Gross profit declined 2% with margins declining .6 percentage points from 43.3% in 1999 to 42.7% in 2000. Excluding special charges in both years, gross profit margins decreased 2.6 percentage points from 45.7% in 1999 to 43.1% in the current year. The decline in margin was driven primarily by lower prices, increased sales of lower margin products, like one-time-use cameras and consumer digital cameras, and the negative impact of exchange. Productivity gains that were recognized earlier in the year were partially offset during the fourth quarter as the Company reduced inventories in the face of slowing demand and retailer inventory reductions.

Selling, general and administrative (SG&A) expenses decreased 10% from 23.4% of sales in 1999 to 21.3% in 2000. Excluding special charges in 1999, SG&A decreased 6% from the prior year from 22.5% of sales to 21.3%. The reduction in SG&A expenses primarily reflects the success of the Company’s cost reduction initiatives and portfolio actions.

R&D expenses decreased 4% during the year from 5.8% of sales in 1999 to 5.6% in 2000. This decline primarily reflects the benefit of portfolio actions, primarily the divestiture of Eastman Software.

Earnings from operations increased 11% or $224 million in 2000. Adjusting for special charges in both years, earnings from operations declined $190 million or 8% as increased sales volumes in many of the Company’s businesses and the success of cost savings initiatives did not offset lower effective selling prices and adverse currency movements.

Interest expense increased 25% over 1999 reflecting higher average borrowing and rising interest rates. Other income decreased by $165 million or 63% from 1999 due largely to the inclusion of gains of $120 million from the sale of the Image Bank and Motion Analysis Systems Division in 1999. Excluding the gains from the sale of these businesses, other income declined $45 million, primarily reflecting lower equity earnings from the Company’s Kodak Polychrome Graphics (KPG) joint venture.

The effective tax rate for both 2000 and 1999 was 34%.

Consumer Imaging  Sales in the Consumer Imaging segment of $7,406 were essentially flat compared with 1999, as increased volumes were offset by lower prices and adverse currency movements. Excluding unfavorable exchange movements, sales increased 3%. U.S. sales increased 5% while sales outside the U.S. declined by 5%, but increased 2% excluding the unfavorable effect of exchange movements.

Worldwide film sales (including 35mm film, Advantix film, and one-time-use cameras) decreased 1% from 1999 as increased volumes in all major categories could not offset pricing pressures and adverse currency movements. U.S. film sales increased 2% primarily due to volume increases of 17% in one-time-use cameras and 15% in Advantix film. The Company successfully held total film market share in the U.S. for the 3rd consecutive year. Outside the U.S., film sales to dealers declined 3% as increased volumes were offset by lower prices and negative currency movements.

Throughout 2000, the Company continued to successfully shift consumers to the differentiated, higher value MAX and Advantix product lines. By the fourth quarter, combined U.S. sales of MAX and Advantix films grew to more than 62% of total U.S. consumer roll film revenues, up 6 percentage points over year-end 1999.

Worldwide paper sales declined 3% in 2000 as volume gains could not offset lower prices and negative exchange. U.S. paper sales increased by 1%, as 3% volume increases offset lower prices. Outside the U.S., paper sales decreased 5% as increased volumes could not offset lower prices and negative exchange movements.