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, 2004

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 ___

The aggregate market value of the shares of voting common stock held by
non-affiliates of the registrant was approximately $12.5 billion based on the
closing price for the Class A common stock on the last business day of the
registrant's most recently completed second fiscal quarter.

As of March 4, 2005, there were outstanding 126,624,740 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.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information in the company's definitive Proxy Statement for the 2005
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, 2004

PART I

ITEM 1. BUSINESS

GENERAL

Lexmark International, Inc., ("Lexmark" or the "company") 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 makes it easier for businesses and consumers to move information between
the digital and paper worlds. Since its inception in 1991, Lexmark has become a
leading developer, manufacturer and supplier of printing and imaging solutions
for offices and homes. Lexmark's products include laser printers, inkjet
printers, multifunction devices, associated supplies, services and solutions.
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 third-party suppliers. 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 of America ("U.S."), 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 more than 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)

Lexmark management believes that the total distributed office and home printing
output opportunity was approximately $85 billion in 2004 including hardware,
supplies and related services. This opportunity includes printers and
multifunction devices as well as a declining base of copiers and fax machines
that are increasingly being integrated into multifunction devices.

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1 Certain information contained in the "Market Overview" section has been
obtained from industry sources, public information and other internal and
external 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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Based on industry analyst information, Lexmark management estimates that this
market will grow annually at low- to mid-single digit percentage rates through
2008. Management believes that the 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 product market primarily serves business customers. Laser products can
be divided into two major categories -- shared workgroup products and lower
priced desktop products. Shared work group products are typically attached
directly to large workgroup networks, while lower priced desktop products are
attached to personal computers ("PCs") or small workgroup networks. The shared
workgroup products include color and monochrome laser printers and multifunction
devices 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 products also have
sophisticated network management software tools and some printers now include
multifunction upgrades that enable copy/fax/scan to network capabilities. At the
end of 2004, the company estimated its installed base of laser printers at 5.9
million units versus 5.2 million units at year-end 2003.(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 products for personal desktop use. Additionally, over the
past few years, the number of consumers seeking to print digitally captured
images in their homes has driven significant growth in the photo printer and
all-in-one products. Key factors promoting this trend are greater affordability
of photo products along with improvements in photo printing -- the print speed,
quality and print permanence. Growth in inkjet product revenue has been slower
than unit growth due to price reductions, which management expects to continue.
At the end of 2004, the company estimated its installed base of inkjet products
at 53 million units versus 47 million units at the end of 2003.(2)

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 competitors'

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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. The mix of products within the installed base
can materially impact the resulting level of supplies consumption. 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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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 markets.

First, Lexmark is exclusively focused on distributed home and office network or
desktop computer 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, monochrome 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 catalogers and value-added resellers. Lexmark's
path-to-market includes industry focused consultative sales and services 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 requires that it provide its array of
high-quality, technologically advanced products and solutions at competitive
prices. Lexmark continually enhances its products to ensure that they function
efficiently in increasingly complex enterprise network environments. It also
provides flexible tools to enable network administrators to improve
manageability. Lexmark's business target markets include large corporations,
small and medium businesses and the public sector. Lexmark's business market
strategy also requires that it continually identify and focus on
industry-specific issues and processes so that it can differentiate itself by
offering unique industry solutions and related services.

The company's consumer market strategy is to generate demand for Lexmark
products by offering high-quality, competitively priced products that present an
exceptional value to consumers and businesses primarily through retail channels.
It is a combination of innovative technology and customer insight that
differentiates Lexmark from its competitors. Lexmark leverages this unique
approach to create printing solutions that make it easier for consumers and
small business owners to create, share and manage information and images.
Lexmark plans to invest in brand building efforts including core product
offerings, advertising campaigns and public relations events that reinforce
Lexmark's unique value proposition.

Because of Lexmark's exclusive focus on printing solutions, the company has
successfully formed alliances and original equipment manufacturer ("OEM")
arrangements with many companies, including Dell, IBM and Lenovo. The entrance
of a competitor that is also exclusively

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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 2004, Lexmark announced the T430, a monochrome laser printer
designed for general-purpose printing in small workgroups. With print speeds of
up to 32 pages per minute ("ppm"), and reliable, high-capacity input, this
product is ideal for small and medium businesses ("SMBs") and small workgroups
in large enterprises requiring business-class paper handling and versatility.
The T634 and T632 monochrome laser printers with print speeds of up to 45 and 40
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, with print speeds of up to 35 ppm, is designed to support
medium and small workgroups. For the personal and SMB sectors of the market,
Lexmark announced a new lineup of monochrome desktop laser printers: the E332n,
E330 and E232. With the E332n and E330 having print speeds of up to 27 ppm and
the E232 with print speeds of up to 22 ppm, they are designed for home office,
SMB and large enterprise desktop printing needs. 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 2004, the company also announced the C510 color laser printer. At a print
speed of up to 30 ppm in monochrome and eight ppm in color, this printer is
designed for small workgroups in enterprises and SMBs. The company's new C760
and C762 color laser printers, designed for medium and large workgroups, feature
the company's internally developed color laser technology and can print up to 25
ppm in both monochrome and color. The C912 prints both monochrome and color
pages at speeds up to 28 ppm and supports printing on tabloid-size paper.

Lexmark's entry laser multifunction product is the X215 designed for desktop
requirements at an affordable price. In 2004, Lexmark introduced the X422, which
is a compact, network-ready multifunction product for workgroups and the X762e,
a high-speed color multifunction product for workgroups. The company also
introduced, in 2004, the X830e and X832e multifunction products, two advanced
workflow solution platforms designed for large departments. These devices
support finishing, printing on tabloid-size paper and monochrome print speeds of
up to 35 ppm and 45 ppm, respectively. In early 2005, the company announced the
X632s, X634e and X634dte multifunction products. At a monochrome print speed of
up to 40 ppm, the X632s provides affordable device consolidation for workgroups.
The X634e class of products provides fast monochrome print speeds of up to 45
ppm and features the easy to use e-Task touch-screen interface. Other
multifunction products offered by the company include the X912e, a wide format
device offering high-speed color multifunction capability. The N4050e, a
low-cost, printer server providing wireless networking capabilities, was
announced by the company in 2004. MarkVision Professional, Lexmark's print
management software that provides remote configuration, monitoring and problem
resolution of network print devices, can be used 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

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of the printers in the "T", "W", "C" and "X" families of business laser printers
to support specific customer environments.

The company continues to offer 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 X6170, X215 and X422 multifunction products. Early in 2004, the
company also 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 2004, the company broadened its consumer product line with the next
generation of its "P" line of photo products, "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.

The next generation of Lexmark's "P" photo products changed the game for photo
printing at home. The P6250 Photo Center All-in-One and the P915 Home Photo
printer bring home the power and simplicity of retail photo kiosks -- all
without leaving home. Both products have an innovative industrial design and are
infused with features that make the photo printing process quick and intuitive.
These products deliver six-color 4 x 6 inch borderless photos in as fast as 38
seconds and include innovative features such as a 2.5 inch color liquid crystal
display ("LCD") and a photo scan guide, which helps consumers determine exactly
where to place their 4 x 6 inch image on the scanner for easy sharing via e-mail
or digital photo editing. The PictBridge port and memory card readers allow for
PC-free photo printing. The company's "P" series was also enhanced by the
introduction of the P315 Snapshot 4 x 6 inch photo printer -- a portable photo
studio that does not connect to a computer. Consumers can print borderless, 35mm
quality images directly from digital cameras with PictBridge or memory cards in
any room of the home or in their office. The Lexmark P315 also comes with an
adjustable 2.5 inch color LCD and allows easy editing for customized prints that
can be produced in as fast as 38 seconds.(3)

The "P" series was further strengthened with the introduction in the P6250 and
P915 of Lexmark's exclusive line of inks under the brand "Evercolor". Evercolor
is a unique six-color hybrid ink system that combines the broad color gamut of
dyes with the permanence of pigment inks. Wilhelm Institute, a world renowned
expert on photo preservation, test results show that Lexmark photos last 65
years in normal display conditions and 200+ years in photo albums.(4)

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3 In Quickprint mode and excluding processing time. Actual print speeds will
vary depending on system configuration, software, image complexity, print mode
and page coverage.

4 Based on accelerated fade resistance testing of photos either displayed
indoors under glass or stored in photo albums. Photos must be printed on
Lexmark Premium Glossy Photo Paper using an Evercolor ink system that includes
a Lexmark Color Cartridge and an Evercolor Photo Cartridge. Actual resistance
to fading will vary based upon factors such as light intensity and type,
humidity, temperature, air quality, drying time, glass, matting, album
materials, print media and image.

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Evercolor inks can also be used in the new generation of Lexmark's X5200 Series
all-in-one and Z810 series inkjet printers, which offer dramatically improved
photo features. They offer a robust feature set and photo capabilities with
borderless and optional six-color printing. These products were engineered to
print quality photos fast -- four color 4 x 6 inch borderless photos on glossy
photo paper in as fast as 32 seconds.(3) The sheet-fed Lexmark X4270 is designed
for demanding small office/home office professionals seeking a compact solution
that accommodates a wide variety of needs. It replaces five pieces of office
equipment (phone, fax, printer, copier and scanner) and delivers best-in-class
black print speeds of up to 19 ppm.

Lexmark strengthened its line of products designed for the SMB sector of the
market with the launch of the X7170 Office Productivity All-in-One. The Lexmark
X7170 combines hardware and software functionality to give SMB professionals a
productivity edge. The innovative Lexmark Productivity Suite software helps
users to create, manage and edit documents quickly and easily, which allows
professionals to accomplish more in less time. In addition, the X7170 comes with
a host of standard productivity features such as the 50-sheet automatic document
feeder for distributing multi-page faxes and scanning of multi-page documents to
e-mail.

Dot Matrix Products

The company continues to market several dot matrix printer models for customers
who print 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 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 product and professional services to complement
the company's line of printing products, including maintenance, consulting,
systems integration and distributed fleet management capabilities. The company
works in collaboration with its business partners and customers to develop and
implement comprehensive, customized printing solutions. Distributed 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.

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MARKETING AND DISTRIBUTION

Lexmark employs large-account sales and marketing teams whose mission 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 United States, 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 upon the geography, substantially all of the company's business
supplies products sold commercially in 2004 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 United States,
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 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 and Lenovo.

Lexmark launched an advertising campaign in the fourth quarter of 2004. The core
message of the campaign is that Lexmark is the company that makes printing
easier. The company believes that this campaign will build brand image and
awareness, and in the long term will support the execution of its strategic
initiatives.

During fiscal 2004, one customer, Dell, accounted for $570 million, or 10.7
percent of the company's total revenue. Sales to Dell are included in both the
business and consumer market segments. In 2003 and 2002, no single customer
accounted for 10 percent or more of total revenue.

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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
Lexmark, 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 distributed printing market is extremely competitive. The distributed laser
printing market is dominated by Hewlett-Packard, which has a widely recognized
brand name and has been estimated to hold approximately 40 percent of the market
as measured in annual units shipped. With the convergence of traditional printer
and copier markets, major laser competitors now include traditional copier
companies such as Canon, Ricoh and Xerox. Other laser competitors include
Brother, Samsung, Konica Minolta and Kyocera Mita.

The company's primary competitors in the inkjet product market are
Hewlett-Packard, Epson and Canon, who together account for approximately 75 to
80 percent 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.

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,

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Scotland; Juarez and 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, many of whom have facilities
located in China, 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 operations for laser printer supplies are located in
Lexington, Kentucky, and Boulder, Colorado. The company's manufacturing
operations for toner and photoconductor drums are located in Boulder, Colorado.
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 assembled by a combination of
in-house and third-party contract manufacturers in the major geographies served
by the company. The manufacturing control center for laser printer supplies is
located in Geneva, Switzerland.

The company's development for inkjet printer supplies is located in Lexington,
Kentucky, while the manufacturing operations are located in Rosyth, Scotland;
Juarez and Chihuahua, Mexico; and Lapu-Lapu City, Philippines. The manufacturing
control center for inkjet supplies is located in Geneva, Switzerland. Over time,
the company has made significant capital investments to expand inkjet supplies
production capacity and capabilities.

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 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 is focused on laser and inkjet
printers, multifunction products, associated supplies, features, software and
related technologies. The company has accelerated its investment in research and
development to support new product

9

initiatives and to advance current technologies and expects this to continue.
The company's primary research and development activities are conducted in
Lexington, Kentucky; Boulder, Colorado; Cebu City, Philippines; and Kolkotta,
India. In the case of certain products, the company may elect to purchase
products or key components from third-party suppliers rather than develop them
internally.

The company is committed to being a technology leader in its targeted areas and
is actively engaged in the design and development of new 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 performance, improve ease of use 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 $313 million in
2004, $266 million in 2003 and $248 million in 2002. 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 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, 2004, the company had approximately 13,400 full-time
equivalent employees worldwide of which 4,400 are located in the U.S. and the
remaining 9,000 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.

AVAILABLE INFORMATION

The company makes available, free of charge, electronic access to all documents
(including annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and any amendments to those reports as well as any
beneficial ownership filings) filed with the Securities and Exchange Commission
("SEC" or the "Commission") by the company on its website at
http://investor.lexmark.com as soon as reasonably practicable after such
documents are filed.

10

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 of the Board of the company. In May
1998, Dr. Curlander was elected 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 May 2001, Mr.
Bahous served as Vice President of Customer Services. From January 1999 to May
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.

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

11

1996 to 1998. Prior to rejoining the company in July 2003, Mr. Pelini was Senior
Vice President of Finance for Convergys Corporation. Mr. Pelini held various
finance positions with Convergys from 1998 to 2003, 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 for 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 for 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
approximately 550 pending U.S. patent applications. The company also holds over
2,600 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 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.

12

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, 2004, the
company owned or leased 7.2 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 4.6 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 61 percent of the worldwide
square footage and leases the remaining 39 percent. 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 (the "District Court") alleging that certain SCC products infringe the
company's copyrights and are in violation of the Digital Millennium Copyright
Act. On February 27, 2003, the District 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 District Court's decision to the Sixth Circuit Court of Appeals (the
"Circuit Court") and on October 26, 2004 a three judge panel of the Circuit
Court vacated the preliminary injunction and remanded the case back to the
District Court for further proceedings. On November 9, 2004, the company filed a
petition with the Circuit Court requesting an en banc rehearing (a rehearing by
all of the eligible Circuit Court judges) of the original three judge panel's
decision. On February 15, 2005, the Circuit Court denied the company's petition
for an en banc rehearing.

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

13

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 against 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

14

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

Lexmark's Class A common stock is traded on the New York Stock Exchange under
the symbol LXK. As of March 4, 2005, there were 1,488 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.

ISSUER PURCHASES OF EQUITY SECURITIES

(1) In October 2004, the company received authorization from the board of
directors to repurchase an additional $1.0 billion of its Class A common
stock for a total repurchase authority of $2.4 billion. As of December 31,
2004, there was approximately $0.9 billion 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 the fourth quarter of 2004, the company
repurchased approximately 1.6 million shares at a cost of approximately $139
million. For the year ended December 31, 2004, the company repurchased
approximately 3.2 million shares at a cost of approximately $281 million. As
of December 31, 2004, since the inception of the program, the company had
repurchased approximately 38.0 million shares for an aggregate cost of
approximately $1.5 billion.

15

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information about the company's equity compensation
plans as of December 31, 2004:

(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, 2004, of the approximately 11.9 million awards
outstanding under the equity compensation plans approved by stockholders,
there were approximately 11.4 million stock options (of which 11,175,000 are
employee stock options and 249,000 are nonemployee director stock options),
290,000 restricted stock units and supplemental deferred stock units, 21,000
voluntarily deferred performance shares that were earned as of the end of
2000, and 164,000 elective deferred stock units (of which 122,000 are
employee elective deferred stock units and 42,000 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.

(3) Of the 8.9 million shares available, 6.5 million relate to employee plans
(of which 3.0 million may be granted as full-value awards), 0.1 million
relate to the nonemployee director plan and 2.3 million relate to the
employee stock purchase plan.

(4) 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 0.9 million awards
outstanding under the equity compensation plan not approved by stockholders
are in the form of stock options.

16

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) 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.

(2) 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.

(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) Provision for income taxes in 2004 includes a $20.0 million benefit from the
resolution of income tax matters, which resulted in a $0.15 increase in
diluted net earnings per share.

(5) Provision for income taxes in 2001 includes a $40.0 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.

17

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

Since its inception in 1991, Lexmark has become a leading developer,
manufacturer and supplier of printing and imaging solutions for offices and
homes. Lexmark's products include laser printers, inkjet printers, multifunction
devices, associated supplies, services and solutions. 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 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.

The total distributed office and home printing output opportunity has expanded
as copiers and fax machines have been integrated into multifunction devices.
Management believes that the 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. Lexmark's
management believes that its total revenue will continue to grow due to
projected overall market growth for 2005 to 2008.

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. Additionally, the number of
consumers seeking to print digitally captured images in their homes has driven
significant growth in the photo printer and all-in-one products. The greater
affordability of inkjet printers, improvements in photo printing products, 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 printers, inkjet printers and
multifunction devices 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 branded printers, aftermarket supplies
for certain competitors' products and typewriter 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

18

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 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 estimates 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, the company records additional allowances as needed.

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

19

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 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's pension and non-pension postretirement benefit costs and
obligations are dependent on various actuarial assumptions used in calculating
such amounts. 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 company uses long-term
historical actual asset 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. This assumption
is reviewed and set annually at the beginning of each year. Differences between
actual and expected returns are recognized in the calculation of net periodic
cost (benefit) over five years. The deferred amounts resulting from this
averaging process are not expected to have a significant effect on the company's
results of operations for 2005.

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.

Actual results that differ from assumptions are accumulated and amortized over
the estimated future service period of the plan participants. For 2004, a 25
basis point change in the assumptions for asset return, discount rate and
compensation increases, would not have had a significant impact on the net
periodic benefit cost.

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 upon 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 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 the 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

20

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.

RESULTS OF OPERATIONS

SUMMARY

The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto. The following table
summarizes the results of Lexmark's operations for the years ended December 31,
2004, 2003 and 2002:

REVENUE

Consolidated revenue increased 12% in 2004 compared to 2003 and 9% in 2003
compared to 2002.

During fiscal 2004, one customer, Dell, accounted for $570 million, or 10.7
percent of the company's total revenue. Sales to Dell are included in both the
business and consumer market segments. In 2003 and 2002, no single customer
accounted for 10 percent or more of total revenue.

The following tables provide a breakdown of the company's revenue by market
segment, geography and product category.

Revenue by market segment:

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During 2004, revenue in the business market segment increased $190 million or 7%
over 2003. This growth was principally due to increases in unit volumes. The
company experienced strong double-digit unit growth in the business market
segment, but saw significant hardware price declines and continuing mix shift to
low-end products, resulting in revenue growth less than unit growth. Market
demand for low-end monochrome laser and color laser printers was strong. During
2003, revenue increased $242 million or 10% when compared to 2002 principally
due to increases in unit volumes.

During 2004, revenue in the consumer market segment increased $370 million or
17% over 2003. This growth was also due to double-digit unit growth, principally
driven by strong sales of inkjet all-in-one products. During 2003, revenue
increased $159 million or 8% when compared to 2002 and was principally due to
increases in unit volumes.

Revenue by geography:

During 2004, revenue increased in all geographies when compared to 2003
principally due to the previously discussed unit growth. Revenue in Europe and
Other International geographies was also favorably impacted by currency. During
2003, revenue increased in all geographies when compared to 2002 due to unit
growth.

Revenue by product:

During 2004 and 2003, laser and inkjet printers and laser and inkjet supplies
revenue both increased when compared to the prior year. These increases
reflected solid unit growth in both the business and consumer market segments as
discussed above.

GROSS PROFIT

The following table provides gross profit information:

During 2004, consolidated gross profit and gross profit as a percentage of
revenue increased when compared to the prior year. The improvement in the gross
profit margin over 2003 was principally due to improved product margins (1.9
percentage points) which was mostly printer driven, partially offset by a
negative mix among products toward hardware (0.7 percentage points).

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During 2003, the increase in consolidated gross profit and gross profit as a
percentage of revenue was attributable to improved supplies margins (1.8
percentage points) and an increased mix of supplies (0.9 percentage points),
partially offset by lower printer margins (2.0 percentage points).

OPERATING EXPENSE

The following table presents information regarding the company's operating
expenses during the periods indicated:

During 2004, operating expense increased $108 million or 11% compared to 2003.
The company has accelerated its investment in research and development to
support new product initiatives and to advance current technologies and expects
this to continue. Additionally, in the fourth quarter of 2004, the company
launched an advertising campaign to build brand image and awareness. The slight
decrease in operating expense as a percent of revenue was primarily due to
revenue growing at a faster rate than selling, general and administrative
expense, partially offset by higher research and development spending.

During 2003, operating expense increased $91 million or 11% compared to 2002.
Operating expense in 2002 included a $6 million benefit in the fourth quarter of
2002 from the reversal of previously accrued restructuring charges. The 0.3
percentage point increase in operating expense as a percent of revenue was
primarily due to the restructuring reserve reversal in 2002.

OPERATING INCOME (LOSS)

The following table provides operating income by market segment:

For 2004, the increase in the consolidated operating income was due to a $246
million increase in gross profit, partially offset by a $108 million increase in
operating expense. Operating income for the business market segment increased
$70 million in 2004 compared to 2003. Operating income for the consumer market
segment increased $108 million in 2004 compared to 2003. The increases in
operating income for both the business and consumer markets were due to higher
revenue and improvements in product margins.

For 2003, 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 compared to 2002, principally due

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to increased supplies sales. Operating income for the consumer market segment
decreased $28 million in 2003, primarily due to lower printer margins.

NON-OPERATING INCOME (EXPENSE)

Non-operating income increased $15 million from 2003 to 2004, principally due to
additional interest income in 2004 as a result of an increased level of cash and
marketable securities held by the company.

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

Net earnings were $569 million in 2004 compared to $439 million in 2003. The
increase in net earnings was due to improved operating income, increased
non-operating income and a lower effective tax rate. The effective income tax
rate was 23.8% in 2004 compared to 26.0% in 2003. During 2004, the IRS completed
its examination of the company's income tax returns for all years through 2001.
As a result of the completion of those audits, the company reversed previously
accrued taxes, reducing the income tax provision by $20 million in the third
quarter of 2004. Excluding the impact of this adjustment, the company's
effective income tax rate was 26.5% for 2004.

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.

EARNINGS PER SHARE

Basic net earnings per share were $4.38 for 2004 compared to $3.43 in 2003.
Diluted net earnings per share were $4.28 for 2004 compared to $3.34 in 2003.
Both basic and diluted net earnings per share for 2004 include a $0.15 benefit
associated with the previously mentioned tax settlement. Excluding this tax
benefit, the increases in basic and diluted net earnings per share were
primarily attributable to the increase in net earnings.

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.

RETIREMENT-RELATED BENEFITS

The following table provides the total pre-tax cost (income) related to
Lexmark's retirement plans for the years 2004, 2003 and 2002. 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.

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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, 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%. The resulting increase in expense in the U.S. was offset by
decreases in non-U.S. pension expense due to plan changes.

The company reduced its discount rate assumption in the U.S. from 7.5% to 6.5%
at the end of 2002, from 6.5% to 6.3% at the end of 2003, and from 6.3% to 5.8%
at the end of 2004. 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 2004, nor are they
expected to have a material effect in 2005.

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. See Note 13
of the Notes to Consolidated Financial Statements for additional information
relating to the company's pension and postretirement plans.

LIQUIDITY AND CAPITAL RESOURCES

FINANCIAL POSITION

Lexmark's financial position remains strong at December 31, 2004, with working
capital of $1,533 million compared to $1,261 million December 31, 2003. At
December 31, 2004, the company had outstanding $1.5 million of short-term debt
and $149.5 million of long-term debt. The debt to total capital ratio was 7% at
December 31, 2004, compared to 8% at December 31, 2003. The company had no
amounts outstanding under its U.S. trade receivables financing program or its
revolving credit facility at December 31, 2004.

LIQUIDITY

The following table summarizes the results of the company's Consolidated
Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002:

The company's primary source of liquidity has been cash generated by operations,
which totaled $775 million, $748 million and $816 million in 2004, 2003 and
2002, 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
$281 million, $5 million and $331 million of its Class A common stock during
2004, 2003 and 2002, respectively. 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 accounts
receivable financing program, revolving credit facility or other financing
sources.

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Operating activities:

The increase in cash flows from operating activities from 2003 to 2004 was
primarily due to increased earnings and favorable cash flow changes in accounts
payable and accrued liabilities, partially offset by unfavorable cash flow
changes in trade receivables, other assets and liabilities and deferred taxes.

The decrease in cash flows from operating activities from 2002 to 2003 was
primarily due to 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.

Cash flows from operations were reduced during 2004, 2003 and 2002 by $53
million, $115 million and $57 million, respectively, due to contributions to its
pension plans. See Note 13 of the Notes to Consolidated Financial Statements for
more information regarding the pension plans.

Investing activities:

The company began investing in marketable securities during the third quarter of
2003, which resulted in a net use of cash of $490 million and $452 million in
2004 and 2003, respectively. The company spent $198 million, $94 million and
$112 million on capital expenditures during 2004, 2003 and 2002, respectively.
The capital expenditures for 2004 principally related to infrastructure support,
new product development and manufacturing capacity expansion.

Financing activities:

The fluctuations in the net cash flows from financing activities were
principally due to treasury stock activity. The company has repurchased $281
million, $5 million and $331 million of treasury stock during 2004, 2003 and
2002, respectively.

CREDIT FACILITY

Effective May 29, 2002, the company entered into a $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 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 company did not renew the $200 million 364-day portion
of the revolving credit facility in 2004. The 3-year portion of the credit
facility has a maturity date of May 29, 2005. As of December 31, 2004 and 2003,
there were no amounts outstanding under the credit facility.

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Effective January 20, 2005, the company entered into a $300 million 5-year
senior, unsecured, multicurrency revolving credit facility with a group of
banks. Upon entering into the new credit agreement, the company terminated the
prior $300 million unsecured, revolving credit facility that was due to expire
on May 29, 2005. There were no amounts outstanding under the prior facility upon
its termination. Under the new credit facility, the company may borrow in
dollars, euros, British pounds sterling and Japanese yen. Under certain
circumstances, the aggregate amount available under the new facility may be
increased to a maximum of $500 million.

Interest on all borrowings under the new facility depends upon the type of loan,
namely alternative base rate loans, swingline loans or eurocurrency loans.
Alternative base rate loans bear interest at the greater of the prime rate or
the federal funds rate plus one-half of one percent. Swingline loans (limited to
$50 million) bear interest at an agreed upon rate at the time of the borrowing.
Eurocurrency loans bear interest at the sum of (i) a LIBOR rate for the
applicable currency and interest period and (ii) an interest rate spread based
upon the company's debt ratings ranging from 0.18% to 0.80%. In addition, the
company is required to pay a facility fee on the $300 million line of credit of
0.07% to 0.20% based upon the company's debt ratings. The interest and facility
fees are payable at least quarterly.

The new credit agreement contains usual and 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 $300 million new credit facility has a maturity date of January 20, 2010.

LONG-TERM DEBT

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 $149.5 million (net of unamortized discount of $0.5 million) was outstanding
at December 31, 2004.

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.

OTHER INFORMATION

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 SEC
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 SEC.

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CONTRACTUAL CASH OBLIGATIONS

The following table summarizes the company's contractual obligations at December
31, 2004:

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.

U.S. TRADE RECEIVABLES FACILITY

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. In October 2004, the company entered into an amended
and restated agreement to sell its U.S. trade receivables on a limited recourse
basis. The amended agreement allows for a maximum financing availability of $200
million under this facility. The primary purpose of the amendment was to extend
the term of the facility to October 16, 2007, with required annual renewal of
commitments in October 2005 and 2006.

This facility contains customary affirmative and negative covenants as well as
specific provisions related to the quality of the accounts receivables sold. 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. 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. At December 31, 2004 and 2003, the facility had no U.S. trade
receivables sold and outstanding.

OFF-BALANCE SHEET ARRANGEMENTS

At December 31, 2004 and 2003, 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.

STOCK REPURCHASE

In October 2004, the company received authorization from the board of directors
to repurchase an additional $1.0 billion of its Class A common stock for a total
repurchase authority of

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$2.4 billion. At December 31, 2004, there was approximately $0.9 billion 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 2004, the company
repurchased approximately 3.2 million shares at a cost of approximately $281
million. As of December 31, 2004, since the inception of the program, the
company had repurchased approximately 38.0 million shares for an aggregate cost
of approximately $1.5 billion.

CAPITAL EXPENDITURES

Capital expenditures totaled $198 million, $94 million and $112 million in 2004,
2003 and 2002, respectively. The capital expenditures were primarily
attributable to infrastructure support and new product development during 2004,
2003 and 2002. During 2005, the company expects capital expenditures to be
approximately $300 million, primarily attributable to infrastructure support
including capacity expansion, and new product development. The capital
expenditures are expected to be funded through cash from operations.

EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMEN