10-K 1 ek910724.htm FORM 10-K

PAGE 1 of 173 pages

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the year ended December 31, 2004 or

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________ to ________

Commission File Number 1-87

EASTMAN KODAK COMPANY
(Exact name of registrant as specified in its charter)

NEW JERSEY		16-0417150
(State of incorporation)		(IRS Employer Identification No.)

343 STATE STREET, ROCHESTER, NEW YORK		14650
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 585-724-4000

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

Title of each class		Name of each exchange on which registered

Common Stock, $2.50 par value		New York Stock Exchange

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, and (2) has been subject to such filing requirements for the past 90 days.
Yes x 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. o

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

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The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2004, was approximately $7.7 billion. The registrant has no non-voting common stock.

The number of shares outstanding of the registrant’s common stock as of March 31, 2005 was 287,093,986 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

PART III OF FORM 10-K

The following items in Part III of this Form 10-K incorporate by reference information from the 2005 Annual Meeting and Proxy Statement:

Item 10 -	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Item 11 -	EXECUTIVE COMPENSATION

Item 12 -	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Item 13 -	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Item 14 -	PRINCIPAL AUDITOR FEES AND SERVICES

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PART I

ITEM 1. BUSINESS

Kodak is the leader in helping people take, share, print and view images – for memories, for information, for entertainment. With sales of $13.5 billion in 2004, the Company is committed to a digitally oriented growth strategy focused on the following businesses: Health -- supplying the medical and dental industries with traditional and digital imaging-information products and services, as well as healthcare IT solutions and services; Graphic Communications - offering on-demand color and black and white printing, wide-format inkjet printing, high-speed, high-volume continuous inkjet printing, as well as document scanning, archiving and multi-vendor IT services; Digital & Film Imaging Systems - providing consumers, professionals and cinematographers with digital and traditional products and services; and Display & Components - which designs and manufactures state-of-the-art organic light-emitting diode displays as well as other specialty materials, and delivers imaging sensors to original equipment manufacturers.

RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

The Company restated its consolidated financial statements as of and for the year ended December 31, 2003. In addition, the Company restated its quarterly consolidated financial statements for each of the quarterly periods in 2003 and for the first three quarters of 2004. The restatement reflects adjustments to correct errors in the Company’s accounting for income taxes, accounting for pensions and other postretirement benefits as well as other miscellaneous adjustments. The restatement resulted in the Company adjusting its previously reported 2003 net income of $265 million ($.92 per share) to net income of $253 million ($.88 per share). The nature and impact of these adjustments are described in Note 1: “Significant Accounting Policies and Restatement.” Also see Note 24: “Quarterly Sales and Earnings Data - Unaudited” for the impact of these adjustments on each of the quarterly periods.

REPORTABLE SEGMENTS

As of and for the year ended December 31, 2004, the Company reported financial information for four reportable segments (Digital & Film Imaging Systems, Health, Commercial Imaging, and Graphic Communications). The balance of the Company’s operations, which individually and in the aggregate do not meet the criteria of a reportable segment, are reported in All Other. However, in September of 2004, the Company announced the realignment of its operations to accelerate growth in the commercial, consumer and health markets. In connection with the realignment, the Company’s new reporting structure will be implemented beginning in the first quarter of 2005 as outlined below:

Digital & Film Imaging Systems (D&FIS) Segment: The D&FIS segment comprises the same products and services as the current D&FIS segment, with the addition of aerial and industrial films. This segment provides consumers, professionals and cinematographers with digital and traditional products and services.

Health Segment: There were no changes to the Health segment. This segment supplies the healthcare industry with traditional and digital image capture and output products and services.

Graphic Communications Segment: As of January 1, 2005, the Graphic Communications segment consists of Encad, Inc., a maker of wide-format inkjet printers, inks and media; Kodak Versamark, Inc., a world leader in high-speed, 100% variable data printing; and NexPress Solutions, Inc., a leader in on-demand digital color and monochrome image printing systems. Kodak’s Document Products and Services organization, which includes market-leading production and desktop document scanners, microfilm, worldwide service and support and business process services operations, is also part of this segment, along with Kodak’s 50 percent interest in Kodak Polychrome Graphics LLC (KPG), a joint venture with Sun Chemical.

The Graphic Communications segment serves a variety of customers in the in-plant, data center, commercial printing and digital service bureau markets with a range of equipment that spans large-format inkjet printing and digital monochrome printing to on-demand digital image-rich color printing and transactional communications.

On January 12, 2005, the Company announced that it had entered into a Redemption Agreement with Sun Chemical Corporation and Sun Chemical Group B.V. (collectively, “Sun”), pursuant to which the parties have agreed to consummate certain transactions that will result in Kodak owning 100% of the equity interests in Kodak Polychrome Graphics LLC and Kodak Polychrome Graphics Company Ltd (KPG). The Company completed its acquisition of KPG on April 1, 2005.

On January 31, 2005, the Company announced that it has entered into a definitive agreement to acquire all of the outstanding common shares of Creo Inc., a premier supplier of prepress systems used by commercial printers worldwide. The closing of the transactions contemplated by the Agreement is scheduled to take place three business days following the satisfaction or waiver of the closing conditions. Either party may terminate the Agreement if the closing does not occur on or before September 30, 2005.

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All Other: All Other is composed of Kodak’s display and components business for image sensors, and other small, miscellaneous businesses. It also includes development initiatives in consumer inkjet technologies. These businesses offer imaging sensors to original equipment manufacturers (OEMs) and other specialty materials including organic light emitting diode (OLED) products to commercial customers.

In 2003, Kodak announced a comprehensive strategy to be implemented through 2006 to complete its transformation as the leader of the traditional photographic industry to a leadership position in emerging digital imaging markets.

Solid progress was achieved during 2004 in each area of this strategy. Kodak holds a leading position in key digital product categories where we participate.

For 2005, the Company’s strategy has been reaffirmed to include the following priorities:

-	Drive digital revenue growth
-	Astutely manage our traditional businesses to stay ahead of market realities, and meet earnings goals
-	Effectively execute the cost structure changes demanded by our transformation
-	Relentlessly control costs associated with every aspect of our business
-	Maintain excellence in delivering customer-centric innovations and imaging solutions with the industry’s highest quality and focused - as always - on ease of use

By the end of 2005, Kodak expects to have achieved a level of digital revenues that exceeds traditional revenues and a balanced portfolio with three profitably growing digital segments and significant investments in new technologies.

As previously mentioned, the realignment and the new reporting structure are effective for the first quarter of 2005. Accordingly, the following business discussion is based on the four reportable segments and All Other as they were structured as of and for the year ended December 31, 2004. Kodak’s sales, earnings and assets by reportable segment for these four reportable segments and All Other for the past three years are shown in Note 23, “Segment Information.”

DIGITAL & FILM IMAGING SYSTEMS (D&FIS) SEGMENT

Sales from continuing operations of the D&FIS segment for 2004, 2003 and 2002 were (in millions) $9,186, $9,248, and $9,002, respectively.

This segment includes digital and traditional products for consumers, professional photographers and the entertainment industry. This segment combines digital and traditional photography and photographic services in all its forms, including consumer, advanced amateur, professional and motion picture. Kodak manufactures and markets films (consumer, professional and motion picture), photographic papers, processing services, photofinishing equipment, photographic chemicals, and cameras (including one-time-use, traditional and digital). Kodak has also developed products that bridge traditional silver halide and digital products. Products and services include kiosks, printer docks, consumer digital services and inkjet media. Other digitization options have been created to stimulate more printing of images, adding to the consumption of film and paper. These products serve amateur photographers, as well as professional, motion picture and television customers. In addition, Kodak EasyShare gallery (formerly Ofoto.com) has accelerated Kodak’s growth in the online photography market and helped to drive more rapid adoption of digital and online services. Kodak EasyShare gallery, which has 20 million members, offers digital processing of digital images and traditional film, top-quality prints, private online image storage, sharing, editing and creative tools, frames, cards, photo calendars and other merchandise.

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Digital product offerings are replacing some of the traditional film and output products at varying rates. For example, the workflow improvements offered by digital are having relatively more significant effects in the professional markets, while digital is having little impact in the entertainment markets. The future impact of digital substitution on these film markets is difficult to predict due to a number of factors, including the pace of digital technology adoption, the underlying economic strength or weakness in major world markets, household film and media usage following a digital camera purchase, and the timing of digital infrastructure installation. Additionally, digital substitution is happening at varying rates depending on geography. For example, the pace of digital substitution in the consumer film market is more rapid in Japan, followed by the U.S. and Western Europe. For 2005, the Company estimates that consumer film industry volumes could decline worldwide as much as 20% and in the U.S. as much as 30% primarily due to digital substitution.

Marketing and Competition: The key elements of the Company’s strategy with respect to the digital and traditional products and services in this segment include growth in digital capture, expansion of online services and mobile imaging, leadership in professional lab solutions, leadership in distributed output at retail and in the home, and intelligent management of the traditional film and paper products and services.

Traditional products and services for the consumer are sold direct to retailers and through distributors throughout the world. Price competition continues to exist in all marketplaces. To be more cost competitive with its traditional product offerings, the Company is continuing to move manufacturing operations to lower cost markets and to rationalize capacity. As previously outlined, digital product offerings are substituting for some of the traditional film and output products, primarily in the U.S., Japan and Western Europe, as a large number of consumers actively use digital cameras. While this substitution to date has had an impact primarily on the Company’s film and paper sales, and processing services in the U.S., Japan and Western Europe, the Company’s strategy is to partially mitigate this by providing its own digital products, digitization services and output services. The Company continues to realize growth in the sale of sensitized products -- including film and paper -- outside the U.S., particularly in emerging markets including Russia, India and China, where the Company has expanded the number of outlets for Kodak products. To further accelerate the market for photography in China, the Company entered into an agreement with China Lucky Film Corporation in 2003 to work together in this regard. The final cooperative agreement became effective on February 10, 2004, when the Chinese government approved Kodak’s acquisition of 20% of Lucky Film Co. Ltd. The Company also has photofinishing laboratories in many parts of the world and supplies photographic papers and chemicals to other entities that provide photofinishing services. The Company’s primary laboratories provide consumers the opportunity to receive film images in traditional formats or digital form, either through Kodak Picture CD or the Company’s retail online partners.

The Company’s strategies in its consumer digital business are to drive image output and sharing in all forms and make digital easier to use. Consumer digital products, including digital cameras, self-contained printer docks, which use thermal media to print pictures from digital cameras without the need for a personal computer, and inkjet media, are sold direct to retailers or distributors. Products are also available to customers through the Internet via online digital services like Kodak EasyShare gallery. Products such as the Company’s EasyShare digital camera system with the camera docks are intended to simplify digital imaging for consumers and thereby increase the popularity for sharing and printing digital photo files. The Company faces competition from other electronics manufacturers in this market, particularly on price and technological advances. Rapid price declines shortly after product introduction in this environment are common, as producers are continually introducing new models with enhanced capabilities, such as improved resolution and/or optical systems. Kodak EasyShare gallery, the Company’s online printing business, continues to demonstrate strong growth and began the establishment of a customer base in selected overseas markets in 2003. Late in 2003, the Company announced Kodak Mobile Service, which allows consumers with image-enabled mobile phones to store, share and print their images.

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Traditional and digital professional products and services are sold direct to professional photographers and laboratories, or through dealers throughout the world. Although the Company continues to provide better performing and innovative traditional films and papers, the focus has shifted towards new products, systems and solutions focused on improving the digital workflow for professional photographers and laboratories. These solutions range from digital capture devices (digital cameras and scanners) designed to improve the image acquisition or digitalization process, software products designed to enhance and simplify the digital workflow, output devices (thermal printers and digital silver halide writers) designed to produce high quality images, and media (thermal and silver halide) optimized for digital workflows.

Throughout the world, almost all entertainment imaging products are sold direct to studios, laboratories, independent filmmakers, or production companies. Quality and availability are important factors for these products, which are sold in a price-competitive environment. When the entertainment industry adopts digital formats, the Company anticipates that it will face new competitors, including some of its current customers and other electronics manufacturers.

Kodak’s advertising programs actively promote the segment’s products and services in its various markets, and its principal trademarks, trade dress and corporate symbol are widely used and recognized. Kodak is frequently noted by trade and business publications as one of the most recognized and respected brands in the world.

HEALTH SEGMENT

Sales from continuing operations of the Health segment for 2004, 2003 and 2002 were (in millions) $2,686, $2,431, and $2,274, respectively.

Products and services of the Health segment enable healthcare customers (e.g., hospitals, imaging centers, etc.) to capture, process, integrate, archive and display images and information in a variety of forms. These products and services provide intelligent decision support through the entire patient pathway from research to detection to diagnosis to treatment. The Health segment also provides products and services that help customers improve workflow in their facilities, which in turn helps them enhance the quality and productivity of healthcare delivery.

Products of the Health segment include traditional analog medical films, chemicals, and processing equipment. Kodak’s history in traditional analog imaging has made it a leader in this area and has served as the foundation for building its important digital imaging business. The segment provides digital medical imaging and information products, systems and solutions, which are key components of sales and earnings growth. These include laser imagers, digital print films, computed and digital radiography systems, and healthcare information systems (HCIS). The Health segment serves the general radiology market and specialty health markets, including dental, mammography, orthopedics and oncology. The segment also provides molecular imaging for the biotechnology research market.

In October 2003, the Company completed the acquisition of all of the outstanding shares of PracticeWorks, Inc., a leading provider of dental practice management software. In the purchase, Kodak also acquired PracticeWorks’ subsidiary, Trophy Radiologie, S.A., a leading provider of dental digital radiographic imaging systems in Paris, France. This acquisition enables Kodak to offer its customers a full spectrum of dental imaging products and services from traditional film to digital radiography and photography and moved the Health segment into the leading position in the dental practice management and dental radiographic markets.

In November 2003, the Company completed the acquisition of Algotec Systems, Ltd., a leading developer of advanced picture-archiving-and-communications systems (PACS), which is part of HCIS, in a move that improves Kodak’s competitive position in the growing market for PACS, which enable radiology departments worldwide to digitally manage and store medical images and information.

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Marketing and Competition: In the U.S., Canada and Latin America, health imaging consumables and analog equipment are sold through distributors. A significant portion of digital equipment and solutions is sold direct to end users, with the balance sold through distributors and OEMs. In the U.S., individual hospitals or groups of hospitals represented by, as buying agents, group purchasing organizations (GPOs), account for a significant portion of consumables and equipment sales industry-wide. The Health segment has secured long-term contracts with many of the major GPOs and, thus, has positioned itself well against competitors. In Europe, consumables and analog equipment are sold through distributors and value added service providers (VASPs) as well as direct to end users. Hospitals in Europe, which are a mix of private and government-funded types, employ a highly regimented tender process in acquiring medical imaging products. In addition to creating a competitive pricing environment, this process can result in a delay of up to 6 to 18 months between the time the tender is delivered to the hospital and the time the hospital makes a decision on the vendor. Additionally, the government-funded hospitals’ budgets tend to be limited and restricted. Government reimbursement policies often drive the use of particular types of equipment and influence the transition from analog to digital imaging. These policies vary widely among European countries. In Asia and Japan, sales of all products are split between distributors and end users. In Europe, Asia and Japan, consumables and analog equipment are often sold as part of a media/equipment bundle. Digital equipment and solutions are sold direct to end-users and through OEMs in these three geographic areas.

Worldwide, the medical imaging market is crowded with a range of strong competitors. To compete aggressively, Kodak’s Health segment has developed a full portfolio of value-adding products and services. Some competitors offer digital solutions similar to those of Kodak, and other competitors offer similar analog solutions or a mix of analog and digital. Health has a wide range of solutions from analog to digital as well as solutions combining both analog and digital technologies. Moreover, the segment’s portfolio is expanding into new areas, including enterprise information management solutions, thus enabling the segment to offer solutions that combine medical images and information, such as patient reports, into one unified package for medical practitioners. Kodak will continue to innovate products and services to meet the changing needs and preferences of the marketplace.

COMMERCIAL IMAGING SEGMENT

Sales from continuing operations of the Commercial Imaging segment for 2004, 2003 and 2002 were (in millions) $803, $791, and $791, respectively.

As of and for the year ended December 31, 2004, the Commercial Imaging segment encompassed Kodak’s expertise in imaging solutions, providing image capture, analysis, printing and archiving. Markets for the segment include industrial, banking and insurance applications. Products include high-speed production document scanners, micrographic peripherals, and aerial, industrial and micrographic films, and optics and optical systems. The Company also provides maintenance and professional services for Kodak and other manufacturers’ products, as well as providing imaging services to customers.

In August 2004, the Company completed the sale of the assets and business of the Remote Sensing Systems operation, including the stock of Kodak’s wholly owned subsidiary, Research Systems, Inc. (collectively known as RSS), to ITT Industries, Inc. The Company’s RSS operation had sales for the period January 1, 2004 through August 13, 2004 of approximately $312 million and sales in 2003 of approximately $424 million. The results of RSS are included in discontinued operations in the Company’s financial statements.

Marketing and Competition: Throughout the world, document imaging products are sold primarily through distributors and value added resellers. The end users of these products include businesses in the banking and insurance sectors. While there is price competition, the Company has been able to maintain price by adding more attractive features to its products through technological advances. The Company has developed a wide range of digital products to meet the needs of customers who are interested in converting from traditional analog technology to new enterprise digital workflow solutions. Maintenance and professional services for Kodak and other manufacturer’s products are sold either through the product distribution channel or directly to the end users of equipment. The Company provides imaging services in Asia which are sold directly to its customers and include both commercial and government customers.

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GRAPHIC COMMUNICATIONS

Sales from continuing operations comprising Graphic Communications for 2004, 2003 and 2002 were (in millions) $724, $346 and $402, respectively.

As of and for the year ended December 31, 2004, Graphic Communications consists of subsidiaries Encad, Inc., Kodak Versamark, Inc., and NexPress Solutions. Additionally, the segment includes Kodak’s equity interest in Kodak Polychrome Graphics LLC (KPG). Products include high-speed, high-volume continuous inkjet printing systems, digital on-demand color and monochrome printing equipment, wide-format inkjet printers, inks, media and services. These businesses market graphic communications products, inkjet products, and digital color and monochrome printing solutions.

In January 2004, Kodak acquired Scitex Digital Printing, renamed Kodak Versamark. This entity is a wholly owned subsidiary of Kodak focused on high-speed, high-volume printing applications, including those in transaction and industrial market segments. Kodak Versamark provides a full set of high-speed, variable-data inkjet printers, inks, service and other consumables.

In May 2004, Kodak acquired Heidelberger Druckmaschinen AG’s (Heidelberg) 50 percent interest in NexPress Solutions LLC, a 50/50 joint venture of Kodak and Heidelberg that makes high-end, on-demand digital color printing systems, and the equity of Heidelberg Digital LLC, a leading maker of digital black-and-white variable-data printing systems. Kodak also acquired NexPress GmbH, a German subsidiary of Heidelberg that provides engineering and development support, and certain inventory, assets, and employees of Heidelberg’s regional operations or market centers.

KPG is an unconsolidated joint venture between Kodak and Sun Chemical Corporation in which Kodak owns a 50% interest. This joint venture is responsible for the photographic plate business, as well as for marketing Kodak graphic arts film, proofing materials and equipment. The Company’s equity in the income or loss of this interest is reflected in other income (charges), net.

Marketing and Competition: Throughout the world, graphic communications products are sold primarily through a variety of direct and indirect channels. The end users of these products include businesses in the commercial printing, data center, in-plant and digital service provider market segments. While there is price competition, the Company has been able to maintain price by adding more attractive features to its products through technological advances. The Company has developed a wide-range portfolio of digital products to meet the needs of customers who are interested in converting from traditional analog technology to new enterprise digital workflow solutions. Maintenance and professional services for Kodak products are sold either through the product distribution channel or directly to the end users of equipment.

Graphic products, primarily consisting of graphic films and chemistry, are sold directly by the Company to KPG. The growth in digital printing workflows has negatively affected the sale of graphic films. The Company announced its intentions to become more active in digital printing products and services to participate in this growth segment. The acquisitions of Scitex Digital Printing, renamed Kodak Versamark, and the NexPress-related entities were an important step in this direction, as are the planned acquisitions noted above.

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Inkjet products are sold primarily through a two-tiered distribution channel. The Company remains competitive by focusing on developing new ink and media formulations, new printer technologies, new software and training enhancements.

ALL OTHER

Sales from continuing operations comprising All Other for 2004, 2003 and 2002 were (in millions) $118, $93, and $80, respectively.

All Other consists primarily of the Kodak components group, which represents an effort by Kodak to diversify into high-growth product areas that are consistent with the Company’s historical strengths in imaging science. As of and for the year ended December 31, 2004, the Kodak components group was comprised of the imaging sensor solutions business and Kodak display business. Products of this group include imaging sensor solutions and OLED displays.

In September 2004, Kodak completed the purchase of the imaging business of National Semiconductor Corporation, which develops and manufactures complimentary metal oxide semiconductor image sensor (CIS) devices. This acquisition has added resources and technologies that will further strengthen the Company’s ability to design next generation CIS devices that promise to deliver improved image quality with complex on-chip image processing circuitry.

OLED technology, pioneered by Kodak, enables full-color, full-motion flat-panel displays. Kodak has a leading intellectual property position in this field. Unique from traditional liquid crystal displays, OLEDs are self-luminous and do not require backlighting. Their imaging performance, together with extremely fast response time, makes them well suited for video and other image intensive applications.

In 2001, the Company and SANYO Electric Co., Ltd. established a global business venture, the SK Display Corporation, to manufacture OLED displays for consumer devices such as cameras, and portable entertainment devices. Kodak holds a 34% ownership interest and SANYO holds a 66% interest in the business venture.

FINANCIAL INFORMATION BY GEOGRAPHIC AREA

Financial information by geographic area for the past three years is shown in Note 23, “Segment Information.”

RAW MATERIALS

The raw materials used by the Company are many and varied, and are generally available. Silver is one of the essential materials used in the manufacture of films and papers. The Company purchases silver from numerous suppliers under annual agreements or on a spot basis. Raw base paper is an essential material in the manufacture of photographic papers. The Company has contracts to acquire raw base paper from certified photographic paper suppliers during the next several years. Electronic components are prevalent in the Company’s equipment and digital product offerings. The Company has entered into contracts with numerous vendors to supply these components over the next one to two years.

SEASONALITY OF BUSINESS

Sales and earnings of the D&FIS segment are linked to the timing of vacations, holidays and other leisure activities. The digital capture and home printing products have experienced peak sales in the fourth quarter as a result of the December holidays. Sales are normally lowest in the first quarter due to the absence of holidays and fewer people taking vacations during that time. Sales and earnings of traditional products of this segment are normally strongest in the second and third quarter as demand for the products of this segment is high due to heavy vacation activity, and events such as weddings and graduations. During the latter part of the third quarter, demand for the products is high as dealers prepare for the holiday seasons. Demand for photofinishing services is also high during this heavy vacation period.

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With respect to the Health, Commercial Imaging and Graphic Communications segments, the sales of consumable products, which generate the major portion of the earnings of these segments, tend to occur uniformly throughout the year. Sales of the lower margin equipment products in these segments tend to be highest in the fourth quarter as purchases by commercial and healthcare customers are linked to their year-end capital budget process. This pattern is also reflected in the third month of each quarter.

RESEARCH AND DEVELOPMENT

Through the years, Kodak has engaged in extensive and productive efforts in research and development.

Research and development expenditures for the Company’s four reportable segments and All Other for 2004, 2003 and 2002 were as follows:

(in millions)	2004		2003		2002

	(Restated)
D&FIS	$	368	$	481	$	513
Health		208		178		152
Commercial Imaging		13		23		30
Graphic Communications		111		23		29
All Other		154		71		33

Total	$	854	$	776	$	757

The downward trend in research and development expenditures in the D&FIS and Commercial Imaging segments and upward trend in the Health and Graphic Communications segments and All Other reflects the shift in strategic focus from traditional products, such as color negative film and paper and color reversal films, to digital product areas, such as display technology, digital medical imaging, software, and digital printing.

Research and development is headquartered in Rochester, New York. Other U.S. groups are located in Boston, Massachusetts; Dallas, Texas; Oakdale, Minnesota; New Haven, Connecticut; and San Jose and San Diego, California. Outside the U.S., groups are located in England, France, Israel, Germany, Japan, China, Singapore and Canada. These groups work in close cooperation with manufacturing units and marketing organizations to develop new products and applications to serve both existing and new markets.

It has been Kodak’s general practice to protect its investment in research and development and its freedom to use its inventions by obtaining patents. The ownership of these patents contributes to Kodak’s ability to provide leadership products and to generate revenue from licensing. The Company holds portfolios of patents in several areas important to its business, including color negative films, processing and papers; digital cameras; network photo fulfillment; x-ray films, mammography systems, computed radiography, digital radiography, photothermographic technology for high quality dry printing, picture archive and communication systems, radiology information systems and organic light-emitting diodes. Each of these areas is important to existing and emerging business opportunities that bear directly on the Company’s overall business performance.

The Company’s major products are not dependent upon one single, material patent. Rather, the technologies that underlie the Company’s products are supported by an aggregation of patents having various remaining lives and expiration dates. There are no individual patents or group of patents the expiration of which is expected to have a material impact on the Company’s results of operations.

ENVIRONMENTAL PROTECTION

Kodak is subject to various laws and governmental regulations concerning environmental matters. The U.S. federal environmental legislation and state regulatory programs having an impact on Kodak include the Toxic Substances Control Act, the Resource Conservation and Recovery Act (RCRA), the Clean Air Act, the Clean Water Act, the NY State Chemical Bulk Storage Regulations and the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (the Superfund Law).

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It is the Company’s policy to carry out its business activities in a manner consistent with sound health, safety and environmental management practices, and to comply with applicable health, safety and environmental laws and regulations. Kodak continues to engage in a program for environmental protection and control.

Based upon information presently available, future costs associated with environmental compliance are not expected to have a material effect on the Company’s capital expenditures, earnings or competitive position. However, such costs could be material to results of operations in a particular future quarter or year.

Environmental protection is further discussed in the Management Discussion and Analysis of Financial Condition and Results of Operations, and Notes to Financial Statements.

EMPLOYMENT

At the end of 2004, the Company employed approximately 54,800 full time equivalent people, of whom approximately 29,200 full time equivalents were employed in the U.S. The actual number of employees may be greater because some individuals work part time.

The current employment amounts are expected to decline significantly (before acquisitions) over the next few years as a result of the headcount reductions yet to be made under the 2004-2006 cost reduction program, which contemplated a 25 percent reduction in headcount below 2003 levels.

AVAILABLE INFORMATION

The Company files many reports with the Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. These reports, and amendments to these reports, are made available free of charge as soon as reasonably practicable after being electronically filed with or furnished to the SEC. They are available through the Company’s website at www.Kodak.com. To reach the SEC filings, follow the links to Corporate, and then Investor Center. The Company also makes available free of charge through its website, at www.Kodak.com/go/annualreport, its summary annual report to shareholders and proxy statement.

The public may also read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site, at www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

We have included the CEO and CFO certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits to this report. We have also included these certifications with the Form 10-K filed on March 15, 2004. Additionally, we filed with the New York Stock Exchange (NYSE) the CEO certification, dated May 28, 2004, regarding our compliance with the NYSE’s corporate governance listing standards pursuant to Section 303A.12(a) of the listing standards, and indicated that the CEO was not aware of any violations of the listing standards by the Company.

ITEM 2. PROPERTIES

The D&FIS segment of Kodak’s business in the United States is centered in Rochester, New York, where photographic goods are manufactured. Another manufacturing facility in Windsor, Colorado, also produces sensitized photographic goods. Kodak EasyShare gallery’s operations are located in Emeryville, California. D&FIS segment manufacturing facilities outside the United States are located in Brazil, Canada, China, England, France, India, Indonesia, Mexico and Russia. Kodak maintains marketing and distribution facilities in many parts of the world. There are also several photofinishing laboratories located across the United States and certain countries in Europe.

Products in the Health segment are manufactured in the United States, primarily in Rochester, New York; Windsor, Colorado; Oakdale, Minnesota; and White City, Oregon. Manufacturing facilities outside the United States are located in Brazil, China, France, Germany, India, Israel and Mexico.

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Products in the Commercial Imaging segment are manufactured in the United States, primarily in Rochester, New York. Manufacturing facilities outside the United States are located in Brazil, Canada, China, England, Japan and Mexico.

Products in the Graphic Communications segment are manufactured in the United States, primarily in Rochester, New York; Dayton, Ohio; and San Diego, California. Manufacturing facilities outside the United States are located in England, France, Germany, China, Japan and Mexico.

Properties within a country are generally shared by all segments operating within that country.

Regional distribution centers are located in various places within and outside of the United States. The Company owns or leases administrative, manufacturing, marketing and processing facilities in various parts of the world. The leases are for various periods and are generally renewable.

The Company anticipates that its property portfolio will be reduced significantly over the next few years as a result of the 2004-2006 cost reduction program. Under this program, the Company plans to reduce its worldwide facility square footage by approximately one-third.

ITEM 3. LEGAL PROCEEDINGS

On March 8, 2004, the Company filed a complaint against Sony Corporation in federal district court in Rochester, New York, for digital camera patent infringement. Several weeks later, on March 31, 2004, Sony sued the Company for digital camera patent infringement in federal district court in Newark, New Jersey. Sony subsequently filed a second lawsuit against the Company in Newark, New Jersey, alleging infringement of a variety of other Sony patents. The Company filed a counterclaim in the New Jersey action, asserting infringement by Sony of the Company’s kiosk patents. The Company successfully moved to transfer Sony’s New Jersey digital camera patent infringement case to Rochester, New York, and the two digital camera patent infringement cases are now consolidated for purposes of discovery. Based on the current discovery schedule, the Company expects that claims construction hearings in the digital camera cases will take place in 2006. Both the Company and Sony Corporation seek unspecified damages and other relief.

On October 7, 2004, the Company and Sun Microsystems Inc. reached a tentative agreement to settle a lawsuit filed by Kodak on February 11, 2002 in Federal District Court, Western District of New York, for infringement of three Kodak patents covering a software architecture used in Sun’s Java product. The settlement followed an October 1, 2004 verdict in which a federal court jury found that the Kodak patents in issue were valid, that Sun infringed the patents, and that Sun’s affirmative defense was without merit.

On October 12, 2004, a final settlement agreement was signed. Pursuant to the terms of the settlement agreement, Sun paid Kodak $92 million in cash on October 12, 2004.

Kodak provided to Sun a non-exclusive license under the Kodak patents at issue. In addition, Kodak licensed to Sun certain other Kodak patents for existing and future versions of Sun’s Java technology. The other licensed Kodak patents are limited to those Kodak patents infringed on October 12, 2004 by the current version of Sun’s Java technology.

Kodak also released Sun from any past infringement of Kodak’s patents by the Java technology.

The license and the release relative to Java technology extend to Sun’s licensees, customers, developers, suppliers, manufacturers, and distributors.

Sun released Kodak from all counterclaims that it had asserted in the litigation.

The case was dismissed with prejudice.

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In February 2005, Kodak and the New York State Department of Environmental Conservation (“DEC”) negotiated a multimedia Order on Consent in settlement of the following activities by Kodak at its Kodak Park facility in Rochester, New York: (i) all alleged violations of the Clean Water Act and the Resource Conservation and Recovery Act (hazardous waste program); (ii) unauthorized spills and releases under the New York Navigation Law and the Chemical Bulk Storage Program reported to or discovered by the DEC through September 30, 2004; and (iii) deviations or violations under the Clean Air Act reported to the DEC through June 30, 2004 (based on the semi-annual reporting cycle). Kodak completely settled this order of consent for $140,000. Kodak paid $100,000 to the DEC in February 2005. The remaining $40,000 will be paid to the Audubon Society during 2005 to fund, as an Environmental Benefit Project, a Birds-of-Prey Satellite Telemetry Program designed to support, and stimulate public interest in, the resident peregrine falcon and active bald eagle programs in the Rochester, New York area.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to General Instructions G (3) of Form 10-K, the following list is included as an unnumbered item in Part I of this report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders.

			Date First Elected

Name	Age	Positions Held	an Executive Officer	to Present Office

Michael P. Benard	57	Vice President	1994	1994
Robert L. Berman	47	Senior Vice President	2002	2005
Charles S. Brown, Jr.	54	Senior Vice President	2000	2000
Richard G. Brown, Jr.	56	Chief Accounting Officer and Controller	2003	2003
Robert H. Brust	61	Chief Financial Officer and Executive Vice President	2000	2000
Daniel A. Carp	56	Chairman of the Board,
		Chief Executive Officer	1995	2000
Carl E. Gustin, Jr.	53	Senior Vice President	1995	1995
Mary Jane Hellyar	51	Senior Vice President	2005	2004
Kevin J. Hobert	40	Senior Vice President	2005	2005
James T. Langley	54	Senior Vice President	2003	2003
William J. Lloyd	65	Senior Vice President	2005	2005
Bernard Masson	57	Senior Vice President	2002	2002
Daniel T. Meek	53	Senior Vice President	2004	1998
Antonio M. Perez	58	President and Chief Operating Officer	2003	2003
Karen A. Smith-Pilkington	46	Senior Vice President	2002	2002
Gary P. Van Graafeiland	58	General Counsel and Senior Vice President	1992	1992

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Executive officers are elected annually in February.

All of the executive officers have been employed by Kodak in various executive and managerial positions for at least five years, except Mr. Hobert, who joined the Company in 2002; Mr. Masson, who joined the Company on December 12, 2002; Mr. Perez, who joined the Company on April 2, 2003; Mr. Lloyd, who joined the Company in June of 2003; Mr. Langley, who joined the Company on August 18, 2003; and Mr. Richard Brown, Jr., who joined the Company on December 17, 2003.

The executive officers biographies follow:

Michael P. Benard

Michael Benard, Eastman Kodak Company’s Director of Communications & Public Affairs, has worldwide responsibility for internal and external communications, government affairs, community relations, corporate contributions, and management communications.

Mr. Benard joined Kodak in 1986 as a senior speechwriter, and took charge of the speechwriting team in 1987. He progressed through a series of management responsibilities including employee communications, KBTV (Kodak Business TeleVision network), and corporate communications. He was appointed director, Communications & Public Affairs in May 1994 and elected vice president, Eastman Kodak Company in November 1994.

Robert L. Berman

Mr. Berman was appointed to his present position as Director, Human Resources in January 2002 and was elected Senior Vice President, Eastman Kodak Company in February 2005. Prior to this position, Mr. Berman was a Vice President and the Associate Director of Human Resources and the Director and divisional vice president of Human Resources for Global Operations. His responsibility in that role included leadership in the delivery of strategic and operational human resources services to Kodak’s global manufacturing, supply chain and regional infrastructure operations around the world. He has held a variety of key human resources positions for Kodak over his 22 year career, including the Director and divisional vice president of Human Resources for the Consumer Imaging business and the Human Resources Director for Kodak Colorado Division.

Charles S. Brown, Jr.

Mr. Brown began his Kodak career as a process engineer in the Synthetic Chemicals Division in 1973 and served in various technical and supervisory capacities until 1982. In addition, he has served in various managerial positions primarily in manufacturing.

On November 1, 1995 he was named Chief Operating Officer, Consumer Imaging and Vice President, Eastman Kodak Company. His primary responsibilities included Consumer Imaging’s film, paper and camera businesses. Mr. Brown was then named the Assistant Director, Imaging Materials Manufacturing beginning September 1, 1997.

Mr. Brown was named Director, Global Manufacturing and Logistics, and Vice President, Eastman Kodak Company, effective February 1, 1999. In this position, he provided leadership for Kodak’s global operations for film, photographic paper, chemical products and equipment.

On April 14, 2000, Eastman Kodak Company’s Board of Directors elected Mr. Brown a Senior Vice President. In June 2004, Mr. Brown was promoted to Chief Administrative Officer and is responsible for such corporate functions as Health, Safety & Environment, Communications & Public Affairs, Human Resources, Corporate Security, Information Security and the Legal department. He also oversees the company’s international regions.

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Richard G. Brown, Jr.

Richard joined Eastman Kodak Company in December 2003 as Chief Accounting Officer and Controller.

Mr. Brown previously was a partner at Ernst & Young LLP, serving SEC registrants and privately held companies in such industries as consumer products, manufacturing and services. During his 32-year career at Ernst & Young, he had significant experience in dealing with matters governed by the U.S. Securities and Exchange Commission, and participated for the last 15 years of his career there in the firm’s National Accounting and Auditing Control Program.

Robert H. Brust

Mr. Brust was named Chief Financial Officer and Executive Vice President of Eastman Kodak Company, effective January 3, 2000. Prior to joining Kodak, Mr. Brust was Senior Vice President and Chief Financial Officer of Unisys Corporation, a global information services and technology company with $8 billion in revenues, located in Blue Bell, Pennsylvania. He joined Unisys in 1997, where he directed the company’s financial organization, including treasury, control, tax, information systems, mergers and acquisitions, strategy, procurement, and investor relations. He is largely credited for strengthening Unisys’ balance sheet and achieving a significant upgrade in the company’s credit ratings.

Mr. Brust went to Unisys following a distinguished 31-year career at General Electric Co., where he last ran the finance operations of that company’s plastics division as it grew from $900 million in revenues to about $8 billion. He joined General Electric in 1965, working in a variety of financial and financial management positions in businesses as diverse as motors, capacitors, steam turbines and generators, and engineering services. He joined the plastics division in 1983, directing the financial operation of that business through its dramatic period of growth.

Daniel A. Carp

Daniel A. Carp began his Kodak career in 1970 as a statistical analyst and held a variety of increasingly responsible positions in market research, business planning, marketing management and line-of-business management, including general manager of Sales for Kodak Canada and general manager of Consumer Electronics Division.

In 1986, Mr. Carp was named assistant general manager of the Latin American Region. In September 1988, he was elected a vice president and named general manager of that organization. Two years later, Carp moved to London to take up the position of general manager of the European Marketing Companies. He was appointed general manager, European, African, and Middle Eastern Region in October 1991. Mr. Carp was elected executive vice president and named assistant chief operating officer effective November 1, 1995. On January 1, 1997, he was elected president and chief operating officer.

He was elected to the Company’s Board of Directors on December 12, 1997. Before serving in his current position as chairman and chief executive officer, Mr. Carp was president and chief executive officer (from January 1, 2000 through December 8, 2000); chairman, president, and chief executive officer (from December 8, 2000 through April 16, 2001); and chairman and chief executive officer (from April 16, 2001 through January 4, 2002); chairman and chief executive officer and president and chief operating officer (from January 4, 2002 until April 2, 2003).

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Carl E. Gustin, Jr.

Carl Gustin joined Kodak as vice president and general manager of the Digital and Applied Imaging Division in August 1994. In October 1995, he was appointed to his present position as chief marketing officer and senior vice president, Eastman Kodak Company, in addition to his role as acting president and general manager of Digital and Applied Imaging, which he did through 1996.

As chief marketing officer, Mr. Gustin has been breaking new ground in the areas of advertising and marketing in an effort to fuel new market growth while further enhancing and broadening the reach of the brand. His areas of responsibility include: corporate-wide general marketing, internet marketing, customer relationship marketing, presence marketing, corporate branding, new business incubation, multicultural marketing, business research, corporate design, as well as providing leadership and direction for the marketing functions across the Company.

Mary Jane Hellyar

Mary Jane Hellyar joined Eastman Kodak Company in 1982 as a research scientist in the Kodak Research Laboratories. She held a variety of positions within R&D and in 1988 she joined Film Manufacturing as a product engineer for motion picture films. In 1992 Ms. Hellyar was named director of the Chemicals Development Division, responsible for process development of chemical components for Kodak. Following a one-year program at the Sloan School, she joined Consumer Imaging in the Strategic Planning function in 1994. In 1995 Ms. Hellyar was named director of the Color Product Platform, responsible for development and commercialization of color negative films, papers and chemicals. In 1998 she assumed the additional responsibility of R&D manager for the Consumer Imaging Film Business.

Effective May 1999, Ms. Hellyar was named general manager, Consumer Film Business, Consumer Imaging and was elected a corporate vice president.

In October 2001, Ms. Hellyar’s responsibilities were expanded and in 2003 she added responsibilities for professional films in her role as General Manager Film Capture, Digital & Film Imaging Systems. In November 2004, she was named President, Display and Components Group. In January 2005, the Board of Directors elected her a senior vice president.

Kevin J. Hobert

Kevin Hobert was appointed President of Kodak’s Health Group and a senior vice president of the Company in February 2005.

Prior to his current position, Mr. Hobert was General Manager, Digital Capture Systems and vice president of Kodak’s Health Group. He drove significant process and product improvements that delivered revenue growth and improved margins. Under his leadership, the computed radiography business achieved the number two position worldwide, a digital radiography business was established and breast cancer computer aided detection, Kodak’s first FDA PMA product, was introduced to the market.

Mr. Hobert joined Kodak in 2002 from General Electric Medical Systems (GEMS), a division of General Electric Co., with 11 years experience in the medical imaging market. At GE he was responsible for leading GEMS’ global business comprised of digital, analog and mobile radiography market segments and remote, classical and multipurpose fluoroscopy market segments.

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James T. Langley

James Langley joined Kodak as President, Commercial Printing, in August 2003. The Commercial Printing Group was renamed Graphic Communications Group in May 2004. In September he was elected a senior vice president of the Company. His responsibilities include leveraging Kodak’s intellectual property to create new streams of revenue from the commercial printing market, as well as managing the Company’s Encad, NexPress and Versamark subsidiaries. Mr. Langley also is responsible for managing Kodak’s participation in the Kodak Polychrome Graphics joint ventures. Mr. Langley has extensive expertise in printing technologies and both low-volume and high-volume manufacturing, stemming from a 30-year career at Hewlett-Packard Company. Most recently, he was vice president of Commercial Printing at HP from March 2000 to August 2002, where he created a business plan, built a team and successfully moved the Company into that market.

Prior to that assignment, Mr. Langley served for three years as vice president of Inkjet Worldwide Office Printers, responsible for expanding the presence of HP’s inkjet products in new, higher-end markets. This included all-in-one office printing devices, large format printing, photofinishing and commercial printing. During his tenure, revenue and earnings at the business grew annually at a double-digit pace.

William J. Lloyd

Bill Lloyd joined Kodak in June 2003 as Director, Portfolio Planning and Analysis. In October 2003, he was named director, Inkjet Systems Program, and was elected a vice president of the Company. In February 2005, he was elected a senior vice president. His current title became effective March 1, 2005.

Prior to Kodak, Mr. Lloyd was president of the consulting firm, Inwit, Inc. focused on imaging technology. From November 2000 until March 2002, he served as executive vice president and chief technology officer of Gemplus International, the leading provider of Smart Card-based secure solutions for the wireless and financial markets.

In 2000, Mr. Lloyd served as the Co-CEO during the startup phase of Phogenix Imaging, a joint venture between Eastman Kodak and Hewlett-Packard.

Mr. Lloyd has extensive expertise in imaging and printing technologies, stemming from his 31-year career at Hewlett-Packard Company where he was group vice president and CTO for consumer imaging and printing. In his career at HP, Mr. Lloyd held a variety of positions in product development and research both in the US and Japan. During his tenure in Japan (from 1990 until 1993) he directed the establishment of a branch of HP Laboratories.

Bernard Masson

Bernard Masson is President, Digital & Film Imaging Systems. He oversees the consumer, professional, digital and entertainment imaging products and services. Prior to this position, which became effective in August 2003, he was president of the Company’s Display Group, a position he assumed in December 2002. He joined Kodak in May 2002, as a consultant to the Company’s Photography Group, with an emphasis on output – or the delivery of hardcopy images and photographs. On December 13, 2002, he was elected senior vice president of the Company.

Prior to Kodak, Mr. Masson was an executive vice president at Lexmark International Inc. and president of the company’s Consumer Printer Division between 1997 and 2001. He joined Lexmark in 1995. From 1992 until 1995, Masson was vice president and general manager of DH Print, a subsidiary of DH Technology, based in San Diego. The company designs, manufactures and markets specialty printers worldwide.

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Daniel T. Meek

Daniel Meek was named Director, Global Manufacturing & Logistics effective June 2004. In this position he provides leadership for Kodak’s global operations for film, photographic paper, chemical products and equipment, as well as global logistics. In April 2004, he was elected a senior vice president of the Company by the board of directors. In October 2003, he was named Corporate KOS (Kodak Operating System) Director on a full time basis reporting to Antonio Perez. Since January 2003, he was both the Director of the Global Capture Flow, part of Global Manufacturing & Logistics and the Corporate KOS Director, which reported to Dan Carp. In November 2002, he was named Director of the Global Capture Flow, Global Manufacturing and Logistics, which included the merger of the Color Film, Graphics, and Document Imaging Flows, as well as Estar Manufacturing. In December 1999, he was named Director of Worldwide Color Film Flow, Imaging Materials Manufacturing. Previously, in October 1998, he was named director of Worldwide Manufacturing Services, Imaging Materials Manufacturing, and elected a vice president, Eastman Kodak Company.

Antonio M. Perez

Antonio M. Perez joined Kodak as President and Chief Operating Officer on April 2, 2003. His responsibilities include overseeing Kodak’s day-to-day operations, including the activities of Digital & Film Imaging Systems, Graphic Communications Group, Display & Components, Health Group, Inkjet Systems Program, Global Manufacturing & Logistics, Chief Marketing Office, Research & Development and Corporate Kodak Operating System (KOS). In October 2004, he was elected to the Company’s Board of Directors.

Mr. Perez has extensive expertise in digital imaging technologies, stemming from a 25-year career at Hewlett-Packard Company, where he was a corporate vice president and a member of the company’s Executive Council. He was president of the Consumer Business there, with responsibility for Digital Media Solutions and corporate marketing. In this role, he spearheaded the company’s efforts to build a business in digital imaging and electronic publishing, and was responsible for all activities affecting the total customer experience in the consumer marketplace. This activity spanned a line of consumer products that had worldwide revenue of more than $16 billion. Mr. Perez also oversaw contract manufacturing, distribution, marketing, order fulfillment, support and services, and HP’s worldwide retail sales force.

Prior to that assignment, Mr. Perez served as President and CEO of HP’s inkjet imaging business. During the five years in which Perez led the business, the installed base of inkjet printers grew from 17 million to 100 million worldwide, with total revenue of more than $10 billion.

From June 2000 to December 2001, Mr. Perez was President and Chief Executive Officer of Gemplus International, where he led the effort to take the company public both on the Premier Marche in Paris and NASDAQ in December 2000. While at Gemplus, he transformed the company into the leading Smart Card-based solution provider in the fast-growing wireless and financial markets. In the first fiscal year, revenue at Gemplus grew 70%, from $700 million to $1.2 billion.

Karen A. Smith-Pilkington

In 2004, Karen A. Smith-Pilkington was appointed Chairman and President, Greater Asia Region. In this role, she manages Kodak’s strategic and operational presence across Asia, ensuring coordinated Company “voice” and “actions”. Located in Shanghai, she ensures integrated business growth, effectiveness and efficiency for Kodak in Asia.

Prior to this role in Asia, she served as the Operating Manager for Consumer and Professional Imaging, Kodak’s largest business. She focused on repositioning, restructuring and enhancing the business’ competitiveness. Ms. Smith-Pilkington was also President, Kodak Professional. In this responsibility, she managed Kodak’s business serving the needs of professional photographers and labs engaged in image capture, digital workflow and output solutions.

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Ms. Smith-Pilkington has held many significant positions in General Management, Marketing, Product Management and Human Resources. She has managed numerous strategic product groups holding global profit and loss responsibility. She has built and leveraged multiple global alliances in product development, manufacturing and customer development, particularly in Asia. She has been a Senior Vice President since 2002 and Corporate Vice President since 1999.

Gary P. Van Graafeiland

Mr. Van Graafeiland was elected a senior vice president and named general counsel of Eastman Kodak Company effective February 14, 1992. He is also the Company’s Chief Compliance Officer. Mr. Van Graafeiland joined the Kodak Legal Department as a member of the Corporate Legal Staff in 1979. He was named assistant general counsel and director of the Corporate Legal Staff in January 1989, and was elected corporate secretary effective January 1990. Prior to joining Kodak, Mr. Van Graafeiland was associated with the Rochester law firm of Harter, Secrest & Emery.

There have been no events under any bankruptcy act, no criminal proceedings, and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past five years.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Eastman Kodak Company common stock is principally traded on the New York Stock Exchange. There are 80,426 shareholders of record of common stock as of December 31, 2004. See Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

MARKET PRICE DATA

Price per share:

	2004				2003

	High		Low		High		Low

1st Quarter	$	31.55	$	24.25	$	41.08	$	26.88
2nd Quarter		27.44		24.55		32.46		26.99
3rd Quarter		33.50		24.75		30.10		20.39
4th Quarter		34.74		28.93		25.83		20.43

ITEM 6. SELECTED FINANCIAL DATA

Refer to Summary of Operating Data on page 159.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accompanying consolidated financial statements and notes to consolidated financial statements contain information that is pertinent to management’s discussion and analysis of the financial condition and results of operations. 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 amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities.

The Company believes that the critical accounting policies and estimates discussed below involve the most complex management judgments due to the sensitivity of the methods and assumptions necessary in determining the related asset, liability, revenue and expense amounts.

REVENUE RECOGNITION

Kodak recognizes revenue when it is realized or realizable and earned. For the sale of multiple-element arrangements whereby equipment is combined with services, including maintenance and training, and other elements, including software and products, the Company allocates to, and recognizes revenue from, the various elements based on verifiable objective evidence of fair value (if software is not included or is incidental to the transaction) or Kodak-specific objective evidence of fair value if software is included and is other than incidental to the sales transaction as a whole. For full service solutions sales, which consist of the sale of equipment and software which may or may not require significant production, modification or customization, there are two acceptable methods of accounting: percentage of completion accounting and completed contract accounting. For certain of the Company’s full service solutions, the completed contract method of accounting is being followed by the Company. This is due to insufficient historical experience resulting in the inability to provide reasonably dependable estimates of the revenues and costs applicable to the various stages of such contracts as would be necessary under the percentage of completion methodology. When the Company does have sufficient historical experience and the ability to provide reasonably dependable estimates of the revenues and the costs applicable to the various stages of these contracts, the Company will account for these full service solutions under the percentage of completion methodology.

At the time revenue is recognized, the Company also records reductions to revenue for customer incentive programs in accordance with the provisions of Emerging Issues Task Force (EITF) Issue No. 01-09, “Accounting for Consideration Given from a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” Such incentive programs include cash and volume discounts, price protection, promotional, cooperative and other advertising allowances, and coupons. For those incentives that require the estimation of sales volumes or redemption rates, such as for volume rebates or coupons, the Company uses historical experience and internal and customer data to estimate the sales incentive at the time revenue is recognized. In the event that the actual results of these items differ from the estimates, adjustments to the sales incentive accruals would be recorded.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company records and maintains a provision for doubtful accounts for customers based on a variety of factors including the Company’s historical experience, the length of time the receivable has been outstanding and the financial condition of the customer. In addition, Kodak regularly analyzes its customer accounts and, when it becomes aware of a specific customer’s inability to meet its financial obligations to the Company, such as in the case of bankruptcy filings or deterioration in the customer’s overall financial condition, records a specific provision for uncollectible accounts to increase the allowance to the amount that is estimated to be uncollectible. If circumstances related to specific customers were to change, the Company’s estimates with respect to the collectibility of the related receivables could be further adjusted. However, losses in the aggregate have not exceeded management’s expectations.

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INVENTORIES

Kodak reduces the carrying value of its inventory based on estimates of what is excess, slow-moving and obsolete, as well as inventory whose carrying value is in excess of net realizable value. These write-downs are based on current assessments about future demands, market conditions and related management initiatives. If, in the future, the Company determined that market conditions and actual demands are less favorable than those projected and, therefore, inventory was overvalued, the Company would be required to further reduce the carrying value of the inventory and record a charge to earnings at the time such determination was made. If, in the future, the Company determined that inventory write-downs were overstated and, therefore, inventory was undervalued, the Company would recognize the increase to earnings through higher gross profit at the time the related undervalued inventory was sold. However, actual results have not differed materially from management’s estimates.

VALUATION OF LONG-LIVED ASSETS, INCLUDING GOODWILL AND PURCHASED INTANGIBLE ASSETS

The Company reviews the carrying value of its long-lived assets, including goodwill and purchased intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company assesses the recoverability of the carrying value of long-lived assets, other than goodwill and purchased intangible assets with indefinite useful lives, by first grouping its long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (the asset group) and, secondly, estimating the undiscounted future cash flows that are directly associated with and expected to arise from the use of and eventual disposition of such asset group. The Company estimates the undiscounted cash flows over the remaining useful life of the primary asset within the asset group. If the carrying value of the asset group exceeds the estimated undiscounted cash flows, the Company records an impairment charge to the extent the carrying value of the long-lived asset exceeds its fair value. The Company determines fair value through quoted market prices in active markets or, if quoted market prices are unavailable, through the performance of internal analyses of discounted cash flows or external appraisals. The undiscounted and discounted cash flow analyses are based on a number of estimates and assumptions, including the expected period over which the asset will be utilized, projected future operating results of the asset group, discount rate and long-term growth rate.

To assess goodwill for impairment, the Company performs an assessment of the carrying value of its reporting units on an annual basis or when events and changes in circumstances occur that would more likely than not reduce the fair value of the Company’s reporting units below their carrying value. If the carrying value of a reporting unit exceeds its fair value, the Company would record an impairment charge to earnings to the extent the carrying amount of the reporting unit goodwill exceeds its implied fair value. The Company estimates the fair value of its reporting units through internal analyses and external valuations, which utilize income and market valuation approaches through the application of capitalized earnings, discounted cash flow and market comparable methods. These valuation techniques are based on a number of estimates and assumptions, including the projected future operating results of the reporting unit, discount rate, long-term growth rate and appropriate market comparables.

The Company’s assessments of impairment of long-lived assets, including goodwill and purchased intangible assets, and its periodic review of the remaining useful lives of its long-lived assets are an integral part of the Company’s ongoing strategic review of the business and operations, and are also performed in conjunction with the Company’s periodic restructuring actions. Therefore, future changes in the Company’s strategy, the ongoing digital substitution, the continuing shift from overnight photofinishing to onsite processing and other changes in the operations of the Company could impact the projected future operating results that are inherent in the Company’s estimates of fair value, resulting in impairments in the future. Additionally, other changes in the estimates and assumptions, including the discount rate and expected long-term growth rate, which drive the valuation techniques employed to estimate the fair value of long-lived assets and goodwill could change and, therefore, impact the assessments of impairment in the future.

In performing the annual assessment of goodwill for impairment, the Company determined that no material reporting units’ carrying values were close to exceeding their respective fair values. See “Goodwill” under Note 1, “Significant Accounting Policies.”

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INVESTMENTS IN EQUITY SECURITIES

Kodak holds minority interests in certain publicly traded and privately held companies having operations or technology within its strategic areas of focus. The Company’s policy is to record an impairment charge on these investments when they experience declines in value that are considered to be other-than-temporary. Poor operating results of the investees or adverse changes in market conditions in the future may cause losses or an inability of the Company to recover its carrying value in these underlying investments. As of December 31, 2004, the amount related to the above investments recorded in the Company’s Consolidated Statement of Financial Position was $44 million.

INCOME TAXES

The Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized. At December 31, 2004, the Company has deferred tax assets for its net operating loss and foreign tax credit carryforwards of $234 million and $189 million, respectively, relating to which the Company has a valuation allowance of $131 million and $0 million, respectively. The Company has considered future market growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which the Company operates, and prudent and feasible tax planning strategies in determining the need for these valuation allowances. If Kodak were to determine that it would not be able to realize a portion of its net deferred tax asset in the future for which there is currently no valuation allowance, an adjustment to the net deferred tax assets would be charged to earnings in the period such determination was made. Conversely, if the Company were to make a determination that it is more likely than not that the deferred tax assets for which there is currently a valuation allowance would be realized, the related valuation allowance would be reduced and a benefit to earnings would be recorded.

The Company’s effective tax rate considers the impact of undistributed earnings of subsidiary companies outside of the U.S. Deferred taxes have not been provided for the potential remittance of such undistributed earnings, as it is the Company’s policy to permanently reinvest its retained earnings. However, from time to time and to the extent that the Company can repatriate overseas earnings on essentially a tax-free basis, the Company’s foreign subsidiaries will pay dividends to the U.S. Material changes in the Company’s working capital and long-term investment requirements could impact the decisions made by management with respect to the level and source of future remittances and, as a result, the Company’s effective tax rate. See Note 15, “Income Taxes.”

The Company operates within multiple taxing jurisdictions worldwide and is subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time for resolution. Although management believes that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on the earnings of the Company. Conversely, if these issues are resolved favorably in the future, the related provisions would be reduced, thus having a positive impact on earnings.

WARRANTY OBLIGATIONS

Management estimates expected product failure rates, material usage and service costs in the development of its warranty obligations. At the time revenue is recognized, the Company provides for the estimated costs of its warranties as a reduction of revenue. Actual results have not differed materially from management’s estimates. In the event that the actual results of these items differ from the estimates, an adjustment to the warranty obligation would be recorded.

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PENSION AND POSTRETIREMENT BENEFITS

Kodak’s defined benefit pension and other postretirement benefit costs and obligations are dependent on assumptions used by actuaries in calculating such amounts. These assumptions, which are reviewed annually by the Company, include the discount rate, long-term expected rate of return on plan assets, salary growth, healthcare cost trend rate and other economic and demographic factors. The Company bases the discount rate assumption for its significant plans on the estimated rate at which annuity contracts could be purchased to discharge the pension benefit obligation. In estimating that rate, the Company looks to the AA-rated corporate long-term bond yield rate in the respective country as of the last day of the year in the Company’s reporting period as a guide. The long-term expected rate of return on plan assets is based on a combination of formal asset and liability studies, historical results of the portfolio, and management’s expectation as to future returns that are expected to be realized over the estimated remaining life of the plan liabilities that will be funded with the plan assets. The salary growth assumptions are determined based on the Company’s long-term actual experience and future and near-term outlook. The healthcare cost trend rate assumptions are based on historical cost and payment data, the near-term outlook, and an assessment of the likely long-term trends.

The Company reviews its expected long-term rate of return on plan asset (EROA) assumption annually for the Kodak Retirement Income Plan (KRIP). To facilitate this review, every three years, or when market conditions change materially, the Company undertakes a new asset and liability study to reaffirm the current asset allocation and the related EROA assumption. The Company’s investment consulting firm completed a study (the Study) in September 2002, which led to several asset allocation shifts and a decrease in the EROA from 9.5% for the year ended December 31, 2002 to 9.0% for the years ended December 31, 2003 and 2004. In March 2005, a new asset and liability modeling study has been completed and the EROA for 2005 will remain at 9.0%. Given the decrease in the discount rate of 25 basis points from 6.0% for 2004 to 5.75% for 2005 and increased recognition of unrecognized losses in accordance with Statement of Financial Accounting Standards (SFAS) No. 87, “Employers’ Accounting for Pensions,” total pension income from continuing operations for the major funded and unfunded defined benefit plans in the U.S. is expected to decrease from $3 million in 2004 to reflect an expense of $1 million in 2005. Pension expense from continuing operations in the Company’s non-U.S. plans is projected to increase from $98 million in 2004 to $104 million in 2005. Additionally, due in part to the decrease in the discount rate from 6.0% for 2004 to 5.75% for 2005 and increased amortization expense relating to the unrecognized actuarial loss, the Company expects the cost of its most significant postretirement benefit plan, the U.S. plan, to approximate $200 million in 2005, as compared with $103 million and $238 million for 2004 and 2003, respectively. These estimates have been incorporated into the Company’s earnings outlook for 2005.

Actual results that differ from our assumptions are recorded as unrecognized gains and losses and are amortized to earnings over the estimated future service period of the plan participants to the extent such total net recognized gains and losses exceed 10% of the greater of the plan’s projected benefit obligation or the market-related value of assets. Significant differences in actual experience or significant changes in future assumptions would affect the Company’s pension and postretirement benefit costs and obligations.

In accordance with the guidance under SFAS No. 87, the Company is required to record an additional minimum pension liability in its Consolidated Statement of Financial Position that is at least equal to the unfunded accumulated benefit obligation of its defined benefit pension plans. During 2004, due to the performance of the global equity markets, combined with decreasing discount rates in 2004, the Company increased its additional minimum pension liability for its major defined benefit plans by $90 million and recorded a corresponding charge to accumulated other comprehensive income (a component of shareholders’ equity) of $61 million, net of taxes of $29 million. If the global equity markets’ performance improves and discount rates stabilize or improve in future periods, the Company may be in a position to reduce its additional minimum pension liability and reverse the corresponding charges to shareholders’ equity. Conversely, if the global equity markets’ performance and discount rates continue to decline in future periods, the Company may be required to increase its additional minimum pension liability and record additional charges to shareholders’ equity. To mitigate the increase in its additional minimum pension liability and additional charges to shareholders’ equity, the Company may elect to fund a particular plan or plans on a case-by-case basis.

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ENVIRONMENTAL COMMITMENTS

Environmental liabilities are accrued based on estimates of known environmental remediation exposures. The liabilities include accruals for sites owned by Kodak, sites formerly owned by Kodak, and other third party sites where Kodak was designated as a potentially responsible party (PRP). The amounts accrued for such sites are based on these estimates, which are determined using the ASTM Standard E 2137-01, “Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters.” The overall method includes the use of a probabilistic model that forecasts a range of cost estimates for the remediation required at individual sites. The Company’s estimate includes equipment and operating costs for remediation and long-term monitoring of the sites. Such estimates may be affected by changing determinations of what constitutes an environmental liability or an acceptable level of remediation. Kodak’s estimate of its environmental liabilities may also change if the proposals to regulatory agencies for desired methods and outcomes of remediation are viewed as not acceptable, or additional exposures are identified. The Company has an ongoing monitoring and identification process to assess how activities, with respect to the known exposures, are progressing against the accrued cost estimates, as well as to identify other potential remediation sites that are presently unknown.

STOCK-BASED COMPENSATION

The Company accounts for its employee stock incentive plans under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and the related interpretations under Financial Accounting Standards Board (FASB) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation.” Accordingly, no stock-based employee compensation cost is reflected in net earnings for the years ended December 31, 2004, 2003 and 2002, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. On February 18, 2004, the Company announced that it would begin expensing stock options starting January 1, 2005 using the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” In December 2004, the FASB issued SFAS No. 123R, a new accounting standard that will require the expensing of stock options and affect the accounting for the Company’s restricted stock and stock appreciations rights as of the beginning of interim or annual reporting periods that begin after June 15, 2005. Early adoption is permitted for all companies; consequently, on January 1, 2005, the Company early adopted the stock option expensing rules of the new standard.

KODAK OPERATING MODEL AND REPORTING STRUCTURE

The Company has four reportable segments: Digital & Film Imaging Systems (D&FIS), Health, Commercial Imaging, and Graphic Communications. The balance of the Company’s operations, which individually and in the aggregate do not meet the criteria of a reportable segment, are reported in All Other. A description of the segments is as follows:

Digital & Film Imaging Systems Segment: The D&FIS segment derives revenues from consumer film products, sales of origination and print film to the entertainment industry, sales of professional film products, thermal, traditional and inkjet photo paper, chemicals, traditional and digital cameras, digital printers, photoprocessing equipment and services, and digitization services, including online services.

Health Segment: The Health segment derives revenues from the sale of digital products, including laser imagers, media, computed and direct radiography equipment and healthcare information systems, as well as traditional medical products, including analog film, equipment, chemistry, services and specialty products for the mammography, oncology and dental fields.

Commercial Imaging Segment: The Commercial Imaging segment is composed of document imaging products and services, commercial and government systems products and services, and optics. The Remote Sensing Systems business, which was sold to ITT Industries in August 2004, is accounted for as a discontinued operation in prior periods and the current period up through the date of sale.

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Graphic Communications Segment: The Graphic Communications segment is composed of the Company’s equity investments in Kodak Polychrome Graphics (Kodak’s 50/50 joint venture with Sun Chemical) and NexPress (Kodak’s 50/50 joint venture with Heidelberg) prior to its acquisition in May 2004, and the graphics and wide-format inkjet businesses. This segment also includes the results of Scitex Digital Printing, which was acquired in January 2004 and has since been renamed Kodak Versamark, as well as the results of the NexPress-related entities subsequent to the acquisition in May 2004.

All Other: All Other is composed of Kodak’s display and components business for image sensors and other small, miscellaneous businesses. It also includes development initiatives in consumer inkjet technologies.

DETAILED RESULTS OF OPERATIONS

Net Sales from Continuing Operations by Reportable Segment and All Other (1)

(in millions)	2004		Change			2003		Change			2002

	(Restated)
D&FIS
Inside the U.S.	$	3,823		0	%	$	3,828		-5	%	$	4,034
Outside the U.S.		5,363		-1			5,420		+9			4,968

Total D&FIS		9,186		-1			9,248		+3			9,002

Health
Inside the U.S.		1,114		+5			1,061		-2			1,088
Outside the U.S.		1,572		+15			1,370		+16			1,186

Total Health		2,686		+10			2,431		+7			2,274

Commercial Imaging
Inside the U.S.		318		-5			334		-9			366
Outside the U.S.		485		+6			457		+8			425

Total Commercial Imaging		803		+2			791		0			791

Graphic Communications
Inside the U.S.		350		+124			156		-10			174
Outside the U.S.		374		+97			190		-17			228

Total Graphic Communications		724		+109			346		-14			402

All Other
Inside the U.S.		53		+26			42		-7			45
Outside the U.S.		65		+27			51		+46			35

Total All Other		118		+27			93		+16			80

Total Net Sales	$	13,517		+5	%	$	12,909		+3	%	$	12,549


(1)	Sales are reported based on the geographic area of destination.

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Earnings (Loss) from Continuing Operations Before Interest, Other (Income) Charges, Net, and Income Taxes by Reportable Segment and All Other

(in millions)	2004			Change			2003			Change			2002

	(Restated)
D&FIS	$	580			+39	%	$	416			-46	%	$	771
Health		435			-9			476			+10			431
Commercial Imaging		127			+17			109			-8			118
Graphic Communications		(140	)		-1173			(11	)		-152			21
All Other		(182	)		-136			(77	)		-185			(27	)

Total of segments		820			-10			913			-31			1,314
Strategic asset impairments		—						(3	)					(32	)
Impairment of Burrell Companies’ net assets		—						(9	)					—
Restructuring costs and other		(901	)					(552	)					(114	)
Donation to technology enterprise		—						(8	)					—
TouchPoint settlement		(6	)					—						—
GE settlement		—						(12	)					—
Patent infringement claim settlement		—						(14	)					—
Prior year acquisition settlement		—						(14	)					—
Legal settlement		—						(8	)					—
Environmental reserve reversal		—						9						—

Consolidated total	$	(87	)		-129	%	$	302			-74	%	$	1,168

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Earnings (Loss) From Continuing Operations by Reportable Segment and All Other

(in millions)	2004			Change			2003			Change			2002

	(Restated)
D&FIS	$	504			+39	%	$	363			-34	%	$	554
Health		352			-11			397			+26			315
Commercial Imaging		102			+19			86			+1			85
Graphic Communications		(88	)		-115			(41	)		-8			(38	)
All Other		(155	)		-94			(80	)		-220			(25	)

Total of segments		715			-1			725			-19			891
Strategic asset and venture investment impairments		—						(7	)					(50	)
Impairment of Burrell Companies’ net assets held for sale		—						(9	)					—
Restructuring costs and other		(901	)					(552	)					(114	)
Donation to technology enterprise		—						(8	)					—
TouchPoint settlement		(6	)					—						—
Sun Microsystems settlement		92						—						—
BIGT settlement		9						—						—
GE settlement		—						(12	)					—
Patent infringement claim settlement		—						(14	)					—
Prior year acquisition settlement		—						(14	)					—
Legal settlements		—						(8	)					—
Environmental reserve reversal		—						9						—
Interest expense		(168	)					(147	)					(173	)
Other corporate items		12						11						14
Tax benefit - contribution of patents		—						13						—
Tax benefit - PictureVision subsidiary closure		—						—						45
Tax benefit - Kodak Imagex Japan		—						—						46
Income tax effects on above items and taxes not allocated to segments		328						202						102

Consolidated total	$	81			-57	%	$	189			-75	%	$	761

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2004 COMPARED WITH 2003
(2003 Restated)

RESULTS OF OPERATIONS - CONTINUING OPERATIONS

CONSOLIDATED

Worldwide Revenues

Net worldwide sales were $13,517 million for 2004 as compared with $12,909 million for 2003, representing an increase of $608 million, or 5% as reported, or an increase of 1% excluding the favorable impact from exchange. The increase in net sales was primarily due to increased volumes, acquisitions and favorable exchange, which increased sales for 2004 by 0.8, 4.3 and 3.3 percentage points, respectively. The increase in volumes was primarily driven by consumer digital cameras, printer dock products, and the picture maker kiosk portion of the consumer output SPG in the Digital & Film Imaging Systems (D&FIS) segment, digital products in the Health segment, partially offset by decreased volumes for traditional consumer film products. Favorable exchange resulted from an increased level of sales in non-U.S. countries as the U.S. dollar weakened throughout 2004 in relation to most foreign currencies. In addition, the acquisition of PracticeWorks, Inc. (PracticeWorks), Versamark, Laser-Pacific and the NexPress-related entities accounted for an additional 4.3 percentage points of the increase in net sales. These increases were partially offset by decreases attributable to price/mix, which reduced sales for 2004 by approximately 3.5 percentage points. These decreases were driven primarily by price/mix declines in traditional products and services, and consumer digital cameras in the D&FIS segment and film capture and output products in the Health segment.

Net sales in the U.S. were $5,658 million for the current year as compared with $5,421 million for the prior year, representing an increase of $237 million, or 4%. Net sales outside the U.S. were $7,859 million for the current year as compared with $7,488 million for the prior year, representing an increase of $371 million, or 5% as reported, or a decrease of 1% excluding the favorable impact of exchange.

Digital Strategic Product Groups’ Revenues

The Company’s digital product sales, excluding New Technologies product sales, were $5,303 million for the current year as compared with $3,736 million for the prior year, representing an increase of $1,567 million, or 42%, primarily driven by the consumer digital capture Strategic Product Group (SPG), the kiosks/media portion of the consumer output SPG, the home printing SPG, and digital acquisitions.

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Traditional Strategic Product Groups’ Revenues

Net sales of the Company’s traditional products were $8,191 million for the current period as compared with $9,156 million for the prior year period, representing a decrease of $965 million, or 11%, primarily driven by declines in the film capture SPG and the wholesale photofinishing portion of the consumer output SPG.

Foreign Revenues

The Company’s operations outside the U.S. are reported in three regions: (1) the Europe, Africa and Middle East region (EAMER), (2) the Asia Pacific region, and (3) the Canada and Latin America region. Net sales in EAMER for 2004 were $4,041 million as compared with $3,880 million for 2003, representing an increase of 4% as reported, or a decrease of 3% excluding the favorable impact of exchange. Net sales in the Asia Pacific region for 2004 were $2,546 million compared with $2,368 million for 2003, representing an increase of 8% as reported, or an increase of 3% excluding the favorable impact of exchange. Net sales in the Canada and Latin America region for 2004 were $1,272 million as compared with $1,240 million for 2003, representing an increase of 3% as reported, or an increase of 1% excluding the favorable impact of exchange.

The Company’s major emerging markets include China, Brazil, Mexico, India, Russia, Korea, Hong Kong and Taiwan. Net sales in emerging markets were $2,878 million for 2004 as compared with $2,591 million for 2003, representing an increase of $287 million, or 11% as reported, or an increase of 10% excluding the favorable impact of exchange. The emerging market portfolio accounted for approximately 21% and 37% of the Company’s worldwide and foreign sales, respectively, in 2004.

Sales growth in China, India, Russia and Brazil of 28%, 9%, 7% and 6%, respectively, were the primary drivers of the increase in emerging market sales, partially offset by decreased sales in Hong Kong of 9%. Sales growth in China resulted from strong business performance for Kodak’s Health, Graphic Communications and entertainment imaging products and services in 2004 as compared with 2003, when the Severe Acute Respiratory Syndrome (SARS) situation negatively impacted operations in that country, particularly for consumer and professional products and services.

Gross Profit

Gross profit was $3,969 million for 2004 as compared with $4,175 million for 2003, representing a decrease of $206 million, or 5%. The gross profit margin was 29.4% in the current year as compared with 32.3% in the prior year. The decrease of 2.9 percentage points was attributable to declines in price/mix, which reduced gross profit margins by approximately 4.2 percentage points. This decrease was driven primarily by price/mix declines in traditional consumer film products, photofinishing, consumer digital cameras, and entertainment print films in the D&FIS segment, analog medical film and digital capture equipment in the Health segment, and graphic arts products in the Graphic Communications segment. The decline in price/mix was partially offset by favorable exchange, which increased gross margins by approximately 0.5 percentage points, and decreases in manufacturing cost, which favorably impacted gross profit margins by approximately 0.4 percentage points year-over-year primarily due to reduced labor expense. The acquisition of PracticeWorks, Versamark and the NexPress-related entities favorably impacted gross profit margin by 0.4 percentage points.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) were $2,507 million for 2004 as compared with $2,618 million for 2003, representing a decrease of $111 million, or 4%. SG&A decreased as a percentage of sales from 20% for the prior year to 19% for the current year. The net decrease in SG&A is primarily attributable to cost savings in the current year period realized from position eliminations resulting from focused cost reduction programs, a decrease in advertising expense of $83 million compared with the prior year, and $58 million in one-time charges incurred in 2003 relating to four legal settlements, an asset impairment, a strategic investment write-down, and a technology contribution, offset by the reversal of an environmental reserve. Such charges amounted to approximately $6 million in the current year. These decreases were partially offset by unfavorable exchange of $69 million and SG&A expense of acquisitions of $192 million.

PAGE 30

Research and Development Costs

Research and development (R&D) costs were $854 million for 2004 as compared with $776 million for 2003, representing an increase of $78 million, or 10%. The increase in R&D is primarily due to increased spending to drive growth in digital product areas as well as acquisition-related R&D, partially offset by reductions in spending on traditional products. Write-offs for in-process R&D associated with acquisitions made in the current year were $15 million compared with $31 million in the prior year. As a percentage of sales, R&D costs remained flat at 6% for both the current and prior years.

Earnings (Losses) From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes

Losses from continuing operations before interest, other income (charges), net, and income taxes for 2004 were $87 million as compared with earnings of $302 million for 2003, representing a decrease of $389 million, or 129%. The decrease is primarily attributable to the reasons described above.

Interest Expense

Interest expense for 2004 was $168 million as compared with $147 million for 2003, representing an increase of $21 million, or 14%. The increase in interest expense is almost entirely attributable to higher average interest rates resulting from the replacement of commercial paper debt with the Senior Notes and Convertible Senior Notes issued in October 2003.

Other Income (Charges), Net

The other income (charges), net component includes investment income, income and losses from equity investments, gains and losses on foreign exchange and on the sales of assets and investments, and other miscellaneous income and expense items. Other income for the current year was $161 million as compared with a net charge of $51 million for 2003. The increase in income is primarily attributable to the proceeds from two favorable legal settlements, increased income from the Company’s equity investment in Kodak Polychrome Graphics, and in the prior year, the NexPress investments were accounted for under the equity method and included in other income (charges), net. As a result of the Company’s purchase of the Heidelberg’s 50 percent interest in the NexPress joint venture, which closed in May 2004, NexPress is consolidated in the Company’s Statement of Earnings for the remaining portion of the year and included in the Graphic Communications segment.

Income Tax Provision (Benefit)

The Company’s effective tax benefit from continuing operations was $175 million for the year ended December 31, 2004, representing an effective tax rate benefit from continuing operations of 186%. The effective tax rate benefit from continuing operations of 186% differs from the U.S. statutory tax rate of 35% primarily due to earnings from operations in certain lower-taxed jurisdictions outside the U.S., coupled with losses incurred in certain jurisdictions that are benefited at a rate equal to or greater than the U.S. federal income tax rate.

The Company’s effective tax rate benefit from continuing operations was $85 million for the year ended December 31, 2003, representing an effective tax rate benefit from continuing operations of 82%, despite the fact that the Company had positive earnings from continuing operations before income taxes. The effective tax rate benefit from continuing operations of 82% differs from the U.S. statutory tax rate of 35% primarily due to earnings from operations in certain lower-taxed jurisdictions outside the U.S., coupled with losses incurred in certain jurisdictions that are benefited at a rate equal to or greater than the U.S. federal income tax rate.

PAGE 31

Excluding the effect of discrete period items, the effective tax rate from continuing operations was 18% and 15.5% in 2004 and 2003, respectively. The increase from 15.5% in 2003 to 18% in 2004 is primarily due to an increase in interest expense on tax reserves and an increase in valuation allowances.

Earnings From Continuing Operations

Net earnings from continuing operations for 2004 were $81 million, or $.28 per basic and diluted share, as compared with net earnings from continuing operations for 2003 of $189 million, or $.66 per basic and diluted share, representing a decrease of $108 million, or 57%. The decrease in net earnings from continuing operations is primarily attributable to the reasons outlined above.

DIGITAL & FILM IMAGING SYSTEMS

Worldwide Revenues

Net worldwide sales for the D&FIS segment were $9,186 million for 2004 as compared with $9,248 million for 2003, representing a decrease of $62 million, or a decrease of 1% as reported, or a decrease of 4% excluding the favorable impact of exchange. Approximately 4.1 percentage points of the decrease in net sales was attributable to price/mix declines driven primarily by declines in traditional film products as well as consumer digital cameras and inkjet media. This decrease was partially offset by favorable exchange, which increased revenues by approximately 3.2 percentage points.

D&FIS segment net sales in the U.S. were $3,823 million for the current year as compared with $3,828 million for the prior year, representing a decrease of $5 million. D&FIS segment net sales outside the U.S. were $5,363 million for the current year as compared with $5,420 million for the prior year, representing a decrease of $57 million, or 1% as reported, or a decrease of 6% excluding the favorable impact of exchange.

Digital Strategic Product Groups’ Revenues

D&FIS segment digital product sales were $2,677 million for the current year as compared with $1,802 million for the prior year, representing an increase of $875 million, or 49%, primarily driven by the consumer digital capture SPG. Net worldwide sales of consumer digital capture products, which include consumer digital cameras, accessories, memory products, and royalties, increased 61% in 2004 as compared with 2003, primarily reflecting strong volume increases and favorable exchange, partially offset by negative price/mix. Sales continue to be driven by strong consumer acceptance of the EasyShare digital camera system and the success of new digital camera product introductions during the current year.

The Company gained worldwide digital camera unit market share when compared with the prior year. According to market research firm IDC’s full year 2004 digital camera study, Kodak leads the industry in the U.S. with a 21.9 percent market share. Digital camera market share has also improved internationally, giving Kodak the number one market share in Australia, Argentina, Peru and Chile as well as putting it among the top three positions in Germany, United Kingdom, Mexico and Brazil.

Net worldwide sales of picture maker kiosks and related media increased 58% in 2004 as compared with 2003, primarily due to strong volume increases and favorable exchange. Sales continue to be driven by strong market acceptance of Kodak’s new generation of kiosks as well as an increase in consumer demand for digital printing at retail.

Net worldwide sales from the home printing solutions SPG, which includes inkjet photo paper and printer docks/media, increased 47% in the current year as compared with the prior year. For inkjet paper, 2004 was marked by increased competition from store brands and the mix shift associated with consumer’s preference for smaller format papers. Kodak’s printer dock products continued to experience strong sales growth during 2004.

PAGE 32

Traditional Strategic Product Groups’ Revenues

D&FIS segment traditional product sales were $6,509 million for the current year as compared with $7,446 million for the prior year, representing a decrease of $937 million, or 13%, primarily driven by declines in the film capture SPG and the consumer output SPG. Net worldwide sales of the film capture SPG, including consumer roll film (35mm film and Advantix film), one-time-use cameras (OTUC), professional films, reloadable traditional film cameras and batteries/videotape, decreased 16% in 2004 as compared with 2003, primarily reflecting volume declines and negative price/mix experienced for all significant film capture product categories. These declines were partially offset by favorable exchange.

U.S. consumer film industry sell-through volumes decreased approximately 18% in 2004 as compared with 2003. Kodak’s sell-in consumer film volumes declined 21% as compared with the prior year, reflecting a decrease in U.S. retailers’ inventories.

As previously announced, the Company’s current estimate of worldwide consumer film industry volumes for 2005 could decline as much as 20%, with U.S. volumes declining as much as 30%.

Net worldwide sales for the retail photofinishing SPG, which includes color negative paper, equipment and services, chemistry, and photofinishing services at retail, decreased 6% in 2004 as compared with 2003, primarily reflecting lower volumes of Qualex retail photofinishing services, partially offset by favorable exchange.

Net worldwide sales for the wholesale photofinishing SPG, which includes color negative paper, equipment, chemistry, and photofinishing services at Qualex in the U.S. and Consumer Imaging Services (CIS) outside the U.S., decreased 31% in 2004 as compared with 2003, primarily reflecting lower volumes, partially offset by favorable exchange. The lower volumes reflect the effects of digital replacement.

Net worldwide sales for the entertainment films SPG, including origination and print films to the entertainment industry increased 12% in 2004 as compared with 2003, reflecting volume increases and favorable exchange that was partially offset by negative price/mix.

Gross Profit

Gross profit for the D&FIS segment was $2,612 million for 2004 as compared with $2,864 million for 2003, representing a decrease of $252 million or 9%. The gross profit margin was 28.4% in the current year as compared with 31.0% in the prior year. The 2.6 percentage point decrease was primarily attributable to decreases in price/mix that impacted gross profit margins by approximately 5.3 percentage points, partially offset by manufacturing cost improvements, which favorably impacted gross margins by approximately 2.4 percentage points. The decrease in price/mix was primarily due to the impact of digital substitution, resulting in a decrease in sales of higher margin traditional products, the impact of which was only partially offset by increased sales of lower margin digital products.

Selling, General and Administrative Expenses

SG&A expenses for the D&FIS segment were $1,665 million for 2004 as compared with $1,967 million for 2003, representing a decrease of $302 million or 15%. The net decrease in SG&A spending is primarily attributable to cost savings realized from position eliminations associated with ongoing focused cost reduction programs and reductions in advertising expense, partially offset by unfavorable exchange of $50 million. As a percentage of sales, SG&A expense decreased from 21% in the prior year to 18% in the current year.

PAGE 33

Research and Development Costs

R&D costs for the D&FIS segment decreased $113 million or 23% from $481 million in 2003 to $368 million in 2004. As a percentage of sales, R&D costs decreased from 5% in the prior year to 4% in the current year. The decrease in R&D is primarily due to a decline in spending related to consumer and professional imaging traditional products and services. In addition, the decline was partly attributable to a $21 million write-off for purchased in-process R&D in 2003, with no such charge incurred in the current year.

Earnings (Losses) From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes

Earnings from continuing operations before interest, other income (charges), net, and income taxes for the D&FIS segment increased $164 million, or 39%, from $416 million in 2003 to $580 million in 2004, primarily as a result of the factors described above.

HEALTH

On October 7, 2003, the Company completed the acquisition of all of the outstanding shares of PracticeWorks, Inc., a leading provider of dental practice management software. As part of this transaction, Kodak also acquired 100% of PracticeWorks’ Paris-based subsidiary, Trophy Radiologie, S.A., a developer and manufacturer of dental digital radiographic equipment, which PracticeWorks purchased in December 2002. The acquisition of PracticeWorks and Trophy was expected to contribute approximately $200 million in sales to the Health segment during the first full year. Full year 2004 net sales for PracticeWorks (acquired in October 2003) were $212 million, which resulted in incremental net sales of $164 million for the Health segment.

It is anticipated that this transaction will be slightly dilutive to earnings from the date of acquisition through the end of 2005 and accretive to earnings thereafter. This acquisition enables Kodak to offer its customers a full spectrum of dental imaging products and services from traditional film to digital radiography and photography, and moved the Health segment into the leading position in the dental practice management and dental digital radiographic markets.

Worldwide Revenues

Net worldwide sales for the Health segment were $2,686 million for 2004 as compared with $2,431 million for 2003, representing an increase of $255 million, or 10% as reported, or an increase of 7% excluding the favorable impact of exchange. The increase in sales was comprised of: (1) an increase from favorable exchange of approximately 3.5 percentage points, (2) the acquisition of PracticeWorks Inc. in October 2003, which accounted for approximately 5.4 percentage points of the sales increase, and (3) an increase in volume of approximately 4.1 percentage points, driven primarily by volume increases in digital products. These increases were partially offset by declines in price/mix of approximately 3.1 percentage points, which were related to both digital and traditional products.

Net sales in the U.S. were $1,114 million for the current year as compared with $1,061 for the prior year, representing an increase of $53 million, or 5%. Net sales outside the U.S. were $1,572 million for 2004 as compared with $1,370 million for 2003, representing an increase of $202 million, or 15% as reported, or an increase of 8% excluding the favorable impact of exchange.

Digital Strategic Product Groups’ Revenues

PAGE 34

Traditional Strategic Product Groups’ Revenues

Health segment traditional product sales, including analog film, equipment, chemistry and services, were $967 million for the current year as compared with $993 million for 2003, representing a decrease of $26 million or 3%, with the decrease mainly attributable to decreases in volume and negative price/mix from analog medical film, partially offset by favorable exchange.

Gross Profit

Gross profit for the Health segment was $1,129 million for 2004 as compared with $1,045 million for 2003, representing an increase of $84 million, or 8%. The gross profit margin was 42.0% in 2004 as compared with 43.0% in 2003. The decrease in the gross profit margin of 1.0 percentage points was primarily attributable to: (1) price/mix which negatively impacted gross profit margins by 2.0 percentage points due to digital media, digital capture equipment and analog medical film, and (2) an increase in manufacturing cost, which decreased gross profit margins by 0.9 percentage points primarily due to increases in silver prices and petroleum based materials during the current year. These decreases were partially offset by increases attributable to favorable exchange, which contributed approximately 0.8 percentage points to the gross profit margin, and the acquisition of PracticeWorks in the fourth quarter of 2003, which increased gross profit margins by approximately 1.1 percentage points for the current year.

Selling, General and Administrative Expenses

SG&A expenses for the Health segment increased $95 million, or 24%, from $391 million for 2003 to $486 million for 2004. Although the dollar increase in SG&A expenses was significant, the increase as a percent of sales was only 2.0 percentage points from 16% in 2003 to 18% in 2004. The increase in SG&A expenses is primarily due to the acquisition of PracticeWorks, which accounted for $65 million of the increase in SG&A expenses in 2004, increased spending on growth initiatives and the unfavorable impact of exchange, which accounted for $12 million of the increase.

Research and Development Costs

R&D costs for the Health segment increased $30 million, or 17%, from $178 million in 2003 to $208 million in 2004, and increased as a percentage of sales from 7% in 2003 to 8% in 2004. The increase is primarily attributable to increased spending to drive growth in selected areas of the product portfolio.

Earnings (Losses) From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes

Earnings from continuing operations before interest, other income (charges), net, and income taxes for the Health segment decreased $41 million, or 9%, from $476 million for 2003 to $435 million for 2004 due primarily to the reasons described above.

COMMERCIAL IMAGING

On February 9, 2004 Kodak announced its intention to sell the Remote Sensing Systems operation to ITT Industries for $725 million in cash. This transaction closed during the third quarter of 2004. The Remote Sensing Systems business was part of Kodak’s commercial and government systems operation. The Commercial Imaging segment results for 2004 and 2003 exclude the financial performance of Kodak’s Remote Sensing Systems business, which is accounted for in discontinued operations. Certain overhead costs that were previously allocated to the RSS business that were not eliminated as a result of the sale are still being reported within the Commercial Imaging segment up through the completion of the divestiture, as the Commercial Imaging segment managed the RSS business until the completion of the divestiture. Subsequent overhead costs have been allocated to all of the existing segments.

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Worldwide Revenues

Net worldwide sales for the Commercial Imaging segment were $803 million for 2004 as compared with $791 million for 2003, representing an increase of $12 million, or 2% as reported, or a decrease of 3% excluding the favorable impact of exchange. The increase in net sales was primarily comprised of an increase of approximately 4.7 percentage points due to favorable exchange, which was partially offset by declines due to volume of approximately 3.1 percentage points, primarily driven by declines in the micrographics equipment and media SPG.

Net sales in the U.S. were $318 million for 2004 as compared with $334 million for 2003, representing a decrease of $16 million, or 5%. Net sales outside the U.S. were $485 million in the current year as compared with $457 million in the prior year, representing an increase of $28 million, or 6%, or a decrease of 2% excluding the favorable impact of exchange.

Digital and Traditional Strategic Product Groups’ Revenues

Commercial Imaging segment digital product sales were $384 million for the current year as compared with $367 million for 2003, representing an increase of $17 million, or 5%. Segment traditional product sales were $419 million for the current year as compared with $424 million for 2003, representing a decrease of $5 million, or 1%. The primary driver was an increase in sales from the aerial and industrial materials SPG and the imaging services SPG, offset by declines in the equipment and media SPG.

Gross Profit

Gross profit for the Commercial Imaging segment for 2004 increased $4 million, or 1%, from $267 million for 2003 to $271 million for 2004. The gross profit margin was 33.7% for 2004 as compared with 33.8% for 2003. The decrease in the gross profit margin of 0.1 percentage points was attributable to an increase in manufacturing cost, which negatively impacted gross profit margins by approximately 0.2 percentage points, and unfavorable price/mix of 0.5 percentage points, partially offset by exchange, which favorably impacted gross profit margins by 0.8 percentage points.

Selling, General and Administrative Expenses

SG&A expenses for the Commercial Imaging segment decreased $5 million, or 4%, from $135 million for 2003 to $130 million for 2004. As a percentage of sales, SG&A expenses decreased from 17% for 2003 to 16% for 2004. The decrease in SG&A expenses is primarily due to cost savings realized from ongoing focused cost reduction programs and reduced advertising costs, partially offset by the unfavorable impact of exchange.

Research and Development Costs

R&D costs for the Commercial Imaging segment decreased $10 million, or 43%, from $23 million for 2003 to $13 million for 2004. As a percentage of sales, R&D costs decreased from 3% in 2003 to 2% in 2004.

Earnings (Losses) From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes

Earnings from continuing operations before interest, other income (charges), net, and income taxes for the Commercial Imaging segment increased $18 million, or 17%, from $109 million in 2003 to $127 million in 2004. The increase in earnings from operations is primarily attributable to the reasons outlined above.

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GRAPHIC COMMUNICATIONS

On May 1, 2004, Kodak completed the acquisition of the NexPress-related entities, which included the following:

-	Heidelberg’s 50% interest in NexPress Solutions LLC (Kodak and Heidelberg formed the NexPress 50/50 JV in 1997 to develop high quality, on-demand, digital color printing systems)

-	100% of the stock of Heidelberg Digital LLC (Hdi), a manufacturer of digital black & white printing systems

-	100% of the stock of NexPress GMBH – a R&D center located in Kiel, Germany

-	Certain sales and service employees, inventory and related assets and liabilities of Heidelberg’s sales and service units located throughout the world

There was no consideration paid to Heidelberg at closing. Under the terms of the acquisition, Kodak and Heidelberg agreed to use a performance-based earn-out formula whereby Kodak will make periodic payments to Heidelberg over a two-year period, if certain sales goals are met. If all sales goals are met during the two calendar years ending December 31, 2005, the Company will pay a maximum of $150 million in cash. During the first calendar year, no amounts were paid. Additional payments may also be made relating to the incremental sales of certain products in excess of a stated minimum number of units sold during a five-year period following the closing of the transaction. The acquisition is expected to become accretive by 2007. During the eight months since closing, the NexPress-related entities contributed $177 million in sales to the Graphic Communications segment.

On January 5, 2004, Kodak announced the completion of its acquisition of Scitex Digital Printing, the world leader in high-speed, variable data inkjet printing systems. Kodak acquired the business for $239 million in net cash. This acquisition was expected to contribute approximately $200 million to Graphic Communications segment sales in 2004. Scitex Digital Printing now operates under the name Kodak Versamark, Inc. During 2004, Kodak Versamark contributed $198 million in sales to the Graphic Communications segment.

Worldwide Revenues

Net worldwide sales for the Graphic Communications segment were $724 million for 2004 as compared with $346 million for 2003, representing an increase of $378 million, or 109% as reported, or 108% excluding the favorable impact from exchange. The increase in net sales was primarily attributable to the acquisitions of Kodak Versamark and the NexPress-related entities, which contributed approximately $375 million in net sales to the Graphic Communications segment.

Net sales in the U.S. were $350 million for 2004 as compared with $156 million for 2003, representing an increase of $194 million, or 124%. Net sales outside the U.S. were $374 million in the current year as compared with $190 million in the prior year, representing an increase of $184 million, or 97%, or 95% excluding the favorable impact from exchange.

Digital Strategic Product Groups’ Revenues

Graphic Communications segment digital product sales, which are comprised of Kodak Versamark, the NexPress-related entities, and Encad, Inc. products and services, were $456 million for the current year as compared with $75 million for the prior year, representing an increase of $381 million, or 508%. The increase is primarily attributable to the acquisitions of Versamark and the NexPress-related entities.

Kodak Versamark experienced strong sales performance driven by increased placements of color printing units in the transactional printing market coupled with a growing consumables business.

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Traditional Strategic Product Groups’ Revenues

Segment traditional product sales are limited to the sales of traditional graphics products to the KPG joint venture. Net worldwide sales of graphic arts products to Kodak Polychrome Graphics (KPG), an unconsolidated joint venture affiliate in which the Company has a 50% ownership interest, of $268 million were consistent for the current year as compared with 2003 net sales of $271 million. Increasing volumes were offset by negative price/mix primarily attributable to graphic arts products.

Gross Profit

Gross profit for the Graphic Communications segment for 2004 increased $82 million, or 167%, from $49 million for 2003 to $131 million for 2004. The gross profit margin was 18.1% for 2004 as compared with 14.2% for 2003. The increase in the gross profit margin of 3.9 percentage points was primarily attributable to the acquisitions of Kodak Versamark and the NexPress-related entities, which contributed 13.2 percentage points to gross profit margin for the current year period. This is despite the fact that Kodak Versamark’s margins were negatively affected by the impact of the purchase accounting for the inventory that was acquired with Kodak Versamark at its fair value, which was sold during 2004. This negative impact was partially offset by a positive impact of purchase accounting for the inventory that was acquired with the NexPress-related entities at its fair value. Excluding the impact of purchase accounting, Kodak Versamark and the NexPress-related entities would have favorably impacted gross profit margins by approximately 14.3 percentage points during the current year period. Partially offsetting the favorable impact of acquisitions were: (1) an increase in manufacturing cost, which negatively impacted gross profit margins by approximately 7.1 percentage points, primarily due to an increase in silver prices and additional costs incurred in relation to the relocation of manufacturing facilities for graphics products from Mexico to Great Britain and the U.S., (2) negative exchange, which reduced gross profit margins by approximately 0.9 percentage points, and (3) negative price/mix of 1.0 percentage points.

Selling, General and Administrative Expenses

SG&A expenses for the Graphic Communications segment were $160 million for 2004 as compared with $37 million in the prior year, representing an increase of $123 million, or 332%, and increased as a percentage of sales from 11% in the prior year to 22% in the current year. The increase in SG&A expenses is primarily attributable to the acquisitions of Kodak Versamark and the NexPress-related entities, which together accounted for $120 million of SG&A expenses in the current year period.

Research and Development Costs

R&D costs for the Graphic Communications segment increased $88 million, or 383%, from $23 million for 2003 to $111 million for the current year, and increased as a percentage of sales from 7% in the prior year to 15% in the current year. The increase was primarily attributable to the acquisitions of Kodak Versamark and the NexPress-related entities, which together accounted for $90 million of R&D in the current period, and includes a $10 million charge for purchased in-process R&D associated with the Kodak Versamark and NexPress-related entities acquisition.

Earnings (Losses) From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes

Losses from continuing operations before interest, other income (charges), net, and income taxes for the Graphic Communications segment increased $129 million from losses of $11 million in 2003 to losses of $140 million in 2004. This increase in losses is primarily attributable to the acquisition of the NexPress-related entities on May 1, 2004, the purchase of Scitex Digital Printing (renamed Kodak Versamark) on January 5, 2004, and the other factors described above. As noted above, the NexPress-related entities are expected to become accretive by 2007, and Kodak Versamark is expected to be slightly dilutive through 2004 and accretive thereafter.

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KPG’s earnings performance continued to improve on the strength of its leading position in digital printing plates and digital proofing, coupled with favorable operating expense management and foreign exchange. The Company’s equity in the earnings of KPG contributed positive results to other income (charges), net during 2004.

On January 12, 2005, the Company announced that it had entered into a Redemption agreement with Sun Chemical Corporation (Sun Chemical) to purchase Sun Chemical’s 50 percent interest in Kodak Polychrome Graphics (KPG), a 50/50 joint venture of Kodak and Sun Chemical that was established in 1998. KPG is one of the world’s leading suppliers of products and services to the graphic communications market, with operations in six continents and an extensive global sales force. Under the terms of the transaction, Kodak will redeem all of Sun Chemical’s shares in KPG by providing $317 million in cash at closing, $200 million in cash in the third quarter of 2006 and $50 million in cash annually from 2008 through 2013, for a total of $817 million. Kodak will fund the acquisition through internally generated cash flow. This transaction, which is expected to close in the second quarter of 2005, will expand the Company’s global distribution network for Graphic Communications digital printing systems and broaden the Company’s solutions portfolio. The Company expects this acquisition to incrementally increase revenue by approximately $1.1 billion in 2005 and be immediately accretive to earnings, adding approximately five cents to diluted earnings per share from continuing operations in 2005 and approximately 14 cents to diluted earnings per share from continuing operations in 2006. The Company completed its acquisition of KPG on April 1, 2005.

On January 31, 2005, the Company announced that it had entered into a definitive agreement with Creo Inc. (Creo) to acquire 100% of its outstanding shares. Creo is based in Vancouver, Canada and is the world’s number one provider of workflow software used by printers to manage efficiently the movement of text, graphics and images from the computer screen to the printing press. Under the terms of the agreement, Kodak will pay approximately $980 million in cash, or $16.50 per share, for all outstanding shares of Creo, on a fully diluted basis. The transaction is subject to regulatory approvals, the approval of Creo’s shareholders and court approval. The acquisition will provide Kodak with an innovative digital pre-press product portfolio and established relationships in the commercial printing segment, the largest market opportunity within the graphic communications industry. This transaction also reinforces Graphic Communications status as a leading industry participant to provide customers with all of the products and services they need to be successful in a blended product environment, where digital, traditional and hybrid print jobs are converging. This acquisition is expected to result in modest earnings dilution in 2005 and approximately $700 million in incremental revenue in 2006. The impact on 2006 net earnings per share cannot be accurately estimated until the transaction is completed, but is expected to be accretive to earnings in 2006.

ALL OTHER

Worldwide Revenues

Net worldwide sales for All Other were $118 million for 2004 as compared with $93 million for 2003, representing an increase of $25 million, or 27%. Net sales in the U.S. were $53 million in 2004 as compared with $42 million for 2003, representing an increase of $11 million, or 26%. Net sales outside the U.S. were $65 million in the current year as compared with $51 million in the prior year, representing an increase of $14 million, or 27%.

Losses From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes

Losses from continuing operations before interest, other income (charges), net, and income taxes for All Other increased $105 million from a loss of $77 million in 2003 to a loss of $182 million in 2004. Increased levels of investment for the Company’s display business and consumer inkjet development activities primarily drove the increase in the loss from operations.

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RESULTS OF OPERATIONS – DISCONTINUED OPERATIONS

Earnings from discontinued operations, net of income taxes, for 2004 were $475 million, or $1.66 per basic and diluted share primarily relating to the sale of Kodak’s Remote Sensing Systems business, which contributed $466 million to earnings from discontinued operations, including the after-tax gain on the sale of $439 million. The 2003 earnings from discontinued operations, net of income taxes, were $64 million, or $.22 per basic and diluted share and reflects net of tax earnings of $27 million primarily related to reversals of tax and environmental reserves as well as $40 million of after-tax earnings from Kodak’s Remote Sensing Systems business.

NET EARNINGS

Net earnings for 2004 were $565 million, or $1.97 per basic and diluted share, as compared with net earnings for 2003 of $253 million, or $.88 per basic and diluted share, representing an increase of $312 million, or 123%. This increase is primarily attributable to the reasons outlined above.

2003 COMPARED WITH 2002
(2003 Restated)

RESULTS OF OPERATIONS - CONTINUING OPERATIONS

CONSOLIDATED

Worldwide Revenues

Net worldwide sales were $12,909 million for 2003 as compared with $12,549 million for 2002, representing an increase of $360 million, or 3% as reported, or a decrease of 2% excluding the favorable impact from exchange. The increase in net sales was primarily due to increased volumes and favorable exchange, which increased sales for 2003 by 1.4 and 5.5 percentage points, respectively. The increase in volumes was primarily driven by consumer digital cameras, printer dock products, inkjet media and entertainment print films in the Digital & Film Imaging Systems (D&FIS) segment, digital products in the Health segment, partially offset by decreased volumes for traditional consumer film products. Favorable exchange resulted from an increased level of sales in non-U.S. countries as the U.S. dollar weakened throughout 2003 in relation to most foreign currencies, particularly the Euro. In addition, the acquisition of PracticeWorks, Inc. (PracticeWorks) in the fourth quarter of 2003 accounted for an additional 0.4 percentage points of the increase in net sales. These increases were partially offset by decreases attributable to price/mix, which reduced sales for 2003 by approximately 4.2 percentage points. These decreases were driven primarily by price/mix declines in traditional products and services, and consumer digital cameras in the D&FIS segment, film and laser imaging systems in the Health segment, and graphic arts products in the Graphic Communications segment.

Net sales in the U.S. were $5,421 million for 2003 as compared with $5,707 million for 2002, representing a decrease of $286 million, or 5%. Net sales outside the U.S. were $7,488 million for 2003 as compared with $6,842 million for 2002, representing an increase of $646 million, or 9% as reported, or no change excluding the favorable impact of exchange.

Digital Strategic Product Groups’ Revenues

The Company’s digital product sales, excluding New Technologies product sales, were $3,736 million for 2003 as compared with $2,963 million for 2002, representing an increase of $773 million, or 26%, primarily driven by the consumer digital capture SPG, the home printing SPG, and the digital capture and applications SPG of the Health segment.

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Traditional Strategic Product Groups’ Revenues

Net sales of the Company’s traditional products were $9,156 million for 2003 as compared with $9,564 million for 2002, representing a decrease of $408 million, or 4%, primarily driven by declines in the film capture SPG and the consumer output SPG.

Foreign Revenues

The Company’s operations outside the U.S. are reported in three regions: (1) the Europe, Africa and Middle East region (EAMER), (2) the Asia Pacific region, and (3) the Canada and Latin America region. Net sales in EAMER for 2003 were $3,880 million as compared with $3,484 million for 2002, representing an increase of 11% as reported, or a decrease of 2% excluding the favorable impact of exchange. Net sales in the Asia Pacific region for 2003 were $2,368 million compared with $2,240 million for 2002, representing an increase of 6% as reported, or a decrease of 1% excluding the favorable impact of exchange. Net sales in the Canada and Latin America region for 2003 were $1,240 million as compared with $1,118 million for 2002, representing an increase of 11% as reported, or an increase of 5% excluding the favorable impact of exchange.

The Company’s major emerging markets include China, Brazil, Mexico, India, Russia, Korea, Hong Kong and Taiwan. Net sales in emerging markets were $2,591 million for 2003 as compared with $2,425 million for 2002, representing an increase of $166 million, or 7% as reported, or an increase of 4% excluding the favorable impact of exchange. The emerging market portfolio accounted for approximately 20% and 35% of the Company’s worldwide and non-U.S. sales, respectively, in 2003.

Sales growth in Russia, India and China of 26%, 17% and 12%, respectively, were the primary drivers of the increase in emerging market sales, partially offset by decreased sales in Taiwan, Hong Kong and Brazil of 19%, 10% and 7%, respectively. The increase in sales in Russia was a result of continued growth in the number of Kodak Express stores, which represent independently owned photo specialty retail outlets, and the Company’s efforts to expand the distribution channels for Kodak products and services. Sales increases in India were driven by the continued success from the Company’s efforts to increase the level of camera ownership and from the continued success of independently owned Photoshop retail stores. Sales growth in China resulted from strong business performance for all Kodak’s operations in that region in the first, third and fourth quarters of 2003; however, this growth was partially offset by the impact of the Severe Acute Respiratory Syndrome (SARS) situation, particularly for consumer and professional products and services, which negatively impacted sales in China during the second quarter. The sales declines experienced in Hong Kong and Taiwan during 2003 are also a result of the impact of SARS. The sales decline in Brazil is reflective of the continued economic weakness experienced there.

Gross Profit

Gross profit was $4,175 million for 2003 as compared with $4,527 million for 2002, representing a decrease of $352 million, or 8%. The gross profit margin was 32.3% in 2003 as compared with 36.1% in 2002. The decrease of 3.8 percentage points was attributable to declines in price/mix, which reduced gross profit margins by approximately 5.1 percentage points. This decrease was driven primarily by price/mix declines in traditional consumer film products, photofinishing, consumer digital cameras, and entertainment print films in the D&FIS segment, analog medical film and digital capture equipment in the Health segment, and graphic arts products in the Graphic Communications segment. The decline in price/mix was partially offset by favorable exchange, which increased gross margins by approximately 0.8 percentage points, and decreases in manufacturing cost, which favorably impacted gross profit margins by approximately 0.3 percentage points year-over-year due to reduced labor expense, favorable materials pricing and improved product yields. The acquisition of PracticeWorks in the fourth quarter of 2003 did not have a significant impact on the gross profit margin.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) were $2,618 million for 2003 as compared with $2,504 million for 2002, representing an increase of $114 million, or 5%. SG&A remained consistent as a percentage of sales at 20% for both years. The net increase in SG&A is primarily attributable to an increase in the benefit rate and the occurrence of the following one-time charges: intellectual property settlement of $12 million; patent infringement claim of $14 million; settlement of outstanding issues relating to a prior year acquisition of $14 million; write-down of the Burrell Companies’ net assets held for sale of $9 million; donation to a technology enterprise for research purposes amounting to $8 million; legal settlement of $8 million; strategic asset impairments of $3 million; and unfavorable exchange of $118 million due to an increased level of SG&A costs incurred in non-U.S. countries as most foreign currencies strengthened against the U.S. dollar in 2003. These items were partially offset by a reversal of environmental reserves of $9 million and cost savings realized from position eliminations associated with ongoing focused cost reduction programs.

Research and Development Costs

Research and development (R&D) costs were $776 million for 2003 as compared with $757 million for 2002, representing an increase of $19 million, or 3%. The increase in R&D is primarily due to $31 million of write-offs for purchased in-process R&D associated with two acquisitions made in 2003. These charges were partially offset by cost savings realized from position eliminations associated with ongoing focused cost reduction programs. As a percentage of sales, R&D costs remained flat at 6.0% for both 2003 and 2002.

Earnings (Losses) From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes

Earnings from continuing operations before interest, other income (charges), net, and income taxes for 2003 were $302 million as compared with $1,168 million for 2002, representing a decrease of $866 million, or 74%. The decrease is primarily the result of (1) the decline in gross profit margin and an increase in SG&A, and (2) net focused cost reduction charges of $479 million incurred during 2003 as compared with $98 million for 2002, an increase of $381 million which was primarily due to the costs incurred under the Third Quarter, 2003 Restructuring Program.

Interest Expense

Interest expense for 2003 was $147 million as compared with $173 million for 2002, representing a decrease of $26 million, or 15%. The decrease in interest expense is almost entirely attributable to lower average interest rates in 2003 relative to 2002, which was driven mainly by the refinancing of the Company’s $144 million 9.38% Notes due March 2003 and the $110 million 7.36% Notes due April 2003 with lower interest rate medium term notes and lower average interest rates on commercial paper during 2003.

Other Income (Charges), Net

The other income (charges), net component includes principally investment income, income and losses from equity investments, foreign exchange, and gains and losses on the sales of assets and investments. Other income (charges), net for 2003 were a net charge of $51 million as compared with a net charge of $101 million for 2002. The decrease in other income (charges), net is primarily attributable to increased income from the Company’s equity investment in Kodak Polychrome Graphics, reduced losses from the Company’s NexPress joint venture, the elimination of losses from the Company’s equity investment in the Phogenix joint venture due to its dissolution in the second quarter of 2003, and lower non-strategic venture investment impairments.

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Income Tax Provision (Benefit)

The Company’s effective tax rate from continuing operations was 15% for the year ended December 31, 2002. The effective tax rate from continuing operations of 15% is less than the U.S. statutory rate of 35% primarily due to the charges for the focused cost reductions and asset impairments being deducted in jurisdictions that have a higher tax rate than the U.S. federal income tax rate, and also due to discrete period tax benefits of $45 million in connection with the closure of the Company’s PictureVision subsidiary and $46 million relating to the consolidation of the Company’s photofinishing operations in Japan and the loss realized from the liquidation of a subsidiary as part of that consolidation. These benefits were partially offset by the impact of recording a valuation allowance to provide for certain tax benefits that the Company would be required to forgo in order to fully realize the benefits of its foreign tax credit carryforwards.

Excluding the effect of discrete period items, the effective tax rate from continuing operations was 15.5% and 26.5% in 2003 and 2002, respectively. The decrease from 26.5% in 2002 to 15.5% in 2003 is primarily due to increased earnings in certain lower-taxed jurisdictions outside the U.S. relative to total consolidated earnings.

Earnings From Continuing Operations

Net earnings from continuing operations for 2003 were $189 million, or $.66 per basic and diluted share, as compared with net earnings from continuing operations for 2002 of $761 million, or $2.61 per basic and diluted share, representing a decrease of $572 million, or 75%. The decrease in net earnings from continuing operations is primarily attributable to the reasons outlined above.

DIGITAL & FILM IMAGING SYSTEMS

Worldwide Revenues

Net worldwide sales for the D&FIS segment were $9,248 million for 2003 as compared with $9,002 million for 2002, representing an increase of $246 million, or 3% as reported, or a decrease of 3% excluding the favorable impact of exchange. Approximately 1.9 percentage points of the increase in net sales was attributable to increases related to volume, driven primarily by consumer digital cameras, printer dock products, inkjet media and entertainment print films, partially offset by volume declines for traditional consumer film products, and approximately 5.9 percentage points of the increase was attributable to favorable exchange. These increases were partially offset by price/mix declines, primarily driven by consumer digital cameras and traditional products and services, which reduced net sales by approximately 4.8 percentage points.

D&FIS segment net sales in the U.S. were $3,828 million for 2003 as compared with $4,034 million for 2002, representing a decrease of $206 million, or 5%. D&FIS segment net sales outside the U.S. were $5,420 million for 2003 as compared with $4,968 million for 2002, representing an increase of $452 million, or 9% as reported, or a decrease of 1% excluding the favorable impact of exchange.

Digital Strategic Product Groups’ Revenues

D&FIS segment digital product sales were $1,802 million for 2003 as compared with $1,199 million for 2002, representing an increase of $603 million, or 50%, primarily driven by the consumer digital capture SPG and the home printing SPG.

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Net worldwide sales of consumer digital cameras increased 79% in 2003 as compared with 2002, driven almost entirely by strong increases in volume, which were partially offset by declines in price/mix. Sales continue to be driven by strong consumer acceptance of the EasyShare digital camera system, as reflected in increased market share in a rapidly growing market.

Although some of Kodak’s largest channels do not report share data, Kodak continued to hold one of the top U.S. digital camera market share positions in channels reporting share data, attaining the number three share position for the full year, after attaining the top spot for the fourth quarter alone. Outside of the U.S., Kodak placed in the top four market share positions in 6 out of 9 key markets in the fourth quarter, and in the top four in 5 out of 9 key markets for the full year. Consumer digital cameras were profitable on a fully allocated basis for the second half of 2003.

Kodak’s new printer dock products, initially launched in the spring of 2003, experienced strong sales growth in the fourth quarter of 2003, strengthening their number two share position in the U.S. snapshot printer market and putting them on track to be a $100 million business in the first full year of sales.

Net worldwide sales from the Company’s consumer digital products and services, which include picture maker kiosks/media and retail consumer digital services revenue primarily from Picture CD and Retail.com, increased 6% in 2003 as compared with 2002, driven primarily by an increase in sales of kiosks and consumer digital services.

Net worldwide sales of inkjet photo paper increased 32% in 2003 as compared with 2002, primarily due to higher volumes. Kodak continued to maintain its shared leader market share position in the U.S. in 2003. The double-digit revenue growth and the maintenance of market share are primarily attributable to strong underlying market growth and the continued growth and acceptance of a new line of small format inkjet papers.

Traditional Strategic Product Groups’ Revenues

D&FIS segment traditional product sales were $7,446 million for 2003 as compared with $7,803 million for 2002, representing a decrease of $357 million, or 5%, primarily driven by declines in the film capture SPG and the consumer output SPG. Net worldwide sales of the film capture SPG, including consumer roll film (35mm and APS), one-time-use cameras (OTUC), decreased 9% in 2003 as compared with 2002, reflecting declines due to lower volumes of 12% and price/mix declines of 3%, partially offset by favorable exchange of 6%. Sales of the Company’s consumer film products within the U.S. decreased 18% in 2003 as compared with 2002, reflecting declines due to lower volumes of 17% and price/mix declines of 1%. Sales of the Company’s consumer film products outside the U.S. decreased 2% in 2003 compared with 2002, reflecting declines in volume of 9% and price/mix declines of 2%, partially offset by favorable exchange of 9%. The lower film product sales are attributable to a declining industry demand driven primarily by the impact of digital substitution and retailer inventory reductions.

The U.S. film industry sell-through volumes decreased approximately 8% in 2003 as compared with 2002 primarily due to the impact of digital substitution. The Company maintained approximately flat year-over-year blended U.S. consumer film share as it has done for the past several consecutive years.

Net worldwide sales for photofinishing services (excluding equipment), including Qualex in the U.S. and Consumer Imaging Services (CIS) outside the U.S., decreased 15% in 2003 as compared with 2002, reflecting lower volumes and declines in price/mix, partially offset by favorable exchange. In the U.S., Qualex’s sales for photofinishing services decreased 19% in 2003 as compared with 2002, and outside of the U.S., CIS sales decreased 8%.

Net worldwide sales of origination and print film to the entertainment industry increased 11% in 2003 as compared with 2002, primarily reflecting higher print film volumes and favorable exchange, partially offset by negative price/mix.

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Net worldwide sales of professional film capture products, including color negative, color reversal and commercial black and white films, decreased 13% in 2003 as compared with 2002, primarily reflecting declines in volume and negative price/mix, partially offset by favorable exchange. Sales declines of professional film capture products resulted primarily from the ongoing impact of digital substitution. Net worldwide sales of professional sensitized output, including color negative paper and display materials, increased 2% in 2003 as compared with 2002, primarily reflecting an increase related to favorable exchange, partially offset by declines in volume and negative price/mix.

Gross Profit

Gross profit for the D&FIS segment was $2,864 million for 2003 as compared with $3,219 million for 2002, representing a decrease of $355 million or 11%. The gross profit margin was 31.0% in the current year as compared with 35.8% in the prior year. The 4.8 percentage point decrease was primarily attributable to decreases in price/mix that impacted gross profit margins by approximately 6.3 percentage points, partially offset by manufacturing cost improvements and favorable exchange, which impacted gross margins by approximately 0.5 and 1.1 percentage points, respectively. The decrease in price/mix was primarily due to the impact of digital substitution, resulting in a decrease in sales of higher margin traditional products, the impact of which was only partially offset by increased sales of lower margin digital products.

Selling, General and Administrative Expenses

SG&A expenses for the D&FIS segment were $1,967 million for 2003 as compared with $1,935 million for 2002, representing an increase of $32 million or 2%. The net increase in SG&A spending is primarily attributable to unfavorable exchange of $96 million and an increase in the benefit rate, partially offset by cost savings realized from position eliminations associated with ongoing focused cost reduction programs. As a percentage of sales, SG&A expense remained constant at 21% for both years.

Research and Development Costs

R&D costs for the D&FIS segment decreased $32 million or 6% from $513 million in 2002 to $481 million in 2003. As a percentage of sales, R&D costs decreased slightly from 6% in 2002 to 5% in 2003. The decrease in R&D was primarily due to cost savings realized from position eliminations associated with ongoing focused cost reduction programs. These cost savings were partially offset by $21 million of write-offs for purchased in-process R&D associated with an acquisition made in 2003.

Earnings (Losses) From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes

Earnings from continuing operations before interest, other income (charges), net, and income taxes for the D&FIS segment decreased $355 million, or 46%, from $771 million in 2002 to $416 million in 2003, primarily as a result of the factors described above.

HEALTH

On October 7, 2003, the Company completed the acquisition of all of the outstanding shares of PracticeWorks, Inc., a leading provider of dental practice management software and digital radiographic imaging systems for approximately $475 million in cash, inclusive of transaction costs, and assumed net debt of approximately $20 million. This acquisition enables Kodak to offer its customers a full spectrum of dental imaging products and services from traditional film to digital radiography and photography.

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Worldwide Revenues

Net worldwide sales for the Health segment were $2,431 million for 2003 as compared with $2,274 million for 2002, representing an increase of $157 million, or 7% as reported, or an increase of 2% excluding the favorable impact of exchange. The increase in sales was comprised of: (1) an increase from favorable exchange of approximately 5.4 percentage points, (2) the acquisition of PracticeWorks Inc. in October 2003, which accounted for approximately 2.1 percentage points of the sales increase as it contributed $48 million to 2003 sales of dental systems, and (3) an increase in volume of approximately 2.9 percentage points, driven primarily by volume increases in digital products. These increases were partially offset by declines in price/mix of approximately 3.3 percentage points, which were related to both digital and traditional products.

Net sales in the U.S. were $1,061 million for 2003 as compared with $1,088 for 2002, representing a decrease of $27 million, or 2%. Net sales outside the U.S. were $1,370 million for 2003 as compared with $1,186 million for 2002, representing an increase of $184 million, or 16% as reported, or an increase of 5% excluding the favorable impact of exchange.

Digital Strategic Product Groups’ Revenues

Health segment digital sales, which include laser printers (DryView imagers and wet laser printers), digital media (DryView and wet laser media), digital capture equipment (computed radiography capture equipment and digital radiography equipment), services, dental practice management software, and Healthcare Information Systems (HCIS) including Picture Archiving and Communications Systems (PACS), were $1,438 million for 2003 compared with $1,269 million for 2002, representing an increase of $169 million or 13%. The increase in digital product sales was primarily attributable to favorable exchange, higher volumes of digital media, digital capture equipment and services, and the PracticeWorks acquisition. Service revenues increased due to an increase in digital equipment service contracts during 2003 as compared with 2002. These increases were partially offset by declines in price/mix for digital media and digital capture equipment.

Traditional Strategic Product Groups’ Revenues

Health segment traditional products, including analog film, equipment, chemistry and services, were $993 million for 2003 compared with $1,005 million for 2002, representing a decrease of $12 million or 1%, reflecting declines in volume and negative price/mix almost entirely offset by favorable exchange.

Gross Profit

Gross profit for the Health segment was $1,045 million for 2003 as compared with $930 million for 2002, representing an increase of $115 million, or 12%. The gross profit margin was 43.0% in 2003 as compared with 40.9% in 2002. The increase in the gross profit margin of 2.1 percentage points was primarily attributable to: (1) a decrease in manufacturing cost, which increased gross profit margins by approximately 3.1 percentage points, primarily due to favorable media and equipment manufacturing cost led by DryView digital media and digital capture equipment, complemented by lower service costs, (2) favorable exchange, which contributed approximately 1.1 percentage points to the gross profit margin, and (3) the acquisition of PracticeWorks in the fourth quarter of 2003, which increased gross profit margins by approximately 0.4 percentage points for the current year. These increases were partially offset by decreases attributable to price/mix, which negatively impacted gross profit margins by 2.5 percentage points due to lower prices for digital media, digital capture equipment and analog medical film.

Selling, General and Administrative Expenses

SG&A expenses for the Health segment increased $44 million, or 13%, from $347 million for 2002 to $391 million for 2003. As a percentage of sales, SG&A expenses increased from 15% for 2002 to 16% for 2003. The increase in SG&A expenses is primarily due to the acquisition of PracticeWorks, which had $21 million of SG&A expenses in 2003, an increase in the benefit rate, and the unfavorable impact of exchange, which accounted for $16 million of the increase.

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Research and Development Costs

R&D costs for the Health segment increased $26 million, or 17%, from $152 million in 2002 to $178 million in 2003. As a percentage of sales, R&D costs remained unchanged at 7% in both years. The increase was primarily due to $12 million of R&D costs associated with the acquisition of PracticeWorks, $10 million of which was a one-time write-off of purchased in-process R&D. The remainder of the increase was due to increased spending to drive growth in selected areas of the product portfolio.

Earnings (Losses) From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes

Earnings from continuing operations before interest, other income (charges), net, and income taxes for the Health segment increased $45 million, or 10%, from $431 million for 2002 to $476 million for 2003 due primarily to the reasons described above.

COMMERCIAL IMAGING

Worldwide Revenues

Net worldwide sales for the Commercial Imaging segment remained constant at $791 million for both 2003 and 2002, or a decrease of 6% excluding the favorable impact of exchange. Favorable exchange and price/mix, which contributed approximately 6.1 and 0.3 percentage points, respectively, to 2003 sales was entirely offset by decreases due to volume of approximately 6.4 percentage points, primarily driven by declines in document imaging products and services.

Net sales in the U.S. were $334 million for 2003 as compared with $366 million for 2002, representing a decrease of $32 million, or 9%. Net sales outside the U.S. were $457 million in 2003 as compared with $425 million in 2002, representing an increase of $32 million, or 8%, or a decrease of 4% excluding the favorable impact of exchange.

Digital and Traditional Strategic Product Groups’ Revenues

Commercial Imaging segment digital product sales remained constant at $367 million for both 2003 and 2002. Segment traditional product sales were constant at $424 million for both 2003 and 2002.

Gross Profit

Gross profit for the Commercial Imaging segment for 2003 decreased $15 million, or 5%, from $282 million for 2002 to $267 million for 2003. The gross profit margin was 33.8% for 2003 as compared with 35.7% for 2002. The decrease in the gross profit margin of 1.9 percentage points was attributable to an increase in manufacturing cost, which negatively impacted gross profit margins by approximately 2.2 percentage points, partially offset by exchange, which favorably impacted gross profit margins by 0.5 percentage points.

Selling, General and Administrative Expenses

SG&A expenses for the Commercial Imaging segment increased $1 million, or 1%, from $134 million for 2002 to $135 million for 2003. As a percentage of sales, SG&A expenses also remained constant at 17% for both years.

Research and Development Costs

R&D costs for the Commercial Imaging segment decreased $7 million, or 23%, from $30 million for 2002 to $23 million for 2003. As a percentage of sales, R&D costs decreased from 4% in 2002 to 3% in 2003.

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Earnings (Losses) From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes

Earnings from continuing operations before interest, other income (charges), net, and income taxes for the Commercial Imaging segment decreased $9 million, or 8%, from $118 million in 2002 to $109 million in 2003. The decrease in earnings from operations is primarily attributable to the reasons outlined above.

GRAPHIC COMMUNICATIONS

Worldwide Revenues

Net worldwide sales for the Graphic Communications segment were $346 million for 2003 as compared with $402 million for 2002, representing a decrease of $56 million, or 14% as reported, with no impact from exchange. The decrease in net sales was due to: (1) declines in volume of approximately 9.4 percentage points, which was primarily attributable to graphics products, and (2) declines due to price/mix of approximately 5.2 percentage points, which was also driven by graphics products.

Net sales in the U.S. were $156 million for 2003 as compared with $174 million for 2002, representing a decrease of $18 million, or 10%. Net sales outside the U.S. were $190 million for 2003 as compared with $228 million for 2002, representing a decrease of $38 million, or 17%, with no impact from exchange.

Digital and Traditional Strategic Product Groups’ Revenues

Graphic Communications segment 2003 and 2002 digital product sales are comprised of Encad, Inc. products and services. Segment traditional product sales are limited to the sales of traditional graphics products to the KPG joint venture.

Net worldwide sales of graphic arts products to Kodak Polychrome Graphics (KPG), an unconsolidated joint venture affiliate in which the Company has a 50% ownership interest, decreased 14% in 2003 as compared with 2002, reflecting declines in both volume and price/mix in graphic arts film. This reduction was primarily due to the effects of digital substitution.

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Gross Profit

Gross profit for the Graphic Communications segment for 2003 decreased $38 million, or 44%, from $87 million for 2002 to $49 million for 2003. The gross profit margin was 14.2% for 2003 as compared with 21.6% for 2002. The decrease in the gross profit margin of 7.4 percentage points was attributable to: (1) declines attributable to price/mix, which reduced gross profit margins by approximately 4.2 percentage points primarily due to declining contributions from traditional graphic arts products for the reasons outlined above, (2) unfavorable exchange, which negatively impacted gross profit margins by 2.8 percentage points, and (3) an increase in manufacturing cost, which negatively impacted gross profit margins by approximately 0.9 percentage points.

Selling, General and Administrative Expenses

SG&A expenses for the Graphic Communications segment remained constant at $37 million for both 2003 and 2002. As a percentage of sales, SG&A expenses increased from 9% for 2002 to 11% for 2003, primarily due to the impact of unfavorable exchange and an increase in the benefit rate.

Research and Development Costs

R&D costs for the Graphic Communications segment decreased $6 million, or 21%, from $29 million for 2002 to $23 million for 2003. As a percentage of sales, R&D costs remained constant at 7% for both years.

Earnings (Losses) From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes

Earnings or losses from continuing operations before interest, other income (charges), net, and income taxes for the Graphic Communications segment decreased $32 million, or 152%, from earnings of $21 million in 2002 to losses of $11 million in 2003. The decrease in earnings from operations is primarily attributable to the reasons outlined above.

KPG’s earnings performance continued to improve driven primarily by its world-leading position in the growth segments of digital proofing and digital printing plates, coupled with favorable foreign exchange. The Company’s equity in the earnings of KPG contributed positive results to other income (charges), net during 2003.

NexPress, the unconsolidated joint venture between Kodak and Heidelberg in which the Company had a 50% ownership interest, continued to increase unit placements of the NexPress 2100 Digital Production Color Press despite a weak printing market, with good customer acceptance.

ALL OTHER

Worldwide Revenues

Net worldwide sales for All Other were $93 million for 2003 as compared with $80 million for 2002, representing an increase of $13 million, or 16%. Net sales in the U.S. were $42 million in 2003 as compared with $45 million for 2002, representing a decrease of $3 million, or 7%. Net sales outside the U.S. were $51 million in 2003 as compared with $35 million in 2002, representing an increase of $16 million, or 46%.

Losses From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes

Losses from continuing operations before interest, other income (charges), net, and income taxes for All Other increased $50 million from a loss of $27 million in 2002 to a loss of $77 million in 2003. Increased levels of investment for the Company’s display business primarily drove the increase in the loss from operations.

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RESULTS OF OPERATIONS – DISCONTINUED OPERATIONS

On February 9, 2004, the Company announced its intent to sell the assets and business of the Remote Sensing Systems operation, including the stock of Kodak’s wholly owned subsidiary, Research Systems, Inc., collectively known as RSS, to ITT Industries for $725 million in cash. RSS, a leading provider of specialized imaging solutions to the aerospace and defense community, was previously presented as part of the Company’s commercial & government systems’ operation within the Commercial Imaging segment. Its customers include NASA, other U.S. government agencies, and aerospace and defense companies.

Earnings from discontinued operations, net of income taxes, for 2003 were $64 million, or $.22 per basic and diluted share, as compared with earnings from discontinued operations, net of income taxes, for 2002 of $9 million, or $.03 per basic and diluted share. The 2003 earnings from discontinued operations, net of income taxes, primarily reflects net of tax earnings of $40 million related to the operations of RSS, and net of tax earnings of $27 million primarily related to reversals of tax and environmental reserves as described below.

During the first quarter of 2003, the Company reversed a tax reserve of $15 million through discontinued operations. The reversal of the tax reserve was triggered by the Company’s repurchase of certain properties that were initially sold in connection with the 1994 divestiture of Sterling Winthrop Inc., which represented a portion of the Company’s non-imaging health businesses. The repurchase of these properties will allow the Company to directly manage the environmental remediation that the Company is required to perform in connection with those properties, which will result in better overall cost control. In addition, the repurchase eliminated the uncertainty regarding the recoverability of tax benefits associated with the indemnification payments that were previously being made to the purchaser.

During the fourth quarter of 2003, the Company recorded a net of tax credit of $7 million through discontinued operations for the reversal of an environmental reserve, which was primarily attributable to positive developments in the Company’s remediation efforts relating to a formerly owned manufacturing site in the U.S. In addition, during the fourth quarter of 2003, the Company reversed state income tax reserves of $3 million, net of tax, through discontinued operations due to the favorable outcome of tax audits in connection with a formerly owned business.

The earnings from discontinued operations, net of income taxes, of $9 million for 2002 reflects net of tax earnings of $32 million related to the operations of RSS, and net of tax earnings of $12 million related to the favorable outcome of litigation associated with the 1994 sale of Sterling Winthrop Inc. These earnings were partially offset by losses incurred from the shutdown of Kodak Global Imaging, Inc. (KGII), which amounted to $35 million net of tax.

NET EARNINGS

Net earnings for 2003 were $253 million, or $.88 per basic and diluted share, as compared with net earnings for 2002 of $770 million, or $2.64 per basic and diluted share, representing a decrease of $517 million, or 67%. This decrease is primarily attributable to the reasons outlined above.

PAGE 50

SUMMARY

(in millions, except per share data)	2004			Change			2003		Change			2002

	(Restated)
Net sales from continuing operations	$	13,517			+ 5	%	$	12,909		+ 3	%	$	12,549
(Loss) earnings from continuing operations before interest, other income (charges), net, and income taxes		(87	)		-129			302		- 74			1,168
Earnings from continuing operations		81			-57			189		- 75			761
Earnings from discontinued operations		475			+642			64		+611			9
Net earnings		556			+120			253		- 67			770
Basic earnings per share:
Continuing operations		.28			-58			.66		- 74			2.61
Discontinued operations		1.66			+655			.22		+600			.03
Total		1.94			+120			.88		- 66			2.64
Diluted earnings per share:
Continuing operations		.28			-58			.66		- 74			2.61
Discontinued operations		1.66			+655			.22		+600			.03
Total		1.94			+120			.88		- 66			2.64

The Company’s results as noted above include certain one-time items, such as charges associated with focused cost reductions and other special charges. These one-time items, which are described below, should be considered to better understand the Company’s results of operations that were generated from normal operational activities.

2004

The Company’s results from continuing operations for the year included the following:

Charges of $889 million ($620 million after tax) related to focused cost reductions implemented primarily under the Third Quarter, 2003 Restructuring Program and 2004-2006 Restructuring Program. See further discussion in the Restructuring Costs and Other section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and Note 16, “Restructuring Costs and Other.”

Charges of $12 million ($7 million after tax), including $2 million ($1 million after tax) for inventory write-downs and $10 million ($6 million after tax) for the write-off of fixed assets related to Kodak’s historical ownership interest in the NexPress joint venture in connection with the acquisition of the NexPress-related entities incurred in the second and fourth quarters.

Charges of $15 million ($10 million after tax) related to purchased in-process R&D incurred in the first and third quarters.

Charges of $6 million ($4 million after tax) related to a legal settlement.

Other income of $101 million ($63 million after tax) related to two favorable legal settlements.

Income tax charges of $31 million related to valuation allowances for restructuring related deferred tax assets.

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2003

The Company’s results from continuing operations for the year included the following:

Charges of $552 million ($396 million after tax) related to focused cost reductions implemented primarily under the First Quarter, 2003 Restructuring Program and the Third Quarter, 2003 Restructuring Program. See further discussion in the Restructuring Costs and Other section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and Note 16, “Restructuring Costs and Other.”

Charges of $16 million ($10 million after tax) related to venture investment impairments and other asset write-offs incurred in the second and fourth quarters. See MD&A and Note 7, “Investments,” for further discussion of venture investment impairments.

Charges of $31 million ($19 million after tax), including $21 million ($13 million after tax) in the first quarter and $10 million ($6 million after tax) in the fourth quarter, related to purchased in-process R&D.

Charges of $14 million ($9 million after tax) connected with the settlement of a patent infringement claim.

Charges of $12 million ($7 million after tax) related to an intellectual property settlement.

Charges of $14 million ($9 million after tax) connected with the settlement of certain issues relating to a prior-year acquisition.

Charges of $8 million ($5 million after tax) for a donation to a technology enterprise.

Charges of $8 million ($5 million after tax) for legal settlements.

Reversal of $9 million ($6 million after tax) for an environmental reserve.

Income tax benefits of $13 million, which included tax benefits related to the donation of patents in the first and fourth quarters, amounting to $8 million and $5 million, respectively.

2002

The Company’s results from continuing operations for the year included the following:

Charges of $114 million ($80 million after tax) related to focused cost reductions implemented in the third and fourth quarters. See further discussion in the Restructuring Costs and Other section of MD&A and Note 16, “Restructuring Costs and Other.”

Charges of $50 million ($34 million after tax) related to venture investment impairments and other asset write-offs incurred in the second, third and fourth quarters. See MD&A and Note 7, “Investments,” for further discussion of venture investment impairments.

Income tax benefits of $121 million, including a $45 million tax benefit related to the closure of the PictureVision subsidiary in the second quarter, a $46 million benefit from the loss realized on the liquidation of a Japanese photofinishing operations subsidiary in the third quarter, an $8 million benefit from a fourth quarter property donation, and a $22 million benefit relating to the decline in the year-over-year operational effective tax rate.

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RESTRUCTURING COSTS AND OTHER

Currently, the Company is being adversely impacted by the progressing digital substitution. As the Company continues to adjust its operating model in light of changing business conditions, it is probable that ongoing cost reduction activities will be required from time to time.

In accordance with this, the Company periodically announces planned restructuring programs (Programs), which often consist of a number of restructuring initiatives. These Program announcements provide estimated ranges relating to the number of positions to be eliminated and the total restructuring charges to be incurred. The actual charges for initiatives under a Program are recorded in the period in which the Company commits to formalized restructuring plans or executes the specific actions contemplated by the Program and all criteria for restructuring charge recognition under the applicable accounting guidance have been met.

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Restructuring Programs Summary

The activity in the accrued restructuring balances and the non-cash charges incurred in relation to all of the restructuring programs described below was as follows for fiscal 2004:

(in millions)	Balance Dec. 31, 2003		Costs Incurred		Reversals			Cash Payments			Non- cash Settlements			Other Adjustments and Reclasses (1)			Balance Dec. 31, 2004

2004-2006 Program:
Severance reserve	$	—	$	418	$	(6	)	$	(169	)	$	—		$	24		$	267
Exit costs reserve		—		99		(1	)		(47	)		—			(15	)		36

Total reserve	$	—	$	517	$	(7	)	$	(216	)	$	—		$	9		$	303

Long-lived asset impairments and inventory write-downs	$	—	$	157	$	—		$	—		$	(157	)	$	—		$	—
Accelerated depreciation		—		152		—			—			(152	)		—			—
Q3 2003 Program:
Severance reserve	$	180	$	45	$	(4	)	$	(208	)	$	—		$	17		$	30
Exit costs reserve		12		7		(3	)		(14	)		—			—			2

Total reserve	$	192	$	52	$	(7	)	$	(222	)	$	—		$	17		$	32

Long-lived asset impairments and inventory write-downs	$	—	$	6	$	—		$	—		$	(6	)	$	—		$	—
Accelerated depreciation	$	—	$	24	$	—		$	—		$	(24	)	$	—		$	—
Q1 2003 Program:
Severance reserve	$	23	$	—	$	(1	)	$	(15	)	$	—		$	—		$	7
Exit costs reserve		4		—		—			(4	)		—			—			—

Total reserve	$	27	$	—	$	(1	)	$	(19	)	$	—		$	—		$	7

Accelerated depreciation	$	—	$	7	$	—		$	—		$	(7	)	$	—		$	—
Phogenix Program:
Exit costs reserve	$	9	$	—	$	(6	)	$	(3	)	$	—		$	—		$	—

Q4 2002 Program:
Severance reserve	$	12	$	—	$	—		$	(11	)	$	—		$	—		$	1
Exit costs reserve		8		1		(4	)		(3	)		—			—			2

Total reserve	$	20	$	1	$	(4	)	$	(14	)	$	—		$	—		$	3

2001 Programs:
Severance reserve	$	6	$	—	$	—		$