EASTMAN CHEMICAL CO (Form: 10-Q, Received: 11/14/2002 14:05:38)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2002

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission file number 1-12626

EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)


Delaware		62-1539359
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

100 N. Eastman Road Kingsport, Tennessee		37660
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (423) 229-2000

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 o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Number of Shares Outstanding at September 30, 2002
Common Stock, par value $0.01 per share (including rights to purchase shares of Common Stock or Participating Preferred Stock)		77,313,933

PAGE 1 OF 76 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 44

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item. 1. Financial Statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX
Notice of Restricted Stock Granted
Amended & Restated Warrant to Purchase Shares
Amended & Restated Registration Rights Agreement
Amendment Number Three to Eastman Chemical Company
Statement Re:Computation of Ratios of Earnings
Operating Segment Information, Sales Revenue
Operating Segment Information, Saless Volume
Operating Segment Information, Sales Revenue
Certifications Pursuant to 18 U.S.C. Section 1350

TABLE OF CONTENTS



ITEM	PAGE

PART I. FINANCIAL INFORMATION
1. Financial Statements		3-21
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22-38
4. Controls and Procedures		39
PART II. OTHER INFORMATION
1. Legal Proceedings		40
2. Changes in Securities		41
6. Exhibits and Reports on Form 8-K		41
SIGNATURES
Signatures		42
Certifications		42-43

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS),
COMPREHENSIVE INCOME (LOSS) and RETAINED EARNINGS


				Third Quarter						First Nine Months

(Dollars in millions, except per share amounts)				2002			2001			2002			2001

Earnings (Loss)
Sales				$	1,374		$	1,373		$	4,005		$	4,119
Cost of sales					1,172			1,134			3,369			3,395

Gross profit					202			239			636			724
Selling and general administrative expenses					100			101			300			305
Research and development costs					42			39			118			118
Asset impairments and restructuring charges					(1	)		27			(1	)		321
Other nonrecurring operating charges					—			2			—			14

Operating earnings (loss)					61			70			219			(34	)
Interest expense, net					30			36			91			108
Other (income) charges, net					3			(7	)		7			5
Other nonrecurring charges					—			2			—			2

Earnings (loss) before income taxes and cumulative effect of change in accounting principle					28			39			121			(149	)
Provision (benefit) for income taxes					4			12			29			(66	)

Earnings (loss) before cumulative effect of change in accounting principle					24			27			92			(83	)
Cumulative effect of change in accounting principle, net					—			—			(18	)		—

	Net earnings (loss)			$	24		$	27		$	74		$	(83	)

Earnings (loss) per share
	Basic
		Before cumulative effect of change in accounting principle		$	0.31		$	0.36		$	1.19		$	(1.08	)
		Cumulative effect of change in accounting principle, net			—			—			(0.23	)		—

			Net earnings (loss) per share	$	0.31		$	0.36		$	0.96		$	(1.08	)

	Diluted
		Before cumulative effect of change in accounting principle		$	0.31		$	0.36		$	1.19		$	(1.08	)
		Cumulative effect of change in accounting principle, net			—			—			(0.23	)		—

			Net earnings (loss) per share	$	0.31		$	0.36		$	0.96		$	(1.08	)

Comprehensive Income (Loss)
Net earnings (loss)				$	24		$	27		$	74		$	(83	)
Other comprehensive income (loss)
	Change in cumulative translation adjustment				—			50			86			(6	)
	Change in unrealized gains (losses) on investments, net of tax				(2	)		—			(2	)		(3	)
	Change in unrealized gains (losses) on derivative instruments, net of tax				9			(15	)		8			6

		Total other comprehensive income (loss)			7			35			92			(3	)

Comprehensive income (loss)				$	31		$	62		$	166		$	(86	)

Retained Earnings
Retained earnings at beginning of period				$	1,938		$	2,088		$	1,956		$	2,266
Net earnings (loss)					24			27			74			(83	)
Cash dividends declared					(34	)		(33	)		(102	)		(101	)

Retained earnings at end of period				$	1,928		$	2,082		$	1,928		$	2,082

The accompanying notes are an integral part of these financial statements.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION


			September 30,			December 31,
(Dollars in millions)			2002			2001

Assets
Current assets
	Cash and cash equivalents		$	88		$	66
	Trade receivables, net of allowance of $44 and $35			616			570
	Miscellaneous receivables			78			92
	Inventories			690			659
	Other current assets			96			77

		Total current assets		1,568			1,464

Properties
	Properties and equipment at cost			9,388			9,302
	Less: Accumulated depreciation			5,825			5,675

		Net properties		3,563			3,627

Goodwill				349			339
Other intangibles, net of accumulated amortization of $47 and $38				232			275
Other noncurrent assets				388			387

Total assets			$	6,100		$	6,092

Liabilities and Stockholders’ Equity
Current liabilities
	Payables and other current liabilities		$	1,075		$	906
	Borrowings due within one year			4			54

		Total current liabilities		1,079			960
Long-term borrowings				1,996			2,143
Deferred income tax liabilities				499			452
Postemployment obligations				942			1,043
Other long-term liabilities				131			112

Total liabilities				4,647			4,710

Commitments and contingencies
Stockholders’ equity
	Common stock ($0.01 par - 350,000,000 shares authorized; shares issued - 85,102,754 and 85,053,349)			1			1
	Paid-in capital			119			118
	Retained earnings			1,928			1,956
	Accumulated other comprehensive loss			(159	)		(251	)

				1,889			1,824
	Less: Treasury stock at cost (7,933,646 and 8,073,859 shares)			436			442

	Total stockholders’ equity			1,453			1,382

Total liabilities and stockholders’ equity			$	6,100		$	6,092

The accompanying notes are an integral part of these financial statements.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


			First Nine Months

(Dollars in millions)			2002			2001

Cash flows from operating activities
	Net earnings (loss)		$	74		$	(83	)

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities, net of effect of acquisitions
		Depreciation and amortization		297			323
		Cumulative effect of change in accounting principle, net		18			—
		Write-off of impaired assets		—			307
		Write-off of acquired in-process research and development		—			5
		Provision (benefit) for deferred income taxes		70			(56	)
		Increase in receivables		(18	)		(26	)
		Increase in inventories		(30	)		(85	)
		Increase (decrease) in liabilities for employee benefits and incentive pay		53			(18	)
		Increase (decrease) in liabilities excluding borrowings and liabilities for employee benefits and incentive pay		41			(97	)
		Other items, net		23			(33	)

		Total adjustments		454			320

		Net cash provided by operating activities		528			237

Cash flows from investing activities
	Additions to properties and equipment			(162	)		(171	)
	Acquisitions, net of cash acquired			(6	)		(252	)
	Additions to capitalized software			(13	)		(20	)
	Other investments			(14	)		(8	)
	Proceeds from sales of fixed assets			7			4

		Net cash used in investing activities		(188	)		(447	)

Cash flows from financing activities
	Net increase (decrease) in commercial paper and other short-term borrowings			(602	)		276
	Proceeds from long-term borrowings			394			—
	Repayment of borrowings			(8	)		(6	)
	Dividends paid to stockholders			(102	)		(101	)
	Treasury stock purchases			—			(4	)
	Stock options and other items			—			19

		Net cash provided by (used in) financing activities		(318	)		184

		Net change in cash and cash equivalents		22			(26	)
Cash and cash equivalents at beginning of period				66			101

Cash and cash equivalents at end of period			$	88		$	75

The accompanying notes are an integral part of these financial statements.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements have been prepared by Eastman Chemical Company (the “Company” or “Eastman”) in accordance and consistent with the accounting policies stated in the Company’s 2001 Annual Report on Form 10-K as amended and the Quarterly Reports on Form 10-Q for the first and second quarters of 2002 and should be read in conjunction with the consolidated financial statements appearing in the Form 10-K as amended by Form 10-K/A. In the opinion of the Company, all normally recurring adjustments necessary for a fair presentation have been included in the unaudited interim consolidated financial statements. The unaudited interim consolidated financial statements are based in part on estimates made by management.

The Company has reclassified certain 2001 amounts to conform to the 2002 presentation.

2. INVENTORIES


			September 30,			December 31,
(Dollars in millions)			2002			2001

At FIFO or average cost (approximates current cost)
	Finished goods		$	565		$	569
	Work in process			171			168
	Raw materials and supplies			224			210

		Total inventories		960			947
	Reduction to LIFO value			(270	)		(288	)

Total inventories at LIFO value			$	690		$	659

Inventories valued on the LIFO method were approximately 70% of total inventories in each of the periods.

3. PAYABLES AND OTHER CURRENT LIABILITIES


	September 30,		December 31,
(Dollars in millions)	2002		2001

Trade creditors	$	494	$	438
Accrued payrolls, vacation, and variable-incentive compensation		162		160
Accrued taxes		78		72
Interest payable		38		45
Dividends payable		34		34
Current portion of U.S. defined benefit pension plan liabilities		135		—
Other		134		157

Total	$	1,075	$	906

The current portion of U.S. defined benefit pension plan liabilities is an estimate of the Company’s funding requirements through September 30, 2003.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. BORROWINGS


			September 30,		December 31,
(Dollars in millions)			2002		2001

Short-term borrowings
	Notes payable		$	4	$	54

		Total short-term borrowings		4		54

Long-term borrowings
	6 3/8% notes due 2004			514		500
	7% notes due 2012			397		—
	7 1/4% debentures due 2024			496		496
	7 5/8% debentures due 2024			200		200
	7.60% debentures due 2027			297		297
	Credit facility and commercial paper borrowings			84		637
	Other			8		13

		Total long-term borrowings		1,996		2,143

Total borrowings			$	2,000	$	2,197

Eastman has access to a $600 million revolving credit facility (the “Credit Facility”) expiring in July 2005. The Credit Facility was reduced from $800 million to $600 million in the second quarter 2002 following the issuance of $400 million in fixed rate debt described below. Any borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates, principally LIBOR. The Credit Facility requires facility fees on the total commitment that vary based on Eastman’s credit rating. The rate for such fees was 0.15% as of September 30, 2002 and December 31, 2001. The Credit Facility contains a number of covenants and events of default, including the maintenance of certain financial ratios. Eastman was in compliance with all such covenants for all periods presented.

Eastman typically utilizes commercial paper, generally with maturities of 90 days or less, to meet its liquidity needs. The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Accordingly, outstanding commercial paper borrowings reduce borrowings available under the Credit Facility. Because the Credit Facility expires in July 2005, the commercial paper borrowings supported by the Credit Facility are classified as long-term borrowings because the Company has the ability to refinance such borrowings long term. As of September 30, 2002, the Company’s commercial paper borrowings were $84 million at an effective interest rate of 1.94%. At December 31, 2001, the Company’s outstanding Credit Facility and commercial paper borrowings were $637 million at an effective interest rate of 3.17%.

On April 3, 2002, the Company issued notes in the principal amount of $400 million due 2012 and bearing interest at 7% per annum. Proceeds from the sale of the notes, net of $3 million in transaction fees, were $394 million and were used to repay portions of outstanding borrowings under the Credit Facility and commercial paper borrowings.

Through interest rate swaps entered into during the first quarter 2002, the effective interest rates of the notes due in 2004 were converted to variable rates that averaged 3.83% at September 30, 2002. The recording of the fair value of the interest rate swaps and the corresponding debt resulted in increases of $14 million in other noncurrent assets and long-term borrowings at September 30, 2002.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)


				Unfunded			Unrealized			Unrealized			Accumulated
	Cumulative			Minimum			Gains			Gains (Losses)			Other
	Translation			Pension			(Losses) on			on Derivative			Comprehensive
(Dollars in millions)	Adjustment			Liability			Investments			Instruments			Income (Loss)

Balance at December 31, 2000	$	(109	)	$	(10	)	$	2		$	—		$	(117	)
Period change		(24	)		(106	)		(2	)		(2	)		(134	)

Balance at December 31, 2001		(133	)		(116	)		—			(2	)		(251	)
Period change		86			—			(2	)		8			92

Balance at September 30, 2002	$	(47	)	$	(116	)	$	(2	)	$	6		$	(159	)

Except for cumulative translation adjustment, amounts of other comprehensive income (loss) are presented net of applicable taxes. Because cumulative translation adjustment is considered a component of permanently invested unremitted earnings of subsidiaries outside the United States, no taxes are provided on such amounts.

6. EARNINGS (LOSS) AND DIVIDENDS PER SHARE


		Third Quarter				First Nine Months

		2002		2001		2002		2001

Shares used for earnings per share calculation:
	Basic		77.1		76.9		77.0		76.8
	Diluted		77.2		77.0		77.2		76.8

Certain shares underlying options outstanding during the third quarter and first nine months 2002 were excluded from the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares during those periods. Excluded from the third quarter and first nine months 2002 calculations were shares underlying options to purchase 7,087,254 shares of common stock at a range of prices from $40.10 to $73.94 and 6,970,729 shares of common stock at a range of prices from $40.10 to $73.94, respectively. Certain shares underlying options outstanding during the third quarter 2001 were excluded from the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares. Excluded from the third quarter 2001 calculation were shares underlying options to purchase 5,467,104 shares of common stock at a range of prices from $42.13 to $73.94. As a result of the net loss reported for the first nine months 2001, common shares underlying options were excluded from the calculation of diluted earnings (loss) per share because their effect would have been anti-dilutive. Excluded from the first nine months 2001 calculations were shares underlying options to purchase 5,663,607 shares of common stock at a range of prices from $33.01 to $73.94.

Additionally, 200,000 shares underlying an option issued to the former Chief Executive Officer in 1997 were excluded from diluted earnings per share calculations for third quarter and first nine months 2001 because the stock price conditions to exercise had not been met as to any of the shares as of September 30, 2001. The entire option was cancelled and forfeited on September 16, 2002, as none of the price vesting conditions had been met.

The Company declared cash dividends of $0.44 per share in the third quarter 2002 and 2001 and $1.32 per share in the first nine months 2002 and 2001.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES

Write-off of prepaid asset

During the second quarter 2001, Eastman terminated an agreement with a supplier that guaranteed the Company’s right to buy a specified quantity of a certain raw material annually through 2007 at prices determined by the pricing formula specified in the agreement. In prior years, the Company paid a total of $239 million to the supplier and deferred those costs to be amortized over the 15-year period during which the product was to be received. The Company began amortizing those costs in 1993 and had recorded accumulated amortization of $131 million at March 31, 2001. As a result of the termination of this agreement, a charge of $108 million, representing unamortized deferred cost, was charged to the Polymers segment’s earnings during the second quarter 2001 as no continuing economic benefits will be received pertaining to this contract.

Write-off of impaired polyethylene assets

During the second quarter 2001, management identified and announced certain assets that were intended to be spun-off at year-end 2001 related to the Company’s efforts to spin-off the specialty chemicals and plastics businesses. An indirect result of these decisions would have been that the continuing operations would have been required to purchase certain raw materials and utilities that were historically produced internally for use in the manufacture of polyethylene. Considering the purchase price of these raw materials and utilities, the carrying value of certain assets used to consume ethylene at the Longview, Texas facility in the manufacture of polyethylene exceeded the expected future cash flows attributable to such assets.

Subsequent to the second quarter 2001, the spin-off was canceled. However, management determined that the continued operation of these assets was not economically attractive and is anticipating reversing the flow of pipelines at the Longview facility to provide an alternate outlet for ethylene, and creating an option to shut down the impaired assets. Based upon the resulting cash flows from the probable future use of these assets, an impairment loss of $103 million was charged to the Polymers segment’s earnings during the second quarter 2001. The impairment represents the excess of the carrying value over the discounted estimated future cash flows related to the products produced by the impacted assets.

Restructuring and asset impairments of the fine chemicals product line

As a result of the on-going restructuring of the Company’s fine chemicals product line, Eastman recorded restructuring charges, including related asset write-downs, totaling approximately $70 million in 2001. These charges resulted from the Company’s on-going restructuring of its fine chemicals product line to reduce costs, and from the write-down of assets determined to be impaired. The restructuring initiative and related asset impairments involve the Company’s Performance Chemicals and Intermediates (“PCI”) segment and include assets at the Company’s Tennessee and Arkansas sites within the United States, a plant in Wales, and a plant in Hong Kong.

Charges in the fourth quarter and the third quarter 2001 of $1 million and $6 million, respectively, pertained primarily to severance accruals for employees impacted by the plant shutdowns, closure costs, and write-downs of fixed assets. Charges totaling approximately $63 million recorded during the second quarter 2001 related to certain fine chemicals product lines that did not fit the Company’s long-term strategic objectives and for assets determined to be impaired.

The impairments at the foreign sites included the write-down of fixed assets and other long-term deposits. The restructuring and asset impairments at the domestic sites primarily pertained to write-downs of fixed assets net of the effect of a reversal of a customer deposit, related to a custom synthesis product contract. In 2001, the Company received notification that the contract would be terminated June 30, 2002. The Company planned to use the related assets to meet contractual requirements, and then to permanently idle such assets. These assets were written down to fair value in the second quarter 2001 using discounted estimated net cash flows from contracts that were currently in effect. Subsequently, the customer initiated discussions with the Company which resulted in an agreement being reached in June 2002 to extend the custom synthesis product contract one year based on renegotiated terms.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restructuring of the Coatings, Adhesives, Specialty Polymers, and Inks (“CASPI”) segment

Consolidation and restructuring of the operations of the CASPI segment resulted in restructuring charges, including related asset write-downs, of approximately $77 million in 2001. In the fourth quarter 2001, the Company recognized a charge of approximately $27 million related to the closure of an operating site in Duesseldorf, Germany. Also in the fourth quarter 2001, charges of approximately $6 million and $3 million, respectively, were recognized related to the impairment of other operating assets in Savannah, Georgia and Banbury, England. In the third quarter 2001, the Company recognized a charge of approximately $21 million related to the closure of a Moundville, Alabama plant that was obtained in the acquisition of Lawter International, Inc. In the second quarter 2001, the Company recognized a charge of approximately $20 million related to the closure of plants in Philadelphia, Pennsylvania and Portland, Oregon that were obtained in the acquisition of McWhorter Technologies, Inc. A change in estimate for the Philadelphia and Portland shutdown reserves resulted in a $1 million credit to earnings in the third quarter 2002.

The restructuring charges include write-downs of the fixed assets at these facilities, severance accruals for employees impacted by the plant shutdowns, and other costs associated with closing the facilities. The Philadelphia and Portland facilities were closed in 2001, and the Moundville, Duesseldorf, and Banbury sites closed in 2002. The Savannah site is expected to close in mid-2003. The fair value of the impacted assets was determined using the discounted estimated net cash flows related to the products produced by the impacted assets.

Other asset impairments and restructuring charges

During fourth quarter 2001, the Company recorded asset impairment charges related to under-utilized assets including $10 million related to the discontinuation of the precolored-green PET product line in Kingsport, Tennessee; $10 million related to cessation of production at the Company’s solid-stating facility in Toronto, Ontario; $15 million related to deterioration of demand for certain specialty plastics products produced in Kingsport, Tennessee; and $3 million related to impaired assets in Europe. Approximately $20 million of these charges are reflected in the Polymers segment, $15 million in the Specialty Plastics (“SP”) segment, and $3 million in the PCI segment. The fair value of the impacted assets was determined using the discounted estimated net cash flows related to the products produced by the impacted assets.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the charges and change in estimate described above, the noncash reductions attributable to asset impairments and the cash reductions in shutdown reserves for severance costs and site closure costs paid.


		Balance at		Provision/		Noncash			Cash			Balance at
(Dollars in millions)		January 1, 2001		Adjustments		Reductions			Reductions			December 31, 2001

Noncash charges		$	—	$	373	$	(373	)	$	—		$	—
Severance costs			—		16		—			(6	)		10
Site closure costs			10		10		—			(7	)		13

	Total	$	10	$	399	$	(373	)	$	(13	)	$	23


		Balance at		Provision/			Noncash		Cash			Balance at
		January 1, 2002		Adjustments			Reductions		Reductions			September 30, 2002

Noncash charges		$	—	$	—		$	—	$	—		$	—
Severance costs			10		1			—		(9	)		2
Site closure costs			13		(1	)		—		(7	)		5

	Total	$	23	$	—		$	—	$	(16	)	$	7

8. OTHER NONRECURRING OPERATING CHARGES

Other nonrecurring operating charges totaling $2 million and $14 million were recognized in the third quarter and first nine months 2001, respectively. The Company recorded charges of $5 million and $9 million in the third quarter and first nine months 2001, respectively, associated with efforts to spin-off the specialty chemicals and plastics businesses. Also in the first nine months 2001, the Company recognized a charge of $5 million associated with the write-off of acquired in-process research and development costs related to the acquisition of certain businesses from Hercules Incorporated (“Hercules Businesses”). Initially recorded as a charge of $8 million in the second quarter 2001, the write-off of in-process research and development was subsequently revised to $5 million with a $3 million credit to earnings in the third quarter 2001.

9. ACQUISITIONS

Ariel Research Corporation

In January 2002, Eastman acquired Ariel Research Corporation (“Ariel”) for approximately $8 million, including $6 million cash paid at closing and a $2 million promissory note to be paid one year after closing, subject to certain post-closing adjustments. Ariel is a provider of worldwide regulatory information, software products and services that enable corporations to manage product safety and stewardship functions, including requirements for workplace, environmental and dangerous goods compliance.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Certain Businesses of Hercules Incorporated

On May 1, 2001, the Company completed the asset acquisition of the Hercules Businesses for approximately $252 million. The facilities acquired are located in the United States, the Netherlands and Mexico. Additionally, certain assets acquired are operated under contracts with Hercules at a shared facility in the United States.

The transaction, which was financed with available cash and commercial paper borrowings, was accounted for by the purchase method of accounting and, accordingly, the results of the Hercules Businesses for the period from the acquisition date are included in the accompanying consolidated financial statements and reported in the CASPI segment. Tangible assets acquired were recorded at their fair values. Goodwill and other intangible assets of approximately $33 million, which represents the excess of cost over the fair value of net tangible assets acquired, were being amortized on a straight-line basis over 17 to 40 years. Effective January 1, 2002, in connection with the adoption of Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” definite-lived intangible assets of approximately $2 million are being amortized on a straight-line basis over 17 years. Acquired in-process research and development of approximately $8 million was written off during the second quarter 2001, and subsequently revised to $5 million with a $3 million credit to earnings in the third quarter 2001. Assuming this transaction had been made at January 1, 2001, the consolidated pro forma results for the nine months ended September 30, 2001 would not be materially different from reported results.

10. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING

Effective January 1, 2001, the Company adopted SFAS No. 133, as amended by SFAS No. 138, “Accounting for Derivative Instruments and Hedging Activities,” which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. Instruments with a fair market value of $33 million, previously not required to be recorded and primarily pertaining to the Company’s raw materials and energy cost hedging program, were recognized as miscellaneous receivables in the Consolidated Statement of Financial Position on January 1, 2001. Previously deferred gains of $68 million from the settlement of currency options were reclassified from other current liabilities. Accordingly, the following amounts were recorded as of January 1, 2001:


(Dollars in millions)

Deferred gains reclassified	$	68

Instruments not previously reported		33

		101
Less: provision for income taxes		39

	$	62

The above amount resulted in an after-tax credit of $58 million to accumulated other comprehensive income (loss), a component of stockholders’ equity, and an after-tax gain of $4 million included in net earnings as of January 1, 2001.

At September 30, 2002, the remaining mark-to-market gains from currency, commodity and certain interest rate hedges that were included in accumulated other comprehensive income (loss) totaled approximately $6 million. If realized, substantially all of this balance will be reclassified into earnings during the next twelve months. The mark-to-market gains or losses on non-qualifying, excluded and ineffective portions of hedges are recognized in cost of sales or other income and charges immediately. Such amounts did not have a material impact on earnings during the third quarter or first nine months 2002.

The Company is exposed to market risk, such as changes in currency exchange rates, raw material and energy costs and interest rates. The Company uses various derivative financial instruments pursuant to the Company’s hedging policies to mitigate these market risk factors and their effect on the cash flows of the underlying transactions. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the cash flows of the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for trading purposes.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Financial instruments held as part of the hedging programs discussed below are recorded at fair value based upon comparable market transactions as quoted by the broker.

Currency rate hedging

The Company manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to movements in foreign currency exchange rates. To manage the volatility relating to these exposures, the Company nets the exposures on a consolidated basis to take advantage of natural offsets. To manage the remaining exposure, the Company enters into forward exchange contracts to hedge certain firm commitments denominated in foreign currencies and currency options and forwards to hedge probable anticipated, but not yet committed, export sales transactions expected within no more than five years and denominated in foreign currencies (principally the British pound, Canadian dollar, euro and the Japanese yen). These contracts are designated as cash flow hedges. The mark-to-market gains or losses on qualifying hedges are included in accumulated other comprehensive income (loss) to the extent effective, and reclassified into cost of sales in the period during which the hedged transaction affects earnings.

Commodity hedging

Raw materials and energy sources used by the Company are subject to price volatility caused by weather, supply conditions, economic variables and other unpredictable factors. To mitigate short-term fluctuations in market prices for propane, ethane and natural gas, the Company enters into forwards and options contracts. These contracts are designated as cash flow hedges. The mark-to-market gains or losses on qualifying hedges are included in accumulated other comprehensive income (loss) to the extent effective, and reclassified into cost of sales in the period during which the hedged transaction affects earnings.

Interest rate hedging

The Company’s policy is to manage interest cost using a mix of fixed and variable rate debt. To manage this mix in a cost-efficient manner, the Company enters into interest rate swaps in which the Company agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. These swaps are designated to hedge the fair value of underlying debt obligations with the interest rate differential reflected as an adjustment to interest expense over the life of the swaps. As these instruments are 100% effective, there is no impact on earnings due to hedge ineffectiveness.

From time to time, the Company also utilizes interest rate derivative instruments, primarily swaps, to hedge the Company’s exposure to movements in interest rates on anticipated debt offerings. These instruments are designated as cash flow hedges and are typically 100% effective. As a result, there is no current impact on earnings due to hedge ineffectiveness. The mark-to-market gains or losses on these hedges are included in accumulated other comprehensive income (loss) to the extent effective, and are reclassified into interest expense over the period of the related debt instruments.

The fair value for fixed-rate borrowings is based upon current interest rates for comparable securities. The Company’s floating-rate instruments have carrying values that approximate fair value.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. OTHER (INCOME) CHARGES, NET, AND OTHER NONRECURRING CHARGES


	Third Quarter						First Nine Months

(Dollars in millions)	2002			2001			2002			2001

Other income	$	(4	)	$	(11	)	$	(7	)	$	(12	)
Other charges		7			4			14			17

	$	3		$	(7	)	$	7		$	5

Other nonrecurring charges	$	—		$	2		$	—		$	2

The third quarter 2002 other charges included a net loss due to remeasurement of foreign currency-denominated amounts. For the first nine months 2002, other income reflected a slight gain from foreign currency remeasurement as the impact of the devaluation of the Argentine peso in the first quarter 2002 and the charges recorded in the third quarter 2002 were more than offset by gains recognized in the second quarter 2002. These gains were primarily attributed to the strengthening of the euro during the second quarter 2002.

The third quarter 2001 other income primarily reflected gains from foreign exchange transactions while the first nine months 2001 other charges reflected a slight loss.

In addition to the impacts of foreign currency remeasurements discussed above, other income in all periods presented primarily reflected gains on equity investments. The first nine months 2002 gain is net of a nonrecurring charge of $5 million related to the previously-announced restructuring of Genencor in which the Company owns a 42% equity interest.

In addition to the impacts of foreign currency remeasurements discussed above, other charges in all periods presented primarily related to fees on securitized receivables. Other charges for the first nine months 2002 also included a write-down to fair value of certain technology business venture investments recorded in the second quarter 2002.

Other nonrecurring charges for the third quarter and first nine months 2001 reflected a charge of $2 million related to the Company’s efforts to sell its fine chemicals product line.

12. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002. The provisions of SFAS No. 142 prohibit the amortization of goodwill and indefinite-lived intangible assets; require that goodwill and indefinite-lived intangible assets be tested at least annually for impairment; require reporting units to be identified for the purpose of assessing potential future impairments of goodwill; and remove the forty-year limitation on the amortization period of intangible assets that have finite lives.

In connection with the adoption of SFAS No. 142, the Company completed in the first quarter 2002 the impairment test for intangible assets with indefinite useful lives other than goodwill. As a result of this impairment test, it was determined that the fair value of certain trademarks related to the CASPI segment, as established by appraisal and based on discounted future cash flows, was less than the recorded value. Accordingly, the Company recognized an after-tax impairment charge of approximately $18 million in the first quarter 2002. This charge is reported in the Consolidated Statement of Earnings as the cumulative effect of a change in accounting principle. Additionally, the Company reclassified $12 million of its intangible assets related to assembled workforce and the related deferred tax liabilities of approximately $5 million to goodwill. During the second quarter 2002, the Company performed the transitional impairment test on its goodwill as required upon adoption of this Statement, and determined that no impairment of goodwill existed as of January 1, 2002. The Company completed its annual testing of goodwill and indefinite-lived intangible assets for impairment in the third quarter 2002 and determined that no impairment existed as of September 30, 2002. The Company plans to continue its annual testing of goodwill and indefinite-lived intangible assets for impairment in the third quarter of each year, unless events warrant additional testing.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Following are the Company’s amortizable intangible assets and indefinite-lived intangible assets. The difference between the gross carrying amount and net carrying amount for each item presented is attributable to accumulated amortization.


			As of September 30, 2002				As of December 31, 2001

			Gross		Net		Gross		Net
			Carrying		Carrying		Carrying		Carrying
(Dollars in millions)			Amount		Amount		Amount		Amount

Amortizable intangible assets
	Developed technology		$	124	$	98	$	124	$	105
	Customer lists			62		50		56		47
	Other			18		15		30		25

		Total	$	204		163	$	210		177

Indefinite-lived intangible assets
	Trademarks					69				98

Other intangible assets					$	232			$	275

As a result of the nonamortization provisions of SFAS No. 142, the Company will no longer record approximately $20 million of annual amortization relating to goodwill and indefinite-lived intangibles, as adjusted for the reclassifications just mentioned.

Changes in the carrying amount of goodwill follow:


					Total
	CASPI		Other		Eastman
(Dollars in millions)	Segment		Segments		Chemical

Reported balance at December 31, 2001	$	333	$	6	$	339
Intangible assets reclassified into goodwill at January 1, 2002, net of deferred tax liability		7		—		7
Acquisitions		—		3		3

Reported goodwill balance at September 30, 2002	$	340	$	9	$	349

The following table presents prior year earnings and earnings per share as if the nonamortization provisions of SFAS No. 142 had been applied in the prior year.


	Third Quarter				First Nine Months

(Dollars in millions)	2002		2001		2002		2001

Reported net earnings (loss)	$	24	$	27	$	74	$	(83	)
Add back goodwill amortization				4				11
Add back assembled workforce and trademark amortization				1				2

Adjusted net earnings (loss)	$	24	$	32	$	74	$	(70	)

Basic earnings (loss) per share before cumulative effect of change in accounting principle:
Reported basic earnings (loss) per share	$	0.31	$	0.36	$	0.96	$	(1.08	)
Add back goodwill amortization				0.05				0.15
Add back assembled workforce and trademark amortization				0.01				0.03

Adjusted basic earnings (loss) per share	$	0.31	$	0.42	$	0.96	$	(0.90	)

Diluted earnings (loss) per share before cumulative effect of change in accounting principle:
Reported diluted earnings (loss) per share	$	0.31	$	0.36	$	0.96	$	(1.08	)
Add back goodwill amortization				0.05				0.15
Add back assembled workforce and trademark amortization				0.01				0.03

Adjusted diluted earnings (loss) per share	$	0.31	$	0.42	$	0.96	$	(0.90	)

Amortization expense for definite-lived intangible assets was approximately $4 million and $11 million, respectively, for the third quarter and first nine months 2002. If the nonamortization provisions of SFAS No. 142 had been applied in the prior year, amortization expense would have been $3 million for the third quarter 2001 and $10 million for the first nine months 2001. Estimated amortization expense for 2002 and the five succeeding years is approximately $15 million per year.

13. SEGMENT INFORMATION

The Company’s products and operations are managed and reported in five operating segments. Effective January 1, 2002, the Company implemented a divisional structure that separated the businesses into two divisions. Eastman Division consists of the CASPI segment, the PCI segment and the SP segment. Voridian Division contains the Polymers segment and the Fibers segment. The divisional structure has allowed the Company to align costs more directly with the activities and businesses that generate them. The divisional and segment results for the first three quarters 2002, but not for prior periods, reflect this new cost structure.

With the implementation of the divisional structure, goods and services are transferred between the two divisions at predetermined prices. Accordingly, the divisional structure results in the recognition of interdivisional sales revenue and operating earnings. Such interdivisional transactions are eliminated in the Eastman Chemical Company consolidated financial statements. Prior to 2002, segment sales revenue was recognized only for actual sales to third parties and the intersegment transfer of goods and services, recorded at cost, had no impact on segment earnings.

All Eastman Chemical Company assets were allocated to the divisions as of January 1, 2002. Corporate, general purpose and other nonoperating assets were allocated to segments within each division based on process or product responsibility. Certain infrastructure assets at each site, primarily utilities that were previously allocated to all five segments, were allocated to the primary division at that site. The primary division invoices the other division for services provided by such infrastructure assets.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

have been allocated to these segments on the basis of sales revenues for each of these segments. Prior to 2002, sales and operating results for Cendian were allocated to all five segments.

Effective January 1, 2002, certain compounded polyethylene products were moved from the Polymers segment to the SP segment. Accordingly, amounts for 2001 have been reclassified to reflect this change.

The CASPI segment manufactures raw materials, additives and specialty polymers primarily for the paints and coatings, inks and graphic arts, adhesives and other markets. The CASPI segment’s products consist of binders and resins, liquid vehicles, pigment concentrates and additives, unsaturated polyester resins and polyester and acrylic emulsions. Binders and resins, such as alkyd and polyester resins, hydrocarbon resins and rosins and rosin esters, are used in adhesives as a key component and in paints and inks to form a protective coating or film and bind color to the substrate. Liquid vehicles, such as ester, ketone and alcohol solvents, maintain the binders in liquid form for ease of application. Pigment concentrates and additives, such as cellulosic polymers, Texanol® coalescing aid and chlorinated polyolefins, provide different properties or performance enhancements to the end product. Unsaturated polyester resins are used primarily in gel coats and fiberglass reinforced plastics. Polyester and acrylic emulsions are used to protect fibers during processing in textile manufacturing, and for use in water-based paints, inks and adhesives. Paints and coatings raw material end use markets consist of architectural, automotive, transportation, industrial, maintenance, marine and furniture coatings. Inks and graphic arts raw material end use markets consist of offset, gravure, and packaging printing and publishing. Adhesives and sealant raw material end use markets include non-woven, tape, label, hot melt, automotive and packaging applications. Composite resins are used in marine, transportation, construction and consumer goods applications. CASPI segment annual sales are approximately 50% to paints and coatings markets, approximately 25% to adhesives markets, and approximately 25% to inks and graphic arts and other markets.

The PCI segment manufactures diversified products in three major groups: acetyl and intermediates; olefins and derivatives; and custom, fine and performance chemicals. Each of these groups accounts for approximately 25% of PCI annual sales with the remaining 25% resulting from other products and interdivisional sales. These products are used in a variety of environments and end uses, including agrochemical, automotive, beverages, catalysts, nutrition, pharmaceuticals, coatings, flooring, medical devices, toys, photographic and imaging, household products, polymers, textiles and consumer and industrials. Custom synthesis and photographic chemicals were historically managed as part of Eastman’s fine chemicals product line.

The SP segment produces highly specialized copolyesters, cellulosic plastics and compounded polyethylene plastics that possess performance properties for value-added end uses such as appliances, in store fixtures and displays, building and construction, electronics and electronic packaging, medical packaging, personal care and cosmetics, performance films, tape and labels, biodegradeables, cups and lids, fiber and strapping, photographic and optical, graphic arts and general packaging. SP segment annual sales are approximately 70% copolyester plastics, approximately 25% cellulosic plastics and approximately 5% compounded polyethylenes and other products.

The Polymers segment manufactures a broad line of PET polymers and polyethylene products for the beverage bottle and consumer and industrial products markets. PET polymers serve as source products for containers for, among other things, carbonated soft drinks, water, beer and personal care items and food containers that are suitable for both conventional and microwave oven use. The Polymers segment also manufactures low density polyethylene and linear low density polyethylene, which are used primarily for packaging and film applications and in extrusion coated containers such as milk and juice cartons.

The Fibers segment manufactures Estron® acetate tow and Estrobond® triacetin plasticizers for the cigarette filter market; acetate yarns for use in apparel, home furnishings and industrial fabrics; and acetate flake and acetyl raw materials for other acetate fiber producers.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


				Third Quarter					First Nine Months

(Dollars in millions)				2002			2001		2002			2001

Sales
	Eastman Division Segments:
		Coatings, Adhesives, Specialty Polymers, and Inks		$	418		$	422	$	1,221		$	1,144
		Performance Chemicals and Intermediates			391			274		1,125			869
		Specialty Plastics			158			137		443			414

			Total		967			833		2,789			2,427

	Voridian Division Segments:
		Polymers			398			388		1,162			1,228
		Fibers			182			152		541			464

			Total		580			540		1,703			1,692

	Eliminations				(173	)		—		(487	)		—

Total Eastman Chemical Company				$	1,374		$	1,373	$	4,005		$	4,119

For the third quarter 2002, Eastman Division interdivisional sales eliminated in consolidation include the following: CASPI $16 million, PCI $107 million, and SP $17 million. For the third quarter 2002, Voridian Division interdivisional sales eliminated in consolidation include: Polymers $16 million and Fibers $17 million. For the first nine months 2002, Eastman Division interdivisional sales eliminated in consolidation include the following: CASPI $42 million, PCI $302 million, and SP $49 million. For the first nine months 2002, Voridian Division interdivisional sales eliminated in consolidation include: Polymers $39 million and Fibers $55 million.


				Third Quarter						First Nine Months

(Dollars in millions)				2002			2001			2002			2001

Operating Earnings (Loss)
	Eastman Division Segments:
		Coatings, Adhesives, Specialty Polymers, and Inks		$	15		$	(8	)	$	51		$	(8	)
		Performance Chemicals and Intermediates			4			(4	)		(9	)		(59	)
		Specialty Plastics			9			15			22			55

			Total		28			3			64			(12	)

	Voridian Division Segments:
		Polymers			(3	)		30			49			(133	)
		Fibers			36			37			109			111

			Total		33			67			158			(22	)

	Eliminations				—			—			(3	)		—

Total Eastman Chemical Company				$	61		$	70		$	219		$	(34	)

Operating earnings presented above include the effect of nonrecurring items described in Notes 7 and 8.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


			September 30,		December 31,
(Dollars in millions)			2002		2001

Assets
Eastman Division Segments:
	Coatings, Adhesives, Specialty Polymers, and Inks		$	1,989	$	1,922
	Performance Chemicals and Intermediates			1,610		1,256
	Specialty Plastics			738		928

		Total		4,337		4,106

Voridian Division Segments:
	Polymers			1,222		1,388
	Fibers			541		598

		Total		1,763		1,986

Total Eastman Chemical Company			$	6,100	$	6,092

14. LEGAL MATTERS

General

From time to time, the Company and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety and employment matters, which are being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any of such pending matters, including the sorbates litigation and the asbestos litigation described in the following paragraphs, will have a material adverse effect on its overall financial condition, results of operations or cash flows. However, adverse developments could negatively impact earnings in a particular future period.

Sorbates litigation

As previously reported, on September 30, 1998, the Company entered into a voluntary plea agreement with the U.S. Department of Justice and agreed to pay an $11 million fine to resolve a charge brought against the Company for violation of Section One of the Sherman Act. Under the agreement, the Company entered a plea of guilty to one count of price-fixing for sorbates, a class of food preservatives, from January 1995 through June 1997. The plea agreement was approved by the United States District Court for the Northern District of California on October 21, 1998. The Company recognized the entire fine in the third quarter of 1998 and is paying the fine in installments over a period of five years. On October 26, 1999, the Company pleaded guilty in a Federal Court of Canada to a violation of the Competition Act of Canada and was fined $780,000 (Canadian). The plea in Canada admitted that the same conduct that was the subject of the United States guilty plea had occurred with respect to sorbates sold in Canada, and prohibited repetition of the conduct and provides for future monitoring. The Canadian fine has been paid and was recognized as a charge against earnings in the fourth quarter of 1999.

In the wake of the September 30, 1998, plea agreement, the Company, along with other defendants, was sued in federal, state and Canadian courts in a number of putative class action lawsuits filed on behalf of purchasers of sorbates and products containing sorbates, claiming those purchasers paid more for sorbates and for products containing sorbates than they would have paid in the absence of the defendants’ price fixing. All but four of these more than twenty lawsuits have been resolved via settlement. Of the remaining cases, one has been settled and the settlement has been approved at the trial court level, but an appeal of that approval is pending. No class has been certified in any of the other three remaining cases, and the trial court in one of them decided in October 2002 that that case would not proceed as a class action. The Company has filed a dispositive motion in one of the other remaining cases and the other case is inactive.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

respective states. Several other states have advised the Company that they intend to bring similar actions against the Company and others.

The Company has recognized charges to earnings in each of the past four years for estimated and actual costs, including legal fees, related to the sorbates fine and litigation. While the Company intends to continue to vigorously defend the remaining sorbates actions unless they can be settled on acceptable terms, the ultimate outcome of the matters still pending and of additional claims that could be made is not expected to have a material impact on the Company’s financial condition, results of operations, or cash flows, although these matters could result in the Company being subject to additional monetary damages, costs or expenses and additional charges against earnings.

Asbestos litigation

Over the years, Eastman has been named as a defendant in lawsuits in various state courts in which plaintiffs allege injury due to exposure to asbestos at Eastman’s manufacturing sites and seek unspecified monetary damages and other relief. Historically, these cases have been dismissed or settled without a material effect on Eastman’s financial results. Recently, Eastman has experienced an increase in the number of asbestos claims and in the settlement demands of plaintiffs. The Company is currently evaluating the allegations and claims made in recent asbestos-related lawsuits and intends to vigorously defend these actions or to settle them on acceptable terms. The Company presently believes that the ultimate resolution of asbestos cases will not have a material impact on the Company’s financial condition, results of operations, or cash flows, although these matters could result in the Company being subject to additional monetary damages, costs or expenses and additional charges against earnings.

15. COMMITMENTS

Lease commitments

During the second quarter 2002, the Company renegotiated a significant operating lease of machinery and equipment extending the terms through June 2007. The new agreement includes provisions that may require the Company to maintain $163 million in restricted cash to serve as collateral for the lease beginning in March 2003 if the lease is not refinanced. The collateral requirements will be included in other assets when and if funded. The Company believes the likelihood of the restricted cash provision becoming operative is remote.

Taking into consideration the terms of the new lease, the Company has various lease commitments totaling approximately $307 million over a period of several years. Of the total lease commitments, approximately 47% relate to machinery and equipment; approximately 35% relate to real property, including office space, storage facilities and land; and approximately 18% relate to railcars. Future lease payments, reduced by sublease income, follow:


(Dollars in millions)

Year ending December 31,
	2002	$	60
	2003		41
	2004		33
	2005		26
	2006		25
	2007 and beyond		122

Total minimum payments required		$	307

Other commitments

In 1999, the Company entered into an agreement that allows the Company to sell certain domestic accounts receivable under a planned continuous sale program to a third party. The agreement permits the sale of undivided interests in domestic trade accounts receivable. Receivables sold to the third party totaled $180 million at September 30, 2002 and $200 million at December 31, 2001. Undivided interests in designated receivable pools were sold to the purchaser with recourse limited to the receivables purchased. Fees paid by the Company under this agreement are based on certain variable market rate indices and totaled approximately $1 million and $2 million in the third quarters 2002 and 2001, respectively, and approximately $3 million and $7 million in the first nine months 2002 and 2001, respectively. Average monthly proceeds from collections reinvested in the continuous sale program were approximately $266 million and $250 million in the third quarters 2002 and 2001, respectively, and approximately $250 million and $240 million in the first nine months 2002 and 2001, respectively. The portion that continues to be recognized in the Statements of Financial Position is domestic trade receivables of $160 million and $124 million at September 30, 2002 and December 31, 2001, respectively.

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16. RECENTLY ISSUED ACCOUNTING STANDARDS

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset.

The Company is required and plans to adopt the provisions of SFAS No. 143 January 1, 2003. Upon initial application of the provisions of SFAS No. 143, entities are required to recognize a liability for any existing asset retirement obligations adjusted for cumulative accretion to the date of adoption of this Statement, an asset retirement cost capitalized as an increase to the carrying amount of the associated long-lived asset, and accumulated depreciation on that capitalized cost. The cumulative effect, if any, of initially applying this Statement will be recognized as a change in accounting principle. The Company has not yet assessed the impact of this Statement on its financial statements.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for assets to be disposed of and broadens the presentation of discontinued operations to include more disposal transactions. The provisions of this Statement, which were adopted by the Company January 1, 2002, have not had a material impact on its financial condition or results of operations.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement, which updates, clarifies and simplifies existing accounting pronouncements, addresses the reporting of debt extinguishments and accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The provisions of this Statement are generally effective for the Company’s 2003 fiscal year, or in the case of specific provisions, for transactions occurring after May 15, 2002 or for financial statements issued on or after May 15, 2002. The provisions of this Statement have not had and are not expected to have a material impact on the Company’s financial condition or results of operations.

In July 2002 the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, and concludes that an entity’s commitment to an exit plan does not by itself create a present obligation that meets the definition of a liability. This Statement also establishes that fair value is the objective of initial measurement of the liability. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company has not yet assessed the impact of this Statement on its financial statements.

17. SUBSEQUENT EVENTS

Income tax matters

During the fourth quarter 2002, the Company will recognize a benefit for certain income tax contingencies that were favorably resolved.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s consolidated financial statements, including related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the 2001 Annual Report on Form 10-K as amended by Form 10-K/A, the Forms 10-Q for the first and second quarters 2002, and the unaudited interim financial statements included elsewhere in this report. All references to earnings (loss) per share contained in this report are diluted earnings (loss) per share unless otherwise noted.

RESULTS OF OPERATIONS

SUMMARY OF CONSOLIDATED RESULTS

The Company’s results of operations as presented in the consolidated financial statements of this Form 10-Q are described below.

Sales revenue for the third quarter 2002 of $1.4 billion was essentially flat when compared to the third quarter 2001. Increased sales volumes were offset by decreased selling prices. Sales revenue for the first nine months 2002 of $4.0 billion decreased 3% compared to the first nine months 2001 sales revenue of $4.1 billion. The decline in sales revenue for the first nine months 2002 was mainly attributed to lower selling prices and an unfavorable shift in product mix, which were partially offset by increased sales volumes.

Operating earnings for the third quarter 2002 were $61 million compared to $70 million in the third quarter 2001. Operating earnings for the first nine months 2002 were $219 million compared to an operating loss of $34 million for the first nine months 2001. Operational disruptions at the Company’s plants in Rotterdam, the Netherlands and Columbia, South Carolina negatively impacted operating earnings by approximately $23 million and $28 million for the third quarter and first nine months 2002, respectively. A change in estimate for the shutdown reserves related to the closure of plants in Portland, Oregon and Philadelphia, Pennsylvania that were obtained in the 2001 acquisition of McWhorter Technologies, Inc. (“McWhorter), had a slightly positive impact on results for 2002. Operating earnings for the third quarter and first nine months 2001 were negatively impacted by nonrecurring items totaling approximately $29 million and $335 million, respectively, described more fully below and in Notes 7 and 8 to the consolidated financial statements. Operating results for the third quarter and first nine months 2001 were also negatively impacted by amortization of goodwill and indefinite-lived intangibles totaling approximately $5 million and $15 million, respectively.

Excluding the additional costs from the operational disruptions in third quarter 2002, the nonrecurring items in both periods, and the amortization of goodwill and indefinite-lived intangibles in the third quarter 2001, operating earnings were $83 million for the third quarter 2002 compared to $104 million for the third quarter 2001. Selling prices for the third quarter 2002 declined more than raw material costs, resulting in margin compression. The decline in selling prices had a negative impact on third quarter 2002 operating earnings of approximately $90 million, roughly one fourth of which was offset by a decrease in raw material costs. Higher sales volumes and lower unit costs resulting from increased capacity utilization had a positive impact on operating earnings for the third quarter 2002.

Excluding the impact of the operational disruptions in the first nine months 2002, the nonrecurring items in both periods, and the amortization of goodwill and indefinite-lived intangibles in the first nine months 2001, operating earnings for the first nine months 2002 were $246 million compared to $316 million for the first nine months 2001. Selling prices for the first nine months 2002 decreased more than raw material costs, resulting in margin compression. The decline in selling prices had a negative impact on operating earnings for the first nine months 2002 of approximately $334 million, roughly three fourths of which was offset by a decrease in raw material costs. Operating earnings for the first nine months 2002 were also negatively impacted by an unfavorable shift in product mix, and foreign currency hedging gains recognized in operating earnings in the first nine months 2001 that were not repeated in the first nine months 2002. Higher sales volumes and lower unit costs resulting from increased capacity utilization had a positive impact on operating earnings for the first nine months 2002.

Diluted earnings per share for the third quarter 2002 were $0.31 compared with $0.36 per share in the third quarter 2001. For the first nine months 2002, the Company reported earnings per share of $0.96 compared with a loss of $1.08 per share for the first nine months 2001.


	Third Quarter							First Nine Months

(Dollars in millions)	2002		2001		Change			2002		2001		Change

Sales	$	1,374	$	1,373		0	%	$	4,005	$	4,119		(3	)%

Sales revenue for the third quarter 2002 was essentially flat compared to the third quarter 2001. Increased sales volumes had a positive impact on sales revenue of 5% or approximately $74 million. Foreign currency exchange rates had a positive effect on sales revenue of 2% or approximately $27 million. These increases were mostly offset by lower selling prices that had a negative impact on revenues of 7% or approximately $90 million. Both the increase in sales volumes and the decrease in selling prices were primarily attributable to the Polymers segment.

The decrease in sales revenue for the first nine months 2002 compared to the first nine months 2001 was due to lower selling prices, primarily for the Polymers segment, and an unfavorable shift in product mix. Lower selling prices had a negative impact on sales revenue of 8% or approximately $334 million, offset mostly by increased sales volumes. The increase in sales volumes was primarily attributed to the Polymers segment and the May 2001 acquisition of certain businesses from Hercules Incorporated (“Hercules Businesses”). An unfavorable shift in product mix had a negative impact on sales revenue of 2% or approximately $101 million. The shift in product mix occurred primarily in the Performance Chemicals and Intermediates (“PCI”) and Fibers segments.


		Third Quarter									First Nine Months

(Dollars in millions)		2002			2001			Change			2002			2001			Change

Gross profit		$	202		$	239			(15	)%	$	636		$	724			(12	)%
	As a percentage of sales		14.7	%		17.4	%					15.9	%		17.6	%

Operational disruptions at the Company's plants in Rotterdam, the Netherlands and Columbia, South Carolina negatively impacted gross profit by approximately $23 million and $28 million for the third quarter and first nine months 2002, respectively. Decreased selling prices had a negative impact on gross profit for the third quarter and first nine months 2002, mostly offset by a decrease in raw material costs and lower unit costs resulting from increased capacity utilization.


		Third Quarter									First Nine Months

(Dollars in millions)		2002			2001			Change			2002			2001			Change

Selling and general administrative expenses		$	100		$	101			(1	)%	$	300		$	305			(2	)%
	As a percentage of sales		7.3	%		7.4	%					7.5	%		7.4	%

Selling and general administrative expenses for the third quarter 2002 were essentially flat compared to the third quarter 2001. The first nine months 2002 selling and general administrative expenses decreased slightly compared to the first nine months 2001 primarily due to cost control efforts.


		Third Quarter									First Nine Months

(Dollars in millions)		2002			2001			Change			2002			2001			Change

Research and development costs		$	42		$	39			8	%	$	118		$	118			0	%
	As a percentage of sales		3.1	%		2.8	%					2.9	%		2.9	%

Research and development costs for the third quarter 2002 increased compared to the third quarter 2001 due to timing of expenditures and a slight increase in spending, but were flat for the first nine months 2002 compared to the first nine months 2001.

Asset impairments and restructuring charges


	Third Quarter					First Nine Months

(Dollars in millions)	2002			2001		2002			2001

Termination of raw material supply agreement	$	—		$	—	$	—		$	108
Under-performing polyethylene assets		—			—		—			103
Restructuring of fine chemicals product lines		—			6		—			69
Consolidation and restructuring of CASPI operations		(1	)		21		(1	)		41

	$	(1	)	$	27	$	(1	)	$	321

In the second quarter and first nine months 2001, approximately $211 million of asset impairment and restructuring charges were incurred in the Polymers segment. A charge of $108 million was recognized for the write-off of a prepaid asset related to the termination of a raw material supply agreement and a charge of $103 million was recognized for the write-down of underperforming polyethylene assets.

During 2001, the Company reported that a large customer of the PCI segment did not intend to renew its contract for a custom synthesis product beyond June 30, 2002. As a consequence, the related assets were impaired based on expected cash flows resulting from notification of termination of this contract. Nonrecurring charges related to the impacted assets were recorded during the second quarter 2001 as part of the restructuring of the fine chemicals product line, as described in Note 7 to the consolidated financial statements. Subsequently, the customer initiated discussions with the Company which resulted in an agreement being reached in June 2002 to extend the custom synthesis product contract one year based on renegotiated terms. Sales revenue related to the contract extension is expected to be approximately the same as under the prior contract.

In the first nine months 2001, nonrecurring charges totaling $41 million were recorded in the Coatings, Adhesives, Specialty Polymers, and Inks (“CASPI”) segment. Included in this amount were charges totaling $20 million recorded in the second quarter 2001 related to the closure of plants in Philadelphia, Pennsylvania and Portland, Oregon that were obtained in the acquisition of McWhorter. Also included in this amount were charges of $21 million recorded in the third quarter 2001 related to the closure of the Moundville, Alabama plant that was obtained in the acquisition of Lawter International, Inc. A change in estimate for the Portland and Philadelphia closure reserves resulted in a $1 million credit to earnings in the third quarter 2002.

Other nonrecurring operating charges


	Third Quarter					First Nine Months

(Dollars in millions)	2002		2001			2002		2001

Write-off of Hercules Businesses in-process research and development costs	$	—	$	(3	)	$	—	$	5
Costs associated with efforts to spin-off specialty chemicals and plastics businesses		—		5			—		9

	$	—	$	2		$	—	$	14

In the first nine months 2001, the Company recognized a charge of $5 million associated with the write-off of acquired in-process research and development costs related to the Hercules Businesses. Initially recorded as a charge of $8 million in the second quarter 2001, the write-off of in-process research and development was subsequently revised to $5 million with a $3 million credit to earnings in the third quarter 2001. The Company also recorded charges of $5 million and $9 million in the third quarter and first nine months 2001, respectively, associated with efforts to spin-off the specialty chemicals and plastics businesses.

Interest expense, net


	Third Quarter							First Nine Months

(Dollars in millions)	2002		2001		Change			2002		2001		Change

Gross interest costs	$	34	$	39				$	99	$	117
Less capitalized interest		2		1					4		4

Interest expense		32		38		(16	)%		95		113		(16	)%
Interest income		2		2					4		5

Net interest expense	$	30	$	36		(17	)%	$	91	$	108		(16	)%

Lower interest expense for the third quarter and first nine months 2002 compared to the third quarter and first nine months 2001 reflected a reduction in borrowings and a decrease in market interest rates, partially offset by a higher interest rate on the Company’s recent 10-year bond issue versus the interest rate on commercial paper that was outstanding during the prior period.

Other (income) charges, net


	Third Quarter								First Nine Months

(Dollars in millions)	2002			2001			Change		2002			2001			Change

Other income	$	(4	)	$	(11	)			$	(7	)	$	(12	)
Other charges		7			4					14			17

	$	3		$	(7	)		N/A	$	7		$	5			(18	)%

The third quarter 2001 other income primarily reflected gains from foreign exchange transactions while the first nine months 2001 other charges reflected a slight loss.

Other nonrecurring charges


	Third Quarter				First Nine Months

(Dollars in millions)	2002		2001		2002		2001

Other nonrecurring charges	$	—	$	2	$	—	$	2

Other nonrecurring charges for the third quarter and first nine months 2001 reflected a charge of $2 million related to the Company’s efforts to sell its fine chemicals product line.


		Third Quarter									First Nine Months

(Dollars in millions)		2002			2001			Change			2002			2001			Change

Provision (benefit) for income taxes		$	4		$	12			(67	)%	$	29		$	(66	)		N/A
	Effective tax rate		14	%		31	%					24	%		(44	)%

The effective tax rates for the third quarter and first nine months 2001 were impacted by the effect of nonrecurring items. Excluding the effect of nonrecurring items, the effective tax rates for the third quarter and first nine months 2001 would have been 33%.

The improvements in the effective tax rates for the third quarter and first nine months 2002 when compared to the comparable periods in 2001 were due primarily to a reduction in international taxes related to the implementation of the Company’s divisional structure and reflect the elimination of non-deductible goodwill amortization resulting from the implementation of Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” In addition, the third quarter 2002 income tax provision was reduced by the recognition of a benefit for certain tax contingencies that were favorably resolved. The lower effective tax rates in 2002 were partially offset by higher state income taxes.



	Third Quarter				First Nine Months

(Dollars in millions)	2002		2001		2002			2001

Cumulative effect of change in accounting principle, net	$	—	$	—	$	(18	)	$	—


	Third Quarter							First Nine Months
(Dollars in millions,
except per share amounts)	2002		2001		Change			2002		2001			Change

Earnings (Loss)
Operating earnings (loss)	$	61	$	70		(13	)%	$	219	$	(34	)		N/A
Net earnings (loss) before cumulative effect of change in accounting principle		24		27		(11	)%		92		(83	)		N/A
Net earnings (loss)		24		27		(11	)%		74		(83	)		N/A
Earnings (loss) per share
— Basic	$	0.31	$	0.36		(14	)%	$	0.96	$	(1.08	)		N/A
— Diluted	$	0.31	$	0.36		(14	)%	$	0.96	$	(1.08	)		N/A

For additional information regarding the change in accounting principle, see Note 12 to the consolidated financial statements.

SUMMARY BY OPERATING SEGMENT

The Company’s products and operations are managed and reported in five operating segments. Effective January 1, 2002, the Company implemented a divisional structure that separated the businesses into two divisions. Eastman Division consists of the CASPI segment, the PCI segment and the Specialty Plastics (“SP”) segment. Voridian Division contains the Polymers segment and the Fibers segment. The divisional structure has allowed the Company to align costs more directly with the activities and businesses that generate them. The divisional and segment results for the first three quarters 2002, but not for prior periods, reflect this new cost structure.

Effective January 1, 2002, sales and operating results for Cendian Corporation (“Cendian”), the Company’s logistics subsidiary and an Eastman Division initiative, are included in amounts for the CASPI, PCI and SP segments, and have been allocated to these segments on the basis of sales revenues for each of these segments. Prior to 2002, sales and operating results for Cendian were allocated to all five segments.

For additional information concerning the Company’s operating segments, see Note 13 to the consolidated financial statements and Exhibits 99.01, 99.02 and 99.03 to this Form 10-Q.

EASTMAN DIVISION

CASPI Segment


	Third Quarter								First Nine Months

(Dollars in millions)	2002		2001			Change			2002		2001			Change

Sales	$	418	$	422			(1	)%	$	1,221	$	1,144			7	%
Operating earnings (loss)		15		(8	)		N/A			51		(8	)		N/A
Operating earnings excluding nonrecurring items and amortization of goodwill and indefinite-lived intangibles		14		16			(13	)%		50		56			(11	)%

Sales revenue for the third quarter 2002 declined slightly compared to the third quarter 2001 due to decreased sales volumes and lower selling prices. The decrease in sales volumes had a negative impact on sales revenue of 4% or approximately $16 million. The decline in sales volumes, primarily for adhesives, was attributed to the expiration of a contract included in the acquisition of Hercules Businesses. Lower selling prices had a negative impact on sales revenue of 3% or approximately $15 million. These decreases were mostly offset by the favorable impact of interdivisional sales and foreign currency exchange rates. Interdivisional sales had a positive impact on revenues of 4% or approximately $16 million. Foreign currency exchange rates had a positive impact on revenues of 2% or approximately $11 million.

The increase in sales revenue for the first nine months 2002 compared to the first nine months 2001 was mainly due to increased sales volumes, primarily attributable to the Hercules Businesses, and interdivisional sales. Increased sales volumes had a positive impact on sales revenue of 6% or approximately $66 million. Interdivisional sales had a positive impact on sales revenue of 4% or approximately $42 million. These increases were partially offset by lower selling prices, which had a negative impact on sales revenue of 3% or approximately $38 million.

Operating earnings excluding nonrecurring items and amortization of goodwill and indefinite-lived intangibles for the third quarter 2002 decreased compared to the third quarter 2001. The decline was mainly due to lower selling prices that were partially offset by lower raw material costs.

The decline in operating earnings for the first nine months 2002 compared to the first nine months 2001, excluding nonrecurring items and amortization of goodwill and indefinite-lived intangibles, was mainly due to lower selling prices that were partially offset by lower raw material costs. Continued costs related to integration of CASPI operations also had a negative impact on operating earnings.

A change in estimate for the Philadelphia, Pennsylvania and Portland, Oregon shutdown reserves resulted in a $1 million credit to earnings in the third quarter 2002. Operating earnings for the third quarter and first nine months 2001 were negatively impacted by nonrecurring items totaling $19 million and $49 million, respectively, relating to restructuring costs, the write-off of acquired in-process research and development costs related to the Hercules Businesses, and efforts to spin-off the specialty chemicals and plastics businesses.

PCI Segment


	Third Quarter								First Nine Months

(Dollars in millions)	2002		2001			Change			2002			2001			Change

Sales	$	391	$	274			42	%	$	1,125		$	869			30	%
Operating earnings (loss)		4		(4	)		N/A			(9	)		(59	)		85	%
Operating earnings (loss) excluding nonrecurring items		4		3			33	%		(9	)		12			(175	)%

Sales revenue for the third quarter 2002 increased compared to the third quarter 2001 primarily due to interdivisional sales, which had a positive impact on sales revenue of 39% or approximately $108 million. Increased sales volumes had a positive impact on revenues of 8% or approximately $22 million. The increase in sales volumes was attributable to higher sales volumes for acetyl and intermediates products primarily resulting from new polymer intermediates sales and competitor operational problems. Lower selling prices had a negative impact on revenues of 7% or approximately $18 million. Contract extension fees related to the custom synthesis product described below also positively impacted sales revenue for the third quarter 2002.

Sales revenue for the first nine months 2002 increased 30% or approximately $256 million including interdivisional sales, but declined 5% or approximately $46 million excluding interdivisional sales. Increased sales volumes had a positive impact on sales revenue of 8% or approximately $72 million. Lower selling prices had a negative impact on revenues of 8% or approximately $72 million. An unfavorable shift in product mix had a negative impact on revenues of 5% or approximately $48 million. The shift in product mix was primarily due to increased sales volumes of lower unit priced products, particularly glacial acetic acid in the acetyl and intermediates product group.

The increase in operating earnings for third quarter 2002 excluding nonrecurring items and amortization of goodwill and indefinite-lived intangibles was primarily due to contract extension fees and improved margins related to the custom synthesis product described below. Results for the third quarter 2002 were also positively impacted by increased sales volumes that were mostly offset by lower selling prices.

The operating loss of $9 million for the first nine months 2002, excluding nonrecurring items and amortization of goodwill and indefinite-lived intangibles, was $21 million below the first nine months 2001 operating earnings of $12 million. This decrease was mainly due to lower selling prices that were partially offset by lower raw material costs, and an unfavorable shift in product mix.

During 2001, the Company reported that a large customer of the PCI segment did not intend to renew its contract for a custom synthesis product beyond June 30, 2002. As a consequence, the related assets were impaired based on expected cash flows resulting from notification of termination of this contract. Nonrecurring charges totaling approximately $69 million related to the impacted assets were recorded during the second and third quarters 2001 as part of the restructuring of the fine chemicals business, as described in Note 7 to the consolidated financial statements. Subsequently, the customer initiated discussions with the Company which resulted in an agreement being reached in June 2002 to extend the custom synthesis product contract one year based on renegotiated terms. Sales revenue related to the contract extension is expected to be approximately the same as under the prior contract. Results for the third quarter and first nine months 2001 were also negatively impacted by nonrecurring items totaling approximately $2 million related to costs associated with efforts to spin-off the specialty chemicals and plastics businesses.

SP Segment


	Third Quarter							First Nine Months

(Dollars in millions)	2002		2001		Change			2002		2001		Change

Sales	$	158	$	137		16	%	$	443	$	414		7	%
Operating earnings		9		15		(40	)%		22		55		(60	)%
Operating earnings excluding nonrecurring items		9		16		(44	)%		22		56		(61	)%

The increase in sales revenue for the third quarter 2002 compared to the third quarter 2001 was mainly attributable to interdivisional sales, which had a positive impact on revenues of 13% or approximately $18 million. Increased sales volumes, primarily attributable to increased business in lower priced products, had a positive impact on revenues of 7% or approximately $10 million. Lower selling prices had a negative impact on revenues of 5% or approximately $7 million.

Sales revenue for the first nine months 2002 increased 7% or approximately $29 million compared to the first nine months 2001 including interdivisional sales, but decreased 5% or approximately $20 million excluding interdivisional sales. The decline in sales revenue excluding interdivisional sales was attributed to a decline in selling prices, which had a negative impact on sales revenue of 3% or approximately $13 million, and decreased sales volumes, which had a negative impact on sales revenue of 2% or approximately $6 million.

The decrease in operating earnings excluding nonrecurring items in the third quarter and first nine months 2002 compared to the third quarter and first nine months 2001 was partially due to the recognition of technology licensing revenue of $6 million that was reflected in results for third quarter 2001. Operating earnings in the first nine months 2002 were also negatively impacted by a decline in selling prices and sales volumes, mainly for cellulosic plastics products.

Results for the third quarter and first nine months 2001 were negatively impacted by a nonrecurring item totaling approximately $1 million related to costs associated with efforts to spin-off the specialty chemicals and plastics businesses.

VORIDIAN DIVISION

Polymers Segment


	Third Quarter								First Nine Months

(Dollars in millions)	2002			2001		Change			2002		2001			Change

Sales	$	398		$	388		3	%	$	1,162	$	1,228			(5	)%
Operating earnings (loss)		(3	)		30		(110	)%		49		(133	)		N/A
Operating earnings (loss) excluding nonrecurring items		(3	)		31		(110	)%		49		79			(38	)%

Sales revenue for the third quarter 2002 increased 3% or approximately $9 million compared to the third quarter 2001 including interdivisional sales, but decreased 1% or approximately $6 million excluding interdivisional sales. The decline in sales revenue excluding interdivisional sales was attributed to lower selling prices, mainly for PET polymers, which had a negative impact on revenues of 13% or approximately $50 million. Increased sales volumes, for PET polymers and polyethylene, had a positive impact on revenues of 9% or approximately $35 million. Foreign currency exchange rates had a slightly positive impact on revenues of 2% or approximately $8 million.

Sales revenue for the first nine months 2002 decreased compared to the first nine months 2001 mainly due to lower selling prices, primarily for PET polymers, which had a negative impact on revenues of 16% or approximately $203 million. Increased sales volumes for PET polymers and polyethylene had a positive impact on revenues of 8% or approximately $100 million. Interdivisional sales also had a positive impact on revenues of 4% or approximately $39 million.

Operational disruptions at the Company's plants in Rotterdam, the Netherlands and Columbia, South Carolina negatively impacted results from operations by approximately $23 million and $28 million for the third quarter and first nine months 2002, respectively. Results were also negatively impacted by lower selling prices that were partially offset by a decrease in raw material costs. Higher sales volumes and lower unit costs resulting from increased capacity utilization had a positive impact on operating earnings.

Results for the third quarter and first nine months 2001 were negatively impacted by nonrecurring items totaling approximately $1 million and $212 million, respectively, which resulted from the write-off of a prepaid asset related to the termination of a raw material supply agreement, the write-down of underperforming polyethylene assets, and costs associated with efforts to spin-off the specialty chemicals and plastics businesses.

Fibers Segment


	Third Quarter							First Nine Months

(Dollars in millions)	2002		2001		Change			2002		2001		Change

Sales	$	182	$	152		19	%	$	541	$	464		17	%
Operating earnings		36		37		(3	)%		109		111		(2	)%
Operating earnings excluding nonrecurring items		36		38		(5	)%		109		113		(4	)%

The increase in sales revenue for the third quarter 2002 compared to the third quarter 2001 was primarily due to increased sales volumes and interdivisional sales. The increase in sales volumes, primarily attributed to acetyl raw materials, had a positive impact on revenues of 15% or approximately $23 million. Interdivisional sales had a positive impact on revenues of 11% or approximately $17 million. Sales revenue for the third quarter 2002 was negatively impacted by an unfavorable shift in product mix, which had a negative impact on revenues of 8% or approximately $11 million. The unfavorable shift in product mix was due to increased sales volumes of lower unit priced products, particularly acetyl raw materials.

The increase in sales revenue for the first nine months 2002 compared to the first nine months 2001 was mainly due to higher sales volumes and interdivisional sales. The increase in sales volumes, primarily for acetyl raw materials, had a positive impact on revenues of 16% or approximately $74 million. Interdivisional sales had a positive impact on revenues of 12% or approximately $55 million. An unfavorable shift in product mix had a negative impact on sales revenue of 9% or approximately $45 million. The unfavorable shift in product mix was due to increased sales volumes of lower unit priced products, particularly acetyl raw materials. Lower selling prices, primarily for acetyl raw materials, had a negative impact on sales revenue of 2% or approximately $8 million.

Operating earnings excluding nonrecurring items for the third quarter and first nine months 2002 decreased slightly compared to the third quarter and first nine months 2001. Results for the third quarter and first nine months 2001 were negatively impacted by nonrecurring items totaling approximately $1 million and $2 million, respectively, related to costs associated with efforts to spin-off the specialty chemicals and plastics businesses.

SUMMARY BY CUSTOMER LOCATION

Third Quarter First Nine Months

(Dollars in millions) 2002 2001 Change 2002 2001 Change

Sales by Region

United States and Canada
$ 788 $ 825 (5 )% $ 2,303 $ 2,481 (7 )%

Europe, Middle East, and Africa
300 289 4 % 886 877 1 %

Asia Pacific
168 144 17 % 471 408 16 %

Latin America
118 115 2 % 345 353 (2 )%

Third quarter 2002 sales revenue in the United States and Canada decreased 5% or approximately $37 million compared to the third quarter 2001. The decline in revenues was mainly due to lower selling prices, primarily for the Polymers segment, which had a negative impact on revenues of 6% or approximately $48 million. An unfavorable shift in product mix, primarily in the Fibers segment, had a negative impact on revenues of 2% or approximately $14 million. These decreases were partially offset by increased sales volumes, primarily for acetyl raw materials, which had a positive impact on revenues of 3% or approximately $24 million. First nine months 2002 sales revenue in the United States and Canada decreased 7% or approximately $178 million compared to the first nine months 2001 primarily due to lower selling prices. The decline in selling prices, primarily attributed to the Polymers segment, had a negative impact on revenues of 7% or approximately $182 million. An unfavorable shift in product mix, primarily in the PCI and Fibers segments, had a negative impact on revenues of 4% or approximately $102 million. Increased sales volumes, mainly for Voridian Division products, had a positive impact on revenues of 4% or approximately $106 million.

Sales revenue outside the United States and Canada for the third quarter 2002 was $586 million, up 7% or approximately $38 million from the 2001 third quarter sales of $548 million, and was 43% of total sales in the third quarter 2002 compared with 40% for the third quarter 2001. The increase in sales revenue was primarily due to higher sales volumes and the positive effect of foreign currency exchange rates. The increase in sales volumes, primarily attributable to the Polymers segment, had a positive impact on sales revenue of 9% or approximately $50 million. Foreign currency exchange rates had a positive impact on revenues of 5% or approximately $27 million. These increases were partially offset by lower selling prices, primarily for the Polymers segment, which had a negative impact on sales revenue of 8% or approximately $42 million. First nine months 2002 sales revenue outside the United States and Canada increased 4% or approximately $64 million compared to the first nine months 2001 primarily due to increased sales volumes, which had a positive impact on revenues of 12% or approximately $199 million. Lower selling prices had a negative impact on sales revenue for the first nine months 2002 of 9% or approximately $152 million.

The increase in sales revenue in Europe, Middle East, and Africa for the third quarter 2002 compared to the third quarter 2001 was primarily due to the positive effect of foreign currency exchange rates, which had a positive impact on sales revenue of 10% or approximately $28 million. Lower selling prices, primarily for the Polymers segment, had a negative impact on revenues of 7% or approximately $19 million. Sales revenue for the first nine months 2002 was relatively flat compared to the first nine months 2001. Increased sales volumes, mainly attributable to the Hercules Businesses, had a positive impact on revenues of 6% or approximately $55 million. Foreign currency exchange rates had a positive impact on revenues of 2% or approximately $22 million. These increases were mostly offset by decreased selling prices, primarily for the Polymers segment, which had a negative impact on revenues of 8% or approximately $69 million.

The increase in sales revenue in Asia Pacific for the third quarter 2002 compared to the third quarter 2001 was primarily attributable to increased sales volumes, which had a positive impact on revenues of 18% or approximately $26 million. The increase in sales volumes was primarily attributable to the PCI and Fibers segments. Sales revenue for the first nine months 2002 increased compared to the first nine months 2001 primarily due to increased sales volumes, which had a positive impact on revenues of 21% or approximately $86 million. The increase in sales volumes was primarily attributable to the PCI and Fibers segments. Lower selling prices had a negative impact on revenues of 6% or approximately $24 million.

For the third quarter 2002, higher sales volumes in Latin America had a positive impact on revenues of 20% or approximately $23 million. Lower selling prices had a negative impact on revenues of 17% or approximately $19 million. The increase in sales volumes and the decrease in selling prices were primarily attributable to the Polymers segment. Sales revenue for the first nine months 2002 decreased slightly compared to the first nine months 2001 as lower selling prices were mostly offset by increased sales volumes. Both the decrease in selling prices and the increase in sales volumes were predominantly attributed to the Polymers segment.

LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA

CASH FLOW


		First Nine Months

(Dollars in millions)		2002			2001

Net cash provided by (used in)
	Operating activities	$	528		$	237
	Investing activities		(188	)		(447	)
	Financing activities		(318	)		184

Net change in cash and cash equivalents		$	22		$	(26	)

Cash and cash equivalents at end of period		$	88		$	75

Cash provided by operating activities in the first nine months 2002 increased approximately $291 million compared with the first nine months 2001 primarily due to the impact of changes in working capital; a change in liabilities for employee benefits and incentive compensation; and receipt of a federal income tax refund of approximately $40 million.

Changes in working capital impacted operating cash flows approximately $150 million. Working capital remained flat during the first nine months 2002 as increases in trade accounts payable largely offset the cash impact of the increases in inventories and accounts receivable. Cash provided by operating activities for the first nine months 2002 reflected a $20 million reduction during third quarter in amounts outstanding under the Company’s continuous sale of accounts receivable program. In the first nine months 2001, working capital increased as a result of a decrease in trade accounts payable and an increase in inventories and receivables, and additionally reflected the payment of certain employee incentive compensation expenses.

Changes in liabilities for employee benefits and incentive compensation impacted operating cash flows $71 million. Payments required under the Eastman Performance Plan and the Unit Performance Plan during the first half of 2002 were significantly lower than similar payments in the first half of 2001 due to the performance under these plans for 2001 and 2000.

Cash used in investing activities reflected decreased expenditures for acquisitions and capital additions in the first nine months 2002 compared with the first nine months 2001. Cash used in investing activities reflected the acquisition of Ariel Research Corporation in the first nine months 2002 and the acquisition of the Hercules Businesses in the first nine months 2001.

Cash used in financing activities in the first nine months 2002 reflected a significant decrease in commercial paper and short-term borrowings attributable to the use of proceeds from long-term debt issued during the second quarter 2002 and the use of cash generated from operations to repay indebtedness. Cash provided by financing activities in the first nine months 2001 included the effect of treasury stock purchases resulting from a reverse/forward stock split of the Company’s common stock approved by the stockholders on May 3, 2001. The payment of dividends is also reflected in both periods.

The Company expects to continue to pay a quarterly cash dividend. Priorities for use of available excess cash are to reduce outstanding borrowings, fund targeted growth initiatives such as small acquisitions and other ventures, and repurchase shares.

LIQUIDITY

The Company has an effective registration statement on file with the Securities and Exchange Commission to issue up to $1 billion of debt or equity securities. On April 3, 2002, Eastman issued notes in the principal amount of $400 million due 2012 and bearing interest at 7% per annum. Net proceeds from the sale of the notes were $394 million and were used to repay portions of outstanding borrowings under the Credit Facility and commercial paper borrowings.

The Company expects to contribute $135 million to its U.S. defined benefit pension plans during 2003 and that additional funding will be required in 2004, although the amount of such contribution is dependent upon interest rates, actual return on plan assets, retirement and attrition rates of employees, and other factors.

As described in Note 15 to the consolidated financial statements, during the second quarter 2002, the Company renegotiated a significant operating lease of machinery and equipment, extending the term through June 2007. The new agreement includes provisions that may require the Company to maintain $163 million in restricted cash to serve as collateral for the lease beginning in March 2003 if the lease is not refinanced. The Company believes the likelihood of the restricted cash provision becoming operative is remote.

Cash flows from operations and the sources of capital described above are expected to be available and sufficient to meet foreseeable cash flow requirements. However, the Company’s cash flows from operations can be affected by numerous factors including risks associated with global operations, raw materials availability and cost, demand for and pricing of Eastman’s products, capacity utilization and other factors described under “Forward-Looking Statements” below.

CAPITAL EXPENDITURES

Capital expenditures were $162 million and $171 million for the first nine months 2002 and 2001, respectively. The Company continues its emphasis on cash flow management and, for 2002 and 2003, expects that capital spending and other directed investments for small acquisitions and other ventures will be no more than depreciation and amortization. Long-term commitments related to planned capital expenditures are not material.

OTHER COMMITMENTS

At September 30, 2002, the Company’s obligations related to long-term notes and debentures totaled $1.9 billion to be paid over a period extending 25 years. Other borrowings, related primarily to commercial paper borrowings, totaled approximately $96 million.

The Company had various purchase obligations at September 30, 2002, totaling approximately $1.7 billion over a period of approximately 15 years for materials, supplies and energy incident to the ordinary conduct of business. The Company also had various lease commitments for property and equipment under cancelable, noncancelable and month-to-month operating leases totaling approximately $307 million over a period of several years. Of the total lease commitments, approximately 47% relate to machinery and equipment, including computer and communications equipment and production equipment; approximately 35% relate to real property, including office space, storage facilities and land; and approximately 18% relate to railcars. The obligations described above are summarized in the following table:


	Payments Due by Period

					2003 -		2007 -		Beyond
(Dollars in millions)	Total		2002		2006		2011		2011

Long-term notes and debentures	$	1,904	$	—	$	514	$	397	$	993
Commercial paper and other borrowings		96		4		92		—		—
Purchase obligations		1,722		228		765		497		232
Operating leases		307		60		125		83		39

	$	4,029	$	292	$	1,496	$	977	$	1,264

If certain operating leases are terminated by the Company, it guarantees a portion of the residual value loss, if any, incurred by the lessors in disposing of the related assets. The Company believes, based on current facts and circumstances, that a material payment pursuant to such guarantees in excess of the payments included above is remote.

TREASURY STOCK TRANSACTIONS

The Company is currently authorized to repurchase up to $400 million of its common stock. During 2001, 77,069 shares of common stock at a total cost of approximately $4 million, or an average price of $53 per share, were repurchased. A total of 2,620,255 shares of common stock at a cost of approximately $105 million, or an average price of approximately $40 per share, has been repurchased under the authorization. Repurchased shares may be used to meet common stock requirements for compensation and benefit plans and other corporate purposes. In the first quarter 2002, the Company issued 126,614 previously repurchased shares as the annual Company contribution to the Eastman Investment and Employee Stock Ownership Plan.

DIVIDENDS

The Company declared cash dividends of $0.44 per share in the third quarters 2002 and 2001 and $1.32 per share in the first nine months 2002 and 2001.

RECENTLY ISSUED ACCOUNTING STANDARDS

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset.

OUTLOOK

For the remainder of 2002 and 2003, the Company expects:

• Typical seasonal declines in sales volumes and revenues and changes in customer buying patterns will reduce operating earnings for fourth quarter 2002 compared with third quarter 2002;

• Additional costs related to operational disruptions at the Columbia, South Carolina site to negatively impact operating earnings by approximately $8 million to $10 million in fourth quarter 2002;

• Insurance proceeds should significantly offset the operating earnings impact associated with the operational disruptions at its Rotterdam, the Netherlands and Columbia, South Carolina facilities. The insurance claims process is expected to be completed in the fourth quarter 2002 or early 2003, and such reimbursement will positively impact operating earnings and cash flows when completed;

• To contribute $135 million to its U.S. defined benefit pension plans during 2003 and that additional funding will be required in 2004, although the amount of such contribution is dependent upon interest rates, actual return on plan assets, retirement and attrition rates of employees, and other factors;

• Pension and other postemployment benefit expenses in 2003 to increase $35 million to $40 million over 2002 due primarily to declining interest rates, unfavorable market performance for plan assets, and the retirement and attrition rates of employees;

• To record an after-tax minimum pension liability adjustment to other comprehensive income of approximately $120 million to $160 million during the fourth quarter 2002 based upon the current market value of the pension plan’s assets and current interest rates;

• Lower depreciation expense in 2003 as compared with 2002 will significantly mitigate the impact of expected pension and other post-employment benefit cost increases;

• Earnings from operations will continue to reflect expenses related to new business development activities and that such expenses will be approximately 1% – 1-1/2% of sales revenue;

• Combined costs related to selling and general administrative expenses and research and development costs to be at or below 11% of sales revenue;

• To recognize increasing selling and general administrative expenses related to Cendian as it adds capacity while continuing to add new customers and revenues;

• To generate positive free cash flow, which is defined as cash flow from operations less net capital expenditures, acquisitions and other investments;

• To continue to pay a quarterly cash dividend;

• Excess available cash will be used to reduce outstanding borrowings, fund targeted growth initiatives such as small acquisitions and other ventures, and repurchase shares; and

• The favorable effective tax rate will continue or improve in the fourth quarter 2002 as a result of certain income tax contingencies that were favorably resolved; but will return in 2003 to more historic levels.

Based upon the expectations described above and the expectation that general economic conditions will improve in 2003, as of October 24, 2002 (the date of its third quarter 2002 sales and earnings press release) the Company anticipated that for 2003 earnings will be sufficient to recover the cost of capital which would result in earnings of approximately $2.70 to $2.85 per diluted share.

Longer term, the Company expects:

• Global demand for PET polymers to grow at an average rate of approximately 10% annually over the next several years;

• Expects peaks and troughs in the Polymers segment created by supply and demand imbalances to be less pronounced in the future; capacity utilization in the Polymers segment to be lower in 2003 than in 2002 based on industry projections worldwide; and capacity utilization to vary by region; and

• To take appropriate actions over time to improve the Company’s credit rating to BBB+.

FORWARD-LOOKING STATEMENTS

The expectations under “Outlook” and certain other statements in this report may be forward-looking in nature as defined in the Private Securities Litigation Reform Act of 1995. These statements and other written and oral forward-looking statements made by the Company from time to time relate to such matters as planned and expected capacity increases and utilization; anticipated capital spending; expected depreciation and amortization; environmental matters; legal proceedings; exposure to, and effects of hedging of, raw material and energy costs and foreign currencies; global and regional economic and business conditions; competition; growth opportunities; supply and demand, volume, price, cost, margin, and sales; earnings, cash flow, dividends and other expected financial conditions; expectations and strategies for individual products, businesses, segments and divisions as well as for the whole of Eastman Chemical Company; cash requirements and uses of available cash; financing plans; pension expenses and funding; future expenses and insurance reimbursement associated with recent operational disruptions; credit rating; cost reduction and control efforts and targets; integration of recently acquired businesses; development, production, commercialization, and acceptance of new products, services and technologies and related costs; and asset and product portfolio changes.

These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, management plans and strategies, economic conditions and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. In addition to the factors described in this report, the following are some of the important factors that could cause the Company’s actual results to differ materially from those in any such forward-looking statements:

• The Company has manufacturing and marketing operations throughout the world, with approximately 45% of the Company’s revenues attributable to sales outside the United States. Economic factors, including foreign currency exchange rates, could affect the Company’s revenues, expenses and results. Although the Company utilizes risk management tools, including hedging, as appropriate, to mitigate market fluctuations in foreign currencies, any changes in strategy in regard to risk management tools can also affect revenues, expenses and results and there can be no assurance that such measures will result in cost savings or that all market fluctuation exposure will be eliminated. In addition, changes in laws, regulations, or other political factors in any of the countries in which the Company operates could affect business in that country or region, as well as the Company’s results of operations.

• The Company has made and may continue to make acquisitions, divestitures and investments, and enter into alliances, as part of its growth strategy. The completion of such transactions are subject to the timely receipt of necessary regulatory and other consents and approvals needed to complete the transactions which could be delayed for a variety of reasons, including the satisfactory negotiation of the transaction documents and the fulfillment of all closing conditions to the transactions. Additionally, after completion of the transactions, there can be no assurance that such transactions will be successfully integrated on a timely and cost-efficient basis or that they will achieve projected operating earnings targets.

• The Company has made strategic technology investments, including formation of joint ventures and investments in other technology businesses, in order to build certain Eastman capabilities. There can be no assurance that such investments will achieve their objectives or that they will be beneficial to the Company’s results of operations.

• The Company owns assets in the form of equity in other companies, including joint ventures, technology investments and Genencor. Such investments are minority investments in companies which are not managed or controlled by the Company and are subject to all of the risks associated with changes in value of such investments including the market valuation of those companies whose shares are publicly traded.

• The Company has undertaken and will continue to undertake productivity and cost reduction initiatives and organizational restructurings to improve performance and generate cost savings. There can be no assurance that these will be completed as planned or beneficial or that estimated cost savings from such activities will be realized.

• In addition to cost reduction initiatives, the Company is striving to improve margins on its products through price increases, where warranted and accepted by the market; however, the Company’s earnings could be negatively impacted should such increases be unrealized, not be sufficient to cover increased raw material costs, or have a negative impact on demand and volume.

• The Company is reliant on certain strategic raw materials for its operations and utilizes risk management tools, including hedging, as appropriate, to mitigate short-term market fluctuations in raw material costs. There can be no assurance, however, that such measures will result in cost savings or that all market fluctuation exposure will be eliminated. In addition, changes in laws or regulations, war or other outbreak of hostilities, or other political factors in any of the countries or regions in which the Company operates or does business, or in countries or regions that are key suppliers of strategic raw materials, could affect availability and costs of raw materials.

• The Company’s competitive position in the markets in which it participates is, in part, subject to external factors. For example, supply and demand for certain of the Company’s products is driven by end-use markets and worldwide capacities which, in turn, impact demand for and pricing of the Company’s products.

• The Company has an extensive customer base; however, loss of certain top customers could adversely affect the Company’s financial condition and results of operations until such business is replaced.

• Limitation of the Company’s available manufacturing capacity due to significant disruption in its manufacturing operations could have a material adverse affect on revenues, expenses and results.

• The Company’s facilities and businesses are subject to complex health, safety and environmental laws and regulations, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations currently and in the future. The Company’s accruals for such costs and associated liabilities are believed to be adequate, but are subject to changes in estimates on which the accruals are based. The estimates depend on a number of factors including those associated with on-going operations and remedial requirements. On-going operations can be affected by unanticipated government enforcement action, which in turn is influenced by the nature of the allegation and the complexity of the site. Likewise, changes in chemical control regulations and testing requirements can increase costs or result in product deselection. Remedial requirements at contaminated sites are dependent on the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties.

• The Company accesses the capital markets on a regular basis. Access to these markets and the cost of capital is dependent upon the Company’s credit rating received from independent credit rating agencies. A downgrade of one level in the Company’s credit rating is not anticipated, but should it occur, would not cause a significant impact on the commitments or sources of capital available to the Company, and would not have a material impact on the Company’s results of operations. However, an adverse change in the Company’s credit rating could affect the renewal of existing credit facilities or the Company’s ability to obtain access to new credit facilities in the future, could adversely affect the terms under which the Company can borrow, and could increase the cost of borrowings under such facilities.

• The Company’s operations from time to time are parties to or targets of lawsuits, claims, investigations and proceedings, including product liability, personal injury, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety and employment matters, which are being handled and defended in the ordinary course of business. The Company believes amounts reserved are adequate for such pending matters; however, results of operations could be affected by significant litigation adverse to the Company.

The foregoing list of important factors does not include all such factors nor necessarily present them in order of importance. This disclosure, including that under “Outlook” and “Forward-Looking Statements,” and other forward-looking statements and related disclosures made by the Company in this filing and elsewhere from time to time, represent management’s best judgment as of the date the information is given. The Company does not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. You are advised, however, to consult any further public Company disclosures (such as in our filings with the Securities and Exchange Commission or in Company press releases) on related subjects.

ITEM 4. CONTROLS AND PROCEDURES

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective.

Subsequent to the date of their evaluation, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

General

Sorbates litigation

In addition, several states have recently sued the Company and other defendants in connection with the sorbates matter, seeking unspecified damages, restitution and civil penalties on behalf of consumers of sorbates in those respective states. Several other states have advised the Company that they intend to bring similar actions against the Company and others.

Asbestos litigation

ITEM 2. CHANGES IN SECURITIES

(c) On January 2, 2002, the Company granted options to purchase an aggregate of 1,282 shares of its common stock on or after July 2, 2002 at an exercise price of $39 per share. On July 1, 2002, the Company granted options to purchase an aggregate of 1,064 shares of its common stock on or after January 1, 2003 at an exercise price of $47 per share. Such options were granted to non-employee directors who elected under the 1996 Non-employee Director Stock Option Plan to receive options in lieu of all or a portion of their semiannual cash retainer fee. The Company issued the options in reliance upon the exemption from registration of Section 4(2) of the Securities Act of 1933.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits filed as part of this report are listed in the Exhibit Index appearing on page 44.

(b) Reports on Form 8-K

On August 13, 2002, Eastman filed a report on Form 8-K announcing that J. Brian Ferguson, Chairman of the Board and Chief Executive Officer, and James P. Rogers, Senior Vice President and Chief Financial Officer, had (i) submitted to the Securities and Exchange Commission (“SEC”) sworn statements pursuant to SEC Order No. 4-460 concerning the Company’s 2001 Annual Report on Form 10-K, its proxy statement for the 2002 Annual Meeting of Stockholders, its Quarterly Reports on Form 10-Q for the first and second quarters of 2002 and all Form 8-Ks filed to date in 2002 and (ii) certified certain matters in connection with the Company’s Quarterly Report on Form 10-Q for the second quarter of 2002 pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Eastman Chemical Company

Date: November 14, 2002	By:	/s/ James P. Rogers

		James P. Rogers Senior Vice President and Chief Financial Officer

CERTIFICATIONS

I, J. Brian Ferguson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Eastman Chemical Company;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date:		November 14, 2002

/s/ J. Brian Ferguson


J. Brian Ferguson Chairman of the Board and Chief Executive Officer

I, James P. Rogers, certify that:


Date:		November 14, 2002

/s/ James P. Rogers


James P. Rogers Chief Financial Officer

EXHIBIT INDEX


Exhibit		Sequential
Number	Description	Page Number

3.01	Amended and Restated Certificate of Incorporation of Eastman Chemical Company, as amended (incorporated by reference to Exhibit 3.01 to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001)

3.02	Amended and Restated Bylaws of Eastman Chemical Company, as amended October 5, 2000 (incorporated herein by reference to Exhibit 3.02 to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000)

4.01	Form of Eastman Chemical Company Common Stock certificate as amended February 1, 2001 (incorporated herein by reference to Exhibit 4.01 to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (the “March 31, 2001 10-Q”)

4.02	Stockholder Protection Rights Agreement dated as of December 13, 1993, between Eastman Chemical Company and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference to Exhibit 4.4 to Eastman Chemical Company’s Registration Statement on Form S-8 relating to the Eastman Investment Plan, File No. 33-73810)

4.03	Indenture, dated as of January 10, 1994, between Eastman Chemical Company and The Bank of New York, as Trustee (the “Indenture”) (incorporated herein by reference to Exhibit 4(a) to Eastman Chemical Company’s current report on Form 8-K dated January 10, 1994 (the “8-K”))

4.04	Form of 6-3/8% Notes due January 15, 2004 (incorporated herein by reference to Exhibit 4(c) to the 8-K)

4.05	Form of 7-1/4% Debentures due January 15, 2024 (incorporated herein by reference to Exhibit 4(d) to the 8-K)

4.06	Officers’ Certificate pursuant to Sections 201 and 301 of the Indenture (incorporated herein by reference to Exhibit 4(a) to Eastman Chemical Company’s Current Report on Form 8-K dated June 8, 1994 (the “June 8-K”))

4.07	Form of 7-5/8% Debentures due June 15, 2024 (incorporated herein by reference to Exhibit 4(b) to the June 8-K)

4.08	Form of 7.60% Debentures due February 1, 2027 (incorporated herein by reference to Exhibit 4.08 to Eastman Chemical Company’s Annual Report on Form 10-K for the year ended December 31, 1996 (the “1996 10-K”))

4.09	Form of 7% Notes due April 15, 2012 (incorporated herein by reference to Exhibit 4.09 to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002)

4.10	Officer’s Certificate pursuant to Sections 201 and 301 of the Indenture related to 7.60% Debentures due February 1, 2027 (incorporated herein by reference to Exhibit 4.09 to the 1996 10-K)


Exhibit		Sequential
Number	Description	Page Number

4.11	$200,000,000 Accounts Receivable Securitization agreement dated April 13, 1999 (amended April 11, 2000), between the Company and Bank One, NA, as agent. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of filing a copy of such agreement, the Company agrees to furnish a copy of such agreement to the Commission upon request.

4.12	Credit Agreement, dated as of July 13, 2000 (the “Credit Agreement”) among Eastman Chemical Company, the Lenders named therein, and Citibank, N.A. as Agent (incorporated herein by reference to Exhibit 4.11 to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000)

10.01*	Notice of Restricted Stock Granted Pursuant to the Eastman Chemical Company 2002 Omnibus Long-Term Compensation Plan, dated October 7, 2002	46

10.02*	Amended and Restated Warrant to Purchase Shares of Common Stock of Eastman Chemical Company, dated January 2, 2002	48

10.03*	Amended and Restated Registration Rights Agreement, dated January 2, 2002	57

10.04*	Amendment Number Three to the Eastman Chemical Company Benefit Security Trust, dated January 2, 2002	69

12.01	Statement re: Computation of Ratios of Earnings to Fixed Charges	72

99.01	Operating Segment Information, Sales Revenue Change, Volume Effect, Price Effect and Interdivisional Effect	73

99.02	Operating Segment Information, Percentage Growth in Sales Volume Compared to Prior Year	74

99.03	Operating Segment Information, Sales Revenue by Segment	75

99.04	Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by J. Brian Ferguson, Chief Executive Officer and James P. Rogers, Chief Financial Officer, for the quarter ended September 30, 2002	76

* Management contract or compensatory plan or arrangement filed pursuant to Item 601(b) (10)(iii) of Regulation S-K.

EXHIBIT 10.01

AWARD NOTICE

NOTICE OF RESTRICTED STOCK
GRANTED PURSUANT TO THE
EASTMAN CHEMICAL COMPANY
2002 OMNIBUS LONG-TERM COMPENSATION PLAN

Grantee: J. Brian Ferguson

Number of Shares: 28,020

Date of Grant: October 7, 2002

1. Award of Restricted Stock. This Award Notice serves to notify you that the Compensation and Management Development Committee (the "Committee") of the Board of Directors of Eastman Chemical Company ("Company") has granted to you, under the 2002 Omnibus Long-Term Compensation Plan ("Plan"), the number of shares ("Restricted Stock") of its $.01 par value Common Stock ("Common Stock") set forth above, to be held, subject to the terms of the Plan and this Award Notice, as restricted stock. This Award recognizes your significant contribution to the Company and provides additional incentive for your continued service with the Company. The Plan is incorporated herein by reference and made a part of this Award Notice. Capitalized terms not otherwise defined herein have the respective meanings set forth in the Plan.

2. Lapse of Restrictions. The restrictions described below with respect to the Restricted Stock will lapse upon the earlier of: (1) as to 9,340 shares, on October 7, 2005; as to 9,340 shares, on October 7, 2006; and as to 9,340 shares, on October 7, 2007; in each case if and only if you are still an employee of the Company or a Subsidiary on that date, or (2) termination of your employment with the Company and its Subsidiaries, if and only if such termination is by reason of death, disability, or for another approved reason, as determined by the Committee (the dates described in clause (1) or (2), as applicable, are referred to herein as the "Vesting Dates").

3. Book-Entry Registration. The Restricted Stock awarded pursuant to this Award Notice initially will be evidenced by book-entry registration only, without the issuance of certificates representing such shares.

4. Issuance of Shares. Subject to the other terms of this Award Notice, the Company will either issue a certificate or certificates representing the Restricted Stock as promptly as practicable following the Vesting Dates or place the shares in the Automatic Dividend Reinvestment Plan maintained for stockholders of the Company as directed by the grantee. The Company may withhold or require the grantee to remit a cash amount sufficient to satisfy federal, state, and local taxes (including the Participant's FICA obligation) required by law to be withheld. Further, either the Company or the grantee may elect to satisfy the withholding requirement by having the Company withhold shares of common stock having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction.

You may elect to defer the Award until after you retire or otherwise terminate employment with the Company and its Subsidiaries under the terms and subject to the conditions of the Eastman Executive Deferred Compensation Plan, as the same now exists or may be amended hereafter (the "EDCP"). If you choose to defer the Award, the Award shall be converted into the right to receive a cash payment.

If any portion of an Award is converted into a right to receive a cash payment as described above, an amount representing the Fair Market Value of the deferred portion of the Award will be credited to the Stock Account of the Eastman EDCP and hypothetically invested in units of Common Stock. Thereafter, such amount will be treated in the same manner as other investments in the EDCP and shall be subject to the terms and conditions thereof.

5. Restrictions on Transfer of Shares. The Restricted Stock, and the right to vote such shares and to receive dividends thereon, may not, except as otherwise provided in the Plan, be sold, assigned, transferred, pledged or encumbered in any way prior to the Vesting Dates, whether by operation of law or otherwise. After the Vesting Dates, certificates for the Restricted Stock may be issued during your lifetime only to you, except in the case of a permanent disability involving mental incapacity.

6. Limitation of Rights. Except as otherwise provided in this Award Notice or the Plan, prior to the Vesting Dates, you will have no rights of a stockholder with respect to the Restricted Stock, except for the right to receive such cash dividends, if any, as may be declared on the shares of Common Stock subject thereto from time to time, and the right to vote (in person or by proxy) such shares at any meeting of stockholders of the Company. Neither the Plan, this Award nor this Award Notice gives you any right to remain employed by the Company or a Subsidiary.

7. Termination. Upon termination of your employment with the Company and its Subsidiaries, prior to a Vesting Date, other than by reason of death, disability, or for another approved reason, as determined by the Committee, all of the unvested shares of Restricted Stock will be canceled and forfeited by you to the Company without the payment of any consideration by the Company. In such event, neither you nor any of your successors, heirs, assigns or personal representatives will thereafter have any further rights or interest in such shares or otherwise in this Award.

8. Change in Ownership; Change in Control. Sections 25 and 26 of the Plan contain certain special provisions that will apply to this Award in the event of a Change in Ownership or Change in Control, respectively.

9. Adjustment of Shares. If the number of outstanding shares of Common Stock changes through the declaration of stock dividends or stock splits prior to the Vesting Date, the shares of Common Stock subject to this Award automatically will be adjusted. If there is a change in the number of outstanding shares of Common Stock or any change in the outstanding stock of the Company (or any successor to the Company) prior to the Vesting Dates, the Committee will make any adjustments and modifications to this Award that it deems appropriate. In the event of any other change in the capital structure or in the Common Stock of the Company, the Committee is authorized to make appropriate adjustments to this Award.

10. Restrictions on Issuance of Shares. If at any time the Company determines that listing, registration or qualification of the shares of Common Stock subject to this Award upon any securities exchange or under any state or federal law, or the approval of any governmental agency, is necessary or advisable as a condition to the award or issuance of certificate(s) for the shares of Common Stock subject to this Award, such award or issuance may not be made in whole or in part unless and until such listing, registration, qualification or approval shall have been effected or obtained free of any conditions not acceptable to the Company.

11. Noncompetition; Confidentiality. You will forfeit all rights to this Award if you violate the noncompetition and confidentiality provisions contained in Section 20 of the Plan.

12. Plan Controls. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Award Notice, the provisions of the Plan will be controlling and determinative.

EXHIBIT 10.02

THE WARRANT REPRESENTED BY THIS AGREEMENT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES ACTS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM.

AMENDED AND RESTATED WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
EASTMAN CHEMICAL COMPANY

DATE OF AMENDMENT: DECEMBER__, 2001

THIS AMENDED AND RESTATED WARRANT supersedes in every respect the Warrant to Purchase Shares of Common Stock of Eastman Chemical Company, dated December 24, 1997, (the "Original Warrant") entered into pursuant to the Eastman Chemical Company Benefit Security Trust Agreement dated December 24, 1997, as amended ("Trust Agreement") by and between Eastman Chemical Company (the "Company") and Wachovia Bank, N.A., as Trustee ("Trustee").

THIS CERTIFIES THAT, for value received, the Holder is entitled to purchase, subject to the provisions of this Warrant, from Eastman Chemical Company (the "Company") at any time after the Trigger Date (as defined herein) and prior to termination of the Trust as defined herein) (the "Expiration Time"), up to the number of Fixed Shares (as defined herein) (as may be adjusted in accordance with Section 2 hereof) of Common Stock (as defined herein), at any time and from time to time, in whole or in part, at an exercise price per share of $.01 (the "Exercise Price). This Warrant shall expire at the Expiration Time.

W I T N E S S E T H:

WHEREAS, Eastman Chemical Company previously entered into the Original Warrant with the Trustee on December 24, 1997 in connection with the Trust Agreement;

NOW THEREFORE, the parties do hereby amend and restate the Original Warrant and agree that to the terms, provisions and conditions set forth herein; with the amended and restated warrant to be effective January 2, 2002.

SECTION 1. DEFINITIONS.

"Additional Shares of Common Stock" means all shares of Common Stock (including options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock, or options to purchase or rights to subscribe for such convertible or exchangeable securities, with or without payment of additional consideration in cash or property, either immediately or upon the occurrence of a specified date or a specified event) issued by the Company after the date hereof.

"Business Day" means any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the State of North Carolina.

"Common Stock" means the Company's common, stock, par value $.01 per share, and shall include any capital stock of the Company into which such class of stock shall be converted.

"Company" means Eastman Chemical Company, a Delaware corporation.

"Daily Closing Price" means the last reported sales price regular way or, in case no such reported sales took place on such day, the average of the last reported bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or if the Common Stock is

not at the time listed or admitted for trading on any such exchange, then such price as shall be equal to the average of the last reported bid and asked prices, as reported by the principal automated quotation service on which such shares are quoted on such day, or if, on any day in question, the Common Stock shall not be quoted on any automated quotation service, then such price shall be equal to the average of the last reported bid and asked prices on such day as reported by any other reasonable source selected in good faith by the Company. Notwithstanding the foregoing, if the Common Stock is not traded in such manner that the prices referred to above are available for the period required hereunder, the Daily Closing Price shall be determined in good faith by the Board of Directors of the Company.

"Fixed Shares" means a number of shares of Common Stock obtained by (i) dividing the Liability Amount by the Initial Trading Price; and (ii) then rounding such number of shares up to the nearest 100,000 shares.

"Holder" means Wachovia Bank, NA,, a national banking association, as trustee under the Trust, or its registered assigns of all or any portion of this Warrant.

"Initial Trading Price" means the average of the Daily Closing Prices of one share of Common Stock for all of the Business Days during January 2002; provided, however, if a Triggering Event occurs before January 31, 2002, then the Initial Trading Price shall be the average of the Daily Closing Prices for all of the Business Days during January 2002 preceding the date of such Triggering Event and shall not include average Closing Prices after the date of the occurrence of such Triggering Event. As a practical determination of the Initial Trading Price, the Company will provide notice to the Holder of the computation of the initial number of Fixed Shares including detail as to the computation of the Initial Trading Price. The Company's determination will be final and binding if the Holder does not object within five (5) Business Days. Any objection by the Holder shall comply with Section 2.6(e) hereof.

"Liability Amount" means one hundred twenty-one million U.S. dollars ($121,000,000.00).

"Market Price" means the average of the daily closing prices of one share of Common Stock for the fifteen (15) consecutive Business Day period and such average will be adjusted for any stock dividend, split, combination or reclassification that took effect during such fifteen (15) Business Day period. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sales took place on such day, the average of the last reported bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or if the Common Stock is not at the time listed or admitted for trading on any such exchange, then such price as shall be equal to the average of the last reported bid and asked prices, as reported by the principal automated quotation service on which such shares are quoted on such day, or if, on any day in question, the Common Stock shall not be quoted on any automated quotation service, then such price shall be equal to the average of the last reported bid and asked prices on such day as reported by any other reasonable source selected in good faith by the Company. Notwithstanding the foregoing, if the Common Stock is not traded in such manner that the prices referred to above are available for the period required hereunder, the Market Price shall be determined in good faith by the Board of Directors of the Company.

"Notice of Exercise" means the Notice of Exercise in the form of Exhibit A.

"Securities Act" means the Securities Act of 1933, as amended.

"Trigger Date" means the fifth Business Day after the first Triggering Event; provided, however, that a Trigger Date shall not occur with respect to a given Triggering Event if no later than the Trigger Date the Company transfers to the Trust cash or other liquid funds in the amount and in the manner required under Section One(e)(3) of the Trust Agreement

"Triggering Event" stall have the meaning set forth in the Trust Agreement.

"Trust" means the Eastman Chemical Company Benefit Security Trust created by the Trust Agreement.

"Trust Agreement" means that certain Trust Agreement, dated December 24, 1997, by and between the Company and the initial Holder.

"Warrant Shares" means the shares of Common Stock or other securities or property, as adjusted from time to time, deliverable upon exercise of this Warrant.

SECTION 2. EXERCISE OF WARRANT.

2.1. Procedures for Exercise of Warrant. (a) To exercise this Warrant in whole or in part, the Holder shall deliver to the Company's transfer agent (or if there is none, the Company) at any time after the Trigger Date and prior to the Expiration Time: (i) a Notice of Exercise indicating thereon the Holder's election to exercise pursuant to this Section 2.1(a); (ii) cash or certified or official bank check, payable to the order of the Company in the an amount of the aggregate Exercise price (rounded up the nearest cent) for the Warrant Shares being purchased; and (iii) this Warrant. Upon payment of the aggregate Exercise Price (rounded up the nearest cent) for the Warrant Shares being purchased, the Holder shall be deemed to be the holder of record of the Warrant Shares, notwithstanding that the stock transfer books of the Company may then be closed or that certificates representing such Warrant Shares may not then be actually delivered to the Holder. The Company shall, as promptly as practicable thereafter, cause to be executed, and deliver to the Holder, or the Holder's nominee, a certificate or certificates representing the aggregate number of Warrant Shares specified in the Notice of Exercise. Each stock certificate so delivered shall be in such denomination as may be requested by the Holder and shall be registered in the name of the Holder or such other name as shall be designated by the Holder. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of said stock certificate or certificates, deliver to the Holder a new Warrant evidencing the right of the Holder to purchase the remaining shares of Common Stock covered by this Warrant. The Company shall pay all expenses, taxes and other charges payable in connection with the preparation, execution and delivery of such stock certificates, provided that Holder shall pay all incremental expenses, taxes and other charges if such stock certificates shall be registered in a name or names other than the name of the Holder.

(b) Alternatively, at the sole election of the Holder, Holder may exercise this Warrant in whole or in part, by delivering to the Company at any time after the Trigger Date and prior to the Expiration Time: (i) a Notice of Exercise, indicating thereon Holder's election to exercise pursuant to this
Section 2.1(b); and (ii) this Warrant, whereupon the Holder shall be deemed to be the holder of record (notwithstanding that the stock transfer books of the Company may then be closed or that certificates representing such Warrant Shares may not then be actually delivered to the Holder) of a number of Warrant Shares equal to the number (rounded up to the next nearest whole share) equal to the product of (A) the number of Warrant Shares in respect of which the Warrant has been exercised (the "Exercise Shares") and (B) the quotient obtained by dividing
(x) the excess of the Market Price of a single Exercise Share on the date of exercise (the "Current Value") over the Exercise Price per Exercise Share by (y) the Current Value, appropriately adjusted in order to protect the interests of the Holder in the event that after the Trigger Date an event of a type analogous to any of the events described in sections 2.4, 2.5 or 2.7 shall have occurred with respect to the Common Stock, the Company shall, as promptly as practicable thereafter, cause to be executed, and deliver to the Holder, or the Holder's nominee, a certificate or certificates representing the aggregate number of Warrant Shares determined in accordance with this Section 2.1(b). Each stock certificate so delivered shall be in such denomination as may be requested by the Holder and shall be registered in the name of the Holder or such other name as shall be designated by the Holder. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of said stock certificate or certificates, deliver to the Holder a new Warrant evidencing the right of the Holder to purchase the remaining shares of Common Stock covered by this Warrant. The Company shall pay all expenses, taxes and other charges payable in connection with the preparation, execution and delivery of such stock certificates, provided that Holder shall pay all incremental expenses, taxes and other charges if such stock certificates shall be registered in a name or names other than the name of the Holder.

2.2. Restrictive Legend. Each certificate for Warrant Shares shall be legended as follows (unless the offer and sale of such Warrant Shares shall have been registered under the Securities Act at the time of exercise),

"The shares represented by this certificate have not been registered under the Securities Act of 1933 or under any state securities laws and shall not be transferred at any time in the absence of (i) an effective registration statement under the Securities Act of 1933 and applicable state securities laws, or (ii) an opinion of counsel reasonably satisfactory to the Company that such registration is not required."

2.3. Character of Warrant Shares. The Company warrants that all Warrant Shares shall be duly authorized and, upon payment of the Exercise Price therefor, validly issued, fully paid and nonassessable.

2.4. Stock Dividends, Subdivisions and Combinations. If at any time the Company shall

(i) establish a record date for the determination of holders of record of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Additional Shares of Common Stock,

(ii) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or

(iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock,

then the Warrant Shares for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event.

2.5. Certain Other Distributions. If at any time the Company shall establish a record date for the determination of the holders of record of its Common Stock for the purpose of entitling them to receive any dividend or other distribution of

(i) cash (other than periodic quarterly cash dividends),

(ii) any evidences of its indebtedness or any other securities or property of any nature whatsoever (other than cash or Additional Shares of Common Stock), or

(iii) any warrants or other rights to subscribe for or purchase any evidences of its indebtedness or any other securities or property of any nature whatsoever (other than cash or Additional Shares of Common Stock),

then the Warrant Shares for which this Warrant is exercisable shall be adjusted to equal the product of the Warrant Shares for which this Warrant is exercisable immediately prior to such adjustment and a fraction (x) the numerator of which shall be the Market Price per share of Common Stock at the date of taking such record and (y) the denominator of which shall be such Market Price per share of Common Stock minus the amount allocable to one share of Common Stock of any such cash so distributable and of the fair value (as determined in good faith by the Board of Directors of the Company) of any and all such evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or purchase rights so distributable. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 2.5 and, if the outstanding shares of the Common Stock shall be changed into a larger or smaller number of shares of the Common Stock as part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of the Common Stock within the meaning of Section 2.4.

2.6 Other Provisions Applicable to Adjustments Under this Section. The following provisions shall be applicable to the making of adjustments of the Warrant Shares for which this Warrant is exercisable provided for in this
Section 2:

(a) Computation of Consideration. To the extent that any Additional Shares of Common Stock shall be issued for cash consideration, the consideration received by the Company therefor shall be the amount of the cash received by the Company therefor, or, if such Additional Shares of Common Stock are offered by the Company for subscription, the subscription price, or, if such Additional Shares of Common Stock are sold to underwriters or dealers for public offering without a subscription offering, the public offering price (in any such case subtracting any amounts paid or receivable for accrued interest or accrued dividends and any compensation, discounts or expenses paid or incurred by the Company for and in the underwriting of, or otherwise in connection with, the issuance thereof). To the extent that such issuance shall be for a consideration other than cash, then except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as determined in good faith by the Board of Directors of the Company. In case any Additional Shares of Common Stock shall be issued in connection with any merger in which the Company issues any securities, the amount of consideration therefor shall be deemed to be the fair value, as determined in good faith by the Board of Directors of the Company, of such portion of the assets and

business of the nonsurviving corporation as such Board in good faith shall determine to be attributable to such Additional Shares of Common Stock. The consideration for any Additional Shares of Common Stock issuable pursuant to any options, warrants or other rights to subscribe for or purchase the same shall be the consideration received by the Company for issuing such options, warrants or other rights plus the additional consideration payable to the Company upon exercise of such options, warrants or other rights. In case of the issuance at any time of any Additional Shares of Common Stock in payment or satisfaction of any dividends upon any class of stock other than Common Stock, the Company shall be deemed to have received for such Additional Shares of Common Stock a consideration equal to the amount of such dividend so paid of satisfied.

(b) When Adjustments to Be Made. The adjustments required by this Section 2 shall be made whenever and as often as any event requiring an adjustment shall occur, except that any adjustment of the Warrant Shares for which this Warrant is exercisable that would otherwise be required may be postponed (except in the case of a subdivision or combination of shares of the Common Stock, as provided for is Section 2.4) up to, but not beyond the date of exercise if such adjustment either by itself or with other adjustments not previously made adds or subtracts less than 1% of the Warrant Shares for which this Warrant is exercisable immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) which is postponed shall be carried forward and made on the earlier of the date of exercise or the date on which such adjustment, together with other adjustments required by this Section 2 and not previously made, would result in a minimum adjustment. For the purpose of any adjustment, any event shall be deemed to have occurred at the close of business on the date of its occurrence.

(c) Fractional Interests. In computing adjustments under this Section 2, fractional interests in the Common Stock shall be taken into account to the nearest 1/10th of a share.

(d) When Adjustment Not Required. If the company shall establish a record date for the determination of the holders of record of the Common stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights, and shall, thereafter and before the distribution to stockholders thereof; legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the establishment of such record date and any such adjustment previously made in respect hereof shall be rescinded and annulled.

(e) Challenge to Good Faith Determination. Whenever the Board of Directors of the Company shall be required to make a determination in good faith of the fair value of any item under this Agreement (including any determination of Market Price), such determination may be challenged in good faith by the Holder and any dispute (including any disputes arising out of any failure or refusal of such Board of Directors to promptly make any such determination) shall be resolved by a business valuation or appraisal firm of recognized national standing selected by the Holder and acceptable to the Company (and if not acceptable to the Company, an investment banking firm of recognized national standing selected by the Holder and acceptable to the Company). The fees of such valuation or appraisal firm (or investment banker) shall be borne by such Holder if the Company's calculation is determined to be correct and otherwise by the Company.

(f) Escrow of Property. If the Company shall establish a record date for the determination of the holders of record of its Common Stock for the purpose of entitling them to receive any distribution of any kind of property whatsoever, but prior to the payment of such distribution the Holder exercises this Warrant, upon payment of the Exercise Price, such property shall be held in escrow for the Holder by the Company to be issued to the Holder upon the occurrence of such distribution and to the extent such distribution actually takes place. Notwithstanding any other provision to the contrary herein, if the distribution for which such record date was established fails to occur or is rescinded, then such escrowed property shall be returned to the Company.

2.7. Reorganization, Reclassification, Merger or Consolidation. If the Company shall at any time reorganize or reclassify the outstanding shares of Common Stock (other than a change in par value, or from no par value to par value, or from par value to no par value by or as a result of a subdivision or combination) or consolidate with or merge into another corporation (where the Company is not the continuing corporation after such merger or consolidation), the Holder shall thereafter be entitled to receive upon exercise of this Warrant in whole or it part, the same kind and number of shares of stock and other securities, cash or other property (and upon the same terms and

with the same rights) as would have been distributed to the Holder upon such reorganization, reclassification, consolidation or merger had the holder exercised this Warrant immediately prior to such reorganization, reclassification, consolidation or merger (subject to subsequent adjustments under this Section 2). The Holder shall pay upon such Exercise the Exercise Price that otherwise would have been payable pursuant to the terms of this Warrant. If any such reorganization, reclassification, consolidation or merger results in a cash distribution in excess of the Exercise Price provided by this Warrant, the Holder may, at the Holder's option, exercise this Warrant without making payment of the Exercise Price, and in such case the Company shall, upon distribution to such Holder, consider the Exercise Price to have been paid in full, and in making settlement to such Holder, shall deduct an amount equal to the Exercise Price from the amount payable to such Holder. Notwithstanding anything herein to the contrary, the Company will not effect any such reorganization, reclassification, merger or consolidation unless prior to the consummation thereof, the corporation who may be required to deliver any stock, securities or other assets upon the exercise of this Warrant shall agree by an instrument in writing to deliver such stock, cash, securities or other assets to the Holder. A sale, transfer or lease of all or substantially all of the assets of the Company to another person shall be deemed a reorganization, reclassification, consolidation or merger for the foregoing purposes.

2.8. Exceptions to Adjustment of Warrant Shares. Anything herein to the contrary notwithstanding, the Company shall not make any adjustment of the number of Warrant Shares in the case of (a) the issuance of the Warrant, any adjustment in the number of shares issuable upon exercise of the Warrant, or the issuance of shares of Common Stock upon exercise of the Warrant, (b) the issuance of additional rights ("Rights") pursuant to the Company's Stockholder Protection Rights Agreement, dated as of December 13, 1993 (as the same may be amended from time to time, and including any substitute or successor plan or agreement, the "Rights Plan"), (c) the issuance of any Additional Shares of Common Stock upon exercise of Rights, but only if the Holder is entitled, upon exercise of this Warrant, to receive and to exercise Right in respect of Warrant Shares issuable upon exercise of this Warrant, or (d) the issuance of Additional Shares of Common Stock to any Person granted pursuant to stock options, restricted stock grants and similar stock-based awards granted by the Company pursuant to its various employee benefit and compensation plans, as the same may be in effect from time to time.

2.9. Chief Financial Officer's Certification. Upon each change in the number of Warrant Shares issuable upon the exercise of this Warrant, and in the event of any change in the rights of the Holder by reason of other events herein set forth, then and in each such case, the Company will promptly obtain a certificate of the chief financial officer of the Company, stating the new Warrant Shares so issuable, or specifying the other shares of the Common Stock, securities or assets and the amount thereof receivable as a result of such change in rights, and setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. The Company will promptly mail a copy of such certificate to the Holder. If the Holder disagrees with such calculation, the Company agrees to obtain, within thirty (30) Business Days, from a firm of independent certified public accountants selected by the Holder and acceptable to the Company, a review of such calculation and the determination of such firm of independent certified public accountants shall be final and binding on the parties and shall be conclusive evidence of the correctness of the computation with respect to any such change in the number of Warrant Shares so issuable.

2.10. Notice of Certain Proposed Actions. In the event that, at any time after the occurrence of any Triggering Event, the Company shall propose to take any action of the types described in Sections 2.4, 2.5 or 2.7, the Company shall forward, at the same time and in the same manner, to the Holder such notice, if any, that the Company shall give to the holders of any class or series of capital stock of the Company. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any such action.

2.11. Treasury Shares. The sale or other disposition of any Common Stock theretofore held in the treasury of the Company shall be deemed to be a new issuance thereof.

SECTION 3. OWNERSHIP AND TRANSFER.

3.1. Ownership. The Company may deem and treat the person in whose name this Warrant is registered as the Holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary until presentation of this Warrant for registration of transfer as provided in this Section 3.

3.2 Transfer and Replacement. Subject to restrictions on transfer of this Warrant under the Securities Act or applicable state securities laws, this Warrant and all rights hereunder are transferable in whole or in part upon the books of the Company (or its transfer agent) by the Holder hereof in person or by duly authorized attorney, and a

new Warrant or Warrants, of the same tenor as this Warrant but registered in the name of the transferee or transferees shall be made and delivered by the Company upon surrender of this Warrant duly endorsed, at the office of the Company's transfer agent (or if none, the Company). Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft or destruction of this Warrant, and of indemnity or security reasonably satisfactory to it, or upon surrender of this Warrant if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any transfer or replacement. Except as otherwise provided above in the case of the loss, theft or destruction of a Warrant, the Company shall pay all expenses, taxes and other charges payable in connection with any transfer or replacement of this Warrant.

SECTION 4. NO FRACTIONAL SHARE.

No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. In lieu thereof, a cash payment shall be made equal to such fraction multiplied by the Market Price per share as then in effect.

SECTION 5. CHARGES AND TAXES.

Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expense shall be paid by the Company.

SECTION 6. RESERVATION OF SHARES.

The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of any purchase rights under this Warrant.

SECTION 7. NO RIGHTS AS STOCKHOLDER; LIMITATION OF LIABILITY.

This Warrant shall not entitle the Holder to any of the rights of a shareholder of the Company prior to exercise of this Warrant, in whole or in part, and payment of the Exercise Price therefor, whereupon the Holder shall be entitled to all of the rights of a shareholder of the company in respect of the Warrant shares so acquired.

SECTION 8. AVOIDANCE OF CERTAIN ACTIONS.

The Company will not, by amendment of its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, share exchange, issue or sale of securities, or otherwise, avoid or take any action which would have the effect of avoiding the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in carrying out all of the provisions of this Warrant and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment, and in particular, will not cause the par value, if any, of any share of Common Stock to be or become greater than the then-effective Exercise Price.

SECTION 9. AMENDMENT.

This Warrant may only be modified or amended and any provision hereof may only be waived by a writing executed by the Company and the Holder of this Warrant.

SECTION 10. REMEDIES.

Each Holder of this Warrant, in addition to being entitled to exercise all rights in an action at law, including recovery of damages, shall be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate.

SECTION 11. LAW GOVERNING.

This Warrant shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware.

SECTION 12. NOTICES.

All notices, requests, waivers, releases, consents, and other communications required or permitted by this Agreement (collectively, "Notices") shall be in writing. Notices shall be deemed sufficiently given for all purposes wider this Agreement when delivered in person, when dispatched by telegram or (upon written confirmation of receipt) by electronic facsimile transmission or (upon written confirmation of receipt) when dispatched by a nationally recognized overnight courier service. All Notices shall be delivered as follows:

(i) if to a Holder, at the address of the initial Holder as provided it the Trust Agreement or at such other address as such Holder may have furnished to the Company in writing; and

(ii) if to the Company, at

Eastman Chemical Company Eastman Road P.O. Box 511 Building 75 Kingsport, Tennessee 37660 Attention: General Counsel Telephone Number: (423) 229-2097

Fax Number: (423) 229-1679 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer as of the ____ day of December, 2001, but effective as of January 2, 2002.

EASTMAN CHEMICAL COMPANY

By:

Name:

Title:

NOTICE OF EXERCISE
OF WARRANT TO PURCHASE COMMON STOCK OF
EASTMAN CHEMICAL COMPANY

To: Eastman Chemical Company

Check one:

[ ] The undersigned, the registered owner of this Warrant, hereby irrevocably elects, pursuant to Section 2.1(a) of the Warrant Agreement, to exercise the purchase rights represented thereby for, and to purchase thereunder, ________ shares of Common Stock of Eastman Chemical Company and herewith makes payment of $__________________ therefor, and requests that the certificates evidencing such shares be issued in the name of and be delivered to:

Name:

Address:

Tax I.D. Number:

and if such shares shall not be all of the shares purchasable hereunder, that a new Warrant of like tenor for the balance of the shares purchasable hereunder be delivered to the undersigned.

[ ] The undersigned, the registered owner of this Warrant, hereby irrevocably elects, pursuant to Section 2.1(b) of the Warrant Agreement, to exercise the purchase rights represented thereby for, and to purchase thereunder, __________ shares of Common Stock of Eastman Chemical Company, and requests that the certificates evidencing such shares be issued in the name of and be delivered to:

Name:

Address:

Tax I.D. Number:

and if such shares shall not be all of the shares purchasable hereunder, that a new Warrant of like tenor for the balance of the shares purchasable hereunder be delivered to the undersigned.

Dated:                       , 19
       ----------------------    --



                                     Name of Holder:
                                                    ----------------------------

By:
Name:

Title:

EXHIBIT 10.03

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

This Amended and Restated Registration Rights Agreement (the" Agreement") is made this ____ day of December, 2001 by and between Eastman Chemical Company, a Delaware corporation (the "Company"), and Wachovia Bank, N.A., a national banking association (the "Trustee"), as trustee under the Eastman Chemical Company Benefit Security Trust created by that certain Trust Agreement, dated December 24, 1997, by and between the Company and the Trustee.

W I T N E S S E T H:

WHEREAS, Eastman Chemical Company previously entered into a Warrant with the Trustee dated December 24, 1997 (the "Original Warrant"), and in connection therewith also entered into a Registration Rights Agreement with the Trustee (the "Original Registration Rights Agreement");

WHEREAS, the Company has amended the Original Warrant effective as of January 2, 2002 (the "Warrant") and in connection therewith, wishes to amend the Original Registration Rights Agreement as provided herein, effective as of January 2, 2002;

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows:

1. Certain Definitions.

For purposes of this Agreement, the following terms have the following meanings when used herein:

(a) "Business Day" means any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the State of North Carolina.

(b) "Commission" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act.

(c) "Common Stock" means the Company's common stock, par value $.01 per share, and shall include any capital stock of the Company into which such class of stock shall be converted.

(d) "Company" means Eastman Chemical Company, a Delaware corporation, and its successors and assigns.

(e) "Exchange Act" means the Securities Exchange Act of 1934, as amended (or any similar successor federal statute), and the rules and regulations thereunder, as in effect from time to time.

(f) "Holder" means any Person that owns Registrable Securities, including such successors and assigns as acquire Registrable Securities, directly or indirectly, from such Person. For purposes of this Agreement, the Company may deem and treat the registered holder of a Registrable Security as the Holder and absolute owner thereof.

(g) "Initial Holder" means the Trustee.

(h) "Majority Registered Holders" means in the case of any registration statement, the Holders of a majority of the Registrable Securities proposed to be covered (or so covered) in such registration statement.

(i) "Person" means any individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, or other entity, or a government or any political subdivision or agency.

(j) "Registrable Securities" means (A) the Warrant Shares issued to the Holder upon exercise of the Warrant and (B) any securities of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, the Warrant Shares. For purposes of this Agreement, a Registrable Security ceases to be a Registrable Security when either (i) it has been effectively registered under the Securities Act and sold or distributed to any Person pursuant to an effective registration statement covering it, or (ii) it has been sold or distributed to any Person pursuant to Rule 144.

(k) "Registration" means any registration of Registrable Securities effected pursuant to Section 2 hereof.

(1) "Regulation M" means the rules promulgated by the Commission under Regulation M of the Exchange Act, as such rules may be amended from time to time, or any similar successor rules that may be promulgated by the Commission.

(m) "Rule 144," Rule 145," "Rule 415" and "Rule 424" mean, respectively, Rule 144, Rule 145, Rule 415 and Rule 424, each promulgated by the Commission under the Securities Act, in each case as amended from time to time, or any similar successor rule thereto that may be promulgated by the Commission.

(n) "Securities Act" means the Securities Act of 1933, as amended (or any similar successor federal statute), and the rules and regulations thereunder, as the same are in effect from time to time.

(o) "Trust" means the Eastman Company Benefit Security Trust created by the Trust Agreement.

(p) "Trustee" means Wachovia Bank, N.A., a national banking association, as trustee under the Trust.

(q) "Trust Agreement" means that certain Trust Agreement, dated December 24, 1997, by and between the Company and the Trustee.

(r) "Warrant" means that certain Warrant to purchase shares of Common Stock of the Company, dated as of December __, 1997, held by the Initial Holder.

(s) "Warrant Shares" means the shares of Common Stock, as adjusted from time to time, deliverable upon exercise of the Warrant.

2. Registrations.

(a) Effective Registration. At any time after exercise of the Warrant and before one year following such exercise, upon written notice to the Company from one or more Holders (the "Initiating Holders") of Registrable Securities holding in the aggregate Registrable Securities with a market value (on the date the written notice is delivered) of at least $20 million, requesting that the Company effect, pursuant to this Section 2, the

registration of any of such Initiating Holders' Registrable Securities under the Securities Act (which notice shall specify the Registrable Securities so requested to be registered, the proposed amounts thereof and the intended method or methods of disposition by such Initiating Holders), the Company shall promptly (but in any event within 10 Business Days) give written notice of such requested registration to all Holders, and thereupon the Company shall, as soon as practicable, use its reasonable efforts to effect the registration under the Securities Act of:

(A) the Registrable Securities that the Initiating Holders have requested the Company to register, for disposition in accordance with the intended method or methods of disposition stated in their notice to the Company; and

(B) all other Registrable Securities the Holders of which shall have made a written request to the Company for registration thereof (which request shall specify such Registrable Securities and the proposed amounts thereof) within 15 Business Days after the receipt of such written notice from the Company,

all to the extent requisite to permit the disposition by Holders of the securities then constituting Registrable Securities so to be registered.

(b) Frequency: Duration. The Company shall not be required to effect more than two Registrations pursuant to this Agreement The Company shall not be required to effect a Registration pursuant to this Section 2 if it shall have so effected a Registration during the previous 12 months; provided, however, that a Registration shall not be deemed to have been effected for purposes of this Section 2(b) if the applicable registration statement has not been declared effective and kept effective until the earlier of (i) 180 days following the date on which such registration statement was declared effective, and (ii) the sale pursuant to such registration statement of the Registrable Securities covered thereby.

(c) Inclusion of Other Securities. The Company shall not register any securities other than Registrable Securities in any Registration without the prior written consent of the Majority Registered Holders. If any securities other than Registrable Securities are so registered, securities requested to be registered by the Company for sale for its own account shall have absolute priority over securities requested to be registered by third parties.

3. Registration Procedures.

(a) Company Procedures. Whenever the Company is required by this Agreement to effect the registration of any Registrable Securities under the Securities Act pursuant to a registration statement, the Company shall use its reasonable efforts to effect each such registration to permit the sale of such Registrable Securities in accordance with the intended method or methods of disposition thereof, and pursuant thereto the Company shall, as soon as practicable:

(i) prepare and file with the Commission the requisite registration statement to effect such registration and thereafter use its reasonable efforts to cause such registration statement to be declared effective as soon as practicable and to remain continuously effective for the time period required by this Agreement to the extent permitted under the Securities Act, provided that as soon as practicable but in no event later than three Business Days before filing such registration statement, any related prospectus or any amendment or supplement thereto, other than any amendment or supplement made solely as a result of incorporation by reference of documents filed with the Commission subsequent to the filing of such registration statement, the Company shall furnish to the Holders of the Registrable Securities covered (or proposed to be covered) by such registration statement and the underwriters, if any, copies of all such documents proposed to be filed, which documents. shall be subject to the review of such Holders and underwriters; the Company shall not file any registration statement or

amendment thereto or any prospectus or any supplement thereto (other than any amendment or supplement made solely as a result of incorporation by reference of documents filed with the Commission subsequent to the filing of such registration statement) to which the managing underwriters of the applicable offering, if any, or the Majority Registered Holders shall have reasonably objected in writing within two Business Days after receipt of such documents to the effect that such registration statement or amendment thereto or prospectus or supplement thereto does not comply in all material respects with the requirements of the Securities Act (provided that the foregoing shall not limit the right of any Holder whose Registrable Securities are covered by a registration statement to reasonably object, within two Business Days after receipt of such documents, to any particular information that is to be contained in such registration statement, amendment, prospectus or supplement and relates specifically to such Holder, including, without limitation, any information describing the manner in which such Holder acquired such Registrable Securities and the intended method or methods of distribution of such Registrable Securities), and if the Company is unable to file any such document due to the objections of such underwriters or such Holders, the Company shall use its reasonable efforts to cooperate with such underwriters and Holders to prepare, as soon as practicable, a document that is responsive in all material respects to the reasonable objections of such underwriters and Holders;

(ii) prepare and file with the Commission such amendments and post-effective amendments to such registration statement as may be necessary to keep such registration statement continuously effective and current for the period required by this Agreement to the extent permitted under the Securities Act; and cause each related prospectus to be supplemented by any prospectus supplement as may be required, and as so supplemented to be filed pursuant to Rule 424; and otherwise comply with the provisions of the Securities Act as may be necessary to facilitate the disposition of all Registrable Securities covered by such registration statement during the applicable period in accordance with the intended method or methods of disposition by the selling Holders thereof set forth in such registration statement or such prospectus or prospectus supplement;

(iii) notify the Holders and the managing underwriters, if any, of the applicable offering (providing, if requested by any such Persons, confirmation in writing) as soon as practicable after becoming aware of: (A) the filing of any prospectus or prospectus supplement or the filing or effectiveness (or anticipated date of effectiveness) of such registration statement or any post-effective amendment thereto; (B) any request by the Commission for amendments or supplements to such registration statement or the related prospectus or for additional information; (C) the issuance by the Commission of any stop order suspending the effectiveness of such registration statement or the initiation of any proceedings for that purpose; (D) the receipt by the Company of any notification with respect to the suspension of the qualification or registration (or exemption therefrom) of any Registrable Securities for sale in any jurisdiction in the United States or the initiation or threatening of any proceeding for such purposes; or (E) the happening of any event that makes any statement made in such registration statement or in any related prospectus, prospectus supplement, amendment or document incorporated therein by reference untrue in any material respect or that requires the making of any changes in such registration statement or in any such prospectus, supplement, amendment or other such document so that it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein (m the case of any prospectus in the light of the circumstances under which they were made) not misleading;

(iv) make every reasonable effort to obtain at the earliest possible moment the withdrawal of any order or other action suspending the effectiveness of any such registration statement or suspending the qualification or registration (or exemption therefrom) of the Registrable Securities for sale in any jurisdiction;

(v) if reasonably requested by the managing underwriters, if any, of the applicable offering, as soon as practicable incorporate in a prospectus supplement or post-effective amendment such information as such underwriters agree should be included therein relating to the sale and offering of the applicable Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being sold

to any underwriters, the purchase price being paid therefor by any such underwriters and any other terms of the offering of the Registrable Securities; and make all required filings of such prospectus supplement or post-effective amendment as soon as practicable following receipt of notice of the matters to be incorporated therein;

(vi) as soon as practicable after filing such documents with the Commission, furnish to the Holders and each of the underwriters, if any, without charge, at least one manually signed or conformed copy of such registration statement and any post-effective amendment thereto, including financial statements and schedules; and as soon as practicable after the request of any Holder or underwriter, furnish to such Holder or underwriter, as the case may be, at least one copy of any document incorporated by reference in such registration statement or in any related prospectus, prospectus supplement or amendment, together with all exhibits thereto (including those previously furnished or incorporated by reference);

(vii) deliver to the Holders and to each of the underwriters, if any, without charge, as many copies of the prospectus or prospectuses (including each preliminary prospectus) and any amendment or supplement thereto as such Persons may reasonably request; subject to Section 3(b)(i) hereof, the Company consents to the use of any such prospectus or any amendment or supplement thereto by the Holders and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by any such prospectus or any amendment or supplement thereto;

(viii) prior to any public offering of Registrable Securities, register or qualify (or obtain an exemption therefrom), or cooperate with the Holders, the underwriters, if any, and their respective counsel in connection With the registration or qualification (or exemption therefrom) of, such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions in the United States as the Holders or the underwriters, if any, shall reasonably request in writing; keep each such registration or qualification (or exemption therefrom) effective during the period during which such registration statement is required to be kept effective pursuant to this Agreement, to the extent permitted under the Securities Act; and do any and all other acts and things reasonably necessary or advisable to facilitate the disposition in such jurisdictions of the Registrable Securities covered by such registration statement; provided that the Company shall not be required to qualify generally to do business in any jurisdiction where it would not be required to qualify but for this Section 3(a)(viii);

(ix) cooperate with Holders participating in such registration and the underwriters, if any, to facilitate the timely preparation and delivery of certificates representing the Registrable Securities to be sold; and enable such Registrable Securities to be in such denominations and registered in such names as the underwriters, if any, may request at least two Business Days prior to any sale of Registrable Securities to the underwriters;

(x) use its reasonable efforts to cause the Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities in the United States as may be reasonably necessary to enable the Holders or the underwriters, if any, to consummate the disposition of such. Registrable Securities;

(xi) as soon as practicable after the occurrence of any event described in Section 3(a)(iii)(E) hereof, prepare a supplement or post-effective amendment to such registration statement or to the related prospectus or any document incorporated therein by reference, or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities being sold thereunder, such prospectus shall not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; if any event described in Section 3(a)(iii)(B) hereof occurs, use its reasonable efforts to cooperate with the Commission to prepare, as soon as practicable, any amendment or supplement to such registration statement or such related prospectus and any other additional information, or to take other action that may have been requested by the Commission;

(xii) use its reasonable efforts to cause all Common Stock constituting Registrable Securities covered by such registration statement to be listed on each securities exchange (or quotation system operated by a national securities association) on which the Common Stock of the Company is then listed (or included), if so requested by the Majority Registered Holders or the underwriters, if any, and enter into customary agreements including, if necessary, a listing application and indemnification agreement in customary form, and provide a transfer agent for such Registrable Securities no later than the effective date of such registration statement; use its reasonable efforts to cause any other Registrable Securities covered by such registration statement to be listed (or included) on each securities exchange (or quotation system operated by a national securities association) on which securities of the same class and series, if any, are then listed (or included) (or on any exchange or quotation system on which any Person other than a Holder shall have the right to have securities of the same class and series, if any, listed or included), if so requested by the Majority Registered Holders or the underwriters, if any, and enter into customary agreements including, if necessary, a listing application and indemnification agreement in customary form, and, if necessary, provide a transfer agent for such securities no later than the effective date of such registration statement;

(xiii) provide a CUSIP number for the Registrable Securities no later than the effective date of such registration statement;

(xiv) enter into customary agreements (including, in the case of an underwritten offering, an underwriting agreement in customary form for the managing underwriters with respect to issuers of similar market capitalization and reporting and financial histories) and take all such other reasonable actions in connection therewith in order to expedite or facilitate the disposition of the Registrable Securities included in such registration statement and, in the case of an underwritten offering: (A) make representations and warranties to each Holder of Registrable Securities participating in such offering and to each of the underwriters, in such form, substance and scope as are customarily made to the managing underwriters by issuers of similar market capitalization and reporting and financial histories and confirm the same to the extent customary if and when requested; (B) obtain opinions of counsel to the Company and updates thereof addressed to each Holder of Registrable Securities participating in such offering and to each of the underwriters, such opinions and updates to be in customary form and covering the matters customarily covered in opinions obtained in underwritten offerings by the managing underwriters for issuers of similar market capitalization and reporting and financial histories;
(C) obtain "comfort" letters and updates thereof from the Company's independent certified public accountants addressed to each Holder of Registrable Securities participating in such offering and to each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "comfort" letters to the managing underwriters in connection with underwritten offerings by them for issuers of similar market capitalization and reporting and financial histories; (D) provide, in the underwriting agreement to be entered into in connection with such offering, indemnification provisions and procedures of the type customarily contained in underwriting agreements for offerings by issuers of similar market capitalization and reporting and financial histories; and (E) deliver such customary documents and certificates as may be reasonably requested by the Majority Registered Holders and the managing underwriters to evidence compliance with clause (A) of this paragraph (xiv) and with any customary conditions contained in the underwriting agreement entered into by the Company in connection with such offering;

(xv) make available, for inspection by the Holders of the Registrable Securities included in such registration, any underwriter participating in any disposition of Registrable Securities pursuant to such registration statement, and any attorney, accountant or other representative retained by such selling Holders or by any such underwriter, all pertinent financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such underwriter, attorney, accountant or other representative in connection with such registration;

(xvi) otherwise use its reasonable efforts to comply with all applicable rules and regulations of the Commission relating to such registration and the distribution of the securities being offered (including, without limitation, Regulation M, with respect to which the Company shall also use its reasonable efforts timely to apprise each Holder of any bids and purchases by the Company, and of any known bids and purchases by each "affiliated purchaser" (as defined in Regulation M) of the Company, that would in the opinion of the Company be prohibited under Regulation M in connection with a "distribution" (as so defined) by such Holder of securities of the Company) and make generally available to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act, no later than 60 days after the end of any 12-month period (or 120 days, if such period is a fiscal year) commencing at the end of any fiscal quarter in which the Registrable Securities are sold to underwriters in a firm commitment or best efforts underwritten offering, or, if not sold to underwriters in such an offering, beginning with the first month of the Company's first fiscal quarter commencing after the effective date of such registration statement, which earning statements shall cover such 12-month periods;

(xvii) cooperate and assist in any filings required to be made with the National Association of Securities Dealers, Inc. and in the performance of any customary or required due diligence investigation by any underwriter; and

(xviii) use its reasonable efforts to take all other reasonable steps necessary and appropriate to effect such registration in the manner contemplated by this Agreement.

(b) Holder Procedures.

(i) Each Holder agrees, by acquisition of the Registrable Securities that, upon receipt of any notice from the Company of the happening of any event described in Section 3(a)(iii)(B), 3(a)(iii)(C), 3(a)(iii)(D) or 3(a)(iii)(E) hereof, such Holder shall forthwith discontinue disposition of any Registrable Securities (but, in the case of an event described in Section
3(a)(iii)(D), in the affected jurisdiction or jurisdictions only) covered by the affected registration statement or prospectus until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(a)(iii) or 3(a)(xi) hereof or until such Holder is (it being agreed by the Company that the underwriters, if any, shall also be) advised in writing (the" Advice") by the Company that the use of the applicable prospectus may be resumed. If the Company shall have given any such notice, the 180-day period mentioned in Section 2(b) hereof shall be extended by the number of days from and including the date of the giving of such notice to and including the date when each Holder of Registrable Securities included in such Registration shall have received the copies of the supplemented or amended prospectus contemplated by Section 3(a)(iii) or 3(a)(xi) hereof or the Advice, as the case may be.

(ii) In connection with any underwritten public offering of Registrable Securities pursuant to a Registration, the managing underwriter of such offering shall be a nationally recognized investment banking firm selected by the Majority Registered Holders and shall be reasonably acceptable to the Company.

(iii) Each Holder hereby agrees that for a period of at least 90 days (or such longer period, not to exceed 180 days, as the Company may agree with the managing underwriter) after the effective date of any underwritten public offering of Registrable Securities, such Holder will not, directly or indirectly, sell, offer to sell, or otherwise transfer or dispose of any Common Stock other than any of such Holder's Common Stock included in such underwritten public offering unless otherwise consented by the representative of the underwriters in such underwritten "public offering, and hereby agrees to execute and delivery to such underwriters such form of agreement reflecting such Holder's agreement as the Company and such underwriter may request.

4. Registration Expenses

All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses of, compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications or registrations (or the obtaining of exemptions therefrom) of the Registrable Securities), printing expenses (including expenses of printing prospectuses), messenger and delivery expenses, internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), reasonable fees and disbursements of its counsel and its independent certified public accountants (including the reasonable expenses of any special audit or "comfort" letters required by or incident to such performance or compliance), securities acts liability insurance (if the Company elects to obtain such insurance), reasonable fees and expenses of any special experts retained by the Company in connection with any registration hereunder, reasonable fees and expenses of other Persons retained by the Company, reasonable fees and expenses of one counsel for the Holders, selected by the Majority Registered Holders, incurred in connection with each registration hereunder, and reasonable out-of-pocket expenses of the Holders (all such expenses being herein referred to as "Registration Expenses"), shall be borne by the Company; provided that Registration Expenses shall not include any underwriting discounts, commissions or fees attributable to the sale of the Registrable Securities.

5. Indemnification: Contribution.

(a) Indemnification by the Company. The Company shall indemnify, to the full extent permitted by law, each Holder of Registrable Securities, and if applicable, its officers, directors, employees and agents, and if applicable, each Person who controls such Holder (within the meaning of the Securities Act), against all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation and legal expenses) arising out of or based upon any untrue or alleged untrue statement of a material fact contained in any registration statement covering any Registrable Securities, any related prospectus or preliminary prospectus, or any amendment or supplement thereto, or any omission or alleged omission to state in any thereof a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus or prospectus supplement, in light of the circumstances under which they were made) not misleading, except in each case insofar as the same arises out of or is based upon an untrue statement or alleged untrue statement of a material fact or an omission or alleged omission to state a material fact in such registration statement, prospectus, preliminary prospectus, amendment or supplement, as the case may be, made or omitted, as the case may be, in reliance upon and in conformity with written information furnished to the Company by such Holder expressly for use therein. This indemnity is in addition to any liability that the Company may otherwise have. The Company shall also indemnify any underwriters of the Registrable Securities and their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of Holders and other specified Persons.

(b) Indemnification by Holders of Registrable Securities. In connection with any registration statement covering Registrable Securities, each Holder any of whose Registrable Securities are covered thereby shall furnish to the Company in writing such information and affidavits with respect to such Holder as the Company reasonably requests for use in connection with such registration statement, any related prospectus or preliminary prospectus, or any amendment or supplement thereto, and shall indemnify, to the full extent permitted by law, the Company, the Company's directors, officers, employees and agents and each Person who controls the Company (within the meaning of the Securities Act), against all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation and legal expenses) arising out of or based upon any untrue or alleged untrue statement of a material fact contained in any registration statement covering any Registrable Securities, any related prospectus or preliminary prospectus, or any amendment or supplement thereto, or any omission or alleged omission to state in any thereof a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus or prospectus supplement, in light of the circumstances under which they were

made) not misleading, in each case to the extent, but only to the extent, that the same arises out of or is based upon an untrue statement or alleged untrue statement of a material fact or an omission or alleged omission to state a material fact in such registration statement or in such related prospectus, preliminary prospectus, amendment or supplement, as the case may be, made or omitted, as the case may be, in reliance upon and in conformity with written information furnished to the Company by such Holder expressly for use therein. This indemnity is in addition to any liability that a Holder may otherwise have. Each Holder participating in an offering of Registrable Securities shall, if requested by the managing underwriter or underwriters of such offering, also indemnify any underwriters of such Registrable Securities and their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the Company and other specified Persons.

(c) Conduct of Indemnification Proceedings. Any Person entitled to indemnification under this Section 5 agrees to give prompt written notice to the indemnifying party after the receipt by such Person of any written notice of the commencement of any action, suit, proceeding or investigation or threat thereof made in writing for which such Person will claim indemnification or contribution pursuant to this Agreement and, unless in the reasonable judgment of such indemnified party a conflict of interest may exist between such indemnified party and the indemnifying party with respect to such claim, permit the indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to such indemnified party. If the indemnifying party is not entitled to, or elects not to, assume the defense of a claim, it shall not be obligated to pay the reasonable fees and expenses of more than one counsel with respect to such claim, unless in the reasonable judgment of counsel to such indemnified party, expressed in a writing delivered to the indemnifying party, a conflict of interest may exist between such indemnified party and any other indemnified party with respect to such claim, in which event the indemnifying party shall be obligated to pay the reasonable fees and expenses of such additional counselor counsels (which shall be limited to one counsel per indemnified party). The indemnifying party shall not be subject to any liability for any settlement made without its consent, which consent shall not be unreasonably withheld.

(d) Contribution.

(i) If the indemnification provided for in this Section 6 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties, relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 5(c) hereof, any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding.

(ii) The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.

(iii) If indemnification is available under this Section 5, the indemnifying parties shall indemnify each indemnified party to the full extent provided in Sections 5(a) and 5(b) hereof without regard to the relative fault of said indemnifying party or indemnified party or any other equitable consideration provided for in this Section 5(d).

6. Participation in Underwritten Registrations.

No Person may participate in any underwritten registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements, (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and (c) agrees to pay such Person's pro rata portion of all underwriting discounts and commissions.

7. Cooperation with the Company.

Each Holder, by the acceptance of Registrable Securities or by exercise of its rights hereunder, agrees to use its reasonable efforts to cooperate with the Company in all reasonable respects in connection with the preparation and filing of Registrations hereunder in which such Registrable Securities are included or requested to be included.

8. Miscellaneous.

(a) Remedies. Each Holder of Registrable Securities, in addition to being entitled to exercise all rights in an action at law, including recovery of damages, shall be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate.

(b) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company shall have obtained the prior written consent of (i) the Holders of a majority of the securities then constituting Registrable Securities and (ii) each Holder materially and adversely affected by such amendment, modification, supplement, waiver or departure.

(c) Notices. All notices, requests, waivers, releases, consents, and other communications required or permitted by this Agreement (collectively, "Notices") shall be in writing. Notices shall be deemed sufficiently given for all purposes under this Agreement when delivered in person, when dispatched by telegram or (upon written confirmation of receipt) by electronic facsimile transmission or (upon written confirmation of receipt) when dispatched by a nationally recognized overnight courier service. All Notices shall be delivered as follows:

(i) if to a Holder of Registrable Securities, at the address indicated on Company's registrar relating to such securities or at such other address as such Holder may have furnished to the Company in writing; and

(ii) if to the Company, at:

Eastman Chemical Company P. O. Box 511 Eastman Road Building 75 Kingsport, Tennessee 37602-5075 Attention: General Counsel Telephone Number: (423) 229-2097 Fax Number: (423) 229-1679

(d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto, including any successors by merger to the Company.

(e) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

(f) Headings: Construction. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. Unless the context otherwise requires, all references to Sections are to Sections of this Agreement, "or" is inclusively disjunctive, and words in the singular include the plural and vice versa. In computing any period of time specified in this Agreement, the date of the act or event from which such period of time is to be measured shall be included, any such period shall expire at 5:00 p.m., Kingsport, Tennessee time, on the last day of such period, and any such period denominated in months shall expire on the date in the last month of such period that has the same numerical designation as the date of the act or event from which such period is to be measured; provided, however, that if there is no date in the last month of such period that has the same numerical designation as the date of such act or event, such period shall expire on the last day of the last month of such period.

(g) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of North Carolina, without regard to the principles of conflicts of laws thereof.

(h) Severability. If one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect, for any reason the validity, legality and enforceability of the remaining provisions contained herein shall not be in any way affected or impaired thereby, and the provision held to be invalid, illegal or unenforceable shall be reformed to the minimum extent necessary, and in a manner as consistent with - the purposes thereof as is practicable, so as to render it valid, legal and enforceable, it being intended that all of the rights and privileges of the Holders hereunder shall be enforceable to the fullest extent permitted by law.

(i) Entire Agreement. This Agreement is intended by the Company and the Initial Holder to be a final expression thereof and is intended to be a complete and exclusive statement of the agreement and understanding of the Company and the Initial Holder in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings among the Company and any Holders with respect to such subject matter.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written, but effective as of January 2, 2002.

EASTMAN CHEMICAL COMPANY

By:

Name Title

EASTMAN CHEMICAL COMPANY BENEFIT
SECURITY TRUST

By: WACHOVIA BANK, N.A., Trustee

By:

Name Title

EXHIBIT 10.04

AMENDMENT NUMBER THREE TO THE
EASTMAN CHEMICAL COMPANY
BENEFIT SECURITY TRUST

THIS AMENDMENT to the Eastman Chemical Company Benefit Security Trust (the "Trust") is adopted by Eastman Chemical Company (the "Company"), and Wachovia Bank, N.A., as Trustee (the "Trustee"), and is consented to by the Steering Committee, effective as of January 2, 2002.

W I T N E S S E T H:

WHEREAS, the Company and the Trustee adopted the Trust as of December 24, 1997; and

WHEREAS, the Company, acting through the Benefit Plans Committee, wishes to amend the Trust, with the consent of the Trustee and the Steering Committee, to (i) remove the Deed to Secure Debt described in Appendix C to the Trust (the "Deed to Secure Debt") as a Security Interest under the Trust; and
(ii) to substitute for the Warrant described in Appendix C to the Trust (the "Deed to Secure Debt") an amended and restated Warrant;

NOW, THEREFORE, the Trust is hereby amended as follows:

Appendix C is hereby amended to read as follows:

"APPENDIX C
SECURITY INTERESTS AND UNDERLYING PROPERTY

SEE ATTACHED AMENDED AND RESTATED WARRANT DATED DECEMBER ___, 2001"

Notwithstanding the fact that the Trust may continue to have references to a Deed of Trust, effective January 2, 2002, the only Security Interest under the Trust shall be the Amended and Restated Warrant described in Appendix C to the Trust.

This Amendment shall be effective as of January 2, 2002. Except as amended herein, the Trust shall remain in full force and effect.

IN WITNESS WHEREOF, this Amendment has been executed by the Benefit Plans Committee of the Company and by the Trustee, and has been consented to by the Steering Committee, effective as of January 2, 2002.

EASTMAN CHEMICAL COMPANY
BENEFIT PLANS COMMITTEE

Earnest W. Deavenport

Theresa K. Lee

B. Fielding Rolston

James P. Rogers

WACHOVIA BANK, N.A., as Trustee

By:

Title:

Date:

APPROVED ON BEHALF OF THE STEERING COMMITTEE:

E.W. Deavenport

J.L. Chitwood

B.W. DeVinney

B.F. Rolston

A.R. Rothwell

H.L. Henderson

R.W. Bourne

T.O. Nethery

D.K. Williams

J.P. Rogers

EXHIBIT 12.01

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

COMPUTATION OF RATIOS OF EARNINGS (LOSS) TO FIXED CHARGES

                                                         Third Quarter      First Nine Months
(Dollars in millions)                                   2002      2001      2002        2001
                                                        ----      ----      -----      ------
Earnings (loss) before income taxes and
    cumulative effect of change in accounting
    principle                                           $ 28      $ 39      $ 121      $ (149)

Add:
    Interest expense                                      32        38         95         113
    Appropriate portion of rental expense (1)              7         7         21          21
    Amortization of capitalized interest                   3         4         10          11
                                                        ----      ----      -----      ------
Earnings (loss) as adjusted                             $ 70      $ 88      $ 247      $   (4)
                                                        ====      ====      =====      ======

Fixed charges:
    Interest expense                                    $ 32      $ 38      $  95      $  113
    Appropriate portion of rental expense (1)              7         7         21          21
    Capitalized interest                                   2         1          4           4
                                                        ----      ----      -----      ------
Total fixed charges                                     $ 41      $ 46      $ 120      $  138
                                                        ====      ====      =====      ======

Ratio of earnings (loss) to fixed charges               1.7x      1.8x       2.1x         (A)
                                                        ====      ====      =====      ======

(1) For all periods presented, the interest component of rental expense is estimated to equal one-third of such expense.

(A) Due to the net loss reported for the first nine months 2001, the coverage ratio was less than 1x. To achieve a coverage ratio of 1x, additional pre-tax earnings of $142 million would have been required for the first nine months 2001. Before nonrecurring items, the ratio of earnings to fixed charges was 2.4x for the first nine months 2001.

EXHIBIT 99.01

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
OPERATING SEGMENT INFORMATION

SALES REVENUE CHANGE, VOLUME EFFECT, PRICE EFFECT AND INTERDIVISIONAL EFFECT

                                                                               THIRD QUARTER 2002
                                                               ---------------------------------------------
                                                                                CHANGE IN REVENUE DUE TO
                                                                            --------------------------------
                                                                                                    INTER-
                                                                REVENUE     VOLUME      PRICE     DIVISIONAL
                                                               % CHANGE     EFFECT      EFFECT      EFFECT
                                                               --------     ------      ------    ----------
Eastman Division Segments:
    Coatings, Adhesives, Specialty Polymers, and Inks              (1)%       (4)%        (3)%         4%
    Performance Chemicals and Intermediates                        42%         8%         (7)%        39%
    Specialty Plastics                                             16%         7%         (5)%        13%
                                                                  ---        ---        ----         ---
        Total                                                      16%         2%         (5)%        17%
                                                                  ===        ===        ====         ===
Voridian Division Segments:
    Polymers                                                        3%         9%        (13)%         4%
    Fibers                                                         19%        15%          0 %        11%
                                                                  ---        ---        ----         ---
        Total                                                       7%        11%         (9)%         6%
                                                                  ===        ===        ====         ===
Total Eastman Chemical Company                                      0%         5%         (7)%
                                                                  ===        ===        ====

                                                                               FIRST NINE MONTHS, 2002
                                                                  -----------------------------------------------
                                                                                    CHANGE IN REVENUE DUE TO
                                                                                ---------------------------------
                                                                                                          INTER-
                                                                  REVENUE       VOLUME       PRICE      DIVISIONAL
                                                                  % CHANGE      EFFECT       EFFECT        EFFECT
                                                                  --------      ------       ------     ----------
Eastman Division Segments:
    Coatings, Adhesives, Specialty Polymers, and Inks                 7%           6%           (3)%           4%
    Performance Chemicals and Intermediates                          30%           8%           (8)%          35%
    Specialty Plastics                                                7%          (2)%          (3)%          12%
                                                                    ---          ---          ----          ----
        Total                                                        15%           5%           (5)%          16%
                                                                    ===          ===          ====          ====
Voridian Division Segments:
    Polymers                                                         (5)%          8%          (16)%           4%
    Fibers                                                           17%          16%           (2)%          12%
                                                                    ---          ---          ----          ----
        Total                                                         1%          10%          (12)%           6%
                                                                    ===          ===          ====          ====
Total Eastman Chemical Company                                       (3)%          7%           (8)%
                                                                    ===          ===          ====

Factors affecting the change in sales revenue include sales volumes, selling prices, interdivisional transactions, product mix and foreign currency exchange rates. The impact of some of the most significant factors is presented above.

EXHIBIT 99.02

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
OPERATING SEGMENT INFORMATION

PERCENTAGE GROWTH IN SALES VOLUME COMPARED TO PRIOR YEAR

                                                                      THIRD QUARTER 2002
                                                                   ---------------------------
                                                                   EXTERNAL      INCLUDING
                                                                    VOLUME     INTERDIVISIONAL
                                                                   --------    ---------------
Eastman Division Segments:
    Coatings, Adhesives, Specialty Polymers, and Inks                (4)%           (4)%
    Performance Chemicals and Intermediates                           7%            63%
    Specialty Plastics                                                7%            27%
                                                                     --            ---
      Total                                                           2%            29%
                                                                     ==            ===

Voridian Division Segments:
    Polymers                                                          9%            15%
    Fibers                                                           15%           140%
                                                                     --            ---
      Total                                                          10%            35%
                                                                     ==             ==

Total Eastman Chemical Company                                        5%
                                                                     ==

Regional Sales Volume Growth
    United States and Canada                                          3%
    Europe, Middle East, and Africa                                   0%
    Asia Pacific                                                     17%
    Latin America                                                    21%

                                                                   FIRST NINE MONTHS, 2002
                                                                ----------------------------
                                                                  EXTERNAL      INCLUDING
                                                                   VOLUME     INTERDIVISIONAL
                                                                ------------  --------------
Eastman Division Segments:
    Coatings, Adhesives, Specialty Polymers, and Inks*                9%             9%
    Performance Chemicals and Intermediates                           9%            67%
    Specialty Plastics                                               (2)%           17%
                                                                     --             --
      Total **                                                        8%            36%
                                                                     ==             ==

Voridian Division Segments:
    Polymers                                                          9%            14%
    Fibers                                                           16%           135%
                                                                     --             --
      Total                                                          10%            34%
                                                                     ==             ==

Total Eastman Chemical Company***                                     9%
                                                                     ==

Regional Sales Volume Growth
    United States and Canada                                          6%
    Europe, Middle East, and Africa                                   7%
    Asia Pacific                                                     24%
    Latin America                                                    18%

* External volume growth excluding Hercules Businesses acquisition: 1% ** External volume growth excluding Hercules Businesses acquisition: 5% *** External volume growth excluding Hercules Businesses acquisition: 7%

EXHIBIT 99.03

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
OPERATING SEGMENT INFORMATION

SALES REVENUE BY SEGMENT

                                                               THIRD QUARTER, 2002
                                        ------------------------------------------------------------------
(Dollars in millions)                   CASPI           PCI             SP          POLYMERS        FIBERS
                                        -----          -----          -----         --------        ------
External sales                          $ 402          $ 284          $ 141          $ 382          $ 165
Interdivisional sales                      16            107             17             16             17
                                        -----          -----          -----          -----          -----
    Total                               $ 418          $ 391          $ 158          $ 398          $ 182
                                        =====          =====          =====          =====          =====

                                                                 FIRST NINE MONTHS, 2002
                                        ------------------------------------------------------------------------
                                         CASPI             PCI              SP           POLYMERS         FIBERS
                                        -------          -------          -----          --------         ------
External sales                          $ 1,179          $   823          $ 394          $ 1,123          $ 486
Interdivisional sales                        42              302             49               39             55
                                        -------          -------          -----          -------          -----
    Total                               $ 1,221          $ 1,125          $ 443          $ 1,162          $ 541
                                        =======          =======          =====          =======          =====

                                                               THIRD QUARTER, 2001
                                        ------------------------------------------------------------------
                                        CASPI           PCI            SP           POLYMERS        FIBERS
                                        -----          -----          -----         --------        ------
External sales                          $ 422          $ 274          $ 137          $ 388          $ 152
Interdivisional sales                      --             --             --             --             --
                                        -----          -----          -----          -----          -----
    Total                               $ 422          $ 274          $ 137          $ 388          $ 152
                                        =====          =====          =====          =====          =====

                                                                 FIRST NINE MONTHS, 2001
                                        ----------------------------------------------------------------------
                                         CASPI            PCI            SP            POLYMERS         FIBERS
                                        -------          -----          -----          --------         ------
External sales                          $ 1,144          $ 869          $ 414          $ 1,228          $ 464
Interdivisional sales                        --             --             --               --             --
                                        -------          -----          -----          -------          -----
    Total                               $ 1,144          $ 869          $ 414          $ 1,228          $ 464
                                        =======          =====          =====          =======          =====

EXHIBIT 99.04

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Eastman Chemical Company (the "Company") on Form 10-Q for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

Date: November 14, 2002



/s/ J. Brian Ferguson
-------------------------------------------------
J. Brian Ferguson
Chairman of the Board and Chief Executive Officer



/s/ James P. Rogers
-------------------------------------------------
James P. Rogers
Senior Vice President and Chief Financial Officer

The foregoing certifications are being furnished solely pursuant to 18 U.S.C.
Section 1350 and are not being filed as part of the Report or as a separate disclosure document.

•		Typical seasonal declines in sales volumes and revenues and changes in customer buying patterns will reduce operating earnings for fourth quarter 2002 compared with third quarter 2002;

•		Additional costs related to operational disruptions at the Columbia, South Carolina site to negatively impact operating earnings by approximately $8 million to $10 million in fourth quarter 2002;

•		Insurance proceeds should significantly offset the operating earnings impact associated with the operational disruptions at its Rotterdam, the Netherlands and Columbia, South Carolina facilities. The insurance claims process is expected to be completed in the fourth quarter 2002 or early 2003, and such reimbursement will positively impact operating earnings and cash flows when completed;

•		To contribute $135 million to its U.S. defined benefit pension plans during 2003 and that additional funding will be required in 2004, although the amount of such contribution is dependent upon interest rates, actual return on plan assets, retirement and attrition rates of employees, and other factors;

•		Pension and other postemployment benefit expenses in 2003 to increase $35 million to $40 million over 2002 due primarily to declining interest rates, unfavorable market performance for plan assets, and the retirement and attrition rates of employees;

•		To record an after-tax minimum pension liability adjustment to other comprehensive income of approximately $120 million to $160 million during the fourth quarter 2002 based upon the current market value of the pension plan’s assets and current interest rates;

•		Lower depreciation expense in 2003 as compared with 2002 will significantly mitigate the impact of expected pension and other post-employment benefit cost increases;

•		Earnings from operations will continue to reflect expenses related to new business development activities and that such expenses will be approximately 1% – 1-1/2% of sales revenue;

•		Combined costs related to selling and general administrative expenses and research and development costs to be at or below 11% of sales revenue;

•		To recognize increasing selling and general administrative expenses related to Cendian as it adds capacity while continuing to add new customers and revenues;

•		To generate positive free cash flow, which is defined as cash flow from operations less net capital expenditures, acquisitions and other investments;

•		To continue to pay a quarterly cash dividend;

•		Excess available cash will be used to reduce outstanding borrowings, fund targeted growth initiatives such as small acquisitions and other ventures, and repurchase shares; and

•		The favorable effective tax rate will continue or improve in the fourth quarter 2002 as a result of certain income tax contingencies that were favorably resolved; but will return in 2003 to more historic levels.

•		Global demand for PET polymers to grow at an average rate of approximately 10% annually over the next several years;

•		Expects peaks and troughs in the Polymers segment created by supply and demand imbalances to be less pronounced in the future; capacity utilization in the Polymers segment to be lower in 2003 than in 2002 based on industry projections worldwide; and capacity utilization to vary by region; and

•		To take appropriate actions over time to improve the Company’s credit rating to BBB+.

•		The Company has manufacturing and marketing operations throughout the world, with approximately 45% of the Company’s revenues attributable to sales outside the United States. Economic factors, including foreign currency exchange rates, could affect the Company’s revenues, expenses and results. Although the Company utilizes risk management tools, including hedging, as appropriate, to mitigate market fluctuations in foreign currencies, any changes in strategy in regard to risk management tools can also affect revenues, expenses and results and there can be no assurance that such measures will result in cost savings or that all market fluctuation exposure will be eliminated. In addition, changes in laws, regulations, or other political factors in any of the countries in which the Company operates could affect business in that country or region, as well as the Company’s results of operations.

•		The Company has made and may continue to make acquisitions, divestitures and investments, and enter into alliances, as part of its growth strategy. The completion of such transactions are subject to the timely receipt of necessary regulatory and other consents and approvals needed to complete the transactions which could be delayed for a variety of reasons, including the satisfactory negotiation of the transaction documents and the fulfillment of all closing conditions to the transactions. Additionally, after completion of the transactions, there can be no assurance that such transactions will be successfully integrated on a timely and cost-efficient basis or that they will achieve projected operating earnings targets.

•		The Company has made strategic technology investments, including formation of joint ventures and investments in other technology businesses, in order to build certain Eastman capabilities. There can be no assurance that such investments will achieve their objectives or that they will be beneficial to the Company’s results of operations.

•		The Company owns assets in the form of equity in other companies, including joint ventures, technology investments and Genencor. Such investments are minority investments in companies which are not managed or controlled by the Company and are subject to all of the risks associated with changes in value of such investments including the market valuation of those companies whose shares are publicly traded.

•		The Company has undertaken and will continue to undertake productivity and cost reduction initiatives and organizational restructurings to improve performance and generate cost savings. There can be no assurance that these will be completed as planned or beneficial or that estimated cost savings from such activities will be realized.

•		In addition to cost reduction initiatives, the Company is striving to improve margins on its products through price increases, where warranted and accepted by the market; however, the Company’s earnings could be negatively impacted should such increases be unrealized, not be sufficient to cover increased raw material costs, or have a negative impact on demand and volume.

•		The Company is reliant on certain strategic raw materials for its operations and utilizes risk management tools, including hedging, as appropriate, to mitigate short-term market fluctuations in raw material costs. There can be no assurance, however, that such measures will result in cost savings or that all market fluctuation exposure will be eliminated. In addition, changes in laws or regulations, war or other outbreak of hostilities, or other political factors in any of the countries or regions in which the Company operates or does business, or in countries or regions that are key suppliers of strategic raw materials, could affect availability and costs of raw materials.

•		The Company’s competitive position in the markets in which it participates is, in part, subject to external factors. For example, supply and demand for certain of the Company’s products is driven by end-use markets and worldwide capacities which, in turn, impact demand for and pricing of the Company’s products.

•		The Company has an extensive customer base; however, loss of certain top customers could adversely affect the Company’s financial condition and results of operations until such business is replaced.

•		Limitation of the Company’s available manufacturing capacity due to significant disruption in its manufacturing operations could have a material adverse affect on revenues, expenses and results.

•		The Company’s facilities and businesses are subject to complex health, safety and environmental laws and regulations, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations currently and in the future. The Company’s accruals for such costs and associated liabilities are believed to be adequate, but are subject to changes in estimates on which the accruals are based. The estimates depend on a number of factors including those associated with on-going operations and remedial requirements. On-going operations can be affected by unanticipated government enforcement action, which in turn is influenced by the nature of the allegation and the complexity of the site. Likewise, changes in chemical control regulations and testing requirements can increase costs or result in product deselection. Remedial requirements at contaminated sites are dependent on the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties.

•		The Company accesses the capital markets on a regular basis. Access to these markets and the cost of capital is dependent upon the Company’s credit rating received from independent credit rating agencies. A downgrade of one level in the Company’s credit rating is not anticipated, but should it occur, would not cause a significant impact on the commitments or sources of capital available to the Company, and would not have a material impact on the Company’s results of operations. However, an adverse change in the Company’s credit rating could affect the renewal of existing credit facilities or the Company’s ability to obtain access to new credit facilities in the future, could adversely affect the terms under which the Company can borrow, and could increase the cost of borrowings under such facilities.

•		The Company’s operations from time to time are parties to or targets of lawsuits, claims, investigations and proceedings, including product liability, personal injury, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety and employment matters, which are being handled and defended in the ordinary course of business. The Company believes amounts reserved are adequate for such pending matters; however, results of operations could be affected by significant litigation adverse to the Company.

(a)		Exhibits filed as part of this report are listed in the Exhibit Index appearing on page 44.

(b)		Reports on Form 8-K

		On August 13, 2002, Eastman filed a report on Form 8-K announcing that J. Brian Ferguson, Chairman of the Board and Chief Executive Officer, and James P. Rogers, Senior Vice President and Chief Financial Officer, had (i) submitted to the Securities and Exchange Commission (“SEC”) sworn statements pursuant to SEC Order No. 4-460 concerning the Company’s 2001 Annual Report on Form 10-K, its proxy statement for the 2002 Annual Meeting of Stockholders, its Quarterly Reports on Form 10-Q for the first and second quarters of 2002 and all Form 8-Ks filed to date in 2002 and (ii) certified certain matters in connection with the Company’s Quarterly Report on Form 10-Q for the second quarter of 2002 pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002.

1.		I have reviewed this quarterly report on Form 10-Q of Eastman Chemical Company;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a.		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b.		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c.		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	a.		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b.		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and