10-K 1 ek111562.htm FORM 10-K

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, 2005 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

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, 2005, 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 February 27, 2006 was 287,213,784 shares of common stock.

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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 2006 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 AND RELATED STOCKHOLDER MATTERS

Item 13 -	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Item 14 -	PRINCIPAL AUDITOR FEES AND SERVICES

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PART I

ITEM 1. BUSINESS

Eastman Kodak Company (the Company or Kodak) is the world’s foremost imaging innovator, providing leading products and services to the photographic, graphic communications and healthcare markets. With sales of $14.3 billion in 2005, the Company is committed to a digitally oriented growth strategy focused on helping people better use meaningful images and information in their life and work. Consumers use Kodak’s system of digital and traditional image capture products and services to take, print, store and share their pictures anytime, anywhere; businesses effectively communicate with customers worldwide using Kodak solutions for prepress, conventional and digital printing and document imaging; creative professionals rely on Kodak technology to uniquely tell their story through moving or still images; and leading healthcare organizations rely on Kodak’s innovative products, services and customized workflow solutions to help improve patient care and maximize efficiency and information sharing within and across their enterprises.

REPORTABLE SEGMENTS

As of and for the year ended December 31, 2005, the Company reported financial information for three reportable segments (Digital & Film Imaging Systems (D&FIS), Health Group, and Graphic Communications Group). 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 2005, the Company announced that effective January 1, 2006, the Digital & Film Imaging Systems segment will be reported as two distinct segments, the Consumer Digital Imaging Group segment and the Film and Photofinishing Systems Group segment, thereby changing the reportable segments beginning with the first quarter of 2006. In connection with the realignment, the Company’s new reporting structure will be implemented beginning in the first quarter of 2006 as outlined below:

Consumer Digital Imaging Group Segment: The Consumer Digital Imaging Group segment encompasses digital capture, kiosks, home printing systems, business development, inkjet systems, digital imaging services and imaging sensors. This segment provides consumers, professionals and cinematographers with digital products and services.

Film and Photofinishing Systems Group Segment: The Film and Photofinishing Systems Group segment encompasses consumer and professional film, photographic paper and photofinishing, aerial and industrial film, and entertainment products and services. This segment provides consumers, professionals and cinematographers with traditional products and services.

Health Group Segment: There are no changes to the Health Group segment. The Health Group segment provides digital medical imaging and information products, and systems and solutions, which are key components of sales and earnings growth. These include laser imagers, digital print films, computed and digital radiography systems, dental radiographic imaging systems, dental practice management software, advanced picture-archiving and communications systems (PACS), and healthcare information systems (HCIS). Products of the Health Group segment also 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 Health Group 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.

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Graphic Communications Group Segment: As of January 1, 2006, the Graphic Communications Group segment consists of Kodak Polychrome Graphics LLC (KPG), a leader in the graphic communications industry; Creo Inc., a premier supplier of prepress and workflow systems used by commercial printers worldwide; NexPress Solutions, Inc., a producer of digital color and black and white printing solutions; Kodak Versamark, Inc., a provider of continuous inkjet technology; and Encad, Inc., a maker of wide-format inkjet printers, inks and media. 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.

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 2007 to complete its transformation as the leader of the traditional photographic industry to a leadership position in digital imaging markets.

Solid progress was achieved during 2005 in each area of this strategy. Kodak holds a leading position in key digital product categories where we participate. For the year ended December 31, 2005, Kodak achieved a level of digital revenues that exceeded traditional revenues. Additionally, through the 2005 acquisitions of KPG and Creo, Kodak has essentially completed its $3 billion investment and acquisition plan included in the 2003 strategy.

For 2006, the Company’s strategy includes the following priorities:

	-	Continue the focus on delivering cash flow
	-	Revenue growth from digital products and services is subordinated to expansion of operating margin on digital products and services
	-	Continue to grow revenue from digital products and services

As previously mentioned, the realignment and the new reporting structure are effective for the first quarter of 2006. Accordingly, the following business discussion is based on the three reportable segments and All Other as they were structured as of and for the year ended December 31, 2005. Kodak’s sales, earnings and assets by reportable segment for these three reportable segments and All Other for the past three years are shown in Note 23, “Segment Information.”

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DIGITAL & FILM IMAGING SYSTEMS (D&FIS) SEGMENT

Sales from continuing operations of the D&FIS segment for 2005, 2004 and 2003 were (in millions) $8,460, $9,366 and $9,415, respectively.

This segment combines digital and traditional photography and imaging services in all its forms, including consumer, professional and motion picture. Kodak manufactures and markets films (consumer, professional, motion picture, aerial and industrial), photographic papers (consumer and professional), photographic processing services, photographic chemicals, and cameras (including one-time-use and digital). Kodak EasyShare Gallery has accelerated Kodak’s growth in the online photography market and helped to drive more rapid adoption of digital and online sharing, printing and archiving services. Kodak EasyShare Gallery, which has more than 30 million members, offers digital processing of images - both digital and film - as well as the ability to go beyond printing 4x6 and create more margin rich items such as photo frames, calendars, photo playing cards, and a host of other personalized merchandise.

Digital product offerings are replacing some of the traditional film 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, and the timing of digital infrastructure installation. Film usage continues to decline as consumers continue to migrate from a film-only household, to a dual-use (digital camera and film) household, to a mobile phone use household. The mobile phone industry will continue to play a role in the digital camera market as phonecams rapidly improve their offerings with one and two megapixel cameras, convergence ability such as wifi, and small, sleek design.

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.

The Company’s strategy in its consumer digital business is to deliver innovative products and services that deliver high quality, easy sharing and easy archiving to consumers, professionals, retailers and labs, while not compromising on Kodak’s legendary ease of 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 ImageLink standard, introduced by Kodak and a consortium of digital camera manufacturers (Nikon, Olympus, Pentax) in 2004, allows non-Kodak cameras to connect to the EasyShare printer dock, enabling consumers to print outstanding quality snapshots at the press of a button without connecting to a computer. 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 imaging 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 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 rationalize capacity. As previously outlined, digital product offerings are substituting for some of the traditional film 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, there are moderating and declining sales in emerging markets as well. The Company’s strategy is to partially mitigate this by providing its own digital products, digitization services and output services. In fact, growth in digital printing often leads to output on silver halide paper. During 2005, as a result of the faster-than-expected decline in the Company’s traditional film and paper business, the Company extended and accelerated its restructuring actions, and revised the useful lives of certain assets. The Company has sold or closed many of its photofinishing laboratories in certain parts of the world and repositioned its remaining labs for digital output as well as traditional processing services for retailers. Kodak also supplies photographic papers and chemicals to other entities that provide photofinishing services. The Company’s remaining laboratories provide consumers the opportunity to receive film images in traditional formats or digital form, such as a Picture CD.

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 GROUP SEGMENT

Sales from continuing operations of the Health Group segment for 2005, 2004 and 2003 were (in millions) $2,655, $2,686 and $2,431, respectively.

Products and services of the Health Group 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 Group 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.

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The Health Group segment provides digital medical imaging and information products, and systems and solutions, which are key components of sales and earnings growth. These include laser imagers, digital print films, computed and digital radiography systems, dental radiographic imaging systems, dental practice management software, advanced picture-archiving and communications systems (PACS), and healthcare information systems (HCIS). Products of the Health Group segment also 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 Health Group 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 March 2005, the Company completed the acquisition of OREX Computed Radiography Ltd. (OREX), a leading provider of compact, robust computed radiography systems that enable medical practitioners to acquire patient x-ray images digitally. This acquisition has added the technology of OREX’s small format computed radiography products for use in various health imaging markets, such as orthopedics, diagnostic imaging centers, dentistry, and industrial non-destructive testing (NDT).

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 Group 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 Group 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. The Health Group segment 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.

GRAPHIC COMMUNICATIONS GROUP

Sales from continuing operations of the Graphic Communications Group segment for 2005, 2004 and 2003 were (in millions) $2,990, $1,343 and $967, respectively.

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The Graphic Communications Group segment serves a variety of customers in the creative, in-plant, data center, commercial printing, packaging, newspaper and digital service bureau market segments with a range of software, media and hardware products that provide customers with a variety of solutions for prepress equipment, workflow software, digital and traditional printing, document scanning and multi-vendor IT services. As of and for the year ended December 31, 2005, the Graphic Communications Group segment consists of subsidiaries Kodak Polychrome Graphics LLC (KPG), Creo Inc., NexPress Solutions, Kodak Versamark, Inc., and Encad, Inc. Products include high-speed, high-volume continuous inkjet printing systems, high-speed production document scanners, micrographic peripherals, digital on-demand color and monochrome printing equipment, wide-format inkjet printers, inks, media (including micrographic films) and services. The Company also provides maintenance and professional services for Kodak and other manufacturers’ products, as well as providing imaging services to customers.

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.

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.

The growth in digital printing workflows has negatively affected the sale of traditional graphic films. As a result, the Company has become more active in digital printing products and services in order to participate in this growth segment through the acquisitions of Scitex Digital Printing, renamed Kodak Versamark, the NexPress-related entities, KPG and Creo. Traditional graphic products, primarily consisting of graphic films and chemistry, were formerly sold directly by the Company to the KPG joint venture.

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.

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ALL OTHER

Sales from continuing operations comprising All Other for 2005, 2004 and 2003 were (in millions) $163, $122 and $96, respectively.

All Other consists primarily of the Kodak components group, representing an effort by Kodak’s move 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, 2005, 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 materials and products.

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 held a 34% ownership interest and SANYO held a 66% interest in the business venture. In January 2006, Kodak announced that it will broaden its participation in the OLED industry. To facilitate this move, Kodak granted full control of SK Display Corporation to SANYO. Kodak will continue as exclusive licensing agent on behalf of Kodak and SANYO for certain OLED intellectual property.

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. Lithographic aluminum is the primary material used in the manufacture of offset printing plates. The Company procures raw aluminum coils from several suppliers, with contracts generally in place over the next one to two 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 holidays, vacations and other leisure activities. In 2005, sales of digital products were highest in the last four months of the year. Digital capture and home printing products have experienced peak sales in this period 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, including photofinishing services, of the D&FIS segment are normally strongest in the second and third quarters as demand is high due to heavy vacation activity and events such as weddings and graduations. These trends are expected to continue as the Company continues to experience growth in sales of digital products.

Sales and earnings of the Graphic Communications Group segment exhibit modestly higher levels in the fourth quarter. This is driven primarily by the sales of continuous inkjet and document scanner products due to seasonal customer demand linked to commercial year-end budgeting processes. In addition, sales of consumable products in this segment tend to occur uniformly throughout the year. Sales and earnings generated by the recent acquisitions of KPG and Creo are not expected to significantly impact the seasonality for this segment.

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With respect to the Health Group segment, the sales of consumable products, which generate the major portion of the earnings of this segment, tend to occur uniformly throughout the year. Sales of equipment products, which carry lower margins than consumables, are highest in the fourth quarter as purchases by 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 three reportable segments and All Other for 2005, 2004 and 2003 were as follows:

(in millions)	2005		2004		2003

D&FIS	$	276	$	365	$	481
Health Group		179		202		173
Graphic Communications Group		271		118		36
All Other		166		151		70

Total	$	892	$	836	$	760

The downward trend in research and development expenditures in the D&FIS and Health Group segments and upward trend in the Graphic Communications Group segment and All Other reflects the acquisitions completed in the current year as well as a continued focus on developing digital product areas.

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, Iceland, 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 and image sensors; network photo sharing and fulfillment; x-ray films, mammography systems, computed radiography, digital radiography, photothermographic dry printing, medical and dental image and information systems; flexographic and lithographic printing plates and systems, digital printing workflow and color management, proofing systems; color and black & white electrophotographic printing systems; inkjet inks, media and printing systems; thermal dye transfer and dye sublimation printing systems; digital cinema; 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 is no individual patent 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 Notes to Financial Statements, Note 11, “Commitments and Contingencies.”

EMPLOYMENT

At the end of 2005, the Company employed approximately 51,100 full time equivalent people, of whom approximately 25,500 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 more over the next few years as a result of the personnel reductions yet to be made under the 2004-2007 cost reduction program, which contemplated a 40 percent reduction in headcount below 2003 levels of 62,300 full time equivalents worldwide.

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 100 F Street, N.E., 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 April 6, 2005. Additionally, we filed with the New York Stock Exchange (NYSE) the CEO certification, dated June 3, 2005, 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.

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ITEM 1A. RISK FACTORS

Set forth below and elsewhere in this report and in other documents that the Company files with the Securities and Exchange Commission are risks and uncertainties that could cause the actual future results of the Company to differ from those expressed or implied in the forward-looking statements contained in this document and other public statements the Company makes. Additionally, because of the following risks and uncertainties, as well as other variables affecting our operating results, the Company’s past financial performance should not be considered an indicator of future performance.

If we do not effectively execute our digital transformation, this could adversely affect our operations, revenue and ability to compete.

The Company continues with its transformation from a traditional products and services company to a digital products and services company. This transformation includes an aggressive restructuring program to reduce its traditional infrastructure to cost-effectively manage the declining traditional business and to reduce its general and administrative costs to the level necessary to compete profitably in the digital markets. The Company expects these actions to be largely completed by mid 2007. As a result of the digital transformation, the Company has established three key financial metrics against which it will measure success: digital earnings growth through expanding margins from the Company’s digital businesses, digital revenue growth and cash generation. Accordingly, the success of the Company’s transformation is dependent upon the execution of the Company’s transformation initiatives including (1) managing the amount and timing of the cost savings resulting from the restructuring of its traditional infrastructure and the reductions in general and administrative costs, (2) Kodak’s ability to continue its development and sale of digital products and services that deliver competitive margins in each of its segments, (3) the Company’s ability to manage the traditional business for cash generation in a cost-effective manner and (4) Kodak’s ability to successfully integrate its acquisitions, including KPG and Creo. If Kodak cannot successfully execute its transformation initiatives, the Company’s ability to compete as a profitable and growing digital company could be negatively affected, which could adversely affect its results of operations and its ability to generate cash.

If we fail to comply with the covenants contained in our Secured Credit Agreement, including the two financial covenants, our ability to meet our financial obligations could be severely impaired.

There are affirmative, negative and financial covenants contained in the Company’s Secured Credit Agreement. These covenants are typical for a secured credit agreement of this nature. The Company’s failure to comply with these covenants could result in a default under the Secured Credit Agreement. If an event of default were to occur and is not waived by the lenders, then all outstanding debt, interest and other payments under the Secured Credit Agreement could become immediately due and payable and any unused borrowing availability under the revolving credit facility of the Secured Credit Agreement could be terminated by the lenders. The failure of the Company to repay any accelerated debt under the Secured Credit Agreement could result in acceleration of the majority of the Company’s unsecured outstanding debt obligations.

If we cannot effectively manage transitions of our products and services, this could adversely affect our revenues.

The industries in which Kodak competes are rapidly changing and becoming increasingly more complex. Kodak’s ability to successfully transition its existing products to new offerings requires that Kodak make accurate predictions of the product development schedule as well as volumes, product mix, customer demand, sales channels, and configuration. The process of developing new products and services is complex and often uncertain due to the frequent introduction of new products that offer improved performance and pricing. Kodak may anticipate demand and perceived market acceptance that differs from the product’s realizable customer demand and revenue stream. Further, in the face of intense industry competition, any unanticipated delay in implementing certain product strategies (including digital products, category expansion and digitization) or in the development, production or marketing of a new product could decrease any advantage Kodak may have to be the first or among the first to market and could adversely affect Kodak’s revenues. Kodak’s failure to carry out a product rollout in the time frame anticipated and in the quantities appropriate to customer demand, or at all, could adversely affect future demand for Kodak’s products and services and have an adverse effect on its business. This risk is exacerbated when a product has a short life cycle or a competitor introduces a new product just before Kodak’s introduction of a similar product.

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If we cannot effectively anticipate trends and respond to changing customer preferences, this could aversely affect our revenues.

Due to changes in technology, the market for traditional photography products and services is in decline and, as a result, product development has focused on 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, digital silver halide writers and commercial printing systems and solutions) designed to produce high quality images, and media (thermal and silver halide) optimized for digital workflows. Kodak’s success depends in part on its ability to develop and introduce new products and services in a timely manner that keep pace with technological developments and that are accepted in the market. The Company continues to introduce new consumer and commercial digital product offerings, however, there can be no assurance that the Company will be successful in anticipating and developing new products, product enhancements or new solutions and services to adequately address changing technologies and customer requirements. In addition, if the Company is unable to anticipate and develop improvements to its current technology, to adapt its products to changing customer preferences or requirements or to continue to produce high quality products in a timely and cost-effective manner in order to compete with products offered by its competitors, this could adversely affect the revenues of the Company.

If we cannot adequately protect our intellectual property, our business could be harmed.

Kodak has made substantial investments in technologies and has filed patent applications and obtained patents to protect its intellectual property rights as well as the interests of Kodak licensees. The execution and enforcement of licensing agreements protects the Company’s intellectual property rights and provides a revenue stream in the form of royalties that enables Kodak to further innovate and provide the marketplace with new products and services. There is no assurance that such measures will be adequate to protect the Company’s intellectual property.

Our revenue, earnings and expenses may suffer if we cannot continue to implement our intellectual property licensing strategies.

Kodak’s ability to execute its intellectual property licensing strategies could also affect the Company’s revenue and earnings. Kodak’s failure to develop and properly manage new intellectual property could adversely affect market positions and business opportunities. Furthermore, Kodak’s failure to manage the costs associated with intellectual property generation, licensing and litigation could adversely affect the profitability of Kodak’s operations.

Our revenue, earnings and expenses may suffer if we cannot continue to license or enforce our intellectual property rights.

Kodak relies upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries, and agreements with its employees, customers, suppliers and other parties, to establish, maintain and enforce its intellectual property rights. Any of Kodak’s direct or indirect intellectual property rights could, however, be challenged, invalidated or circumvented, or such intellectual property rights may not be sufficient to permit the Company to take advantage of current market trends or otherwise to provide competitive advantages, which could result in costly product redesign efforts, discontinuance of certain product offerings or other competitive harm. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States. Therefore, in certain jurisdictions, Kodak may be unable to protect its proprietary technology adequately against unauthorized third party copying or use, which could adversely affect its competitive position. Also, because of the rapid pace of technological change in the information technology industry, much of our business and many of our products rely on key technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties at all or on reasonable terms, or such parties may demand cross-licenses.

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Our revenue, earnings and expenses may suffer if third parties assert that we violate their intellectual property rights.

Third parties may claim that Kodak or customers indemnified by Kodak are infringing upon their intellectual property rights. In recent years, individuals and groups have begun purchasing intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from large companies like Kodak. Even if Kodak believes that the claims are without merit, the claims can be time-consuming and costly to defend and distract management’s attention and resources. Claims of intellectual property infringement also might require Kodak to redesign affected products, enter into costly settlement or license agreements or pay costly damage awards, or face a temporary or permanent injunction prohibiting Kodak from marketing or selling certain of its products. Even if Kodak has an agreement to indemnify it against such costs, the indemnifying party may be unable to uphold its contractual agreement to Kodak. If we cannot or do not license the infringed technology at all or on reasonable terms or substitute similar technology from another source, our revenue and earnings could suffer.

If we are not successful in transitioning certain financial processes and administrative functions to a global shared services model and outsourcing some of their work to third parties, our business performance, cost savings and cash flow could be adversely impacted.

The Company continues to migrate various administrative and financial processes, such as general accounting, accounts payable, credit and collections, call centers and human resources processes to a global shared services model to more effectively manage its costs. Delays in the migration to the global shared services model and to third party vendors could adversely impact the Company’s ability to meet its cost reduction goals. Also, if third party vendors do not perform to Kodak’s standards, such as a delay in collection of customer receipts, the Company’s cash flow could be negatively impacted.

Our inability to develop and implement e-commerce strategies that align with industry standards, could adversely affect our business.

In the event Kodak were unable to develop and implement e-commerce strategies that are in alignment with the trend toward industry standards and services, the Company’s business could be adversely affected. The availability of software and standards related to e-commerce strategies is of an emerging nature. Kodak’s ability to successfully align with the industry standards and services and ensure timely solutions requires the Company to make accurate predictions of the future accepted standards and services.

System integration issues could adversely affect our revenues and earnings.

Kodak’s completion of planned information systems upgrades, including SAP, if delayed, could adversely affect its business. As Kodak continues to expand the planned information services, the Company must continue to balance the investment of the planned deployment with the need to upgrade the vendor software. Kodak’s failure to successfully upgrade to the vendor-supported version could result in risks to system availability, which could adversely affect the business.

Our inability to effectively manage our acquisitions, divestitures and other portfolio actions could adversely impact our revenues and earnings.

Kodak has recently completed two large business acquisitions in its Graphic Communications Group segment in order to strengthen and diversify its portfolio of businesses, while establishing itself as a leader in the graphic communications market. At the same time, Kodak is accelerating the current restructuring of its traditional manufacturing infrastructure. In the event that Kodak fails to effectively manage the continuing decline of its more traditional businesses while simultaneously integrating these acquisitions, it could fail to obtain the expected synergies and favorable impact of these acquisitions. Such a failure could cause Kodak to lose market opportunities and experience a resulting adverse impact on its revenues and earnings.

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Economic trends in our major markets could adversely affect net sales.

Economic downturns and declines in consumption in Kodak’s major markets may affect the levels of both commercial and consumer sales. Purchases of Kodak’s consumer products are to a significant extent discretionary. Accordingly, weakening economic conditions or outlook could result in a decline in the level of consumption and could adversely affect Kodak’s results of operations.

If we do not timely implement our planned inventory reductions, this could adversely affect our cash flow.

Unanticipated delays in the Company’s plans to continue inventory reductions in 2006 could adversely impact Kodak’s cash flow outlook. Planned inventory reductions could be compromised by slower sales due to the competitive environment for digital products, and the continuing decline in demand for traditional products, which could also place pressures on Kodak’s sales and market share. In the event Kodak is unable to successfully manage these issues in a timely manner, they could adversely impact the planned inventory reductions.

Delays in our plans to improve manufacturing productivity and control cost of operations could negatively impact our gross margins.

Kodak’s failure to successfully manage operational performance factors could delay or curtail planned improvements in manufacturing productivity. Delays in Kodak’s plans to improve manufacturing productivity and control costs of operations, including its ongoing restructuring actions to significantly reduce its traditional manufacturing infrastructure, could negatively impact the gross margins of the Company. Furthermore, if Kodak is unable to successfully negotiate raw material costs with its suppliers, or incurs adverse pricing on certain of its commodity-based raw materials, reduction in the gross margins could occur.

We depend on third party suppliers and, therefore, our revenue and gross margins could suffer if we fail to manage supplier issues properly.

Kodak’s operations depend on its ability to anticipate the needs for components, products and services and Kodak’s suppliers’ ability to deliver sufficient quantities of quality components, products and services at reasonable prices in time for Kodak to meet its schedules. Given the wide variety of products, services and systems that Kodak offers, the large number of suppliers and contract manufacturers that are dispersed across the globe, and the long lead times that are required to manufacture, assemble and deliver certain components and products, problems could arise in planning production and managing inventory levels that could seriously harm Kodak. Other supplier problems that Kodak could face include component shortages, excess supply and risks related to terms of its contracts with suppliers.

If our planned improvements in supply chain efficiency are delayed, this could adversely affect our revenues and earnings.

As the Company continues with its transformation from a traditional products and services company to a digital products and services company, Kodak’s planned improvement in supply chain efficiency, if delayed, could adversely affect its business by preventing shipments of certain products to be made in their desired quantities and in a timely and cost-effective manner. The planned efficiencies could be compromised if Kodak expands into new markets with new applications that are not fully understood or if the portfolio broadens beyond that anticipated when the plans were initiated. Any unforeseen changes in manufacturing capacity could also compromise the supply chain efficiencies.

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The competitive pressures we face could harm our revenue, gross margins and market share.

Competition remains intense across all segments in which Kodak competes. In the D&FIS segment (which has been realigned into the Consumer Digital Imaging Group and the Film and Photofinishing Systems Group effective January 1, 2006), price competition has been driven somewhat by consumers’ conservative spending behaviors during times of a weak world economy, international tensions and the accompanying concern over war and terrorism. In the Health Group and Graphic Communications Group segments, aggressive pricing tactics intensified in the contract negotiations as competitors were vying for customers and market share domestically. If the Company is unable to obtain pricing or programs sufficiently competitive with current and future competitors, Kodak may lose market share, adversely affecting its revenue and gross margins.

If we fail to manage distribution of our products and services properly, our revenue, gross margins and earnings could be adversely impacted.

The impact of continuing customer consolidation and buying power could have an adverse impact on Kodak’s revenue, gross margins, and earnings. In the competitive consumer retail environment, there is a movement from small individually owned retailers to larger and commonly known mass merchants. In the health market, there is a continuing consolidation of various group purchasing organizations. In the commercial graphic communications market, the Company’s products are sold primarily through a variety of direct and indirect channels. These resellers and distributors may elect to use suppliers other than Kodak. Kodak’s challenge is to successfully negotiate contracts that provide the most favorable conditions to the Company in the face of price and aggressive competitors.

Economic uncertainty in developing markets could adversely affect our revenue and earnings.

Kodak conducts business in developing markets with economies that tend to be more volatile than those in the United States and Western Europe. The risk of doing business in developing markets like China, India, Brazil, Argentina, Mexico, Russia and other economically volatile areas could adversely affect Kodak’s operations and earnings. Such risks include the financial instability among customers in these regions, political instability and potential conflicts among developing nations and other non-economic factors such as irregular trade flows that need to be managed successfully with the help of the local governments. Kodak’s failure to successfully manage economic, political and other risks relating to doing business in developing countries and economically and politically volatile areas could adversely affect its business.

Because we sell our products and services worldwide, we are subject to changes in currency exchange rates and interest rates that may adversely impact our operations and financial position.

Kodak, as a result of its global operating and financing activities, is exposed to changes in currency exchange rates and interest rates, which may adversely affect its results of operations and financial position. Exchange rates and interest rates in certain markets in which the Company does business tend to be more volatile than those in the United States and Western Europe. There can be no guarantees that the economic situation in developing markets or elsewhere will not worsen, which could result in future effects on earnings should such events occur.

Management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2005 due to a material weakness in internal controls surrounding our accounting for income taxes. If we fail to remediate this material weakness or any material weaknesses we may discover in the future, we may not be able to provide reasonable assurance regarding the reliability of our financial statements. As a result, our business, brand and operating results could be harmed.

Effective internal control over financial reporting is necessary for the Company to provide reasonable assurance with respect to our financial reports. If the Company cannot provide reasonable assurance with respect to its financial reports, its business, brand and operating results could be harmed. As disclosed in the Company’s 2004 Annual Report on Form 10-K, and in its Quarterly Reports on Form 10-Q for each of the first three quarters of 2005, management’s assessment of the Company’s internal controls over financial reporting identified material weaknesses in the Company’s internal controls surrounding the accounting for income taxes and in its internal

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controls surrounding the accounting for pension and other postretirement benefit plans. In addition, in the Company’s Quarterly Report on Form 10-Q for the three and nine-month periods ended September 30, 2005, the Company also reported a material weakness in its internal controls surrounding the preparation and review of spreadsheets that include new or changed formulas. During the year ended December 31, 2005, the Company has made significant progress in executing the remediation plans that were established to address the material weaknesses identified above. This resulted in material improvements in the Company’s internal control over financial reporting, including the successful remediation of the material weaknesses in internal controls surrounding its accounting for pension and other postretirement benefits and spreadsheet controls as of December 31, 2005. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Therefore, even effective internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.

If we cannot protect our reputation due to product quality and liability issues, our business could be harmed.

Kodak products are becoming increasingly sophisticated and complicated to design and build as rapid advancements in technologies occur. Although Kodak has established internal procedures to minimize risks that may arise from product quality and liability issues, there can be no assurance that Kodak will be able to eliminate or mitigate occurrences of these issues and associated damages. Kodak may incur expenses in connection with, for example, product recalls, service and lawsuits, and Kodak’s brand image and reputation as a producer of high-quality products could suffer.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

On June 8, 2005, the Company received a comment letter from the staff of the Division of Corporation Finance of the SEC. The comments from the staff were issued with respect to its review of the Company’s Form 10-K for the year ended December 31, 2004, the Form 10-Q for the quarterly period ended March 31, 2005 and the Form 8-K filed on April 22, 2005 relating to the Company’s first quarter 2005 earnings release. In addition to other comments, the staff’s June 8, 2005 letter included three comments relating to the Company’s restatement of (1) the 2003 quarterly and full-year periods and (2) the first three quarters of 2004 (the “restatements”). The substance of those three comments is summarized below:

	•	In Note 1, “Significant Accounting Policies and Restatement,” to the Consolidated Financial Statements as of and for the year ended December 31, 2004 (Note 1), the Company provided disclosure summarizing the nature of the income taxes, pensions and other postretirement benefits and other errors that resulted in the restatements. In its comment letter, the staff requested additional detailed information regarding the individual errors within these categories, including an analysis of the impact of those errors on each of the five years in the period from 2000 through 2004;

	•	In Note 1, the Company provided disclosure of the net impact of the errors relating to periods prior to 2003 of $1.2 million (net adjustment) and the fact that, because these errors did not have a material impact on the periods prior to 2003 or to the first quarter of and full-year 2003, the Company recorded the net adjustment as a charge to Selling, General and Administrative expenses (SG&A) in the quarter ended March 31, 2003. In its comment letter, the staff requested that the Company (1) explain its treatment of the net adjustment as a charge to SG&A in the first quarter of 2003 and (2) provide an analysis demonstrating that the items comprising the net adjustment were not material to the periods prior to 2003; and

	•	In its comment letter, the staff requested that the Company provide quantitative and qualitative analyses supporting its materiality judgments for each of the five years in the period from 2000 through 2004. The staff requested that these analyses consider the materiality of each misstatement individually and in the aggregate, including their impact on individual balance sheet and income statement line items, quarterly and annual earnings per share, gross margins and the segment data.

The Company responded to all of the staff’s comments in a letter it filed with the SEC dated August 9, 2005. Included in the Company’s response were the supplemental analyses and information requested by the staff. As of the date of the filing of this Form 10-K, the staff continues to review the Company’s responses and, therefore, these comments remain unresolved.

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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. Digital product manufacturing is located in China and is also outsourced to third parties. Additional D&FIS segment manufacturing facilities outside the United States are located in the United Kingdom, Brazil, China, France, India, 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 Group 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 and Mexico. The segment provides digital and traditional products and services including picture archiving and communications systems, radiology information systems, enterprise and departmental healthcare information systems, digital and computed radiography systems, laser imaging, mammography and oncology systems, x-ray film systems for general radiography, and dental imaging products.

Products in the Graphic Communications Group segment are manufactured in the United States, primarily in Rochester, New York; Dayton, Ohio; Columbus, Georgia; Weatherford, Oklahoma; Windsor, Colorado; and San Diego, California. Manufacturing facilities outside the United States are located in the United Kingdom, France, Germany, South Africa, Israel, Bulgaria, China, Japan, Canada and Mexico. The segment provides digital and traditional products and services including digital printing, industrial solutions, prepress consumables and workflow and prepress equipment.

Properties within a country may be 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 expected to reduce its worldwide facility square footage by approximately one-third. In July 2005, the Company expanded this program and now plans to reduce its traditional manufacturing infrastructure by two-thirds below 2004 levels. This program has been renamed the “2004-2007 Restructuring Program” and is expected to be largely complete by mid-2007. During 2005, the Company made significant progress towards achieving this goal and remains committed to this plan.

ITEM 3. LEGAL PROCEEDINGS

During March 2005, the Company was contacted by members of the Division of Enforcement of the SEC concerning the announced restatement of the Company’s financial statements for the full year and quarters of 2003 and the first three unaudited quarters of 2004. An informal inquiry by the staff of the SEC into the substance of that restatement is continuing. The Company continues to fully cooperate with this inquiry, and the staff has indicated that the inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred.

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On June 13, 2005, a purported shareholder class action lawsuit was filed against the Company and two of its executives in the United States District Court for the Southern District of New York. On June 20, 2005 and August 10, 2005, similar lawsuits were filed against the same defendants in the United States District Court for the Western District of New York. The cases have been consolidated in the Western District of New York and the lead plaintiffs are John Dudek and the Alaska Electrical Pension Fund. The complaints filed in each of these actions (collectively, the “Complaints”) seek to allege claims under the Securities Exchange Act on behalf of a proposed class of persons who purchased securities of the Company between April 23, 2003 and September 25, 2003, inclusive. The substance of the Complaints is that various press releases and other public statements made by the Company during the proposed class period allegedly misrepresented the Company’s financial condition and omitted material information regarding, among other things, the state of the Company’s film and paper business. An amended complaint was filed on January 20, 2006, containing essentially the same allegations as the original complaint but adding an additional named defendant. Defendants’ initial responses to the Complaints are not yet due. The Company intends to defend these lawsuits vigorously but is unable currently to predict the outcome of the litigation or to estimate the range of potential loss, if any.

On or about November 9, 2005, the Company was served with a purported derivative lawsuit that had been commenced against the Company, as a nominal defendant, and eleven current and former directors and officers of the Company, in the New York State Supreme Court, Monroe County. The Complaint seeks to allege claims on behalf of the Company that, between April 2003 and September 2003, the defendant officers and directors caused the Company to make allegedly improper statements, in press release and other public statements, which falsely represented or omitted material information about the Company’s financial results and guidance. The plaintiff alleges that this conduct was a breach of the defendants’ common law fiduciary obligations to the Company, and constituted an abuse of control, gross mismanagement, waste and unjust enrichment. Defendants’ initial responses to the Complaint are not yet due. The Company intends to defend this lawsuit vigorously but is unable currently to predict the outcome of the litigation or to estimate the range of possible loss, if any.

The Company is named a Potentially Responsible Party (“PRP”) along with seven other companies in connection with certain alleged environmental contamination at the Rochester Fire Academy, located in Rochester, New York. The Company provided flammable materials to the Fire Academy, which were used in fire-fighting training. The Company and the seven other PRPs have been negotiating with the New York State Attorney General’s office. On November 15, 2005, the New York State Attorney General filed a complaint in the U.S. District Court, Western District of New York against all eight PRPs seeking recovery of expenses to remediate the site. The Company has not yet been served and therefore its initial response is not yet due. The potential monetary sanction will be in excess of $100,000 but is not expected to be material.

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

None.

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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

Robert L. Berman	48	Senior Vice President	2002	2005
Charles S. Brown, Jr.	55	Senior Vice President	2000	2000
Richard G. Brown, Jr.	57	Chief Accounting Officer and Controller	2003	2003
Robert H. Brust	62	Chief Financial Officer and Executive Vice President	2000	2000
Philip J. Faraci	50	Senior Vice President	2005	2005
Carl E. Gustin, Jr.	54	Senior Vice President	1995	1995
Joyce P. Haag	55	General Counsel and Senior Vice President	2005	2005
Mary Jane Hellyar	52	Senior Vice President	2005	2004
Kevin J. Hobert	41	Senior Vice President	2005	2005
James T. Langley	55	Senior Vice President	2003	2003
William J. Lloyd	66	Senior Vice President	2005	2005
Daniel T. Meek	54	Senior Vice President	2004	1998
Antonio M. Perez	60	Chairman of the Board, Chief Executive Officer	2003	2005

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 on September 30, 2002; Mr. Perez, who joined the Company on April 2, 2003; Mr. Lloyd, who joined the Company on June 16, 2003; Mr. Langley, who joined the Company on August 18, 2003; Mr. Richard Brown, Jr., who joined the Company on December 17, 2003; and Mr. Faraci, who joined the Company on December 6, 2004.

The executive officers’ biographies follow:

Robert L. Berman

Mr. Berman was appointed to the position of Director, Human Resources in January 2002 and was elected a Vice President of the Company in February 2002. In March 2005, he was elected a Senior Vice President by the Board of Directors. Prior to this position, Mr. Berman was 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 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.

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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. Mr. Brown’s Kodak management experience has been primarily in manufacturing serving as the Director, Manufacturing Research and Engineering Division; Manufacturing Manager, Materials for Ektacolor Paper and Chemicals; and Manager, Synthetic Chemicals Division. In 1993, he was named the General Manager of Sensitized Goods Platform Center, the Company’s unit responsible for the development of new photographic films, papers and photochemical products, and manufacturing technologies.

In September 1995 he was named Chief Operating Officer, Consumer Imaging and in October of that same year, the Board of Directors elected him a Vice President of the 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, 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, Human Resources, Corporate Security, Information Security and the Legal department. He also oversees the Company’s international regions.

Richard G. Brown, Jr.

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

Mr. Brown was previously 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. On January 30, 2006, the Company announced that Mr. Brust plans to retire from the Company effective January 31, 2007. 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, controllers, 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.

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Philip J. Faraci

Mr. Faraci was named President, Consumer Digital Imaging Group in September 2005, effective January 1, 2006. He oversees Kodak’s consumer, digital capture, printing, kiosk, and imaging systems businesses. He joined Kodak as Director, Inkjet Systems Program in December 2004. In February 2005 he was elected Senior Vice President of the Company. In June 2005, he was also named Director, Corporate Strategy & Business Development.

Prior to Kodak, Mr. Faraci served as Chief Operating Officer of Phogenix Imaging and President and General Manager of Gemplus Corporation’s Telecom Business Unit. Prior to these roles, he spent 22 years at Hewlett-Packard, where he served as Vice President and General Manager of the Consumer Business Organization and Senior Vice President and General Manager for the Inkjet Imaging Solutions Group.

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 and corporate design, as well as providing leadership and direction for the marketing functions across the Company.

Joyce P. Haag

Ms. Haag began her Kodak career in 1981, as a lawyer on the Legal Staff. She was elected Assistant Secretary in December 1991 and Corporate Secretary in February 1995. In January 2001, she was appointed to the additional position of Assistant General Counsel. In August 2003, she became Director, Marketing, Antitrust, Trademark & Litigation Legal Staff and in March 2004, she became General Counsel, Europe, Africa and Middle Eastern Region (EAMER). In July 2005, she was promoted to General Counsel and Senior Vice President.

Prior to joining the Kodak Legal Staff, Ms. Haag was an associate with Boylan, Brown, Code, Fowler Vigdor & Wilson LLP in Rochester, New York.

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.

Effective May 1999, Ms. Hellyar was named General Manager, Consumer Film Business, Consumer Imaging and was elected to Corporate Vice President.

In October 2001, Ms. Hellyar’s responsibilities were expanded and in 2003 she added responsibilities for professional films. In November 2004, she was named President, Display and Components Group. In January 2005, the Board of Directors elected her to Senior Vice President.

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In September 2005, the Company moved to four vertical businesses. Ms. Hellyar was named President, Film & Photofinishing Systems Group, effective January 1, 2006, while also continuing responsibility for Kodak’s Display business.

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.

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 to 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, Versamark, Kodak Polychrome Graphics and Creo subsidiaries. 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 (HP). 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.

From August 1993 to June 1997, Mr. Langley served as the General Manager of HP’s Vancouver Printer Division, a new unit whose sales represented incremental business for the company. As General Manager, he led the development of high-performance inkjet technology and products for retail and commercial channels.

Mr. Langley joined HP in 1972, working in a variety of technical and management positions involving laser printers. His achievements in that time included writing the Printer Control Language for use with HP LaserJet printers.

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 to Vice President of the Company. In February 2005, he was elected to 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 (“CTO”) of Gemplus International, the leading provider of smart card-based secure solutions for the wireless and financial markets.

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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.

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 to 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. Since January 2003, he was both the Director of the Global Capture Flow, part of Global Manufacturing & Logistics and the Corporate KOS Director. 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 to Vice President, Eastman Kodak Company.

Prior to joining Kodak, from 1995 to 1998, Daniel Meek was Vice President of Operations at NYPRO, Inc., a worldwide custom injection molding company.

He previously worked for Kodak and originally joined the Company in 1973 as a systems analyst and later held a variety of positions in the Paper Manufacturing Organization. In 1985, he joined Verbatim Corporation after Kodak acquired it, subsequently serving as Senior Vice President for North American operations. In 1990, the Verbatim Corporation was sold to Mitsubishi Chemical Corporation and Dan remained at Verbatim until 1995 continuing in his executive operations role.

Antonio M. Perez

Antonio M. Perez joined Kodak as President and Chief Operating Officer in April 2003, and was elected to the Company’s Board of Directors in October 2004. In May 2005, he was elected Chief Executive Officer, effective June 1, 2005, and on December 31, 2005, he became Chairman of the Company’s Board of Directors.

Mr. Perez is leading the digital transformation of Kodak, aimed at delivering innovative digital products and services to consumer and commercial customers in the fastest-growing segments of the imaging industry.

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. As President of HP’s consumer business, Mr. Perez spearheaded the company’s efforts to build a business in digital imaging and electronic publishing, ultimately generating worldwide revenue of more than $16 billion.

Prior to that assignment, Mr. Perez served as President and CEO of HP’s inkjet imaging business. During the five years in which he 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.

Just prior to joining Kodak, Mr. Perez served as an independent consultant for large investment firms, providing counsel on the effect of technology shifts on financial markets.

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From June 2000 to December 2001, Mr. Perez was President and CEO of Gemplus International, where he led the effort to take the company public. 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.

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 under the symbol “EK.” There are 76,539 shareholders of record of common stock as of January 31, 2006.

MARKET PRICE DATA

	2005				2004

Price per share:	High		Low		High		Low

1st Quarter	$	35.19	$	30.87	$	31.55	$	24.25
2nd Quarter		33.10		24.63		27.44		24.55
3rd Quarter		29.24		23.97		33.50		24.75
4th Quarter		25.14		20.77		34.74		28.93

DIVIDEND INFORMATION

The Company has a dividend policy whereby it makes semi-annual payments of dividends, when declared, on the Company’s 10th business day each July and December to shareholders of record on the close of the first business day of the preceding month.

On May 11, 2005, the Board of Directors declared a semi-annual cash dividend of $.25 per share payable to shareholders of record at the close of business on June 1, 2005. This dividend was paid on July 15, 2005. On October 18, 2005, the Board of Directors declared a semi-annual cash dividend of $.25 per share payable to shareholders of record at the close of business on November 1, 2005. This dividend was paid on December 14, 2005. The total dividends paid for the year ended December 31, 2005 was $144 million.

On May 12, 2004, the Board of Directors declared a semi-annual cash dividend of $.25 per share payable to shareholders of record at the close of business on June 1, 2004. This dividend was paid on July 15, 2004. On October 19, 2004, the Board of Directors declared a semi-annual cash dividend of $.25 per share payable to shareholders of record at the close of business on November 1, 2004. This dividend was paid on December 14, 2004. The total dividends paid for the year ended December 31, 2004 was $143 million.

ITEM 6. SELECTED FINANCIAL DATA

Refer to Summary of Operating Data on page 154.

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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 their fair value. 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.

Incremental direct costs (i.e. costs that vary with and are directly related to the acquisition of a contract which would not have been incurred but for the acquisition of the contract) of a customer contract in a transaction that results in the deferral of revenue are deferred and netted against revenue in proportion to the related revenue recognized in each period if: (1) an enforceable contract for the remaining deliverable items exists; and (2) delivery of the remaining items in the arrangement is expected to generate positive margins allowing realization of the deferred costs.

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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.

INVENTORIES

Inventories are stated at the lower of cost or market. The cost of most inventories in the U.S. is determined by the “last-in, first-out” (LIFO) method. The cost of all of the Company’s remaining inventories in and outside the U.S. is determined by the “first-in, first-out” (FIFO) or average cost method, which approximates current cost.

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.

On January 1, 2006, the Company elected to change its method of costing its U.S. inventories to the FIFO method, whereas in all prior years most of Kodak’s inventory in the U.S. was costed using the LIFO method. The new method of accounting for inventory in the U.S. was adopted because the FIFO method will provide for a better matching of revenue and expenses given the rapid technological change in the Company’s products. The FIFO method will also better reflect the cost of inventory on the Company’s Statement of Financial Position. Prior periods will be restated in future financial statements for comparative purposes in order to reflect the impact of this change in methodology from LIFO to FIFO.

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.

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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 ongoing restructuring actions. Therefore, changes in the Company’s strategy, the Company’s ongoing digital transformation 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 exceeded their respective fair values. See “Goodwill” under Note 1, “Significant Accounting Policies.” Due to the realignment of the Kodak operating model and change in reporting structure, as described in Note 23, “Segment Information,” effective January 1, 2006, the Company reassessed its goodwill for impairment during the first quarter of 2006, and determined that no reporting units’ carrying values exceeded their respective estimated fair values based on the realigned reporting structure and, therefore, there is no impairment.

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. The valuation allowance as of December 31, 2005 of $1,406 million is attributable to $177 million of net foreign deferred tax assets, including certain net operating loss and capital loss carryforwards and $1,229 million of U.S. net deferred tax assets, including current year losses and credits, which the Company is unable to realize. 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.”

PAGE 30

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 charge to cost of goods sold. Estimates are based on historical warranty experience and related costs to repair. 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.

PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company accounts for its defined benefit pension plans in accordance with Statement of Financial Accounting Standards (SFAS) No. 87, “Employers’ Accounting for Pensions,” and its other postretirement benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions.” These standards require that the amounts recognized in the financial statements be determined on an actuarial basis. See Note 17, “Retirement Plans,” and Note 18, “Other Postretirement Benefits,” for disclosure of (i) the nature of the Company’s plans, (ii) the amount of income and expense included in the Company’s Consolidated Statement of Operations for the years ended December 31, 2005, 2004 and 2003, (iii) the Company’s contributions and estimated future funding requirements and (iv) the amount of unrecognized losses at December 31, 2005 and 2004.

Kodak’s defined benefit pension and other postretirement benefit costs and obligations are dependent on the Company’s 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 (EROA), salary growth, healthcare cost trend rate and other economic and demographic factors. 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 unrecognized 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 other postretirement benefit costs and obligations.

Generally, the Company bases the discount rate assumption for its significant plans on high quality corporate long-term bond yields in the respective countries as of the measurement date. Specifically, for its U.S. and Canada plans, the Company determines a discount rate using a cash flow model to incorporate the expected timing of benefit payments and a AA-rated high quality corporate bond yield curve. For the Company’s other non-U.S. plans, the discount rates are determined by comparison to published local long-term high quality bond indices.

The EROA assumption 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 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. In March 2005, a new asset and liability modeling study was completed and the KRIP EROA assumption for 2005 remained at 9.0%. The KRIP EROA assumption is expected to remain at 9.0% for 2006 as well. Given the decrease in the discount rate of 25 basis points from 5.75% for 2005 to 5.50% for 2006 an increase in expected return on plan assets due to asset performance in 2005, changes in demographic assumptions, resulting from the completion of assumption studies in 2005, and a decrease in amortization expense relating to unrecognized actuarial losses in accordance with SFAS No. 87, total pension income from continuing operations before special termination benefits, curtailment losses and settlement losses for the major funded and unfunded defined benefit plans in the U.S. is expected to increase from $22 million in 2005 to $79 million in 2006. Pension expense from continuing operations before special benefits, curtailment losses and settlement losses in the Company’s major funded and unfunded non-U.S. defined benefit plans is projected to increase from $88 million in 2005 to $113 million in 2006, which is primarily attributable to an increase in amortization expense relating to the unrecognized actuarial losses. Additionally, due in part to the decrease in the discount rate from 5.75% for 2005 to 5.50% for 2006 and a decrease in amortization expense relating to the unrecognized actuarial losses, the Company expects the cost, before curtailment and settlement gains and losses, of its most significant postretirement benefit plan, the U.S. plan, to approximate $180 million in 2006, as compared with $192 for 2005. These estimates have been incorporated into the Company’s earnings outlook for 2006.

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The following table illustrates the sensitivity to a change to certain key assumptions used in the calculation of expense for the year ending December 31, 2006 and the projected benefit obligation (PBO) at December 31, 2005 for the Company’s major U.S. and non-U.S. defined benefit pension plans:

(in millions)	Impact on 2006 Pre-Tax Pension Expense Increase (Decrease)						Impact on PBO December 31, 2005 Increase (Decrease)

	U.S.			Non-U.S.			U.S.			Non-U.S.

Change in assumption:
25 basis point decrease in discount rate	$	12		$	11		$	185		$	141
25 basis point increase in discount rate		(7	)		(11	)		(172	)		(132	)
25 basis point decrease in EROA		15			7
25 basis point increase in EROA		(15	)		(7	)

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 2005, due to the performance of the global equity markets, combined with decreasing discount rates, the Company was required to increase its additional minimum pension liability for its major defined benefit plans by $223 million and to record a corresponding charge to accumulated other comprehensive income (a component of shareholders’ equity) of $156 million, net of taxes of $67 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

On January 1, 2005, the Company early adopted the stock option expensing rules of Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,” as interpreted by Financial Accounting Standards Board (FASB) Staff Positions No. 123R-1, 123R-2, 123R-3, and 123R-4, using the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company utilized the modified prospective approach of adoption under SFAS No. 123R. The adoption resulted in the recognition of $16 million of compensation cost for the year ended December 31, 2005, related to stock options issued to employees. As of December 31, 2005, unvested compensation cost for stock options is approximately $9 million and will be recognized over a weighted-average remaining vesting period of 2.14 years.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the following assumptions. Expected volatilities are based on historical volatility of the Company’s stock, management’s estimate of implied volatility of the Company’s stock, and other factors. The expected term of options granted is derived from the vesting period of the award, as well as historical exercise behavior, and represents the period of time that options granted are expected to be outstanding. The risk-free rate is calculated using the U.S. Treasury yield curve, and is based on the expected term of the option. The Company uses historical data to estimate forfeitures.

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The Company previously accounted 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 FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation.” Accordingly, no stock-based employee compensation cost was reflected in net earnings for the years ended December 31, 2004 and 2003, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.

KODAK OPERATING MODEL AND REPORTING STRUCTURE

As of and for the year ended December 31, 2005, the Company had three reportable segments: Digital & Film Imaging Systems (D&FIS), Health Group, and Graphic Communications Group. 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 provides consumers, professionals and cinematographers with digital and traditional products and services. D&FIS digital products and services include digital capture, kiosks, home printing systems and digital imaging services. D&FIS traditional products and services include consumer and professional film, photographic paper and photofinishing, aerial and industrial film, and entertainment products and services.

Health Group Segment: The Health Group segment provides digital medical imaging and information products, and systems and solutions, which are key components of sales and earnings growth. These include laser imagers, digital print films, computed and digital radiography systems, dental radiographic imaging systems, dental practice management software, advanced picture-archiving and communications systems (PACS), and healthcare information systems (HCIS). Products of the Health Group segment also 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 Health Group 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.

Graphic Communications Group Segment: The Graphic Communications Group segment is composed of the Company’s equity investments in KPG (Kodak’s 50/50 joint venture with Sun Chemical) prior to its acquisition in April 2005; the results of KPG subsequent to the acquisition in April 2005; the results of Creo Inc., a premier supplier of prepress and workflow systems used by commercial printers worldwide, which was acquired in June 2005; NexPress Solutions, Inc., a leader in on-demand digital color and monochrome image printing systems, which was acquired in May 2004; the Company’s equity investment in NexPress Solutions LLC (Kodak’s 50/50 joint venture with Heidelberger Druckmaschinen AG) prior to its acquisition in May 2004; the results of Scitex Digital Printing, a provider of continuous inkjet technology, which was acquired in January 2004 and has since been renamed Kodak Versamark; and the results of Encad, Inc., a maker of wide-format inkjet printers, inks and media. Kodak’s Document Product 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.

The Graphic Communications Group segment serves a variety of customers in the creative, in-plant, data center, commercial printing and digital service bureau market segments with a variety of solutions for prepress equipment, workflow software, digital and traditional printing, and document scanning and multi-vendor IT services.

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.

Prior period segment results have been restated to conform to the current period segment reporting structure.

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DETAILED RESULTS OF OPERATIONS
Net Sales from Continuing Operations by Reportable Segment and All Other (1)

(in millions)	2005		Change			2004		Change			2003

D&FIS
Inside the U.S.	$	3,777		- 3	%	$	3,900		0	%	$	3,900
Outside the U.S.		4,683		-14			5,466		- 1			5,515

Total D&FIS		8,460		-10			9,366		- 1			9,415

Health Group
Inside the U.S.		1,052		- 6			1,114		+ 5			1,061
Outside the U.S.		1,603		+ 2			1,572		+15			1,370

Total Health Group		2,655		- 1			2,686		+10			2,431

Graphic Communications Group
Inside the U.S.		1,079		+84			587		+ 41			415
Outside the U.S.		1,911		+153			756		+ 37			552

Total Graphic Communications Group		2,990		+123			1,343		+ 39			967

All Other
Inside the U.S.		71		+25			57		+ 27			45
Outside the U.S.		92		+42			65		+ 27			51

Total All Other		163		+34			122		+ 27			96

Total Net Sales	$	14,268		+ 6	%	$	13,517		+ 5	%	$	12,909

(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)	2005			Change			2004			Change			2003

D&FIS	$	362			-39	%	$	598			+ 40	%	$	427
Health Group		354			-22			452			- 9			497
Graphic Communications Group		1			+103			(39	)		- 148			82
All Other		(177	)		+ 7			(191	)		- 105			(93	)

Total of segments		540			-34			820			- 10			913
Strategic asset impairments		—						—						(3	)
Impairment of Burrell Companies’ net assets		—						—						(9	)
Restructuring costs and other		(1,118	)					(901	)					(552	)
Donation to technology enterprise		—						—						(8	)
TouchPoint settlement		—						(6	)					—
GE settlement		—						—						(12	)
Patent infringement claim settlement		—						—						(14	)
Prior year acquisition settlement		—						—						(14	)
Legal settlements		(21	)					—						(8	)
Environmental reserve reversal		—						—						9

Consolidated total	$	(599	)		-589	%	$	(87	)		-129	%	$	302

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

(in millions)	2005			Change			2004			Change			2003

D&FIS	$	212			-59	%	$	520			+ 41	%	$	370
Health Group		196			-46			366			- 12			415
Graphic Communications Group		(9	)		- 13			(8	)		-123			35
All Other		(98	)		+ 40			(163	)		- 72			(95	)

Total of segments		301			- 58			715			- 1			725
Strategic asset and venture investment impairments		—						—						(7	)
Lucky Film impairment		(19	)					—						—
Impairment of Burrell Companies’ net assets held for sale		—						—						(9	)
Restructuring costs and other		(1,118	)					(901	)					(552	)
Asset impairment		(25	)					—						—
Property sales		41						—						—
Donation to technology enterprise		—						—						(8	)
TouchPoint settlement		—						(6	)					—
Sun Microsystems settlement		—						92						—
GE settlement		—						—						(12	)
Patent infringement claim settlement		—						—						(14	)
Prior year acquisition settlement		—						—						(14	)
Legal settlements		(21	)					9						(8	)
Environmental reserve reversal		—						—						9
Interest expense		(211	)					(168	)					(147	)
Other corporate items		18						12						11
Tax on Infotonics contribution		(6	)					—						—
Tax benefit - contribution of patents		—						—						13
Income tax effects on above items and taxes not allocated to segments		(415	)					328						202

Consolidated total	$	(1,455	)		-1,896	%	$	81			- 57	%	$	189

2005 COMPARED WITH 2004

RESULTS OF OPERATIONS – CONTINUING OPERATIONS

CONSOLIDATED

Worldwide Revenues
Net worldwide sales were $14,268 million for 2005 as compared with $13,517 million for 2004, representing an increase of $751 million or 6%. This increase in net sales was primarily attributable to the acquisitions of KPG, Creo and NexPress, which contributed $1,562 million or approximately 11.6 percentage points to sales, and favorable exchange, which increased sales by approximately 0.5 percentage points. These increases were partially offset by declines in volumes and declines in price/mix, which decreased 2005 sales by approximately 1.9 and 4.6 percentage points, respectively. The decrease in volumes was primarily driven by declines in the film capture Strategic Product Group (SPG), the wholesale and retail photofinishing portions of the consumer output SPG, and the digital output and film capture and output SPGs within the Health Group segment. The decrease in price/mix was primarily driven by the film capture SPG, consumer digital capture SPG and the digital capture SPG within the Health Group segment.

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Net sales in the U.S. were $5,979 million for 2005 as compared with $5,658 million for the prior year, representing an increase of $321 million, or 6%. Net sales outside the U.S. were $8,289 million for the current year as compared with $7,859 million for the prior year, representing an increase of $430 million, or 5%, which includes a favorable impact from exchange of 1%.

Digital Strategic Product Groups’ Revenues
The Company’s digital product sales, including new technologies product sales of $27 million, were $7,757 million for 2005 as compared with $5,532 million, including new technologies of $23 million, for the prior year, representing an increase of $2,225 million, or 40%, primarily driven by the digital portion of KPG and Creo, the consumer digital capture SPG, the kiosks/media portion of the consumer output SPG, and the home printing SPG.

Traditional Strategic Product Groups’ Revenues
Net sales of the Company’s traditional products were $6,511 million for 2005 as compared with $7,985 million for the prior year, representing a decrease of $1,474 million, or 18%, primarily driven by declines in the film capture SPG, and the wholesale and retail photofinishing portions 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 the EAMER Region were $4,223 million for 2005 as compared with $4,038 million for 2004, representing an increase of $185 million, or 5%, which includes an insignificant impact from exchange. Net sales in the Asia Pacific Region were $2,652 million for 2005 as compared with $2,549 million for 2004, representing an increase of $103 million, or 4%, which includes a favorable impact from exchange of 1%. Net sales in the Canada and Latin America Region were $1,414 million for 2005 as compared with $1,272 million for 2004, representing an increase of $142 million, or 11%, which includes a favorable impact from exchange of 2%.

The Company’s major emerging markets include China, Brazil, Mexico, Russia, India, Korea, Hong Kong and Taiwan. Net sales in emerging markets were $2,845 million for 2005 as compared with $2,871 million for the prior year, representing a decrease of $26 million, or 1%, which includes a favorable impact from exchange of 1%. The emerging market portfolio accounted for approximately 20% of Kodak’s worldwide sales and 34% of Kodak’s non-U.S. sales in the current year. The decrease in emerging market sales was primarily attributable to sales declines in Taiwan, Korea, China and Hong Kong of 16%, 15%, 13% and 10%, respectively. These declines were offset by sales increases in Mexico, Brazil, Russia and India of 13%, 5%, 1% and 1%, respectively.

Gross Profit
Gross profit was $3,651 million for 2005 as compared with $3,935 million for 2004, representing a decrease of $284 million, or 7%. The gross profit margin was 25.6% in the current year as compared with 29.1% in the prior year. The 3.5 percentage point decrease was primarily attributable to declines that reduced gross profit margins by approximately 3.8 percentage points due to: (1) price/mix, driven primarily by consumer digital cameras, one-time-use cameras, traditional consumer and digital health products and services, partially offset by the year-over-year increase in royalty income relating to digital capture; and (2) declines in volumes, which reduced gross profit margins by approximately 0.1 percentage points. These decreases were partially offset by exchange, which favorably impacted gross profit margins by approximately 0.4 percentage points.

Included in the increased manufacturing costs referred to above is $139 million of additional depreciation expense related to the change in estimate of the useful lives of production machinery and equipment as a result of the faster-than-expected decline in the Company’s traditional film and paper business. During the third quarter of 2005, the Company revised the useful lives of production machinery and equipment from 3-20 years to 3-5 years and manufacturing-related buildings from 10-40 years to 5-20 years. Also included in 2005 manufacturing costs were accelerated depreciation charges of $391 million related to the 2004-2007 Restructuring Program, compared with accelerated depreciation charges of $152 million in 2004.

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Selling, General and Administrative Expenses
SG&A expenses were $2,668 million for 2005 as compared with $2,491 million for 2004, representing an increase of $177 million, or 7%. SG&A increased as a percentage of sales from 18% for the prior year to 19% for the current year. The increase in SG&A is primarily attributable to SG&A related to acquisitions of $293 million, unfavorable legal settlements totaling $21 million, and unfavorable exchange of $6 million, partially offset by cost reduction initiatives.

Research and Development Costs
R&D costs were $892 million for 2005 as compared with $836 million for 2004, representing an increase of $56 million, or 7%. R&D as a percentage of sales remained unchanged at 6%. The dollar increase in R&D is primarily attributable to write-offs for purchased in-process R&D associated with acquisitions made in 2005 for $54 million and increases in R&D spend related to newly-acquired businesses of $95 million, partially offset by significant reductions in R&D spending related to traditional products.

Loss From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes
The loss from continuing operations before interest, other income (charges), net and income taxes for 2005 was $599 million as compared with a loss of $87 million for 2004, representing an increase of $512 million. This increase is attributable to the reasons described above.

Interest Expense
Interest expense for 2005 was $211 million as compared with $168 million in the prior year. This increase is related to higher interest rates in 2005 and higher debt levels in the current year as a result of borrowings to finance acquisitions.

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 for the current year was $44 million as compared with other income of $161 million for the prior year. The decline of $117 million is primarily attributable to proceeds from two favorable legal settlements totaling $101 million in 2004, with no similar favorable legal settlements in 2005. Also contributing to the decline for the year was a loss on foreign exchange of $31 million due to the unhedged U.S. dollar denominated note payable outside of the U.S. relating to the KPG acquisition versus foreign exchange losses of $10 million in 2004. Future foreign exchange gains or losses arising from this note payable will be substantially offset by currency forward hedge contracts entered into on July 28, 2005.

The decline was also impacted by $44 million of charges, including a $19 million impairment of the investment in Lucky Film as a result of an other-than-temporary decline in the market value of Lucky’s stock and a $25 million asset impairment. Additionally, equity income from joint ventures declined by $18 million due to the acquisitions of KPG and NexPress, which were formerly accounted for under the equity method, and are now consolidated in the Company’s Statement of Operations and included in the Graphic Communications Group segment. These items were partially offset by a net year-over-year increase of $59 million from gains on the sale of properties and capital assets.

Income Tax (Benefit) Provision

The Company’s annual effective tax rate from continuing operations decreased from a benefit rate of 186% for 2004 to a provision rate of 90% for 2005. The change is primarily attributable to the inability to recognize a benefit from losses in the U.S. as a result of the requirement to record a valuation allowance against net U.S. deferred tax assets.

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During the year ended December 31, 2005, the Company recorded a tax provision of $689 million representing an income tax rate on losses from continuing operations of 90%. The income tax rate of 90% for the year ended December 31, 2005 differs from the Company’s statutory tax rate of 35% primarily due to the inability to benefit losses in the U.S., which resulted in the recording of the valuation allowance charge against net U.S. deferred tax assets in the amount of $1,075 million. Some of the other significant items that caused the difference from the statutory tax rate include non-U.S. tax benefits of $106 million associated with total worldwide restructuring costs of $1,143 million; a benefit of $101 million associated with rate differentials on operations outside the U.S.; a benefit of $28 million associated with export sales and manufacturing credits; a tax charge of $29 million associated with the remittance of earnings from subsidiary companies outside of the U.S. in connection with the American Jobs Creation Act of 2004; and a tax benefit of $44 million resulting from the Company’s audit settlement with the Internal Revenue Service for tax years covering 1993 through 1998.

Valuation Allowance - U.S.
During the third quarter of 2005, based on management’s assessment of positive and negative evidence regarding the realization of the net deferred tax assets, the Company recorded a valuation allowance of approximately $900 million against its net U.S. deferred tax assets. In accordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS 109), managements’ assessment included the evaluation of scheduled reversals of deferred tax assets and liabilities, estimates of projected future taxable income, carryback potential and tax planning strategies.

Prior to the Company’s third quarter 2005 assessment of realizability, it was believed, based on available evidence including tax planning strategies, that the Company would more likely than not realize its net U.S. deferred tax assets. The third quarter 2005 assessment considered the following significant matters based upon some recent changes that occurred in the quarter:

	•	In July 2005, management announced plans to significantly accelerate its restructuring efforts and to significantly reduce the assets supporting its traditional business by the end of 2007. This global plan includes accelerating the reduction of traditional film assets from $2.9 billion in January 2004 to approximately $1 billion by 2007 and terminating approximately 10,000 employees. These actions will have a negative impact on Kodak’s ability to generate taxable income in the U.S.

	•	On October 18, 2005, the Company entered into a new secured credit facility pursuant to which the borrowings in the U.S. are collateralized by certain U.S. assets, including the Company’s intellectual property assets. Thus, management determined that the previous tax planning strategy to sell the U.S. intellectual property to a foreign subsidiary to generate taxable income in the U.S. was no longer prudent nor feasible and should not be relied upon as part of the third quarter assessment of realizability of the Company’s U.S. deferred tax assets.

Based upon management’s above-mentioned September 30, 2005 assessment of realizability, management concluded that it was no longer more likely than not that the U.S. net deferred tax assets would be realized and, as such, recorded a valuation allowance of approximately $900 million.

In the fourth quarter of 2005, management updated its assessment of the realizability of its net deferred tax assets. As a result of management’s assessment of positive and negative evidence regarding the realization of the net deferred tax assets, which included the evaluation of scheduled reversals of deferred tax assets and liabilities, estimates of projected future taxable income, carryback potential and tax planning strategies, the Company maintained that it was still no longer more likely than not that the U.S. net deferred tax assets would be realized and, as such, increased the valuation allowance by approximately $181 million relating to deferred tax benefits generated in the fourth quarter. In addition, the Company expects to record a valuation allowance on all U.S. tax benefits generated in the future until an appropriate level of profitability in the U.S. is sustained or until the Company is able to generate enough taxable income through other tax planning strategies and transactions. Both the net deferred tax asset balances and the offsetting valuation allowance include estimates attributable to the recent acquisitions of KPG and Creo. Deferred tax amounts attributable to these businesses are expected to be finalized during 2006 with the completion of the Company’s purchase accounting for these acquired entities.

As of December 31, 2005, the Company had a valuation allowance of $1,229 million relating to its net deferred tax assets in the U.S. of $1,308 million. The valuation allowance of $1,229 million is attributable to (i) the charges totaling $1,081 million that were recorded in the third and fourth quarters of 2005 and (ii) a valuation allowance of $148 million recorded in a prior year for certain state tax carryforward deferred tax assets relating to which management believes it is not more likely than not that the assets will be realized. The remaining net deferred tax assets in excess of the valuation allowance of $79 million relate to certain foreign tax credit deferred tax assets relating to which management believes it is more likely than not that the assets will be realized.

Valuation Allowance – Outside the U.S.
As of December 31, 2005, the Company had a valuation allowance of approximately $177 million relating to its deferred tax assets outside of the U.S. of $534 million. The valuation allowance of $177 million is attributable to certain net operating loss and capital loss carryforwards relating to which management believes it is not more likely than not that the assets will be realized.

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(Loss) Earnings From Continuing Operations
The loss from continuing operations for 2005 was $1,455 million, or $5.05 per basic and diluted share, as compared with earnings from continuing operations for 2004 of $81 million, or $.28 per basic and diluted share, representing a decrease of $1,536 million. This decrease in earnings from continuing operations is attributable to the reasons described above.

DIGITAL & FILM IMAGING SYSTEMS

Worldwide Revenues
Net worldwide sales for the D&FIS segment were $8,460 million for 2005 as compared with $9,366 million for 2004, representing a decrease of $906 million, or 10%. The decrease in net sales was primarily attributable to declines related to negative price/mix, driven primarily by the digital capture SPG and the traditional film capture SPG, which reduced net sales by approximately 5.9 percentage points, and volume declines in the film capture SPG and the wholesale and retail photofinishing portions of the consumer output SPG, which decreased sales by approximately 4.3 percentage points. These decreases were partially offset by favorable exchange, which increased net sales by approximately 0.5 percentage points.

D&FIS segment net sales in the U.S. were $3,777 million for the current year as compared with $3,900 million for the prior year, representing a decrease of $123 million, or 3%. D&FIS segment net sales outside the U.S. were $4,683 million for the current year as compared with $5,466 million for the prior year, representing a decrease of $783 million, or 14%, which includes a favorable impact from exchange of 1%.

Digital Strategic Product Groups’ Revenues
D&FIS segment digital product sales were $3,412 million for 2005 as compared with $2,641 million for 2004, representing an increase of $771 million, or 29%, primarily driven by the consumer digital capture SPG, the kiosks/media portion of the consumer output SPG, and the home printing SPG. Net worldwide sales of consumer digital capture products, which include consumer digital cameras, accessories, memory products, and royalties, increased 30% in 2005 as compared with the prior year, primarily reflecting strong volume increases and favorable exchange, partially offset by negative price/mix.

Net worldwide sales of picture maker kiosks/media increased 37% in 2005 as compared with 2004, as a result of strong volume increases and favorable exchange. Sales continue to be driven by strong market acceptance of Kodak’s new generation of kiosks and an increase in consumer demand for digital printing at retail.

Net worldwide sales of the home printing solutions SPG, which includes inkjet photo paper and printer docks/media, increased 57% in 2005 as compared with 2004 driven by sales of printer docks and associated thermal media. For full year 2005, Kodak’s printer dock product held the number-one market share position (on a unit basis) in the United States, Canada, Germany, Australia and the United Kingdom. However, inkjet paper sales in 2005 declined year over year, as volume growth was more than offset by lower pricing. Industry growth for inkjet paper continues to slow as a result of improving retail printing solutions, and alternative home printing solutions.

Traditional Strategic Product Groups’ Revenues
D&FIS segment’s traditional product sales were $5,048 million for the current year period as compared with $6,725 million for the prior year, representing a decrease of $1,677 million or 25%, 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 film), one-time-use cameras (OTUC), professional films, reloadable traditional film cameras and batteries/videotape, decreased 31% in 2005 as compared with 2004, primarily reflecting volume declines and negative price/mix, partially offset by favorable exchange.

U.S. consumer film industry sell-through volumes decreased approximately 25% in 2005 as compared with the prior year. Kodak’s sell-in consumer film volumes declined approximately 36% in the current year as compared with the prior year, reflecting a continuing reduction in U.S. retailer inventories as well as a decline in market share.

PAGE 41

Net worldwide sales for the retail photofinishing SPG, which includes color negative paper, minilab equipment and services, chemistry, and photofinishing services at retail, decreased 27% in 2005 as compared with 2004, primarily reflecting volume declines and negative price/mix partially offset by favorable exchange. The volume declines are the result of the substantial reduction of direct sale of minilab equipment. The Company has shifted its focus to providing minilab services.

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 CIS (Consumer Imaging Services) outside the U.S., decreased 46% in 2005 as compared with 2004, reflecting continuing volume declines partially offset by favorable exchange.

Net worldwide sales for the entertainment film SPGs, including origination and print films for the entertainment industry increased 1%, primarily reflecting volume increases and favorable exchange, partially offset by overall negative price/mix.

Gross Profit
Gross profit for the D&FIS segment was $2,226 million for 2005 as compared with $2,644 million for the prior year period, representing a decrease of $418 million or 16%. The gross profit margin was 26.3% in the current year as compared with 28.2% in the prior year. The 1.9 percentage point decrease was primarily attributable to negative price/mix, primarily driven by the film capture SPG and the digital capture SPG which reduced gross profit margins by approximately 5.0 percentage points, partially offset by the year-over-year increase in royalty income relating to digital capture. Declines in price/mix were partially offset by positive results from initiatives to reduce manufacturing costs, which improved gross profit margins by approximately 2.8 percentage points, and foreign exchange, which favorably impacted gross profit margins by approximately 0.5 percentage points.

Selling, General and Administrative Expenses
SG&A expenses for the D&FIS segment decreased $93 million, or 6%, from $1,681 million in 2004 to $1,588 million in the current year, and increased as a percentage of sales from 18% for 2004 to 19% for the current year. The dollar decrease is primarily attributable to cost reduction actions. These cost reduction actions are being outpaced by the decline of traditional product sales, which resulted in a minor year-over-year increase of SG&A as a percentage of sales.

Research and Development Costs
R&D costs for the D&FIS segment decreased $89 million, or 24%, from $365 million in 2004 to $276 million in the current year period and decreased as a percentage of sales from 4% in the prior year to 3% in the current year. The decrease in R&D was primarily attributable to spending reductions related to traditional products and services.

Earnings 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 were $362 million in 2005 compared with $598 million in 2004, representing a decrease of $236 million or 39%, as a result of the factors described above.

HEALTH GROUP

Worldwide Revenues
Net worldwide sales for the Health Group segment were $2,655 million for 2005 as compared with $2,686 million for the prior year, representing a decrease of $31 million, or 1%. The decrease in sales was primarily attributable to decreases in price/mix of approximately 2.4 percentage points, primarily driven by the digital capture SPG, digital output SPG, and the traditional medical film portion of the film capture and output SPG. These decreases were partially offset by increases in volume, primarily driven by the digital capture SPG and the services SPG, which contributed approximately 1.0 percentage points to the increase in sales. Sales were also favorably impacted by favorable exchange of approximately 0.3 percentage points.

PAGE 42

Net sales in the U.S. were $1,052 million for the current year as compared with $1,114 million for 2004, representing a decrease of $62 million, or 6%. Net sales outside the U.S. were $1,603 million for 2005 as compared with $1,572 million for the prior year, representing an increase of $31 million, or 2%, which includes a favorable impact from exchange of less than 1%.

Digital Strategic Product Groups’ Revenues
Health Group segment digital sales, which include digital products (DryView laser imagers/media and wet laser printers/media), digital capture equipment (computed radiography capture equipment and digital radiography equipment), services, dental systems (practice management software and digital radiography capture equipment) healthcare information systems (Picture Archiving and Communications Systems (PACS)), and Radiology Information Systems (RIS), were $1,748 million for 2005 as compared with $1,732 million for 2004, representing an increase of $16 million, or 1%. The increase in digital product sales was primarily attributable to volume increases and favorable exchange, partially offset by negative price/mix.

Traditional Strategic Product Groups’ Revenues
Health Group segment’s traditional product sales, including analog film, equipment, and chemistry, were $907 million for 2005 as compared with $954 million for 2004, representing a decrease of $47 million, or 5%. The primary drivers were lower volumes and unfavorable price/mix for the film capture and output SPG, partially offset by favorable exchange.

Gross Profit
Gross profit for the Health Group segment was $1,026 million for 2005 as compared with $1,134 million in the prior year, representing a decrease of $108 million, or 10%. The gross profit margin was 38.6% in the current year period as compared with 42.2% in 2004. The decrease in the gross profit margin of 3.6 percentage points was principally attributable to: (1) price/mix, which negatively impacted gross profit margins by 2.6 percentage points driven by the digital capture SPG, digital output SPG and the traditional medical film portion of the film capture and output SPG, and (2) an increase in manufacturing cost, which decreased gross profit margins by approximately 1.3 percentage points due to an increase in silver and raw material costs. These decreases were partially offset by favorable exchange, which contributed approximately 0.4 percentage points to the gross profit margins.

Selling, General and Administrative Expenses
SG&A expenses for the Health Group segment increased $13 million, or 3%, from $480 million in 2004 to $493 million for the current year and increased as a percentage of sales from 18% in the prior year to 19% in the current year. The increase in SG&A expenses is primarily attributable to increases in certain corporate overhead costs. SG&A was also negatively impacted by costs associated with the OREX acquisition of approximately $6 million.

Research and Development Costs
Current period R&D costs were $179 million as compared with the prior year of $202 million, representing a decrease of $23 million or 11%, and decreased as a percentage of sales from 8% to 7%. This decrease is a result of reduced R&D spending related to traditional products and services.

Earnings 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 Group segment decreased $98 million, or 22%, from $452 million for the prior year to $354 million for 2005 due to the reasons described above.

PAGE 43

GRAPHIC COMMUNICATIONS GROUP

On May 1, 2004, Kodak completed the acquisition of the NexPress-related entities, which develop high quality on-demand digital color printing systems and manufacture digital black and white printing systems. 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 were met during the two calendar years ended December 31, 2005, the Company would have paid a maximum of $150 million in cash. For both the first calendar year (2004) and for the second calendar year (2005), there were no amounts paid to Heidelberg. 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.

On April 1, 2005, the Company became the sole owner of KPG through the redemption of Sun Chemical Corporation’s 50 percent interest in the KPG joint venture. This transaction further established the Company as a leader in the graphic communications industry and complements the Company’s existing business in this market. Under the terms of the transaction, the Company redeemed all of Sun Chemical’s shares in KPG by providing $317 million in cash (excluding $7 million in transaction costs) at closing and by entering into two notes payable arrangements, one that will be payable within the U.S. (the U.S. note) and one that will be payable outside of the U.S. (the non-U.S. note), that will require principal and interest payments of $200 million in the third quarter of 2006, and $50 million annually from 2008 through 2013. The total payments due under the U.S. note and the non-U.S. note are $100 million and $400 million, respectively. The aggregate fair value of these note payable arrangements of approximately $395 million as of the acquisition date was recorded as long-term debt in the Company’s Consolidated Statement of Financial Position.

On June 15, 2005, the Company completed the acquisition of Creo Inc. (Creo), a premier supplier of prepress and workflow systems used by commercial printers around the world. The acquisition of Creo uniquely positions the Company to be the preferred partner for its customers, helping them improve efficiency, expand their offerings and grow their businesses. The Company paid $954 million (excluding approximately $13 million in transaction related costs), or $16.50 per share, for all of the outstanding shares of Creo. The Company used its bank lines to initially fund the acquisition, which has been refinanced through a 7-Year Term Loan under the Company’s new Secured Credit Facilities completed on October 18, 2005.

Worldwide Revenues
Net worldwide sales for the Graphic Communications Group segment were $2,990 million for 2005 as compared with $1,343 million for the prior year period, representing an increase of $1,647 million, or 123%, which includes a favorable impact from exchange of less than 1%. The increase in net sales was primarily due to the KPG, Creo and NexPress acquisitions, which contributed $1,561 million in sales.

Net sales in the U.S. were $1,079 million for the current year as compared with $587 million for the prior year, representing an increase of $492 million, or 84%. Net sales outside the U.S. were $1,911 million in 2005 as compared with $756 million for the prior year period, representing an increase of $1,155 million, or 153% as reported, which includes a favorable impact from exchange of approximately 1%.

Digital Strategic Product Groups’ Revenues
The Graphic Communications Group segment’s digital product sales consist of KPG digital revenues; Creo, a supplier of prepress systems; NexPress Solutions, a producer of digital color and black and white printing solutions; Kodak Versamark, a leader in continuous inkjet technology; document scanners; Encad, Inc., a maker of wide-format inkjet printers; and service and support.

Digital product sales for the Graphic Communications Group segment were $2,461 million for 2005 as compared with $1,065 million for the prior year, representing an increase of $1,396 million, or 131%. The increase in digital product sales was primarily attributable to the KPG, Creo and NexPress acquisitions.

PAGE 44

Traditional Strategic Product Groups’ Revenues
The Graphic Communications Group segment’s traditional product sales are primarily comprised of sales of traditional graphics products, KPG’s analog plates and other films, and microfilm products. These sales were $529 million for the current year compared with $278 million for the prior year, representing an increase of $251 million, or 90%. This increase is primarily attributable to the acquisition of KPG.

Gross Profit
Gross profit for the Graphic Communications Group segment was $805 million for 2005 as compared with $338 million in the prior year, representing an increase of $467 million, or 138%. The gross profit margin was 26.9% in the current year as compared with 25.2% in the prior year. The increase in the gross profit margin of 1.7 percentage points was primarily attributable to: (1) reductions in manufacturing and other costs, which positively impacted gross profit margins by approximately 3.4 percentage points, and (2) volume increases related to Versamark products and services of approximately 1.7 percentage points. These positive impacts on gross profit margin were partially offset by the negative impact of acquisitions on gross profit margins of approximately 2.9 percentage points, and by negative price/mix of approximately 0.5 percentage points. Foreign exchange did not have a significant impact on segment gross profit margin.

Selling, General and Administrative Expenses
SG&A expenses for the Graphic Communications Group segment were $533 million for 2005 as compared with $259 million in the prior year, representing an increase of $274 million, or 106%, and decreased as a percentage of sales from 19% in the prior year period to 18% in the current year period. The dollar increase in SG&A dollars is primarily attributable to the acquisitions of KPG, Creo and NexPress, while the decrease in SG&A as a percentage of sales is primarily attributable to the increase in sales as a result of the acquisitions, as well as the fact that the acquired businesses generally have lower SG&A as a percentage of sales.

Research and Development Costs
Current period R&D costs for the Graphic Communications Group segment increased $153 million, or 130%, from $118 million for 2004 to $271 million for the current year, and remained constant as a percentage of sales at 9%. The dollar increase was primarily attributable to the write-off of in-process R&D associated with the KPG and Creo acquisitions of $52 million, as well as increased levels of R&D spending associated with the acquired companies of $95 million.

Earnings (Loss) 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 Graphic Communications Group segment were $1 million in 2005 compared with a loss of $39 million in 2004. This increase in earnings of $40 million is attributable to the reasons described above.

ALL OTHER

Worldwide Revenues
Net worldwide sales for All Other were $163 million for 2005 as compared with $122 million for 2004, representing an increase of $41 million, or 34%. Net sales in the U.S. were $71 million for the current year as compared with $57 million for the prior year, representing an increase of $14 million, or 25%. Net sales outside the U.S. were $92 million in 2005 as compared with $65 million in the prior year, representing an increase of $27 million, or 42%.

Loss From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes
The loss from continuing operations before interest, other income (charges), net and income taxes for All Other was $177 million in the current year as compared with a loss of $191 million in 2004, representing an increase in earnings of $14 million or 7%.

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EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES

Earnings from discontinued operations for 2005 were $150 million, or $.52 per basic and diluted share and were primarily related to a $203 million reversal of certain tax accruals as a result of a settlement between the Company and the Internal Revenue Service on the audit of the tax years 1993 through 1998. These accruals had been established in 1994 in connection with the Company’s sale of its pharmaceutical, consumer health and household products businesses during that year. The tax accrual reversals were partially offset by a pension settlement charge of $54 million resulting from the finalization of the transfer of pension assets to ITT Industries, Inc. (ITT) in connection with the sale of the Company’s Remote Sensing Systems business (RSS) in August 2004. Earnings from discontinued operations for 2004 were $475 million or $1.66 per basic and diluted share and were primarily related to the gain on the sale of RSS to ITT in August 2004.

LOSS FROM CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF INCOME TAXES

The loss from cumulative effect of an accounting change, net of income taxes, of $57 million or $.20 per basic and diluted share is the result of the Company’s adoption of Financial Accounting Standards Board Interpretation No. (FIN) 47, “Accounting for Conditional Asset Retirement Obligations,” as of December 31, 2005. Under FIN 47, the Company is required to record an obligation and an asset for the present value of the estimated cost of fulfilling its legal obligation with respect to the retirement of an asset when the timing or method of settling that obligation is conditional upon a future event (for example, the sale of, exiting from or disposal of an asset - the “settlement date”). The primary application of FIN 47 to the Company is with respect to asbestos remediation. The $57 million charge represents the present value of the Company’s asset retirement obligations (net of the related unamortized asset) relating to facilities with estimated settlement dates. Refer to further discussion in the “New Accounting Pronouncements” section of Item 7 for further information.

NET (LOSS) EARNINGS

The net loss for 2005 was $1,362 million, or a loss of $4.73 per basic and diluted share, as compared with net earnings for 2004 of $556 million, or $1.94 per basic and diluted share, representing a decrease of $1,918 million, or 345%. This decrease is attributable to the reasons outlined above.

2004 COMPARED WITH 2003

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%. The increase in net sales was primarily due to increased volumes, acquisitions and favorable exchange, which increased sales for 2004 by 0.9, 4.3 and 3.0 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 Group 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 Group segment.

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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%, which includes a favorable impact from exchange of 6%.

Digital Strategic Product Groups’ Revenues
The Company’s digital product sales, including new technologies product sales of $23 million, were $5,532 million for the current year as compared with $3,978 million, including new technologies product sales of $17 million for the prior year, representing an increase of $1,554 million, or 39%, primarily driven by the consumer digital capture SPG, the kiosks/media portion of the consumer output SPG, the home printing SPG, and digital acquisitions.

Traditional Strategic Product Groups’ Revenues
Net sales of the Company’s traditional products were $7,985 million for the current period as compared with $8,931 million for the prior year period, representing a decrease of $946 million, or 11%, primarily driven by declines in the film capture SPG and the wholesale photofinishing portion of the consumer output SPG.

Foreign Revenues
Net sales in EAMER for 2004 were $4,038 million as compared with $3,880 million for 2003, representing an increase of $158 million or 4%, which includes a favorable impact from exchange of 7%. Net sales in the Asia Pacific region for 2004 were $2,549 million compared with $2,368 million for 2003, representing an increase of $181 million or 8%, which includes a favorable impact from exchange of 5%. 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 $32 million or 3%, which includes a favorable impact from exchange of 2%.

The Company’s major emerging markets include China, Brazil, Mexico, India, Russia, Korea, Hong Kong and Taiwan. Net sales in emerging markets were $2,871 million for 2004 as compared with $2,591 million for 2003, representing an increase of $280 million, or 11%, which includes a favorable impact from exchange of 1%. 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 Group, Graphic Communications Group 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 $3,935 million for 2004 as compared with $4,158 million for 2003, representing a decrease of $223 million, or 5%. The gross profit margin was 29.1% in the current year as compared with 32.2% in the prior year. The decrease of 3.1 percentage points was attributable to declines in price/mix, which reduced gross profit margins by approximately 4.0 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 Group segment, and graphic arts products in the Graphic Communications Group 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 and other costs, which favorably impacted gross profit margins by approximately 0.4 percentage points year-over-year primarily due to reduced labor expense. Included in 2004 manufacturing and other costs were accelerated depreciation charges of $152 million related to actions taken under the Company’s restructuring programs, compared with accelerated depreciation charges of $69 million in 2003.

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Selling, General and Administrative Expenses
SG&A expenses were $2,491 million for 2004 as compared with $2,617 million for 2003, representing a decrease of $126 million, or 5%. SG&A decreased as a percentage of sales from 20% for the prior year to 18% 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 the companies acquired of $192 million.

Research and Development Costs
R&D costs were $836 million for 2004 as compared with $760 million for 2003, representing an increase of $76 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.

(Losses) Earnings 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 Operations for the remaining portion of the year and included in the Graphic Communications Group segment.

Income Tax Provision (Benefit)
The Company’s recorded 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.

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The Company’s recorded 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.

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 $9,366 million for 2004 as compared with $9,415 million for 2003, representing a decrease of $49 million, or 1%, which includes a favorable impact from exchange of 3%. Approximately 3.8 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 3.1 percentage points.

D&FIS segment net sales in the U.S. were $3,900 million for the current and prior year. D&FIS segment net sales outside the U.S. were $5,466 million for the current year as compared with $5,515 million for the prior year, representing a decrease of $49 million, or 1%, which includes a favorable impact from exchange of 5%.

Digital Strategic Product Groups’ Revenues
D&FIS segment digital product sales were $2,641 million for the current year as compared with $1,802 million for the prior year, representing an increase of $839 million, or 47%, 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 58% 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 43% 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 57% 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.

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Traditional Strategic Product Groups’ Revenues
D&FIS segment traditional product sales were $6,725 million for the current year as compared with $7,613 million for the prior year, representing a decrease of $888 million, or 12%, 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 17% 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.

Net worldwide sales for the retail photofinishing SPG, which includes color negative paper, equipment and services, chemistry, and photofinishing services at retail, decreased 10% 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 32% 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 10% 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 $2,644 million for 2004 as compared with $2,899 million for 2003, representing a decrease of $255 million or 9%. The gross profit margin was 28.2% in the current year as compared with 30.8% 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 5.0 percentage points, partially offset by manufacturing cost improvements, which favorably impacted gross margins by approximately 2.5 percentage points. The decrease in price/mix was primarily due to the impact of digital replacement, 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 $1,681 million for 2004 as compared with $1,991 million for 2003, representing a decrease of $310 million or 16%. 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. As a percentage of sales, SG&A expense decreased from 21% in the prior year to 18% in the current year.

Research and Development Costs
R&D costs for the D&FIS segment decreased $116 million or 24% from $481 million in 2003 to $365 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.

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Earnings 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 $171 million, or 40%, from $427 million in 2003 to $598 million in 2004, primarily as a result of the factors described above.

HEALTH GROUP

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 Group 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 Group segment.

Worldwide Revenues
Net worldwide sales for the Health Group segment were $2,686 million for 2004 as compared with $2,431 million for 2003, representing an increase of $255 million, or 10%, including a favorable impact from exchange of 4%. The increase in sales consists of: (1) an increase from favorable exchange of approximately 3.6 percentage points, (2) the acquisition of PracticeWorks Inc. in October 2003, which accounted for approximately 6.0 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 3.2 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%, including a favorable impact from exchange of 6%.

Digital Strategic Product Groups’ Revenues
The Health Group segment’s 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 Picture Archiving and Communications Systems (PACS), were $1,732 for the current year compared with $1,437 million for 2003, representing an increase of $295 million, or 21%. The increase in digital product sales was primarily attributable to the PracticeWorks acquisition and higher volumes of digital capture equipment, digital media and services.

Traditional Strategic Product Groups’ Revenues
The Health Group segment’s traditional product sales, including analog film, equipment, and chemistry, were $954 million for the current year as compared with $994 million for 2003, representing a decrease of $40 million or 4%, 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 Group segment was $1,134 million for 2004 as compared with $1,059 million for 2003, representing an increase of $75 million, or 7%. The gross profit margin was 42.2% in 2004 as compared with 43.6% in 2003. The decrease in the gross profit margin of 1.4 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 and other costs, which decreased gross profit margins by 1.3 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.

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Selling, General and Administrative Expenses
SG&A expenses for the Health Group segment increased $91 million, or 23%, from $389 million for 2003 to $480 million for 2004. Although the dollar increase in SG&A expenses was significant, the increase as a percent of sales was 2 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 Group segment increased $29 million, or 17%, from $173 million in 2003 to $202 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 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 Group segment decreased $45 million, or 9%, from $497 million for 2003 to $452 million for 2004 due primarily to the reasons described above.

GRAPHIC COMMUNICATIONS GROUP

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 Group 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. Scitex Digital Printing now operates under the name Kodak Versamark, Inc. During 2004, Kodak Versamark contributed $198 million in sales to the Graphic Communications Group segment.

Worldwide Revenues
Net worldwide sales for the Graphic Communications Group segment were $1,343 million for 2004 as compared with $967 million for 2003, representing an increase of $376 million, or 39%, including a favorable impact from exchange of less than 1%. 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 Group segment.

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Net sales in the U.S. were $587 million for 2004 as compared with $415 million for 2003, representing an increase of $172 million, or 41%. Net sales outside the U.S. were $756 million in the current year as compared with $552 million in the prior year, representing an increase of $204 million, or 37%, which includes favorable impacts from exchange of 1%.

Digital Strategic Product Groups’ Revenues
The Graphic Communications Group segment’s digital product sales, which consist of Kodak Versamark, the NexPress-related entities, Encad, Inc. products and services, and document imaging service and support, were $1,065 million for the current year as compared with $665 million for the prior year, representing an increase of $400 million, or 60%. 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.

Traditional Strategic Product Groups’ Revenues
The Graphic Communications Group segment’s traditional product sales were primarily attributable to sales of traditional graphics products to the KPG joint venture, and document imaging imagelink equipment and media sales. Net worldwide sales of traditional products for the Graphic Communications Group segment declined $24 million or 8% from $302 million in 2003 to $278 million in 2004. This decline was primarily attributable to negative price/mix for graphic arts products, partially offset by increasing volumes.

Gross Profit
Gross profit for the Graphic Communications Group segment for 2004 increased $81 million, or 32%, from $257 million for 2003 to $338 million for 2004. The gross profit margin was 25.2% for 2004 as compared with 26.6% for 2003. The decrease in the gross profit margin of 1.4 percentage points was primarily attributable to (1) an increase in manufacturing cost, which negatively impacted gross profit margins by approximately 3.2 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) volume declines, which negatively impacted gross profit margins by 0.9 percentage points, and (3) negative price/mix of 0.6 percentage points. Partially offsetting these negative impacts were the acquisitions of Kodak Versamark and the NexPress-related entities, which contributed 2.1 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. Additionally, favorable exchange positively impacted gross profit margins by 1.5 percentage points.

Selling, General and Administrative Expenses
SG&A expenses for the Graphic Communications Group segment were $259 million for 2004 as compared with $139 million in the prior year, representing an increase of $120 million, or 86%, and increased as a percentage of sales from 14% in the prior year to 19% 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 Group segment increased $82 million, or 228%, from $36 million for 2003 to $118 million for the current year, and increased as a percentage of sales from 4% in the prior year to 9% 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 acquisitions.

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Earnings (Losses) From Continuing Operations Before Interest, Other Income (Charges), Net and Income Taxes
Earnings (losses) from continuing operations before interest, other income (charges), net and income taxes for the Graphic Communications Group segment decreased $121 million from earnings of $82 million in 2003 to losses of $39 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.

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.

ALL OTHER

Worldwide Revenues
Net worldwide sales for All Other were $122 million for 2004 as compared with $96 million for 2003, representing an increase of $26 million, or 27%. Net sales in the U.S. were $57 million in 2004 as compared with $45 million for 2003, representing an increase of $12 million, or 27%. 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 $98 million from a loss of $93 million in 2003 to a loss of $191 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.

EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES

Earnings from discontinued operations, net of income taxes, for 2004 were $475 million, or $1.66 per basic and diluted share and were primarily related to the sale of Kodak’s Remote Sensing Systems business (RSS), 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 RSS.

NET EARNINGS

Net earnings for 2004 were $556 million, or $1.94 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 $303 million, or 120%. This increase is primarily attributable to the reasons outlined above.

PAGE 54

SUMMARY

(in millions, except per share data)	2005			Change			2004			Change			2003

Net sales from continuing operations	$	14,268			+ 6	%	$	13,517			+ 5	%	$	12,909
(Loss) earnings from continuing operations before interest, other income (charges), net, and income taxes		(599	)		-589			(87	)		-129			302
(Loss) earnings from continuing operations		(1,455	)		-1,896			81			- 57			189
Earnings from discontinued operations		150			- 68			475			+642			64
Cumulative effect of accounting change		(57	)					—						—
Net (loss) earnings		(1,362	)		-345			556			+120			253
Basic and diluted net (loss) earnings per share:
Continuing operations		(5.05	)		-1,904			.28			- 58			.66
Discontinued operations		.52			- 69			1.66			+655			.22
Cumulative effect of accounting change		(.20	)					—						—

Total		(4.73	)		- 344			1.94			+120			.88

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 items, which are described below, should be considered to better understand the Company’s results of operations that were generated from normal operational activities.

2005

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

Charges of $1,118 million ($1,020 million after tax) related to focused cost reductions implemented primarily under the 2004-2007 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.”

Net charges of $52 million ($38 million after tax) related to purchased in-process R&D incurred in the second quarter (adjusted for credits of $12 million ($2 million after tax) in the third quarter) related to the acquisitions of KPG and Creo.

Charges of $44 million ($35 million after tax) related to a $19 million impairment of the investment in Lucky Film and a $25 million ($16 million after tax) asset impairment.

Charges of $21 million ($21 million after tax) related to unfavorable legal settlements.

Other income of $41 million ($39 million after tax) related to the gain on the sale of properties in connection with restructuring actions.

Income tax charges of $6 million related to a change in estimate with respect to a tax benefit recorded in connection with a land donation.

PAGE 55

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 2004-2007 Restructuring Program. See further discussion in the Restructuring Costs and Other section of 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.

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 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.

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RESTRUCTURING COSTS AND OTHER

The Company is currently undergoing the transformation from a traditional products and services company to a digital products and services company. In connection with this transformation, the Company announced a cost reduction program in January 2004 that would extend through 2006 to achieve the appropriate business model and to significantly reduce its worldwide facilities footprint. In July 2005, the Company announced an extension to this program into 2007 to accelerate its digital transformation, which included further cost reductions that will result in a business model consistent with what is necessary to compete profitably in digital markets.

In connection with its announcement relating to the extended “2004-2007 Restructuring Program,” the Company has provided estimates with respect to (1) the number of positions to be eliminated, (2) the facility square footage reduction, (3) the reduction in its traditional manufacturing infrastructure, and (4) the total restructuring charges to be incurred.

The actual charges for initiatives under this 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 2005:

(in millions)	Balance Dec. 31, 2004		Charges		Reversals			Cash Payments			Non- cash Settle- ments			Other Adjustments and Reclasses (1)			Balance Dec. 31, 2005

2004-2007 Restructuring Program:
Severance reserve	$	267	$	497	$	(3	)	$	(377	)	$	—		$	(113	)	$	271
Exit costs reserve		36		84		(6	)		(95	)		—			4			23

Total reserve	$	303	$	581	$	(9	)	$	(472	)	$	—		$	(109	)	$	294

Long-lived asset impairments and inventory write-downs	$	—	$	161	$	—		$	—		$	(161	)	$	—		$	—
Accelerated depreciation		—		391		—			—			(391	)		—			—
Pre-2004 Restructuring Programs:
Severance reserve	$	40	$	—	$	(3	)	$	(30	)	$	—		$	(5	)	$	2
Exit costs reserve		12		—		(3	)		(6	)		—			10			13

Total reserve	$	52	$	—	$	(6	)	$	(36	)	$	—		$	5		$	15

Total of all restructuring programs	$	355	$	1,133	$	(15	)	$	(508	)	$	(552	)	$	(104	)	$	309

(1)

The total restructuring charges of $1,133 million include: (1) pension and other postretirement charges and credits for curtailments, settlements and special termination benefits, and (2) environmental remediation charges that resulted from the Company’s ongoing restructuring actions. However, because the impact of these charges and credits relate to the accounting for pensions, other postretirement benefits, and environmental remediation costs, the related impacts on the Consolidated Statement of Financial Position are reflected in their respective components as opposed to within the accrued restructuring balances at December 31, 2005 or 2004. Accordingly, the Other Adjustments and Reclasses column of the table above includes: (1) reclassifications to Other long-term assets and Pension and other postretirement liabilities for the position elimination-related impacts on the Company’s pension and other postretirement employee benefit plan arrangements, including net curtailment losses, settlement losses, and special termination benefits of $(98) million, and (2) reclassifications to Other long-term liabilities for the restructuring-related impacts on the Company’s environmental remediation liabilities of $(8) million. Additionally, the Other Adjustments and Reclasses column of the table above includes: (1) adjustments to the restructuring reserves of $14 million related to the Creo purchase accounting impacts that were charged appropriately to Goodwill as opposed to Restructuring charges, (2) foreign currency translation adjustments of $(12) million, which are reflected in Accumulated other comprehensive loss in the Consolidated Statement of Financial Position, and (3) rebalancing reclassifications between the restructuring reserves, which net to zero on a consolidated basis.

The costs incurred, net of reversals, which total $1,118 million for the year ended December 31, 2005, include $391 million and $37 million of charges related to accelerated depreciation and inventory write-downs, respectively, which were reported in cost of goods sold in the accompanying Consolidated Statement of Operations for the year ended December 31, 2005. The remaining costs incurred, net of reversals, of $690 million, were reported as restructuring costs and other in the accompanying Consolidated Statement of Operations for the year ended December 31, 2005. The severance costs and exit costs require the outlay of cash, while long-lived asset impairments, accelerated depreciation and inventory write-downs represent non-cash items.

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2004-2007 Restructuring Program

The Company announced on January 22, 2004 that it planned to develop and execute a comprehensive cost reduction program throughout the 2004 to 2006 timeframe. The objective of these actions was to achieve a business model appropriate for the Company’s traditional businesses, and to sharpen the Company’s competitiveness in digital markets.

The Program was expected to result in total charges of $1.3 billion to $1.7 billion over the three-year period, of which $700 million to $900 million related to severance, with the remainder relating to the disposal of buildings and equipment. Overall, Kodak’s worldwide facility square footage was expected to be reduced by approximately one-third. Approximately 12,000 to 15,000 positions worldwide were expected to be eliminated through these actions primarily in global manufacturing, selected traditional businesses and corporate administration.

On July 20, 2005, the Company announced that it would extend the restructuring activity, originally announced in January 2004, as part of its efforts to accelerate its digital transformation and to respond to a faster-than-expected decline in consumer film sales. The Company now plans to increase the total employment reduction to a range of 22,500 to 25,000 positions, and to reduce its traditional manufacturing infrastructure to approximately $1 billion, compared with $2.9 billion as of December 31, 2004. When largely completed by the middle of 2007, these activities will result in a business model consistent with what is necessary to compete profitably in digital markets. As a result of this announcement, this program has been renamed the “2004-2007 Restructuring Program.”

The Company implemented certain actions under this program during 2005. As a result of these actions, the Company recorded charges of $742 million in 2005, which were composed of severance, long-lived asset impairments, exit costs and inventory write-downs of $497 million, $124 million, $84 million and $37 million, respectively. The severance costs related to the elimination of approximately 8,125 positions, including approximately 1,000 photofinishing, 4,375 manufacturing, 575 research and development and 2,175 administrative positions. The geographic composition of the positions to be eliminated includes approximately 4,150 in the United States and Canada and 3,975 throughout the rest of the world. The reduction of the 8,125 positions and the $581 million charges for severance and exit costs are reflected in the 2004-2007 Restructuring Program table below. The $124 million charge for long-lived asset impairments was included in restructuring costs and other in the accompanying Consolidated Statement of Operations for the year ended December 31, 2005. The charges taken for inventory write-downs of $37 million were reported in cost of goods sold in the accompanying Consolidated Statement of Operations for the year ended December 31, 2005.

Under this Program, on a life-to-date basis as of December 31, 2005, the Company has recorded charges of $1,416 million, which were composed of severance, long-lived asset impairments, exit costs and inventory write-downs of $915 million, $262 million, $183 million and $56 million, respectively. The severance costs related to the elimination of approximately 17,750 positions, including approximately 5,700 photofinishing, 7,950 manufacturing, 1,000 research and development and 3,100 administrative positions.

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The following table summarizes the activity with respect to the charges recorded in connection with the focused cost reduction actions that the Company has committed to under the 2004-2007 Restructuring Program and the remaining balances in the related reserves at December 31, 2005:

(dollars in millions)	Number of Employees			Severance Reserve			Exit Costs Reserve			Total			Long-lived Asset Impairments and Inventory Write-downs			Accelerated Depreciation

2004 charges		9,625		$	418		$	99		$	517		$	157		$	152
2004 reversals		—			(6	)		(1	)		(7	)		—			—
2004 utilization		(5,175	)		(169	)		(47	)		(216	)		(157	)		(152	)
2004 other adj. & reclasses		—			24			(15	)		9			—			—

Balance at 12/31/04		4,450			267			36			303			—			—
2005 charges		8,125			497			84