UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

or

Commission File No. 0-516

SONOCO PRODUCTS COMPANY

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

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

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

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

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

The aggregate market value of voting common stock held by nonaffiliates of the registrant (based on the New York Stock Exchange closing price) on June 25, 2004, which was the last business day of the registrant’s most recently completed second fiscal quarter, was $2,257,589,743. Registrant does not (and did not at June 25, 2004) have any non-voting common stock outstanding.

As of February 18, 2005, there were 98,981,756 shares of no par value common stock outstanding.

Documents Incorporated by Reference

Portions of the Proxy Statement for the annual meeting of shareholders to be held on April 20, 2005, which statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates, are incorporated by reference in Part III.

TABLE OF CONTENTS

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SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Forward-Looking Statements

This Annual Report on Form 10-K includes and incorporates by reference “forward-looking statements” within the meaning of the securities laws. All statements that are not historical facts are “forward-looking statements.” The words “estimate,” “project,” “intend,” “expect,” “believe,” “plan,” “anticipate,” “objective,” “goal,” “guidance” and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding offsetting high raw material costs, adequacy of income tax provisions, refinancing of debt, adequacy of cash flows, effects of acquisitions and dispositions, adequacy of provisions for environmental liabilities, financial strategies and the results expected from them, and producing improvements in earnings.

These forward-looking statements are based on current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by management. Such information includes, without limitation, discussions as to guidance and other estimates, expectations, beliefs, plans, strategies and objectives concerning our future financial and operating performance. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed or forecasted in such forward-looking statements. Such risks and uncertainties include without limitation: availability and pricing of raw materials; success of new product development and introduction; ability to maintain or increase productivity levels; international, national and local economic and market conditions; fluctuations in obligations and earnings of pension and postretirement benefit plans; ability to maintain market share; pricing pressures and demand for products; continued strength of our paperboard-based engineered carrier and composite can operations; anticipated results of restructuring activities; resolution of income tax contingencies; ability to successfully integrate newly acquired businesses into the Company’s operations; currency stability and the rate of growth in foreign markets; use of financial instruments to hedge foreign currency, interest rate and commodity price risk; actions of government agencies; loss of consumer confidence; and economic disruptions resulting from terrorist activities.

We undertake no obligation to publicly update or revise forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this Annual Report on Form 10-K might not occur.

References to our Web Site Address

References to our Web site address and domain names throughout this Annual Report on Form 10-K are for informational purposes only, or to fulfill specific disclosure requirements of the Securities and Exchange Commission’s rules or the New York Stock Exchange Listing Standards. These references are not intended to, and do not, incorporate the contents of our Web sites by reference into this Annual Report on Form 10-K.

PART I

Item 1. Business

	The Company is a South Carolina corporation founded in Hartsville, South Carolina in 1899 as the Southern Novelty Company. The name was subsequently changed to Sonoco Products Company (the “Company” or “Sonoco”). Sonoco is a manufacturer of industrial and consumer packaging products and a provider of packaging services, with 322 locations in 35 countries.
	Information regarding the Company’s acquisitions, dispositions, joint ventures and restructuring activities is provided in Notes 2, 3 and 4 to the Consolidated Financial Statements on pages F-8 through F-13 of this Annual Report on Form 10-K.

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SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

(b)	Financial information about segments –
	Information regarding the Company’s reportable segments is provided in Note 16 to the Consolidated Financial Statements on pages F-29 through F-31 of this Annual Report on Form 10-K.
(c)	Narrative description of business –
	Product Distribution – Each of the Company’s operating units has its own sales staff and maintains direct sales relationships with its customers. Some of the units have service staff at the manufacturing facility that interacts directly with the customers. The North American operations in the Engineered Carriers and Paper segment also have a customer service center located in Hartsville, South Carolina that is the main contact point between these business units and customers. Divisional sales personnel also provide sales management, marketing and product development assistance as needed. For those customers that buy from more than one business unit, the Company often assigns a single representative or team of specialists to handle that customer’s needs. Product distribution is normally directly from the manufacturing plant to the customer. There are cases where product is warehoused in a mutually advantageous location to be shipped to the customer as needed.
	Products and Services – The following discussion outlines the principal products produced and services rendered by the Company.
	Engineered Carriers and Paper The Engineered Carriers and Paper segment accounted for 44% of the Company’s net sales in 2004. This business serves its market through 126 converting facilities on five continents. Sonoco’s paper operations provide the primary raw material for the Company’s fiber-based packaging. This vertical integration strategy is supported by 27 paper mills with 38 paper machines and 47 recovered paper collection facilities throughout the world. In 2004, Sonoco had the capacity to manufacture approximately two million tons of recycled paperboard. The products, services and markets of the Engineered Carriers and Paper segment are as follows:

Sonoco’s engineered carriers (tubes and cores) business is the Company’s largest revenue-producing business, representing approximately 34%, 36% and 35% of consolidated net sales in 2004, 2003 and 2002, respectively.

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	Consumer Packaging
	The Consumer Packaging segment accounted for 36% of the Company’s net sales in 2004. The operations in this segment consist of 52 plants throughout the world. The products, services and markets of the Consumer Packaging segment are as follows:

	Sonoco’s composite can business is the Company’s second largest revenue-producing business, representing approximately 17%, 19% and 20% of consolidated net sales in 2004, 2003 and 2002, respectively.
	Packaging Services
	The Packaging Services segment accounted for 10% of the Company’s consolidated net sales in 2004. The products, services and markets of the Packaging Services segment are as follows:

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	Other
	In addition to the products and services outlined in each of the segments above, the Company produces the following products:

	Raw Materials – The principal raw materials used by the Company are recovered paper, paperboard, metal and plastic resins. Recovered paper used in the manufacture of paperboard is purchased either directly from suppliers near manufacturing operations or through the Company’s recovered paper operations. Other raw materials are purchased from a number of outside sources. The Company considers the supply and availability of raw materials to be adequate to meet its needs.
	Patents, Trademarks and Related Contracts – Most inventions are made by members of Sonoco’s development and engineering staff and are important to the Company’s organic growth. Patents have been granted on many inventions created by Sonoco staff in the United States and other countries. These patents are managed globally by a Sonoco intellectual capital management team through one of the Company’s subsidiaries, Sonoco Development, Inc. (SDI). SDI globally manages patents, trade secrets, confidentiality agreements and license agreements. Some patents have been licensed to other manufacturers, including Sonoco’s associated companies. Sonoco also licenses a few patents from outside companies and universities for business unit use. U.S. patents expire after 17 or 20 years, depending on the patent issue date. New patents replace many of the abandoned or expired patents.
	A second intellectual capital subsidiary of Sonoco, SPC Resources, Inc., globally manages Sonoco’s trademarks, service marks, copyrights and Internet domain names. Most of Sonoco’s products are marketed worldwide under trademarks such as SONOCOÒ, SONOTUBEÒ, SAFE-TOPÒ, SEALED SAFEÒ, DUROÒ and DUROXÒ. Sonoco’s registered Web domain names such as www.sonoco.com and www.sonotube.com provide information about Sonoco, its people and products. Trademarks and domain names are also licensed to subsidiaries and other companies where appropriate.
	Seasonality – The businesses of the Company’s segments are not seasonal to any significant degree.
	Dependence on Customers – The Company serves many customers with many different product lines, and no single customer represents 10% of consolidated net sales. On an aggregate basis, the five largest customers in the Engineered Carriers and Paper segment accounted for approximately 11.4% of segment sales and the five largest customers in the Consumer Packaging segment accounted for approximately 19.9% of segment sales. The dependence on a few customers in the Packaging Services segment is more significant as the five largest customers in this segment accounted for approximately 74% of segment sales.

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	Backlog – Most customer orders are manufactured with a lead time of three weeks or less. Therefore, the amount of backlog orders at December 31, 2004 and 2003 was not material. The Company expects all backlog orders at December 31, 2004 to be shipped during 2005.
	Competition – The Company’s products are sold in highly competitive market environments, which include paper, textiles, films, food, chemicals, pharmaceuticals, packaging, construction, and wire and cables. Within each of these markets, supply and demand is the major factor controlling the market environment. Additionally, and to a lesser degree, these markets are influenced by the overall rate of economic activity. Throughout the year, the Company remained highly competitive within each of the markets served. The Company manufactures and sells many of its products globally. Having operated internationally since 1923, the Company considers its ability to serve its customers worldwide in a timely, consistent and cost-effective manner a competitive advantage. The Company also believes that its technological leadership, reputation for quality and vertical integration are competitive advantages. Furthermore, the Company’s product development and global expansion reflect the rapidly changing needs of its major customers, who demand high-quality, state-of-the-art, environmentally compatible packaging wherever they choose to do business. In addition, the Company is focusing on productivity improvements with the objective of being the low-cost producer in value-added niches of the packaging market. The Company continues to pursue several productivity initiatives aimed at reducing costs and improving processes using the latest in information technology.
	Research and Development – Company-sponsored research and development expenses totaled approximately $15.4 million in 2004, $14.2 million in 2003 and $13 million in 2002. Customer-sponsored research and development costs were not material for each of these periods. Significant projects in Sonoco’s Engineered Carriers and Paper segment during 2004 included efforts to design and develop a new generation of products for the construction industry and to enhance performance characteristics of the Company’s engineered carriers in the textile, film and paper packaging areas, as well as projects aimed at enhancing productivity. The Consumer Packaging segment continued to invest in new materials technology and new process technology for a range of packaging options, including composite cans and other forms of shaped packaging during 2004.
	Compliance with Environmental Laws – Information regarding compliance with environmental laws is provided in Note 14 to the Consolidated Financial Statements on pages F-27 and F-28 of this Annual Report on Form 10-K.
	Number of Employees – Sonoco had approximately 17,100 employees as of December 31, 2004.
(d)	Financial information about geographic areas –
	Financial information about geographic areas is provided in Note 16 to the Consolidated Financial Statements on pages F-29 through F-31 of this Annual Report on Form 10-K and in the information about market risk under the caption “Risk Management” in Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 20 and 21 of this Annual Report on Form 10-K.
(e)	Available information –
	The Company electronically files with the Securities and Exchange Commission (SEC) its annual reports on Form 10-K, its quarterly reports on Form 10-Q, its periodic reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934. The SEC maintains a site on the Internet, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Sonoco also makes these filings available free of charge through its Internet site, www.sonoco.com, as soon as reasonably practical after the electronic filing of such material with the SEC.

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(f)	Executive Officers of the Registrant –

Item 2. Properties

The Company’s corporate offices are owned and operated in Hartsville, South Carolina. There are 116 owned and 70 leased facilities used by operations in the Engineered Carriers and Paper segment, 25 owned and 27 leased facilities used by operations in the Consumer Packaging segment, four owned and 15 leased facilities used by operations in the Packaging Services segment, and 19 owned and 23 leased facilities used by all other operations. Europe, the largest foreign geographic location, has 58 manufacturing locations.

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SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Item 3. Legal Proceedings

Information regarding legal proceedings is provided in Note 14 to the Consolidated Financial Statements on pages F-27 and F-28 of this Annual Report on Form 10-K.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock is traded on the New York Stock Exchange under the stock symbol “SON.” As of December 31, 2004, there were approximately 37,600 shareholder accounts. Information required by Item 201(d) of Regulation S-K can be found in Part III, Item 12 of this Annual Report on Form 10-K. The following table indicates high and low sales prices for common stock of Sonoco as reported on the New York Stock Exchange as well as cash dividends declared per common share:

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SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Item 6. Selected Financial Data

The following table sets forth the Company’s selected consolidated financial information. The information presented below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s historical consolidated financial statements and the notes thereto. The selected statement of income data and balance sheet data are derived from the Company’s Consolidated Financial Statements.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

During 2004, the Company undertook several key strategic initiatives including:

	-	The acquisition of CorrFlex Graphics, LLC (“CorrFlex”), one of the nation’s largest point-of-purchase display companies, with annual sales of approximately $200 million.
	-	The completion of a business combination with Ahlstrom Corporation, Helsinki, Finland (“Ahlstrom”), to combine each of the companies’ respective European paper-based tube/core and coreboard operations into a joint venture that operates under the name Sonoco-Alcore S.a.r.l., of which the Company owns 64.5%.
	-	The start-up of several plants producing new products and serving new markets.

Net sales for the Company increased to $3.16 billion in 2004 from $2.76 billion in 2003 primarily as a result of the acquisition of CorrFlex, increased volumes, higher selling prices, the favorable impact of foreign exchange translation and the impact of two months of sales from Sonoco-Alcore S.a.r.l.

The Company reported net income of $151.2 million for 2004, compared with $138.9 million for 2003. Earnings growth in 2004 resulted in large part from strong sales, which were driven by acquisitions, new product and market development and geographical expansion; from the reduction in cost structure, which resulted from restructuring actions completed since 2001; and from higher productivity improvement in virtually all of the Company’s businesses, partially as a result of increased unit volumes. Rising material costs, inflation and escalating energy prices negatively impacted operating earnings. Net income for 2004 and 2003 included after-tax restructuring charges of approximately $14.4 million and $36.8 million, respectively. Net income for 2004 was positively impacted by $9.3 million due to the recognition of certain tax benefits and a $7 million after-tax reduction in expense resulting from the Company’s adoption of new accounting guidance on the Medicare Prescription Drug Improvement and Modernization Act of 2003. Net income for 2003 was positively impacted by the $49.4 million after-tax gain on the sale of the High Density Film business, which is classified as discontinued operations on the Company’s Consolidated Statements of Income for 2002 and 2003.

Cash flow remained strong with cash generated from operations totaling $252.2 million in 2004, which, in conjunction with proceeds from the issuance of debt, was used to purchase CorrFlex, fund capital expenditures, pay dividends and increase cash investments by $32.9 million. To sustain strong cash flow, the Company remains focused on growing sales by developing new products and markets, expanding geographically and making appropriate acquisitions. At the same time, the Company is committed to aggressively controlling costs and effectively employing its capital by paying close attention to working capital management and capital expenditures.

Restructuring Charges, One-Time Items and Other Activities

Restructuring Charges

During 2004, the Company recognized restructuring charges, net of adjustments, of $19 million ($16.2 million after tax), primarily related to 10 plant closings in the Engineered Carriers and Paper segment, five plant closings in the Consumer Packaging segment and one plant closing in All Other Sonoco. Included in this amount, is $2.2 million in restructuring charges, which resulted from a correction to previously reported financial statements at the Company’s wholly owned subsidiary in Spain. Restructuring charges recognized during 2004 consisted of severance and termination benefits of $6.5 million, asset impairment charges of $6.2 million and other exit costs of $6.3 million, consisting of building lease termination charges and other miscellaneous exit costs. These costs are associated with the Company’s general plans, announced in August 2003, to reduce its overall cost structure by $54 million pretax. The Company expects to recognize an additional cost of approximately $4.2 million pretax in the future associated with these actions. The objectives of these restructuring actions are to realign and centralize a number of staff functions and eliminate excess plant capacity. As part of the target to reduce its cost structure by $54 million, the Company expects to announce in 2005 the closing of up to five additional plants. Restructuring charges associated with these expected 2005 actions cannot be estimated at this time. With the exception of ongoing pension subsidies and certain building

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lease termination expenses, costs associated with the 2004 restructuring actions are expected to be paid by the end of the fourth quarter 2005 using cash generated from operations.

In connection with the Company’s restructuring actions, asset impairment charges, which were related to the writeoff/down of assets associated with nine plant closings, of $6.2 million were recognized during 2004. Impaired assets were written down to the lower of carrying amount or fair value, less estimated costs to sell, if applicable. Of the $6.2 million, the Company recognized writeoffs/downs of impaired equipment of $4.5 million and writeoffs/downs related to facilities held for sale of $1.7 million. In addition, the Company recognized pension costs of $2 million relating to curtailments associated with restructuring actions.

During 2004, the Company also recorded non-cash income in the amount of $1.8 million after tax in order to reflect Ahlstrom’s portion of restructuring costs that were charged to expense. This income, which resulted from the expected closure of certain plants that the Company contributed to Sonoco-Alcore S.a.r.l., is included in “Equity in earnings of affiliates/minority interest in subsidiaries” in the Company’s Consolidated Statements of Income.

During 2003, the Company recognized restructuring charges, net of adjustments, of $50.1 million pretax ($35.3 million after tax). Additionally, the Company’s High Density Film business, which was divested in 2003, incurred restructuring charges of $.2 million pretax ($.1 million after tax) in 2003. The 2003 restructuring charges were primarily related to six plant closings in the Engineered Carriers and Paper segment, three plant closings in the Consumer Packaging segment, three plant closings in All Other Sonoco and a global reduction in salaried positions. These restructuring charges consisted of severance and termination benefits of $37.7 million, asset impairment charges of $8.4 million and other exit costs of $4 million, consisting of building lease termination charges and other miscellaneous exit costs.

During 2003, the Company also recorded restructuring charges of $1.5 million after tax related to affiliates/minority interest in subsidiaries. The restructuring charges are included in “Equity in earnings of affiliates/minority interest in subsidiaries” in the Company’s Consolidated Statements of Income.

During 2002, the Company recognized restructuring charges of $10.4 million pretax ($6.7 million after tax). Additionally, the Company’s High Density Film business, which was divested in 2003, incurred restructuring charges of $2.2 million pretax ($1.4 million after tax) in 2002. The 2002 restructuring charges were primarily related to three plant closings in the United States in the Consumer Packaging segment, one plant closing in the United States in the Engineered Carriers and Paper segment, one plant closing in All Other Sonoco and severance costs associated with plant consolidations in Europe. The restructuring charges consisted of severance and termination benefits of $10.5 million, asset impairment charges of $.4 million and other exit costs of $1.7 million, consisting of building lease termination charges and other miscellaneous costs.

Acquisitions/Joint Ventures

The Company completed nine acquisitions during 2004, with an aggregate cost of approximately $367 million, of which, $267 million was paid in cash. Acquisitions in the Company’s Engineered Carriers and Paper segment included engineered carrier manufacturers in Australia, China and the United States along with the formation of a joint venture as described below. During 2004, the Company also acquired CorrFlex, one of the nation’s largest point-of-purchase display companies. The acquired business, which is known as Sonoco CorrFlex, LLC, is reflected in the Packaging Services segment. Acquisitions in the Company’s Consumer Packaging segment included a composite can manufacturer in Australia, a manufacturer of rotogravure cylinders in Canada and the remaining ownership interest in a manufacturer of rotogravure cylinders in Charlotte, N.C. The Company also acquired certain assets of a wooden reel refurbisher in Alabama, which are classified as components of All Other Sonoco.

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As the acquisition of CorrFlex was considered material to the Company’s financial statements, unaudited pro forma combined historical results, as if CorrFlex had been acquired at the beginning of fiscal 2004, 2003 and 2002, are provided in the table below:

The pro forma results include amortization of intangibles and interest expense on debt assumed to finance the purchase. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of each period presented, nor are they necessarily indicative of future consolidated results.

In the fourth quarter of 2004, the Company completed a business combination with Ahlstrom to combine each of the companies’ respective European paper-based tube/core and coreboard operations into a joint venture that operates under the name Sonoco-Alcore S.a.r.l. The Company contributed ownership positions in 25 tube and core plants and five paper mills to Sonoco-Alcore S.a.r.l. and holds a 64.5% interest in the joint venture. Ahlstrom, a leader in high-performance fiber-based materials serving niche markets worldwide, contributed 14 tube and core plants and one paper mill to Sonoco-Alcore S.a.r.l. and holds a 35.5% interest in the joint venture. Annualized net sales of the operations contributed by Ahlstrom to Sonoco-Alcore S.a.r.l. totaled approximately $102 million for 2004. The Company has accounted for this transaction as an acquisition and, therefore, consolidates the results of the joint venture and reports Ahlstrom’s minority interest as such in its financial statements. While the Company is consolidating the results of the joint venture and reporting the full impact of sales and operating expenses, there is no significant impact on net income, as minority interest is recognized in order to reflect Ahlstrom’s share of after-tax profits. The recognition of minority interest is included in “Income before equity in earnings of affiliates/minority interest in subsidiaries” on the Company’s Consolidated Statements of Income. As part of this transaction, the Company and Ahlstrom have entered into put and call option arrangements as described in Note 14 to the Consolidated Financial Statements.

The Company completed four acquisitions during 2003, with an aggregate cost of approximately $11.1 million. Acquisitions in the Company’s Engineered Carriers and Paper segment included an engineered carriers manufacturer in Australia and a recovered paper operation in Savannah, Ga. The Company also acquired certain assets of a wooden reel manufacturer in Canada and the United States, which were classified as components of All Other Sonoco. In addition, the Company increased its ownership interest in a manufacturer of rotogravure cylinders in Charlotte, N.C., that is included in the Company’s Consumer Packaging segment.

During 2002, the Company purchased a small paper recycling operation in Kansas City, Mo., and Topeka, Kan., and a small, recovered paper trucking operation in Manhattan, Kan., in its Engineered Carriers and Paper segment. In addition, during the fourth quarter of 2002, the Company completed the purchase of a plywood reel operation in Sherman, Texas, and a nailed wooden reel operation in Bonham, Texas. The purchases, which included equipment, inventory and intangible assets, were classified as components of All Other Sonoco. The aggregate cost of all 2002 acquisitions was approximately $8.5 million.

Dispositions

In December 2003, the Company divested its High Density Film business to Hilex Poly Co., LLC, of Los Angeles, Calif., at a price of approximately $81 million in cash and the balance in subordinated notes and preferred nonvoting membership interests, resulting in a gain of approximately $63.1 million pretax ($49.4 million after tax). Operating results of this business are presented as “Income from discontinued operations, net of income taxes” in the Company’s Consolidated Statements of Income for 2003 and 2002. After-tax income contributed by the High Density Film business was approximately $60.8 million and $9.8 million in 2003 and 2002, respectively.

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Other Special Charges and One-Time Items

In 2004, the Company recognized charges of approximately $5.6 million, which the Company incurred to recognize vested commitments to pay future costs associated with new executive life insurance benefits that will replace split dollar life agreements made with key executives since 1995. Due to regulatory changes, the Company was not able to maintain those split-dollar agreements, and the replacement benefits for the affected employees have been provided by the Company to meet the intent and commitments of the previous plan. Also in 2004, the U.S. District Court for the Southern District of Ohio entered a judgment against the Company’s subsidiary, Sonoco-U.S. Mills, and the Company. The Company accrued approximately $4.5 million related to this legal proceeding. The charges recognized for the new executive life insurance benefits and the legal proceeding are included in “Selling, general and administrative expenses” in the Company’s Consolidated Statements of Income. Additionally, 2004 net income was positively affected by approximately $9.3 million due to the recognition of certain tax benefits as a result of the Internal Revenue Service closing its examination of the Company’s tax returns for years 1999 through 2001.

During the fourth quarter of 2004, the Company determined that misstatements were made in the financial statements of its wholly owned subsidiary in Spain, which consists of two engineered carriers plants. The primary impact of these misstatements was an underreporting of expenses over a six-year period totaling approximately $9.4 million, before and after tax, of which $2.2 million was related to restructuring charges as previously discussed. Of the remaining $7.2 million, approximately $1.6 million was associated with the first three quarters of 2004, approximately $1.3 million was associated with 2003, approximately $.3 million was associated with 2002, approximately $1.9 million was associated with 2001 and the remaining amount of approximately $2.1 million was associated with 2000 and prior. As the impact of these misstatements was not material to the reported results of any of the prior periods affected or to the current period, the Company recorded the charge in the fourth quarter.

Results of Operations 2004 versus 2003

Operating Revenue

Consolidated net sales for 2004 were $3.16 billion, versus $2.76 billion in 2003, an increase of approximately $397 million.

The components of the sales change were:

Sales for the year were higher due to increased volumes, higher selling prices, the impact of acquisitions and the favorable impact of foreign exchange rates as the dollar weakened against foreign currencies. Company-wide volume, including the impact of acquisitions, was approximately 10% higher than 2003. Domestic sales were $2.11 billion, up approximately 14% from 2003 and international sales were $1.04 billion, up approximately 16% over 2003.

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Operating Profits

Consolidated operating profits, which represent “Income before income taxes” on the Consolidated Statements of Income for 2004 and 2003, are comprised of the following:

Operating profits for 2004 increased due to higher volumes, the accretive impact of acquisitions and savings resulting from ongoing productivity and purchasing initiatives. Operating profits for 2004 were negatively impacted by higher energy costs, product start-up costs associated with the Company’s new multi-line steel easy-open closure operation in Brazil and new rigid plastic container plants in California and Wisconsin, as well as the costs associated with the movement of production between plants. The Company experienced increased costs for raw materials, primarily for old corrugated containers (OCC), the Company’s primary raw material, and steel. The higher OCC costs have been nearly offset through price increases for tubes and cores and for trade sales of recovered paper, and a significant portion of the increased steel costs are expected to be offset in the first quarter of 2005 due to contractual pass through provisions. Gross profit as a percentage of net sales was 18.2% in 2004, compared with 18.1% in 2003. As previously discussed, operating profits included $19 million and $50.1 million of restructuring charges in 2004 and 2003, respectively.

Selling, general and administrative expenses as a percentage of sales remained relatively flat at approximately 10%. In 2004, the Company continued to focus on controlling fixed cost spending, as it realized the majority of the benefits from restructuring actions started in 2003.

During 2004, income before income taxes was negatively impacted by charges of approximately $5.6 million pretax, which the Company incurred to recognize commitments to pay future costs associated with new executive life insurance benefits as discussed above under “Restructuring Charges, One-time Items and Other Activities – Other Special Charges and One-time Items.” Income before income taxes for 2004 was also negatively impacted by a charge of approximately $4.5 million pretax associated with an unfavorable legal judgment that was entered against the Company.

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”). The Act expands Medicare, primarily by adding a prescription drug benefit for Medicare-eligibles starting in 2006. The Act provides employers currently sponsoring prescription drug programs for Medicare-eligibles with a range of options for coordinating with the new government-sponsored program to potentially reduce program cost. These options include supplementing the government program on a secondary payor basis or accepting a direct subsidy from the government to support a portion of the cost of the employer’s program. On May 19, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position 106-2, ‘Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003’ (FSP 106-2), which requires measures of the accumulated postretirement benefit obligation and net periodic postretirement benefit costs to reflect the effects of the Act. In 2004, the Company adopted and retroactively applied FSP 106-2. As a result of the Company’s adoption of FSP 106-2, the accumulated postretirement benefit obligation was reduced by approximately $48.9 million, and net periodic benefit costs were reduced by approximately $9.1 million for 2004. See Note 12 to the Company’s Consolidated Financial Statements for further information about the reduction in net periodic benefit costs.

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During 2004, the Company experienced lower year-over-year pension and postretirement expense of approximately $11 million pretax, primarily related to the impact of the Company’s adoption of FSP 106-2 as discussed above. The market value of U.S. benefit plan assets increased approximately 13% and 26% in 2004 and 2003, respectively. Investment returns earned on assets held by the Company’s benefit plans are used to lower the Company’s cost of providing pension and postretirement benefits. There were no requirements under ERISA to fund the plan. For 2004, the Company used 8.5% as its expected long-term rate of return for U.S. pension and postretirement benefit plan assumptions. The Company will continue to use this 8.5% assumption rate in 2005.

Research and development costs charged to expense were $15.4 million and $14.2 million in 2004 and 2003, respectively. Significant projects in Sonoco’s Engineered Carriers and Paper segment during 2004 included efforts to design and develop a new generation of products for the construction industry and to enhance performance characteristics of the Company’s engineered carriers in the textile, film and paper packaging areas, as well as projects aimed at enhancing productivity. The Consumer Packaging segment continued to invest in new materials technology and new process technology for a range of packaging options, including composite cans and other forms of shaped packaging during 2004.

Net interest expense decreased by approximately $8.2 million from 2003. The decrease in net interest expense resulted primarily from lower average interest rates and increased interest income.

The effective tax rate for continuing operations in 2004 was 29.8%, compared with 34.8% in 2003. Included in the effective tax rate for 2004 was the impact of the recognition of certain tax benefits. These tax benefits totaled approximately $9.3 million and resulted from the Internal Revenue Service closing its examination of the Company’s tax returns for years 1999 through 2001. Also included in the effective tax rate for 2004 are tax benefits associated with the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which were partially offset by certain non-deductible foreign restructuring charges. Included in the effective tax rate for 2003 is the impact of certain non-deductible foreign restructuring charges.

Net income (including discontinued operations) for 2004 was $151.2 million, versus $138.9 million in 2003. Income from continuing operations for 2004 was $151.2 million, compared with $78.2 million in 2003. Net income included restructuring charges of $14.4 million after tax, compared with restructuring charges of $36.8 million after tax in 2003. Net income also included after-tax charges of $3.6 million, which the Company incurred to recognize vested commitments to pay future costs associated with the new executive life insurance benefits that will replace split-dollar life agreements made with key executives since 1995; $5.6 million related to prior years for an adjustment in the Company’s wholly owned subsidiary in Spain; and approximately $2.9 million related to a judgment against the Company’s subsidiary, Sonoco-U.S. Mills, and the Company. Although foreign exchange rates had an impact on sales, they did not have a significant impact on earnings in 2004.

Operating Segments

In 2004, in conjunction with its acquisition of CorrFlex, the Company reviewed the appropriateness of disclosures about its reportable segments in accordance with Statement of Financial Accounting Standards No. 131, ‘Disclosures about Segments of an Enterprise and Related Information’ (FAS 131). As a result of this review, the Company revised its reportable segments on a prospective basis beginning with the third quarter of 2004. Prior period information related to the Company’s reportable segments in this report has been restated to conform to the current presentation.

Prior to the third quarter of 2004, the Company reported its results in two segments, Industrial Packaging and Consumer Packaging. Beginning with the third quarter of 2004, the Company began reporting results in three segments – Engineered Carriers and Paper, Consumer Packaging and Packaging Services. Certain smaller operations are reported as All Other Sonoco.

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SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Certain businesses previously reported in the Industrial Packaging reportable segment have been reclassified as components of All Other Sonoco. Upon the removal of these businesses from the Industrial Packaging reportable segment, the remaining operating segments are those specifically related to the production of engineered carriers, paper and recovered paper, and therefore, the name of this reportable segment was changed to Engineered Carriers and Paper.

The Company’s specialty paperboard business, which was previously a component of the Consumer Packaging reportable segment, has been reclassified as a component of All Other Sonoco. In conjunction with the acquisition of CorrFlex in May 2004, the Company’s existing packaging services operations, which were previously included in the Consumer Packaging reportable segment, were combined with those of CorrFlex, which resulted in a newly created reportable segment – Packaging Services.

See Note 16 to the Company’s Consolidated Financial Statements for more information on operating segments.

Engineered Carriers and Paper Segment – Results for this segment are presented below:

The increase in sales was due primarily to the impact of favorable exchange rates as the dollar weakened against foreign currencies, higher average selling prices, increased volume and the impact of two months of sales resulting from the formation of Sonoco-Alcore S.a.r.l. Overall, volumes in this segment, excluding the impact of acquisitions and the formation of Sonoco-Alcore S.a.r.l., increased approximately 2%. Domestic sales increased approximately $45 million or 6% and international sales increased approximately $84 million, or 15%.

Earnings in this segment were favorably impacted by increased volumes and by productivity and purchasing initiatives, partially offset by higher energy costs, the impact of inflation and an adjustment at the Company’s subsidiary in Spain. This segment also experienced higher OCC costs, as the domestic price of OCC increased by an average of approximately 28% from 2003 to 2004. These increased costs were largely offset through price increases for tubes and cores and for trade sales of recovered paper.

Significant capital spending included the rebuilding and modification of several paper mills, primarily in the United States, Mexico and Europe and building new engineered carrier plants in Europe and Asia. Depreciation, depletion and amortization expense was $85.2 million in 2004, compared with $83.6 million in 2003.

Consumer Packaging Segment – Results for this segment are presented below:

Sales for the segment increased due to higher volume, price increases and the favorable impact of foreign exchange translation. Overall, volumes in this segment, excluding the impact of acquisitions, were up approximately 5%. Domestic sales were approximately $839 million, up 5% from 2003, and international sales were approximately $293 million, up 20% from 2003.

Earnings in this segment were favorably impacted by increased volumes as well as productivity and purchasing initiatives, partially offset by inflation and product start-up costs associated with the Company’s new multi-line steel easy-open closure operation in Brazil and new rigid plastic container plants in California and Wisconsin,

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SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

as well as the costs associated with the movement of production between plants. Earnings in this segment were negatively impacted by an unfavorable price/cost relationship, as material costs, primarily steel, increased significantly. In response to those cost increases, the Company began raising prices in the latter half of 2004 and continues to raise prices in 2005 as allowed by contractual pass-through provisions.

Significant spending included building two new plants in the United States and numerous productivity and customer development projects in the United States and Europe. The closures business continued to invest in new capacity in Brazil to support increasing global demand. Depreciation, depletion and amortization expense in this segment was $59.4 million in 2004, compared with $52.5 million in 2003.

Packaging Services Segment – Results for this segment are presented below:

Sales in this segment increased primarily due to the acquisition of CorrFlex in May 2004. See Note 2 to the Company’s Consolidated Financial Statements for further information about the impact of this acquisition. Sales in pre-existing operations in this segment increased due to volume and mix changes. Overall, volumes in this segment, excluding the impact of acquisitions, were up approximately 8%. Domestic sales were $248 million, up over 100% from 2003, and international sales were $73 million, up 17% from 2003.

Although the increase in earnings in this segment is primarily attributable to the acquisition of CorrFlex, productivity and purchasing initiatives in pre-existing operations also contributed to the improvement. A slight volume improvement was offset by the impact of inflation.

Significant spending included numerous productivity and customer development projects in the United States and Europe. Depreciation, depletion and amortization expense in this segment was $8.2 million in 2004, compared with $3.5 million in 2003.

All Other Sonoco – Results for all other businesses not included in the segments above are presented below:

Sales for All Other Sonoco increased due to volume and price increases in molded and extruded plastics, wire and cable reels, and protective packaging. In addition, the impact of favorable foreign exchange translation, along with the impact of a small acquisition, increased sales in All Other Sonoco. Domestic sales were approximately $253 million, up 16% from 2003, and international sales were approximately $60 million, up 20% from 2003.

Earnings in All Other Sonoco increased due to volume improvements along with manufacturing productivity and purchasing initiatives. All Other Sonoco also recognized a slightly positive price/cost relationship, as the Company was able to recover increases in raw material costs, including lumber, resin and paper, via price increases to the customers as well as material purchasing initiatives.

Significant spending included investing in customer development projects in the United States and Europe for molded and extruded plastics. Depreciation, depletion and amortization expense in All Other Sonoco was $11.1 million in 2004, compared with $13 million in 2003.

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SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Financial Position, Liquidity and Capital Resources

Cash Flows

Cash flows from operations totaled $252.2 million in 2004, compared with $332.2 million in 2003. The decrease is primarily attributed to an increase in net working capital associated with higher sales and increased material costs in inventory, as well as increased inventory associated with the start-up of the Company’s new easy-open closure operation in Brazil and new rigid plastic operations in California and Wisconsin.

Cash flows used by investing activities increased from $35.9 million in 2003 to $378.2 million in 2004. This increase is due primarily to the Company’s purchase of CorrFlex in May 2004. Also in 2003, the Company received cash proceeds of approximately $81.2 million as a result of the sale of its High Density Film business. Capital expenditures in 2004 were $119.8 million, compared with $113.6 million in 2003 and $124 million in 2002. Capital expenditures in 2005 are expected to be in the $130 million range.

Net cash provided by financing activities totaled $156 million in 2004, compared with net cash used by financing activities of $245.9 million in 2003. This change was funded by incremental borrowing and is primarily due to the previously described decrease in cash flows from operations and increase in cash flows used by investing activities. The Company expects internally generated cash flows to be sufficient to meet operating and normal capital expenditure requirements on a short- and long-term basis.

Current assets increased by $166.8 million to $922.1 million at December 31, 2004. This increase, due in part to the impact of acquisitions, resulted from higher levels of cash, accounts receivable and inventory. In 2003, current assets increased by $92 million when compared with 2002, primarily as a result of higher cash balances. Current liabilities decreased by $39.7 million to $639.9 million at December 31, 2004. This decrease resulted from the repayment of $150 million in debentures in November 2004, partially offset by increases in accounts payable and accrued expenses. In 2003, current liabilities increased by $120.7 million to $679.6 million due to increased current debt maturities. The current ratio was 1.4 at the end of 2004, compared with 1.1 and 1.2 at the end of 2003 and 2002, respectively.

Contractual Obligations

The following table summarizes contractual obligations at December 31, 2004:

In December 2003, the Company entered into an agreement with the majority shareholders of Demolli Industra Cartaria S.p.A., an Italian-based manufacturer of paperboard and engineered carriers, which is currently partially owned by the Company and reported as an equity investment. This agreement allows the majority shareholder to require (through a put option arrangement) the Company to buy the shares not currently owned by the Company at any time between the date of the agreement and December 2006. The agreement also gives the Company the right to purchase the shares (through a call option arrangement) any time after December 2006 through December 2009. The price of the share purchase will be determined by a pre-set formula, which the Company believes approximates fair value, related to an earnings multiple at the time such shares might be put or called.

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SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

In November 2004 and in conjunction with the Sonoco-Alcore S.a.r.l. joint venture, the Company entered into an agreement with Ahlstrom, the minority shareholder of Sonoco-Alcore S.a.r.l. This agreement states that, following a two and one-half year standstill period, subject to certain conditions, Ahlstrom shall have the right over the next three and one-half years to require (through a put option arrangement) the Company to purchase its shares in Sonoco-Alcore S.a.r.l. During the seventh year, the Company will have the right to purchase the shares (through a call option arrangement). The price of the share purchase will be determined by a pre-set formula, which the Company believes approximates fair value, related to an earnings multiple at the time such shares might be put or called.

Capital Resources

Debt increased by $232.4 million to $907 million at December 31, 2004, primarily due to the issuance of $150 million of notes in June 2004, proceeds of which were used to partially fund the purchase of CorrFlex, as well as increased commercial paper borrowings. Debt also increased at foreign locations to finance the Company’s new multi-line steel easy-open closure operation in Brazil as well as the needs of Sonoco-Alcore S.a.r.l. The Company also repaid $150 million in 7% debentures in November of 2004.

The Company currently operates a commercial paper program totaling $350 million and has fully committed bank lines of credit supporting the program by a like amount. In July 2004, the Company entered into a new five-year, $350 million credit agreement that also provides the Company with the option to increase its credit line to $450 million subject to the concurrence of its lenders. It is the Company’s intent to indefinitely maintain line of credit agreements fully supporting its commercial paper program. The five-year term on the new line of credit allows commercial paper borrowings up to the maximum amount of the line of credit to be classified as long-term debt. In 2003, the Company’s commercial paper program totaled $450 million with a 364-day backstop line of credit of the same amount that could be extended under a term-out option. This credit line expired in July 2004 and was replaced by the five-year line of credit discussed above. At December 31, 2004, the amount of the Company’s commercial paper that was outstanding was $180 million. The Company had no commercial paper outstanding at December 31, 2003.

On October 22, 2004, the President signed the American Jobs Creation Act of 2004, which 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. The deduction is subject to a number of limitations. The Company has not yet decided whether, or to what extent, foreign earnings will be repatriated. Based on its analysis to date, however, it is possible that the Company may repatriate an amount between $0 to $100 million with the respective tax liability ranging from $0 to $10 million. The Company expects to be in a position to finalize its assessment by June 30, 2005. See Note 18 to the Company’s Consolidated Financial Statements for further information about the anticipated effects of the American Jobs Creation Act of 2004.

Interest expense totaled $47.5 million for the year ended December 31, 2004, compared with $52.4 million and $54.2 million for the years ended December 31, 2003 and 2002, respectively. The decrease in 2004, compared with 2003, was due primarily to lower average interest rates in the United States, partially offset by higher debt levels.

Income before interest and taxes was 5.0 times interest expense in 2004, compared with 3.0 times and 4.3 times in 2003 and 2002, respectively. The Company’s total debt to capital ratio was 40.1 % at December 31, 2004, compared with 35.8% and 44.5% at December 31, 2003 and 2002, respectively. Return on total equity was 14.2% in 2004, compared with 15% in 2003 and 16% in 2002.

Shareholders’ equity increased $138.7 million from December 31, 2003, to $1.15 billion at December 31, 2004. The increase resulted mainly from net income of $151.2 million in 2004, stock option exercises of $34.5 million and foreign currency translation of $36.9 million, reduced by dividends of $85.1 million and minimum pension liability adjustments of $4.5 million. Shareholders’ equity increased $146.7 million from December 31, 2002, to

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SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

$1.01 billion at December 31, 2003. The change resulted primarily from net income of $138.9 million and $8.8 million of exercised stock options and foreign currency translation of $77.9 million, reduced by dividends of $81.1 million and minimum pension liability adjustments of $3.4 million. The Company did not repurchase any of its common stock in 2004. At December 31, 2004 and 2003, the Company had remaining authorizations from its Board of Directors to repurchase approximately 5,300,000 shares of common stock.

Although the ultimate determination of whether to pay dividends is within the sole discretion of the Board of Directors, the Company plans to increase dividends as earnings grow. Dividends per common share were $.87 in 2004, $.84 in 2003, and $.83 in 2002.

Off-Balance Sheet Arrangements

The Company had no material off-balance sheet arrangements at December 31, 2004.

Risk Management

As a result of operating globally, the Company is exposed to market risk from changes in foreign exchange rates. The exposure is well diversified as the Company’s facilities are spread throughout the world, and the Company generally sells in the same country where it produces. The Company monitors these exposures and may use traditional currency swaps and forward foreign exchange contracts to hedge a portion of the net investment in foreign subsidiaries, foreign currency assets and liabilities, or forecasted transactions that are denominated in foreign currencies. The Company’s foreign operations are exposed to political and cultural risks, but they are not believed to be material because of diversification and the relative stability of most of the countries in which the Company has operations.

The Company is exposed to interest rate fluctuations as a result of using debt as a source of financing its operations. When necessary, the Company expects to use traditional, unleveraged interest rate swaps to manage its mix of fixed and variable rate debt to maintain exposure to interest rate movements within established ranges. All interest rate swaps qualified as fair value hedges under Statement of Financial Accounting Standards No. 133, ‘Accounting for Derivative Instruments and Hedging Activities, (FAS 133)’ and swapped fixed interest rates for floating rates.

During June 2004, the Company issued $150 million of 5.625% notes maturing in 2016 and simultaneously entered a $150 million interest rate swap with the same maturity, effectively swapping the fixed rate bond to floating. In January 2004, the Company entered into an agreement to swap $100 million of its $250 million 6.5% notes maturing in 2013 effectively swapping the interest rate on that $100 million portion from a fixed rate to a floating rate. The fair market value of these interest rate swaps was a favorable position of $7.8 million and $1.9 million, respectively, at December 31, 2004. During 2003, the Company entered into a $150 million swap against a $150 million 7.0% bond that matured in 2004. This swap terminated in conjunction with the bond maturity on November 15, 2004. Additionally, during the third quarter of 2002, the Company terminated a $150 million swap, which was entered into in the first quarter of 2002, against the 7.0% bond that matured in 2004. The termination of that swap resulted in a gain of approximately $2.7 million. In accordance with FAS 133, interest expense was lowered by amortization of this gain until the bonds matured on November 15, 2004.

The Company is a purchaser of commodities such as recovered paper, energy, metal and resin. The Company does not engage in material hedging of many commodities because there is usually a high correlation between the commodity cost and the ultimate selling price of its products. Commodities are generally purchased at market or fixed prices that are established with the vendor as part of the purchase process for quantities expected to be consumed in the ordinary course of business. On occasion, where the correlation between selling price and commodity price is less direct, the Company may enter into commodity futures or swaps to reduce the effect of price fluctuations.

At the end of 2004, the Company had commodity swaps outstanding to fix the costs of a portion of raw materials for 2005 through 2007 in some cases. The swaps qualify as cash flow hedges under FAS 133. The fair market value of these commodity swaps was a favorable position of $3.4 million ($2.2 million after tax) and

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SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

$2.6 million ($1.6 million after tax) at December 31, 2004 and 2003, respectively. This favorable position is reflected as a component of “Other Assets” on the Company’s Consolidated Balance Sheets. The fair market value of commodity swaps at December 31, 2002 was not material to the Consolidated Financial Statements.

FAS 133 requires that derivatives be marked to fair value quarterly and recorded on the balance sheet. The Company uses published market prices or estimated values based on current price quotes and a discounted cash flow model to estimate the fair market value of the swaps.

The use of financial instruments to hedge foreign currency, interest rate and commodity price risk was not material to the Consolidated Financial Statements as a whole as of December 31, 2004, 2003 or 2002. See Note 10 to the Consolidated Financial Statements for more information on financial instruments.

Except for the impact on energy and raw material prices, inflation did not have a material effect on the Company’s operations in 2004, 2003 or 2002.

The Company is subject to various federal, state and local environmental laws and regulations concerning, among other matters, wastewater effluent and air emissions. Compliance costs have not been significant due to the nature of the materials and processes used in manufacturing operations. Such laws also make generators of hazardous wastes and their legal successors financially responsible for the cleanup of sites contaminated by those wastes. The Company has been named a potentially responsible party at several environmentally contaminated sites not owned by the Company. These regulatory actions and a small number of private party lawsuits are believed to represent the Company’s largest potential environmental liabilities. Accordingly, the Company has accrued approximately $4.4 million at December 31, 2004, compared with approximately $4.0 million at December 31, 2003, with respect to these sites. See Note 14 to the Consolidated Financial Statements for more information on environmental matters.

Results of Operations 2003 versus 2002

Operating revenue and operating profit for 2002 have been restated to reflect the reclassification of the Company’s High Density Film business as discontinued operations.

Operating Revenue

Consolidated net sales for 2003 were $2.76 billion, versus $2.7 billion in 2002, an increase of approximately $57 million.

The components of the sales change were:

Sales for the year were higher than 2002 primarily as a result of favorable exchange rates as the dollar weakened against foreign currencies and higher average selling prices, mainly attributed to the Company’s engineered carriers and paper operations. Company-wide volume was approximately 1% lower than 2002. Domestic sales were $1.86 billion, down 1% from 2002 and international sales were $899 million, up 9% over 2002 due primarily to the impact of foreign exchange.

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SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Operating Profits

Consolidated operating profits, which represent “Income before income taxes” on the Consolidated Statements of Income for 2003 and 2002, are comprised of the following:

Operating profits for 2003 were adversely impacted by lower volume and mix of approximately $24 million and a negative price/cost relationship of approximately $9 million, primarily associated with higher costs for old corrugated containers (OCC), the Company’s primary raw material, and higher raw material costs in the Company’s rigid paper and plastic packaging operations. The Company was impacted by operating issues in the flexible packaging business due to new equipment start-up issues and additional costs associated with the closing of one flexible packaging plant and the resulting transfer of these operations to other Sonoco facilities. In addition, the Company continued to experience pricing pressure reflecting growing global competition and industry overcapacity. Higher pension and postretirement expenses of approximately $28 million and higher energy costs of approximately $12 million were partially offset by approximately $42 million of lower fixed costs and the results of ongoing productivity initiatives. Gross profit as a percentage of net sales was 18.1% in 2003, compared with 19.3% in 2002. As previously discussed, operating profits included $50.1 million and $10.4 million of restructuring charges in 2003 and 2002, respectively.

Selling, general and administrative expenses as a percentage of sales remained flat with 2002 at approximately 10% of sales. In 2003, the Company continued to focus on controlling fixed cost spending. This focus was supported by the Company’s restructuring actions during the year.

Investment returns earned on assets held by the Company’s benefit plans are used to lower the Company’s cost of providing pension and postretirement benefits. During 2003, the Company experienced higher year-over-year expense of approximately $28 million pretax, primarily related to the impact of stock market performance on investment earnings of assets in U.S. pension and postretirement plans during 2002. The market value of U.S. benefit plan assets increased approximately 26% in 2003, compared with a decline of approximately 9% in 2002. There were no requirements under ERISA to fund the plan in 2004. The Company revised its U.S. pension and postretirement benefit plan assumptions for its expected long-term asset rate of return to 8.5% for 2004, compared with 8.75% in 2003 and 9.5% in 2002.

Research and development costs charged to expense were $14.2 million and $13 million in 2003 and 2002, respectively. Significant projects in the Engineered Carriers and Paper segment included efforts to design new products for the construction industry and to enhance performance characteristics of the Company’s engineered carriers in the textile, film and paper packaging areas, as well as projects aimed at productivity enhancements. The Consumer Packaging segment continued to invest in new materials technology and new process technology in support of flexible and rigid packaging options.

Net interest expense decreased $2.4 million over 2002. The decrease was primarily driven by lower debt levels and associated interest rates, the payoff of approximately $100 million in 5.875% bonds and swapping certain fixed rate debt for floating rates.

The effective tax rate for continuing operations in 2003 was 34.8%, compared with 35.5% in 2002. The lower effective tax rate was primarily due to tax benefits relating to restructuring charges in higher tax rate jurisdictions.

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SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Net income (including discontinued operations) for 2003 was $138.9 million, versus $135.3 million in 2002. Income from continuing operations for 2003 was $78.2 million, compared with $125.5 million in 2002. Net income included restructuring charges of $50.1 million ($36.8 million after tax), compared with restructuring charges of $12.6 million ($8.1 million after tax) in 2002. Earnings per diluted share in 2003 included a net gain on the sale of assets of $.51 per share and restructuring charges of $.38 per share, compared with restructuring charges of $.08 per share in 2002. Although foreign exchange rates had an impact on sales, they did not have a significant impact on earnings in 2003.

Operating Segments

Engineered Carriers and Paper Segment – Results for this segment are presented below:

The higher sales, compared with 2002, were due primarily to favorable exchange rates as the dollar weakened against foreign currencies and higher average selling prices. This increase in revenue was partially offset by lower volume, which declined less than 1% compared with 2002. Domestic sales were up $33.2 million or 4% and international sales were up $20.3 million, or 4%.

Earnings in this segment were adversely impacted by lower volumes and mix issues along with a negative price/cost relationship, primarily associated with higher costs for OCC. Additionally, higher pension and postretirement expenses and general inflation, particularly higher energy costs, were only partially offset by lower fixed costs and productivity initiatives.

Significant capital spending included the rebuilding of several paper mills, primarily in the United States, Canada and Europe. Depreciation, depletion and amortization expense was $83.6 million in 2003, compared with $79.8 million in 2002.

Consumer Packaging Segment – Results for this segment are presented below:

The slight increase in sales was due primarily to favorable exchange rates, which resulted as the dollar weakened against foreign currencies, partially offset by lower volume, which was down approximately 2% compared with 2002. Domestic sales were $801.8 million, down 1% from 2002, and international sales were $242.6 million, up 4% from 2002, due primarily to the impact of foreign exchange.

Lower volume had a negative impact on operating profit. This lower volume, along with higher pension and postretirement expenses and general inflation, was partially offset by productivity initiatives. Operating issues in the flexible packaging division due to new equipment start-up issues and additional costs associated with the closing of one flexible packaging plant and the resulting transfer of business to other flexible packaging plants had a negative impact on segment earnings. The price/cost relationship for the segment was slightly negative.

Significant spending included numerous productivity enhancement and consolidation projects in the United States. The closures business invested significantly in new Brazil capacity to support increasing global demand. Depreciation, depletion and amortization expense in this segment was $52.5 million in 2003, compared with $50 million in 2002.

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SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Packaging Services Segment – Results for this segment are presented below:

Sales for the segment were flat as sales price decreases were offset by favorable exchange rates as the dollar weakened against foreign currencies. Overall, volumes were flat when compared with 2002. Domestic sales were $129.9 million, up 5% from 2002, and international sales were $54.7 million, down 10% from 2002.

Earnings in this segment increased as productivity initiatives, along with a slightly favorable price/cost relationship, were only partially offset by increased fixed costs, including pension and postretirement expenses.

Depreciation, depletion and amortization expense in this segment was $3.5 million in 2003, compared with $2.9 million in 2002.

All Other Sonoco – Results for all other businesses not included in the segments above are presented below:

Sales for All Other Sonoco were flat as favorable exchange rates, which resulted as the dollar weakened against foreign currencies, and price increases were offset by volume declines, primarily in the cable and wire reels business and molded plastics business. Domestic sales were $219.3 million, down 1% from 2002, and international sales were $50.2 million, up 5% from 2002.

Earnings decreased as the impact of volume declines, along with a slightly unfavorable price/cost relationship, more than offset the year-over-year savings from productivity initiatives and fixed cost reductions.

Depreciation, depletion and amortization expense in All Other Sonoco was $13 million in 2003, compared with $13.3 million in 2002.

Critical Accounting Policies and Estimates

The Company’s analysis and discussion of its financial condition and results of operations are based upon its Consolidated Financial Statements that have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The Company evaluates these estimates and assumptions on an ongoing basis, including but not limited to those related to inventories, bad debts, derivatives, income taxes, intangible assets, restructuring, pension and other postretirement benefits, environmental liabilities and contingencies and litigation. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from estimates. The impact and any associated risks related to estimates, assumptions and accounting policies are discussed in Management’s Discussion and Analysis of Operations and Financial Condition, as well as in the Notes to the Consolidated Financial Statements, if applicable, where such estimates, assumptions and accounting policies affect the Company’s reported and expected financial results.

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SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

The Company believes the following accounting policies are critical to its business operations and the understanding of results of operations and affect the more significant judgments and estimates used in the preparation of its Consolidated Financial Statements:

Allowance for Doubtful Accounts

The Company maintains accounts receivable allowances for estimated losses resulting from the inability of its customers to make required payments. Additional allowances may be required if the financial condition of the Company’s customers deteriorates.

Revenue Recognition

In accordance with US GAAP, the Company records revenue when title and risk of ownership pass to the customer and when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price to the customer is fixed or determinable, and when collectibility is reasonably assured. Certain judgments, such as provisions for estimates of sales returns and allowances, may affect the application of the Company’s revenue policy and, therefore, the results of operations in its Consolidated Financial Statements.

Impairment of Long-Lived and Intangible Assets

The Company evaluates its long-lived assets (property, plant and equipment) and definite-lived intangible assets for impairment whenever indicators of impairment exist or when it commits to sell the asset. The accounting standards require that if the sum of the undiscounted expected future cash flows from a long-lived asset or definite-lived intangible asset is less than the carrying value of that asset, an asset impairment charge must be recognized. The amount of the impairment charge is calculated as the excess of the asset’s carrying value over its fair value, which generally represents the discounted future cash flows from that asset, or in the case of assets the Company evaluates for sale, at fair value less costs to sell. A number of significant assumptions and estimates are involved in developing operating cash flow forecasts for the Company’s discounted cash flow model, including markets and market share, sales volumes and prices, costs to produce, working capital changes and capital spending requirements. The Company considers historical experience and all available information at the time the fair values of its assets are estimated. However, fair values that could be realized in an actual transaction may differ from those used to evaluate the impairment of long-lived assets and definite-lived intangible assets. Therefore, assumptions and estimates used in the determination of impairment losses may affect the carrying value of long-lived and intangible assets and possible impairment expense in the Company’s Consolidated Financial Statements.

Impairment of Goodwill

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (FAS 142), the Company evaluates its goodwill for impairment at least annually and more frequently if indicators of impairment are present. FAS 142 requires that if the fair value of a reporting unit is less than its carrying value including goodwill (Step I), an impairment charge for goodwill must be recognized. The impairment charge is calculated as the difference between the implied fair value of the reporting unit goodwill and its carrying value (Step II).

The Company’s reporting units are the same as its operating segments, as determined in accordance with FAS 131. Accordingly, these reporting units reflect the way the Company manages its business, and impairment testing at this reporting unit level reflects how the Company is managed overall. The components within these reporting units serve similar types of customers, provide similar services and operate in similar regulatory environments. The benefits of goodwill are shared by each component.

In performing the impairment evaluation required by FAS 142, the Company estimates the fair value of each reporting unit and compares it to the carrying amount of that reporting unit. To the extent the carrying amount of

25

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

a reporting unit exceeds the fair value of that reporting unit, the Company is required to perform the second step of the impairment test. In this step, the Company compares the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

The Company uses a discounted cash flow model to estimate the fair value of each reporting unit. The Company considers historical experience and all available information at the time the fair values of its businesses are estimated. However, fair values that could be realized in an actual transaction may differ from those used to evaluate the impairment of goodwill. Therefore, assumptions and estimates used in the determination of impairment losses may affect the carrying value and possible impairment expense in the Company’s Consolidated Financial Statements.

Restructuring

Liabilities for costs associated with an exit or disposal activity are recognized when the liability is incurred. Termination costs are recognized upon communication of notice of termination to employees, unless service is required beyond the minimum retention period. If service is required beyond the minimum retention period, the liability is recognized ratably over the future service period. If, as a result of the restructuring action, assets become impaired, the assets are written down to the lower of carrying amount or fair value, less estimated costs to sell, if applicable. The Company estimates the fair value of impaired assets using accepted valuation techniques such as available market information or indicative bids, when available. A number of significant estimates and assumptions are involved in the application of these techniques. The Company considers historical experience and all available information at the time the estimates are made; however, the fair values that are ultimately realized upon the sale of the assets to be divested may differ from the estimated fair values reflected in the Company’s Consolidated Financial Statements.

Income Taxes

The Company records an income tax valuation allowance when the realization of certain deferred tax assets, net operating losses and capital loss carryforwards is not likely. These deferred tax assets represent expenses recognized for financial reporting purposes, which will result in tax deductions over varying future periods. Certain judgments, assumptions and estimates may affect the carrying value of the valuation allowance and deferred income tax expense in the Company’s Consolidated Financial Statements. Additionally, the Company periodically reviews assumptions and estimates of the Company’s probable tax obligations using historical experience in tax jurisdictions and informed judgments.

Stock Compensation Plans

As permitted by Statement of Financial Accounting Standards No. 123, ‘Accounting for Stock-Based Compensation’ (FAS 123), the Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, ‘Accounting for Stock Issued to Employees,’ and its related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. Compensation cost for performance stock options is recognized over the vesting period and is recorded based on the quoted market price of the Company’s stock at the end of the period.

The Company records compensation expense associated with performance-based stock compensation plans using vesting assumptions that are derived from performance measures as defined in the plans. In 2004, performance measures consisted of Earnings Per Share and Return on Net Assets Employed. Certain judgments, assumptions and estimates in connection with the future achievement of these performance measures may affect the amount of accrued compensation expense and performance-based stock compensation expense in the Company’s Consolidated Financial Statements.

26

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Pension and Postretirement Benefit Plans

The Company has significant pension and postretirement benefit costs that are developed from actuarial valuations. The actuarial valuations employ key assumptions that are particularly important when determining the Company’s projected liabilities for pension and other postretirement benefits. Key actuarial assumptions used in determining the projected benefit obligation, the accumulated benefit obligation, and net periodic benefit cost (income) for U.S. retirement and retiree health and life insurance plans include: a discount rate of 5.75% to determine benefit obligations, a discount rate of 6.25% to determine net periodic benefit cost (income), an expected long term rate of return of 8.5% and a rate of compensation increase of 4.6%. These assumptions are as of December 31, 2004.

The Company adjusts its discount rate annually in relationship to movements in high-quality debt instruments. The long-term rate of return assumption is based on the Company’s historical plan return performance. The rate of compensation assumption is generally based on salary and incentive increases. A key assumption for the U.S. health and life insurance plan is a medical trend rate beginning at 10% and trending down to an ultimate rate of 6% in 2008. The ultimate trend rate of 6% represents the Company’s best estimate of the long-term average annual medical cost increase over the duration of the plan’s liabilities. It provides for real growth in medical costs in excess of the overall inflationary level.

During 2004, the Company incurred total pension and postretirement benefit expenses of approximately $45.8 million, compared with $65.7 million during 2003. The 2004 amount is net of $69.5 million of expected returns on plan assets at the assumed rate of 8.5% and includes interest cost of $66.4 million at a discount rate of 6.25%. The 2003 amount included pension costs associated with restructuring and the impact of curtailment associated with the disposition of the Company’s High Density Film business in December 2003. During 2004, the Company made contributions to the pension and postretirement plans of approximately $42.7 million. The contribution amount varies from year to year depending on factors including market asset volatility and interest rates. Although the cash portion of these contributions reduced cash flows from operations during the year, under Statement of Financial Accounting Standards No. 87, ‘Employers’ Accounting for Pensions’ (FAS 87), they did not have an immediate significant impact on pension expense. Unrecognized net actuarial losses were approximately $436.8 million at December 31, 2004, and are primarily the result of poor asset performance during 2000 through 2002. The amortization period for unrecognized losses/gains is 12 years for the portion outside the 10% corridor as defined by FAS 87, except for curtailments, which would result in accelerated expense.

The projected liability of these plans will be affected by assumptions regarding inflation, investment returns, market interest rates, changes in the number of plan participants and changes in the benefit obligations and laws and regulations pertaining to benefit obligations. The Company annually reevaluates assumptions used in projecting the pension and postretirement liabilities and associated expense. These judgments, assumptions and estimates may affect the carrying value of pension and postretirement plan assets and liabilities and pension and postretirement plan expenses in the Company’s Consolidated Financial Statements. The effect of lowering the selected assumptions, excluding any changes to the investment base, is shown below for the year ended December 31, 2004, for U.S. plans, assuming no changes in benefit levels in 2004:

See Note 12 to the Consolidated Financial Statements for additional information on the Company’s pension and postretirement plans.

27

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, ‘Consolidation of Variable Interest Entities – an interpretation of ARB 51’ (FIN 46). FIN 46 addresses when a company should include in its financial statements the assets, liabilities and activities of a variable interest entity. It defines variable interest entities as those entities with a business purpose that either do not have equity investors with voting rights in proportion to such investors’ equity, or have investors that do not provide financial resources in proportion to such investors’ equity for the entity to support its activities and have equity investors that lack a controlling financial interest. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. FIN 46 consolidation requirements applied immediately to variable interest entities created or obtained after January 31, 2003, but this had no impact on the Company’s 2003 financial statements. A modification to FIN 46 (FIN 46R) was released on December 17, 2003. FIN 46R delayed the effective date for variable interest entities created before February 1, 2003, with the exception of special-purpose entities, until the first fiscal year or interim period after December 15, 2003. As of January 1, 2004, the Company adopted FIN 46R. In conjunction with this adoption, the Company performed an evaluation of variable interest entities in which it has an ownership, contractual or other monetary interest. The adoption of FIN 46R did not have a material effect on the Company’s Consolidated Financial Statements.

In May 2004, the FASB issued FASB Staff Position 106-2, ‘Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003’ (FSP 106-2), which requires measures of the accumulated postretirement benefit obligation and net periodic postretirement benefit costs to reflect the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP 106-2 supersedes FSP 106-1 and is effective for interim or annual reporting periods beginning after June 15, 2004. The Company adopted and retroactively applied FSP 106-2 as of the effective date. In response to the Company’s adoption of FSP 106-2, the accumulated postretirement benefit obligation was reduced by approximately $48.9 million, and net periodic benefit costs were reduced by approximately $9.1 million. See Note 12 to the Consolidated Financial Statements for further information about the reduction in net periodic benefit costs.

In October 2004, the President signed the American Jobs Creation Act of 2004. The American Jobs Creation Act provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. In return, the American Jobs Creation Act also provides for a two-year phase-out of the existing extra-territorial income exclusion (the “ETI”) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. The Company expects the net effect of the phase out of the ETI and the phase in of this new deduction to result in a decrease in the effective tax rate for fiscal years 2005 and 2006 of approximately .3 percentage point, based on current earnings levels. In the long term, the Company expects that the new deduction will result in a decrease of the annual effective tax rate by approximately one percentage point based on current earnings levels. The American Jobs Creation Act of 2004 also 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.

In December 2004, the FASB issued FASB Staff Position 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’ (FSP 109-1). Under the guidance of FSP 109-1, the deduction will be treated as a “special deduction” as described in Statement of Financial Accounting Standards No. 109, ‘Accounting for Income Taxes’ (FAS 109). As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the period in which the deduction is claimed on the Company’s tax return.

In December 2004, the FASB issued FASB Staff Position 109-2, ‘Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004’ (FSP 109-2). Under the guidance of FSP 109-2, an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the American Jobs Creation Act of 2004 on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FAS 109. The deduction is subject to a number of limitations. The

28

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

Company has not yet decided whether, or to what extent, foreign earnings will be repatriated. Based on its analysis to date, however, it is possible that the Company may repatriate some amount between $0 to $100 million with the respective tax liability ranging from $0 to $10 million. The Company expects to be in a position to finalize its assessment by June 30, 2005.

In December 2004, the FASB issued a revision to Statement of Financial Accounting Standards No. 123, ‘Share-Based Payment’ (FAS 123R), which requires companies to expense the value of employee stock options and similar awards. Under FAS 123R, share-based payment awards result in a cost that will be measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest. FAS 123R is effective for interim and annual periods beginning after June 15, 2005. The Company is planning to use the “modified prospective” transition method, which does not require restating previous periods’ results. No additional compensation expense would be recorded for any vested awards outstanding as of the effective date. As the Company does not expect to have any unvested awards that would be affected by FAS 123R outstanding as of the effective date, the adoption of FAS 123R will not have a material effect on the Company’s Consolidated Financial Statements for 2005. Although the Company continues to reevaluate the number of stock options to be granted each year, based on its current expectations, the Company expects that earnings per diluted share will decrease by approximately $.04 in 2006 and annually thereafter. The historical impact on net income and earnings per share if stock options would have been expensed is set forth in Note 11 to the Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Information regarding market risk is provided under the caption “Risk Management” of Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 20 and 21 of this Annual Report on Form 10-K.

Item 8. Financial Statements and Supplementary Data

The Consolidated Financial Statements and Notes to the Consolidated Financial Statements are provided on pages F-1 through F-36 of this report. Selected quarterly financial data is provided in Note 19 to the Consolidated Financial Statements included in this report.

29

Report of Independent Registered Public Accounting Firm

To the Shareholders and Directors of Sonoco Products Company:

We have completed an integrated audit of Sonoco Products Company’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Sonoco Products Company and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the 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), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the 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 the 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 opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting 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. An audit of internal control over financial reporting includes 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 consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.

F-1

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.

PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 1, 2005

F-2

CONSOLIDATED BALANCE SHEETS
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

The Notes beginning on page F-7 are an integral part of these financial statements.

F-3

CONSOLIDATED STATEMENTS OF INCOME
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

The Notes beginning on page F-7 are an integral part of these financial statements.

F-4

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

The Notes beginning on page F-7 are an integral part of these financial statements.

F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS
SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES

The Notes beginning on page F-7 are an integral part of these financial statements.

F-6

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

The following notes are an integral part of the Consolidated Financial Statements. The accounting principles followed by the Company appear in bold type.

1. Basis of Presentation

The Consolidated Financial Statements include the accounts of Sonoco Products Company and its majority-owned subsidiaries (the “Company” or “Sonoco”) after elimination of intercompany accounts and transactions. Investments in affiliated companies in which the Company owns 20% to 50% and is able to exercise significant influence, but not control, are accounted for by the equity method of accounting (equity investments). Income applicable to equity investments is reflected as “Equity in earnings of affiliates/minority interest in subsidiaries” in the Consolidated Statements of Income. Investments related to equity in affiliates are included in “Other Assets” in the Company’s Consolidated Balance Sheets and totaled $110,829 and $100,427 at December 31, 2004 and 2003, respectively.

Investments in affiliated companies that were accounted for by the equity method of accounting at December 31, 2004, are as follows:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In accordance with US GAAP, the Company records revenue when title and risk of ownership pass to the customer and when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price to the customer is fixed or determinable, and when collectibility is reasonably assured. Certain judgments, such as provisions for estimates of sales returns and allowances, may affect the application of the Company’s revenue policy and, therefore, the results of operations in its Consolidated Financial Statements. Shipping and handling expenses are included in “Cost of sales,” and freight charged to customers is included in “Net sales” in the Company’s Consolidated Statements of Income.

The Company’s trade accounts receivable are non-interest bearing and are recorded at the invoiced amounts. The allowance for doubtful accounts represents the Company’s best estimate of the amount of probable credit losses in existing accounts receivable. Provisions are made to the allowance for doubtful accounts at such time that collection of all or part of a trade account receivable is in question. The allowance for doubtful accounts is monitored on a regular basis and adjustments are made as needed to ensure that the account properly reflects the Company’s

F-7

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

best estimate of uncollectible trade accounts receivable. Trade accounts receivable balances that are more than 180 days past due are generally 100% provided for in the allowance for doubtful accounts. Account balances are charged off against the allowance for doubtful accounts when the Company determines that it is probable that the receivable will not be recovered.

2. Acquisitions/Dispositions/Joint Ventures

In May 2004, the Company acquired CorrFlex Graphics, LLC (“CorrFlex”), one of the nation’s largest point-of-purchase display companies. The acquired business, which is known as Sonoco CorrFlex, LLC, is reflected in the Packaging Services segment. As the acquisition of CorrFlex was considered material to the Company’s financial statements, unaudited pro forma combined historical results, as if CorrFlex had been acquired at the beginning of fiscal 2002, 2003 and 2004, are provided in the table below:

The pro forma results include amortization of intangibles and interest expense on debt assumed to finance the purchase. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of each period presented, nor are they necessarily indicative of future consolidated results.

The following table summarizes the estimated fair value of assets acquired (net of cash) and liabilities assumed at the date of acquisition:

Intangible assets acquired in conjunction with the Company’s purchase of CorrFlex consisted primarily of customer lists. The Company has allocated $31,100 of the purchase price to these intangible assets, which have a weighted-average amortization period of approximately 15 years.

The $146,887 of goodwill associated with this acquisition is expected to be deductible for tax purposes.

In addition to CorrFlex, the Company completed eight acquisitions during 2004, with an aggregate cost of approximately $113,000. This amount included cash, assumption of debt and contribution of assets. In connection with these acquisitions, the Company recorded fair value of identifiable intangibles of approximately $20,000, goodwill of approximately $31,000 and net tangible assets of approximately $62,000. Acquisitions in the Company’s Engineered Carriers and Paper segment included engineered carrier manufacturers in Australia, China and the United States along with the formation of a joint venture as described below. Acquisitions in the Company’s Consumer Packaging segment included a composite can manufacturer in Australia, a manufacturer of rotogravure cylinders in Canada and the remaining ownership interest in a manufacturer of rotogravure cylinders in Charlotte, N.C. The Company also acquired certain assets of a wooden reel refurbisher in Alabama, which are classified as components of All Other Sonoco.

F-8

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

In the fourth quarter of 2004, the Company completed a business combination with Ahlstrom Corporation, Helsinki, Finland (“Ahlstrom”), to combine each of the companies’ respective European paper-based tube/core and coreboard operations into a joint venture that will operate under the name Sonoco-Alcore S.a.r.l. The Company contributed ownership positions in 25 tube and core plants and five paper mills to Sonoco-Alcore S.a.r.l. and holds a 64.5% interest in the joint venture. Ahlstrom, a leader in high-performance fiber-based materials serving niche markets worldwide, contributed 14 tube and core plants and one paper mill to Sonoco-Alcore S.a.r.l. and holds a 35.5% interest in the joint venture. The Company has accounted for this transaction as an acquisition and, therefore, consolidates the results of the joint venture and reports Ahlstrom’s minority interest as such in its financial statements.

The Company completed four acquisitions during 2003, with an aggregate cost of approximately $11,077 in cash, assumption of debt, relief of notes receivable and issuance of common stock. In connection with these acquisitions, the Company recorded fair value of identified intangibles of $3,150, goodwill of $2,897 and other net tangible assets of $5,030. Acquisitions in the Company’s Engineered Carriers and Paper segment included an engineered carriers manufacturer in Australia and a recovered paper operation in Savannah, Ga. The Company also acquired certain assets of a wooden reel manufacturer in Canada and the United States, which are classified as components of All Other Sonoco. In addition, the Company increased its ownership interest in a manufacturer of rotogravure cylinders in Charlotte, N.C., in the Company’s Consumer Packaging segment.

During 2003, the Company decided to divest itself of the High Density Film business in order to redirect the value of those assets to primary growth vehicles that will enhance the opportunity to increase total returns to shareholders and significantly reduce the Company’s exposure to highly cyclical resin markets. In December 2003, the Company completed this divestiture by selling the business to Hilex Poly Co., LLC, of Los Angeles, Calif., for a price of approximately $118,800, including approximately $80,800 in cash; $28,000 in subordinated notes bearing a 4.95% interest rate maturing in 10 years; and, a $10,000 nonvoting cumulative preferred instrument yielding 10%. This transaction resulted in a gain of $63,112 ($49,433 after tax). Operating results of this business have been presented for all periods as “Income from discontinued operations, net of income taxes” in the Company’s Consolidated Statements of Income.

The Company completed three acquisitions during 2002, with an aggregate cost of approximately $8,500 in cash. In connection with these acquisitions, the Company recorded fair value of identified intangibles of $6,025, goodwill of $1,725 and other net tangible assets of $750. Acquisitions in the Company’s Engineered Carriers and Paper segment included certain assets from Republic Paperboard Company, LLC, and the related Republic Resource Control, LLC. The Company also acquired a plywood reel operation in Sherman, Texas, and a nailed wooden reel operation in Bonham, Texas, both of which are classified as components of All Other Sonoco.

The Company has accounted for all of its acquisitions as purchases and, accordingly, has included their results of operations in consolidated net income from the date of acquisition.

3. Discontinued Operations

The Company accounts for discontinued operations in accordance with Statement of Financial Accounting Standards No. 144, ‘Accounting for the Impairment or Disposal of Long-Lived Assets’ (FAS 144). Accordingly, the results of operations of a business component are reported in discontinued operations when the component has either been disposed of or is classified as held for sale and the operations and cash flows of the component have been or will be eliminated and the Company will not have any significant continuing involvement in the operations of the component.

F-9

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

Income from discontinued operations for 2003 and 2002 represents the results of operations of the Company’s High Density Film business, which was sold in December 2003. See Note 2 for a discussion of this disposition.

The following table sets forth the operating results for the business unit, which was previously reported in the Company’s Consumer Packaging segment:

No interest expense or income was allocated to this business unit.

The Company has no continuing involvement in the management or operations of the divested business.

4. Restructuring Programs

The Company accounts for restructuring charges in accordance with Statement of Financial Accounting Standards No. 146, ‘Accounting for Costs Associated with Exit or Disposal Activities’ (FAS 146). Restructuring plans that were in existence prior to the effective date of FAS 146 are accounted for in accordance with Emerging Issues Task Force Issue No. 94 –3, ‘Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (Including Certain Costs Incurred in Restructuring’ (EITF 94-3). The major difference between EITF 94-3 and FAS 146 is the timing of recognizing the liability for costs associated with an exit or disposal activity. Under EITF 94-3 the liability is recognized when an enterprise’s management commits to an exit plan, whereas under FAS 146, the liability is recognized when exit costs are incurred.

In August 2003, the Company announced general plans to reduce its overall cost structure by $54,000 pretax by realigning and centralizing a number of staff functions and eliminating excess plant capacity. Pursuant to these plans, the Company has initiated or completed 16 plant closings and has terminated approximately 910 employees. As of December 31, 2004, the Company had incurred cumulative charges, net of adjustments, of approximately $73,090 pretax associated with these activities. Of this amount, $48,382 was related to the Engineered Carriers and Paper segment, $16,254 was related to the Consumer Packaging segment, $333 was attributed to the Packaging Services segment, $2,814 was related to All Other Sonoco, and $5,307 was associated with Corporate. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $48,322, asset impairment charges of $14,409 and other exit costs of $10,359. The Company expects to recognize an additional cost of approximately $4,245 pretax in the future associated with these activities, which is comprised of approximately $768 in severance and termination benefits and $3,477 in other exit costs. Of this amount, approximately $2,051 is related to the Engineered Carriers and Paper segment and approximately $2,194 is related to the Consumer Packaging segment. As part of the target to reduce its cost structure by $54,000, the Company expects to announce, in 2005, the closing of up to five plants. The costs associated with these future plant closings have not yet been determined. In conjunction with the Company’s review of its restructuring accrual in the second quarter of 2004, it was determined that one of the plants that had originally been

F-10

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

identified to be closed pursuant to these plans would not be closed due to changes in certain factors. In response to this determination, the Company reduced its restructuring accrual for the Consumer Packaging segment, which resulted in a credit to the restructuring accrual of approximately $900 in 2004.

During 2004, the Company recognized restructuring charges, net of adjustments, of $18,982 ($16,154 after tax). Included in this amount, is $2,200 in restructuring charges, which resulted from a correction to previously reported financial statements at the Company’s wholly owned subsidiary in Spain. Of the restructuring charges recognized during 2004, $14,752 was attributed to the Engineered Carriers and Paper segment, $5,261 was related to the Consumer Packaging segment, $1,018 was related to All Other Sonoco and $(2,049) was associated with Corporate. The Corporate credit is an adjustment in severance relating to the restructuring plan announced in August 2003. None of these charges has been allocated to the segments’ operating results. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $6,545, asset impairment charges of $6,153 and other exit costs of $6,284, primarily associated with lease termination, pension curtailment and other miscellaneous plant closing costs.

During 2004, the Company also recorded non-cash income in the amount of $1,778 after tax in order to reflect Ahlstrom’s portion of restructuring costs that were charged to expense. This income, which resulted from the expected closure of certain plants that the Company contributed to Sonoco-Alcore S.a.r.l., is included in “Equity in earnings of affiliates/minority interest in subsidiaries” in the Company’s Consolidated Statements of Income.

During 2003, the Company recognized restructuring charges, net of adjustments, of $50,056 ($35,329 after tax). Of these charges, $31,413 was attributed to the Engineered Carriers and Paper segment, $9,469 was related to the Consumer Packaging segment, $335 was attributed to the Packaging Services segment, $1,806 was related to All Other Sonoco and $7,033 was associated with Corporate. None of these charges has been allocated to the segments’ operating results. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $37,733, asset impairment charges of $8,381 and other exit costs of $3,942, primarily associated with lease termination and other miscellaneous plant closing costs. Additionally, the Company’s High Density Film business, which was divested in 2003, incurred restructuring charges of $200 pretax ($128 after tax), which are included in “Income from discontinued operations” on the Company’s Consolidated Statements of Income.

During 2003, the Company also recorded restructuring charges of $1,455 after tax related to affiliates/minority interest in subsidiaries. The restructuring charges are included in “Equity in earnings of affiliates/minority interest in subsidiaries” in the Company’s Consolidated Statements of Income.

During 2002, the Company recognized restructuring charges, net of adjustments, of $10,409 ($6,663 after tax). Additionally, the Company’s High Density Film business, which was divested in 2003, incurred restructuring charges of $2,238 pretax ($1,432 after tax), which are included in “Income from discontinued operations” on the Company’s Consolidated Statements of Income. The 2002 restructuring charges, including the High Density Film business charges, were primarily related to three U.S. plant closings in the Consumer Packaging segment, one U.S. plant closing in the Engineered Carriers and Paper segment, one plant closing in All Other Sonoco and severance costs associated with plant consolidations in Europe. These restructuring charges, net of adjustments, consisted of severance and termination benefits of $10,532, asset impairment charges of $360 and other exit costs of $1,755, consisting of building lease termination charges and other miscellaneous costs.

The following table sets forth the activity in the restructuring accrual included in “Accrued expenses and other” on the Company’s Consolidated Balance Sheets. Restructuring charges are included in “Restructuring charges” in the Consolidated Statements of Income, except for the restructuring charges

F-11

SONOCO PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)

applicable to the High Density Film business and equity method investments, which are included in “Income from discontinued operations” and “Equity in earnings of affiliates/minority interest in subsidiaries,” respectively. In accordance with the agreement of sale for the High Density Film business, the liability associated with the restructuring has been retained by the Company and is, therefore, included in the table below: