UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the Quarterly Period Ended September 26, 2004            
|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: 000-50661

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POLAROID HOLDING COMPANY(Exact name of Registrant as specified in its charter)

|Delaware(State or other jurisdiction of incorporation or organization)                             |  | 22-3856538(I.R.S. employer identification number)
|-------------------------------------------------------------------------------------------------- |  | -------------------------------------------------
|1265 Main Street
Waltham, Massachusetts 02451(Address of principal executive offices and zip code)
|(781) 386-2000(Registrant's telephone number, including area code)                                

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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 ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
 Yes o    No ý

As of November 5, 2004, the number of outstanding shares of the Registrant's Common Stock, $.001 par value, was 34,956,069.



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POLAROID HOLDING COMPANY
FORM 10-Q
For the Three and Nine Month Periods Ended September 26, 2004
INDEX

|          |  |                       |  |                                                                                                                                 |  | PAGE
|--------- |  | --------------------- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Part I.   |  | FINANCIAL INFORMATION |  |                                                                                                                                
|          |  | Item 1.               |  | Financial Statements                                                                                                            |  |     
|          |  | a)                    |  | Consolidated Statement of Earnings for three and nine month periods ended September 26, 2004 and September 28, 2003 (unaudited) |  | 1   
|          |  | b)                    |  | Consolidated Balance Sheet as of September 26, 2004 and December 31, 2003 (unaudited)                                           |  | 2   
|          |  | c)                    |  | Consolidated Statement of Cash Flows for nine month periods ended September 26, 2004 and September 28, 2003 (unaudited)         |  | 3   
|          |  | d)                    |  | Notes to Consolidated Financial Statements (unaudited)                                                                          |  | 4   
|          |  | e)                    |  | Report of Independent Registered Public Accounting Firm                                                                         |  | 15  
|          |  | Item 2.               |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                           |  | 16  
|          |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                                                      |  | 33  
|          |  | Item 4.               |  | Controls and Procedures                                                                                                         |  | 33  
|Part II.  |  | OTHER INFORMATION     |  |                                                                                                                                
|          |  | Item 1.               |  | Legal Proceedings                                                                                                               |  | 34  
|          |  | Item 2.               |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                     |  | 34  
|          |  | Item 3.               |  | Defaults Upon Senior Securities                                                                                                 |  | 34  
|          |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                                                             |  | 35  
|          |  | Item 5.               |  | Other Information                                                                                                               |  | 35  
|          |  | Item 6.               |  | Exhibits                                                                                                                        |  | 35  
|Signature |  | 36                   

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statement of Earnings

Polaroid Holding Company and Subsidiary CompaniesThree and nine month periods ended September 26, 2004 and September 28, 2003
(in millions, except per share and share amounts)
(unaudited)

|                                                                                                     |                                                              | Third Quarter |        | Nine Months |  
|---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------- | ------ | ----------- | -
|
|Net sales                                                                                            |                                                              | $             | 152.6  |             | $
|                                                                                                     | Cost of goods sold                                           |               |        | 83.9        |  
|                                                                                                     | Marketing, research, engineering and administrative expenses |               |        | 50.4        |  
|                                                                                                     | Restructuring charges                                        |               |        | 6.7         |  
|                                                                                                     |                                                              |               |        |             |  
|Total costs                                                                                          |                                                              |               | 141.0  |             |  
|Profit from operations                                                                               |                                                              |               | 11.6   |             |  
|                                                                                                     | Other income                                                 |               |        | 0.4         |  
|                                                                                                     | Interest expense                                             |               |        | (1.0        | )
|                                                                                                     |                                                              |               |        |             |  
|Earnings before income tax expense/(benefit)                                                         |                                                              |               | 11.0   |             |  
|                                                                                                     | Federal, state and foreign income tax expense/(benefit)      |               |        | (8.3        | )
|                                                                                                     |                                                              |               |        |             |  
|Net earnings before extraordinary gain                                                               |                                                              |               | 19.3   |             |  
|Extraordinary gain                                                                                   |                                                              |               |       |             |  
|                                                                                                     |                                                              |               |        |             |  
|Net earnings                                                                                         |                                                              | $             | 19.3   |             | $
|                                                                                                     |                                                              |               |        |             |  
|Basic earnings per common share before extraordinary gain                                            |                                                              | $             | 0.58   |             | $
|Extraordinary gain                                                                                   |                                                              |               |       |             | $
|                                                                                                     |                                                              |               |        |             |  
|Basic earnings per common share                                                                      |                                                              | $             | 0.58   |             | $
|Diluted earnings per common share before extraordinary gain                                          |                                                              | $             | 0.54   |             | $
|Extraordinary gain                                                                                   |                                                              |               |       |             | $
|                                                                                                     |                                                              |               |        |             |  
|Diluted earnings per common share                                                                    |                                                              | $             | 0.54   |             | $
|Cash dividends per common share                                                                      |                                                              |               |       |             |  
|Weighted average common shares used for basic earnings per common share calculation (in thousands)   |                                                              |               | 32,432 |             |  
|Weighted average common shares used for diluted earnings per common share calculation (in thousands) |                                                              |               | 34,847 |             |  

See
accompanying notes to consolidated financial statements and accompanying review report of KPMG LLP.

1

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Consolidated Balance Sheet

Polaroid Holding Company and Subsidiary Companies(in millions, except per share amount)
(unaudited)

|                                           |                                                                                             | September 26,
2004 |       | December 31,
2003 |     
|------------------------------------------ | ------------------------------------------------------------------------------------------- | ------------------ | ----- | ----------------- | ----
|Assets                                     |                                                                                             |                    |       |                   |     
|Current assets                             |                                                                                             |                    |       |                   |     
|                                           | Cash and cash equivalents                                                                   |                    | $     | 100.9             |     
|                                           | Receivables, net of allowances of $9.5 at September 26, 2004 and $10.0 at December 31, 2003 |                    |       | 83.3              |     
|                                           | Inventories:                                                                                |                    |       |                   |     
|                                           |                                                                                             | Raw materials      |       |                   | 29.4
|                                           |                                                                                             | Work-in-process    |       |                   | 91.4
|                                           |                                                                                             | Finished goods     |       |                   | 45.2
|                                           |                                                                                             |                    |       |                   |     
|                                           | Total inventories                                                                           |                    |       | 166.0             |     
|                                           | Assets held for sale                                                                        |                    |       | 1.2               |     
|                                           | Prepaid expenses and other current assets                                                   |                    |       | 41.0              |     
|                                           |                                                                                             |                    |       |                   |     
|Total current assets                       |                                                                                             |                    | 392.4 |                   |     
|Property, plant and equipment              |                                                                                             |                    |       |                   |     
|                                           | Total property, plant and equipment                                                         |                    |       | 53.3              |     
|                                           | Less: Accumulated depreciation                                                              |                    |       | 6.0               |     
|                                           |                                                                                             |                    |       |                   |     
|Net property, plant and equipment          |                                                                                             |                    | 47.3  |                   |     
|Deferred tax assets                        |                                                                                             |                    | 1.9   |                   |     
|Other non-current assets                   |                                                                                             |                    | 33.9  |                   |     
|                                           |                                                                                             |                    |       |                   |     
|Total assets                               |                                                                                             | $                  | 475.5 |                   | $   
|                                           |                                                                                             |                    |       |                   |     
|Liabilities and stockholders' equity       |                                                                                             |                    |       |                   |     
|Current liabilities                        |                                                                                             |                    |       |                   |     
|                                           | Payables and accruals                                                                       |                    | $     | 97.9              |     
|                                           | Compensation and benefits                                                                   |                    |       | 26.8              |     
|                                           | Federal, state and foreign income taxes                                                     |                    |       | 12.1              |     
|                                           |                                                                                             |                    |       |                   |     
|Total current liabilities                  |                                                                                             |                    | 136.8 |                   |     
|Non-current pension liability              |                                                                                             |                    | 28.0  |                   |     
|Other non-current liabilities              |                                                                                             |                    | 15.7  |                   |     
|Preferred Stock                            |                                                                                             |                    | 22.3  |                   |     
|Common stockholders' equity                |                                                                                             |                    |       |                   |     
|                                           | Common Stock, $.001 par value                                                               |                    |       |                  |     
|                                           | Additional paid-in capital                                                                  |                    |       | 11.0              |     
|                                           | Retained earnings                                                                           |                    |       | 251.8             |     
|                                           | Accumulated other comprehensive income                                                      |                    |       | 16.0              |     
|                                           | Less: Treasury stock                                                                        |                    |       | (0.9              | )   
|                                           | Deferred compensation                                                                       |                    |       | (5.2              | )   
|                                           |                                                                                             |                    |       |                   |     
|Total common stockholders' equity          |                                                                                             |                    | 272.7 |                   |     
|                                           |                                                                                             |                    |       |                   |     
|Total liabilities and stockholders' equity |                                                                                             | $                  | 475.5 |                   | $   
|                                           |                                                                                             |                    |       |                   |     

See
accompanying notes to consolidated financial statements and accompanying review report of KPMG LLP.

2

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Consolidated Statement of Cash Flows

Polaroid Holding Company and Subsidiary CompaniesNine month periods ended September 26, 2004 and September 28, 2003
(in millions)
(unaudited)

|                                                     |                                                                        | Nine Months |      
|---------------------------------------------------- | ---------------------------------------------------------------------- | ----------- | -----
|
|Cash flows from operating activities                 |                                                                        |             |      
|                                                     | Net earnings                                                           |             | $    
|                                                     | Depreciation of property, plant and equipment                          |             |      
|                                                     | Deferred taxes                                                         |             |      
|                                                     | Gain on sale of asset held for sale and other real estate              |             |      
|                                                     | Other non-cash items                                                   |             |      
|                                                     | Decrease/(increase) in receivables                                     |             |      
|                                                     | Decrease/(increase) in inventories                                     |             |      
|                                                     | Decrease in prepaids and other assets                                  |             |      
|                                                     | Decrease in payables and accruals                                      |             |      
|                                                     | Increase/(decrease) in compensation and benefits                       |             |      
|                                                     | Increase/(decrease) in federal, state and foreign income taxes payable |             |      
|                                                     |                                                                        |             |      
|                                                     | Net cash provided/(used) by operating activities                       |             |      
|Cash flows from investing activities                 |                                                                        |             |      
|                                                     | (Increase)/decrease in other assets                                    |             |      
|                                                     | Proceeds from sale of asset held for sale and other real estate        |             |      
|                                                     | Additions to property, plant and equipment                             |             |      
|                                                     |                                                                        |             |      
|                                                     | Net cash used by investing activities                                  |             |      
|Cash flows from financing activities                 |                                                                        |             |      
|                                                     | Repayment of short-term debt                                           |             |      
|                                                     | Dividends paid on preferred stock                                      |             |      
|                                                     | Redemption of preferred stock                                          |             |      
|                                                     | Repurchase of treasury stock                                           |             |      
|                                                     |                                                                        |             |      
|                                                     | Net cash used by financing activities                                  |             |      
|Effect of exchange rate changes on cash              |                                                                        |             | (0.4 
|                                                     |                                                                        |             |      
|Net increase/(decrease) in cash and cash equivalents |                                                                        |             | (65.9
|Cash and cash equivalents at beginning of period     |                                                                        |             | 166.8
|                                                     |                                                                        |             |      
|Cash and cash equivalents at end of period           |                                                                        | $           | 100.9
|                                                     |                                                                        |             |      

See
accompanying notes to consolidated financial statements and accompanying review report of KPMG LLP.

3

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Accounting Information

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Polaroid Holding Company and its domestic and foreign subsidiaries, all of which are
either wholly owned or majority owned (collectively, the "Company"). Intercompany transactions have been eliminated. The information furnished in this interim unaudited report reflects all normal
adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the interim periods.

The
Company's results of operations for the three and nine month periods ended September 26, 2004 are not necessarily indicative of the results to be expected for the full year.
The information included in this quarterly report on Form 10-Q should be read in conjunction with the information in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and the consolidated financial statements and notes thereto included in Items 7, 7A and 8, respectively, in the
Company's Form 10-K for the fiscal year ended December 31, 2003. As noted therein, the Company's Form 10-K for the fiscal year ended December 31,
2003 does not contain all of the financial information that is required by the rules and regulations applicable to such report, and the absence of such information could be material to investors.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the Company's
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash Payments for Interest and Income Taxes

The Company's cash payments for interest and income taxes for the three and nine month periods ended September 26, 2004 and September 28, 2003 were
as follows (in millions):

|                   |  | Three month
period ended
September 26,
2004 |     | Three month
period ended
September 28,
2003 |   | Nine month
period ended
September 26,
2004 |  | Nine month
period ended
September 28,
2003
|------------------ |  | ------------------------------------------- | --- | ------------------------------------------- | - | ------------------------------------------ |  | ------------------------------------------
|Cash payments for: |  |                                             |     |                                             |   |                                            |  |                                           
|Interest           |  | $                                           | 0.6 |                                             | $ | 0.3                                        |  | $                                         
|Income taxes       |  | $                                           | 1.3 |                                             | $ | 1.2                                        |  | $                                         

Termination Costs:

In the second quarter of 2004, the Company made a decision to terminate the test marketing and development of its instant digital printing kiosk and does not plan
to commercialize this product in the future. As a result, the Company recorded a charge of $2.8 million in cost of sales in the second quarter of 2004, related to certain media and hardware
vendor termination costs as well as for fixed asset write-offs. These non-standard costs were reported in the Global Manufacturing business segment.

Asset Sales:

In the second quarter of 2004, the Company sold certain held for sale property located in Germany for net cash proceeds of $4.0 million and reported a gain
of $1.0 million on this sale in general and

4

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administrative
expenses. In addition, the Company sold certain excess real estate located in the United Kingdom for $0.5 million and recognized this amount as a gain in general and
administrative expenses.

Also
in the second quarter of 2004, the Company received a cash distribution of $1.2 million related to the sale of the Company's equity interest in a private company. The gain of
$1.2 million from the sale of the Company's investment in this company was recorded in other income. In connection with this sale, the Company negotiated a settlement of a license agreement
with the private company and, as a result, received a cash payment $0.4 million in the second quarter of 2004. This settlement amount was also recorded in other income.

Other Non-cash Items:

In the first nine months of 2004 and 2003, the Company recorded other non-cash items of $6.4 million and $5.9 million, respectively, in
its cash flows from operating activities. These non-cash items primarily related to foreign exchange adjustments.

Stock-Based Compensation:

The Company accounts for its stock-based compensation under the intrinsic value method of accounting as defined by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations and provides disclosure related to its stock-based compensation
under the provisions of SFAS 123,Accounting for Stock-Based Compensation("SFAS 123"), as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure.

If
compensation cost for the Company's stock option awards (see Note 3) had been determined based on the fair value at grant date for awards under the plans consistent with
SFAS 123, the Company's net earnings and basic and diluted earnings per common share, based on net earnings available to common

5

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stockholders,
would have been changed to the pro forma amounts as follows (in millions except per share data):

|                                                                                                                                   |             | Three month
period ended
September 26,
2004 |      | Three month
period ended
September 28,
2003 |   | Nine month
period ended
September 26,
2004 |      | Nine month
period ended
September 28,
2003 |     
|---------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------------------------------- | ---- | ------------------------------------------- | - | ------------------------------------------ | ---- | ------------------------------------------ | ----
|Net earnings, as reported                                                                                                          |             | $                                           | 19.3 |                                             | $ | 33.8                                       |      | $                                          | 53.7
|Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effect                        |             |                                             | 0.6  |                                             |   |                                           |      |                                            | 3.2 
|Less: Stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effect |             |                                             | (0.8 | )                                           |   |                                           |      |                                            | (3.3
|                                                                                                                                   |             |                                             |      |                                             |   |                                            |      |                                            |     
|Pro forma net earnings                                                                                                             |             |                                             | 19.1 |                                             |   | 33.8                                       |      |                                            | 53.6
|Less: Preferred dividends                                                                                                          |             |                                             | 0.5  |                                             |   | 1.9                                        |      |                                            | 1.9 
|                                                                                                                                   |             |                                             |      |                                             |   |                                            |      |                                            |     
|Pro forma net earnings available to common stockholders                                                                            |             | $                                           | 18.6 |                                             | $ | 31.9                                       |      | $                                          | 51.7
|Basic earnings per share:                                                                                                          |             |                                             |      |                                             |   |                                            |      |                                            |     
|                                                                                                                                   | As reported |                                             | $    | 0.58                                        |   | $                                          | 1.02 |                                            | $   
|                                                                                                                                   | Pro forma   |                                             | $    | 0.57                                        |   | $                                          | 1.02 |                                            | $   
|Diluted earnings per share:                                                                                                        |             |                                             |      |                                             |   |                                            |      |                                            |     
|                                                                                                                                   | As reported |                                             | $    | 0.54                                        |   | $                                          | 1.00 |                                            | $   
|                                                                                                                                   | Pro forma   |                                             | $    | 0.53                                        |   | $                                          | 1.00 |                                            | $   

The
fair value of the Company's stock option grants during the first six months of 2004 was estimated on the grant date using the Minimum Value Method with the following weighted average
assumptions:

Dividend yield

Risk free interest rate

3.4%Expected option life

5 years


The
fair value of the Company's stock option grants during the third quarter of 2004 was estimated on the grant date using the Black Scholes Method with the following weighted average
assumptions:

Dividend yield

Risk free interest rate

3.7%Expected volatility

50.0%Expected option life

5 years


6

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2.     Earnings per Share

The numerators and denominators of the basic and diluted earnings per common share computations for the Company's reported net earnings available to common
stockholders were as follows (in millions except share and per share amounts):

|                                                                                                               |  | Three month
period ended
September 26,
2004 |        | Three month
period ended
September 28,
2003 |   | Nine month
period ended
September 26,
2004 |  | Nine month
period ended
September 28,
2003
|-------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ------ | ------------------------------------------- | - | ------------------------------------------ |  | ------------------------------------------
|Net earnings before extraordinary gain                                                                         |  | $                                           | 19.3   |                                             | $ | 31.2                                       |  | $                                         
|Extraordinary gain                                                                                             |  |                                             |       |                                             |   | 2.6                                        |  |                                           
|                                                                                                               |  |                                             |        |                                             |   |                                            |  |                                           
|Net earnings                                                                                                   |  |                                             | 19.3   |                                             |   | 33.8                                       |  |                                           
|Less: preferred dividends                                                                                      |  |                                             | 0.5    |                                             |   | 1.9                                        |  |                                           
|                                                                                                               |  |                                             |        |                                             |   |                                            |  |                                           
|Net earnings available to common stockholders                                                                  |  | $                                           | 18.8   |                                             | $ | 31.9                                       |  | $                                         
|Weighted average number of common shares outstanding used for basic earnings per common share (in thousands)   |  |                                             | 32,432 |                                             |   | 31,322                                     |  |                                           
|Weighted average number of potentially dilutive restricted common shares outstanding (in thousands)            |  |                                             | 2,415  |                                             |   | 570                                        |  |                                           
|                                                                                                               |  |                                             |        |                                             |   |                                            |  |                                           
|Weighted average number of common shares outstanding used for diluted earnings per common share (in thousands) |  |                                             | 34,847 |                                             |   | 31,892                                     |  |                                           
|Basic earnings per common share before extraordinary gain                                                      |  | $                                           | 0.58   |                                             | $ | 0.94                                       |  | $                                         
|Extraordinary gain                                                                                             |  |                                             |       |                                             |   | 0.08                                       |  |                                           
|                                                                                                               |  |                                             |        |                                             |   |                                            |  |                                           
|Basic earnings per common share                                                                                |  | $                                           | 0.58   |                                             | $ | 1.02                                       |  | $                                         
|Diluted earnings per common share before extraordinary gain                                                    |  | $                                           | 0.54   |                                             | $ | 0.92                                       |  | $                                         
|Extraordinary gain                                                                                             |  |                                             |       |                                             |   | 0.08                                       |  |                                           
|                                                                                                               |  |                                             |        |                                             |   |                                            |  |                                           
|Diluted earnings per common share                                                                              |  | $                                           | 0.54   |                                             | $ | 1.00                                       |  | $                                         

The
calculation of diluted earnings per common share for the three and nine month periods ended September 26, 2004 does not include the effects of 158,625 outstanding options to
purchase shares of the Company's common stock because the effects were anti-dilutive. The Company's basic earnings per share calculations for the three and nine month periods ended
September 28, 2003 contain an immaterial revision to include the vested portion of the outstanding restricted shares of Common Stock that have been included in the diluted earnings per share
calculations.

7

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3.     Stock-based Compensation

In the first and second quarters of 2003, the Company sold 2,855,390 and 1,169,350 restricted shares of its Common Stock, respectively, for a nominal amount to
certain executives and directors. These sales were exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) thereof or pursuant to
Rule 701 promulgated thereunder. These shares are subject to restrictions, including those on voting rights, transfers, sales and other matters, and are subject to repurchase by the Company
under certain circumstances. A total of 25% of the restricted shares of Common Stock vests one year after the date specified in the grant letter for the award and an additional 12.5% vest every six
months thereafter over the following three year period. The intrinsic value, based on the estimated fair value, of these restricted shares at the time of sale of $0.4 million was recorded by
the Company as deferred compensation in common stockholders' equity and is being
recognized in general and administrative expense on a straight line basis over the four year vesting period for these shares.

In
the third quarter of 2003, the Company sold 42,440 restricted shares of its Common Stock for a nominal amount to a director with terms similar to those applicable to the sales of
restricted shares of Common Stock in the first and second quarters of 2003.

In
the first quarter of 2004, the Company sold 843,900 restricted shares of its Common Stock for a nominal amount to certain executives and a director of the Company. These sales were
exempt from registration under the Securities Act, pursuant to Section 4(2) thereof or pursuant to Rule 701 promulgated thereunder. These shares are subject to the same terms as
described above for the restricted shares of Common Stock granted in the third quarter of 2003. The intrinsic value, based on the estimated fair value, of these restricted shares at the time of sale
of $4.7 million was recorded by the Company as deferred compensation in common stockholders' equity and is being recognized in general and administrative expense on a straight line basis over
the four year vesting period for these shares.

Concurrent
with the sale of the restricted shares of Common Stock in the first quarter of 2004, the Company purchased 170,901 shares of the newly issued restricted shares of Common Stock
for approximately $0.9 million. The Company did not pay the purchase price to the sellers but instead used the purchase price of these shares to pay a portion of each such seller's income tax
liability related to the original purchase of restricted shares of Common Stock. In addition, the Company awarded a bonus of $1.1 million in the first quarter of 2004 to the purchasers of the
restricted shares of Common Stock that was used to pay most of the purchasers' remaining income tax liability associated with the original purchase of restricted stock. The bonus was recorded in
general and administrative expenses in the first quarter of 2004. The deferred compensation of approximately $0.9 million related to the shares repurchased was recognized as a
non-cash expense in general and administrative expenses in the first quarter of 2004. The Company also recognized a non-cash expense in general and administrative expenses of
approximately $0.3 million and $0.9 million in the third quarter and first nine months of 2004, respectively, based on a straight line amortization of the deferred compensation related
to the grant of restricted shares of Common Stock in the first quarter of 2004.

The
Company has the right to purchase the non-vested restricted shares of Common Stock held by executives or directors who leave the Company or the Board of Directors,
respectively, for a nominal amount. These repurchased shares are recorded as treasury stock and are available to be reissued. As of September 26, 2004, the Company has repurchased a total of
553,340 shares of non-vested restricted shares of Common Stock from executives who left the Company, of which 80,312 shares were repurchased in the third quarter of 2004.

In
the first quarter of 2004, the Company adopted the 2004 Stock Option Plan under which directors, executives and certain employees may be granted options to purchase restricted shares
of the Company's Common Stock (the "2004 Stock Option Plan"). Any shares of Common Stock issued upon exercise of

8

---



options
will be subject to restrictions, including restrictions on voting rights, transfers, sales and other matters, and will be subject to repurchase by the Company under certain circumstances.

In
the first quarter of 2004, the Company granted a total of 452,901 options to certain executives and a director pursuant to the 2004 Stock Option Plan. The options issued in the first
quarter of 2004 have a term of ten years from the date of grant and 25% of the options vest one year after the date specified in the grant letters for the award (which in some cases is prior to the
grant date) and an additional 12.5% vest every six months thereafter over the following three year period.

In
the second quarter of 2004, the Company granted a total of 123,375 options to certain executives pursuant to the 2004 Stock Option Plan. These options have a term of ten years from
the date of grant and 25% of the options vest one year after the date of the grant and an additional 12.5% vest every six months thereafter over the following three year period.

In
the third quarter of 2004, the Company granted a total of 158,625 options to certain executives pursuant to the 2004 Stock Option Plan. These options have a term of ten years from the
date of grant and 25% of the options vest one year after the date of the grant and an additional 12.5% vest every six months thereafter over the following three year period.

As
of September 26, 2004, the Company has recorded the intrinsic value of its stock-based compensation grants as deferred compensation in common stockholders' equity. This
deferred compensation is being amortized to general and administrative expenses over the respective vesting periods of these grants. As of September 26, 2004, 915,735 options were authorized
under the 2004 Stock Option Plan, 717,671 options had been granted and remained outstanding under the 2004 Stock Option Plan, and 198,064 options were available for future grant under the 2004 Stock
Option Plan.

A
summary of the Company's stock option awards as of September 26, 2004, and the changes for the period from January 1 to September 26, 2004, is presented below:

Number of
Stock Options

Weighted-Average
Exercise Price(in thousands)Outstanding at January 1, 2004




Granted

453

$
5.59Exercised




Forfeited




Outstanding at March 28, 2004

453

$
5.59Granted

123

$
5.59Exercised




Forfeited

(11
)
$
5.59Outstanding at June 27, 2004

565

$
5.59Granted

159

$
12.92Exercised




Forfeited

(6
)
$
5.59Outstanding at September 26, 2004

718

$
7.21


Of
the Company's stock option awards outstanding at September 26, 2004, 4,875 were exercisable.

9

---





4.     Comprehensive Income

The Company's total comprehensive income for the three and nine month periods ended September 26, 2004 and September 28, 2003 were as follows (in
millions):

|                           |                                                                          | Three month
period ended
September 26,
2004 |      | Three month
period ended
September 28,
2003 |   | Nine month
period ended
September 26,
2004 |      | Nine month
period ended
September 28,
2003
|-------------------------- | ------------------------------------------------------------------------ | ------------------------------------------- | ---- | ------------------------------------------- | - | ------------------------------------------ | ---- | ------------------------------------------
|Net earnings               |                                                                          | $                                           | 19.3 |                                             | $ | 33.8                                       |      | $                                         
|                           | Other comprehensive income/(loss):                                       |                                             |      |                                             |   |                                            |      |                                           
|                           | Change in unrealized gains and (losses) on available for sale securities |                                             |      |                                            |   |                                            |     |                                           
|                           | Change in cumulative translation adjustments                             |                                             |      | 1.0                                         |   |                                            | (7.8 | )                                         
|                           |                                                                          |                                             |      |                                             |   |                                            |      |                                           
|Total comprehensive income |                                                                          | $                                           | 20.3 |                                             | $ | 26.0                                       |      | $                                         
|                           |                                                                          |                                             |      |                                             |   |                                            |      |                                           

Accumulated
other comprehensive income as of September 26, 2004, consisted of foreign currency translation adjustments of $16.1 million offset by an unrealized loss on
available for sale securities of $0.1 million. Accumulated other comprehensive income as of December 31, 2003, consisted of unrealized foreign currency translation adjustments of
$17.0 million. There were no tax effects associated with the foreign currency translation adjustments recorded in accumulated other comprehensive income at September 26, 2004 or
December 31, 2003.

5.     Business Segments

The Company's reportable business segments are: the Americas Region; the International Region; Global Manufacturing; and Research and Development ("R&D"). The
Company also has an All Other segment that includes: the eyewear business; the commercial secure identification systems business; brand and technology licensing operations; and contract manufacturing.
The Americas Region consists of sales, marketing and distribution operations in the United States of America and other countries in North America and South America. The International Region consists
of sales, marketing and distribution operations outside the Americas Region. Global Manufacturing consists of worldwide activities associated with manufacturing, procurement, developing manufacturing
processes for new products, and inventory management. R&D consists of research and development activities. The Company's business segments are managed by senior executives who are directly responsible
for all activities in the segment and report to the Company's chief operating decision-maker.

The
Company evaluates the performance of its business segments based on each segment's impact on profit from operations and its asset management. In the regional sales and marketing
segments, profit from operations is based on standard product costs excluding intercompany margins and therefore reflects contribution to worldwide Company profits from third party sales.
Non-standard manufacturing costs along with the costs of procurement, inventory management and developing manufacturing processes for new products are reported as costs in profit from
operations in the Global Manufacturing segment. For the R&D segment, research and development costs are expensed as incurred in profit from operations. The financial results of each business segment
are reviewed by the Company's chief operating decision-maker.

10

---



The
Company has one category called Corporate which is not classified as a business segment. This category includes: central marketing; centralized information systems; general and
administrative functions; worldwide finished goods planning activities; and certain other corporate functions. The non-segment Corporate category also includes costs related to
restructuring activities, certain incentive compensation costs and certain other non-operating items.

The
following is a summary of information related to the Company's business segments and the non-segment Corporate category (in millions):

|                               |                      | Three month
period ended
September 26,
2004 |       | Three month
period ended
September 28,
2003 |   | Nine month
period ended
September 26,
2004 |       | Nine month
period ended
September 28,
2003
|------------------------------ | -------------------- | ------------------------------------------- | ----- | ------------------------------------------- | - | ------------------------------------------ | ----- | ------------------------------------------
|Net sales to customers:        |                      |                                             |       |                                             |   |                                            |       |                                           
|                               | Americas Region      |                                             | $     | 81.1                                        |   | $                                          | 104.2 |                                           
|                               | International Region |                                             |       | 56.0                                        |   |                                            | 64.8  |                                           
|                               | Global Manufacturing |                                             |       |                                            |   |                                            |      |                                           
|                               | R&D                  |                                             |       |                                            |   |                                            |      |                                           
|                               | All Other            |                                             |       | 15.5                                        |   |                                            | 16.4  |                                           
|                               |                      |                                             |       |                                             |   |                                            |       |                                           
|Segment net sales to customers |                      |                                             | 152.6 |                                             |   | 185.4                                      |       |                                           
|                               | Corporate            |                                             |       |                                            |   |                                            |      |                                           
|                               |                      |                                             |       |                                             |   |                                            |       |                                           
|Total net sales to customers   |                      | $                                           | 152.6 |                                             | $ | 185.4                                      |       | $                                         
|                               |                      |                                             |       |                                             |   |                                            |       |                                           

|                               |                      | Three month
period ended
September 26,
2004 |      | Three month
period ended
September 28,
2003 |   | Nine month
period ended
September 26,
2004 |       | Nine month
period ended
September 28,
2003 |      
|------------------------------ | -------------------- | ------------------------------------------- | ---- | ------------------------------------------- | - | ------------------------------------------ | ----- | ------------------------------------------ | -----
|Profit/(loss) from operations: |                      |                                             |      |                                             |   |                                            |       |                                            |      
|                               | Americas Region      |                                             | $    | 25.8                                        |   | $                                          | 41.0  |                                            | $    
|                               | International Region |                                             |      | 14.8                                        |   |                                            | 18.3  |                                            |      
|                               | Global Manufacturing |                                             |      | (6.3                                        | ) |                                            | (6.1  | )                                          |      
|                               | R&D                  |                                             |      | (10.6                                       | ) |                                            | (9.8  | )                                          |      
|                               | All Other            |                                             |      | 5.6                                         |   |                                            | 3.8   |                                            |      
|                               |                      |                                             |      |                                             |   |                                            |       |                                            |      
|Segment profit from operations |                      |                                             | 29.3 |                                             |   | 47.2                                       |       |                                            | 108.8
|                               | Corporate            |                                             |      | (17.7                                       | ) |                                            | (19.3 | )                                          |      
|                               |                      |                                             |      |                                             |   |                                            |       |                                            |      
|Total profit from operations   |                      | $                                           | 11.6 |                                             | $ | 27.9                                       |       | $                                          | 44.8 
|                               |                      |                                             |      |                                             |   |                                            |       |                                            |      

6.     Restructuring Charges

The Company recorded restructuring charges of $6.7 million in the third quarter of 2004, and $8.9 million in the first nine months of 2004. These
charges were recorded in the non-segment Corporate category and primarily represented charges for involuntary severance programs intended to downsize and consolidate certain sales and
marketing operations, primarily in the International Region, certain operations in Global Manufacturing and certain non-segment Corporate operations. These reductions were intended to
further reduce the Company's cost of manufacturing and its overhead costs. The charges in the third quarter of 2004 and the first nine months of 2004 also included approximately $0.1 million
and $0.4 million, respectively, of exit costs related to the liquidation of certain non-U.S. marketing subsidiaries.

11

---



The
following table summarizes the Company's reserves established for restructuring programs at December 31, 2003 and the related cash charges for the three and nine month periods
ended September 26, 2004 (in millions):

Severance

Exit Costs

TotalBalance at December 31, 2003

$
2.5



$
2.5Restructuring charges


1.0




1.0Cash payments


(1.8
)



(1.8
)Balance at March 28, 2004

$
1.7



$
1.7Restructuring charges


0.9

0.3


1.2Cash payments


(1.5
)
(0.3
)

(1.8
)Balance at June 27, 2004

$
1.1



$
1.1Restructuring charges


6.6

0.1


6.7Cash payments


(1.1
)
(0.1
)

(1.2
)Balance at September 26, 2004

$
6.6



$
6.6


Approximately
$3.0 million of the severance charges in the first nine months of 2004 represent pension enhancement costs under a non-U.S. pension plan. In the first
nine months of 2004, approximately $0.8 million of cash payments had been made to the local pension trust related to these charges. These cash payments are included in the Company's pension
plan cash contributions in the first nine months of 2004 (see Note 7).

The
Company recorded restructuring charges of $0.1 million in the third quarter of 2003 and $1.7 million in the first nine months of 2003. These charges were recorded in
the non-segment Corporate category and represented charges for involuntary severance programs intended to downsize and consolidate certain operations in Global Manufacturing, certain sales
and marketing operations, and certain non-segment Corporate operations. These reductions were intended to further reduce the Company's cost of manufacturing and its overhead costs.

12

---



The
following table summarizes the Company's reserves established for restructuring programs at December 31, 2002 and the related cash and non-cash charges for the
three and nine month period ended September 28, 2003 (in millions):

Severance

Exit Costs

TotalBalance at December 31, 2002

$
8.6

$
0.2

$
8.8Restructuring charges


0.5





0.5Cash payments


(4.9
)

(0.1
)

(5.0
)Non-cash charges





(0.1
)

(0.1
)Balance at March 30, 2003

$
4.2




$
4.2Restructuring charges


1.1





1.1Cash payments


(2.7
)




(2.7
)Balance at June 29, 2003

$
2.6




$
2.6Restructuring charges


0.1





0.1Cash payments


(1.5
)




(1.5
)Balance at September 28, 2003

$
1.2




$
1.2


7.     Pension Plans

The components of the Company's net periodic pension expense for its manufacturing subsidiaries in the United Kingdom and the Netherlands with trusteed,
contributory defined benefit pension plans for the three and nine month periods ended September 26, 2004 and September 28, 2003 were as follows (in millions):

Three month
period ended
September 26,
2004

Three month
period ended
September 28,
2003

Nine month
period ended
September 26,
2004

Nine month
period ended
September 28,
2003Service cost

$
1.0

$
1.4

$
3.8

$
4.4Interest cost


4.0


3.7


12.1


10.9Expected return on assets


(4.7
)

(4.2
)

(14.2
)

(12.6
)Amortization of unrecognized prior service cost


(0.1
)




(0.1
)

Net periodic pension cost

$
0.2

$
0.9

$
1.6

$
2.7


The
Company expects to contribute a total of approximately $8.7 million to these pension plans in fiscal 2004. As of September 26, 2004, approximately $5.8 million
of cash contributions have been made to these pension plans. Therefore, the Company expects to make $2.9 million of additional cash contributions to fund these pension plans during the
remainder of fiscal 2004.

13

---



8.     Short-term Debt

In September 2004, the Company entered into an amendment to its $100 million credit facility (the "Credit Agreement"). The amendment provides for a
reduction in the minimum earnings before interest, taxes, depreciation and amortization ("EBITDA") covenant levels (calculated as of the end of each fiscal quarter on a rolling four quarter basis) for
the third and fourth fiscal quarters of 2004 and the first fiscal quarter of 2005 to $38.0 million, $12.5 million and $2.5 million, respectively. The EBITDA covenant level for the
second fiscal quarter 2005, which is the final period tested, was unchanged by this amendment and remained at $53.0 million. In addition, the amendment removed the ability of the Company to
redeem shares of its outstanding Preferred Stock and to pay dividends or make other distributions to any of its shareholders without approval of the lenders under the Credit Agreement. In connection
with this amendment, the Company paid the lenders under the Credit Agreement a fee of $0.2 million. The Company did not borrow under the revolving credit line in the Credit Agreement in the
first nine months of 2004 or 2003.

9.     Common Stockholder's Equity

As of September 26, 2004, the Company had authorized 50,000,000 shares of Common Stock with a par value of $0.001 per share (the "Common Stock"), of which
34,956,069 shares were issued and outstanding. In the first quarter of 2004, the Company repurchased 170,901 shares of its restricted Common Stock (see Note 3) for approximately
$0.9 million and recorded this repurchase as treasury stock. In addition, as of September 26, 2004, the Company has repurchased a total of 553,340 shares of non-vested
restricted stock for a nominal amount from executives who left the Company (refer to Note 3) and recorded these repurchases as treasury stock.

10.   Preferred Stock

As of December 31, 2003, the Company had issued and outstanding 446,150 shares of Series A 8% Cumulative Compounding Preferred Stock (the "Preferred
Stock"). In April 2004, the Company paid a
dividend of $1.4 million on the Preferred Stock (representing all accrued and unpaid dividends on the Preferred Stock as of that date) and redeemed 50% of the then outstanding Preferred Stock
for $22.3 million. As of September 26, 2004, 223,190 shares of the Company's Preferred Stock were outstanding.

14

---





Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders
Polaroid Holding Company and Subsidiary Companies

We
have reviewed the accompanying consolidated balance sheet of Polaroid Holding Company and Subsidiary Companies as of September 26, 2004 and the related consolidated statements
of earnings for the three and nine month periods ended September 26, 2004 and September 28, 2003 and consolidated statements of cash flows for the nine month periods ended
September 26, 2004 and September 28, 2003. These consolidated financial statements are the responsibility of the Company's management.

We
conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.

Based
on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with
United States generally accepted accounting principles.

We
have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Polaroid Holding
Company and Subsidiary Companies as of December 31, 2003, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 4, 2004, we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003, is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.

KPMG
LLP
Boston, Massachusetts
October 25, 2004

15

---





Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Some statements in this report may be forward looking in nature, or "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as "believe", "expect", "anticipate", "should", "plan", "seek", "goal", "outlook",
"target", "intend", "will", "estimate" and "potential" among others. Actual results may differ materially from those projected in or implied by any forward-looking statement as a result of a wide
variety of factors, which include, but are not limited to those set forth in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's Annual
Report for the fiscal year ended December 31, 2003 filed with the United States Securities and Exchange Commission ("SEC") on Form 10-K on April 14, 2004 (the
"Form 10-K"). The Registrant assumes no obligation to update forward-looking statements whether as a result of new information, future events or otherwise.

Background

The following information should be read in conjunction with the information regarding the Company in Part I Item 1.Financial
Statementsand in conjunction with the Form 10-K for the fiscal year ended December 31, 2003 and the quarterly reports filed on
Form 10-Q for the subsequent fiscal quarters. As noted therein, the Company's Form 10-K for the fiscal year ended December 31, 2003 does not contain all of
the financial information that is required by the rules and regulations applicable to such report, and the absence of such information could be material to investors. The information on the Company's
results of operations for any interim period, including the information presented below, is not necessarily indicative of the results of the Company's operations for the entire year.

Business

The Company designs, develops, manufactures and markets instant and digital imaging products and related products. The Company's principal products are instant
cameras and instant film, which are marketed worldwide. In addition to its principal products, the Company designs, develops, manufactures and/or markets photographic hardware accessories for the
instant photography market. The Company's other products and services consist of eyewear, principally sunglasses, and secure identification systems for commercial applications. The Company also
performs contract manufacturing for and licenses its brand and technology to third parties.

As
previously disclosed, the Company made a decision in the second quarter of 2004 to terminate the test marketing and development of its instant digital printing kiosk and does not plan
to commercialize this product in the future. The Company continues its efforts to design and develop other digital printing applications that will enable digital images to be printed quickly,
conveniently and affordably. The Company has made and continues to make a significant investment in instant digital printing which continues to have an adverse effect on profit from operations. There
can be no assurance that any of these digital printing applications will be commercialized.

Overview of Third Quarter and First Nine Months of 2004 Results

The Company's net sales in the third quarter of 2004 were $153 million, which includes a favorable impact from foreign exchange of approximately
$3 million. The Company's variances from standard manufacturing costs and its sales and marketing expenses in the third quarter of 2004 include a total of approximately $2 million from
the unfavorable impact of foreign exchange. In the third quarter of 2004, the Company recorded approximately $7 million of restructuring expenses. Also in the third quarter of 2004, the Company
determined that it was not probable that it would meet the criteria for its 2004 employee cash incentive compensation program and, as a result, reversed the year to date provision for this program
resulting in a reduction of overhead expenses of $4 million. The Company may, in its discretion,

16

---



consider
an alternative 2004 employee incentive compensation program which could result in a charge for employee incentive compensation in the fourth quarter of 2004. In the third quarter of 2004, the
Company revised its estimate of its effective tax rate for 2004 to negative 20% from negative 2% used in the second quarter of 2004, primarily due to lower than expected earnings and a foreign tax
credit carryback. As a result, the Company recorded a tax benefit of $8 million in the third quarter of 2004. The Company's effective tax rate of negative 20% for 2004, which was
estimated in the third quarter of 2004, is not necessarily indicative of the Company's effective tax rate for future periods. In the third quarter of 2004, the Company's profit from operations
was $12 million and its net earnings were $19 million, or $0.54 per common share on a diluted basis based on net earnings available to common stockholders.

The
Company's net sales in the first nine months of 2004 were $496 million, which includes a favorable impact from foreign exchange of approximately $15 million, and a
favorable impact of approximately $3 million related to the resolution of a post audit claim by a major customer. The Company's variances from standard manufacturing costs and its sales and
marketing expenses in the first nine months of 2004 include a total of approximately $14 million from the unfavorable impact of foreign exchange. In the first nine months of 2004, the Company
recorded approximately $9 million of restructuring expenses and $3 million of costs related to its decision to terminate the development and test marketing of the instant digital
printing kiosk. In the third quarter of 2004, the Company reversed its year to date provision for its employee cash incentive compensation program resulting in a reduction of overhead expenses of
$4 million. The Company may, in its discretion, consider an alternative 2004 employee incentive compensation program which could result in a charge for employee cash incentive compensation in
the fourth quarter of 2004. The Company's estimate of its effective tax rate for 2004 that is used for the first nine months of 2004 is negative 20%, primarily due to the use of foreign tax credits in
the U.S., including a projected foreign tax credit carryback, generated as a result of dividends paid or expected to be paid from certain of the Company's foreign subsidiaries. As a result, the
Company recorded an income tax benefit of $9 million in the first nine months of 2004. The Company's effective tax rate of negative 20% for 2004, which was estimated in the third quarter
of 2004, is not necessarily indicative of the Company's effective tax rate for future periods. The Company's profit from operations in the first nine months of 2004 was $45 million and
its net earnings were $54 million, or $1.50 per common share on a diluted basis based on net earnings available to common stockholders.

The
market for instant photography has been experiencing a significant and steady decline in demand due to competition from digital camera products and media formats. The Company's net
sales of instant camera and film products, excluding the favorable impact of foreign exchange, declined by approximately 22% in the third quarter of 2004 compared to the third quarter of 2003.
Excluding the portions of the favorable impact of foreign exchange, the second quarter resolution of a post audit claim by a major customer and lower net costs for marketing programs that related to
instant cameras and film, the Company's net sales of instant camera and film products declined approximately 19% for the first nine months of 2004 compared to the same period in 2003. Declining demand
is expected to continue and to continue to have a negative impact on the Company's net sales of instant camera and film products. The rate of decline of the Company's net sales of instant cameras and
film may increase or decrease in the future. Although the Company has been attempting to reduce its costs in line with the decline in its instant camera and film sales, the Company's gross margin has
declined by approximately 3 percentage points in the first nine months of 2004 compared to the same period in 2003. The Company has been and continues to be challenged to reduce its fixed as
well as variable costs in the future. If the Company is not successful in reducing these costs in line with the reductions in its net sales, the Company's profit from operations and net earnings would
be negatively impacted.

At
September 26, 2004, the Company had cash and cash equivalents of $101 million and no outstanding debt, compared to cash and cash equivalents of approximately
$167 million and no outstanding debt at December 31, 2003. During the first nine months of 2004, the Company's net cash used by operating activities was $33 million. Cash flow
from investing activities during the first nine months of 2004 was $8 million, which related to capital spending of $19 million, offset, in part, by $4 million of

17

---



proceeds
from the sale of held for sale assets and $7 million from the use of deposits from the sale of held for sale assets in 2003. Cash used by financing activities during this period was
$25 million, which related to the payment of dividends on the Company's Preferred Stock and the redemption of fifty percent of the outstanding shares of the Company's Preferred Stock.

General

The Company's reportable business segments are: the Americas Region; the International Region; Global Manufacturing; and R&D. The Company also has an All Other
segment that includes: the eyewear business; the commercial secure identification systems business; brand and technology licensing operations; and contract manufacturing. The Americas Region consists
of sales, marketing and distribution operations in the United States of America and other countries in North America and South America. The International Region consists of sales, marketing and
distribution operations outside the Americas Region. Global Manufacturing consists of worldwide activities associated with manufacturing, procurement, developing manufacturing processes for new
products, and inventory management. R&D consists of the Company's research and development activities. The Company's business segments are managed by senior executives who are directly responsible for
all activities in the segment and report to the Company's chief operating decision-maker.

The
Company has one category called Corporate which is not classified as a business segment. This category includes: central marketing; centralized information systems; general and
administrative functions; worldwide finished goods planning activities; and certain other corporate functions. The Corporate category also includes costs related to restructuring activities, certain
incentive compensation costs and certain other non-operating items.

The
Company evaluates the performance of its business segments based on each segment's impact on profit from operations and its asset management. In the regional sales and marketing
segments, profit from operations is based on standard product costs excluding intercompany margins and therefore reflects contribution to worldwide Company profits from third-party sales.
Non-standard manufacturing costs along with the costs of procurement, inventory management and developing manufacturing processes for new products are reported as costs in profit from
operations in the Global Manufacturing segment. For the R&D segment, research and development costs are expensed as incurred in profit from operations. The financial results of each business segment
are reviewed by the Company's chief operating decision-maker.

The
Americas and International Regions are responsible for managing accounts receivable and for charges associated with reserves for slow moving and obsolete finished goods inventory.
The Company manages and reports worldwide inventories, excluding the slow moving and obsolete finished goods inventories, centrally in Global Manufacturing.

Critical Accounting Estimates

The methods, estimates and judgments the Company uses in applying its accounting policies have a significant impact on the results it reports in its financial
statements. Some of the Company's accounting policies require it to make subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The Company's
most critical accounting estimates include: revenue recognition, which impacts gross margin; allowance for doubtful accounts, which impacts profit from operations; valuation of inventory, which
impacts gross margin; and recognition and measurement of current and deferred income tax assets and liabilities, which impacts the Company's income tax provision. Below, the Company discusses these
policies further, as well as the estimates and judgments involved.

Revenue Recognition:

The Company recognizes net sales when all of the following criteria have been met: evidence exists that the customer is bound to the transaction; the product has
been shipped and title has passed to the customer; the sales price to the customer has been fixed or is determinable; and collectability of the sales

18

---



price
is reasonably assured. Provisions for estimated sales returns and allowances are made at the time the products are sold. To arrive at net sales, the Company records reductions to net sales for
the cost of programs offered to customers that include cash and volume discounts and cooperative and other advertising allowances. The Company recognizes the liability for these programs at the time
the related sales are recorded. The Company determines the cost of these programs based on the terms of the programs, estimates using its historical experience and internal and customer data. The
Company adjusts net sales for the cost of price protection programs associated with customer inventories, as well as for the cost of promotional allowances and other fees and coupons, at the time it
can reasonably estimate this cost. To the extent actual experience differs from the estimates, adjustments to net sales could be recognized, which could have an impact on the Company's net sales and
net earnings.

Allowance for Doubtful Accounts:

The Company's allowance for doubtful accounts is reviewed on a regular basis and is based on a variety of factors including: individual account risk profiles,
which consider customer credit ratings and financial condition reviews; a review of individual accounts receivable aging; and new information that becomes available on specific customers, economic
trends and changes in customer payment terms. If circumstances related to specific customers were to change, the Company's estimates of the collectability of its accounts receivable could be adjusted,
which would have an impact on the Company's net earnings.

Inventory:

The Company's policy for valuation of inventory, including the determination of obsolete or excess inventory and lower of cost or market reserves, requires it to
estimate the future demand for its products within specific time horizons, generally one year or less. The estimates of future demand, that the Company uses in the valuation of inventory, are the
basis for the Company's short-term manufacturing and procurement plans. If the demand forecast for specific products is greater than actual demand and the Company fails to reduce its
manufacturing output and procurement accordingly, the Company could be required to record additional inventory reserves, which would have a negative impact on the Company's net earnings.

Income Taxes:

In determining its provision for income taxes for financial statement purposes, the Company must make certain estimates and judgments. These estimates and
judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the
tax and financial statement recognition of its revenue and expense.

The
Company must assess the likelihood that it will be able to recover its deferred tax assets. Unless the recovery is more likely than not, the Company must increase its provision for
taxes by recording a reserve, in the form of a valuation allowance, for the deferred tax assets that it estimates may not ultimately be recoverable. Should there be a change in the Company's ability
to recover the remainder of its deferred tax assets, its tax provision would decrease or increase in the period of the change, which would have a positive or negative impact on the Company's net
earnings.

In
addition, the calculation of the Company's income tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes potential
liabilities for anticipated tax audit issues in the United States of America ("U.S.") and other tax jurisdictions based on the Company's estimate of the amount of these additional taxes and when they
will be due. If the payment of these amounts ultimately proves to be unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period when the Company
determined the liabilities are no longer necessary. If the Company's estimate of these tax liabilities proves to be less than the ultimate assessment,

19

---



a
further charge to tax expense would result, which would have a negative impact on the Company's net earnings.

Stock-Based Compensation:

The Company has sold shares of restricted Common Stock and granted options to purchase shares of the Company's restricted Common Stock to certain of its directors
and executives. The purchase price of the restricted Common Stock sold was nominal and the exercise price of the options granted was equal to the estimated fair value of the underlying restricted
shares of Common Stock on the date of grant. To record and disclose the cost of these sales and grants for financial reporting, the Company must make estimates and judgments to arrive at the estimated
fair value of its restricted Common Stock, including consideration of the trading price of the Company's Common Stock and the impact that transfer restrictions have on fair value. Estimates of fair
value are inherently subjective. If the Company were to make a different determination of the fair value of its restricted Common Stock, the amount of its deferred compensation and its stock-based
compensation expense would be different which could have a positive or negative impact on the Company's net earnings.

Pension Benefits:

The calculation of the Company's defined pension benefit costs and obligations are dependent on the assumptions used by its actuaries. These assumptions, which
are reviewed by the Company annually, include discount rates, salary growth rates, expected long-term return on plan assets, and other factors. The significant factors utilized by the
Company's actuaries are discussed in further detail in Note 13 of the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003. To the extent actual experience differs from the Company's assumptions, the differences are recorded as unrecognized gains and losses, which are amortized to net
earnings over the estimated future service period of plan participants, if the cumulative amount of the unamortized gains or losses exceeds 10% of the greater of the plan's projected benefit
obligation or market-related value of plan assets. Significant differences in actual experience to assumptions or significant changes in future assumptions would affect the Company's
pension benefit obligations and costs, which could have a positive or negative impact on the Company's net earnings.

Restructuring Charges:

The Company has implemented a number of restructuring programs in an effort to reduce its costs in line with the continuing decline in its instant camera and film
business. These programs consist of involuntary severance programs and certain exit costs primarily related to the liquidation of certain non-U.S. marketing subsidiaries. The Company
records severance-related expenses in accordance with the provisions of Financial Accounting Standards Board ("FASB") Statement No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Costs" or Statement No. 112, "Employer's Accounting for Post-Employment Benefits." Non-employee-related exit and
disposal costs, primarily costs to consolidate or close facilities, are accounted for under the provisions of FASB Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". The Company estimates its liabilities for these programs, which are approved by the Company's management, by obtaining detailed estimates of costs for these programs, including the
estimated costs of employee severance and related benefits, contract termination payments for leases, distributor arrangements and other contractual obligations, and any other qualifying exit costs
related to the exit plan. These estimated costs are grouped by specific programs and are monitored on a monthly basis. These costs represent the Company's best estimate, but require assumptions about
the programs that could change over time. Estimates are evaluated periodically to determine if a change is required. There were no material changes in estimates recorded by the Company during the
first nine months of 2004 and 2003 related to its restructuring programs. However, if the Company were to change its estimates for these charges, the change could have a positive or negative impact on
the Company's profit from operations and net earnings.

20

---



Consolidated Worldwide Results for Third Quarter of 2004 Compared to Third Quarter of 2003

The following table presents selected financial information regarding the Company's results of operations for the three month periods ended September 26,
2004 and September 28, 2003. This table is presented for use in the discussion of operating results for the third quarter of 2004 compared to the third quarter of 2003 below. The results for
these periods are as follows (in millions, except for percentages):

Three month
period ended
September 26,
2004

Three month
period ended
September 28,
2003Net sales

$
153

$
185Cost of goods sold


84


91Gross margin


69


94% of Net sales


45
%

51
%Marketing, research, engineering and administrative expenses


50


66Restructuring charges


7


Profit from operations


12


28Other income, net





9Interest expense


(1
)

(1
)Earnings before income tax expense


11


36Federal, state and foreign income tax expense/(benefit)


(8
)

5Net earnings before extraordinary gain


19


31Extraordinary gain





3Net earnings

$
19

$
34


The
Company's consolidated net sales and gross margin for the third quarter of 2004 compared to the third quarter of 2003 were as follows (dollars in millions):

Third
Quarter
2004

Third
Quarter
2003Net sales

$
153

$
185Gross margin


69


94% of Net sales


45
%

51
%


The
Company's consolidated net sales in the third quarter of 2004 decreased by $32 million, or approximately 17%, compared to the same period of 2003, primarily as a result of
lower net sales of instant film and, to a lesser degree, instant cameras. Net sales in the third quarter of 2004 include approximately $3 million from the favorable impact of foreign exchange.
Excluding the favorable impact of foreign exchange, the Company's net sales of instant cameras and film declined by approximately 22% in the third quarter of 2004 compared to the same period of 2003.
The net sales of instant cameras and film in the third quarter of 2004 were negatively impacted by competition from digital camera products and media formats.

The
Company had a gross margin of $69 million or 45% in the third quarter of 2004 compared to a gross margin of $94 million or 51% in the third quarter of 2003. The
decrease in gross margin of 6 percentage points was mainly due to the impact of lower net sales, primarily of instant film, which decreased gross margin by approximately 6 percentage
points. The decrease in net sales resulted in lower production volumes. This in turn resulted in an increase in manufacturing unit costs due to certain costs

21

---



which
were not reduced in line with the lower production volumes. The decrease in gross margin also included the impact of higher promotion costs in the third quarter of 2004 compared to the same
period in 2003 which decreased gross margin by approximately 1 percentage point. The decreases in gross margin were offset, in part, by the favorable impact of foreign exchange on net sales in
the third quarter of 2004, which increased gross margin by approximately 1 percentage point.

The
Company's selling, general and administrative ("SG&A") expenses were $39 million and $56 million, for the third quarter of 2004 and 2003, respectively. The Company's
SG&A expenses are its reported marketing, research, engineering and administrative expenses, excluding the R&D segment expenses. The decrease of $17 million in SG&A expenses in the third
quarter of 2004 compared to the same period in 2003 reflects a reduction of approximately $8 million in regional sales and marketing expenses to approximately $25 million in the third
quarter of 2004 from approximately $33 million in the same period in 2003. This decrease was primarily due to lower advertising expenses and the favorable impact of restructuring programs. The
decrease in SG&A expenses, in the third quarter of 2004 compared to the same period in 2003, also reflects approximately $8 million of lower costs in the non-segment Corporate
category for employee cash incentive compensation. This decrease included approximately $4 million related to the reversal of the Company's year to date provision for employee cash incentive
compensation. In the third quarter of 2004, the Company determined that it was not probable that it would meet the criteria for its 2004 employee cash incentive compensation program and, as a result,
reversed its year to date provision for employee cash incentive compensation. The Company may, in its discretion, consider an alternative 2004 employee cash incentive compensation program which could
result in a charge for employee cash incentive compensation in the fourth quarter of 2004.

SG&A
expenses in the third quarter of 2004 compared to the same period in 2003 also included an increase of approximately $2 million in certain infrastructure costs in the
non-segment Corporate category, including an increase in the cost of corporate governance, and approximately $1 million from the unfavorable impact of foreign exchange on regional
sales and marketing expenses. These increases were offset by reductions of approximately $4 million mainly in the other non-segment Corporate category costs, including savings from
restructuring. The majority of the Company's SG&A expenses were recorded in the Americas and International Region segments with the remainder recorded primarily in the non-segment
Corporate category.

In
the third quarter of 2004, the Company recorded restructuring charges of approximately $7 million compared to restructuring charges of less than $1 million in the same
period in 2003. The increase in these charges in the third quarter of 2004 related to involuntary severance programs intended to downsize and consolidate the Company's non-U.S.
manufacturing operations and, to a
lesser degree, certain of the Company's sales and marketing, and non-segment Corporate category administrative operations. The Company expects to make most of the cash payments related to
the third quarter 2004 restructuring charges by the end of the fourth quarter of 2004. Refer to Note 6 of the consolidated financial statements contained in Part I Item 1. Financial Statementsfor more information on the Company's restructuring programs.

The
gross margin and expenses discussed above resulted in profit from operations of $12 million in the third quarter of 2004 compared to a profit from operations of
$28 million in the third quarter of 2003. The net of other income and expense in the third quarter of 2004 was income of less than $1 million, primarily related to interest income,
compared to income of $9 million in the third quarter of 2003. Other income in the third quarter of 2003 primarily related to foreign exchange gains, including a net foreign currency
translation gain of approximately $7 million, previously recorded as a cumulative translation adjustment within stockholders' equity that resulted from the liquidation of certain
non-U.S. subsidiaries, and foreign currency transaction gains of approximately $2 million.

In
the third quarter of 2004, the Company revised its estimate of its effective tax rate for 2004 to negative 20% from negative 2% used in the second quarter of 2004 primarily due to
lower than expected earnings in 2004 and a foreign tax credit carryback. As a result, the Company recorded an income tax

22

---



benefit
of $8 million, or an effective tax rate of negative 75%, on reported earnings before income taxes of $11 million in the third quarter of 2004 compared to an income tax expense of
$5 million, or an effective tax rate of 12%, on reported earnings before income taxes of $36 million in the third quarter of 2003. The decrease in the Company's effective tax rate for
2004 was primarily related to the use of foreign tax credits in the U.S., including a projected foreign tax credit carryback, generated as a result of dividends paid or expected to be paid from
certain of the Company's foreign subsidiaries. The Company's effective tax rate of negative 20% for 2004, which was estimated in the third quarter of 2004, is not necessarily indicative
of the Company's effective tax rate for future periods.

In
the third quarter of 2004 the Company's net earnings were $19 million compared to net earnings of $34 million in the third quarter of 2003. Basic and diluted earnings
per common share based on earnings available to common stockholders were $0.58 and $0.54, respectively, in the third quarter of 2004, compared to $1.02 and $1.00, respectively, for basic and diluted
earnings per common share based on earnings available to common stockholders in the third quarter of 2003. Net earnings in the third quarter of 2003 included an extraordinary gain of $3 million
which related to adjustments required under purchase accounting for the fair values of certain liabilities assumed by the Company in its asset purchase from Primary PDC, Inc. on July 31,
2002.

The
following is a summary of the Company's net sales and profit from operations by business segment, and for the non-segment Corporate category, for the periods indicated
(in millions):

Three month
period ended
September 26,
2004

Three month
period ended
September 28,
2003Net sales to customers:Americas Region

$
81

$
104International Region


56


65Global Manufacturing





R&D





All Other


16


16Subtotal Segments


153


185Corporate





Total

$
153

$
185Profit/(loss) from operations:Americas Region

$
26

$
41International Region


15


18Global Manufacturing


(6
)

(6
)R&D


(11
)

(10
)All Other


5


4Subtotal Segments


29


47Corporate


(17
)

(19
)Total

$
12

$
28


23

---





Americas Region

Net sales and profit from operations for the Americas Region for the third quarter of 2004 and 2003, were as follows (in millions):

Third
Quarter
2004

Third
Quarter
2003Net sales

$
81

$
104Profit from operations


26


41


Net
sales in the Americas Region decreased by $23 million, or approximately 22%, in the third quarter of 2004 compared to the same period in 2003, primarily related to lower net
sales of instant film and, to a lesser degree, instant cameras. Competition from digital camera products and media formats negatively impacted the Company's net sales in the Americas Region in the
third quarter of 2004.

Profit
from operations in the Americas Region for the third quarter of 2004 was $26 million compared to profit from operations of $41 million in the same period of 2003.
The decline in profit from operations in the Americas Region of $15 million was primarily due to the impact of lower net sales.
This decrease was offset, in part, by lower selling and administrative expenses, primarily related to lower advertising costs and, to a lesser degree, savings from restructuring in the third quarter
of 2004.

International Region

Net sales and profit from operations for the International Region for the third quarter of 2004 and 2003 were as follows (in millions):

Third
Quarter
2004

Third
Quarter
2003Net sales

$
56

$
65Profit from operations


15


18


Net
sales in the International Region decreased by $9 million, or approximately 14%, to $56 million in the third quarter of 2004 from $65 million in the same period
of 2003, primarily due to lower net sales of instant film and, to a lesser degree, instant cameras. The net sales in the International Region in the third quarter of 2004 included approximately
$3 million related to the favorable impact of foreign exchange. Excluding the favorable impact of foreign exchange, net sales in the International Region declined by approximately
$12 million, or approximately 18%, in the third quarter of 2004 compared to the same period in 2003. Net sales in the International Region in the third quarter of 2004 were negatively impacted
by competition from digital camera products and media formats.

Profit
from operations in the International Region was $15 million in the third quarter of 2004 compared to $18 million in the same period in 2003. Profit from operations
in the third quarter of 2004 included the net favorable impact of approximately $2 million of foreign exchange. Excluding the favorable impact of foreign exchange, profit from operations in the
International Region declined by approximately $5 million in the third quarter of 2004 compared to the same period in 2003. This decrease reflects the impact of lower net sales in the
International Region in the third quarter of 2004 compared to the same period in 2003 offset, in part, by the favorable impact of lower selling and administrative expenses in the third quarter of
2004, primarily due to lower advertising costs and, to a lesser degree, savings from restructuring.

24

---



Global Manufacturing

The manufacturing costs in the Global Manufacturing segment, which consist of non-standard costs, including variances from standard costs, procurement
costs, inventory management costs, and development costs for manufacturing processes ("manufacturing non-standard costs"), were approximately $6 million in each of the third
quarters of 2004 and 2003. The manufacturing non-standard costs in the third quarter of 2004 compared to the same period in 2003 included an increase of approximately $3 million of
unfavorable manufacturing non-standard costs, primarily related to reductions in the Company's production volumes. This increase was offset by the favorable impact of approximately
$2 million from foreign exchange and $1 million of lower development costs related to the Company's decision to terminate the development of its instant digital printing kiosks.

R&D

R&D segment expenses were $11 million in the third quarter of 2004 compared to $10 million in the same period in 2003. The increase of
$1 million primarily relates to an increase in spending related to the Company's instant digital printing activities in the third quarter of 2004. Approximately 85% of the Company's total
research and development expenses in the third quarter of 2004 were related to the Company's instant digital printing activities with the balance primarily related to the Company's instant
photographic activities.

All Other

Net sales in the All Other segment were approximately $16 million in both the third quarter of 2004 and the third quarter of 2003.

Profit
from operations in the All Other segment was $5 million in the third quarter of 2004 compared to $4 million in the same period in 2003. The increase of
$1 million in profit from operations primarily reflected an increase in net sales related to the Company's licensing operations in the third quarter of 2004 compared to the same period in 2003.

Consolidated Worldwide Results for First Nine Months of 2004 Compared to First Nine Months of 2003

The following table presents selected financial information regarding the Company's results of operations for the nine month periods ended September 26,
2004 and September 28, 2003. This table is presented for use in the discussion of operating results for the first nine months of 2004 compared to the

25

---



first
nine months of 2003 below. The results for these periods are as follows (in millions, except for percentages):

Nine month
period ended
September 26,
2004

Nine month
period ended
September 28,
2003Net sales

$
496

$
564Cost of goods sold


263


280Gross margin


233


284% of Net sales


47
%

50
%Marketing, research, engineering and administrative expenses


179


201Restructuring charges


9


2Profit from operations


45


81Other income, net


2


7Interest expense


(2
)

(3
)Earnings before income tax expense


45


85Federal, state and foreign income tax expense/(benefit)


(9
)

21Net earnings before extraordinary gain


54

$
64Extraordinary gain





3Net earnings

$
54

$
67


The
Company's consolidated net sales and gross margin for the first nine months of 2004 compared to the first nine months of 2003 were as follows (dollars in millions):

Nine Months
2004

Nine Months
2003Net sales

$
496

$
564Gross margin


233


284% of Net sales


47
%

50
%


In
the first nine months of 2004 compared to the same period of 2003, the Company's consolidated net sales decreased by $68 million, or approximately 12%, primarily related to
lower net sales of instant film and, to a lesser degree, instant cameras. The net sales in the first nine months of 2004 include the favorable impact of approximately $15 million of foreign
exchange. The net sales in the first nine months of 2004 also include a favorable impact of approximately $3 million from the resolution of a post audit claim by a major customer and the
favorable impact of approximately $9 million related to lower net costs for marketing programs in the first nine months of 2004 compared to the same period in 2003. Excluding the portions of
the favorable impact of foreign exchange, the post audit claim resolution and the lower net costs for marketing programs related to instant camera and film products, the Company's net sales of instant
cameras and film declined by approximately 19% in the first nine months of 2004 compared to the same period of 2003. Net sales of instant cameras and film in the first nine months of 2004 were
negatively impacted by competition from digital camera products and media formats.

The
Company had a gross margin of $233 million or 47% in the first nine months of 2004 compared to a gross margin of $284 million or 50% in the first nine months of 2003.
The decrease in gross margin of 3 percentage points was primarily the result of: the impact of lower net sales, primarily of instant film, which decreased gross margin by approximately
3 percentage points; and higher non-standard

26

---



manufacturing
costs, including the net impact of foreign exchange, in the first nine months of 2004 compared to the same period in 2003, which decreased gross margin by approximately
2 percentage points. These decreases were offset, in part, by the favorable impact of foreign exchange on net sales in the first nine months of 2004, which increased gross margin by
approximately 1 percentage point and the favorable impact of the post audit claim resolution and the lower net costs for marketing programs which increased gross margin by approximately
1 percentage point.

The
Company's SG&A expenses were approximately $149 million and $175 million for the first nine months of 2004 and 2003, respectively. The Company's SG&A expenses are its
reported marketing, research, engineering and administrative expenses, excluding R&D segment expenses. The decrease of $26 million in SG&A expenses in the first nine months of 2004 compared to
the same period in 2003 reflects a reduction of approximately $28 million in regional sales and marketing expenses to approximately $79 million in the first nine months of 2004 from
approximately $107 million in the same period in 2003, due to lower advertising expenses, the favorable impact of restructuring programs and approximately $2 million from the closeout of
certain 2003 and 2002 promotional programs. The decrease in SG&A expenses, in the first nine months of 2004 compared to the same period in 2003, also reflects approximately $12 million of lower
costs in the non-segment Corporate category for employee incentive compensation to approximately $3 million, which related to the cost of stock-based compensation awards, in the
first nine months of 2004, compared to approximately $15 million in the same period in 2003, which primarily related to provisions for the Company's employee cash incentive compensation
program. In the third quarter of 2004, the Company determined that it was not probable that it would meet the criteria for its 2004 employee cash incentive compensation program and, as a result,
reversed its year to date provision for employee cash incentive compensation. The Company may, in its discretion, consider an alternative 2004 employee cash incentive compensation program which could
result in a charge for employee cash incentive compensation in the fourth quarter of 2004. In the first nine months of 2004, the Company sold certain held for sale property located in Germany and
other property located in the United Kingdom for aggregate net cash proceeds of approximately $5 million. The Company recorded the gain on these sales of approximately $1 million in
general and administrative expenses in the non-segment Corporate category.

The
decreases in SG&A expenses in the first nine months of 2004 compared to the same period in 2003 were offset, in part, by planned increases of approximately $3 million in
certain marketing expenses related to new products as well as approximately $8 million of increases mainly in certain infrastructure costs, including increases in the cost of corporate
governance in the non-segment Corporate category. The increases in SG&A expenses also included approximately $4 million from the unfavorable impact of foreign exchange on sales and
marketing expenses in the first nine months of 2004. The majority of the Company's SG&A expenses were recorded in the Americas Region and International Region segments with the remainder recorded
primarily in the non-segment Corporate category.

In
the first nine months of 2004 and 2003, the Company recorded restructuring charges of approximately $9 million and approximately $2 million, respectively. These charges
primarily related to involuntary severance programs intended to downsize and consolidate certain of the Company's non-U.S. manufacturing, sales and marketing and non-segment
Corporate category administrative operations. The Company expects the pre-tax savings from the restructuring charges recorded in the first nine months of 2004 to be approximately
$16 million on an annualized basis. Refer to Note 6 of the consolidated financial statements contained in Part I Item 1.Financial
Statementsfor more information on the Company's restructuring programs.

The
gross margin and expenses discussed above resulted in profit from operations of $45 million in the first nine months of 2004 compared to a profit from operations of
$81 million in the first nine months of 2003. The net of other income and expense in the first nine months of 2004 was net other income of $2 million compared to $7 million of net
other income in the first nine months of 2003. Other income in the first nine months of 2004 primarily related to a gain from the sale of the Company's equity interest in a private company. Other
income in the first nine months of 2003 primarily consisted of a net foreign

27

---



currency
translation gain, previously recorded as a cumulative translation adjustment within stockholders' equity, that resulted from the liquidation of certain non-U.S. subsidiaries and a
distribution from a real estate investment.

The
Company's income tax benefit was $9 million, or an effective tax rate of negative 20%, on reported earnings before income taxes of $45 million in the first nine months
of 2004 compared to an income tax expense of $21 million, or an effective tax rate of 25%, on reported earnings before income taxes of $85 million in the first nine months of 2003. The
decrease in the Company's effective tax rate in the first nine months of 2004 compared to the same period in 2003 was primarily related to the use of foreign tax credits in the U.S., including a
projected foreign tax credit carryback, generated as a result of dividends paid or expected to be paid from certain of the Company's foreign subsidiaries. The Company's effective tax rate of negative
20% for 2004, which was estimated in the third quarter of 2004, is not necessarily indicative of the Company's effective tax rate for future periods.

In
the first nine months of 2004 the Company's net earnings were $54 million compared to net earnings of $67 million in the first nine months of 2003. Basic and diluted
earnings per common share based on earnings available to common stockholders were $1.61 and $1.50, respectively, in the first nine months of 2004, and $1.97 and $1.94, respectively, for basic and
diluted earnings per common share based on earnings available to common stockholders in the first nine months of 2003. Net earnings in the first nine months of 2003 include an extraordinary gain of
$3 million which related to adjustments required under purchase accounting for the fair values of certain liabilities assumed by the Company in its asset purchase from Primary PDC, Inc.
on July 31, 2002.

The
following is a summary of the Company's net sales and profit from operations by business segment, and for the non-segment Corporate category, for the periods indicated
(in millions):

Nine month
period ended
September 26,
2004

Nine month
period ended
September 28,
2003Net sales to customers:Americas Region

$
259

$
318International Region


176


186Global Manufacturing





R&D





All Other


61


60Subtotal Segments


496


564Corporate





Total

$
496

$
564Profit/(loss) from operations:Americas Region

$
93

$
116International Region


51


45Global Manufacturing


(24
)

(9
)R&D


(30
)

(26
)All Other


19


14Subtotal Segments


109


140Corporate


(64
)

(59
)Total

$
45

$
81


28

---



Americas Region

Net sales and profit from operations for the Americas Region for the first nine months of 2004 and 2003, were as follows (in millions):

Nine Months
2004

Nine Months
2003Net sales

$
259

$
318Profit from operations


93


116


Net
sales in the Americas Region decreased by $59 million, or approximately 19%, in the first nine months of 2004 compared to the same period in 2003, primarily due to lower net
sales of instant film and, to a lesser degree, instant cameras. The net sales in the region in the first nine months of 2004 include the favorable impact of approximately $3 million related to
the resolution of a post audit claim by a major customer and a favorable impact of approximately $6 million of lower net costs for marketing programs in the first nine months of 2004 compared
to the same period in 2003. Excluding the favorable impact of the post audit claim resolution and the lower net costs for marketing programs, net sales in the Americas Region declined by approximately
$68 million, or approximately 21%, in the first nine months of 2004 compared to the same period in 2003. Competition from digital camera products and media formats negatively impacted the
Company's net sales in the first nine months of 2004.

Profit
from operations in the Americas Region for the first nine months of 2004 was $93 million compared to profit from operations of $116 million in the same period of
2003. The profit from operations in the first nine months of 2004 includes approximately $3 million related to the favorable impact of the post audit claim resolution and the favorable impact
of approximately $6 million related to the lower net costs for marketing programs. Excluding the favorable impact of the post audit claim resolution and the lower net costs for marketing
programs, profit from operations in the Americas Region in the first nine months of 2004 compared to the same period in 2003 declined by $32 million. This decrease was primarily due to the
impact of lower net sales in the first nine months of 2004, offset, in part, by lower selling and administrative expenses, primarily related to lower advertising costs and savings from restructuring.

International Region

Net sales and profit from operations for the International Region for the first nine months of 2004 and 2003 were as follows (in millions):

Nine Months
2004

Nine Months
2003Net sales

$
176

$
186Profit from operations


51


45


Net
sales in the International Region declined by $10 million, or approximately 5%, to $176 million in the first nine months of 2004 from $186 million in the same
period in 2003. The net sales in the International Region in the first nine months of 2004 included approximately $12 million from the favorable impact of foreign exchange and $3 million
related to lower net costs for marketing programs in the first nine months of 2004 compared to the same period in 2003. Excluding the favorable impact of foreign exchange and the lower net costs for
marketing programs, net sales in the International Region declined by approximately $25 million, or approximately 13%, in the first nine months of 2004 compared to the same period in 2003,
primarily due to lower net sales of instant film and, to a lesser degree, instant cameras. Net sales in the International Region in the first nine months of 2004 were negatively impacted by
competition from digital camera products and media formats.

Profit
from operations in the International Region was $51 million in the first nine months of 2004 compared to $45 million in the same period in 2003. The increase of
$6 million included approximately

29

---



$9 million
from the net favorable impact of foreign exchange, approximately $3 million related to lower net costs for marketing programs and approximately $2 million related to
the closeout of certain 2003 promotional programs. Excluding the impact of foreign exchange, lower net costs for marketing programs and the closeout of promotional programs, profit from operations in
the International Region declined by approximately $8 million in the first nine months of 2004 compared to the same period in 2003, primarily due to the impact of the lower net sales in the
first nine months of 2004 compared to the same period in 2003 offset, in part, by the favorable impact of lower selling and administrative expenses in the first nine months of 2004, primarily due to
savings from restructuring, and lower advertising costs.

Global Manufacturing

The manufacturing non-standard costs in the Global Manufacturing segment were $24 million in the first nine months of 2004 compared to
$9 million in the first nine months of 2003. The net increase of $15 million in manufacturing non-standard costs included: a favorable inventory valuation adjustment of
approximately $3 million in the first nine months of 2003 that did not occur in the first nine months of 2004; approximately $3 million of vendor termination costs and fixed asset
write-offs related to the Company's decision to terminate the manufacturing development and test marketing of its instant digital printing kiosks; and approximately $1 million of
unfavorable foreign exchange variances in the first nine months of 2004. The net increase in manufacturing non-standard costs in the first nine months of 2004 also includes approximately
$2 million of inventory write-offs of certain raw and in-process material that was no longer required and approximately $6 million of other unfavorable
manufacturing non-standard costs, primarily related to reductions in the Company's production volumes.

R&D

R&D segment expenses were $30 million in the first nine months of 2004 compared to $26 million in the same period in 2003. The increase of
$4 million primarily related to increases in spending related to the Company's instant digital printing activities in the first nine months of 2004. Approximately 80% of the Company's total
research and development expenses in the first nine months of 2004 were related to the Company's instant digital printing activities with the balance primarily related to the Company's instant
photographic activities.

All Other

Net sales in the All Other segment increased by $1 million, or approximately 2%, to $61 million in the first nine months of 2004 compared to
$60 million in the same period in 2003. This increase was primarily related to an increase in net sales of the Company's eyewear business of approximately $5 million, including the
favorable impact of approximately $2 million of foreign exchange, and in licensing operations of approximately $3 million. These increases were offset, in part, by a reduction in
revenues from the Company's third party contract manufacturing operations in the first nine months of 2004 compared to the same period in 2003.

Profit
from operations in the All Other segment increased by $5 million to $19 million in the first nine months of 2004 compared to $14 million in the same period in
2003. The increase in profit from operations in the first nine months of 2004 primarily reflects the impact of the increase in licensing and eyewear net sales, including the favorable impact of
foreign exchange, offset, in part, by the impact of the decrease in the net sales related to third party contract manufacturing operations.

30

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Financial Liquidity and Capital Resources

The Company's principal source of capital is its cash flow from operating activities, which may be supplemented by borrowing under the Company's revolving line of
credit as discussed below. A summary of the Company's cash flows in the first nine months of 2004 follows (in millions):

Nine Month
Period ended
September 26,
2004Net cash used by operating activities

$
(33
)Net cash used by investing activities


(8
)Net cash used by financing activities


(25
)Net decrease in cash and cash equivalents

$
(66
)


The
Company's cash and cash equivalents were $101 million at September 26, 2004, a decrease of $66 million from $167 million at December 31, 2003. In
the first nine months of 2004, net cash used by the Company's operating activities was $33 million. Net earnings in the first nine months of 2004, adjusted for non-cash items (such
as depreciation and other non-cash items) contributed approximately $49 million to cash flow from operating activities. An increase in
receivables and inventories in the first nine months of 2004 decreased cash flows from operating activities by $19 million. An increase in prepaid and other assets increased cash flow from
operating activities by approximately $3 million. A decrease in accounts payables and accruals, compensation and benefits payable, and income taxes payable also decreased cash flows from
operating activities by approximately $66 million in the first nine months of 2004. The decrease in compensation and benefits payable in the first half of 2004 includes the impact of cash
payments of approximately $21 million related to incentive compensation liabilities recorded in 2003.

Net
cash used by the Company for investing activities in the first nine months of 2004 was $8 million, primarily related to capital spending of approximately $19 million
offset, in part, by a decrease in other assets and $4 million of proceeds from the sale of held for sale property located in Germany and other property located in the United Kingdom. In the
first nine months of 2004, capital spending related to: the acquisition of land adjacent to the Company's headquarters in Waltham, Massachusetts; facilities and equipment upgrades in Global
Manufacturing; and new products. The decrease in other assets in the first nine months of 2004 of approximately $7 million primarily related to the use of deposits related to the
pre-tax proceeds from the sale of certain of the Company's held for sale assets in 2003 that were used to acquire land adjacent to the Company's headquarters in Waltham, Massachusetts.

The
net cash used by the Company's financing activities in the first nine months of 2004 was $25 million. Approximately $24 million of this use was related to the
redemption of fifty percent of the outstanding shares of the Company's Preferred Stock and the payment of dividends on the outstanding shares of this stock immediately prior to the redemption in the
second quarter of 2004. Cash used by financing activities also reflects the repurchase of approximately $1 million of restricted Common Stock from certain executives and a director in
connection with a purchase by those individuals of shares of the Company's restricted Common Stock in the first quarter of 2004. The Company utilized the purchase price it would otherwise have paid
for the repurchase to pay a portion of the estimated income tax liability of those individuals on the restricted Common Stock they purchased in the first quarter of 2004.

The
Company's working capital was $256 million at September 26, 2004 compared to $242 million at December 31, 2003.

As
of July 29, 2002, the Company entered into a three year, $100 million credit facility and accompanying security documents with a group of lenders (the "Credit
Agreement"). The Credit Agreement is secured by, among other things, a first priority security interest in substantially all of the

31

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Company's
assets in the United States and most of the assets of the Company's non-U.S. subsidiaries that are designated as borrowers or guarantors under the Credit Agreement. The Credit
Agreement expires by its terms in July 2005. The Company is considering a number of alternatives for replacing the Credit Agreement, including the negotiation of an extension of the Credit
Agreement with the existing group of lenders.

The
Credit Agreement provides for a term loan of up to $20 million and a three year $80 million revolving credit line, of which $50 million is available to be
borrowed by the Company's U.S. operations and $30 million is available to be borrowed by the Company's non-U.S. subsidiaries that are designated as borrowers under the Credit
Agreement. It also includes provisions for letters of credit in lieu of borrowings under the revolving credit line. In addition, the Credit Agreement contains provisions for borrowings between the
Company's subsidiaries that are designated as borrowers or guarantors.

Under
the revolving credit line in the Credit Agreement, the Company's borrowing availability is tied to a percentage of eligible domestic and foreign inventory and accounts receivable.
Approximately $45 million was available to the Company under the revolving line of credit at September 26, 2004. There were no borrowings by the Company under the revolving line of
credit in any of the first nine months of 2004 or 2003.

The
Credit Agreement contains certain restrictive covenants. In 2003, the Credit Agreement was amended to provide a $100 million discretionary basket for certain items otherwise
restricted such as preferred stock redemptions and dividends, asset acquisitions, additional instant digital printing spending and other investments, as long as certain of the Company's financial
covenants are satisfied. In the fourth quarter of 2003, the Company paid approximately $10 million of dividends on its Preferred Stock and redeemed 50% of the then outstanding shares of its
Preferred Stock for approximately $44 million. In April 2004, the Company paid a further dividend of $1.4 million on its Preferred Stock (representing all accrued and unpaid
dividends on its Preferred Stock as of that date) and redeemed 50% of the then outstanding Preferred Stock for $22.3 million. In the third quarter of 2004, the Company used approximately
$2 million of the discretionary basket for additional instant digital printing research and development spending. As a result, approximately $20 million remained from the
$100 million discretionary basket at September 26, 2004.

In
September 2004, the Company entered into an amendment to the Credit Agreement. The amendment provides for a reduction in the minimum earnings before interest, taxes,
depreciation and amortization ("EBITDA") covenant levels (calculated as of the end of each fiscal quarter on a rolling four quarter basis) for the third and fourth fiscal quarters of 2004 and the
first fiscal quarter of 2005 to
$38.0 million, $12.5 million and $2.5 million, respectively. The EBITDA covenant level for the second fiscal quarter 2005, which is the final period tested, was unchanged by this
amendment and remained at $53.0 million. In addition, the amendment removed the ability of the Company to redeem shares of its outstanding Preferred Stock and to pay dividends or make other
distributions to any of its shareholders without approval of the lenders under the Credit Agreement. In connection with this amendment, the Company paid the lenders under the Credit Agreement a fee of
$0.2 million. The Company has not borrowed to date in 2004 under the revolving credit line in the Credit Agreement.

The
Company may redeem the outstanding balance of its Preferred Stock in the fourth quarter of 2004, subject to the Company's cash requirements and the approval of the lenders under the
Credit Agreement but there is no assurance that the lenders will consent to any partial or total redemption of the Preferred Stock.

Under
the Company's asset purchase agreement with Primary, the Company is required to reimburse Primary for certain costs incurred by Primary, if certain conditions are met. As of
December 31, 2003, the Company had recorded liabilities of $7 million for these costs and the Company cash collateralized the $7 million of liabilities for these costs in the
first quarter of 2004.

32

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Also,
under the provisions of the asset purchase agreement with Primary, if Primary incurs in excess of certain amounts for estate costs and does not have the funds necessary to pay for
them, it has the right to require the Company to purchase from it up to 4% of the total shares of Common and Preferred Stock of the Company outstanding at the date of the asset purchase from Primary
for up to $4.5 million.

The
Company believes it will have sufficient financial resources, primarily from its cash on hand and its operating cash flow as well as from other available sources of liquidity, to
meet its business requirements for the next twelve months.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk that affect the Company, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk,"
in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, which is incorporated herein by reference. The Company's exposure to market risk has
not changed materially since December 31, 2003.

Item 4. Controls and Procedures

The Company's management conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures under the
supervision of the Chief Executive Officer and the Chief Financial Officer. Based on the Company's evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of
September 26, 2004, the Company's disclosure controls and procedures provided reasonable assurance that the material information that will be required to be included in the Company's SEC
reports is recorded, processed, summarized and reported within the time period specified in the relevant SEC rules and forms. There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control objectives.

There
has been no change in the Company's internal control over financial reporting during the three month period ended September 26, 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over financial reporting.

33

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

|            |  |             |   |         |  | Terms of Exercise
|----------- |  | ----------- | - | ------- |  | -----------------
|
|Officer (*) |  | Options (** | ) | 70,500  |  | $                
|Employees   |  | Options (** | ) | 88,125  |  | $                
|            |  |             |   |         |  |                  
|Total       |  |             |   | 158,625 |  |                  

---

None

ISSUER PURCHASES OF EQUITY SECURITIES

|Period                       |  | (a) Total
Number of
Shares
(or Units)
Purchased |     | (b) Average
Price Paid
per Share
(or Unit) |      | (c) Total Number
of Shares
(or Units)
Purchased
as Part of Publicly
Announced Plans
or Programs |     | (d) Maximum
Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet
Be Purchased
Under the Plans
or Programs
|---------------------------- |  | ----------------------------------------------- | --- | ------------------------------------------ | ---- | ----------------------------------------------------------------------------------------------- | --- | ---------------------------------------------------------------------------------------------------------------------------
|June 28August 1, 2004       |  | N/A                                             |     |                                            | N/A  |                                                                                                 | N/A |                                                                                                                            
|August 2August 29, 2004     |  | N/A                                             |     |                                            | N/A  |                                                                                                 | N/A |                                                                                                                            
|August 30September 26, 2004 |  | 80,312.50                                       | (*) | $                                          | 0.04 |                                                                                                 | N/A |                                                                                                                            
|                             |  |                                                 |     |                                            |      |                                                                                                 |     |                                                                                                                            
|Total                        |  | 80,312.50                                       |     | $                                          | 0.04 |                                                                                                 | N/A |                                                                                                                            
|                             |  |                                                 |     |                                            |      |                                                                                                 |     |                                                                                                                            

---

Item 3. Defaults Upon Senior Securities

None

34

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Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits

| |  | 10.2 (c) |  | Seventh Waiver and Amendment Letter to the Credit Agreement as of July 29, 2002, effective September 24, 2004                  
| |  | -------- |  | -------------------------------------------------------------------------------------------------------------------------------
| |  | 31.1     |  | Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                            
| |  | 31.2     |  | Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                            
| |  | 32       |  | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

35

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SIGNATURE

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.

|                        |  | Polaroid Holding Company
|----------------------- |  | ------------------------
|Date: November 10, 2004 |  | By:                     

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