(FORTUNE Magazine) – The last time Wal-Mart announced a stock split, in April 1999, Warren Buffett decided to buy 100 million shares of the retail giant. But after accumulating five million shares, then trading at about $24, Buffett felt the price had moved too high, and he stopped buying. In the years since, Wal-Mart's stock has climbed as high as $70, and it currently hovers around $50. "That one cost me about $8 billion," says Buffett, laughing. "Talk about your least admired decisions."

When it came to casting his vote this year for the most admired company in America, Buffett chose Wal-Mart, even though his own company, Berkshire Hathaway, was a contender for the top spot. "[Wal-Mart] is the largest company around, and it hasn't lost a bit of the dynamism that it had back when Sam [Walton] started it," says Buffett. "I think that's enormously impressive."

Buffett's admiration for the $244 billion Arkansas retailer puts him in good company. In FORTUNE's annual poll of 10,000 executives, directors, and analysts, Wal-Mart has toppled General Electric as the most admired company in America. That marks the first time in our survey's 21-year history that the nation's largest company is also its most admired. Meanwhile GE, which had led the list for five straight years, slipped to No. 5. Home Depot, Citigroup, and Intel fell off altogether, supplanted by Dell Computer (No. 4), newbie Starbucks (No. 9), and Procter & Gamble (No. 10). Rounding out the top ten are returnees Southwest Airlines (No. 2), Berkshire Hathaway (No. 3), Johnson & Johnson (No. 6), Microsoft (No. 7), and FedEx (No. 8).

The planting of Wal-Mart's flag atop yet another summit (see previous story) caps a year in which the company seemed to ignore both the economic slowdown and the swirling corporate scandals. It is above all the triumph of Sam Walton, who, 11 years after his death, continues to be the most powerful man in retailing. His self-perpetuating creation grew an astonishing $25 billion last year--nearly half of Wal-Mart's total revenues when Walton died--driven by a unique culture that could largely be reduced to the question "What Would Sam Do?" "It is as though Sam Walton and his genius is walking the aisles of these stores each and every day," says DreamWorks' Jeffrey Katzenberg.

Nor does the company show any signs of faltering under current CEO Lee Scott. Invited to speak at one of Wal-Mart's 7 A.M. Saturday morning meetings--yes, that's 7 A.M. Saturday--Buffett was planning to discuss the dangers of complacency. That is, until everyone in attendance demonstrated enthusiasm by standing on the seats and cheering. "I thought, Whoops, there goes that speech," he says.

By contrast, after a decade-long stretch in the stratosphere, former No. 1 GE returned to earth in 2002. A cyclical downturn in its power-generation and jet-engine divisions, along with mounting losses in its reinsurance business, reduced the conglomerate's customary double-digit earnings growth to a very un-GE-like 3%. Wall Street's impatience with opaque financial statements after the Enron scandal led to considerable criticism about GE's accounting. (Enron, unsurprisingly, is now near the very bottom of the Most Admired barrel; see the detailed industry lists in the foldout that follows this story.) As a result, GE's once-bulletproof stock fell 41%. Then there were those embarrassing revelations about GE's former CEO Jack Welch. Disclosures of his extramarital affair and his gargantuan retirement package reflected poorly on the company.

Given all the challenges and distractions swirling around GE, it is a testament to the steady hand of CEO Jeffrey Immelt that the company remains among the ten most admired, scoring a solid No. 5. (It was even higher--No. 2--on the international list; see box.) "If you are going to bet on GE for the future, you are going to bet on their leadership," says Noel Tichy, a business professor at the University of Michigan who once ran GE's renowned management training school in Crotonville, N.Y. "I still think they have the best leadership team and the best bench strength of any company in the world."

The three companies ousted from this year's ten most admired list have also taken hits. Chipmaker Intel, facing the worst slump in the history of the PC industry, earned $3.1 billion last year--ahead of 2001 but down 70% from 2000. The company's shares have declined 80% from their 2000 high of nearly $75. At Home Depot, whose sizzling growth has slowed, the stock lost 52% of its value in 2002, the largest drop of any company on the Dow. In January, Home Depot announced that its same-store sales--a key measure for retailers--were off 10% in the last quarter of 2002, and it lowered its earnings forecasts for the coming year.

Then there's Citigroup. "In the past, it's pretty clear that Citigroup's stock traded at a premium as a result of the reputation of its management, particularly [CEO] Sandy Weill," says A.G. Edwards banking analyst David Stumpf. But that reputation was tarnished when the company was fined $400 million last year after being implicated in the industrywide scandal over conflicts of interest between investment banking and research divisions. Then Weill made headlines for allegedly helping the children of his star telecom analyst, Jack Grubman, get into an elite Manhattan preschool in exchange for a positive research report. (Weill declined to comment.) The stock fell 25% in 2002.

But amid the doom, several companies shone, mostly by holding up better than their rivals during tough economic times. The total return of the ten Most Admired Companies in 2002 was --8.63%, more than 13% higher than the total return of the S&P 500. For example, in a devastating year for the airline industry--both US Airways and United filed for Chapter 11 bankruptcy protection--No. 2 Southwest had earnings of $241 million, its 30th consecutive year of profitability.

The top ten won the business world's regard, too, by refocusing attention where it counts the most: on customers and employees. "Over the last half of the 1990s, we were all a little bit too shareholder focused, too growth-at-any-cost focused," says A.G. Lafley, chief executive of No. 10 Procter & Gamble, which rejoined the list after a five-year absence. "I tried to get people to flip that around. If we create brands that make a difference to our customers and focus on the fundamentals, ultimately shareholder growth will take care of itself." When Lafley took over nearly three years ago, the company had spent millions chasing new products while neglecting brands like Tide, Crest, and Pampers. Lafley turned his attention to its 12 billion-dollar brands. P&G's stock has since soared 60%, to $85, from a low of $53 in 2000.

For further inspiration, look at No. 9 Starbucks, which is making its debut on the Most Admired list. Despite frequent predictions that the ubiquitous brand has reached its saturation point--6,300 stores and counting--Starbucks continues to grow its top and bottom lines at better than 20% per year. "There has been a lot of doubt that a coffee company could be developed in a way that would provide ongoing growth," says Merrill Lynch analyst Scott Waltman. "But Starbucks continues to prove the skeptics wrong."

Even more impressive, perhaps, is that same-store sales increased by 6% at a time when the company was opening three new locations a day. Howard Schultz, Starbucks' chairman, attributes his company's success to its ability to maintain a level of intimacy. "Despite the fact that we are large in scale and ubiquitous," says Schultz, "the relationships we have built and maintained with our people and our customers are defined by the experience they have with their particular store." Schultz's sentiments seem to be shared by his customers: Last year they visited Starbucks an average of 18 times per month, making it the most frequented retailer in the country.

No. 4 Dell, which fell off the list in 2002, returned this year by sidestepping the maelstrom that has engulfed most of its computer-maker rivals. President and COO Kevin Rollins attributes Dell's resurgence to a year spent on the basics: ensuring that customers and employees are happy. "Two or three years ago we noticed that our performance was really slacking off," says Rollins. "We had to return to the fundamentals and refocus our people around these goals." In the clearest sign of customer satisfaction, Dell's third-quarter sales increased 22% over the same period last year, and the company expects to report a 40% increase for the fourth quarter. As for employees, more than 80% of those who responded to Dell's quarterly survey said management was doing a good job positioning the company for the future. "When you get 38,000 people singing the same song," says Rollins, "it makes beautiful music."

The top ten

1 Wal-Mart 2 Southwest Airlines 3 Berkshire Hathaway 4 Dell Computer 5 General Electric 6 Johnson & Johnson 7 Microsoft 8 FedEx 9 Starbucks 10 Procter & Gamble

Top 10 over time

It's not so easy to keep the business world's esteem over time. This chart shows the fate of the 19 companies (this year's top ten in bold) that have been in the top ten over the past five years.

1999

1 General Electric 2 Coca-Cola 3 Microsoft 4 Dell Computer 5 Berkshire Hathaway 6 Wal-Mart 7 Southwest 8 Intel 9 Merch 10 Disney

2000

1 General Electric 2 Microsoft 3 Dell Computer 4 Cisco 5 Wal-Mart 6 Southwest 7 Berkshire Hathaway 8 Intel 9 Home Depot 10 Lucent

2001

1 General Electric 2 Cisco 3 Wal-Mart 4 Southwest 5 Microsoft 6 Home Depot 7 Berkshire Hathaway 8 Schwab 9 Intel 10 Dell Computer

2002

1 General Electric 2 Southwest 3 Wal-Mart 4 Microsoft 5 Berkshire Hathaway 6 Home Depot 7 Johnson & Johnson 8 FedEx 9 Citigroup 10 Intel

2003

1 Wal-Mart 2 Southwest 3 Berkshire Hathaway 4 Dell Computer 5 General Electric 6 Johnson & Johnson 7 Microsoft 8 FedEx 9 Starbucks 10 Procter & Gamble

Eight key attributes of reputation

To arrive at each company's score on the industry rankings (see foldout), we averaged the scores of these eight criteria. Here are the highest in each.

Social responsibility

1 Alexander & Baldwin 2 Johnson & Johnson 3 American Express

Innovation

1 PepsiCo 2 Nike 3 Medtronic

Long-term investment value

1 Medtronic 2 Cardinal Health 3 Cintas

Use of corporate assets

1 Berkshire Hathaway 2 Cintas 3 Philip Morris*

Employee talent

1 General Electric 2 American Express 3 Philip Morris*

Financial soundness

1 Microsoft 2 Berkshire Hathaway 3 Philip Morris*

Quality of products/services

1 Philip Morris* 2 Medtronic 3 Procter & Gamble

Quality of management

1 Philip Morris* 2 Berkshire Hathaway 3 General Electric

*Now called Altria.

THE HAY GROUP, which has conducted the research for the Most Admired Companies list since 1997, is a global human resources consulting firm with 73 offices in 38 countries. For additional information about Hay's services, go to www.haygroup.com. For more Most Admired survey results and analysis, call 212-522-5342 and ask about the FORTUNE Corporate Reputation Report for your industry. Also, see www.fortune.com/mostadmired.