In 2002 — an exceptionally difficult year for most businesses — Eastman Kodak Company turned in a strong performance that achieved or exceeded most of our strategic, operational and financial objectives.

We strengthened our balance sheet and improved free cash flow. We also maintained our common stock dividend. Our business groups introduced innovative new products. Worldwide manufacturing productivity improved significantly. With a 25% total return, including dividends, Kodak closed the year as the best-performing stock among companies that make up the Dow Jones Industrial Average.

The continuing economic slump in the U.S., Europe and many other countries dampened sales growth. Restrained consumer spending and a sluggish travel and vacation industry — along with the continuing evolution of digital technology — impacted traditional photography sales in the U.S. and Western Europe, especially in the fourth quarter. In this environment, 2002 worldwide sales declined 3% compared with 2001. Even so, we managed the operational elements of our business to achieve a 16% year-over-year increase in operational earnings. We continued to see strong growth in the emerging markets of China (+25%), Russia (+20%) and India (+8%). In the U.S., we held market share in consumer film steady for the fifth straight year.

FINANCIAL PERFORMANCE

Our financial strategy again focused on generating cash to support the underlying value of the company, pay down debt, and enable prudent investments for growth. By year's end, we delivered $948 million in operating cash flow by lowering inventories, reducing receivables and keeping a tight lid on capital expenditures. In the process, we reduced debt by $594 million by year's end. We also bought back 7.4 million shares of Kodak stock from the company's U.S. pension plan, and ended a costly company-owned life insurance plan. Our cash position increased by $121 million to $569 million.

Continuing in 2002 was a worldwide workforce reduction, with the final phase to be completed in 2003. A further reduction in Kodak's worldwide employment of an estimated 3% is planned for 2003. A significant part of these reductions will result from consolidation of photofinishing operations in the U.S. and Western Europe as the company continues to rationalize and align its investments under our growth strategies.