Kodak took aggressive steps in 2003 to remake itself into a leaner, stronger, more diversified company as fundamental structural change continued to reshape the global imaging industry. As we sharpened our focus on the commercial, consumer and health imaging markets, we implemented a digitally oriented strategy to support revenue and sustainable earnings growth. To deliver on our strategy, we exercised prudent cost management and put in place an experienced leadership team.

Our strategy is firmly rooted in Kodak's core businesses: digital and traditional imaging. Continued success in both components of the business is vital to the Company's future as the merger of information and imaging technologies (infoimaging) accelerates the demand for digital imaging solutions. The Company is expanding the horizon for imaging services while implementing an improved business model for its traditional and digital businesses.

This environment required an aggressive leveraging of our strength in digital imaging while at the same time maintaining our historic leadership in maturing traditional businesses. In 2003, our digital businesses accelerated smartly in key world markets. Several of our traditional silver halide markets showed volume declines in developed countries, although the growth opportunity for traditional products in emerging market countries improved during the year.

Because of Kodak's proven success in digital imaging—already a $4 billion business for Kodak—our customers look to us for leadership as market dynamics evolve. In fact, a Forrester Technology Brand Scorecard placed Kodak number two in trust among 58 major technology brands. We have the market knowledge, the technical assets and the global brand strength to succeed.

FINANCIAL PERFORMANCE
As the world economy slowly gained momentum during the year, our financial strategy was characterized by strict cost control, an improving cash position and a selective acquisition strategy for key businesses. We ended the year on a positive note financially, the result of solid progress on our overall business strategy.

Increased sales volumes were driven primarily by consumer digital cameras, printer dock products, inkjet media and motion picture print films in the Photography segment, digital products in Health Imaging and imaging services and document scanners in the Commercial Imaging segment. Earnings from continuing operations were impacted by declines in price/mix for traditional businesses, and costs related to restructuring. Investable cash flow throughout the year was on target. Inventory turns improved, reflecting revenue growth in our digital businesses. We continued strict control of capital spending, which was on plan.

Our action on the dividend was not an easy decision. But given the choices, including higher debt levels, we believe it was a prudent way to help fund growth and generate shareholder value over time.

Internal and external investments will fuel our growth. Internal investments focused on technical core competencies that play well in the future digital systems world. R&D investments leveraged Kodak's deep knowledge in materials science, imaging science and coating technologies. This expertise supports the rapid growth of Kodak digital systems and enables cash generation through reduced cost of traditional products.

In 2003, Kodak delivered breakthrough technology in silver halide film systems for entertainment and consumer imaging, while accomplishing significant cost reductions for all of our traditional products. Kodak innovators contributed to leadership imaging systems for markets such as wide-format inkjet, digital cinema and document scanning. New products in computed radiography, computer-aided diagnostics and picture archiving and communications (PACS) are based on Kodak innovations. Our technical core competencies are the foundation for successful products, such as the EasyShare printer dock, inkjet photo paper with ColorLast technology, picture maker imaging kiosks and the new mobile imaging service—not to mention exciting future imaging systems now in our research laboratories.

Kodak inventors around the world filed more than 900 patent applications in 2003, and received 748 U.S. patents—an increase of 11% over 2002. The Company's overall strength in intellectual property includes new areas such as inkjet, where the Company has more than 700 patents, and new display technology such as our world-leading organic light emitting diodes (OLED).

The second investment component involves acquisition of external capabilities that complement our existing businesses. An example is the acquisition of PracticeWorks, the world leader in digital dental imaging, and a leading provider of management software for dental offices. This acquisition intelligently expands our Health Imaging digital portfolio for dental markets. In 2003, we made six such targeted acquisitions in Health, Entertainment Imaging and Commercial Printing. Our Digital and Film Imaging Systems business acquired a 20% share of China Lucky Film Corp., the largest photo film manufacturer headquartered in China. This investment will help Kodak and Lucky Film expand the traditional film market in China.