Note 1: Significant Accounting Policies

Company Operations  Eastman Kodak Company (the Company or Kodak) is engaged primarily in developing, manufacturing, and marketing consumer, professional, health and other imaging products and services. The Company’s products are manufactured in a number of countries in North and South America, Europe, Australia and Asia. The Company’s products are marketed and sold in many countries throughout the world.

Basis of Consolidation  The consolidated financial statements include the accounts of Eastman Kodak Company and its majority owned subsidiary companies. Intercompany transactions are eliminated and net earnings are reduced by the portion of the earnings of subsidiaries applicable to minority interests. The equity method of accounting is used for investments in associated companies over which Kodak does not have effective control.

Use of Estimates  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at year end and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Foreign Currency  For most subsidiaries and branches outside the U.S., the local currency is the functional currency and translation adjustments are accumulated in a separate component of shareholders’ equity. Translation adjustments are not tax-effected since they relate to investments which are permanent in nature.

For subsidiaries and branches that operate in U.S. dollars or whose economic environment is highly inflationary, the U.S. dollar is the functional currency.

The effects of foreign currency transactions, including related hedging activities, were losses of $13 million, $2 million, and $20 million in the years 2000, 1999, and 1998, respectively.

Cash Equivalents  All highly liquid investments with an original maturity of three months or less at date of purchase are considered to be cash equivalents.

Marketable Securities and Noncurrent Investments  At December 31, 2000, investments of $5 million, which were included in marketable securities, were considered held to maturity. Long-term marketable securities and other investments of $44 million, which were included in other noncurrent assets, were considered available for sale.

At December 31, 1999, investments of $10 million, which were included in marketable securities, were considered held to maturity. Investments of $10 million included in marketable securities, and $117 million of long-term marketable securities and other investments which were included in other noncurrent assets, were considered available for sale.

Inventories   Inventories are valued at cost, which is not in excess of market. The cost of most inventories in the U.S. is determined by the “last-in, first-out” (LIFO) method. The cost of other inventories is determined by the "first-in, first-out" (FIFO) or average cost method, which approximates current cost. The Company provides inventory reserves for excess, obsolete or slow-moving inventory based on changes in customer demand, technology developments or other economic factors

Properties    Properties are recorded at cost net of accumulated depreciation. Depreciation expense is provided based on historical cost and estimated useful lives ranging from approximately three years to fifty years for buildings and building equipment and three years to twenty years for machinery and equipment. The Company generally uses the straight-line method for calculating the provision for depreciation.

Goodwill  Goodwill is charged to earnings on a straight-line basis over the period estimated to be benefited, generally ten years. The Company regularly assesses all of its long-lived assets for impairment when events or circumstances indicate their carrying amounts may not be recoverable, in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This is accomplished by comparing the estimated undiscounted future cash flows of the asset grouping with the respective carrying amount as of the date of assessment. Should aggregate future cash flows be less than the carrying value, a write-down would be required, measured as the difference between the carrying value and the discounted future cash flows.