LEXMARK INTERNATIONAL INC /KY/ - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NO. 1-14050

LEXMARK INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 06-1308215
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

ONE LEXMARK CENTRE DRIVE
740 WEST NEW CIRCLE ROAD
LEXINGTON, KENTUCKY 40550
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(859) 232-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No ___

As of March 5, 2004, there were outstanding 129,513,276 shares (excluding shares
held in treasury) of the registrant's Class A common stock, par value $.01,
which is the only class of voting common stock of the registrant, and there were
no shares outstanding of the registrant's Class B common stock, par value $.01.
As of that date, the aggregate market value of the shares of voting common stock
held by non-affiliates of the registrant (based on the closing price for the
Class A common stock on the New York Stock Exchange on March 5, 2004) was
approximately $10,811,768,280.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information in the company's definitive Proxy Statement for the 2004
Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year, is incorporated by reference in Part III of this
Form 10-K.
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LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003

PART I

ITEM 1. BUSINESS

GENERAL

Lexmark International, Inc., ("Lexmark") is a Delaware corporation and the
surviving company of a merger between itself and its former parent holding
company, Lexmark International Group, Inc., ("Group") consummated on July 1,
2000. Group was formed in July 1990 in connection with the acquisition of IBM
Information Products Corporation from International Business Machines
Corporation ("IBM"). The acquisition was completed in March 1991. On November
15, 1995, Group completed its initial public offering of Class A common stock
and Lexmark now trades on the New York Stock Exchange under the symbol "LXK."

Lexmark is a leading developer, manufacturer and supplier of printing
solutions -- including laser and inkjet printers, multifunction products,
associated supplies and services -- for offices and homes. Lexmark develops and
owns most of the technology for its laser and inkjet products and associated
supplies, and that differentiates the company from many of its major
competitors, including Hewlett-Packard, which purchases its laser engines and
cartridges from a third party. Lexmark also sells dot matrix printers for
printing single and multi-part forms by business users and develops,
manufactures and markets a broad line of other office imaging products. The
company operates in the office products industry. The company is primarily
managed along business and consumer market segments. Refer to Note 17 of the
Notes to Consolidated Financial Statements for additional information regarding
the company's reportable segments.

Revenue derived from international sales, including exports from the United
States, make up about half of the company's consolidated revenue, with Europe
accounting for approximately two-thirds of international sales. Lexmark's
products are sold in over 150 countries in North and South America, Europe, the
Middle East, Africa, Asia, the Pacific Rim and the Caribbean. This geographic
diversity offers the company opportunities to participate in new markets,
provides diversification to its revenue stream and operations to help offset
geographic economic trends, and utilizes the technical and business expertise of
a worldwide workforce. Currency translation has significantly affected
international revenue and cost of revenue during the past several years. Refer
to Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Effect of Currency Exchange Rates and Exchange Rate Risk
Management for more information. As the company's international operations grow,
management's attention continues to be focused on the operation and expansion of
the company's global business and managing the cultural, language and legal
differences inherent in international operations. A summary of the company's
revenue and long-lived assets by geographic area is found in Note 17 of the
Notes to Consolidated Financial Statements included in this Annual Report on
Form 10-K.

MARKET OVERVIEW(1)

In 2003, estimated worldwide revenue for the office and home printing hardware
and associated supplies market, including monochrome (black) and color laser,
inkjet and dot matrix printers, exceeded $40 billion. Lexmark management
believes that the total office and home printing output opportunity is expanding
as copiers and fax machines have begun to be integrated into multifunction
printers. Based on industry analyst information, Lexmark management estimates
that this expanded market revenue opportunity, which includes multifunction
products, copiers and fax machines, was approximately $80 billion in 2003, and
will grow annually at low- to mid-

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1 Certain information contained in the "Market Overview" section has been
obtained from industry sources. Data available from industry analysts varies
widely among sources. The company bases its analysis of market trends on the
data available from several different industry analysts.

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single digit percentage rates through 2006. Management believes that this
integration of print/copy/fax capabilities favors companies like Lexmark due to
its experience in providing industry leading network printing solutions and
multifunction printing products.

The Internet is positively impacting the distributed home and office printing
market opportunity in several ways. As more information is available over the
Internet, and new tools and solutions are being developed to access it, more of
this information is being printed on distributed home and office printers.
Management believes that an increasing percentage of this distributed output
includes color and graphics, which tend to increase supplies usage. Growth in
high-speed Internet access to the home, combined with the rise in digital camera
sales, is also contributing to increased photo printing on distributed devices.

The laser printer market is primarily serving business customers. Laser printing
products can be divided into two major categories -- shared workgroup printers,
which are typically attached directly to large workgroup networks, and lower
priced desktop printers attached to PCs or small workgroup networks. The shared
workgroup printers include color and monochrome laser printers that are easily
upgraded to include additional input and output capacity, additional memory and
storage, and typically include high performance internal network adapters. Most
shared workgroup printers also have sophisticated network management software
tools and some products (including Lexmark's) now include multifunction upgrades
that enable copy/fax/scan to network capabilities. Based on industry data,
within the overall distributed laser printer market, Lexmark has gained market
share over the past six years. At the end of 2003, the company estimated its
installed base of laser printers at 5.2 million units versus 4.8 million units
at year-end 2002.(2)

Laser printer unit growth in recent years has generally exceeded the growth rate
of laser printer revenue due to unit growth in lower priced desktop laser
printers and unit price reductions, and management believes this trend will
continue. This pricing pressure is partially offset by the tendency of customers
in the shared workgroup laser market to add higher profit margin optional
features including network adapters, document management software, additional
memory, paper handling and multifunction capabilities. Pricing pressure is also
partially offset by the opportunity to provide business solutions and services
to customers who are increasingly looking for assistance to better manage and
leverage their document-related costs and output infrastructure.

The inkjet product market is predominantly a consumer market but also includes
business users who may choose inkjet products as a lower priced alternative or
supplement to laser printers for personal desktop use. Additionally, over the
past two years, the number of consumers seeking to print digitally captured
images in their homes have driven the photo-based sector up significantly. The
greater affordability of inkjet printers, as well as the growth in the
inkjet-based multifunction devices (all-in-one printers), both with a focus on
delivering digital photos, have been important factors in the growth of this
market. Based on industry data, Lexmark has gained market share over the past
six years. Growth in inkjet product revenue has been slower than unit growth due
to price reductions, which management expects to continue. At the end of 2003,
the company estimated its installed base of inkjet products at 47 million units
versus 43 million units at year-end 2002.(2)

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2 Over the last few years, Lexmark has provided estimates of its laser and
inkjet installed base on an annual basis, usually in January of each year.
These estimates are derived from detailed models, which contain numerous
assumptions requiring the use of management's judgment, such as ink and toner
usage, economic life of the products, retirement rates and product mix. The
company continually updates these models internally and revises the
assumptions, as new information is discovered. While these installed base
amounts reflect management's best estimate when published, they are subject to
change based on subsequent receipt of additional or different data, or changes
in the underlying assumptions. There can be no assurance that any of the
assumptions are correct and management's estimates of the installed base may
differ materially from the actual installed base. Management undertakes no
responsibility to update the public disclosure of its estimate of the
installed base as new information is continuously discovered.

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The markets for dot matrix printers and most of the company's other office
imaging products, including supplies for select IBM branded printers,
aftermarket supplies for original equipment manufacturer ("OEM") products, and
typewriter supplies, continue to decline as these markets mature, and the
underlying product installed bases are replaced.

STRATEGY

Lexmark's strategy is based on a business model of building an installed base of
printers and multifunction products that generate demand for its related
supplies and services. Management believes that Lexmark has unique strengths
related to this business model, which have allowed it to grow faster than the
market over the past several years and achieve above average profitability in
the office and home printing output market.

First, Lexmark is exclusively focused on printing and related solutions.
Management believes that this focus has enabled Lexmark to be more responsive
and flexible than competitors at meeting specific customer and channel partner
needs.

Second, Lexmark internally develops all three of the key technologies in the
distributed printing business, including inkjet, mono laser and color laser.
Lexmark is also recognized as an industry leader in critical software
competencies related to printing, network connectivity/management and enhancing
document workflow. The company's technology platform has historically allowed it
to be a leader in product price/performance and also build unique capabilities
into its products that enable it to offer unique solutions (combining hardware,
software and professional services) for specific customer groups. This breadth
of technology capabilities has also enabled Lexmark to offer an extensive
product line alternative to the industry leader, Hewlett-Packard.

Third, Lexmark has leveraged its technological capabilities and its commitment
to flexibility and responsiveness to build strong relationships with
large-account customers and channel partners, including major retail chains,
distributors, direct-response cataloguers and value-added resellers. Lexmark's
path-to-market includes industry focused sales and marketing teams that deliver
unique and differentiated solutions to both large accounts and channel partners
that sell into the company's target industries. Retail-centric teams also have
enabled Lexmark to meet the specific needs of major retail partners and have
resulted in the company winning numerous "best supplier" awards over the last
few years.

Lexmark's business market strategy involves targeting large corporations, small
and medium businesses and the public sector to increase market share by
providing an array of high quality, technologically advanced products at
competitive prices. Lexmark also continues to identify and focus on industries
where it can differentiate itself by providing unique printing solutions and
related services.

Lexmark's strategy also continually focuses on enhancing its laser printers to
function efficiently in a networked environment as well as providing significant
flexibility and manageability to network administrators. Generally, Lexmark
leverages expertise gained from its exclusive focus on printing solutions and
its understanding of industry-specific customer requirements to provide unique
and customized printing solutions and related services tailored to address
specific industry customer needs.

The company's consumer market strategy is to generate demand for Lexmark
products by offering high-quality, competitively-priced products to consumers
and businesses primarily through retail channels. Lexmark develops its own
technology to meet customer needs for increased functionality, faster printing
and better print quality. Lexmark management believes that its core product
offerings in this market, including the "Z" and "X" families of inkjet printers
and all-in-one printers, will also help it to build brand recognition in the
retail channels. Lexmark has aggressively reduced costs while pushing the
performance and features of higher-end color inkjets into the sub-$100 sector
and all-in-one printers into the sub-$250 sector.

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Because of Lexmark's exclusive focus on printing solutions, the company has
successfully formed alliances and OEM arrangements with many companies,
including Dell, IBM, Lenovo (formerly Legend) and Sindo Ricoh. The entrance of a
competitor that is also exclusively focused on printing solutions could have a
material adverse impact on the company's strategy and financial results.

The company's strategy for dot matrix printers and other office imaging products
is to continue to offer high-quality products while managing cost to maximize
cash flow and profit.

PRODUCTS

Laser Products

Lexmark offers a wide range of monochrome and color laser printers,
multifunction products, and associated features, software, and application
solutions. In 2003, the company introduced a new line of monochrome laser
printers designed to serve both workgroup and desktop applications. The T634 and
T632 monochrome laser printers with print speeds of up to 45 and 40 pages per
minute ("ppm"), respectively, are designed to support large and medium
workgroups and have optional paper input and output features, including a
stapler and offset stacker. The T630 and T420d monochrome laser printers with
print speeds of up to 35 and 22 ppm, respectively, are designed to support
medium and small workgroups. For the personal sector of the market, the company
introduced the E323, E321 and E220 monochrome laser printers with print speeds
of up to 20, 20 and 18 ppm, respectively. The monochrome laser printer line
extends into the wide format sector of the market with the W820 and W812. With
print speeds of up to 45 ppm, the W820 is supported with an array of paper
handling and finishing options that make it well suited for departmental
printing needs. The W812 is a small workgroup printer designed for wide format
and specialty printing applications with print speeds of up to 26 ppm.

In 2003, the company introduced two single pass technology color laser printers,
the C752 and C912. The C752 features the company's internally developed color
laser technology and prints both monochrome and color pages at up to 20 ppm. The
C752 is designed for large and medium workgroups. The C912 prints both
monochrome and color pages at up to 28 ppm and supports printing on tabloid size
paper. The company also offers the C720, a small workgroup color laser printer
that prints at up to 24 ppm in monochrome and six ppm in color. Early in 2004,
Lexmark introduced the C752L, which makes high-speed color printing even more
affordable for businesses. The C752L prints both monochrome and color pages at
up to 20 ppm.

In 2003, the company introduced the X912e, X752e and X632e multifunction
products. Along with the X820e, these products include an intuitive touch screen
display and the ability to integrate with corporate directories and leverage
existing network security to regulate access. These characteristics make it easy
for users to scan paper documents and fax or e-mail them. Other multifunction
products introduced in 2003 by the company include the X632, X630 and X215, each
of which provides print/copy/fax/scan capability. The X215 is a compact,
integrated device, designed for desktop applications and personal use. The X720
is also offered by the company, and like the X912e and X752e, has the added
capability of printing, scanning and copying in color. Early in 2004, Lexmark
introduced the X422, which is a compact, integrated, network-ready,
multifunction product for workgroups.

The N4000e network adapter was announced by the company in 2003 to support
low-cost networking for desktop devices. MarkVision Professional, Lexmark's
print management software that provides remote configuration, monitoring, and
problem resolution of network print devices can be bundled with all business
printers and multifunction products. Application solution options that support
web, bar code, encrypted data and Intelligent Printer Data Stream ("IPDS")
printing are also available for most of the printers in the "T", "W", "C" and
"X" families of business printers to support specific customer environments.

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In early 2003, the company introduced the Lexmark Document Solutions Suite,
which is designed to minimize the expense and inefficiencies of manual,
paper-based processes that are costly and time-intensive. The Lexmark Document
Solutions Suite integrates three distinct document solutions which work
separately or together as an integrated solution. The Lexmark Document
Distributor helps improve information workflow by capturing and moving documents
faster, more efficiently and more accurately into a broader range of network
systems. The Lexmark Document Producer is an e-forms solution that empowers
customers to take control of the presentation and delivery of output from almost
any host system and thus avoid the cost of preprinted forms. The Lexmark
Document Portal enables users of a Lexmark multifunction product to find, view
and print network documents when and where they need them. The suite enables the
graphical e-Task interface featured on Lexmark network multifunction products to
be tailored to an individual, workgroup, business or industry, using friendly
and descriptive icons that allow users to quickly identify and select the
appropriate work process. It also extends this interface and e-workflow
capability to workstation users of the X215 and X6170 multifunction products.
Early in 2004, the company introduced the Lexmark Workgroup OCR Solution, which
enables users to easily transform paper information into versatile, electronic
documents that can be efficiently shared and used.

Inkjet Products

In 2003, the company broadened its consumer product line with the introduction
of its first "P" line of photo products, as well as its next generation "X" line
of all-in-one products and "Z" line of inkjet printers. Lexmark's inkjet
introductions included a wide range of innovative functions and photo features,
as well as proven technology, such as the Accu-Feed paper handling system.

Lexmark's "P" series launch into the photo market in 2003 was led by the P707
and P3150. These products deliver 4 x 6 inch photographs in less than sixty
seconds and include innovative features such as PrecisionSense technology, which
automatically determines the paper type loaded in the printer and automatically
aligns the print cartridges. In addition, the company's "P" series offers
six-color printing, borderless photographs, Lexmark Photo Center software and
includes a memory card reader for today's most popular digital media.

The enhancements to Lexmark's all-in-one inkjet products was led by the
company's first four-in-one flatbed product, the X6170, which offers
print/copy/fax/scan capabilities in an innovative design. The X6170 also
established new industry standards in productivity with its 100-sheet automatic
document feeder and PC-free color or black fax mode. The Lexmark "X" series
continues to define the multifunction category by offering up to 4,800 x 1,200
dots per inch ("dpi") printing and 48-bit color scanning in the sub-$100 sector,
with its X1150. The company has expanded its line of "X" inkjet printers to five
models with print speeds of up to 19 ppm in black and 15 ppm in color.

Lexmark's "Z" line of inkjet printers in 2003 is focused on delivering high
performance with ease of use features. The company introduced borderless
printing on its Z705, which also automatically determines the paper type loaded
into the printer to ensure high quality output. Lexmark's "Z" line of products
offer up to 4,800 x 1,200 dpi resolution, as well as maximum print speeds of up
to 17 ppm in black and 10 ppm in color.

Dot Matrix Products

The company continues to market several dot matrix printer models for customers
who print a large volume of multi-part forms.

Supplies

The company designs, manufactures, and distributes a variety of cartridges and
other supplies for use in its installed base of laser, inkjet, and dot matrix
printers. Lexmark is currently the

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exclusive source for new printer cartridges for the printers it manufactures.
The company's revenue and profit growth from its supplies business is directly
linked to the company's ability to increase the installed base of its laser and
inkjet products and customer usage of those products. Lexmark is an industry
leader with regard to the recovery, remanufacture, reuse and recycling of used
supplies cartridges, helping to keep empty cartridges out of landfills.
Attaining that leadership position was made possible by the company's various
empty cartridge collection programs around the world. Lexmark continues to
launch new programs and expand existing cartridge collection programs to further
expand its remanufacturing business and this environmental commitment.

The company also offers a broad range of other office imaging supplies products,
applying both impact and non-impact technology.

Service and Support

Lexmark offers a wide range of professional services to complement the company's
line of printing products including maintenance, consulting, systems integration
and fleet management capabilities. The company works in collaboration with its
customers to develop and implement comprehensive, customized printing solutions.
Fleet management services allow organizations to outsource fleet management,
technical support, supplies replenishment and maintenance activities to Lexmark.

The company's printer products generally include a warranty period of at least
one year, and customers typically have the option to purchase an extended
warranty.

MARKETING AND DISTRIBUTION

Lexmark employs large-account sales and marketing teams whose mission it is to
generate demand for its business printing solutions and services, primarily
among large corporations as well as the public sector. Sales and marketing teams
focus on industries such as financial services, retail/pharmacy, manufacturing,
government, education and health care. Those teams, in conjunction with the
company's development and manufacturing teams, are able to customize printing
solutions to meet customer specifications for printing electronic forms, media
handling, duplex printing and other document workflow solutions. The company
distributes its products to business customers primarily through its
well-established distributor network, which includes such distributors as Ingram
Micro, Tech Data, Synnex and Northamber. The company's products are also sold
through solution providers, which offer custom solutions to specific markets,
and through direct response resellers.

The company's international sales and marketing activities for the business
market are organized to meet the needs of the local jurisdictions and the size
of their markets. Operations in the U.S., Australia, Canada, Latin America and
western Europe focus on large account demand generation with orders filled
through distributors and retailers.

The company's business printer supplies and other office imaging products are
generally available at the customer's preferred point of purchase through
multiple channels of distribution. Although channel mix varies somewhat
depending on the geography, substantially all of the company's business supplies
products sold commercially in 2003 were sold through the company's network of
Lexmark-authorized supplies distributors and resellers who sell directly to end
users or to independent office supply dealers.

For the consumer market, the company distributes its inkjet products and
supplies primarily through more than 15,000 retail outlets worldwide. The
company's sales and marketing activities are organized to meet the needs of the
various geographies and the size of their markets. In the U.S., products are
distributed through large discount store chains such as Wal-Mart and Target, as
well as consumer electronics stores such as Best Buy and Circuit City, office
superstores such

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as Staples and OfficeMax, and wholesale clubs such as Sam's Club. The company's
western European operations distribute products through major information
technology resellers such as Northamber, and in large markets, through key
retailers such as Media Markt in Germany, Dixon's in the United Kingdom and
Carrefour in France. Australian and Canadian marketing activities focus on large
retail account demand generation, with orders filled through distributors or
resellers, whereas Latin American marketing activities are mostly conducted
through retail sales channels.

For both the business and consumer markets, the company's eastern European,
Middle East and African regions are primarily served through strategic
partnerships and distributors. Asia Pacific markets (excluding Australia) are
served through a combination of Lexmark sales offices, strategic partnerships
and distributors.

The company also sells its products through numerous alliances and OEM
arrangements, including Dell, IBM, Lenovo (formerly Legend) and Sindo Ricoh.

No single customer accounts for 10% or more of the company's consolidated annual
revenue.

COMPETITION

The company continues to develop and market new and innovative products at
competitive prices. New product announcements by the company's principal
competitors, however, can have, and in the past, have had, a material adverse
effect on the company's financial results. Such new product announcements can
quickly undermine any technological competitive edge that one manufacturer may
enjoy over another and set new market standards for price, quality, speed and
functionality. Furthermore, knowledge in the marketplace about pending new
product announcements by the company's competitors may also have a material
adverse effect on the company as purchasers of printers may defer buying
decisions until the announcement and subsequent testing of such new products.

In recent years, the company and its principal competitors, many of which have
significantly greater financial, marketing and/or technological resources than
the company, have regularly lowered prices on printers and are expected to
continue to do so. The company is vulnerable to these pricing pressures, which
could jeopardize the company's ability to grow or maintain market share and, if
not mitigated by cost and expense reductions, may result in lower profitability.
The company expects that as it competes more successfully with its larger
competitors, the company's increased market presence may attract more frequent
challenges, both legal and commercial, from its competitors, including claims of
possible intellectual property infringement.

The markets for printers and supplies are extremely competitive. The laser
printer market is dominated by Hewlett-Packard, which has a widely recognized
brand name and has been estimated to hold approximately 50% of the market.
Several other large vendors such as Brother, Canon, Samsung and Konica Minolta
also compete in the laser printer market.

As more data is distributed electronically, demand has risen for increased
device functionality to include print/copy/fax/scan capabilities, resulting in a
convergence of the distributed printing and copier markets. This converging
marketplace is highly competitive and, in addition to the traditional laser
competitors, includes large copier companies such as Canon, Ricoh and Xerox.

The company's primary competitors in the inkjet product market are
Hewlett-Packard, Epson and Canon, who together account for approximately 80% of
worldwide inkjet product sales. As with laser printers, if pricing pressures are
not mitigated by cost and expense reductions, the company's ability to grow or
maintain market share and its profitability could be adversely affected. In
addition, the company must compete with these same vendors for retail shelf
space allocated to printers and their associated supplies.

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Although Lexmark is currently the exclusive supplier of new printer cartridges
for its laser and inkjet products, there can be no assurance that other
companies will not develop new compatible cartridges for Lexmark products. In
addition, refill and remanufactured alternatives for some of the company's
cartridges are available and, although generally offering inconsistent quality
and reliability, compete with the company's supplies business. As the installed
base of laser and inkjet products grows and matures, the company expects
competitive refill and remanufacturing activity to increase.

The market for other office imaging products is also highly competitive and the
impact printing sector of the supplies market is declining. Although the company
has rights to market certain IBM branded supplies until December 2007, there are
many independent ribbon and toner manufacturers competing to provide compatible
supplies for IBM branded printing products. The revenue and profitability from
the company's other office imaging products is less relevant than it has been
historically. Management believes that the operating income associated with its
other office imaging products will continue to decline.

MANUFACTURING

The company operates manufacturing control centers in Lexington, Kentucky and
Geneva, Switzerland, and has manufacturing sites in Boulder, Colorado; Orleans,
France; Rosyth, Scotland; Juarez, Mexico; Chihuahua, Mexico and Lapu-Lapu City,
Philippines. The company also has customization centers in each of the major
geographies it serves. The company's manufacturing strategy is to retain control
over processes that are technologically complex, proprietary in nature and
central to the company's business model, such as the manufacture of inkjet
cartridges, at company owned and operated facilities. The company shares some of
its technical expertise with certain manufacturing partners, which collectively
provide the company with substantially all of its printer production capacity.
Lexmark oversees these manufacturing partners to ensure that products meet the
company's quality standards and specifications.

The company's development and manufacturing operations for laser printer
supplies, which include toners, photoconductor drums and charge rolls, are
located in Boulder. The company also manufactures toner in Orleans, France. Over
time, the company has made significant capital investments to expand toner and
photoconductor drum capabilities. Laser printer cartridges are typically
assembled by third party contract manufacturers in the major geographies served
by the company.

MATERIALS

The company procures a wide variety of components used in the manufacturing
process, including semiconductors, electro-mechanical components and assemblies,
as well as raw materials, such as plastic resins. Although many of these
components are standard off-the-shelf parts that are available from multiple
sources, the company often utilizes preferred supplier relationships to better
ensure more consistent quality, cost and delivery. Typically, these preferred
suppliers maintain alternate processes and/or facilities to ensure continuity of
supply. The company generally must place commitments for its projected component
needs approximately three to six months in advance. The company occasionally
faces capacity constraints when there has been more demand for its products than
initially projected. From time to time, the company may be required to use air
shipment to expedite product flow, which can adversely impact the company's
operating results. Conversely, in difficult economic times, the company's
inventory can grow as market demand declines.

Many components of the company's products are sourced from sole suppliers,
including certain custom chemicals, microprocessors, electro-mechanical
components, application specific integrated circuits and other semiconductors.
In addition, the company sources some printer engines and finished products from
OEMs. Although the company plans in anticipation of its

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future requirements, should these components not be available from any one of
these suppliers, there can be no assurance that production of certain of the
company's products would not be disrupted. Such a disruption could interfere
with the company's ability to manufacture and sell products and materially
adversely affect the company's business. Conversely, during economic slowdowns,
the company may build inventory of components as demand decreases.

RESEARCH AND DEVELOPMENT

The company's research and development activity for the past several years has
focused on laser and inkjet printers, multifunction products, associated
supplies, features, software and related technologies. The company has been able
to keep pace with product development and improvement while spending less than
its larger competitors by selectively targeting its research and development
efforts. It has also been able to achieve significant productivity improvements
and minimize research and development costs. The company's research and
development activities are conducted in Lexington, Kentucky and Boulder,
Colorado with recent expansion to sites in Kolkotta, India and Cebu City,
Philippines. In the case of certain products, the company may elect to purchase
products and key components from third party suppliers rather than develop them
internally.

The company is committed to being one of the technology leaders in its targeted
areas and is actively engaged in the design and development of additional
products and enhancements to its existing products. Its engineering efforts
focus on laser, inkjet, and connectivity technologies, as well as design
features that will increase efficiency and lower production costs. Lexmark also
develops related applications and tools to enable it to efficiently provide a
broad range of services. The process of developing new technology products is
complex and requires innovative designs that anticipate customer needs and
technological trends. Research and development expenditures were $266 million in
2003, $248 million in 2002 and $246 million in 2001. The company must make
strategic decisions from time to time as to which new technologies will produce
products in market sectors that will experience the greatest future growth.
There can be no assurance that the company can continue to develop the more
technologically advanced products required to remain competitive.

BACKLOG

Although the company experiences availability constraints from time to time for
certain of its products, the company generally fills its orders within 30 days
of receiving them. Therefore, the company usually has a backlog of less than 30
days at any one time, which the company does not consider material to its
business.

EMPLOYEES

As of December 31, 2003, the company had approximately 11,800 full-time
equivalent employees worldwide of which 4,200 are located in the U.S. and the
remaining 7,600 are located in Europe, Canada, Latin America, Asia, and the
Pacific Rim. None of the U.S. employees are represented by a union. Employees in
France are represented by a Statutory Works Council. Substantially all regular
employees have been granted stock options.

The company conducted restructurings in 2000 and 2001 which were intended to
result in approximately 2,500 employee separations. Employee additions to
support other initiatives have partially offset these employee separations
resulting in the number of company employees worldwide being reduced from
approximately 13,000 at December 31, 2000 to approximately 12,100 at December
31, 2002.

9

AVAILABLE INFORMATION

The company makes available, free of charge, electronic access to all documents
filed with the Securities and Exchange Commission by the company on its website
at http://investor.lexmark.com as soon as reasonably practicable after such
documents are filed.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the company and their respective ages, positions and
years of service with the company are set forth below.

Dr. Curlander has been a Director of the company since February 1997. Since
April 1999, Dr. Curlander has been Chairman and Chief Executive Officer of the
company. From May 1998 to April 1999, Dr. Curlander was President and Chief
Executive Officer of the company. Prior to such time, Dr. Curlander served as
President and Chief Operating Officer and Executive Vice President, Operations
of the company.

Mr. Morin has been Executive Vice President and Chief Financial Officer of the
company since January 2000. From January 1996 to January 2000, Mr. Morin was
Vice President and Chief Financial Officer of the company.

Mr. Rooke has been Executive Vice President and President of the company's
Printing Solutions and Services Division since October 2002. Prior to such time
and since May 2001, Mr. Rooke served as Vice President and President of the
Printing Solutions and Services Division. From December 1999 to May 2001, Mr.
Rooke was Vice President and President of the company's Business Printer
Division, and from June 1998 to December 1999, Mr. Rooke was Vice President and
President of the company's Imaging Solutions Division.

Mr. Bahous has been Vice President and President of the company's Consumer
Printer Division since March 2003. Prior to such time and since July 2001, Mr.
Bahous served as Vice President of Customer Services. From January 1999 to July
2001, Mr. Bahous served as Vice President and General Manager, Customer Services
Europe.

Mr. Bork has been Vice President, Tax of the company since May 2001. From
October 1996 to May 2001, he was Director of Taxes of the company.

Mr. Cole has been Vice President and General Counsel of the company since July
1996 and Corporate Secretary since February 1996.

10

Mr. Goodnight has been Vice President, Asia Pacific and Latin America since June
2001. From May 1998 to June 2001, Mr. Goodnight served as Vice President and
Corporate Controller of the company.

Mr. Pelini has been Vice President and Treasurer of the company since July 2003.
Mr. Pelini was employed by the company from 1991 to 1998 and was assistant
treasurer of the company from 1996 to 1998. Prior to rejoining the company in
July 2003, Mr. Pelini was Senior Vice President of Finance for Convergys
Corporation. He held various positions with Convergys since 1998, including that
of Vice President and Treasurer.

Mr. Stromquist has been Vice President and Corporate Controller of the company
since July 2001. From July 1999 to July 2001, Mr. Stromquist served as Vice
President of Alliances/ OEM in the company's Consumer Printer Division. From
November 1998 to July 1999, he served as Vice President of Finance of the
company's Consumer Printer Division. Mr. Stromquist is the husband of Jeri I.
Stromquist, Vice President of Human Resources of the company.

Ms. Stromquist has been Vice President of Human Resources of the company since
February 2003. From January 2001 to February 2003, Ms. Stromquist served as Vice
President of Worldwide Compensation and Resource Programs in the company's Human
Resources department. From November 1998 to January 2001, she served as Vice
President of Finance of the company's Business Printer Division. Ms. Stromquist
is the wife of Gary D. Stromquist, Vice President and Corporate Controller of
the company.

INTELLECTUAL PROPERTY

The company's intellectual property is one of its major assets and the ownership
of the technology used in its products is important to its competitive position.
Lexmark seeks to establish and maintain the proprietary rights in its technology
and products through the use of patents, copyrights, trademarks, trade secret
laws, and confidentiality agreements.

The company holds a portfolio of approximately 1,000 U.S. patents and over 350
pending U.S. patent applications. The company also holds over 2,500 foreign
patents and pending patent applications. The inventions claimed in these patents
and patent applications cover aspects of the company's current and potential
future products, manufacturing processes, business methods and related
technologies. The company is developing a portfolio of patents that protects its
product lines and offers the possibility of entering into licensing agreements
with others.

The company has a variety of intellectual property licensing and cross-licensing
agreements with a number of third parties. Certain of the company's material
license agreements, including those that permit the company to manufacture some
of its current products, terminate as to specific products upon certain "changes
of control" of the company.

The company has trademark registrations or pending trademark applications for
the name LEXMARK in approximately 70 countries for various categories of goods.
Lexmark also owns a number of trademark applications and registrations for
various product names. The company holds worldwide copyrights in computer code,
software and publications of various types. Other proprietary information is
protected through formal procedures which include confidentiality agreements
with employees and other entities.

The company's success depends in part on its ability to obtain patents,
copyrights and trademarks, maintain trade secret protection and operate without
infringing the proprietary rights of others. While Lexmark designs its products
to avoid infringing the intellectual property rights of others, current or
future claims of intellectual property infringement, and the expenses resulting
therefrom, could materially adversely affect its business, operating results and
financial condition. Expenses incurred by the company in obtaining licenses to
use the intellectual property rights of others and to enforce its intellectual
property rights against others also could

11

materially affect its business, operating results and financial condition. In
addition, the laws of some foreign countries may not protect Lexmark's
proprietary rights to the same extent as the laws of the United States.

ENVIRONMENTAL AND REGULATORY MATTERS

The company's operations, both domestically and internationally, are subject to
numerous laws and regulations, particularly relating to environmental matters
that impose limitations on the discharge of pollutants into the air, water and
soil and establish standards for the treatment, storage and disposal of solid
and hazardous wastes. Over time, the company has implemented numerous programs
to recover, remanufacture and recycle certain of its products and intends to
continue to expand on initiatives that have a positive effect on the
environment. The company is also required to have permits from a number of
governmental agencies in order to conduct various aspects of its business.
Compliance with these laws and regulations has not had, and in the future is not
expected to have, a material effect on the capital expenditures, earnings or
competitive position of the company. There can be no assurance, however, that
future changes in environmental laws or regulations, or in the criteria required
to obtain or maintain necessary permits, will not have an adverse effect on the
company's operations.

ITEM 2. PROPERTIES

The company's corporate headquarters and principal development facilities are
located on a 386 acre campus in Lexington, Kentucky. At December 31, 2003, the
company owned or leased 7.0 million square feet of administrative, sales,
service, research and development, warehouse and manufacturing facilities
worldwide. The properties are used by both the business and consumer segments of
the company. Approximately 4.5 million square feet is located in the United
States and the remainder is located in various international locations. The
company's principal international manufacturing facilities are in Mexico, the
Philippines, Scotland and France. The principal domestic manufacturing facility
is in Colorado. The company leases facilities for software development in India
and the Philippines. The company owns approximately 63% of the worldwide square
footage and leases the remaining 37%. The leased property has various lease
expiration dates. The company believes that it can readily obtain appropriate
additional space as may be required at competitive rates by extending expiring
leases or finding alternative space.

None of the property owned by the company is held subject to any major
encumbrances and the company believes that its facilities are in good operating
condition.

ITEM 3. LEGAL PROCEEDINGS

On December 30, 2002, the company filed a lawsuit against Static Control
Components, Inc. ("SCC") in the U.S. District Court for the Eastern District of
Kentucky alleging that certain SCC products infringe the company's copyrights
and are in violation of the Digital Millennium Copyright Act. The Court granted
the company's motion requesting a preliminary injunction ordering SCC to cease
making, selling or otherwise trafficking in the specified products. On March 31,
2003, SCC appealed the Court's decision to the Sixth Circuit Court of Appeals
and oral arguments for this appeal occurred on January 30, 2004.

On February 28, 2003, SCC filed a lawsuit against the company in the U.S.
District Court for the Middle District of North Carolina alleging that the
company engaged in anti-competitive and monopolistic conduct and unfair and
deceptive trade practices in violation of the Sherman Act, the Lanham Act and
various North Carolina state laws. That lawsuit was dismissed on October 15,
2003. On December 23, 2003, these claims were asserted against the company as
counterclaims in the company's case against SCC pending in the U.S. District
Court for the

12

Eastern District of Kentucky. SCC is seeking damages in excess of $100 million.
The company believes that the claims by SCC are without merit, and intends to
vigorously defend them.

The company and Pitney Bowes, Inc. ("PBI") are involved in litigation in the
U.S. District Court for the Eastern District of Kentucky in which PBI alleges
that certain of the company's printers infringe the claims of PBI's patent
4,386,272, and that such infringement is willful. The company believes, based on
the opinion of outside counsel, that it does not infringe the patent. The
company believes the claims are without merit, and intends to vigorously defend
them.

The company is also party to various litigation and other legal matters,
including claims of intellectual property infringement and various purported
consumer class action lawsuits alleging, among other things, various product
defects and false and deceptive advertising claims, that are being handled in
the ordinary course of business. In addition, various governmental authorities
have from time to time initiated inquiries and investigations, some of which are
ongoing, concerning the activities of participants in the markets for printers
and supplies. The company intends to continue to cooperate fully with those
governmental authorities in these matters.

Although it is not reasonably possible to estimate whether a loss will occur as
a result of these legal matters, or if a loss should occur, the amount of such
loss, the company does not believe that any legal matters to which it is a party
is likely to have a material adverse effect on the company's financial position
or results of operations. However, there can be no assurance that any pending
legal matters or any legal matters that may arise in the future would not have a
material adverse effect on the company's financial position or results of
operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

13

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Lexmark's Class A common stock is traded on the New York Stock Exchange under
the symbol LXK. As of March 5, 2004, there were 1,636 holders of record of the
Class A common stock and there were no holders of record of the Class B common
stock. Information regarding the market prices of the company's Class A common
stock appears in Part II, Item 8, Note 18 of the Notes to Consolidated Financial
Statements.

DIVIDEND POLICY

The company has never declared or paid any cash dividends on the Class A common
stock and has no current plans to pay cash dividends on the Class A common
stock. The payment of any future cash dividends will be determined by the
company's board of directors in light of conditions then existing, including the
company's earnings, financial condition and capital requirements, restrictions
in financing agreements, business conditions, tax laws, certain corporate law
requirements and various other factors.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information about the company's equity compensation
plans as of December 31, 2003.

(Number of securities in millions)
- --------------------------------------------------------------------------------

(1) The numbers in this column represent the weighted average exercise price of
stock options only.

(2) As of December 31, 2003, of the approximately 11.8 million awards
outstanding under the equity compensation plans approved by stockholders,
there were approximately 11.3 million stock options (of which 11,040,000 are
employee stock options and 274,000 are nonemployee director stock options),
246,000 restricted stock units and supplemental deferred stock units, 21,000
voluntarily deferred performance shares that were earned as of the end of
2000, and 203,000 elective deferred stock units (of which 159,000 are
employee elective deferred stock units and 44,000 are nonemployee director
elective deferred stock units) that pertain to voluntary elections by
certain members of management to defer all or a portion of their annual
incentive compensation and by certain nonemployee directors to defer all or
a portion of their annual retainer, chair retainer and/or meeting fees, that
would have otherwise been paid in cash. Of the 10.9 million shares
available, 8.3 million relate to employee plans (of which 3.1 million may be
granted as full-value awards), 0.2 million relate to the nonemployee
director plan and 2.4 million relate to the employee stock purchase plan.

(3) The company has only one equity compensation plan which has not been
approved by its stockholders, the Lexmark International, Inc. Broad-Based
Employee Stock Incentive Plan (the "Broad-Based Plan"). The Broad-Based
Plan, which was established on December 19, 2000, provides for the issuance
of up to 1.6 million shares of the company's common stock pursuant to stock
incentive awards (including stock options, stock appreciation rights,
performance awards, restricted stock units and deferred stock units) granted
to the company's employees, other than its directors and executive officers.
The Broad-Based Plan expressly provides that the company's directors and
executive officers are not eligible to participate in the Plan. The
Broad-Based Plan limits the number of shares subject to full-value awards
(e.g., restricted stock units and performance awards) to 50,000 shares. The
company's board of directors may at any time terminate or suspend the
Broad-Based Plan, and from time to time, amend or modify the Broad Based-
Plan, but any amendment which would lower the minimum exercise price for
options and stock appreciation rights or materially modify the requirements
for eligibility to participate in the Broad-Based Plan, requires the
approval of the company's stockholders. In January 2001, all employees other
than the company's directors, executive officers and senior managers, were
awarded stock options under the Broad-Based Plan. All 1.2 million awards
outstanding under the equity compensation plan not approved by stockholders
are in the form of stock options.

14

ITEM 6. SELECTED FINANCIAL DATA

The table below summarizes recent financial information for the company. For
further information refer to the company's financial statements and notes
thereto presented under Part II, Item 8 of this Form 10-K.

(Dollars in Millions, Except per Share Data)
- --------------------------------------------------------------------------------

(1) All data prior to 2002 has been reclassified in accordance with EITF 00-25
and clarified by EITF 01-9, resulting in a reduction to both revenue and
selling, general and administrative expense in the amount of $38.5 million
in 2001, $39.7 million in 2000 and $38.6 million in 1999.

(2) Amounts include the impact of restructuring and other charges in 2001 of
$87.7 million ($64.5 million, net of tax), which resulted in a $0.48
reduction in diluted net earnings per share. Inventory write-offs of $29.3
million associated with the restructuring actions were included in cost of
revenue.

(3) Amounts include the impact of restructuring and related charges in 2000 of
$41.3 million ($29.7 million, net of tax), which resulted in a $0.22
reduction in diluted net earnings per share.

(4) Amounts include the benefit of a ($5.9) million (($4.4) million, net of tax)
reversal of restructuring and other charges in 2002, which resulted in a
$0.03 increase in diluted net earnings per share.

(5) Provision for income taxes in 2001 includes a $40 million benefit from the
resolution of income tax matters, which resulted in a $0.30 increase in
diluted net earnings per share.

(6) Cash flows from investing and financing activities, which are not presented,
are integral components of total cash flow activity.

(7) The debt to total capital ratio is computed by dividing total debt (which
includes both short-term and long-term debt) by the sum of total debt and
stockholders' equity.

(8) Represents the approximate number of full-time equivalent employees at
December 31 of each year.

15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto:

OVERVIEW

Lexmark International, Inc. ("Lexmark" or the "company") is a leading developer,
manufacturer and supplier of printing solutions -- including laser and inkjet
printers, multifunction products, associated supplies and services -- for
offices and homes. The company also sells dot matrix printers for printing
single and multi-part forms for business users and develops, manufactures and
markets a broad line of other office imaging products. The company is primarily
managed along business and consumer market segments. Refer to Note 17 of the
Notes to Consolidated Financial Statements for additional information regarding
the company's reportable segments.

Over the past several years, the worldwide office and home printing output
opportunity has expanded as copiers and fax machines have been integrated into
multifunction products. Lexmark's management believes that this integration of
print/copy/fax/scan capabilities favors companies like Lexmark due to its
experience in providing industry leading network printing solutions and
multifunction printing products. Lexmark's management believes that its total
revenue will continue to grow due to projected overall market growth for 2004 to
2006.

In recent years, the company's growth rate in sales of printer units has
generally exceeded the growth rate of its printer revenue due to sales price
reductions and the introduction of new lower priced products in both the laser
and inkjet printer markets. In the laser printer market, this pricing pressure
is partially offset by the tendency of customers to add higher profit margin
optional features including network adapters, document management software,
additional memory, paper handling and multifunction capabilities. Pricing
pressure is also partially offset by the opportunity to provide business
solutions and services to customers who are increasingly looking for assistance
to better manage and leverage their document-related costs and output
infrastructure. In the inkjet product market, advances in inkjet technology have
resulted in products with higher resolution and improved performance while
increased competition has led to lower prices. The greater affordability of
inkjet printers, as well as the growth in the all-in-one category, have been
important factors in the growth of this market.

As the installed base of Lexmark laser and inkjet printers and multifunction
products continues to grow, management expects the market for supplies will grow
as well, as such supplies are routinely required for use throughout the life of
those products. While profit margins on printers and multifunction products have
been negatively affected by competitive pricing pressure, the supplies are a
higher margin, recurring business, which the company expects to contribute to
the stability of its earnings over time.

The company's dot matrix printers and other office imaging products include many
mature products such as supplies for IBM printers, typewriter supplies and other
impact technology supplies that require little ongoing investment. The company
expects that the market for these products will continue to decline, and has
implemented a strategy to continue to offer high-quality products while managing
cost to maximize cash flow and profit.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Lexmark's discussion and analysis of its financial condition and results of
operations are based upon the company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of consolidated financial
statements requires the company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and related

16

disclosure of contingent assets and liabilities. On an ongoing basis, the
company evaluates its estimates, including those related to customer programs
and incentives, product returns, doubtful accounts, inventories, intangible
assets, income taxes, warranty obligations, copyright fees, product royalty
obligations, restructurings, pension and other postretirement benefits, and
contingencies and litigation. The company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

The company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.

Revenue Recognition

The company records estimated reductions to revenue at the time of sale for
customer programs and incentive offerings including special pricing agreements,
promotions and other volume-based incentives. Estimated reductions in revenue
are based upon historical trends and other known factors at the time of sale.
The company also provides price protection to substantially all of its reseller
customers. The company records reductions to revenue for the estimated impact of
price protection when price reductions to resellers are anticipated. If market
conditions were to decline, the company may take actions to increase customer
incentive offerings, possibly resulting in an incremental reduction of revenue
at the time the incentive is offered.

Allowances for Doubtful Accounts

The company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
company determines the estimate of the allowance for doubtful accounts based on
a variety of factors including the length of time receivables are past due, the
financial health of customers, unusual macroeconomic conditions, and historical
experience. If the financial condition of the company's customers deteriorates
or other circumstances occur that result in an impairment of customers' ability
to make payments, additional allowances may be required.

Warranty Reserves

The company provides for the estimated cost of product warranties at the time
revenue is recognized. The reserve for product warranties is based on the
quantity of units sold under warranty, estimated product failure rates, and
material usage and service delivery costs. The estimates for product failure
rates and material usage and service delivery costs are periodically adjusted
based on actual results. To minimize warranty costs, the company engages in
extensive product quality programs and processes, including actively monitoring
and evaluating the quality of its component suppliers. Should actual product
failure rates, material usage or service delivery costs differ from the
company's estimates, revisions to the estimated warranty liability may be
required.

Inventory Reserves and Adverse Purchase Commitments

The company writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value. The company estimates the difference between the cost of
obsolete or unmarketable inventory and its market value based upon product
demand requirements, product life cycle, product pricing, and quality issues.
Also, the company records an adverse purchase commitment liability when
anticipated market sales prices are lower than committed costs. If actual market
conditions are

17

less favorable than those projected by management, additional inventory
write-downs and adverse purchase commitment liabilities may be required.

Long-Lived Assets

Management considers the potential impairment of both tangible and intangible
assets when circumstances indicate that the carrying amount of an asset may not
be recoverable. An asset impairment review estimates the fair value of an asset
based upon the future cash flows that the asset is expected to generate. Such an
impairment review incorporates estimates of forecasted revenue and costs that
may be associated with an asset, expected periods that an asset may be utilized,
and appropriate discount rates.

Pension and Postretirement Benefits

The company accounts for its defined benefit pension plans and its non-pension
postretirement benefit plans using actuarial models required by Statement of
Financial Accounting Standards ("SFAS") No. 87, Employers' Accounting for
Pensions, and SFAS No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, respectively. These models use an attribution approach that
generally spreads the expected liability for projected benefits over the service
lives of the employees in the plan and require that explicit assumptions be used
to estimate future events. Examples of assumptions the company must make include
selecting the following: expected long-term rate of return on plan assets, a
discount rate that reflects the rate at which pension benefits could be settled,
and the anticipated rates of future compensation increases.

The assumed long-term rate of return on plan assets and the market-related value
of plan assets are used to calculate the expected return on plan assets. The
required use of an expected versus actual long-term rate of return on plan
assets may result in recognized pension income that is greater or less than the
actual returns of those plan assets in any given year. Over time, however, the
expected long-term returns are designed to approximate the actual long-term
returns and therefore result in a pattern of income and expense recognition that
more closely matches the pattern of the services provided by the employees. For
the market-related value of plan assets, the company uses a calculated value
that recognizes changes in asset fair values in a systematic and rational
manner. A five-year-moving-average value is used for equities and high-yield
bonds due to the volatility of these types of investments and fair value is used
for all other bonds. Differences between actual and expected returns are
recognized in the market-related value of plan assets over five years.

The company uses long-term historical actual return information, the mix of
investments that comprise plan assets and future estimates of long-term
investment returns by reference to external sources to develop its expected
return on plan assets.

The discount rate assumptions used for pension and non-pension postretirement
benefit plan accounting reflect the rates available on high-quality fixed-income
debt instruments at December 31 each year. The rate of future compensation
increases is determined by the company based upon its long-term plans for such
increases.

Changes in actual asset return experience and discount rate assumptions can
impact the company's stockholders' equity. Actual asset return experience
results in an increase or decrease in the asset base and this effect, in
conjunction with a decrease in the pension discount rate, may result in a plan's
assets being less than a plan's accumulated benefit obligation ("ABO"). The ABO
is the present value of benefits earned to date and is based on past
compensation levels. The company is required to show in its Consolidated
Statements of Financial Position a net liability that is at least equal to the
ABO less the market value of plan assets. This liability is referred to as an
additional minimum liability ("AML"). An AML, which is recorded and updated on
December 31 each year, is reflected as a long-term pension liability with the
offset in other

18

comprehensive earnings (loss) in the equity section of the Consolidated
Statements of Financial Position (on a net of tax basis) and/or as an intangible
asset to the degree a company has unrecognized prior service costs.

Income Taxes

The company estimates its tax liability based on current tax laws in the
statutory jurisdictions in which it operates. These estimates include judgments
about deferred tax assets and liabilities resulting from temporary differences
between assets and liabilities recognized for financial reporting purposes and
such amounts recognized for tax purposes, as well as about the realization of
deferred tax assets. If the provisions for current or deferred taxes are not
adequate, if the company is unable to realize certain deferred tax assets or if
the tax laws change unfavorably, the company could potentially experience
significant losses in excess of the reserves established. Likewise, if the
provisions for current and deferred taxes are in excess of those eventually
needed, if the company is able to realize additional deferred tax assets or if
tax laws change favorably, the company could potentially experience significant
gains.

RESTRUCTURING AND OTHER CHARGES

Although the company had substantially completed all restructuring activities at
December 31, 2002 and the employees had exited the business, approximately $4.7
million of severance payments were made during 2003. Refer to Note 15 of the
Notes to Consolidated Financial Statements for additional information regarding
the company's restructuring activities.

BASIS OF PRESENTATION

In 2001, the Emerging Issues Task Force ("EITF") reached a consensus that
consideration from a vendor to a purchaser of the vendor's products should be
characterized as a reduction in revenue as stated in EITF 00-25, Accounting for
Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products, and clarified in EITF 01-9. This EITF
consensus was effective for annual or interim financial statements beginning
after December 5, 2001, with reclassification required for comparative prior
periods. The company adopted this EITF as required in 2002 and the adoption of
this statement had no impact on the company's net earnings, financial position
or cash flows, but did result in a reclassification of certain prior year
reported amounts to conform to the current year's presentation. Both revenue and
selling, general and administrative expense for the twelve months ended December
31, 2001 were reduced by approximately $38.5 million as a result of this
reclassification.

RESULTS OF OPERATIONS

2003 COMPARED TO 2002

Consolidated revenue in 2003 was $4,755 million, an increase of 9% over 2002.
Revenue in the business market segment was $2,627 million in 2003 and increased
$242 million, or 10% compared to 2002. This growth was principally due to
increases in unit volumes. Revenue in the consumer market segment was $2,128
million in 2003 and increased $159 million, or 8% versus 2002. This growth was
principally due to increases in unit volumes. Total U.S. revenue increased $114
million or 6% and international revenue, including exports from the U.S.,
increased $284 million or 12%.

Consolidated gross profit was $1,545 million for 2003, an increase of 13% from
2002. Gross profit as a percentage of revenue for 2003 increased to 32.5% from
31.5% in 2002, an increase of 1.0 percentage point. The increase was principally
due to improved supplies margins (1.8 percentage points) and an increased mix of
supplies (0.9 percentage point), partially offset by lower printer margins (2.0
percentage points).

19

Total operating expense was $951 million in 2003, an increase of 11% from 2002.
Operating expense in 2002 included a $6 million benefit in the fourth quarter of
2002 from the reversal of previously accrued restructuring charges. Operating
expense as a percentage of revenue was 20.0%, compared to 19.7% for the
corresponding period of 2002. The 0.3 percentage point increase was primarily
due to the restructuring reserve reversal in 2002.

Consolidated operating income was $594 million in 2003 compared to $511 million
in 2002, a 16% increase. The increase in the consolidated operating income was
due to a $174 million increase in gross profit, partially offset by a $91
million increase in operating expense. Operating income for the business market
segment increased $132 million in 2003, principally due to increased supplies
sales. Operating income for the consumer market segment decreased $28 million in
2003, primarily due to lower printer margins.

Non-operating expenses declined $15 million from 2002 to 2003, principally due
to additional interest income in 2003 as a result of the company's strong cash
generation and the $5 million write-down of a private equity investment during
2002.

Net earnings were $439 million in 2003 compared to $367 million in 2002. The
increase in net earnings was primarily due to improved operating income and
lower non-operating expenses. The effective income tax rate remained at 26.0% in
2003 and 2002.

Basic net earnings per share were $3.43 for 2003 compared to $2.85 in 2002.
Diluted net earnings per share were $3.34 for 2003 compared to $2.79 in 2002.
The increases in basic and diluted net earnings per share were primarily due to
the increase in net earnings.

The following table sets forth the percentage of total revenue represented by
certain items reflected in the company's Consolidated Statements of Earnings:

2002 COMPARED TO 2001

Consolidated revenue in 2002 was $4,356 million, an increase of 6% over 2001.
Revenue in the business market segment was $2,386 million in 2002 and increased
$18 million, or 1% compared to 2001. This growth was principally due to an
increase in supplies unit volumes. Revenue in the consumer market segment was
$1,969 million in 2002 and increased $271 million, or 16% versus 2001. This
growth was principally due to increases in unit volumes. Total U.S. revenue
increased $196 million or 11% and international revenue, including exports from
the U.S., increased $56 million or 3%.

Consolidated gross profit was $1,371 million for 2002, an increase of 11% from
2001. Gross profit as a percentage of revenue for 2002 increased to 31.5% from
30.2% in 2001, an increase of 1.3 percentage points. The increase was
principally due to an increase to supplies in the product mix (2.3 percentage
points), higher supplies margins (1.1 percentage points) and the impact of a
restructuring related inventory charge of $29 million in 2001 (0.7 percentage
point), partially offset by lower printer margins (2.8 percentage points).

20

Total operating expense was $860 million in 2002, a decrease of 4% from 2001.
Operating expense in 2002 included a $6 million benefit in the fourth quarter of
2002 from the reversal of previously accrued restructuring charges and operating
expense in 2001 included a restructuring charge of approximately $58 million.
Operating expense as a percentage of revenue decreased to 19.7% in 2002 compared
to 21.9% in 2001. The 2.2 percentage point decrease was primarily due to the
restructuring charge in 2001 and the reversal in 2002 as well as the company's
continuing focus on expense management and the benefits of the restructuring
activities.

Consolidated operating income was $511 million in 2002 compared to $341 million
in 2001, a 50% increase. Included in the 2002 operating income was the $6
million restructuring reversal benefit noted previously and the 2001 operating
income included $88 million of restructuring and related charges. The increase
in the consolidated operating income was due to the impact of the restructuring
charges, the increased gross profit margin and the decrease in operating expense
as a percentage of revenue. Operating income for the business market segment
increased $85 million in 2002, principally due to increased supplies sales.
Operating income for the consumer market segment increased $39 million in 2002,
principally due to increased supplies sales.

Non-operating expenses declined $8 million from 2001 to 2002, principally due to
reduced borrowings at lower interest rates partially offset by a $5 million
write-down of a private equity investment during 2002.

Net earnings were $367 million in 2002 compared to $274 million in 2001.
Included in the 2002 net earnings was a $4 million after-tax benefit of the
restructuring reversal and the 2001 net earnings included restructuring and
related charges of $65 million after-tax as well as a $40 million benefit from
the resolution of income tax matters. After adjusting for the above-noted items,
the increase in net earnings was primarily due to improved operating income.
After adjusting for the $40 million tax benefit in 2001, the income tax
provision was 26.0% of earnings before tax for 2002 as compared to 26.5% in
2001. The decrease in the effective tax rate was primarily due to lower income
tax rates on manufacturing activities in certain countries.

Basic net earnings per share were $2.85 for 2002 compared to $2.11 in 2001. The
2002 basic net earnings per share included a $0.03 benefit from the
restructuring reversal and the 2001 basic net earnings per share included a
$0.50 negative impact from restructuring and related charges and a $0.31
positive impact from the income tax benefit. Diluted net earnings per share were
$2.79 for 2002 compared to $2.05 in 2001. The 2002 diluted net earnings per
share included a $0.03 benefit from the restructuring reversal and the 2001
diluted net earnings per share included a $0.48 negative impact from
restructuring actions and a $0.30 income tax benefit. After adjusting for the
noted items, the increases in basic and diluted net earnings per share were
primarily due to the increase in net earnings.

RETIREMENT-RELATED BENEFITS

The following table provides the total pre-tax cost/(income) related to
Lexmark's retirement plans for the years 2003, 2002 and 2001. Cost/(income)
amounts are included as an addition to/reduction from, respectively, the
company's cost and expense amounts in the Consolidated Statements of Earnings.

21

The company uses long-term historical actual return experience, the expected
investment mix of the plans' assets, and future estimates of long-term
investment returns to develop its assumed rate of return on pension assets used
in the net periodic pension calculation. The assumption is reviewed and set
annually at the beginning of each year. The company reduced its expected
long-term asset return assumption on the U.S. plan from 10.0% to 8.5% at the
beginning of 2003. This change, and the recognition of losses related to
negative pension asset returns over the past few years, increased the cost of
defined benefit plans in 2003. At the beginning of 2004, the company further
reduced its expected long-term asset return assumption on its U.S. plan from
8.5% to 8.0%. This change is expected to increase 2004 pension expense by
approximately $3 million.

The company annually sets its discount rate assumption for retirement-related
benefits accounting to reflect the rates available on high-quality, fixed-income
debt instruments at the end of each year. Using this process, the company
reduced its discount rate assumption in the U.S. from 7.5% to 6.5% at the end of
2002 and from 6.5% to 6.3% at the end of 2003. These changes, combined with
other changes in actuarial assumptions such as the assumed rate of compensation
increase, did not have a significant impact on the company's results of
operations for 2003, nor are they expected to have a material effect in 2004.

Future effects of retirement-related benefits, including the changes noted
above, on the operating results of the company depend on economic conditions,
employee demographics, mortality rates and investment performance.

LIQUIDITY AND CAPITAL RESOURCES

Lexmark's primary source of liquidity has been cash generated by operations,
which totaled $748 million, $816 million and $196 million in 2003, 2002 and
2001, respectively. Cash from operations generally has been sufficient to allow
the company to fund its working capital needs and finance its capital
expenditures during these periods along with the repurchase of approximately $5
million and $331 million of its Class A common stock during 2003 and 2002,
respectively. The company did not repurchase shares of its Class A common stock
during 2001. Management believes that cash provided by operations will continue
to be sufficient to meet operating and capital needs. However, in the event that
cash from operations is not sufficient, the company has other potential sources
of cash through utilization of its revolving credit facility, accounts
receivable financing program or other financing sources.

Cash flows from operating activities in 2003 were $748 million, compared to $816
million in 2002. These amounts were reduced during 2003 and 2002 by $108 million
and $50 million, respectively, due to contributions to the U.S. pension plan.
See Note 13 of the Notes to Consolidated Financial Statements for more
information regarding the 2003 pension contribution. Also contributing to the
change in cash flow from operating activities were unfavorable cash flow changes
in accrued liabilities, trade receivables and inventories, offset somewhat by
favorable cash flow changes in accounts payable and other assets and liabilities
as well as increased earnings. In 2002, cash provided by operating activities
increased from 2001 due to favorable cash flow changes in working capital
accounts, particularly trade receivables, accrued liabilities and inventories.

Cash used for investing activities in 2003 was $544 million, compared to $114
million in 2002. The company began investing in marketable securities during the
third quarter of 2003, which resulted in a net use of cash of $452 million in
2003. The company spent $94 million on capital expenditures during 2003,
compared to $112 million during 2002.

Cash provided by financing activities during 2003 was $36 million, compared $302
million cash used for financing activities during 2002. This $338 million
increase in cash from financing activities was primarily due to the purchase of
$331 million of treasury stock in 2002, compared to $5 million in 2003.

22

The company experienced some significant changes in other balance sheet accounts
in 2003. The decrease in prepaid expenses and other current assets was primarily
due to a reduction in prepaid income taxes ($43 million) due to a
reclassification of prepaid income taxes to net against accrued liabilities for
income taxes as well as a reduction in derivative assets ($33 million). Other
assets increased $29 million during 2003, primarily due to a $108 million
funding of the U.S. pension plan, offset somewhat by a $69 million decrease in
deferred tax assets.

Effective May 29, 2002, the company entered into a new $500 million unsecured,
revolving credit facility with a group of banks, including a $200 million
364-day portion and a $300 million 3-year portion. Upon entering into the new
credit agreement, the company terminated the prior $300 million unsecured,
revolving credit facility that was due to expire on January 27, 2003. There were
no amounts outstanding under the prior facility upon its termination.

Under the credit facility, the company may borrow in dollars, euros and certain
other currencies. The interest rate ranges from 0.35% to 1.25% above the London
Interbank Offered Rate ("LIBOR") for borrowings denominated in U.S. dollars, the
Eurocurrency Interbank Offered Rate ("EURIBOR") for borrowings denominated in
euros, or other relevant international interest rate for borrowings denominated
in another currency. The interest rate spread is based upon the company's debt
ratings. In addition, the company is required to pay a facility fee on the $500
million line of credit of 0.075% to 0.25% based upon the company's debt ratings.
The interest and facility fees are payable quarterly.

The credit agreement contains customary default provisions, leverage and
interest coverage restrictions and certain restrictions on secured and
subsidiary debt, disposition of assets, liens and mergers and acquisitions. The
364-day portion of the $500 million credit facility had a maturity date of May
28, 2003. During May 2003, each lender approved the extension of the $200
million 364-day portion of the revolving credit facility with a new maturity
date of May 26, 2004. The 3-year portion of the credit facility has a maturity
date of May 29, 2005. Any amounts outstanding under the credit facility are due
according to the applicable maturity dates noted above. As of December 31, 2003
and 2002, there were no amounts outstanding under the credit facility.

The company has outstanding $150 million principal amount of 6.75% senior notes
due May 15, 2008, which was initially priced at 98.998%, to yield 6.89% to
maturity. The senior notes contain typical restrictions on liens, sale leaseback
transactions, mergers and sales of assets. There are no sinking fund
requirements on the senior notes and they may be redeemed at any time at the
option of the company, at a redemption price as described in the related
indenture agreement, as supplemented and amended, in whole or in part. A balance
of $149 million (net of unamortized discount of $1 million) was outstanding at
December 31, 2003.

During October 2003, the company entered into interest rate swap contracts to
convert its $150 million principal amount of 6.75% senior notes from a fixed
interest rate to a variable interest rate. Interest rate swaps with a notional
amount of $150 million were executed whereby the company will receive interest
at a fixed rate of 6.75% and pay interest at a variable rate of approximately
2.76% above the six-month LIBOR. These interest rate swaps have a maturity date
of May 15, 2008, which is equivalent to the maturity date of the senior notes.

The company is in compliance with all covenants and other requirements set forth
in its debt agreements. The company does not have any rating downgrade triggers
that would accelerate the maturity dates of its revolving credit facility and
public debt. However, a downgrade in the company's credit rating could adversely
affect the company's ability to renew existing, or obtain access to new, credit
facilities in the future and could increase the cost of such facilities.

In February 2001, the company filed a shelf registration statement with the
Securities and Exchange Commission to register $200 million of debt securities.
Due to the company's strong

23

cash position, in early 2004 the company determined that it did not plan to
utilize the shelf registration, and on January 28, 2004, withdrew its
registration pursuant to the rules and regulations of the Securities and
Exchange Commission.

The following table summarizes the company's contractual obligations at December
31, 2003:

Purchase obligations reported in the table above include agreements to purchase
goods or services that are enforceable and legally binding on the company and
that specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction.

In October 2001, the company entered into an agreement to sell its U.S. trade
receivables on a limited recourse basis that allowed for a maximum amount of
financing availability of $225 million. In October 2003, the agreement was
amended and the maximum amount of U.S. trade receivables to be sold was
decreased to $200 million. As collections reduce previously sold receivables,
the company may replenish these with new receivables. The company bears a
limited risk of bad debt losses on U.S. trade receivables sold, since the
company over-collateralizes the receivables sold with additional eligible
receivables. The company addresses this risk of loss in its allowance for
doubtful accounts. Receivables sold may not include amounts over 90 days past
due or concentrations over certain limits with any one customer. This facility
contains customary affirmative and negative covenants as well as specific
provisions related to the quality of the accounts receivables sold. The facility
also contains customary cash control triggering events which, if triggered,
could adversely affect the company's liquidity and/or its ability to sell trade
receivables. A downgrade in the company's credit rating could reduce the
company's ability to sell trade receivables. The facility expires in October
2004, and required annual renewal of commitments in October 2002 and 2003. At
December 31, 2003 and 2002, the facility had no U.S. trade receivables sold and
outstanding.

At December 31, 2003 and 2002, the company did not have any relationship with
unconsolidated entities or financial partnerships, which other companies have
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. Therefore, the company is not
materially exposed to any financing, liquidity, market or credit risk that could
arise if the company had engaged in such relationships.

In July 2002, the company received authorization from the board of directors to
repurchase an additional $200 million of its Class A common stock for a total
repurchase authority of $1.4 billion. At December 31, 2003, there was
approximately $183 million of share repurchase authority remaining. This
repurchase authority allows the company, at management's discretion, to
selectively repurchase its stock from time to time in the open market or in
privately negotiated transactions depending upon market price and other factors.
During 2003, the company repurchased approximately 0.1 million shares in the
open market at prices ranging from $71.51 per share to $74.30 per share for a
cost of approximately $5 million. As of December 31, 2003, the company had
repurchased approximately 34.8 million shares at prices ranging from $10.63 per
share to $105.38 per share for an aggregate cost of approximately $1.2 billion.

24

CAPITAL EXPENDITURES

Capital expenditures totaled $94 million, $112 million and $214 million in 2003,
2002 and 2001, respectively. The capital expenditures were primarily
attributable to infrastructure support and new product development during 2003,
2002 and 2001. During 2004, the company expects capital expenditures to be
approximately $150 million, primarily attributable to new product development
and infrastructure support. The capital expenditures are expected to be funded
through cash from operations.

EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT

Revenue derived from international sales, including exports from the United
States, make up about half of the company's consolidated revenue, with Europe
accounting for approximately two-thirds of international sales. Substantially
all foreign subsidiaries maintain their accounting records in their local
currencies. Consequently, period-to-period comparability of results of
operations is affected by fluctuations in currency exchange rates. Certain of
the company's Latin American entities use the U.S. dollar as their functional
currency. Lexmark's operations in Argentina were adversely impacted by currency
devaluation in late 2001 and the first six months of 2002. This resulted in
translation losses of approximately $5 million in 2002 and approximately $2
million in 2001. Since June 2002, the company did not experience significant
translation losses related to the Argentina operations.

Currency translation has significantly affected international revenue and cost
of revenue, but it did not have a material impact on operating income during
2002 and 2001. The 2003 operating income was materially positively impacted by
exchange rate fluctuations. The company acts to neutralize the effects of
exchange rate fluctuations through the use of operational hedges, such as
pricing actions and product sourcing decisions.

The company's exposure to exchange rate fluctuations generally cannot be
minimized solely through the use of operational hedges. Therefore, the company
utilizes financial instruments such as forward exchange contracts and currency
options to reduce the impact of exchange rate fluctuations on actual and
anticipated cash flow exposures and certain assets and liabilities which arise
from transactions denominated in currencies other than the functional currency.
The company does not purchase currency related financial instruments for
purposes other than exchange rate risk management.

TAX MATTERS

The company's effective income tax rate was approximately 26.0%, 26.0% and 13.9%
for 2003, 2002 and 2001, respectively. The 2001 effective income tax rate was
significantly impacted by the company's resolution with the Internal Revenue
Service ("IRS") on certain adjustments related to the allocation of intercompany
profits. As a result of this resolution, the company reversed previously accrued
taxes, reducing the tax provision in the fourth quarter of 2001 by $40 million.
Excluding the impact of this adjustment, the company's effective income tax rate
was 26.5% for 2001. Due to the anticipated expirations of favorable tax laws and
geographical shifts in earnings, the company expects the 2004 effective income
tax rate to be approximately 27.5%.

The IRS has completed its examination of the company's income tax returns for
all years through 1996. As of December 31, 2003, the IRS was in the process of
examining the company's income tax returns for the years 1997 through 2001.
Additionally, the company and its subsidiaries are subject to tax examinations
in various states and foreign jurisdictions. The company believes that adequate
amounts of taxes and related interest have been provided for any adjustments
that may result from these examinations.

As of December 31, 2003, the company had non-U.S. tax loss carryforwards of $3
million, which have an indefinite carryforward period.

25

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board ("FASB") issued FIN
46, Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51. FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. In December 2003,
the FASB issued FIN 46-R, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 (revised December 2003), which replaces FIN 46. FIN
46-R incorporates certain modifications to FIN 46 adopted by the FASB subsequent
to the issuance of FIN 46, including modifications to the scope of FIN 46.
Additionally, FIN 46-R also incorporates much of the guidance previously issued
in the form of FASB Staff Positions. For all special purpose entities ("SPEs")
created prior to February 1, 2003, public entities must apply either the
provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the
first interim or annual reporting period ending after December 15, 2003. The
company has evaluated the provisions of this interpretation and determined that
the interpretation has no impact on its financial position, results of
operations and cash flows.

In April 2003, the FASB issued SFAS 149, Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS 133. SFAS 149 is generally effective for contracts entered into or
modified after June 30, 2003. The company has evaluated the provisions of this
statement and determined that this statement has no impact on the company's
financial position, results of operations and cash flows.

In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers'
Disclosures about Pension and Other Postretirement Benefits. This Statement
revises employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those plans
required by SFAS 87, SFAS No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and
SFAS 106. This Statement retains the disclosure requirements contained in SFAS
132, which it replaces. It requires additional disclosures to those in the
original SFAS 132 about the assets, obligations, cash flows and net periodic
benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The new rules also require additional disclosures in
interim financial statements about the amount of net periodic benefit cost
recognized and the amount of contributions paid or to be paid to a plan if
significantly different from amounts previously reported. The disclosures are
required to be provided separately for pension plans and for other
postretirement benefit plans. The newly required annual disclosures are included
in Note 13 of the Notes to Consolidated Financial Statements. The interim
disclosures are required for quarters beginning after December 15, 2003.

In December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 104, Revenue Recognition, which superceded SAB 101, Revenue
Recognition in Financial Statements. SAB 104 updated certain interpretive
guidance included in SAB 101, including the SAB 101 guidance related to multiple
element revenue arrangements, to reflect the issuance of EITF 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables. The basic revenue
recognition principles of SAB 101 were largely unchanged by the issuance of SAB
104, and therefore, did not have a material impact on the company's financial
position, results of operations and cash flows.

In January 2004, the FASB issued FASB Staff Position ("FSP") No. FAS 106-1,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003. FSP 106-1 permits employers who
sponsor postretirement benefit plans (plan sponsors) that provide prescription
drug benefits to retirees to make a one-time election to defer accounting for
any effects of the Medicare, Prescription Drug, Improvement and

26

Modernization Act of 2003 (the "Act"). Without FSP 106-1, plan sponsors would be
required under SFAS 106 to account for the effects of the Act in the fiscal
period that includes December 8, 2003, the date the President signed the Act
into law. For example, a calendar year plan sponsor would be required to account
for the Act for the first time in its 2003 year-end financial statements if it
uses a year-end measurement date, or in its financial statements for the first
quarter of calendar 2004 if it uses a September 30 measurement date. If deferral
is elected, the deferral must remain in effect until the earlier of (a) the
issuance of guidance by the FASB on how to account for the federal subsidy to be
provided to plan sponsors under the Act or (b) the remeasurement of plan assets
and obligations subsequent to January 31, 2004. The company has elected to defer
accounting for the effects of the Act.

INFLATION

The company is subject to the effects of changing prices and operates in an
industry where product prices are very competitive and subject to downward price
pressures. As a result, future increases in production costs or raw material
prices could have an adverse effect on the company's business. In an effort to
minimize the impact on earnings of any such increases, the company must
continually manage its product costs and manufacturing processes.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND INFORMATION CONCERNING
FORWARD-LOOKING STATEMENTS

Statements contained in this report which are not statements of historical fact
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are made based upon management's current expectations
and beliefs concerning future developments and their potential effects upon the
company. There can be no assurance that future developments affecting the
company will be those anticipated by management, and there are a number of
factors that could adversely affect the company's future operating results or
cause the company's actual results to differ materially from the estimates or
expectations reflected in such forward-looking statements, including without
limitation, the factors set forth below:

- - The company and its major competitors, many of which have significantly
greater financial, marketing and/or technological resources than the company,
have regularly lowered prices on their products and are expected to continue to
do so. In particular, both the inkjet and laser printer markets have experienced
and are expected to continue to experience significant price pressure. Price
reductions on inkjet or laser products or the inability to reduce costs,
including warranty costs, contain expenses or increase or maintain sales as
currently expected, as well as price protection measures, could result in lower
profitability and jeopardize the company's ability to grow or maintain its
market share.

- - The company's future operating results may be adversely affected if it is
unable to continue to develop, manufacture and market products that are
reliable, competitive, and meet customers' needs. The markets for laser and
inkjet products and associated supplies are aggressively competitive, especially
with respect to pricing and the introduction of new technologies and products
offering improved features and functionality. The impact of competitive
activities on the sales volumes or revenue of the company, or the company's
inability to effectively deal with these competitive issues, could have a
material adverse effect on the company's ability to maintain or grow retail
shelf space or market share and on its financial results.

- - The introduction of products by the company or its competitors, or delays in
customer purchases of existing products in anticipation of new product
introductions by the company or its competitors and market acceptance of new
products and pricing programs, the reaction of competitors to any such new
products or programs, the life cycles of the company's products, as well as
delays in product development and manufacturing, and variations in the cost of
component parts, may impact sales, may cause a buildup in the company's
inventories, make

27

the transition from current products to new products difficult and could
adversely affect the company's future operating results. The competitive
pressure to develop technology and products and to increase marketing
expenditures also could cause significant changes in the level of the company's
operating expenses.

- - The company's performance depends in part upon its ability to successfully
forecast the timing and extent of customer demand and manage worldwide
distribution and inventory levels of the company and its resellers. Unexpected
fluctuations in reseller inventory levels could disrupt ordering patterns and
may adversely affect the company's financial results. In addition, the financial
failure or loss of a key customer or reseller could have a material adverse
impact on the company's financial results. The company must also be able to
address production and supply constraints, particularly delays or disruptions in
the supply of key components necessary for production, which may result in lost
revenue or in the company incurring additional costs to meet customer demand.
The company's future operating results and its ability to effectively grow or
maintain its market share may be adversely affected if it is unable to address
these issues on a timely basis.

- - Revenue derived from international sales make up about half of the company's
revenue. Accordingly, the company's future results could be adversely affected
by a variety of factors, including changes in a specific country's or region's
political or economic conditions, foreign currency exchange rate fluctuations,
trade protection measures and unexpected changes in regulatory requirements. In
addition, changes in tax laws and the ability to repatriate cash accumulated
outside the United States in a tax efficient manner may adversely affect the
company's financial results, investment flexibility and operations. Moreover,
margins on international sales tend to be lower than those on domestic sales,
and the company believes that international operations in new geographic markets
will be less profitable than operations in the U.S. and European markets, in
part, because of the higher investment levels for marketing, selling and
distribution required to enter these markets.

- - The company's effective tax rate could be adversely affected by changes in the
mix of earnings in countries with differing statutory tax rates. In addition,
the amount of income tax the company pays is subject to ongoing audits in
various jurisdictions and a material assessment by a taxing authority could
adversely affect the company's profitability.

- - The company relies in large part on its international production facilities
and international manufacturing partners for the manufacture of its products and
key components of its products. Future operating results may be adversely
affected by several factors, including, without limitation, if the company's
international operations or manufacturing partners are unable to supply products
reliably, if there are disruptions in international trade, disruptions at
important geographic points of exit and entry, if there are difficulties in
transitioning such manufacturing activities among the company, its international
operations and/or its manufacturing partners, or if there arise production and
supply constraints which result in additional costs to the company. The
financial failure or loss of a key supplier could result in a material adverse
impact on the company's financial results.

- - The company markets and sells its products through several sales channels. The
company has also advanced a strategy of forming alliances and OEM arrangements
with many companies. The company's future operating results may be adversely
affected by any conflicts that might arise between or among its various sales
channels, the loss of any alliance or OEM arrangement or the loss of retail
shelf space. Aggressive pricing on laser and inkjet products and/or associated
supplies from customers and resellers, including, without limitation, OEM
customers, could result in a material adverse impact on the company's strategy
and financial results.

- - Unfavorable global economic conditions may adversely impact the company's
future operating results. Since the second quarter of 2001, the company has
experienced weak markets for its products. Although the company has seen some
indications of market improvement in the

28

fourth quarter of 2003, continued softness in these markets and uncertainty
about the timing and extent of the global economic downturn by both corporate
and consumer purchasers of the company's products could result in lower demand
for the company's products. Weakness in demand has resulted in intense price
competition and may result in excessive inventory for the company and/or its
reseller channel, which may adversely affect sales, pricing, risk of
obsolescence and/or other elements of the company's operating results.

- - Although the company is currently the exclusive supplier of new cartridges for
its laser and inkjet products, there can be no assurance that other companies
will not develop new compatible cartridges for the company's products. In
addition, refill and remanufactured alternatives for some of the company's
cartridges are available and compete with the company's supplies business. The
company expects competitive refill and remanufacturing activity to increase.
Various legal challenges and governmental activities may intensify competition
for the company's aftermarket supplies business.

- - The company's success depends in part on its ability to obtain patents,
copyrights and trademarks, maintain trade secret protection and operate without
infringing the proprietary rights of others. Current or future claims of
intellectual property infringement could prevent the company from obtaining
technology of others and could otherwise materially and adversely affect its
operating results or business, as could expenses incurred by the company in
obtaining intellectual property rights, enforcing its intellectual property
rights against others or defending against claims that the company's products
infringe the intellectual property rights of others. Furthermore, the imposition
of copyright fees or similar fees by copyright owners or collecting societies in
certain jurisdictions, primarily in Europe, could adversely affect the company's
operating results or business.

- - The company's inability to perform satisfactorily under service contracts for
managed print services and other customer services may result in the loss of
customers, loss of reputation and/or financial consequences that may have a
material adverse impact on the company's financial results and strategy.

- - The company depends on its information technology systems for the development,
manufacture, distribution, marketing, sales and support of its products and
services. Any failure in such systems, or the systems of a partner or supplier,
may adversely affect the company's operating results. Furthermore, because vast
quantities of the company's products flow through only a few distribution
centers to provide product to various geographic regions, the failure of
information technology systems or any other disruption affecting those product
distribution centers could have a material adverse impact on the company's
ability to deliver product and on the company's financial results.

- - Terrorist attacks and the potential for future terrorist attacks have created
many political and economic uncertainties, some of which may affect the
company's future operating results. Future terrorist attacks, the national and
international responses to such attacks, and other acts of war or hostility may
affect the company's facilities, employees, suppliers, customers, transportation
networks and supply chains, or may affect the company in ways that are not
capable of being predicted presently.

- - The entrance of additional competitors that are focused on printing solutions
could further intensify competition in the inkjet and laser printer markets and
could have a material adverse impact on the company's strategy and financial
results.

- - Factors unrelated to the company's operating performance, including the
financial failure or loss of significant customers, resellers, manufacturing
partners or suppliers; the outcome of pending and future litigation or
governmental proceedings; and the ability to retain and attract key personnel,
could also adversely affect the company's operating results. In addition, the
company's stock price, like that of other technology companies, can be volatile.
Trading activity

29

in the company's common stock, particularly the trading of large blocks and
intraday trading in the company's common stock, may affect the company's common
stock price.

While the company reassesses material trends and uncertainties affecting the
company's financial condition and results of operations in connection with the
preparation of its quarterly and annual reports, the company does not intend to
review or revise, in light of future events, any particular forward-looking
statement contained in this report.

The information referred to above should be considered by investors when
reviewing any forward-looking statements contained in this report, in any of the
company's public filings or press releases or in any oral statements made by the
company or any of its officers or other persons acting on its behalf. The
important factors that could affect forward-looking statements are subject to
change, and the company does not intend to update the foregoing list of certain
important factors. By means of this cautionary note, the company intends to
avail itself of the safe harbor from liability with respect to forward-looking
statements that is provided by Section 27A and Section 21E referred to above.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK SENSITIVITY

The market risk inherent in the company's financial instruments and positions
represents the potential loss arising from adverse changes in interest rates and
foreign currency exchange rates.

Interest Rates

At December 31, 2003, the fair value of the company's senior notes was estimated
at $167 million using quoted market prices and yields obtained through
independent pricing sources for the same or similar types of borrowing
arrangements, taking into consideration the underlying terms of the debt. The
fair value of the senior notes exceeded the carrying value as recorded in the
Consolidated Statements of Financial Position at December 31, 2003 by
approximately $18 million. Market risk is estimated as the potential change in
fair value resulting from a hypothetical 10% adverse change in interest rates
and amounts to approximately $2 million at December 31, 2003.

The company has interest rate swaps that serve as a fair value hedge of the
company's senior notes. The fair value of the interest rate swaps at December
31, 2003 was an asset of $0.4 million. Market risk for the interest rate swaps
is estimated as the potential change in fair value resulting from a hypothetical
10% adverse change in interest rates and amounts to approximately $2 million at
December 31, 2003.

Foreign Currency Exchange Rates

The company employs a foreign currency hedging strategy to limit potential
losses in earnings or cash flows from adverse foreign currency exchange rate
movements. Foreign currency exposures arise from transactions denominated in a
currency other than the company's functional currency and from foreign
denominated revenue and profit translated into U.S. dollars. The primary
currencies to which the company is exposed include the euro, the Canadian
dollar, the Japanese yen, the British pound and other Asian and South American
currencies. Exposures are hedged with foreign currency forward contracts, put
options, and call options with maturity dates of less than eighteen months. The
potential loss in fair value at December 31, 2003 for such contracts resulting
from a hypothetical 10% adverse change in all foreign currency exchange rates is
approximately $89 million. This loss would be mitigated by corresponding gains
on the underlying exposures.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In Millions, Except Per Share Amounts)
- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

31

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 2003 AND 2002
(In Millions, Except Par Value)
- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

32

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In Millions)
- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

33

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In Millions)
- --------------------------------------------------------------------------------

See notes to consolidated financial statements.

34

- --------------------------------------------------------------------------------

35

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Millions, Except per Share Amounts)

1. ORGANIZATION AND BUSINESS

Lexmark International, Inc. ("Lexmark" or the "company") is a leading developer,
manufacturer and supplier of printing solutions -- including laser and inkjet
printers, multifunction products, associated supplies and services -- for
offices and homes. The company also sells dot matrix printers for printing
single and multi-part forms by business users and develops, manufactures and
markets a broad line of other office imaging products. The principal customers
for the company's products are dealers, retailers and distributors worldwide.
The company's products are sold in over 150 countries in North and South
America, Europe, the Middle East, Africa, Asia, the Pacific Rim and the
Caribbean.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:

The accompanying consolidated financial statements include the accounts of the
company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Foreign Currency Translation:

Assets and liabilities of non-U.S. subsidiaries that operate in a local currency
environment are translated into U.S. dollars at period-end exchange rates.
Income and expense accounts are translated at average exchange rates prevailing
during the period. Adjustments arising from the translation of assets and
liabilities are accumulated as a separate component of accumulated other
comprehensive earnings in stockholders' equity.

Use of Estimates:

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, the company evaluates
its estimates, including those related to customer programs and incentives,
product returns, doubtful accounts, inventories, intangible assets, income
taxes, warranty obligations, copyright fees, product royalty obligations,
restructurings, pension and other postretirement benefits, and contingencies and
litigation. The company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

Cash Equivalents:

All highly liquid investments with an original maturity of three months or less
at the company's date of purchase are considered to be cash equivalents.

Marketable Securities:

The company evaluates its marketable securities in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and classifies these investments as
held-to-maturity, trading or available-for-sale. Based on the company's expected
holding period, the company has classified all of its

36

marketable securities as available-for-sale and reported these investments in
the Consolidated Statements of Financial Position as current assets. The company
reports its available-for-sale marketable securities at fair value with
unrealized gains or losses recorded on the accumulated other comprehensive
earnings (loss) line in the Consolidated Statements of Financial Position.
Realized gains or losses are included in net earnings and are derived using the
specific identification method for determining the cost of the securities.

Fair Value of Financial Instruments:

The financial instruments of the company consist mainly of cash and cash
equivalents, marketable securities, trade receivables, short-term debt,
long-term debt and derivatives. The fair value of cash and cash equivalents,
trade receivables and short-term debt approximates their carrying values due to
the relatively short-term nature of the instruments. The fair value of
marketable securities approximates the company's amortized cost, due to the
frequent resetting of interest rates resulting in repricing of the investments.
The fair value of long-term debt is based on current rates available to the
company for debt with similar characteristics. The fair value of derivative
financial instruments is based on quoted market prices of comparable instruments
or, if none are available, on pricing models or formulas using current
assumptions.

Inventories:

Inventories are stated at the lower of average cost or market. The company
considers all raw materials to be in production upon their receipt.

Property, Plant and Equipment:

Property, plant and equipment are stated at cost and depreciated over their
estimated useful lives using the straight-line method. Property, plant and
equipment accounts are relieved of the cost and related accumulated depreciation
when assets are disposed of or otherwise retired.

Internal Use Software Costs:

The company capitalizes direct costs incurred during the application development
and implementation stages for developing, purchasing, or otherwise acquiring
software for internal use. These software costs are included in property, plant
and equipment in the Consolidated Statements of Financial Position and are
depreciated over the estimated useful life of the software, generally three
years. All costs incurred during the preliminary project stage are expensed as
incurred.

Goodwill and Other Intangible Assets:

The company accounts for goodwill and other intangible assets in accordance with
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 142 no longer permits
the amortization of goodwill and indefinite-lived intangible assets. Instead,
the assets must be reviewed at least annually for impairment. The company
annually reviews its goodwill for impairment and currently does not have any
indefinite-lived intangible assets. The company's goodwill and intangible assets
are immaterial, and therefore are not separately presented in the Consolidated
Statements of Financial Position.

Long-Lived Assets:

The company performs reviews for the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss is recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition are less than its carrying amount. If future expected
undiscounted cash flows are insufficient to recover the carrying value of the

37

assets, then an impairment loss is recognized based upon the excess of the
carrying value of the asset over the anticipated cash flows on a discounted
basis. The company also reviews any legal and contractual obligations associated
with the retirement of its long-lived assets and records assets and liabilities,
as necessary, related to the cost of such obligations.

Warranty Reserves:

In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. The disclosure requirements of FIN 45, which are effective for financial
statements of interim or annual periods ending after December 15, 2002, are
included below and in Note 7 of the Notes to Consolidated Financial Statements.

The company provides for the estimated cost of product warranties at the time
revenue is recognized. The reserve for product warranties is based on the
quantity of units sold under warranty, estimated product failure rates, and
material usage and service delivery costs. The estimates for product failure
rates and material usage and service delivery costs are periodically adjusted
based on actual results. For extended warranty programs, the company defers
revenue in short-term and long-term liability accounts (based on the extended
warranty contractual period) for amounts invoiced to customers for these
programs and recognizes the revenue ratably over the contractual period. Costs
associated with extended warranty programs are expensed as incurred.

Revenue Recognition:

Accounting Changes

In December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 104, Revenue Recognition, which superceded SAB 101, Revenue
Recognition in Financial Statements. SAB 104 updated certain interpretive
guidance included in SAB 101, including the SAB 101 guidance related to multiple
element revenue arrangements, to reflect the issuance by the Emerging Issues
Task Force ("EITF") of EITF 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. The basic revenue recognition principles of SAB 101 were
largely unchanged by the issuance of SAB 104, and therefore, did not have a
material impact on the company's financial position, results of operations or
cash flows.

In November 2002, the EITF issued EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables, which addresses revenue recognition
accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. The provisions of this pronouncement were
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The company accounts for arrangements with multiple
revenue-generating activities in accordance with EITF 00-21, as described in the
following subsection on multiple element revenue arrangements.

In 2001, the EITF reached a consensus that consideration from a vendor to a
purchaser of the vendor's products should be characterized as a reduction in
revenue as stated in EITF 00-25, Accounting for Consideration from a Vendor to a
Retailer in Connection with the Purchase or Promotion of the Vendor's Products,
and clarified in EITF 01-9. This EITF consensus was effective for annual or
interim financial statements beginning after December 5, 2001, with
reclassification required for comparative prior periods. The company adopted
this EITF as required in 2002 and the adoption of this statement had no impact
on the company's net earnings, financial position or cash flows, but did result
in a reclassification of certain prior year reported amounts to conform to the
current year's presentation. Both revenue and selling, general and
administrative expense for the twelve months ended December 31, 2001 were
reduced by approximately $38.5 million, as a result of this reclassification.

38

General

The company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable and
collectibility is probable. The following are the policies applicable to
Lexmark's major categories of revenue transactions:

Products

Revenue from product sales, including sales to distributors and resellers, is
recognized when title and risk of loss transfer to the customer, generally when
the product is shipped to the customer. When other significant obligations
remain after products are delivered, revenue is recognized only after such
obligations are fulfilled. At the time revenue is recognized, the company
provides for the estimated cost of post-sales support, principally product
warranty, and reduces revenue for estimated product returns. Additionally, the
company records estimated reductions to revenue at the time of sale for customer
programs and incentive offerings including special pricing agreements,
promotions and other volume-based incentives. Estimated reductions in revenue
are based upon historical trends and other known factors at the time of sale. In
addition, the company provides price protection to substantially all of its
reseller customers. The company records reductions to revenue for the estimated
impact of price protection when price reductions to resellers are anticipated.

Services

Revenue from support or maintenance contracts, including extended warranty
programs, is recognized ratably over the contractual period. Amounts invoiced to
customers in excess of revenue recognized on support or maintenance contracts
are recorded as deferred revenue until the appropriate revenue recognition
criteria are met. Revenue for time and material contracts is recognized as the
services are performed.

Multiple Element Revenue Arrangements

The company enters into transactions that include multiple elements, such as a
combination of products and services. Revenue for these arrangements is
allocated to each element based on its relative fair value and is recognized
when the revenue recognition criteria for each element have been met. Relative
fair value may be determined by the price of an element if it were sold on a
stand-alone basis (referred to as vendor-specific objective evidence ("VSOE")).
In the absence of VSOE, third party evidence (competitors' prices of comparable
products or services) is used to determine relative fair value.

Advertising Costs:

The company expenses advertising costs when incurred. Advertising expense was
approximately $80.7 million, $76.2 million and $78.1 million in 2003, 2002 and
2001, respectively.

Pension and Postretirement Benefits:

The company accounts for its defined benefit pension plans and its non-pension
postretirement benefit plans using actuarial models required by SFAS No. 87,
Employers' Accounting for Pensions, and SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, respectively. Liabilities are
computed using the projected unit credit method. The objective under this method
is to expense each participant's benefits under the plan as they accrue, taking
into consideration future salary increases and the plan's benefit allocation
formula. Thus, the total pension to which each participant is expected to become
entitled is broken down into units, each associated with a year of past or
future credited service.

39

The discount rate assumption for the pension and postretirement benefit plans
reflects the rates available on high-quality fixed-income investments at
December 31 each year. The company's assumed long-term rate of return on plan
assets is based on long-term historical actual return information, the mix of
investments that comprise plan assets and future estimates of long-term
investment returns by reference to external sources. Differences between actual
and expected asset returns are recognized in the market-related value of plan
assets over five years. The rate of compensation increase is determined by the
company based upon its long-term plans for such increases. The company's funding
policy for its pension plans is to fund minimum amounts according to the
regulatory requirements under which the plans operate. From time to time, the
company may choose to fund amounts in excess of the minimum for various reasons.

The company accrues for the cost of providing postretirement benefits such as
medical and life insurance coverage over the active service period of the
employee. These benefits are funded by the company when paid.

Stock-Based Compensation:

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an Amendment of SFAS 123, which
provides alternative methods for a voluntary change to the fair value method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS 123. The company has elected to continue to account for its
stock-based employee compensation plans under APB Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations. The following
disclosures are provided in accordance with SFAS 148.

The company has various stock-based employee compensation plans, which are
described in Note 12 of the Notes to Consolidated Financial Statements. No
stock-based employee compensation cost is reflected in net earnings as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net earnings and earnings per share if the company had
applied the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.

Income Taxes:

The provision for income taxes is computed based on pre-tax income included in
the statements of earnings. The company recognizes deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference

40

between the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.

Derivatives:

The company accounts for derivative instruments in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities,
which amended certain portions of SFAS 133. These statements require that all
derivatives, including foreign currency exchange contracts, be recognized in the
statement of financial position at their fair value. Derivatives that are not
hedges must be recorded at fair value through earnings. If a derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of the
derivative are either offset against the change in fair value of underlying
assets or liabilities through earnings or recognized in other comprehensive
earnings until the underlying hedged item is recognized in earnings. Any
ineffective portion of a derivative's change in fair value is immediately
recognized in earnings.

Net Earnings Per Share:

Basic net earnings per share is calculated by dividing net income by the
weighted average number of shares outstanding during the reported period. The
calculation of diluted net earnings per share is similar to basic, except that
the weighted average number of shares outstanding includes the additional
dilution from potential common stock such as stock options and stock under
long-term incentive plans.

Other Comprehensive Earnings (Loss):

Other comprehensive earnings (loss) refers to revenues, expenses, gains and
losses that under accounting principles generally accepted in the United States
of America are included in comprehensive earnings (loss) but are excluded from
net income as these amounts are recorded directly as an adjustment to
stockholders' equity, net of tax. The company's other comprehensive earnings
(loss) is composed of deferred gains and losses on cash flow hedges, foreign
currency translation adjustments and adjustments made to recognize additional
minimum liabilities associated with the company's defined benefit pension plans.

Segment Data:

The company manufactures and sells a variety of printing products and related
supplies and services. The company is primarily managed along business and
consumer market segments. Refer to Note 17 of the Notes to Consolidated
Financial Statements for additional information regarding the company's
reportable segments.

Recent Accounting Pronouncements:

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB issued FIN 46-R,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
(revised December 2003), which replaces FIN 46. FIN 46-R incorporates certain
modifications to FIN 46 adopted by the FASB subsequent to the issuance of FIN
46, including modifications to the scope of FIN 46. Additionally, FIN 46-R also
incorporates much of the guidance previously issued in the form of FASB Staff
Positions. For all special purpose entities ("SPEs") created prior to February
1, 2003, public entities must apply either the provisions of FIN 46 or early
adopt the provisions of FIN 46-R at the end of the first interim or

41

annual reporting period ending after December 15, 2003. The company has
evaluated the provisions of this interpretation and determined that the
interpretation has no impact on its financial position, results of operations
and cash flows.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS 133. SFAS 149 is generally effective for contracts entered into or
modified after June 30, 2003. The company has evaluated the provisions of this
statement and determined that this statement has no impact on the company's
financial position, results of operations and cash flows.

In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers'
Disclosures about Pension and Other Postretirement Benefits. This Statement
revises employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those plans
required by SFAS 87, SFAS No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and
SFAS 106. This Statement retains the disclosure requirements contained in SFAS
132, which it replaces. It requires additional disclosures to those in the
original SFAS 132 about the assets, obligations, cash flows and net periodic
benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The new rules also require additional disclosures in
interim financial statements about the amount of net periodic benefit cost
recognized and the amount of contributions paid or to be paid to a plan if
significantly different from amounts previously reported. The disclosures are
required to be provided separately for pension plans and for other
postretirement benefit plans. The newly required annual disclosures are included
in Note 13 of the Notes to Consolidated Financial Statements. The interim
disclosures are required for quarters beginning after December 15, 2003.

In December 2003, the Securities and Exchange Commission issued SAB 104, Revenue
Recognition, which superceded SAB 101, Revenue Recognition in Financial
Statements. SAB 104 updated certain interpretive guidance included in SAB 101,
including the SAB 101 guidance related to multiple element revenue arrangements,
to reflect the issuance of EITF 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. The basic revenue recognition principles of SAB 101 were
largely unchanged by the issuance of SAB 104, and therefore, did not have a
material impact on the company's financial position, results of operations and
cash flows.

In January 2004, the FASB issued FASB Staff Position ("FSP") No. FAS 106-1,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003. FSP 106-1 permits employers who
sponsor postretirement benefit plans (plan sponsors) that provide prescription
drug benefits to retirees to make a one-time election to defer accounting for
any effects of the Medicare, Prescription Drug, Improvement and Modernization
Act of 2003 (the "Act"). Without FSP 106-1, plan sponsors would be required
under SFAS 106 to account for the effects of the Act in the fiscal period that
includes December 8, 2003, the date the President signed the Act into law. For
example, a calendar year plan sponsor would be required to account for the Act
for the first time in its 2003 year-end financial statements if it uses a
year-end measurement date, or in its financial statements for the first quarter
of calendar 2004 if it uses a September 30 measurement date. If deferral is
elected, the deferral must remain in effect until the earlier of (a) the
issuance of guidance by the FASB on how to account for the federal subsidy to be
provided to plan sponsors under the Act or (b) the remeasurement of plan assets
and obligations subsequent to January 31, 2004. The company has elected to defer
accounting for the effects of the Act.

42

Reclassifications:

Certain prior year amounts have been reclassified, if applicable, to conform to
the 2003 presentation.

3. MARKETABLE SECURITIES

During September 2003, the company began investing in marketable securities. The
company evaluated its marketable securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and determined
that all of its investments in marketable securities to date should be
classified as available-for-sale and reported at fair value, with unrealized
gains and losses recorded in other comprehensive earnings (loss). The fair value
of the company's available-for-sale marketable securities approximates the
company's amortized cost. As of December 31, 2003, there were no realized or
unrealized gains or losses related to marketable securities. The company expects
to use the specific identification method when accounting for the costs of its
available-for-sale marketable securities as sold.

At December 31, 2003, the company's available-for-sale marketable securities
consisted of the following:

Although contractual maturities of the company's debt securities are generally
greater than one year, the investments are classified as current assets in the
Consolidated Statements of Financial Position due to the company's expected
holding period of less than one year. The contractual maturities of the
company's available-for-sale marketable debt securities noted above were as
follows:

4. RECEIVABLES

The company's trade receivables are reported in the Consolidated Statements of
Financial Position net of allowances for doubtful accounts and product returns.

In the U.S., the company sells its receivables to its wholly-owned subsidiary,
Lexmark Receivables Corporation ("LRC"), which then sells the receivables to an
unrelated third party. The financial results of LRC are included in the
company's consolidated financial results. LRC is a separate legal entity with
its own separate creditors who, in a liquidation of LRC, would be entitled to be
satisfied out of LRC's assets prior to any value in LRC becoming available for
equity claims of the company. The company accounts for the transfers of
receivables as sales transactions.

In October 2001, the company entered into an agreement to sell its U.S. trade
receivables on a limited recourse basis that allowed for a maximum amount of
financing availability of $225.0 million. In October 2003, the agreement was
amended and the maximum amount of U.S.

43

trade receivables to be sold was decreased to $200.0 million. As collections
reduce previously sold receivables, the company may replenish these with new
receivables. The company bears a limited risk of bad debt losses on U.S. trade
receivables sold, since the company over-collateralizes the receivables sold
with additional eligible receivables. The company addresses this risk of loss in
its allowance for doubtful accounts. Receivables sold may not include amounts
over 90 days past due or concentrations over certain limits with any one
customer. This facility contains customary affirmative and negative covenants as
well as specific provisions related to the quality of the accounts receivables
sold. The facility expires in October 2004, and required annual renewal of
commitments in October 2002 and 2003. At December 31, 2003 and 2002, the
facility had no U.S. trade receivables sold and outstanding.

Expenses incurred under this program totaling $0.3 million, $1.3 million, and
$7.1 million for 2003, 2002 and 2001, respectively, are included on the other
expense line in the Consolidated Statements of Earnings.

5. INVENTORIES

Inventories consisted of the following at December 31:

6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following at December 31:

Depreciation expense was $148.1 million, $137.5 million and $125.3 million for
2003, 2002 and 2001, respectively.

During the third quarter of 2002, the company recorded an asset impairment
write-off of approximately $15.8 million related to the abandonment of a
customer relationship management software project which had encountered software
implementation and integration issues. The project was never implemented and,
after it was determined that it would not meet the company's needs, it was
abandoned and the in-process capital was written off. The third quarter asset
impairment write-off was determined in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, and was included on the
cost of revenue line in the Consolidated Statements of Earnings. The fair value
of the asset was determined to be zero, since it was customized for the company
and therefore, had no commercial value.

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7. ACCRUED LIABILITIES

Accrued liabilities consisted of the following at December 31:

In accordance with the disclosure requirements of FIN 45, changes in the
company's aggregate warranty liability, which includes both warranty and
extended warranty (deferred revenue), are presented below.

Both warranty and the short-term portion of extended warranty are included on
the accrued liabilities line in the Consolidated Statements of Financial
Position. The long-term portion of extended warranty is included on the other
liabilities line in the Consolidated Statements of Financial Position.

8. DEBT

The company has outstanding $150.0 million principal amount of 6.75% senior
notes due May 15, 2008, which was initially priced at 98.998%, to yield 6.89% to
maturity. A balance of $149.3 million (net of unamortized discount of $0.7
million) was outstanding at December 31, 2003. At December 31, 2002, the balance
was $149.2 million (net of unamortized discount of $0.8 million). The senior
notes contain typical restrictions on liens, sale leaseback transactions,
mergers and sales of assets. There are no sinking fund requirements on the
senior notes and they may be redeemed at any time at the option of the company,
at a redemption price as described in the related indenture agreement, as
supplemented and amended, in whole or in part.

During October 2003, the company entered into interest rate swap contracts to
convert its $150.0 million principal amount of 6.75% senior notes from a fixed
interest rate to a variable interest rate. Interest rate swaps with a notional
amount of $150.0 million were executed whereby the company will receive interest
at a fixed rate of 6.75% and pay interest at a variable rate of approximately
2.76% above the six-month London Interbank Offered Rate ("LIBOR"). These
interest rate swaps have a maturity date of May 15, 2008, which is equivalent to
the maturity date of the senior notes.

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Effective May 29, 2002, the company entered into a new $500 million unsecured,
revolving credit facility with a group of banks, including a $200 million
364-day portion and a $300 million 3-year portion. Upon entering into the new
credit agreement, the company terminated the prior $300 million unsecured,
revolving credit facility that was due to expire on January 27, 2003. There were
no amounts outstanding under the prior facility upon its termination.

Under the credit facility, the company may borrow in dollars, euros and certain
other currencies. The interest rate ranges from 0.35% to 1.25% above the LIBOR
for borrowings denominated in U.S. dollars, the Eurocurrency Interbank Offered
Rate ("EURIBOR") for borrowings denominated in euros, or other relevant
international interest rate for borrowings denominated in another currency. The
interest rate spread is based upon the company's debt ratings. In addition, the
company is required to pay a facility fee on the $500 million line of credit of
0.075% to 0.25% based upon the company's debt ratings. The interest and facility
fees are payable quarterly.

The credit agreement contains customary default provisions, leverage and
interest coverage restrictions and certain restrictions on secured and
subsidiary debt, disposition of assets, liens and mergers and acquisitions. The
364-day portion of the $500 million credit facility had a maturity date of May
28, 2003. During May 2003, each lender approved the extension of the $200
million 364-day portion of the revolving credit facility with a new maturity
date of May 26, 2004. The 3-year portion of the credit facility has a maturity
date of May 29, 2005. Any amounts outstanding under the credit facility are due
according to the applicable maturity dates noted above. As of December 31, 2003
and 2002, there were no amounts outstanding under the credit facility.

The company's Brazilian operation has a short-term, uncommitted line of credit
with an outstanding balance of $1.1 million and $9.3 million at December 31,
2003 and 2002, respectively. The interest rate on this line of credit varies
based upon the local prevailing interest rates at the time of borrowing, and
averaged approximately 25% and 19%, during 2003 and 2002, respectively.

During 2002, the company's operation in the People's Republic of China entered
into a short-term, uncommitted revolving loan facility. As of December 31, 2003,
there were no amounts outstanding under this facility and as of December 31,
2002, a balance of $3.0 million was outstanding under this facility. The
interest rate on this facility varies based upon the local prevailing interest
rates at the time of borrowing. While no amounts were outstanding under this
facility at December 31, 2003, it was utilized during 2003 and the interest rate
averaged approximately 5% during 2003 and 2002.

In February 2001, the company filed a shelf registration statement with the
Securities and Exchange Commission to register $200 million of debt securities.
Due to the company's strong cash position, in early 2004 the company determined
that it did not plan to utilize the shelf registration, and on January 28, 2004,
withdrew its registration pursuant to the rules and regulations of the
Securities and Exchange Commission.

Total cash paid for interest amounted to $11.1 million, $12.6 million and $14.3
million in 2003, 2002 and 2001, respectively.

The components of interest (income)/expense, net in the Consolidated Statements
of Earnings were as follows:

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9. INCOME TAXES

The provision for income taxes consisted of the following:

Earnings before income taxes were as follows:

The company realized an income tax benefit from the exercise of certain stock
options in 2003, 2002 and 2001 of $37.2 million, $31.3 million and $54.7
million, respectively. This benefit resulted in a decrease in current income
taxes payable and an increase in capital in excess of par.

In 2001, the company reached resolution with the Internal Revenue Service
("IRS") on certain adjustments related to the intercompany allocation of
profits. As a result of this resolution, the company reversed previously accrued
taxes, reducing the tax provision in the fourth quarter of 2001 by $40.0 million
or $0.30 per share.

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Significant components of deferred income tax assets and (liabilities) at
December 31 were as follows:

The company has non-U.S. tax loss carryforwards of $3.0 million, which have an
indefinite carryforward period.

Deferred income taxes have not been provided on the undistributed earnings of
foreign subsidiaries. Undistributed earnings of non-U.S. subsidiaries included
in the consolidated retained earnings were approximately $843.2 million. The
company does not plan to initiate any action that would precipitate the payment
of income taxes. It is not practicable to estimate the amount of additional tax
that may be payable on the foreign earnings.

The IRS has completed its examination of the company's income tax returns for
all years through 1996. As of December 31, 2003, the IRS was in the process of
examining the company's income tax returns for the years 1997 through 2001.
Additionally, the company and its subsidiaries are subject to tax examinations
in various states and foreign jurisdictions. The company believes that adequate
amounts of taxes and related interest have been provided for any adjustments
that may result from these examinations.

A reconciliation of the provision for income taxes using the U.S. statutory rate
and the company's effective tax rate was as follows:

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Cash paid for income taxes was $90.4 million, $94.5 million and $32.1 million in
2003, 2002 and 2001, respectively.

10. STOCKHOLDERS' EQUITY

The Class A common stock is voting and exchangeable for Class B common stock in
very limited circumstances. The Class B common stock is non-voting and is
convertible, subject to certain limitations, into Class A common stock.

At December 31, 2003, approximately 712.7 million and 1.8 million shares of
Class A and Class B common stock were unissued and unreserved. These shares are
available for a variety of general corporate purposes, including future public
offerings to raise additional capital and for facilitating acquisitions.

In July 2002, the company received authorization from the board of directors to
repurchase an additional $200 million of its Class A common stock for a total
repurchase authority of $1.4 billion. At December 31, 2003, there was
approximately $183 million of share repurchase authority remaining. This
repurchase authority allows the company, at management's discretion, to
selectively repurchase its stock from time to time in the open market or in
privately negotiated transactions depending upon market price and other factors.
During 2003, the company repurchased approximately 0.1 million shares in the
open market at prices ranging from $71.51 per share to $74.30 per share for a
cost of approximately $5 million. As of December 31, 2003, the company had
repurchased approximately 34.8 million shares at prices ranging from $10.63 per
share to $105.38 per share for an aggregate cost of approximately $1.2 billion.
As of December 31, 2003, the company had reissued 0.3 million shares of
previously repurchased shares in connection with certain of its employee benefit
programs. As a result of these issuances, the net treasury shares outstanding at
December 31, 2003 were 34.5 million.

In 1998, the company's board of directors adopted a stockholder rights plan (the
"Rights Plan") which provides existing stockholders with the right to purchase
one one-thousandth (0.001) of a share of Series A Junior Participating preferred
stock for each share of Class A and Class B common stock held in the event of
certain changes in the company's ownership. The rights will expire on January
31, 2009, unless earlier redeemed by the company.

11. EARNINGS PER SHARE

The following table presents a reconciliation of the numerators and denominators
of the basic and diluted net earnings per share calculations for the years ended
December 31:

Stock options to purchase 1.4 million common shares in 2003, 2.1 million common
shares in 2002, and 1.9 million common shares in 2001 were outstanding, but were
not included in the

49

computation of diluted net earnings per share because the options' exercise
prices were greater than the average market price of the common shares and,
therefore, the effect would have been antidilutive.

12. STOCK INCENTIVE PLANS

The company has various stock incentive plans to encourage employees and
nonemployee directors to remain with the company and to more closely align their
interests with those of the company's stockholders. Under the employee plans, as
of December 31, 2003 approximately 8.7 million shares of Class A common stock
are reserved for future grants in the form of stock options, stock appreciation
rights, restricted stock, performance shares or deferred stock units (of which
up to 3.1 million shares can be used for restricted stock, performance shares
and deferred stock units). Under the nonemployee director plan, as of December
31, 2003 approximately 0.2 million shares of Class A common stock are reserved
for future grants in the form of stock options and deferred stock units. As of
December 31, 2003, awards under the programs have been limited to stock options,
restricted stock, performance shares and deferred stock units.

The exercise price of options awarded under stock option plans is equal to the
fair market value of the underlying common stock on the date of grant. Generally
options expire ten years from the date of grant and generally become fully
vested at the end of five years based upon continued employment or the
completion of three years of service on the board of directors. In some cases,
option vesting and exercisability may be accelerated due to the achievement of
performance objectives.

The company applies APB Opinion 25, and related interpretations in accounting
for its plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans other than for restricted stock,
performance-based awards and deferred stock units. Refer to significant
accounting policies -- stock-based compensation in Note 2 of the Notes to
Consolidated Financial Statements for the effects on net earnings and earnings
per share had the company applied the fair value methodology prescribed under
SFAS 123, as amended by SFAS 148.

The weighted average fair value of options granted during 2003, 2002 and 2001
was $25.94, $24.14 and $23.02 per share, respectively.

The fair value of each option grant on the grant date was estimated using the
Black-Scholes option-pricing model with the following assumptions:

50

A summary of the status of the company's stock option plans as of December 31,
2003, 2002 and 2001 and changes during the years then ended is presented below:

As of December 31, 2003, 2002 and 2001 there were 5.0 million, 5.4 million and
5.0 million options exercisable, respectively.

The following table summarizes information about stock options outstanding and
exercisable at December 31, 2003:

As of December 31, 2003, the company had granted approximately 500,000
restricted stock units and supplemental deferred stock units with various
vesting periods. During 2003, 2002, and 2001, respectively, the company granted
50,000, 29,000 and 140,000 restricted stock units and supplemental deferred
stock units with weighted average grant prices of $60.78, $52.02 and $49.98. As
of December 31, 2003, there were approximately 246,000 restricted stock units
and supplemental deferred stock units outstanding. The cost of the awards,
determined to be the fair market value of the shares at the date of grant, is
charged to compensation expense ratably over the vesting periods.

The company has also issued approximately 337,000 deferred stock units to
certain members of management who have elected to defer all or a portion of
their annual bonus into such units and to certain nonemployee directors who
elected to defer all or a portion of their annual retainer, chair retainer
and/or meeting fees into such units. These deferred stock units are 100% vested
at

51

all times. As of December 31, 2003, there were approximately 203,000 such
deferred stock units outstanding.

In addition, the company awarded approximately 134,000 performance shares, the
vesting of which was based on the attainment of certain performance goals by the
end of the four year period 1997 through 2000. Based on the certification in
early 2001 that such performance goals were satisfied, the shares were fully
vested but receipt of these shares was deferred by the grantees. In January
2003, 113,000 of these shares were issued and 21,000 shares were further
deferred until February 2005. The compensation expense in connection with the
performance shares was estimated over the four year period based on the fair
market value of the shares during that period. In order to mitigate the impact
of stock price changes on compensation expense, the company entered into a
forward equity contract on its common stock during 2000 which was settled in
cash in 2001.

The company recorded compensation expense of $2.1 million, $3.0 million and $4.4
million in 2003, 2002 and 2001, respectively, related to these stock incentive
plans.

The company also has an Employee Stock Purchase Plan ("ESPP") which enables
substantially all regular employees to purchase full or fractional shares of
Lexmark Class A common stock through payroll deductions of up to 10% of eligible
compensation. Effective July 1, 2002, the ESPP was amended whereby the share
price paid by an employee changed from 85% of the closing market price on the
last business day of each month, to 85% of the lesser of the closing market
price on (i) the last business day immediately preceding the first day of the
respective offering period and (ii) the last business day of the respective
offering period. The current plan provides semi-annual offering periods
beginning each January 1 and July 1. During 2003, 2002 and 2001, employees paid
the company $7.9 million, $4.5 million and $8.2 million, respectively, to
purchase approximately 0.2 million shares, 0.1 million shares and 0.2 million
shares, respectively. As of December 31, 2003, there were approximately 2.4
million shares of Class A common stock reserved for future purchase under the
ESPP.

52

13. EMPLOYEE PENSION AND POSTRETIREMENT PLANS

The company and its subsidiaries have defined benefit and defined contribution
pension plans that cover a majority of its regular employees, and a supplemental
plan that covers certain executives. Medical, dental and life insurance plans
for retirees are provided by the company and certain of its non-U.S.
subsidiaries. Plan assets are invested in equity securities, government and
agency securities, corporate debt and annuity contracts.

The non-U.S. pension plans are not significant and use economic assumptions
similar to the U.S. pension plan and therefore are not shown separately in the
following disclosures. The changes in the defined benefit plan obligations and
plan assets for 2003 and 2002 were as follows:

The weighted-average discount rate and rate of compensation increase assumptions
are calculated based on the end of year benefit obligation of the U.S. and
non-U.S. plans. The weighted-average expected return on plan assets is based on
the end of year fair value of plan assets of the U.S. and non-U.S. plans.

The accumulated benefit obligation for all of the company's defined benefit
pension plans was $684.1 million and $625.1 million at December 31, 2003 and
2002, respectively.

During 2003 and 2002, the company contributed $108.5 million and $50.0 million,
respectively, to its U.S. pension plan. These contributions were made to improve
the funding status of the plan following the negative returns in the capital
markets over the past few years, which decreased the value of the pension plan
assets. In 2004, the company expects to contribute approximately $45.0 million
to its pension and postretirement plans, primarily for its European pension
plans.

For measurement purposes, a 10.0% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2004. The rate is assumed to
decrease gradually to 5.25% in 2012 and remain at that level thereafter. Since
the net employer costs for postretirement medical benefits reach the preset caps
within the next two to four years, a 1% increase or decrease in trend has a de
minimis effect on costs.

Related to the company's acquisition of the Information Products Corporation
from IBM in 1991, IBM agreed to pay for its pro rata share (currently estimated
at $72.9 million) of future

54

postretirement benefits for all the company's U.S. employees based on pro rated
years of service with IBM and the company.

A significant portion of the retirement plan assets and liabilities relating to
its defined benefit plans are derived from the company's U.S. defined benefit
plan. The investment goal of the U.S. defined benefit plan is to achieve an
adequate net investment return in order to provide for future benefit payments
to its participants. The target asset allocation percentages approved by the
company's board of directors are 75% equity securities and 25% fixed income
securities. The plan currently employs professional investment managers to
invest in two assets classes: U.S. equity and U.S. fixed income. Each investment
manager operates under an investment management contract that includes specific
investment guidelines, requiring among other actions, adequate diversification,
prudent use of derivatives and standard risk management practices such as
portfolio constraints relating to established benchmarks. The plan currently
uses a combination of both active management and passive index funds to achieve
its investment goals.

The company's U.S. pension plan's weighted-average asset allocations at December
31, 2003 and 2002, by asset category were as follows:

The company also sponsors defined contribution plans for employees in certain
countries. Company contributions are based upon a percentage of employees'
contributions. The company's expense under these plans was $12.8 million, $11.4
million, and $10.0 million in 2003, 2002 and 2001, respectively.

14. DERIVATIVES, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The company's activities expose it to a variety of market risks, including the
effects of changes in foreign currency exchange rates and interest rates. The
company's risk management program seeks to reduce the potentially adverse
effects that market risks may have on its operating results.

The company maintains a foreign currency risk management strategy that uses
derivative instruments to protect its interests from unanticipated fluctuations
in earnings and cash flows caused by volatility in currency exchange rates. The
company does not hold or issue financial instruments for trading purposes nor
does it hold or issue leveraged derivative instruments. The company maintains an
interest rate risk management strategy that may, from time to time use
derivative instruments to minimize significant, unanticipated earnings
fluctuations caused by interest rate volatility. By using derivative financial
instruments to hedge exposures to changes in exchange rates and interest rates,
the company exposes itself to credit risk and market risk. The company manages
exposure to counterparty credit risk by entering into derivative financial
instruments with highly rated institutions that can be expected to fully perform
under the terms of the agreement. Market risk is the adverse effect on the value
of a financial instrument that results from a change in currency exchange rates
or interest rates. The company manages exposure to market risk associated with
interest rate and foreign exchange contracts by establishing and monitoring
parameters that limit the types and degree of market risk that may be
undertaken.

55

The company uses the following hedging strategies to reduce the potentially
adverse effects that market volatility may have on its operating results:

Fair Value Hedges: Fair value hedges are hedges of recognized assets or
liabilities. The company enters into forward exchange contracts to hedge actual
purchases and sales of inventories. The forward contracts used in this program
mature in three months or less, consistent with the related purchase and sale
commitments. Foreign exchange option contracts, as well as forward contracts,
may be used as fair value hedges in situations where derivative instruments, for
which hedge accounting has been discontinued, expose earnings to further change
in exchange rates. The company is using interest rate swaps to convert a portion
of its fixed rate financing activities to variable rates.

Cash Flow Hedges: Cash flow hedges are hedges of forecasted transactions or of
the variability of cash flows to be received or paid related to a recognized
asset or liability. The company enters into foreign exchange options and forward
exchange contracts expiring within eighteen months as hedges of anticipated
purchases and sales that are denominated in foreign currencies. These contracts
are entered into to protect against the risk that the eventual cash flows
resulting from such transactions will be adversely affected by changes in
exchange rates. The company also enters into currency swap contracts to hedge
foreign currency risks that result from the transfer of various currencies
within the company. The currency swap contracts entered into generally expire
within one month.

ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES

All derivatives are recognized in the Consolidated Statements of Financial
Position at their fair value. Fair values for the company's derivative financial
instruments are based on quoted market prices of comparable instruments or, if
none are available, on pricing models or formulas using current assumptions. On
the date the derivative contract is entered into, the company designates the
derivative as either a fair value or cash flow hedge. Changes in the fair value
of a derivative that is highly effective as -- and that is designated and
qualifies as -- a fair value hedge, along with the loss or gain on the hedged
asset or liability are recorded in current period earnings in cost of revenues.
Changes in the fair value of a derivative that is highly effective as -- and
that is designated and qualifies as -- a cash flow hedge are recorded in other
comprehensive earnings, until the underlying transactions occur.

At December 31, 2003, the company had derivative assets of $8.1 million
classified as prepaid expenses and other current assets as well as derivative
liabilities of $50.0 million classified as accrued liabilities. At December 31,
2002, the company had derivative assets of $40.9 million classified as prepaid
expenses and other current assets as well as derivative liabilities of $57.4
million classified as accrued liabilities. As of December 31, 2003, a total of
$36.5 million of deferred net losses on derivative instruments were accumulated
in other comprehensive earnings (loss), of which $35.3 million is expected to be
reclassified to earnings during the next twelve months. As of December 31, 2002,
a total of $20.9 million of deferred net losses on derivative instruments were
accumulated in other comprehensive earnings (loss), of which $19.9 million was
reclassified to earnings during 2003.

The company formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objective and strategy for
undertaking various hedge items. This process includes linking all derivatives
that are designated as fair value and cash flow to specific assets and
liabilities on the balance sheet or to forecasted transactions. The company also
formally assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair value or cash flows of hedged items.
When it is determined that a derivative is not highly effective as a hedge or
that it has ceased to be a highly effective hedge, the company discontinues
hedge accounting prospectively, as discussed below.

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The company discontinues hedge accounting prospectively when (1) it is
determined that a derivative is no longer effective in offsetting changes in the
fair value or cash flows of a hedged item; (2) the derivative expires or is
sold, terminated, or exercised or (3) the derivative is discontinued as a hedge
instrument, because it is unlikely that a forecasted transaction will occur.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be carried in the Consolidated Statements of Financial Position
at its fair value. When hedge accounting is discontinued because it is probable
that a forecasted transaction will not occur, the derivative will continue to be
carried in the Consolidated Statements of Financial Position at its fair value,
and gains and losses that were accumulated in other comprehensive earnings are
recognized immediately in earnings. In all other situations in which hedge
accounting is discontinued, the derivative will be carried at its fair value in
the Consolidated Statements of Financial Position, with changes in its fair
value recognized in current period earnings. A fair value hedge is entered into
when the derivative instrument, for which hedge accounting has been
discontinued, exposes earnings to further change in exchange rates. An
immaterial portion of the company's cash flow hedges was determined to be
ineffective as of December 31, 2003 and 2002 because it was unlikely that the
forecasted transactions would occur. During 2003, an immaterial loss was
reclassified to current period earnings and during 2002, an immaterial gain was
reclassified to current period earnings.

The company recorded $10.4 million, $13.0 million and $7.0 million of aggregate
foreign currency transaction losses in 2003, 2002 and 2001, respectively. The
aggregate foreign currency transaction loss amounts include the gains/losses of
the company's foreign currency fair value hedges for all periods presented.

FINANCIAL INSTRUMENTS

At December 31, 2003, the carrying value of the company's long-term debt was
$149.3 million and the fair value was $166.9 million. At December 31, 2002, the
carrying value of the company's long-term debt was $149.2 million and the fair
value was $163.0 million. The fair value of the long-term debt was estimated
based on current rates available to the company for debt with similar
characteristics. At December 31, 2003 and 2002, the carrying value of the
company's short-term debt was $1.1 and $12.3 million, respectively, which
approximated the fair value.

During October 2003, the company entered into interest rate swap contracts to
convert its $150.0 million principal amount of 6.75% senior notes from a fixed
interest rate to a variable interest rate. The interest rate swaps are
designated as a fair value hedge of the company's $150.0 million long-term debt.
The interest rate swaps are recorded at their fair value and the company's
long-term debt is adjusted by the same corresponding value in accordance with
the short-cut method of SFAS 133. The fair value of the interest rate swaps is
combined with the fair value adjustment of the company's long-term debt due to
immateriality and is presented on the long-term debt line in the company's
Consolidated Statements of Financial Position. At December 31, 2003, the fair
value of the interest rate swap contracts was $0.4 million.

CONCENTRATIONS OF RISK

The company's main concentrations of credit risk consist primarily of temporary
cash investments, marketable securities and trade receivables. Cash and
marketable securities investments are made in a variety of high quality
securities with prudent diversification requirements. Credit risk related to
trade receivables is dispersed across a large number of customers located in
various geographic areas. The company sells a large portion of its products
through third-party distributors and resellers and original equipment
manufacturer ("OEM") customers. If the financial condition or operations of
these distributors, resellers and OEM customers were to deteriorate
substantially, the company's operating results could be adversely affected. The
three largest distributor, reseller and OEM customer trade receivable balances

57

collectively represented approximately 29% of total trade receivables at
December 31, 2003 and approximately 20% at December 31, 2002. However, the
company performs ongoing credit evaluations of the financial position of its
third-party distributors, resellers and other customers to determine appropriate
credit limits. Collateral such as letters of credit and bank guarantees is
required in certain circumstances.

The company generally has experienced longer accounts receivable cycles in its
emerging markets, in particular, Asia Pacific and Latin America, when compared
to its U.S. and European markets. In the event that accounts receivable cycles
in these developing markets lengthen further, the company could be adversely
affected.

The company also procures a wide variety of components used in the manufacturing
process. Although many of these components are available from multiple sources,
the company often utilizes preferred supplier relationships to better ensure
more consistent quality, cost and delivery. The company also sources some
printer engines and finished products from OEMs. Typically, these preferred
suppliers maintain alternate processes and/or facilities to ensure continuity of
supply. Although the company plans in anticipation of its future requirements,
should these components not be available from any one of these suppliers, there
can be no assurance that production of certain of the company's products would
not be disrupted.

15. RESTRUCTURING AND OTHER CHARGES

As of December 31, 2002, the company had substantially completed all
restructuring activities and, therefore, reversed approximately $5.9 million
($4.4 million, net of tax) during the fourth quarter of 2002. The reversal was
primarily due to lower severance costs (approximately $3.5 million) and lower
other exit costs (approximately $2.4 million). The severance payments were lower
than originally estimated due to higher than expected attrition which resulted
in the company being able to achieve headcount reductions at a lower cost.
Although the restructuring activities were substantially complete at year-end
2002 and the employees exited the business, approximately $4.7 million of
severance payments were paid during 2003.

The following table presents a rollforward of the liabilities (in millions)
incurred in connection with the 2001 and prior restructuring plans. These
liabilities were reflected as accrued liabilities in the company's Consolidated
Statements of Financial Position.

During the fourth quarter of 2001, Lexmark's management and board of directors
approved a restructuring plan (the "2001 restructuring") that included a
reduction in the company's global

58

workforce of up to 12 percent. This plan provided for a reduction in
infrastructure and overhead expenses, the elimination of the company's business
class inkjet printer, and the closure of an electronic card manufacturing
facility in Reynosa, Mexico. Restructuring and related charges of $58.4 million
($42.9 million, net of tax) were expensed during the fourth quarter of 2001.
These charges were comprised of $36.0 million of accrued restructuring costs
related to separation and other exit costs, $11.4 million associated with a
pension curtailment related to the employee separations and $11.0 million
related to asset impairment charges. The company also recorded $29.3 million
($21.6 million, net of tax) of associated restructuring-related inventory
write-offs resulting from the company's decision to eliminate its business class
inkjet printer, to limit the period over which the company will provide
replacement parts for products no longer in production, and to exit the
electronic card manufacturing facility. The inventory write-offs were included
on the cost of revenue line in the Consolidated Statements of Earnings.

The accrued restructuring costs for employee separations of $26.3 million were
associated with approximately 1,600 employees worldwide from various business
functions and job classes. Employee separation benefits included severance,
medical and other benefits. As of December 31, 2002, approximately 1,225
employees exited the business under the 2001 restructuring plan. This total
included the employees discussed below who were transferred to another company.
In addition to employees exiting the business under the restructuring plan, the
company's headcount was further decreased due to higher than expected attrition.
The other exit costs of $9.7 million were primarily related to vendor and lease
cancellation charges.

The $11.0 million charge for asset impairment in 2001 was determined in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, and resulted from the company's
decision to abandon certain assets consisting primarily of machinery and
equipment used to manufacture business class inkjet printers and electronic
cards. The charge for asset impairments was included on the restructuring and
related charges line in the Consolidated Statements of Earnings.

In connection with the company's plans to exit the electronic card manufacturing
facility in Reynosa, Mexico, Lexmark sold the Reynosa operation to
Manufacturers' Services Limited ("MSL") in early July 2002. Approximately 250
Reynosa employees were transferred to MSL as part of the sale transaction and
those employees were expected to be retained by MSL. In accordance with the
sales agreement, the company prepaid eighteen months of the building lease and
agreed to provide support payments to MSL for approximately eighteen months,
subject to the terms of the agreement. MSL agreed to assume the building lease
payments for the remainder of the lease term. During the third quarter of 2002,
the company reversed excess reserves of approximately $5.4 million for lease
cancellation charges and employee separation costs, which were not incurred as a
result of the sale to MSL. The company recorded a charge for approximately the
same amount related to the support agreement with MSL.

16. COMMITMENTS AND CONTINGENCIES

The company is committed under operating leases (containing various renewal
options) for rental of office and manufacturing space and equipment. Rent
expense (net of rental income of $2.1 million, $2.0 million and $2.0 million)
was $45.1 million, $41.4 million, and $42.2 million in 2003, 2002 and 2001,
respectively. Future minimum rentals under terms of non-cancelable operating
leases at December 31 are: 2004-$33.0 million; 2005-$28.2 million; 2006-$22.4
million; 2007-$15.5 million; 2008-$12.7 million and thereafter-$20.7 million.

The company is subject to legal proceedings and claims that arise in the
ordinary course of business. The company does not believe that the outcome of
any of those matters will have a material adverse effect on the company's
financial position, results of operations or cash flows.

59

17. SEGMENT DATA

The company manufactures and sells a variety of printing products and related
supplies and services. The company is primarily managed along business and
consumer market segments. The company evaluates the performance of its segments
based on revenue and operating income, and does not include segment assets or
other income and expense items for management reporting purposes. Segment
operating income includes selling, general and administrative, research and
development and other expenses, certain of which are allocated to the respective
segments based on internal measures and may not be indicative of amounts that
would be incurred on a stand alone basis or may not be indicative of results of
other enterprises in similar businesses. Additionally, segment operating income
excludes significant expenses that are managed outside of the reporting
segments.

The following table includes information about the company's reportable segments
for and as of December 31:

The following are revenue and long-lived asset information by geographic area
for and as of December 31:

International revenue includes exports from the United States.

Long-lived assets include property, plant and equipment, net of accumulated
depreciation.

60

The following is revenue by product category as of December 31:

61

18. QUARTERLY FINANCIAL DATA (UNAUDITED)

* The sum of the quarterly earnings per share amounts do not necessarily equal
the year-to-date earnings per share due to changes in average share
calculations. This is in accordance with prescribed reporting requirements.

(1) Amounts include the benefit of the ($5.9) million (($4.4) million, net of
tax) reversal of restructuring and other charges recorded during the fourth
quarter of 2002. Diluted EPS was increased by $0.03 during the fourth
quarter of 2002 as a result of the restructuring reversal.

62

MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS

The consolidated financial statements and related information included in this
Financial Report are the responsibility of management and have been reported in
conformity with accounting principles generally accepted in the United States of
America. All other financial data in this Annual Report have been presented on a
basis consistent with the information included in the consolidated financial
statements. Lexmark International, Inc. maintains a system of financial controls
and procedures, which includes the work of corporate auditors, which we believe
provides reasonable assurance that the financial records are reliable in all
material respects for preparing the consolidated financial statements and
maintaining accountability for assets. The concept of reasonable assurance is
based on the recognition that the cost of a system of financial controls must be
related to the benefits derived and that the balancing of those factors requires
estimates and judgment. This system of financial controls is reviewed, modified
and improved as changes occur in business conditions and operations, and as a
result of suggestions from the corporate auditors and PricewaterhouseCoopers
LLP.

The Finance and Audit Committee, composed of outside members of the Board of
Directors, meets periodically with management, the independent accountants and
the corporate auditors, for the purpose of monitoring their activities to ensure
that each is properly discharging its responsibilities. The Finance and Audit
Committee, independent accountants, and corporate auditors have free access to
one another to discuss their findings.

/s/ Paul J. Curlander

Paul J. Curlander
Chairman and chief executive officer

/s/ Gary E. Morin

Gary E. Morin
Executive vice president and chief financial officer

63

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Lexmark International, Inc.

In our opinion, the accompanying Consolidated Statements of Financial Position
and the related Consolidated Statements of Earnings, Cash Flows, and
Stockholders' Equity and Comprehensive Earnings appearing on pages 31 through 61
of this annual report on Form 10-K present fairly, in all material respects, the
consolidated financial position of Lexmark International, Inc. and its
subsidiaries (the company) at December 31, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. These consolidated financial
statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Lexington, Kentucky
February 25, 2004

64

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The company's management, with the participation of the company's Chairman and
Chief Executive Officer and Executive Vice President and Chief Financial
Officer, have evaluated the effectiveness of the company's disclosure controls
and procedures as of the end of the period covered by this report. Based upon
that evaluation, the company's Chairman and Chief Executive Officer and
Executive Vice President and Chief Financial Officer have concluded that the
company's disclosure controls and procedures are effective in providing
reasonable assurance that the information required to be disclosed by the
company in the reports that it files under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.

Changes in Internal Control over Financial Reporting

There has been no change in the company's internal control over financial
reporting that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the company's
internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Except with respect to information regarding the executive officers of the
Registrant and the company's code of ethics, the information required by Part
III, Item 10 of this Form 10-K is incorporated by reference herein, and made
part of this Form 10-K, from the company's definitive Proxy Statement for its
2004 Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission, pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year. The information with respect to the executive
officers of the Registrant is included under the heading "Executive Officers of
the Registrant" in Item 1 above. The company has adopted a code of business
conduct and ethics for directors, officers (including the company's principal
executive officer, principal financial officer and controller) and employees,
known as the Code of Business Conduct. The Code of Business Conduct, as well as
the company's Corporate Governance Principles and the charters of each of the
committees of the Board of Directors, is available on the Corporate Governance
section of the company's Investor Relations website at
http://investor.lexmark.com. Stockholders may request a free copy of the Code of
Business Conduct from:

Lexmark International, Inc.
Attention: Investor Relations
One Lexmark Centre Drive
740 West New Circle Road
Lexington, Kentucky 40550
(859) 232-5934

ITEM 11. EXECUTIVE COMPENSATION

Information required by Part III, Item 11 of this Form 10-K is incorporated by
reference from the company's definitive Proxy Statement for its 2004 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, not later than

65

120 days after the end of the fiscal year, and of which information is hereby
incorporated by reference in, and made part of, this Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Information required by Part III, Item 12 of this Form 10-K is incorporated by
reference from the company's definitive Proxy Statement for its 2004 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year, and of which information is hereby incorporated by reference
in, and made part of, this Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by Part III, Item 13 of this Form 10-K is incorporated by
reference from the company's definitive Proxy Statement for its 2004 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year, and of which information is hereby incorporated by reference
in, and made part of, this Form 10-K.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by Part III, Item 14 of this Form 10-K is incorporated by
reference from the company's definitive Proxy Statement for its 2004 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year, and of which information is hereby incorporated by reference
in, and made part of, this Form 10-K.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1 FINANCIAL STATEMENTS:

Financial statements filed as part of this Form 10-K are included under
Part II, Item 8.

(a) 2 FINANCIAL STATEMENT SCHEDULE:

All other schedules are omitted as the required information is inapplicable or
the information is presented in the consolidated financial statements or related
notes.

66

REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders of Lexmark International, Inc.

Our audits of the consolidated financial statements referred to in our report
dated February 25, 2004 appearing on page 64 of this annual report on Form 10-K
also included an audit of the financial statement schedule listed in item
14(a)(2) of this Form 10-K. In our opinion, the financial statement schedule on
page 68 of this Form 10-K presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Lexington, Kentucky
February 25, 2004

67

LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(Dollars in Millions)

68

ITEM 15(a)(3). EXHIBITS

Exhibits for the company are listed in the Index to Exhibits beginning on page
E-1.

(b) REPORTS ON FORM 8-K

A Current Report on Form 8-K dated October 20, 2003 was filed by the company
with the Securities and Exchange Commission to announce the company's third
quarter 2003 financial results.

A Current Report on Form 8-K dated November 10, 2003 was filed by the company
with the Securities and Exchange Commission to announce the company's Analyst
Day scheduled to be held on November 11, 2003.

69

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Lexington,
Commonwealth of Kentucky, on March 12, 2004.

LEXMARK INTERNATIONAL, INC.

By /s/ Paul J. Curlander
------------------------------------
Name: Paul J. Curlander
Title: Chairman and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the following capacities and on the dates indicated.

70

INDEX TO EXHIBITS

E-1

E-2

- ---------------

* Confidential treatment previously granted by the Securities
and Exchange Commission.
+ Indicates management contract or compensatory plan, contract
or arrangement.
(1) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000
(Commission File No. 1-14050).
(2) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000 (Commission
File No. 1-14050).
(3) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001
(Commission File No. 1-14050).
(4) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998 (Commission
File No. 1-14050).
(5) Incorporated by reference to the company's Amended
Registration Statement on Form 8-A filed with the Commission
on December 22, 2003 (Commission File No. 1-14050).
(6) Incorporated by reference to the company's Form S-1
Registration Statement, Amendment No. 2 (Registration No.
33-97218) filed with the Commission on November 13, 1995.
(7) Incorporated by reference to the company's Quarterly Report
on Form 10-Q/A for the quarter ended September 30, 1996
(Commission File No. 1-14050).
(8) Incorporated by reference to the company's Form S-1
Registration Statement (Registration No. 33-97218) filed
with the Commission on September 22, 1995.
(9) Incorporated by reference to the company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001
(Commission File No. 1-14050).
(10) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002 (Commission
File No. 1-14050).
(11) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002
(Commission File No. 1-14050).
(12) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003
(Commission File No. 1-14050).
(13) Incorporated by reference to the company's Form S-1
Registration Statement, Amendment No. 1 (Registration No.
33-97218), filed with the Commission on October 27, 1995.
(14) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999 (Commission
File No. 1-14050).
(15) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2003
(Commission File No. 1-14050).
(16) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999
(Commission File No. 1-14050).
(17) Incorporated by reference to the company's Quarterly Report
of Form 10-Q for the quarter ended June 30, 2003 (Commission
File No. 1-14050).
(18) Incorporated by reference to the company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998
(Commission File No. 1-14050).

E-3