  Lead Director

Committee
Chair

---

Corporate and
Shareholder Information

Shareholder Inquiries
William J. Mostyn III  Secretary, Deputy General Counsel, and Corporate
Governance  Officer

Investor
Inquiries
Christopher M. Jakubik  Vice President, Investor Relations

Media Inquiries
Eric A. Kraus  Vice President, Corporate Communications

Annual Meeting
The  Annual Meeting of Shareholders will take place on Thursday, May 12, 2005, at The
Hilton Rye Town, Rye Brook, New York. The meeting will convene at 10 a.m.

Corporate HeadquartersPrudential Tower Building 
Boston, Massachusetts 02199 (617) 421-7000 Web site: www.gillette.com

Incorporated
State of Delaware

Common Stock
Major stock exchanges: New York, Boston, Chicago, Pacific

New York Stock
Exchange Symbol: G

At
January 31, 2005, shareholders numbered 40,466, living in all 50 states and more
than 50 countries abroad.

Transfer Agent and Registrar 
The Bank of New York Shareholder Relations Department P.O. Box 11258 Church
Street Station New York, New York 10286 Toll-free (888) 218-2841 Email:
shareowners@bankofny.com Web site: www.stockbny.com

Auditors
KPMG LLP

Financial Information
The Gillette Company offers free of charge this Annual Report, which
includes the Form 10-K, as well as quarterly earnings releases and other announcements
concerning financial results.     Printed
copies of these materials may be requested by writing to the Office of the  Secretary; by
calling toll-free (877) 788-G-INFO from within the United States;  or by calling (703)
386-1171 from outside the United States.     Financial
information also may be reviewed, down-loaded or requested in printed form by  accessing
the Investors section of www.gillette.com.

Buy DIRECT
 Direct Stock Purchase Plan 
BuyDIRECT is a direct stock purchase plan sponsored
and administered by The Bank of New York, Gillettes Transfer Agent. BuyDIRECT
provides an economical, convenient way to purchase your first shares or to purchase
additional shares of Gillette common stock. Plan participants may also reinvest their
cash dividends through BuyDIRECT.     Interested
individuals may request an enroll-ment package by calling The Bank of New York  toll-free
at (888) 218-2841 or by visiting its web site at www.stockbny.com.