EASTMAN KODAK COMPANY 2005 ANNUAL REPORT and 2006 PROXY STATEMENT IMAGING TECHNOLOGY Eastman Kodak Company 343 State Street Rochester, NY 14650 www.kodak.com www.kodakgallery.com CC5-05/06 CAT No. 1989623 EASTMAN KODAK COMPANY 2005 ANNUAL REPORT NOTICE OF 2006 ANNUAL MEETING INNOVATION AND PROXY STATEMENT EASTMAN KODAK COMPANY 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 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 workfl ow solutions to help improve patient care and maximize effi ciency and information sharing within and across their enterprise. For information visit: www.kodak.com. CHAIRMAN’S LETTER To Our Shareholders: In 2005, for the fi rst time in Kodak’s history, more than half of our revenue came from digital products and services, and we solidifi ed our leading market share in many of the consumer and commercial digital categories in which we participate. We completed an aggressive acquisitions program in our Graphic Communications business, setting the stage for that segment to contribute signifi cantly to digital sales and earnings in 2006. We ended the year in an excellent cash position, with $1.7 billion of cash on hand, and we secured access to signifi cant fi nancing to ensure liquidity for our transformation. We also worked aggressively to refresh our brand for the digital world. As you may have noticed from our new product designs, advertising, packaging, and even the look of this annual report, the very face of Kodak is changing. Having passed the halfway point of our four-year transformation, we’ve achieved a series of milestones that position us well for the remainder of our journey. Because of our now sizable digital business, we have started to: • attract new customers and business partners; • negotiate mutually advantageous relationships with retailers and suppliers; and • shift focus to design of technology platforms versus individual products. We now have in place the core product portfolio, organizational structure and leadership team Antonio M. Perez that will take us through the second half of our transformation. Chairman and Chief Executive Offi cer Financial Review After a challenging start in 2005, Kodak came on strong at the fi nish. Revenues were up 6% overall, and digital revenue growth* — one of our key performance metrics — was 40% for the year, exceeding our target of 36% growth. Our net loss of $1.362 billion stemmed largely from $1.1 billion in non-cash charges to account for tax valuation allowances in the U.S. Our decision to accelerate our restructuring also contributed to the year’s results. In the fourth quarter, when the company generates a signifi cant amount of its sales and earnings for a given year, we demonstrated substantial improvement in our digital results. Digital earnings* for the quarter, for example, grew to $158 million. For the year, net operating cash from continuing operations totaled $1.180 billion, at the high end of the $1.0 to $1.2 billion range we had expected. In addition to cash that came from our digital and traditional earnings, we generated cash from reductions in inventories and receivables, real estate sales and continued progress in leveraging our intellectual property. Further strengthening our fi nancial picture, in October we obtained $2.7 billion of new credit lines that will address our fi nancing needs for the foreseeable future. This allowed us to refi nance $1.2 billion in short-term debt (primarily related to our acquisition of Creo, Inc.) with long-term debt. It also gives us access to more than $1 billion of new borrowing capacity should we need it. * Amounts used that are considered non-GAAP fi nancial measures are defi ned and reconciled to the most directly comparable GAAP measure on page 5 of this annual report to shareholders. GAAP refers to accounting principles generally accepted in the U.S. “ Having passed the halfway point of our four-year transformation, we’ve achieved a series of milestones that position us well for the remainder of our journey.” 1 Business Review We can proudly point to examples of growth and innovation in each of our business areas. n Digital and Film Imaging Systems Digital Products and Services Some aspects of the consumer imaging business don’t change with the technology. People still want simple solutions that will let them take, share and control pictures of their lives. Kodak is committed to providing new capabilities, while staying true to the “you press the button, we do the rest” simplicity on which our company was built. According to the market research fi rm IDC, Kodak retained its #1 U.S. market position in digital still cameras in 2005, increasing our lead over the next closest competitor. Worldwide, we ascended to the #2 position. We were also: • #1 worldwide in snapshot printers, competing against the specialized printer companies. • #1 in retail photo kiosks, with nearly 75,000 installed worldwide — far ahead of our nearest competitor. • #1 in online services with the Kodak EasyShare Gallery, which today has more than 30 million registered members. With this presence, it is not surprising that our products continue to receive numerous accolades. For the second consecutive year, we captured the highest rankings in two of four price segments in the J.D. Power and Associates Digital Camera Satisfaction Study. The two segments, $200 – $399 and $199 or less, comprise more than 85% of the U.S. digital camera market, according to NPD Techworld. After taking top honors at the 2005 Consumer Electronics Show (CES), the world’s largest event of its kind, the Kodak EasyShare-One digital camera was lauded in hundreds of publications around the world for its unique design and its status as the world’s fi rst consumer camera offering wireless transmission of pictures. It was also featured on the cover of Business Week as one of that magazine’s Best Products of 2005. Industry buzz was also strong for the new Kodak photo kiosk G4. It features wireless input of images from digital cameras and camera phones, provides four-second printing and is 30% lighter and smaller than previous models — giving retailers an attractive alternative to minilabs for digital printing. In fact, to meet growing demand for thermal prints from our kiosks and printer docks, we added manufacturing capacity for thermal paper and media at our plant in Windsor, Colorado. Additional capacity will be operational this year in Rochester, New York. Consumers will see more innovative products from us in 2006. Already, our new Kodak EasyShare V570 zoom digital camera is being heralded by technology opinion leaders, and was named one of the 25 Most Innovative Products of 2006 by PC World editors. The world’s fi rst dual lens digital still camera, it features both an ultra-wide angle lens and optical zoom lens in a body less than one-inch thick. We are also collaborating on the next generation of mobile capture devices through a 10-year global product, cross-licensing and marketing alliance with Motorola, one of the world’s leading wireless companies. This agreement, negotiated in 2005, provides us an opportunity to sell image sensors to Motorola, and to link Motorola phone users with the Kodak Gallery and other Kodak services for storing and printing pictures. Traditional Products and Services As we manage the growth from our digital products and services, we are also effectively managing the overall decline in sales from our traditional products and services. There, inventory reductions and cost controls have generated substantial cash to fund our transformation. In the motion picture industry, a majority of fi lmmakers continue to choose fi lm over current digital alternatives. They feel it still offers superior imaging and archival characteristics, as evidenced by products like the Kodak Vision2 fi lm platform, which has dramatically improved the quality of motion picture fi lm. Development into hybrid technologies and digital services, to make fi lm perform even better in conjunction with increasingly digital postproduction work, is also taking place. As such, fi lm volumes and revenues have remained very consistent in the entertainment sector. As testimony to Kodak’s presence in this market, every movie nominated for the Oscar for “Best Picture” of 2005 was recorded on Kodak fi lm. In fact, since the Academy Awards were fi rst given in 1928, every “Best Picture” has been shot on Kodak fi lm. “ Kodak retained its #1 U.S. market position in digital still cameras in 2005, increasing our lead over the next closest competitor. Worldwide, we ascended to the #2 position.” 2 n Graphic Communications Our Graphic Communications Group (GCG) is an excellent example of Kodak growing its presence in a key industry. Starting with a modest portfolio, Kodak has built a $3 billion business in graphics over the past two years. Today, Kodak products and services are used in production of a substantial percentage of the world’s commercially printed pages. Acquisitions were key to our growth. In April 2005, we took full ownership of Kodak Polychrome Graphics (KPG).