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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

OR

Commission File Number 1-5231

MCDONALD’S CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

(630) 623-3000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ  No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ  No ¨

1,257,205,376

(Number of shares of common stock

outstanding as of September 30, 2004)

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McDONALD’S CORPORATION

INDEX

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEET

See notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

See notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

See notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Basis of Presentation

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s December 31, 2003 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. The results for the quarter and nine months ended September 30, 2004 do not necessarily indicate the results that may be expected for the full year.

The results of operations of restaurant businesses purchased and sold were not material to the condensed consolidated financial statements for periods prior to purchase and sale.

Change in Accounting Standard

Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations. The Statement requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time the obligations are incurred. Upon initial recognition of a liability, the cost is capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. In first quarter 2003, the Company recorded a noncash charge of $36.8 million after tax ($0.03 per diluted share) related to lease obligations in certain international markets to reflect the cumulative effect of this accounting change. There is not a material effect to the Company’s ongoing results of operations or financial position as a result of adopting SFAS No. 143.

Comprehensive Income

The following table presents the components of comprehensive income for the quarters and nine months ended September 30, 2004 and 2003:

Accrued Restructuring and Restaurant Closing Costs

In 2003 and 2002, the Company recorded certain charges primarily related to the disposition of certain non-McDonald’s brands, restaurant closings, restructuring markets and eliminating positions. The Company made cash payments of $7.8 million during the third quarter and $36.0 million during the nine months ended September 30, 2004, primarily related to lease obligations. The remaining balance of $79.7 million at September 30, 2004 primarily related to lease obligations.

Per Common Share Information

Diluted net income per common share is calculated using net income divided by diluted weighted-average shares. Diluted weighted-average shares include weighted-average shares outstanding plus the dilutive effect of stock-based employee compensation, calculated using the treasury stock method, of 11.7 million shares and 9.5 million shares for the third quarter 2004 and 2003, respectively, and 12.5 million shares and 5.0 million shares for the nine months ended September 30, 2004 and 2003, respectively. Stock options that were not included in diluted weighted-average shares because they would have been antidilutive were 83.5 million shares and 159.1 million shares for the third quarter 2004 and 2003, respectively, and 90.0 million shares and 167.1 million shares for the nine months ended September 30, 2004 and 2003, respectively.

Stock-Based Compensation

The Company accounts for all stock-based compensation as prescribed by Accounting Principles Board Opinion No. 25. The Company discloses pro forma net income and net income per common share, as provided by Statement of Financial Accounting Standards (SFAS) No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation.

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The pro forma information was determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value of these options was estimated at the date of grant using an option pricing model. The model was designed to estimate the fair value of exchange-traded options that, unlike employee stock options, can be traded at any time and are fully transferable. In addition, such models require the input of highly subjective assumptions including the expected volatility of the stock price. For pro forma disclosures, the options’ estimated fair value was amortized over their vesting period.

Segment Information

The Company primarily operates and franchises McDonald’s restaurants in the food service industry. In addition, the Company operates certain non-McDonald’s brands that are not material to the Company’s overall results.

The following table presents the Company’s revenues and operating income by geographic segment. The APMEA segment represents McDonald’s restaurant operations in Asia/Pacific, the Middle East and Africa. The Other segment represents non-McDonald’s brands.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Description of Business

The Company primarily operates and franchises McDonald’s restaurants. In addition, the Company operates certain non-McDonald’s brands that are not material to the Company’s overall results. Of the more than 30,000 McDonald’s restaurants in over 100 countries, more than 8,000 are operated by the Company, approximately 18,000 are operated by franchisees and about 4,000 are operated by affiliates under license agreements. In general, the Company owns the land and building or secures long-term leases for restaurant sites regardless of who operates the restaurant. This ensures long-term occupancy rights and helps control related costs.

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

The business is managed as distinct geographic segments: United States; Europe; Asia/Pacific, the Middle East and Africa (APMEA); Latin America; and Canada. In addition, throughout this report we present a segment entitled “Other” that includes non-McDonald’s brands. The U.S. and Europe segments account for approximately 70% of total revenues.

Strategic Direction

In early 2003, the Company introduced a comprehensive revitalization plan to increase McDonald’s relevance to today’s consumers as well as improve our financial discipline. We redefined our strategy to emphasize growth through adding more customers to existing restaurants. In line with this, we took a more disciplined approach to capital allocation and put a greater emphasis on controlling expenses. We aligned the System around our customer-focused Plan to Win, designed to deliver operational excellence and leadership marketing. This Plan contains aggressive goals and measures for success based on the five drivers of exceptional customer experiences—people, products, place, price and promotion.

In 2003, we made significant progress in operational excellence and leadership marketing. We also made progress from a financial perspective. We improved our comparable sales and Company-operated margin trends, reduced capital expenditures by $700 million, paid down about $900 million of debt, bought back stock and increased the dividend by 70%.

The progress has continued into 2004. We are focused on providing better service; further enhancing our food taste, menu variety and value offerings; and creating more relevant marketing. The Company has fortified its foundation and is positioned for future growth. We continue to exercise strong financial discipline by managing costs and using our significant and growing cash flow to invest in the business and strengthen our balance sheet. We continue to pay down debt and plan to return at least $1.3 billion to shareholders during the year through share repurchases and dividends.

For each quarter of 2004, McDonald’s increased customer visits, improved margins and delivered double-digit growth in earnings per share.

In the U.S., results were strong, especially in the face of increasingly difficult year-over-year comparisons. Our U.S. business has now posted comparable sales increases along with meaningful margin expansion for six consecutive quarters.

In Europe, high unemployment and low consumer confidence in Germany continue to negatively impact our growth and we expect these challenges to continue to impact our performance in the near-term. We are leveraging the strengths of our everyday value offerings to attract more consumers in this challenging economic environment. In the U.K., we are starting to make progress renewing consumer excitement in our Brand with enhanced food taste and variety and improved service.

For McDonald’s Asia/Pacific, Middle East and Africa segment comparable sales trends were strong in 2004, driven by efforts in Japan, Australia and China to distinguish our Brand through added value and menu variety.

Looking ahead, we will continue to face difficult sales comparisons as well as economic challenges in some key markets outside the U.S. Yet, we remain confident that our initiatives will continue to generate solid results and build on the foundation established last year.

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Our goal is to strengthen our business in the near term and to deliver sustainable growth and returns over the long term. For 2005 and beyond, we are targeting average annual Systemwide sales and revenue growth of 3 percent to 5 percent, average annual operating income growth of 6 percent to 7 percent, and annual returns on incremental invested capital in the high teens. These targets exclude the impact of foreign currency translation.

Operating Highlights Included:

Outlook

The Following Definitions Apply to These Terms as Used Throughout This Form 10-Q:

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Forward-Looking Statements

A number of factors can affect our business, including the effectiveness of operating initiatives and changes in global and local business and economic conditions. These and other risks are noted in the Forward-Looking Statements at the end of Management’s Discussion and Analysis.

CONSOLIDATED OPERATING RESULTS

n/m Not meaningful

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Net Income and Diluted Net Income Per Common Share

For the quarter, net income increased $231.0 million or 42%, and diluted income per common share increased $0.18 or 42%.

For the nine months, income before the cumulative effect of accounting changes increased $498.1 million or 36%, and diluted income per common share before the cumulative effect of accounting change increased $0.40 or 37%. Net income, including the cumulative effect of the accounting change, increased $534.9 million or 40% and diluted net income per common share increased $0.43 or 41%.

Diluted weighted average shares outstanding were lower for both periods compared with the prior year due to shares repurchased partially offset by higher dilution from outstanding stock options.

Cumulative Effect of Accounting Change

First quarter 2003 included a noncash charge of $36.8 million after tax ($0.03 per diluted share) for the cumulative effect of an accounting change that impacted lease obligations in certain international markets. See change in accounting standard note on page 6 for further discussion of this charge.

Impact of Foreign Currency Translation on Reported Results

Foreign currency translation had a positive impact on the growth rates of consolidated revenues, operating income and earnings per share for the quarter and nine months, primarily due to the strengthening of the Euro and British Pound.

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Revenues

n/m Not meaningful

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n/m Not meaningful

In the U.S., the increase in revenues for the quarter and nine months is due to alignment, focus and discipline behind delivering menu variety, choice and value, better tasting food, more convenient hours, stronger marketing and improved service. Franchised and affiliated revenues increased at a higher rate than Company-operated sales for both periods due to a higher percentage of franchised restaurants in 2004 compared with 2003. We remain confident that our combination of initiatives will continue to generate solid results and build on the foundation established last year.

In Europe, the increase in revenues for both periods was due to strong comparable sales in Russia, which is entirely Company-operated, positive comparable sales in France and the U.K and expansion. Germany’s poor performance had a negative impact on the quarter.