Exhibit 13


FINANCIAL REVIEW

Polaroid Corporation and Subsidiary Companies

   21 Management's Discussion and Analysis of Operations
   29 Independent Auditors' Report
   29 Management's Report

FINANCIAL STATEMENTS:
   30 Consolidated Statement of Earnings
   31 Consolidated Balance Sheet
   32 Consolidated Statement of Cash Flows
   33 Consolidated Statement of Changes in
         Common Stockholders' Equity

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
   34 1.  Summary of Significant Accounting Policies
   36 2.  Supplemental Information
   37 3.  Financial Instruments
   39 4.  Income Taxes
   40 5.  Inventories
   40 6.  Short-term Debt
   41 7.  Payables and Accruals
   41 8.  Long-term Debt
   42 9.  Common Stockholders' Equity
   42 10. Incentive Compensation and Stock Incentive Plans
   44 11. Benefit Plans
   46 12. Rental Expense and Lease Commitments
   47 13. Business
   48 14. Contingencies
   48 15. Supplementary Financial Information

SUPPLEMENTARY FINANCIAL INFORMATION:
   49 Quarterly Financial Data
   50 Ten-Year Financial Summary


Polaroid Annual Report 1997


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS

The following  table  summarizes the relation to net sales of income and expense
items  included in the  Consolidated  Statement of Earnings  for 1997,  1996 and
1995.

<TABLE>
<CAPTION>
                                                        Income and Expense Items
                                                        as a Percent of Net Sales
----------------------------------------------------------------------------------------
Income and Expense Items                                       1997     1996     1995
----------------------------------------------------------------------------------------
<S>                                                              <C>      <C>      <C>
Net Sales:
   United States                                                 50%      47%      46%
   International                                                 50       53       54
----------------------------------------------------------------------------------------
Total net sales                                                 100      100      100
Cost of goods sold                                               57       56       58
Marketing, research, engineering and administrative expenses     35       35       38
Restructuring and other expenses                                 15        5       11
Special charges                                                  --        2       --
----------------------------------------------------------------------------------------
Profit/(loss) from operations                                    (7)       2       (7)
Other income                                                     --        1       --
Interest expense                                                  2        2        2
----------------------------------------------------------------------------------------
Earnings/(loss) before income tax expense/(benefit)              (9)       1       (9)
Federal, state and foreign income tax expense/(benefit)          (3)      --       (3)
----------------------------------------------------------------------------------------
Earnings/(loss) before extraordinary item                        (6)       1       (6)
Extraordinary item                                               --       (3)      --
----------------------------------------------------------------------------------------
Net loss                                                         (6)%     (2)%     (6)%
----------------------------------------------------------------------------------------
</TABLE>


[Pie Charts - Page 21]
PERCENT OF WORLD SALES
                             1997           1996
U.S.                           50%            47%
Europe                         27%            29%
Asia Pacific, Canada,
  Latin and South America      23%            24%

[Bar Chart - Page 21]
PROFIT FROM OPERATIONS
          0        $50       $100      $150      $200       $250
1993*     xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
1994      xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
1995**    xxxxxxxxxxxxxxxxxxx
1996***   xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
1997****  xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

   * Excludes  impact of $44 million of expenses  related to  restructuring  and
     other charges.
  ** Excludes impact of $247 million of expenses  related to  restructuring  and
     other charges.
 *** Excludes impact of $110 million of expenses  related to  restructuring  and
     other charges and $40 million of special charges.
**** Excludes impact of $340 million of expenses  related to  restructuring  and
     other charges and $20 million of above normal inventory  write-offs  (which
     were unrelated to restructuring).

                                                 Polaroid Annual Report 1997


<PAGE>


The Company  often uses the  following  qualitative  descriptors  to explain its
results of  operations:  "flat"  indicates  fluctuations  of zero-to-one
percent;  "slight"  is in  the  two-to-three  percent  range;  "moderate"  means
four-to-ten percent; "significant" is in the eleven-to-twenty percent range; and
"substantial" represents fluctuations greater than twenty percent.

1997 WORLDWIDE RESULTS COMPARED WITH 1996
Worldwide  sales of Polaroid  Corporation and its  subsidiaries  decreased 6% to
$2.15 billion in 1997 compared with $2.28 billion in 1996,  primarily because of
the  strengthening  of the U.S.  dollar  and lower  sales in Russia  and  China.
Worldwide  shipments of instant film in 1997  decreased  moderately  compared to
1996. The Company sold 5.1 million  cameras in both 1997 and 1996, but excluding
Russia,  1997  camera  shipments  increased  moderately  compared  to 1996.  (In
addition,   worldwide   shipments  of   conventional   film  in  1997  increased
significantly  while videotape  shipments were significantly  lower in 1997 than
1996.)

Sales in the United  States were $1.06  billion in both 1997 and 1996.  In 1997,
U.S.  shipments of instant  cameras  increased  significantly  and  shipments of
instant film were flat compared to 1996.  Conventional film shipments  increased
substantially  while  shipments of videotapes  decreased  significantly  in 1997
compared with last year. In addition,  in 1997,  sales  reflected a reduction of
approximately $10 million in licensing income.

International  sales in 1997  decreased 11% to $1.08  billion  compared to $1.21
billion in 1996. The decline was primarily due to the  strengthening of the U.S.
dollar and lower sales in Russia and China.  International  shipments of instant
cameras decreased  significantly and instant film shipments decreased moderately
in 1997  compared to 1996.  The decline in  international  shipments  of instant
cameras  was  primarily  due to  declines  in  Russia,  while  the  decrease  in
international shipments of film was due to shortfalls in Russia and China.

Gross margin, as a percent of sales, decreased to 43% for 1997 from 44% in 1996.
Excluding  inventory  write-offs  related  to  restructuring  and other  special
charges  ($17  million  in 1997 and $7  million  in 1996) and the  above  normal
inventory write-offs recorded in the fourth quarter of 1997 of approximately $20
million  (which were unrelated to  restructuring),  gross margin was 44% in both
1997 and 1996.

Marketing,  research,  engineering and administrative  expenses declined to $752
million in 1997 from $797 million in 1996.  This decline was  primarily a result
of a reduction in digital  imaging  spending,  a stronger U.S.  dollar and lower
incentive  payments  offset in part by an  increase  in  spending  primarily  in
marketing and research and engineering  expenses.  In both years,  overhead as a
percent of sales totaled 35%.

In December  1997,  the Company  announced a  broad-based  program to streamline
operations  and enhance  earnings  by  consolidating  and selling  manufacturing
facilities  and reducing its  corporate  overhead  structure.  The total pre-tax
expenses  recorded  in the fourth  quarter of 1997 for  restructuring  and other
charges related to this program were $340 million.  Of this amount,  $17 million
represented inventory write-downs which were included in cost of goods sold.

The 1997  restructuring  and other charges included  approximately  $150 million
related to an  involuntary  severance  program under which  approximately  1,800
employees will leave the Company  (approximately  40% from manufacturing and 60%
from  non-manufacturing  jobs) over  approximately  18 months.  Most of the cash
severance payments related to this program are expected to be paid by the end of
1999. No cash payments were made under the program in 1997.

The remainder of the  restructuring  and other charges of $190 million primarily
relates to the write-down of assets.  Approximately  $106 million of this amount
was related to the write-down of the Company's underutilized New Bedford coating
facility to an independently determined fair value of approximately $18 million.
The  Company is  considering  several  strategic  options for future use of this
facility, including an outright sale. In addition, approximately $22 million was
for the write-off of battery assembly equipment which is not required to support
the Company's anticipated production  requirements.  The restructuring and other
charges  also  included  approximately  $26  million  related  to the  Company's
underutilized  chemical  manufacturing  facility  in  Freetown,  Mass.,  that it
intended to sell to International  Specialties  Products,  Inc. (ISP) (and which
was actually  sold in February  1998).  Under the terms of the agreement to sell
this facility, the Company entered into a long-term supply agreement with ISP to
purchase certain  specialty  chemicals used to manufacture the Company's instant
film. The remainder of these write-downs related primarily to other assets which
are no  longer  required  and  will  ultimately  be  disposed  of and  inventory
write-downs related to restructured operations.

In 1996, restructuring and other special charges totaled $150 million pre-tax of
which $110 million was recorded in the first quarter of 1996 and $40 million was
recorded in the fourth quarter of 1996.

In 1997, the Company  incurred an operating loss of $159 million compared with a
profit from operations of $52 million in 1996. Excluding restructuring and other
special charges and the above normal inventory  write-offs (which were unrelated
to  restructuring),  the profit  from  operations  would have been $201  million
versus $202 million in 1997 and 1996, respectively. Compared with last year, the


Polaroid Annual Report 1997

<PAGE>


Company was adversely  affected by foreign exchange,  lower volume in Russia and
China  and  lower  licensing  income.  These  factors  were  offset  in  part by
reductions  in digital  losses of  approximately  $42  million  and  savings and
efficiencies from prior period restructuring programs.

Other  income was $15 million in 1997  compared  to $27  million in 1996,  while
interest  expense  increased  to $48 million in 1997  compared to $47 million in
1996. In 1997,  other income includes a $16 million gain primarily  attributable
to the change in the Company's method of applying Financial Accounting Standards
Board Statement No. 52, "Foreign Currency  Translation" (FAS 52) for translating
the financial results of most of its foreign subsidiaries from dollar functional
to local currency  functional.  The change was adopted  because of the Company's
new   operational   and   financial   structure  in  Europe  and  the  increased
globalization of the Company's  manufacturing  since the initial adoption of FAS
52 in 1981. In 1997,  other income also includes a gain on a real estate sale of
$19 million and a donation  valued at $19  million to endow  charitable  giving.
Other income in 1996 includes a $23 million gain on the sale of real estate.

For the full year 1997,  the effective  tax rate was 34%,  compared with 52% for
1996.  The  decrease  in the  effective  tax rate was  primarily a result of the
change  in the  Company's  method  of  applying  FAS 52 and  the  change  in its
operational structure.  For purposes of determining the after-tax  restructuring
and other special charges, the Company assumed a tax rate of 34% in 1997 and 40%
in 1996 to calculate the tax benefit.

In 1996, the Company recorded an  extraordinary  loss of $56.1 million (net of a
tax benefit of $1.5 million)  related to two  transactions  associated  with the
Company's   $140   million   8%   Subordinated   Convertible   Debentures   (the
"Debentures").  In June 1996, the Company  purchased the  conversion  rights for
$53.8  million and redeemed $.5 million of  principal  of the  Debentures.  This
transaction was determined to be a substantive  modification of the terms of the
Debentures and was accounted for as an  extinguishment  of debt and the issuance
of new debt. The cost of the conversion  rights and the amount of the fair value
of the new debt over the carrying value of the extinguished debt was recorded as
an extraordinary  loss of $54.5 million (net of a tax benefit of $.4 million) in
the second quarter of 1996. As the holder of the conversion  rights, the Company
could have redeemed the Debentures at any time on or before  September 30, 1998.
If the  Debentures  had not been  redeemed by the Company by September 30, 1998,
the conversion  rights would have reverted to the holders of the Debentures.  In
December 1996, the Company gave irrevocable  notice that it was repurchasing the
remaining  $139.5 million of principal of the  Debentures.  The repurchase  cost
over the carrying value of the Debentures was recorded as an extraordinary  loss
of $1.6 million (net of a tax benefit of $1.1 million) in the fourth  quarter of
1996. This transaction closed in January 1997.

Including  restructuring and other special charges totaling $340 million in 1997
and $150 million in 1996 and the extraordinary  item, the Company recorded a net
loss of $127 million, or $2.81 basic loss per common share in 1997 compared to a
net loss of $41 million,  or $.90 basic loss per common  share in 1996.  Diluted
loss per common  share was the same as the basic  loss per common  share in 1997
and 1996. Excluding  restructuring and other charges, the above normal inventory
write-offs  (which were unrelated to  restructuring),  the currency  translation
gain primarily attributable to the change in applying FAS 52 previously reported
in the first  quarter of 1997 and the related tax effects,  net earnings in 1997
were $100  million,  or $2.19 diluted  earnings per common share.  Excluding the
extraordinary  item,  restructuring  and other special charges,  gains from real
estate sales and the related tax effects, net earnings for 1996 were $91 million
or $1.95 diluted earnings per common share.

1997 FOURTH QUARTER RESULTS
Worldwide sales for the fourth quarter of 1997 were $608 million, an 8% decrease
compared with sales of $663 million in the fourth quarter of 1996. The principal
reasons for this decrease were a stronger U.S. dollar,  lower sales in China and
a decline in sales in the U.S.

U.S. sales  decreased 4% in the fourth quarter of 1997 to $321 million  compared
with $335  million in the same  period  last year.  The decline was due in large
part to lower sales volume in instant film.  Shipments of instant film decreased
moderately compared to 1996.

International  sales  decreased  13% from $329 million in the fourth  quarter of
1996 to $287  million in the fourth  quarter of 1997.  International  sales were
adversely  impacted  primarily by the stronger U.S. dollar and sales declines in
China. In addition,  both instant camera and film shipments decreased moderately
in international markets.

Gross margin, as a percent of sales,  decreased to 36% for the fourth quarter of
1997 from 42% for the fourth  quarter of 1996.  Excluding  inventory  write-offs
related to  restructuring  and other special charges ($17 million in 1997 and $7
million in 1996) and the above normal inventory  write-offs of approximately $20
million  (which were  unrelated to  restructuring),  gross margin was 42% in the
fourth  quarter  of 1997  compared  to 43% in the fourth  quarter  of 1996.  The
primary reason for this decline was the stronger U.S. dollar,  offset in part by
improvements in manufacturing operations.

Marketing,  research,  engineering and  administrative  expenses were reduced to
$190  million  in the  fourth  quarter  of 1997 from $208  million in the fourth
quarter of 1996.  The primary  reasons  for this  decrease  were a reduction  in
digital imaging spending,  lower incentive payments and, to a lesser degree, the
impact of foreign currency.


                                                 Polaroid Annual Report 1997

<PAGE>


These  amounts  were  offset in part by an increase  in  spending  primarily  in
marketing and research and engineering expenses.

The loss  from  operations  for the  fourth  quarter  of 1997  was $294  million
compared to an  operating  profit of $36 million in the fourth  quarter of 1996.
Excluding restructuring and other special charges and the above normal inventory
write-offs (which were unrelated to  restructuring),  profit from operations was
$66  million in the  fourth  quarter  of 1997  versus $76  million in the fourth
quarter  of 1996.  This  decline  is  primarily  the  result of the  impact of a
stronger U.S. dollar and lower sales volume in China.  These factors were offset
in part by reductions in digital imaging losses.

Interest  expense was $13 million in the fourth  quarter of 1997 compared to $12
million in the same period of 1996.

The worldwide  effective tax rate for the fourth quarter was 34% in 1997 and 47%
in 1996.  The decrease in the  effective  tax rate was primarily a result of the
change  in the  Company's  method  of  applying  FAS 52 and  the  change  in its
operational structure.  For purposes of determining the after-tax  restructuring
and other special charges,  the Company assumed a tax rate of 34% and 40% in the
fourth quarter of 1997 and 1996, respectively, to calculate the tax benefit.

Including  restructuring and other special charges and the  extraordinary  item,
the Company recorded a net loss of $203 million,  or $4.51 basic loss per common
share for the fourth  quarter of 1997,  compared to net earnings of $11 million,
or $.25 basic  earnings  per common  share in the same  period of 1996.  Diluted
earnings or loss per common share was the same as the basic earnings or loss per
common share in the fourth quarter of 1997 and 1996. Excluding the extraordinary
item,  restructuring  and other  special  charges,  the above  normal  inventory
write-offs (which were unrelated to restructuring)  and the related tax effects,
net  earnings in the fourth  quarter of 1997 were $35  million,  or $.76 diluted
earnings per common share,  compared with net earnings of $37 million, or a $.78
diluted earnings per common share in 1996.

1996 WORLDWIDE RESULTS COMPARED WITH 1995

Worldwide  sales of Polaroid  Corporation and its  subsidiaries  increased 2% to
$2.28 billion in 1996 compared with $2.24 billion in 1995. In 1996,  the Company
sold 5.1 million cameras  compared with 5.4 million  cameras in 1995.  Excluding
camera shipments in Russia, 1996 camera shipments increased  moderately compared
to 1995. Worldwide shipments of instant film in 1996 increased slightly compared
to 1995. Excluding instant film shipments in Russia, 1996 shipments increased in
the mid-single digits compared to 1995.  Conventional  film shipments  increased
significantly  and videotape  shipments  increased  slightly in 1996 compared to
1995.

In 1996,  sales in the United  States  were $1.06  billion,  an  increase  of 4%
compared to $1.02 billion in 1995. In 1996,  U.S.  shipments of instant  cameras
decreased  moderately and shipments of instant film increased  slightly compared
to 1995.  Sales in the U.S.  in 1996 also  includes  $10  million to $20 million
generated from licensing income on patents.

International  sales in 1996 of $1.21 billion were  comparable to  international
sales of $1.22  billion in 1995,  despite the decline in sales in Russia and the
negative impact of foreign currency translation.  In 1996, sales in the European
region  decreased  10% to $664  million  compared  with  $739  million  in 1995,
reflecting  the  substantial  decrease in sales in Russia which more than offset
increases in the rest of Europe. The Company's sales in Russia in 1996 decreased
over 40% compared to 1995. In 1996, sales in the Asia Pacific, Canada, Latin and
South America regions  increased 15% to $551 million compared to $479 million in
1995 despite the negative impact of foreign currency translation, in particular,
the yen.

Gross  margin,  as a percent  of sales,  increased  to 44% for 1996 from 42% for
1995.  The increase in gross margin in 1996  reflects the impact of savings from
restructuring,  favorable  pricing on instant film,  licensing income on patents
and more cost-effective promotions.

Marketing,  research,  engineering and administrative expenses decreased to $797
million  (35% of  sales)  in 1996 from  $849  million  in 1995  (38% of  sales),
primarily as a result of lower  spending in research and  engineering  expenses.
Research and  engineering  expenses  were $116 million in 1996  compared to $166
million in 1995, a 30% decrease.

In 1996,  pre-tax costs for restructuring and other special charges totaled $150
million of which $110 million was recorded in the first  quarter of 1996 and $40
million was recorded in the fourth quarter of 1996. In 1995, pre-tax charges for
restructuring and other expenses totaled $247 million.

The $110  million  restructuring  and other  expenses  in 1996  represented  the
balance of severance and pension  enhancement  costs and  inventory  write-downs
related to the December  1995  restructuring  program.  The $110 million  charge
included  approximately  $55  million  pre-tax  costs  related to the  severance
program. Additionally, approximately $45 million represented enhanced retirement
benefits  provided under the early  retirement  program that will be funded from
the Company's  pension plans and therefore has been reflected as a non-cash item
on the Company's consolidated statement of cash flows.

The 1996 fourth quarter $40 million pre-tax cost included $25 million related to
costs  associated  with  the sale of the  Company's  Helios  medical  diagnostic
imaging equipment


Polaroid Annual Report 1997

<PAGE>

line and $15 million to write down parts and capital equipment under development
for a printer  project  and other  costs.  Inventory  write-offs  of $7  million
related to these  matters were  recorded in cost of goods sold,  and $33 million
was  reported  as special  charges.  The $33  million  special  charge  reflects
write-offs of fixed assets, severance and other costs.

Excluding restructuring and other special charges, operating profit for 1996 was
$202 million  compared to $89 million in 1995. The increase in operating  profit
primarily  reflects the impact of savings from restructuring and lower losses in
the Company's  digital imaging  businesses.  Including  restructuring  and other
special  charges,  operating  profit was $52 million in 1996  compared to a loss
from operations of $158 million in 1995.

Total  losses in the  Company's  digital  imaging  businesses  in 1996  declined
approximately $60 million compared to total losses of approximately $190 million
in 1995.  Reduction of these losses was achieved through  restructuring  and the
growth of new product  revenue,  particularly in the digital products arena with
sales of LCD panels and projectors,  the Company's  PDC-2000  digital camera and
color film recorders.

Other  income was $27  million in 1996  compared  with $9 million in 1995.  This
increase  primarily  reflected  a $23  million  gain on the sale of real  estate
partially  offset by lower  interest  income.  Included  in other  income  was a
foreign  currency  loss of $2 million from  balance  sheet  translation  in 1996
compared to a foreign  currency loss of $3 million a year ago.  Interest expense
decreased to $47 million in 1996 from $52 million in 1995  primarily as a result
of lower average borrowings and lower average interest rates.

For the full year 1996,  the effective  tax rate was 52%,  compared with 30% for
1995.  The  increase  in the  effective  tax rate was  primarily a result of the
adverse effect of the  strengthening  U.S. dollar on the international tax rate.
For  purposes of  determining  the  after-tax  cost of  restructuring  and other
special  charges,  the Company assumed a tax rate of 40% in 1996 and 35% in 1995
to calculate the tax benefit.  The net after-tax  foreign currency exchange loss
from balance  sheet  translation  for the full year 1996  amounted to $.11 basic
earnings per common share,  compared with a $.03 basic loss per common share for
1995.

In 1996, the Company recorded an  extraordinary  loss of $56.1 million (net of a
tax benefit of $1.5 million) related to the two transactions associated with the
Debentures (as discussed under "1997 Worldwide Results Compared with 1996").

In 1996,  the  extraordinary  item was a loss of $56 million or $1.23 basic loss
per common share. Including  restructuring and other special charges, gains from
real estate  sales,  and the  extraordinary  item,  the net loss in 1996 was $41
million,  or $.90 basic loss per common share,  compared with a net loss of $140
million,  or $3.09 basic loss per common share in 1995.  Diluted loss per common
share was the same as basic  loss per common  share in 1996 and 1995.  Excluding
the extraordinary  item and restructuring and other special charges,  gains from
real estate  sales and the related tax  effects,  net  earnings in 1996 were $91
million, or $1.95 diluted earnings per common share,  compared with $20 million,
or $.44 diluted earnings per common share for 1995.

FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997,  the Company's  cash and cash  equivalents  and short-term
investments  amounted  to $79 million  compared  to $78 million at December  31,
1996.  Working capital  decreased to $557 million at December 31, 1997 from $623
million at December  31,  1996.  This  decrease  of $66 million was  primarily a
result of an increase in compensation and benefits  liabilities  associated with
the 1997 involuntary  severance  program and short-term  borrowings as well as a
decline in  inventories,  largely due to write-offs.  These decreases in working
capital were offset by increases in prepaid taxes and reductions in payables and
the current tax liability.

The primary  sources for cash in 1997 were cash flows from operating  activities
and financing activities. This was offset by cash used for investing activities.
The  primary  source for cash in 1996 was cash flows from  operating  activities
which  more  than  offset  cash  used  in  investing  activities  and  financing
activities.

In 1997,  capital  spending was $134 million and  depreciation  expense was $112
million.   This  compares  with  capital   expenditures   of  $122  million  and
depreciation  expense of $118 million in 1996. Capital expenditures in both 1997
and 1996 were primarily  related to ongoing capital  programs.  In addition,  in
1997 capital  expenditures  included  increased  spending for new products while
1996  included  expenditures  for the  consolidation  of the  Company's  coating
facilities.  Capital  expenditures in 1998 are expected to be approximately $165
million.

In 1997,  the Company made cash  payments of $42 million under the December 1995
severance program which was  substantially  completed in 1997. Also in 1997, the
Company  expended  approximately  $30  million  to  purchase  additional  equity
investments  as  part  of  the  Helios   transaction  and  to  purchase  foreign
distributors,  $57 million to repurchase the Company's common stock and paid $27
million in dividends to common stockholders.

In 1996,  the Company made cash  payments of $76 million under the December 1995
severance  programs,  purchased the conversion  rights of the Debentures for $54
million, repurchased $44 million of the Company's common stock,


                                                 Polaroid Annual Report 1997

<PAGE>


paid $27 million of dividends to common stockholders and reduced borrowings.  In
1996,  the Company also expended $28 million to purchase  equity  investments as
part of the Helios transaction.

In March of 1997,  the Company  executed a $350 million credit  agreement  which
provides committed funds for general corporate purposes.  This agreement expires
at the end of 2001. As of December 31, 1997, there were no borrowings under this
facility.  As  of  December  31,  1997,  gross  borrowings  from  the  Company's
international  uncommitted  lines  of  credit  were  $151  million  while  gross
borrowings from the Company's U.S. uncommitted lines of credit were $91 million.
Additional  available,  uncommitted  lines of credit for U.S. and  international
operations  were $99 million and $104  million,  respectively,  at December  31,
1997. As of December 31, 1996, gross borrowings from  international  uncommitted
lines of credit  were $125  million  while  there  were no  borrowings  from the
Company's U.S. uncommitted lines at that time. Additional available, uncommitted
lines of  credit  for  U.S.  and  international  operations  were  $120 and $140
million, respectively, at December 31, 1996.

In November 1996, the Company filed a shelf registration with the Securities and
Exchange Commission to sell up to $400 million in debt securities. When combined
with an earlier  filing,  this filing  provided the Company with a total of $500
million of debt  securities  eligible to be sold. In January  1997,  the Company
issued $300 million of debt  securities  consisting  of $150 million 7.25% Notes
due January 15, 2007 and $150 million 6.75% Notes due January 15, 2002 leaving a
balance  on the shelf of $200  million.  The net  proceeds  from the sale of the
notes were used  primarily for the payment of $150 million  principal  amount of
7.25%  Notes due  January 15, 1997 and to  repurchase  the  remaining  principal
amount of $139.5 million Debentures.  The Company's available borrowing capacity
is limited by certain debt covenants in the $350 million committed facility.

During 1997, the Company  repurchased 1.3 million shares of its common stock for
$57 million.  In 1996, 1.1 million shares were  repurchased for $44 million.  On
October 21,  1997,  the  Company's  Board of  Directors  authorized a repurchase
program for as many as 5 million shares,  or 11% of outstanding  shares over the
next three years. This program includes approximately $30 million remaining from
the $100  million  common  stock  repurchase  program  approved  by the Board of
Directors in January  1995.  As of December 31, 1997,  up to  approximately  4.0
million  shares  remain to be  purchased  under  the  current  stock  repurchase
program.  The Company may  repurchase  its common stock on the open  market,  in
privately  negotiated  transactions or otherwise (which may include transactions
with Polaroid stock option holders and with Polaroid retirement plans, including
the  employee  stock  ownership  plan).  The  timing  and  amounts of any future
purchases  under  this  program  depend  upon  many  factors,  including  market
conditions as well as the Company's business and financial condition.

The Company  believes that its borrowing  capacity and other existing  corporate
resources  are  adequate  for at least the next  twelve  months to meet  working
capital needs,  to fund planned  capital  expenditures,  to pursue future growth
opportunities and to fund other corporate requirements, including cash severance
payments for the December 1997 restructuring program.

FOREIGN CURRENCY EXCHANGE
The Company  generates a  substantial  portion of its revenues in  international
markets,  which  subjects its  operations  to the exposure of currency  exchange
fluctuations. The impact of currency fluctuations can be positive or negative in
any given period. The Company's ability to counteract currency exchange movement
is primarily dependent on pricing.

Effective January 1, 1997, the Company has determined that the local currency is
the  functional  currency for most of its  subsidiaries  outside of the U.S. The
U.S.  dollar will continue to be the  functional  currency for  subsidiaries  in
highly inflationary economies.

To  minimize  the  adverse  impact  of  currency   fluctuations  on  net  assets
denominated  in  currencies   other  than  the  relevant   functional   currency
(nonfunctional  currencies),  the Company may engage in nonfunctional  currency-
denominated  borrowings.  The Company  determines  the aggregate  amount of such
borrowings based on forecasts of each entity's  nonfunctional net asset position
and  the  relative  strength  of  the  functional  currencies  compared  to  the
nonfunctional     currencies.     These    borrowings    create    nonfunctional
currency-denominated   liabilities   that  hedge  the  Company's   nonfunctional
currency-denominated  net assets.  Upon  receipt of the  borrowed  nonfunctional
currency-denominated  funds,  the Company converts those funds to the functional
currency  at  the  spot  exchange  rate.   Exchange  gains  and  losses  on  the
nonfunctional  currency-denominated  borrowings  are  recognized  in earnings as
incurred.  At  December  31,  1997  and  1996,  the  amounts  of  the  Company's
outstanding  short-term debt incurred for hedging purposes were $150 million and
$123 million, respectively.

From time to time, the Company may use over-the-counter  currency exchange swaps
to reduce the interest expense  incurred through the borrowings  described above
and to replace the hedge created by those  borrowings.  When a currency exchange
swap is used to replace a hedge,  the  currency  received  by the Company in the
spot market  component  of the currency  exchange  swap is used to close out the
borrowings  and,  simultaneously,  the hedge is  reinstituted  through a forward
contract  (not  exceeding  six months).  The net interest  value of the currency
exchange  swap  contract is amortized to earnings over the life of the contract.
Exchange  gains or losses on the foreign  currency


Polaroid Annual Report 1997

<PAGE>


obligation  component  of the forward  contract  are  recognized  in earnings as
incurred in each  accounting  period.  The Company does not enter into  currency
exchange  swaps  for  trading  purposes.  The  aggregate  notional  value of the
Company's short-term foreign exchange swap contracts was $21 million at December
31, 1997. There were no foreign exchange swap contracts  outstanding at December
31, 1996.

Since the  Company  has  limited  flexibility  to  increase  prices in local
currency to offset the adverse impact of foreign exchange,  the Company may also
purchase foreign currency call options. The term of these call options typically
does not exceed 18 months.  The Company's  purchase of call options allows it to
protect a portion of its expected  foreign  currency-denominated  revenues  from
adverse foreign currency exchange  movement.  The Company typically does not buy
call options which can be exercised  prior to the  expiration  date, nor does it
typically  write  options or purchase  call  options for trading  purposes.  The
Company amortizes  premiums over the term of the option and defers any gains for
its call options  activity until the option exercise date. At December 31, 1997,
option  contracts  with a notional  value of $268 million were  outstanding.  No
option contracts were outstanding at December 31, 1996.

The Company  maintains a Monetary Control Center (the MCC), which operates under
written  policies  and  procedures  defining  day-to-day  operating  guidelines,
including  exposure  limits,  to contract for the foreign  currency  denominated
borrowings,  foreign exchange swaps and call options described above. The MCC is
subject to random  independent  audits and  reports to a  supervisory  committee
comprised of members of the  Company's  management.  The MCC  publishes  regular
reports to the Company's management detailing the foreign currency activities.

IMPACT OF INFLATION
Inflation  continues  to be a factor in many  countries in which the Company
does  business.  The  Company's  pricing  strategy has offset to a  considerable
degree inflation and normal cost increases.  The overall inflationary impact
on earnings has been immaterial.

FACTORS  THAT MAY  AFFECT  FUTURE  RESULTS
From time to time,  information  and  statements  provided  by the  Company  may
contain  "forward-looking  statements"  as  defined  by the  Private  Securities
Litigation Reform Act of 1995 (the "Act"). The Company desires to take advantage
of the "safe  harbor"  provisions  of the Act.  The Company  therefore  cautions
shareholders and investors that actual results may differ  materially from those
projected or suggested in any forward-looking  statement as the result of a wide
variety  of  factors,  which  include  but are not  limited to the  factors  and
conditions  set forth  below.  Many of the  important  factors  below  have been
discussed in prior Securities and Exchange Commission filings by the Company.

The Company sells and markets its products  worldwide.  A major risk  associated
with such worldwide operations is the fluctuation of foreign exchange rates,
particularly the Japanese yen and German mark.

The Company's future operating results may be negatively affected if the Company
is unable to promptly design, develop, manufacture and market innovative imaging
products  that meet customer  demands.  Since some of the Company's new products
will replace or compete  with its existing  products,  the  Company's  operating
results could be adversely  affected even if it is successful in developing  and
introducing new products.

In addition, the timing and introduction of competitors' new products could have
a negative impact upon the Company's  introduction of new or enhanced  products.
The  Company has  competitors  worldwide,  ranging  from large  corporations  to
smaller  and  more  specialized  companies.  Its  most  significant  traditional
competitors,   Eastman  Kodak  Company  and  Fuji  Photo  Film  Co.,  Ltd.,  are
considerably  larger  than the  Company  and have more  resources.  The  Company
anticipates  that price  competition  from  conventional  film and other imaging
technologies will place continued  pressure on instant  products.  The impact of
these factors can cause results that are both adverse and varied.

The Company is  committed to reducing its cycle time in bringing new products to
market.  There is no guarantee  that the Company will succeed in this  endeavor.
Shorter  cycle times  present a challenge  for the  effective  management of the
transition from existing  products to new products and could  negatively  impact
the Company's future operating results.

The Company is affected by retail demand for its products,  particularly  in the
United  States,  Europe and Japan,  and by factors  extraneous  to the Company's
performance  such  as  economic  conditions.   Moreover,  changes  in  laws  and
regulations, particularly in the environmental arena, could adversely affect the
Company's results from operations.

While  the  Company  believes  that  developing   markets  continue  to  present
attractive opportunities,  such markets tend to be considerably less stable than
more established  markets and there can be no assurance that developing  markets
will  produce  favorable  results for the Company.  For  example,  sales in both
Russia and China declined substantially in 1997 compared to 1996.

The Company is continuing to develop  digital  imaging  products.  The operating
losses of the Company's digital imaging business have reduced the profits of the
Company.  Markets for digital imaging  products are increasing  rapidly and over
time may erode either the growth or the absolute size of the  Company's  instant
photography business.


                                                 Polaroid Annual Report 1997

<PAGE>


Worldwide  marketing of digital imaging products is highly competitive in price,
quality and product  performance and there is no assurance that the Company will
attain the level of success in these  markets that it has achieved  with respect
to instant photography.  The Company's ability to compete effectively in digital
imaging  markets is also  dependent  on its ability to develop new products in a
timely manner and to market them effectively.

The future  prospects of the Company's  digital imaging  business are uncertain.
These  markets  require a speed of  execution  that is greater  than that of the
Company's  traditional  business;  and competition in these new markets includes
companies some of which have greater resources and have more experience  serving
the demands of these  markets.  Moreover,  the  Company's  ability to succeed in
these new markets will be enhanced if it is able to develop meaningful strategic
business  relationships with other companies;  there can be no assurance that it
will achieve  these  objectives.  The Company's  ability to achieve  anticipated
savings in  overhead  and other  costs from its  restructuring  programs is also
important to its ability to compete effectively in digital markets but there can
be no assurance that it will achieve these objectives.

The Company  aggressively  endeavors to protect its  investment  in research and
development by obtaining patents where feasible.  The ownership of these patents
contributes to the Company's  ability to use its inventions and at the same time
may provide  significant  patent license  revenue.  While in the aggregate,  the
Company's  patents are considered to be of material  importance in the operation
of its business,  the patents  relating to any single product or process may not
necessarily be of material  significance  when judged from the standpoint of the
Company's total business.

OTHER MATTERS
The Company,  together with other parties, is currently designated a Potentially
Responsible  Party by the  United  States  Environmental  Protection  Agency and
certain  state  agencies  with  respect  to  the  costs  of  investigation   and
remediation of pollution at several sites.  In each case in which the Company is
able to  determine  the likely  exposure,  such amount has been  included in the
Company's  reserve.  Where a range of comparably  likely exposures  exists,  the
Company has  included  in its reserve at least the minimum  amount of the range.
The  Company's  aggregate  reserve for these  liabilities  was $2 million and $4
million as of December 31, 1997 and 1996, respectively.  The decrease in reserve
reflects  a  reassessment  of the Company's  liability and payments that the
Company  made during  1997 to settle its  exposure  at two of these  sites.  The
Company  currently  estimates  that the majority of the $2 million  reserved for
environmental liabilities at December 31, 1997 will be payable over the next two
to three years.

NEW ACCOUNTING STANDARDS
In June 1997, The Financial  Accounting  Standards Board (FASB) issued Financial
Accounting  Standard No. 130,  "Reporting  Comprehensive  Income" (FAS 130) that
establishes  standards for reporting and display of comprehensive income and its
components in a full set of general purpose  financial  statements.  The Company
will adopt FAS 130 for 1998 and will reclassify financial statement  information
for earlier periods that are provided for comparative purposes.

Also in June of 1997,  the FASB issued  Financial  Accounting  Standard No. 131,
"Disclosure  about Segments of an Enterprise and Related  Information" (FAS 131)
that requires companies to determine reportable segments based on how management
makes  decisions about  allocating  resources to the segments and measures their
performance.  Disclosures  for  segments  are  similar to those  required  under
current standards.  However,  certain new information and quarterly  disclosures
will be required.  In  addition,  new entity wide  disclosures  will be required
about  products  and services and the  countries  in which  material  assets are
located and that report material revenues.  Prior period  information  disclosed
will be restated to comply with FAS 131. The Company will adopt FAS 131 in 1998.
The Company is still  evaluating  the effect of this  statement  on its reported
segment information.

YEAR 2000 DATE CONVERSION
The Year 2000 problem is the result of computer  programs being written with two
digits  instead of four  digits to define the  applicable  year.  The  Company's
management  has  initiated  a  company-wide  program  to prepare  the  Company's
computer  systems for the Year 2000.  A  comprehensive  review of the  Company's
computer  systems and  software  has been  conducted to identify the systems and
software  that could be affected by this issue.  A plan to resolve this issue is
currently being developed and implemented.  The Company presently  believes that
with  modifications  to existing  systems and  software  and  converting  to new
software, the Year 2000 problem will not pose a significant  operational problem
to the Company.  The Company is also  reviewing the possible  impact of the Year
2000 problem on its customers and suppliers.  However, without the modifications
and  conversions,  the Year 2000  problem  could have a  material  impact on the
operations  of  the  Company.   The  Company   expects  the  Year  2000  related
modifications  and  conversions to be  substantially  completed by the middle of
1999. The cost to modify existing software is expected to cost approximately $10
to $15  million,  based on  available  information,  of which  approximately  $1
million had been expended through December 31, 1997.


Polaroid Annual Report 1997

<PAGE>


INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
POLAROID CORPORATION:

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Polaroid
Corporation  and subsidiary  companies as of December 31, 1997 and 1996, and the
related  consolidated  statements of earnings,  cash flows and changes in common
stockholders'  equity  for each of the  years  in the  three-year  period  ended
December  31,   1997.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Polaroid Corporation
and subsidiary companies at December 31, 1997 and 1996, and the results of their
operations and cash flows for each of the years in the  three-year  period ended
December 31, 1997, in conformity with generally accepted accounting principles.

As discussed in Note 1 to the  consolidated  financial  statements,  in 1997 the
Company changed its method of accounting for depreciation.



/S/ KPMG PEAT MARWICK LLP
    KPMG Peat Marwick LLP
    Boston, Massachusetts
    January 27, 1998


MANAGEMENT'S REPORT

FINANCIAL REPORTING AND CONTROLS

The  financial  statements  presented in this report were prepared in accordance
with generally accepted accounting principles. The Company maintains a number of
measures to assure the  accuracy of its  financial  information.  To that end, a
system of internal  accounting  controls and  procedures  has been  developed to
provide  reasonable  assurance that assets are safeguarded and that transactions
are  recorded  and  reported  properly.  The Company  also  maintains  financial
policies and procedures,  and a program of internal audits,  management  reviews
and careful selection and training of qualified personnel.

The majority of the Audit Committee is composed of outside  directors.  As such,
it is in a position to provide  additional,  independent reviews of the adequacy
of internal controls and the quality of financial reporting.



/S/ GARY T. DICAMILLO
    Gary T. DiCamillo
    Chairman and
    Chief Executive Officer



/S/ WILLIAM J. O'NEILL, JR.
    William J. O'Neill, Jr.
    Executive Vice President and
    Chief Financial Officer


                                                 Polaroid Annual Report 1997

<PAGE>


<TABLE>
<CAPTION>

FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF EARNINGS

Polaroid Corporation and Subsidiary Companies
                                                                                          Years ended December 31,
(In millions, except per share data)                                               1997            1996            1995
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>             <C>             <C>
NET SALES
   United States                                                            $   1,063.0     $   1,060.3     $   1,019.0
   International                                                                1,083.4         1,214.9         1,217.9
                                                                            -----------     -----------     -----------
TOTAL NET SALES                                                                 2,146.4         2,275.2         2,236.9
                                                                            -----------     -----------     -----------
   Cost of goods sold                                                           1,229.8         1,283.8         1,298.6
   Marketing, research, engineering and administrative expenses (Note 2)          752.2           796.6           849.1
   Restructuring and other (Note 2)                                               323.5           110.0           247.0
   Special charges (Note 2)                                                          --            33.0              --
                                                                            -----------     -----------     -----------
TOTAL COSTS                                                                     2,305.5         2,223.4         2,394.7
                                                                            -----------     -----------     -----------
PROFIT/(LOSS) FROM OPERATIONS                                                    (159.1)           51.8          (157.8)
                                                                            -----------     -----------     -----------
   Other income/(expense):
      Interest income                                                               3.7             5.1             8.7
      Other                                                                        11.3            21.7             (.2)
                                                                            -----------     -----------     -----------
   Total other income                                                              15.0            26.8             8.5
   Interest expense                                                                47.8            47.4            52.1
                                                                            -----------     -----------     -----------
EARNINGS/(LOSS) BEFORE INCOME TAX EXPENSE/(BENEFIT)                              (191.9)           31.2          (201.4)
   Federal, state and foreign income tax expense/(benefit) (Note 4)               (65.2)           16.2           (61.2)
                                                                            -----------     -----------     -----------

EARNINGS/(LOSS) BEFORE EXTRAORDINARY ITEM                                        (126.7)           15.0          (140.2)
   Extraordinary item (Note 8)                                                       --           (56.1)             --
                                                                            -----------     -----------     -----------
NET LOSS                                                                    $    (126.7)    $     (41.1)    $    (140.2)
                                                                            ===========     ===========     ============
BASIC EARNINGS/(LOSS) PER COMMON SHARE: (NOTE 1)
   Earnings/(loss) before extraordinary item                                $      (2.81)   $        .33    $      (3.09)
   Extraordinary item                                                                 --           (1.23)             --
                                                                            -----------     -----------     -----------
   Net loss                                                                 $      (2.81)   $       (.90)   $      (3.09)
DILUTED EARNINGS/(LOSS) PER COMMON SHARE: (NOTE 1)
   Earnings/(loss) before extraordinary item                                $      (2.81)   $        .33    $      (3.09)
   Extraordinary item                                                                 --           (1.23)             --
                                                                            -----------     -----------     -----------
   Net loss                                                                 $      (2.81)   $       (.90)   $      (3.09)

CASH DIVIDENDS PER COMMON SHARE                                             $        .60    $        .60    $        .60

</TABLE>

See accompanying notes to consolidated financial statements.


Polaroid Annual Report 1997

<PAGE>


<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEET

Polaroid Corporation and Subsidiary Companies
                                                                             December 31,
(In millions)                                                              1997        1996
------------------------------------------------------------------------------------------------
<S>                                                                  <C>         <C>
ASSETS
CURRENT ASSETS
   Cash and cash equivalents                                         $     68.0  $     72.8
   Short-term investments                                                  11.0         5.5
   Receivables, less allowances of $25.6 in 1997 and $24.1 in 1996        545.1       535.2
   Inventories (Note 5)                                                   506.1       548.8
   Prepaid expenses and other assets (Note 4)                             289.1       224.1
                                                                     ----------  ----------

TOTAL CURRENT ASSETS                                                    1,419.3     1,386.4
                                                                     ----------  ----------
PROPERTY, PLANT AND EQUIPMENT
   Land                                                                    25.0        35.0
   Buildings                                                              344.5       352.3
   Machinery and equipment                                              1,460.0     1,663.5
   Construction in process                                                106.8       112.8
                                                                     ----------  ----------
   Total property, plant and equipment                                  1,936.3     2,163.6
   Less accumulated depreciation                                        1,423.8     1,497.4
                                                                     ----------  ----------
   Net property, plant and equipment                                      512.5       666.2


PREPAID TAXES - NON-CURRENT (NOTE 4)                                      124.7        98.8
OTHER ASSETS                                                               76.2        50.2
                                                                     ----------  ----------

TOTAL ASSETS                                                         $  2,132.7  $  2,201.6
                                                                     ==========  ==========
------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
   Short-term debt (Note 6)                                          $    241.6  $    124.9
   Current portion of long-term debt (Note 8)                            --            37.7
   Payables and accruals (Note 7)                                         277.3       310.5
   Compensation and benefits (Notes 10 and 11)                            310.9       238.4
   Federal, state and foreign income taxes (Note 4)                        32.9        51.6
                                                                     ----------  ----------
TOTAL CURRENT LIABILITIES                                                 862.7       763.1
                                                                     ----------  ----------
LONG-TERM DEBT (NOTE 8)                                                   496.6       489.9
ACCRUED POSTRETIREMENT BENEFITS (NOTE 11)                                 246.5       248.5
ACCRUED POSTEMPLOYMENT BENEFITS (NOTE 11)                                  42.5        41.9
                                                                     ----------  ----------
TOTAL LIABILITIES                                                       1,648.3     1,543.4
                                                                     ----------  ----------
Preferred stock, Series A and Series D, $1 par value,
   authorized 20,000,000 shares; all shares unissued                     --          --
                                                                     ----------  ----------
COMMON STOCKHOLDERS' EQUITY (NOTES 1 AND 9)
   Common stock, $1 par value, authorized 150,000,000 shares               75.4        75.4
   Additional paid-in capital                                             425.2       409.4
   Retained earnings                                                    1,304.1     1,457.8
   Cumulative translation adjustments                                     (39.8)     --
   Less: Treasury stock, at cost                                        1,279.4     1,244.8
         Deferred compensation                                              1.1        39.6
                                                                     ----------  ----------
   Total common stockholders' equity                                      484.4       658.2
                                                                     ----------  ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                           $  2,132.7  $  2,201.6
                                                                     ==========  ==========

</TABLE>

See accompanying notes to consolidated financial statements.


                                                 Polaroid Annual Report 1997

<PAGE>


<TABLE>
<CAPTION>

CONSOLIDATED STATEMENT OF CASH FLOWS

Polaroid Corporation and Subsidiary Companies
                                                                                  Years ended December 31,
(In millions)                                                                     1997      1996      1995
-------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>       <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                                   $ (126.7) $  (41.1) $ (140.2)
   Extraordinary item                                                               --      56.1        --
   Depreciation of property, plant and equipment                                 111.5     118.3     132.7
   (Increase)/decrease in receivables                                            (36.2)      4.1       (.1)
   (Increase)/decrease in inventories                                              9.8      82.2     (68.1)
   Increase in prepaids and other assets                                         (75.6)    (26.7)    (66.6)
   Increase/(decrease) in payables and accruals                                  (23.8)     42.1      (6.3)
   Increase/(decrease) in compensation and benefits                               64.1     (25.4)     44.2
   Increase/(decrease) in federal, state and foreign income taxes payable         (4.3)      7.9      (1.6)
   Gain on sale of real estate                                                   (19.5)    (23.2)       --
   Contribution of real estate                                                    19.1        --        --
   Other non-cash items                                                          203.7     118.1     168.8
                                                                              --------  --------  --------
   Net cash provided by operating activities                                     122.1     312.4      62.8
                                                                              --------  --------  --------
CASH FLOWS FROM INVESTING ACTIVITIES
   (Increase)/decrease in short-term investments                                  (5.5)      4.3      75.7
   Increase in other assets                                                      (26.0)    (42.0)     (1.1)
   Additions to property, plant and equipment                                   (134.3)   (121.8)   (167.9)
   Proceeds from sale of fixed assets                                              7.7      35.4       4.8
                                                                              --------  --------  --------
   Net cash used by investing activities                                        (158.1)   (124.1)    (88.5)
                                                                              --------  --------  --------
CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase/(decrease) in short-term debt (maturities 90 days or less)       138.4     (31.0)     49.3
   Short-term debt (maturities over 90 days):
      Proceeds                                                                    44.8      64.5      52.6
      Payments                                                                   (63.7)    (62.0)    (59.4)
   Proceeds from issuance of long-term debt                                      296.6        --        --
   Repayments of long-term debt                                                 (327.8)    (39.5)    (34.3)
   Cash dividends paid                                                           (27.1)    (27.3)    (27.3)
   Purchases of treasury stock                                                   (57.4)    (43.6)    (40.2)
   Extinguishment of debt                                                           --     (56.1)       --
   Proceeds from issuance of shares in connection with stock incentive plan       31.7       9.6      19.5
                                                                              --------  --------  --------
   Net cash provided/(used) by financing activities                               35.5    (185.4)    (39.8)
                                                                              --------  --------  --------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                           (4.3)     (3.4)     (4.5)
                                                                              --------  --------  --------
NET DECREASE IN CASH AND CASH EQUIVALENTS                                         (4.8)      (.5)    (70.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                    72.8      73.3     143.3
                                                                              --------  --------  --------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                      $   68.0  $   72.8  $   73.3
                                                                              ========  ========  ========
</TABLE>

See accompanying notes to consolidated financial statements.


Polaroid Annual Report 1997

<PAGE>


<TABLE>
<CAPTION>

CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY

Polaroid Corporation and Subsidiary Companies
                                                                                     Years ended December 31,
(In millions, except number of shares)                                             1997        1996        1995
------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>         <C>         <C>
COMMON STOCK
   Balance at January 1 (75,427,550 shares in 1997, 1996 and 1995)           $     75.4  $     75.4  $     75.4
                                                                             ---------   ----------  ----------
   Balance at December 31                                                          75.4        75.4        75.4
                                                                             ---------   ----------  ----------
ADDITIONAL PAID-IN CAPITAL
   Balance at January 1                                                           409.4       401.9       387.2
      Issuance of shares in connection with stock incentive plan (Note 10)          9.2         6.1        11.3
      Stock options exercised - tax benefit                                         6.6         1.4         3.4
                                                                             ---------   ----------  ----------
   Balance at December 31                                                         425.2       409.4       401.9
                                                                             ---------   ----------  ----------
RETAINED EARNINGS
   Balance at January 1                                                         1,457.8     1,525.8     1,692.1
      Net loss                                                                   (126.7)      (41.1)     (140.2)
      Dividends declared - common stock                                           (27.1)      (27.3)      (27.3)
      ESOP dividend tax benefit received on unallocated shares                       .1          .4         1.2
                                                                             ---------   ----------  ----------
   Balance at December 31                                                       1,304.1     1,457.8     1,525.8
                                                                             ---------   ----------  ----------
CUMULATIVE TRANSLATION ADJUSTMENTS
   Balance at the beginning of the period                                            --          --          --
      Currency translation adjustment (Note 1)                                    (39.8)         --          --
                                                                             ---------   ----------  ----------
   Balance at the end of the period                                               (39.8)         --          --
                                                                             ---------   ----------  ----------
LESS:
TREASURY STOCK
   Balance at January 1 (30,608,160 shares in 1997,
      29,894,724 shares in 1996, and 29,429,928 shares in 1995)                 1,244.8     1,205.4     1,174.5
      Repurchase of shares (1,266,600 shares in 1997,
         1,057,565 shares in 1996, and 1,217,561 in 1995)                          57.4        43.6        40.2
      Issuance of shares in connection with compensation and
         stock incentive plans (983,510 shares in 1997,
         344,129 shares in 1996, and 752,765 shares in 1995)                      (22.8)       (4.2)       (9.3)
                                                                             ---------   ----------  ----------
   Balance at December 31 (30,891,250 shares in 1997,
      30,608,160 shares in 1996, and 29,894,724 shares in 1995)                 1,279.4     1,244.8     1,205.4
                                                                             ---------   ----------  ----------
DEFERRED COMPENSATION
   Balance at January 1                                                            39.6        80.0       115.8
      Stock options - 1993 (Note 10)                                                (.5)       (1.0)       (1.0)
      Loan repayments from ESOP Trust                                             (37.7)      (39.7)      (35.9)
      Restricted stock                                                              (.3)         .3         1.1
                                                                             ---------   ----------  ----------
   Balance at December 31                                                           1.1        39.6        80.0
                                                                             ---------   ----------  ----------
TOTAL COMMON STOCKHOLDERS' EQUITY                                            $    484.4  $    658.2  $    717.7
                                                                             ==========  ==========  ==========
</TABLE>

See accompanying notes to consolidated financial statements.


                                                 Polaroid Annual Report 1997

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Polaroid Corporation and Subsidiary Companies

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The  consolidated  financial  statements  include the accounts of the  Company's
domestic  and  foreign  subsidiaries,  all of which are either  wholly  owned or
majority owned. Intercompany accounts and transactions are eliminated.

Use of Estimates:
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Cash Equivalents:
The Company  considers all highly  liquid debt  instruments  with  maturities of
three months or less when purchased to be cash equivalents.

Short-term Investments:
The Company  classifies  its  securities as  held-to-maturity.  Held-to-maturity
securities are those investments which the Company has the ability and intent to
hold until maturity. Held-to-maturity securities are recorded at amortized cost,
adjusted for the  amortization  of premiums  and  discounts  which  approximates
market value.

Derivatives:
Gains on the Company's  purchase of call options,  if any, related to qualifying
hedges of  anticipated  transactions  are deferred and are  recognized in income
when the hedged  transaction  occurs.  Premiums  related to the purchase of call
options are amortized to expense over the period of the related contracts.

Inventories:
Inventories  are valued on a first-in,  first-out  basis at the lower of cost or
market value.  Market value is determined by replacement  cost or net realizable
value.

Income Taxes:
Amounts in the financial statements related to income taxes are calculated using
the  principles  of Financial  Accounting  Standards  Board  Statement  No. 109,
"Accounting  for Income  Taxes" (FAS 109).  Under FAS 109,  prepaid and deferred
taxes  reflect  the impact of temporary  differences  between the amounts of
assets and  liabilities  recognized  for  financial  reporting  purposes and the
amounts recognized for tax purposes as well as tax credit carryforwards and loss
carryforwards.  These deferred taxes are measured by applying  currently enacted
tax rates. A valuation  allowance  reduces  deferred tax assets when it is "more
likely than not" that some portion or all of the deferred tax assets will not be
recognized.

Provision  for  U.S.  income  taxes on the  undistributed  earnings  of  foreign
subsidiaries is made only on those amounts in excess of the funds  considered to
be permanently reinvested.

Property, Plant and Equipment:
In the fourth  quarter of 1997  retroactive  to  January  1, 1997,  the  Company
changed  its method of  depreciation  for  financial  reporting  for the cost of
buildings,  machinery  and  equipment  acquired on or after January 1, 1997 from
primarily an accelerated method to the straight-line  method. Prior to 1997, the
cost of  buildings,  machinery  and  equipment  was  depreciated,  primarily  by
accelerated depreciation methods over the estimated useful lives of those assets
for both financial  reporting and income tax purposes.  The Company continues to
use primarily  accelerated  depreciation  methods for income tax  purposes.  The
Company believes that the straight-line  method more appropriately  measures the
economic benefits received from these assets and since the straight-line  method
is the predominant method used in the industry in which it operates, this change
increases  the  comparability  of  the  Company's  results  with  those  of  its
competitors.  The impact of this change was not material to either the Company's
consolidated  statement of earnings or balance sheet for 1997. Since this change
was not  material,  the  Company's  previously  reported  financial  results for
interim quarters for 1997 have not been restated.  For financial reporting,  the
estimated useful lives of these assets were as follows:  buildings, 20-40 years;
machinery and equipment, 3-15 years.

Foreign Currency Translation:
Effective January 1, 1997, the Company has determined that the local currency is
the functional currency for most of its subsidiaries outside the U.S. under
Financial Accounting Standards Board Statement No. 52, "Foreign Currency
Translation" (FAS 52). This change was adopted because of the Company's new
operational and financial structure in Europe and the increased globalization of
the Company's manufacturing since the initial adoption of FAS 52 in 1981. Assets
and liabilities denominated in foreign functional currencies are translated at
the exchange rate as of the balance sheet date. Translation adjustments are
recorded as a separate component of shareholders' equity. Revenues, costs and
expenses denominated in foreign functional currencies are translated at the
weighted average exchange rate for the period. The U.S. dollar will continue to
be the functional currency for subsidiaries in highly inflationary economies.
This change did not have a material impact on the Company's consolidated balance
sheet as of January 1, 1997.

Prior to 1997,  the  Company's  foreign  operations  were measured by reflecting
financial  results of those  operations as if they had taken place within a U.S.
dollar-based economic environment.  For those years, inventory,  property, plant
and equipment, cost of goods sold and depreciation


Polaroid Annual Report 1997

<PAGE>


were remeasured from foreign currencies to U.S. dollars at historical exchange
rates. All other accounts were translated at current exchange rates. Gains and
losses resulting from those remeasurements were included in income.

Patents and Trademarks:
Patents and trademarks are valued at $1.

Product Warranty:
Estimated product warranty costs are accrued at the time the products are sold.

Advertising Costs:
The Company  expenses the cost of  advertising as incurred or the first time the
advertising takes place.

Earnings Per Common Share:
In December 1997,  the Company  adopted  Financial  Accounting  Standards  Board
Statement  No. 128,  "Earnings  Per Share" (FAS 128).  All  previously  reported
earnings per share information presented has been restated to reflect the impact
of adopting FAS 128.

Under FAS 128, basic earnings per common share are computed by dividing net
earnings available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per common share
reflect the maximum dilution that would have resulted from the exercise of stock
options and the convertible debentures (see Note 8). Diluted earnings per common
share are computed by dividing net income, after adding back the after-tax
interest on the convertible debentures, by the weighted average number of common
shares and all dilutive securities.

EPS Reconciliation:
The  reconciliation  of the numerators and denominators of the basic and diluted
earnings/(loss)  per  common  share  computations  for  the  Company's  reported
earnings/(loss) is as follows: (in millions except per share amounts)

                                     EARNINGS/           PER SHARE
1997                                    (LOSS)   SHARES     AMOUNT
--------------------------------------------------------------------------------
BASIC LOSS PER SHARE                $  (126.7)     45.1  $  (2.81)
                                    ==========           =========
DILUTED LOSS PER SHARE              $  (126.7)     45.1* $  (2.81)
                                    ==========   ======  =========
1996
--------------------------------------------------------------------------------
Basic earnings/(loss)per share:
Earnings before
    extraordinary item              $    15.0      45.4  $    .33
Extraordinary item                  $   (56.1)     45.4  $  (1.23)
                                    ----------           ---------
Net loss                            $   (41.1)     45.4  $   (.90)
                                    ==========   ======  =========
Diluted earnings/(loss) per share:
Earnings before
    extraordinary item              $    15.0      45.4* $    .33
Extraordinary item                  $   (56.1)     45.4* $  (1.23)
                                    ----------           ---------
Net loss                            $   (41.1)     45.4* $   (.90)
                                    ==========   ======  =========

                                     Earnings/           Per Share
1995                                    (Loss)   Shares     Amount
--------------------------------------------------------------------------------

Basic loss per share                $  (140.2)     45.4  $  (3.09)
                                    ==========   ======  =========
Diluted loss per share              $  (140.2)     45.4* $  (3.09)
                                    ==========   ======  =========

*For 1997, 1996 and 1995,  stock options for shares of common stock totaling 3.9
million,  4.1 million and 3.9 million,  respectively,  were outstanding but were
not  included in the  calculations  of diluted  earnings  per share  because the
effect was  anti-dilutive.  In  addition,  the effect of .1 million  outstanding
performance  shares for 1997 and the effect of the  outstanding  8%  Convertible
Debentures of 4.3 million  shares for 1996 and 1995 were not included  since the
effects were antidilutive.

New Accounting  Standards:
In the fourth quarter of 1997, the Company  adopted  Financial  Accounting
Standards Board Statement No. 129, "Disclosure of Information about Capital
Structure" (FAS 129). The Company was previously subject to the disclosure
requirements in FAS 129.  Therefore, the adoption of FAS 129 had no impact
on the Company's disclosures.

In June 1997, The Financial  Accounting  Standards Board (FASB) issued Financial
Accounting  Standard No. 130,  "Reporting  Comprehensive  Income" (FAS 130) that
establishes  standards for reporting and display of comprehensive income and its
components in a full set of general purpose  financial  statements.  The Company
will adopt FAS 130 for 1998 and will reclassify financial statement  information
for earlier periods that are provided for comparative purposes.

Also in June of 1997,  the FASB issued  Financial  Accounting  Standard No. 131,
"Disclosure  about Segments of an Enterprise and Related  Information" (FAS 131)
that requires companies to determine reportable segments based on how management
makes  decisions about  allocating  resources to the segments and measures their
performance.  Disclosures  for  segments  are  similar to those  required  under
current standards.  However,  certain new information and quarterly  disclosures
will be required.  In  addition,  new entity wide  disclosures  will be required
about  products  and services and the  countries  in which  material  assets are
located and that report material revenues.  Prior period  information  disclosed
will be restated to comply with FAS 131. The Company will adopt FAS 131 in 1998.
The Company is still  evaluating  the effect of this  statement  on its reported
segment information.

                                                 Polaroid Annual Report 1997

<PAGE>


2. SUPPLEMENTAL INFORMATION

(In millions)                     1997        1996         1995
--------------------------------------------------------------------------------
Research, engineering
   and development              $122.8      $116.3       $165.5

Advertising Costs:
(In millions)                     1997        1996         1995
--------------------------------------------------------------------------------
Advertising costs               $127.9      $134.6       $124.1

At December  31, 1997 and 1996,  the amounts of  advertising  costs  reported as
prepaid expenses on the  consolidated  balance sheet were $4.8 and $5.4 million,
respectively.

Interest Capitalization:
The Company  has  capitalized  interest  costs  relating  to certain  qualifying
assets.  In 1997, 1996 and 1995, the amounts of interest costs  capitalized were
$2.6 million, $5.1 million and $4.8 million, respectively.

Cash Flow Information:
Cash payments for interest and income taxes were:

(In millions)                    1997        1996         1995
--------------------------------------------------------------------------------
Interest                        $46.7       $52.0        $55.6
Income taxes                     22.2         7.3         29.0

In 1997, other non-cash items included $177.8 million of fixed asset and
inventory write-downs and $7.5 million of pension curtailment costs all of which
is related to the Company's plan to streamline global operations announced in
December 1997. Also in 1997, the Company recorded a non-cash item of $19.7
million primarily for inventory write-offs for products not included in
restructuring.

Other non-cash items included $44.6 million for 1996 related to enhanced pension
benefits provided under the Company's early retirement programs,  offered in the
fourth quarter of 1995 and the first quarter of 1996, respectively, that will be
funded from the Company's  pension plans.  In 1996, the Company also recorded as
other  non-cash  items $25.8  million for fixed asset and  inventory  write-offs
associated with the sale of the Company's Helios  diagnostic  equipment line and
the  cancellation  of a printer  project.  In 1995, the Company also recorded as
other  non-cash  items $85.0  million for certain  assembly  equipment and fixed
asset write-offs and $30.0 million for inventory write-offs and other costs, all
of which were related to the Company's plan to make  fundamental  changes in its
operating  structure  announced in December  1995.  As part of the December 1995
plan,  the Company  also  recorded  as other  non-cash  items $10.0  million for
additional inventory write-offs in the first quarter of 1996.

Restructuring Charges and Other:
In the first quarter of 1995, the Company implemented a restructuring plan which
resulted in a pre-tax  charge of $77.0  million.  The  Company  offered an early
retirement  program to certain qualified  employees.  and a voluntary  severance
program  to all  employees.  As a result of these  programs,  approximately  930
employees  (approximately 560 from manufacturing and 370 from  non-manufacturing
jobs)  terminated  their  employment  in 1995.  The pre-tax costs related to the
voluntary  severance program were $56.0 million,  of which $47.0 million of cash
severance  payments were made in 1995. The remaining cash severance  payments of
approximately $9.0 million were paid in the first quarter of 1996. Additionally,
$18.0 million represented  enhanced retirement benefits provided under the early
retirement  program that will be funded from the Company's  pension  plans.  The
remainder of the charge  consisted  of a pre-tax  charge of  approximately  $3.0
million for exit costs related to the shutdown of certain facilities.

In December 1995, the Company  announced a plan to make  fundamental  changes in
its operating structure. This plan featured three principal components - program
reductions  in certain  product,  research and  manufacturing  areas;  strategic
refocusing  of  the  Company's  digital  imaging   businesses  for  the  medical
diagnostic  and graphic arts  markets;  and a reduction  in  corporate  overhead
expenses.  The total pre-tax charge for restructuring and other expenses related
to this plan was $280.0 million. Of that amount,  $170.0 million was recorded in
the fourth  quarter of 1995 and $110.0 million was recorded in the first quarter
of 1996. The December 1995 early retirement and severance  programs  resulted in
the  elimination  of  a  total  of  approximately   1,570  positions   worldwide
(approximately 810 from manufacturing and 760 from non-manufacturing jobs).

The 1995 fourth quarter pre-tax charge of $170.0 million  included $85.0 million
to write off certain  assembly  equipment  and fixed assets and $30.0 million to
write off inventory and accrue other costs, all of which were primarily  related
to the Captiva  product  line.  The  remaining  $55.0  million of the charge was
related  to the  estimated  cost  of  involuntary  severance  benefits  for  the
Company's domestic employees who terminated in 1996. This amount did not include
severance costs for international employees, and incremental voluntary severance
benefits and pension enhancement benefits.

The 1996 first quarter pre-tax charge of $110.0 million  represented the balance
of severance and pension enhancement costs and inventory  write-downs related to
the December  1995  program.  In the first  quarter of 1996,  the pre-tax  costs
related to the severance program were approximately $55.4 million. Additionally,
approximately  $44.6 million  represented  enhanced retirement benefits provided
under the early  retirement  program  that  will be  funded  from the  Company's
pension plans.


Polaroid Annual Report 1997

<PAGE>


Total  cash  severance  payments  related  to the  December  1995  program  were
approximately  $110.4  million.  As of December 31, 1997,  these cash  severance
payments were substantially completed.

In December  1997,  the Company  announced a  broad-based  program to streamline
operations  and enhance  earnings  by  consolidating  and selling  manufacturing
facilities and reducing corporate overhead structure. The total pre-tax expenses
recorded  in the fourth  quarter  of 1997 for  restructuring  and other  charges
related to this program were $340.0 million. Of this amount, approximately $16.5
million represented  inventory  write-downs which were included in cost of goods
sold.

The 1997 restructuring and other charges included  approximately  $150.0 million
related to an  involuntary  severance  program under which  approximately  1,800
employees will leave the Company  (approximately  40% from manufacturing and 60%
from  non-manufacturing  jobs) over  approximately  18 months.  Most of the cash
severance payments related to this program are expected to be paid by the end of
1999. No cash payments were made under the program in 1997. Also included in the
cost of the involuntary  severance program were  approximately  $7.5 million for
non-cash  curtailment  costs  related to the  Company's  pension plans that were
based on the number of employees expected to terminate under this program.

The remainder of the restructuring and other charges of $190.0 million primarily
related to the write-down of assets. Approximately $106.0 million of this amount
was related to the write-down of the Company's underutilized New Bedford coating
facility to an independently determined fair value of approximately $18.0
million. The Company is considering several strategic options for future use of
this facility, including an outright sale. In addition, approximately $22.0
million was for the write-off of battery assembly equipment which is not
required to support the Company's anticipated production requirements. The
restructuring and other charges also included approximately $26.0 million
related to the Company's underutilized chemical manufacturing facility in
Freetown, Mass., that it intended to sell to International Specialties Products,
Inc. (ISP) (and which was actually sold in February 1998). Under the terms of
the agreement to sell this facility, the Company entered into a long-term supply
agreement with ISP to purchase certain specialty chemicals used to manufacture
the Company's instant film. The remainder of these write-downs related primarily
to other assets which are no longer required and will ultimately be disposed of
and inventory write-downs related to restructured operations.

Special Charges:
In 1996, the Company  recorded a $40.0 million pre-tax cost which included $25.0
million  related  to costs  associated  with the  sale of the  Company's  Helios
medical  diagnostic  imaging equipment line and $15.0 million for the write-down
of parts and capital equipment under development for a printer project and other
costs.  Inventory  write-offs  of $7.0  million  related to these  matters  were
recorded  in cost of goods  sold and  $33.0  million  was  reported  as  special
charges. The $33.0 million of special charges  reflects  write-offs of fixed
assets,  severance  and other costs.  In  connection  with the Helios sale,  the
Company acquired a minority interest in the buyer and its parent company.

Reclassification:
Certain prior year  information  has been  reclassified  to conform with current
year presentation of data.

3. FINANCIAL INSTRUMENTS
Foreign Exchange Risk Management:
The Company  generates a  substantial  portion of its revenues in  international
markets,  which  subjects its  operations  to the  exposure of foreign  currency
fluctuations.  The impact of  currency  fluctuations  can be positive or
negative in any given  period.  The  Company's  ability to  counteract  currency
exchange movement is primarily dependent on pricing.

To  minimize  the  adverse  impact of  currency  fluctuations  on net assets
denominated  in  currencies   other  than  the  relevant   functional   currency
(nonfunctional   currencies),   the   Company   may   engage  in   nonfunctional
currency-denominated  borrowings  (see  Note  6).  The  Company  determines  the
aggregate  amount  of such  borrowings  based  on  forecasts  of  each  entity's
nonfunctional  net asset  position and the relative  strength of the  functional
currencies  compared to the  nonfunctional  currencies.  These borrowings create
nonfunctional   currency-denominated   liabilities   that  hedge  the  Company's
nonfunctional  currency-denominated  net assets.  Upon  receipt of the  borrowed
nonfunctional  currency-denominated  funds,  the Company converts those funds to
the functional  currency at the spot exchange rate. Exchange gains and losses on
the nonfunctional  currency-denominated borrowings are recognized in earnings as
incurred. At December 31, 1997 and 1996, the amount of the Company's outstanding
short-term  debt  incurred for hedging  purposes  was $149.9  million and $122.9
million, respectively.


                                                 Polaroid Annual Report 1997

<PAGE>


From time to time, the Company may use over-the-counter currency exchange swaps
to reduce the interest expense  incurred through the borrowings  described above
and to replace the hedge created by those  borrowings.  When a currency exchange
swap is used to replace a hedge, the  currency  received  by the Company in the
spot market  component  of the currency  exchange  swap is used to close out the
borrowings,  and,  simultaneously,  the hedge is reinstituted  through a forward
contract  (not  exceeding  six months).  The net interest  value of the currency
exchange  swap  contract is amortized to earnings over the life of the contract.
Exchange  gains or losses on the foreign  currency  obligation  component of the
forward  contract  are  recognized  in earnings  as incurred in each  accounting
period.  The Company  does not enter into  currency  exchange  swaps for trading
purposes.  The  aggregate  notional  value of the Company's  short-term  foreign
exchange swap contracts was $20.8 million at December 31, 1997.  These contracts
did not have a net carrying amount nor a fair value at December 31, 1997.  There
were no foreign exchange swap contracts outstanding at December 31, 1996.

Since the  Company  has  limited  flexibility  to  increase  prices in local
currency to offset the adverse impact of foreign exchange,  the Company may also
purchase foreign currency call options. The term of these call options typically
does not exceed 18 months.  The Company's  purchase of call options allows it to
protect a portion of its expected  foreign  currency-denominated  revenues  from
adverse foreign currency exchange  movement.  The Company typically does not buy
call options which can be exercised  prior to the  expiration  date, nor does it
typically  write  options or purchase  call  options for trading  purposes.  The
Company amortizes  premiums over the term of the option and defers any gains for
its call options  activity until the option exercise date. At December 31, 1997,
option  contracts with a notional value of $268.2 million were  outstanding.  No
option contracts were outstanding at December 31, 1996.

Fair Value:
The carrying amounts of cash, cash equivalents,  short-term  investments,  trade
receivables,  short-term debt and trade payables  approximate fair value because
of the short maturity of these  financial  instruments.  Other  assets  include
investments in nonmarketable private companies which are carried at the lower of
cost or net realizable value. The estimated aggregate fair market value of these
investments  approximated  the carrying amount as of December 31, 1997 and 1996.
As of December 31, 1997,  the  carrying  amount and fair value of the  Company's
long-term  debt was $496.6  million  and  $499.9  million,  respectively.  As of
December 31, 1996, the carrying amount and fair value of the Company's long-term
debt was $527.6 million and $537.0 million, respectively.

The  estimated  fair value of the  Company's  call options and foreign  exchange
swaps generally  reflects the estimated amounts the Company would receive or
pay to terminate  the  contracts at the  reporting  dates,  thereby  taking into
account the current unrealized gains or losses on open contracts.  The aggregate
notional value of the Company's  short-term  foreign exchange swap contracts was
$20.8 million at December 31, 1997.  These contracts did not have a net carrying
amount nor a fair value at December  31,  1997.  There were no foreign  exchange
swap contracts  outstanding  at December 31, 1996. At December 31, 1997,  option
contracts  with a  notional  value  of  $268.2  million  were  outstanding.  The
estimated fair value of these call options was $7.3 million. No option contracts
were outstanding at December 31, 1996.

Dealer quotes are available for the Company's call options and foreign  exchange
swaps. The fair value of the Company's  long-term debt is estimated based on the
quoted  market  prices for the same or similar  issues or on the  current  rates
offered to the Company for debt of the same remaining maturities.

Fair value  estimates  are made at a specific  point in time,  based on relevant
market  information  and  information  about  the  financial  instrument.  These
estimates  are  subjective  in nature and involve  uncertainties  and matters of
significant  judgment  and,  therefore,  cannot be  determined  with  precision.
Changes in assumptions could significantly affect estimates.

Concentration of Credit Risk:
The Company  places its temporary  cash  investments  in highly rated  financial
instruments  and  financial  institutions,  and by policy,  limits the amount of
credit  exposure to any one  financial  institution.  The  Company's  investment
policy limits its exposure to concentrations of credit risk.

The Company would be exposed to credit risk if a  counterparty  to a call option
contract or the forward  component of a foreign  exchange  swap contract were to
fail to meet its contractual obligation, in which situation the Company would be
required to replace the contract at market rate.  The Company  believes that the
risk of  financial  loss due to the  inability of  counterparties  to meet their
obligation is remote and that any such loss would not be material to the results
of  operations  of the Company.  The Company  minimizes  its risk  exposure from
foreign exchange swaps and purchased call options by limiting  counterparties to
carefully selected major financial institutions.

The Company  markets a  substantial  portion of its products to customers in the
retail industry,  a market in which a number of companies are highly  leveraged.
The  Company  continually  evaluates  the  credit  risk of these  customers  and
believes  that its  allowances  for doubtful  accounts  relative to its customer
receivables are adequate.


Polaroid Annual Report 1997

<PAGE>


4. INCOME TAXES
An analysis of income tax expense/(benefit) follows:

(In millions)
1997                          CURRENT      DEFERRED         TOTAL
--------------------------------------------------------------------------------
FEDERAL                         $ 6.8        $(72.0)     $  (65.2)
STATE                              .3          (3.2)         (2.9)
FOREIGN                            --           2.9           2.9
                                ------      --------     ---------
TOTAL                           $ 7.1        $(72.3)     $  (65.2)
                                ======      ========     ========
1996
--------------------------------------------------------------------------------
Federal                         $ 2.8       $(19.2)      $  (16.4)
State                              .4           .8            1.2
Foreign                          25.7          5.7           31.4
                                ------      --------     ---------
Total                           $28.9       $(12.7)      $   16.2
                                ======      ========     ========
1995
--------------------------------------------------------------------------------
Federal                         $  .9       $(68.4)      $ (67.5)
State                              .3         (7.5)         (7.2)
Foreign                          17.7         (4.2)         13.5
                                ------      --------     ---------
Total                           $18.9       $(80.1)      $ (61.2)
                                ======      ========     ========

Prepaid  income taxes and deferred  income taxes result from future tax benefits
and  expenses  related  to the  difference  between  the tax basis of assets and
liabilities  and  the  amounts  reported  in  the  financial  statements.  These
differences  predominately  relate  to U.S.  operations.  Carryforwards  and tax
overpayments  are also  included in prepaid  income  taxes.  The net of deferred
income tax assets and  deferred  income  tax  liabilities  reflected  on the
consolidated  balance sheet was a net asset of $325.6 million and $243.7 million
as of December 31, 1997 and 1996, respectively.  Significant components of those
amounts shown on the balance sheet as of December 31 were as follows:

(In millions)                            1997        1996
--------------------------------------------------------------------------------
Deferred tax assets:
   Property, plant and equipment
      and trademarks                 $   16.5    $  (22.0)
   Inventory                             43.4        43.0
   Compensation and benefits             96.4        59.4
   Postretirement and
      postemployment benefits           114.7       124.8
   Loss and credit carryforwards         79.8        54.1
   All other                             14.7        17.6
                                    ---------    ---------
   Subtotal                             365.5       276.9
   Valuation allowance                  (27.4)      (21.5)
                                    ---------    ---------
   Total deferred tax assets         $  338.1    $  255.4
                                    ---------    ---------
Deferred tax liabilities:
   Property, plant and equipment
      and trademarks                 $    5.7    $    4.4
   Inventory                              3.3         3.1
   Compensation and benefits              2.9         3.9
   All other                               .6          .3
                                    ---------    ---------
   Total deferred tax liability          12.5        11.7
                                    ---------    ---------
    Net deferred tax asset           $  325.6    $  243.7
                                     ========    =========

Valuation allowances of $27.4 million and $21.5 million
as of December 31, 1997 and 1996, respectively, were established for the prepaid
taxes related to foreign tax credits and to capital losses.  Foreign tax credits
may be used to offset the U.S.  income  taxes due on income  earned from foreign
sources. However, the credit is limited by the total income included on the U.S.
income tax return as well as the ratio of foreign source income to total income.
Excess foreign tax credits may be carried back two years and forward five years.
As of December 31, 1997, the Company did not believe it was more likely than not
that it would generate  sufficient  U.S.  sourced income within the  appropriate
period to utilize all the foreign tax credits.

Capital losses may be used only to offset  capital gains.  Capital losses may be
carried  back three years and forward five years.  As of December 31, 1997,  the
Company had a capital loss  carryforward  of $4.3  million.  In addition,  those
temporary  differences  which most  likely  will  produce  capital  losses  upon
reversal  have been  treated as capital  losses.  Historically,  the Company has
generated  limited net capital  gains.  Therefore,  as of December 31, 1997, the
Company  did not  believe  it was more  likely  than not that it would  generate
sufficient  capital  gains  within the  appropriate  time period to offset those
capital losses.

Management  believes the Company will obtain the full benefit of other  deferred
tax  assets  on  the  basis  of its  evaluation  of  the  Company's  anticipated
profitability  over the  period  of years  that the  temporary  differences  are
expected to become tax deductions.  It believes that sufficient book and taxable
income  will be  generated  to realize  the  benefit of these tax  assets.  This
assessment  of  profitability  takes into  account  the  Company's  present  and
anticipated split of domestic and  international  earnings and the fact that the
temporary   differences  related  to  postretirement  and  other  postemployment
benefits are deductible over a period of 30 to 40 years.

Management  considered  that as of  December  31,  1997,  the  Company has a net
operating  loss  carryforward  of  $125.2  million.  $37.8  million  of the  net
operating loss in the U.S.  expires in 2010.  $45.5 million  expires in 2011 and
$41.9  million  expires  in 2012.  The  Company  also has a foreign  tax  credit
carryforward  of  $24.4  million  (against  which  there  is  a  full  valuation
allowance) and an alternative minimum tax credit carryforward of $2.8 million as
of December 31, 1997.  $16.2 million of the foreign tax credit  expires in 2000,
$3.9 million  expires in 2001 and $4.4 million  expires in 2002. The alternative
minimum  tax  credit  does not  expire.  Management  does  believe  it will earn
sufficient  U.S.  income  to  utilize  the  net  operating   losses  within  the
carryforward period.  Regardless of management's  expectations,  there can be no
assurance  that the Company  will  generate  any  specific  level of  continuing
earnings or where these earnings will be generated.


                                                 Polaroid Annual Report 1997

<PAGE>


For alternative minimum tax purposes, the Company had an alternative minimum tax
net  operating  loss of $37.8  million at the end of 1997.  $19.7  million  will
expire in 2011, $18.1 million will expire in 2012. In addition,  the Company had
an alternative minimum tax foreign tax credit carryforward at the end of 1997 of
$54.1  million:  $22.0 million  expires in 1998,  $6.5 million  expires in 1999,
$18.1 million  expires in 2000,  $3.1 million  expires in 2001, and $4.4 million
expires in 2002.

An  analysis  of  earnings/(loss)   before  income  tax   expense/(benefit)  and
extraordinary loss follows:

(In millions)         1997            1996             1995
--------------------------------------------------------------------------------

Domestic          $ (189.9)        $  (3.7)        $ (236.8)
Foreign               (2.0)           34.9             35.4
                  ---------        --------        ---------
Total             $ (191.9)        $  31.2         $ (201.4)
                  =========        ========        =========

A  reconciliation  of differences  between the statutory U.S. federal income tax
rate and the Company's effective tax rate follows:

                                      1997            1996            1995
--------------------------------------------------------------------------------
U.S. statutory rate                   35.0%           35.0%           35.0%
State taxes                            1.7             3.3             2.3
Benefit plan deductions                 .5            (3.3)             --
Loss carryforwards                      .8            (2.9)             --
Nondeductible expenses/
    Nontaxable Income                  2.0             2.7              --
Valuation allowance change            (3.1)           (5.5)           (7.8)
Tax effect resulting from
   foreign activities                 (1.4)           21.9              .5
Other                                 (1.5)             .8              .4
                                    --------        -------         -------
Effective tax rate                    34.0%           52.0%           30.4%
                                    ========        =======         =======

In 1996 and 1995, the tax effect resulting from foreign activities  includes the
effect of remeasuring foreign currency.  The impact on the tax rate for 1996 was
an increase of 28.7 percentage  points and an increase of 2.1 percentage  points
for  1995.  In 1997,  the  Company  changed  its  method of  applying  Financial
Accounting Standards Board Statement No. 52, "Foreign Currency Translation" (FAS
52) and adopted the local  currency as its  functional  currency for most of its
subsidiaries  outside the U.S.  Therefore,  there is no impact from  remeasuring
foreign  currency in the tax effect  resulting from foreign  activities for 1997
for those subsidiaries which are local currency functional.

Undistributed earnings of foreign subsidiaries held for reinvestment in overseas
operations  amounted to $417.9  million at December  31, 1997.  Additional  U.S.
income taxes may be due upon  remittance  of those  earnings (net of foreign tax
reductions because of the distribution),  but it is impractical to determine the
amount of any such additional  taxes. If all those earnings were  distributed as
dividends,  foreign  withholding  taxes of approximately  $20.4 million would be
payable.

5. INVENTORIES
The classification of inventories at December 31 follows:

(In millions)              1997        1996
--------------------------------------------------------------------------------

Raw materials            $ 91.0      $104.7
Work-in-process           192.4       225.3
Finished goods            222.7       218.8
                        --------    --------
Total                    $506.1      $548.8
                        ========    ========

6. SHORT-TERM DEBT
In the first quarter of 1997, the Company replaced its $150.0 million committed
line of credit with a $350.0 million committed line of credit. The line of
credit is available for general corporate purposes and expires at the end of
2001. As of December 31, 1997 and 1996, there were no borrowings under the
$350.0 million and $150.0 lines of credit, respectively.

As of December 31,  1997,  gross  borrowings  from the  Company's  international
uncommitted  lines of credit  were $150.5  million.  Gross  borrowings  from the
Company's U.S. uncommitted lines of credit were $91.1 million as of December 31,
1997.   Additional   available,   uncommitted  lines  of  credit  for  U.S.  and
international operations were $98.9 million and $103.9 million, respectively, at
December 31, 1997. As of December 31, 1996, gross borrowings from  international
uncommitted  lines of credit were $124.9 million.  There were no borrowings from
the  Company's  U.S.  uncommitted  lines of  credit  as of  December  31,  1996.
Additional  available,  uncommitted  lines of credit for U.S. and  international
operations  were $120.0 and $140.3  million,  respectively at December 31, 1996.
Borrowings from  international  uncommitted lines of credit were incurred by the
Company  primarily to manage its foreign  currency  balance sheet  exposure (see
Note 3). The weighted  average  interest rate on  international  short-term debt
outstanding  as of December  31, 1997 and 1996 was 5.2% and 4.7%,  respectively.
The Company's total borrowing capacity is limited by certain debt covenants.

Interest  expense on  international  short-term  borrowings  was $8.4 million in
1997, $7.5 million in 1996 and $10.9 million in 1995. The average interest rates
on those borrowings  ranged from 4.7% to 5.5% in 1997, 3.2% to 5.3% in 1996, and
4.0% to 7.1% in 1995.  Interest expense on U.S.  short-term  borrowings was $1.5
million in 1997 and $.6  million  in both 1996 and 1995.  The  average  interest
rates on these borrowings were 5.8% in 1997, 5.6% in 1996 and 6.1% in 1995.


Polaroid Annual Report 1997

<PAGE>


7. PAYABLES AND ACCRUALS
The following items are included in payables and accruals at December 31:

(In millions)                                            1997        1996
--------------------------------------------------------------------------------
Trade accounts payable                                 $138.1      $165.0
Reserve for marketing programs                           44.8        42.1
Other accrued expenses and
   current liabilities                                   94.4       103.4
                                                      --------    --------
Total                                                  $277.3      $310.5
                                                      ========    ========

8. LONG-TERM DEBT
Principal amounts of long-term debt outstanding as of December 31 are as
follows:

(In millions)
1997                               LONG-TERM        CURRENT           TOTAL
--------------------------------------------------------------------------------

6 3/4% NOTES                       $  148.7        $    --           $  148.7
7 1/4% NOTES                           148.2             --             148.2
8% NOTES                               199.7             --             199.7
                                    --------        -------          --------
TOTAL                               $  496.6        $    --          $  496.6
                                    ========        =======          ========

1996                               Long-term        Current           Total
--------------------------------------------------------------------------------

ESOP loan                           $ --            $  37.7        $   37.7
7 1/4% Notes                           150.0             --           150.0
8% Notes                               199.4             --           199.4
8% Subordinated
    Convertible Debentures             140.4             --           140.4
Other                                     .1             --              .1
                                    --------        -------          --------
Total                               $  489.9        $  37.7        $  527.6
                                    ========        =======          ========

At December 31, 1997 and 1996, the Company had a working  capital line of credit
(see Note 6), and at December 31, 1996, a long-term ESOP loan.  Borrowing  costs
under the related credit  agreements are tied to the Company's  long-term public
debt ratings.  The interest rates on the loans are based on various  alternative
interest indices at the Company's option and will fluctuate  over time. The
agreements contain various restrictions, including the ability of the Company to
incur or guarantee debt. The Company is required to maintain a certain net worth
and to meet certain leverage and interest coverage ratios.

Under the ESOP loan, which was used to finance the leveraged  Polaroid ESOP (see
Notes 9 and 11), the final scheduled principal payment of $37.7 million was made
on June 30,  1997.  Interest  expense on the ESOP loan was $.9  million in 1997,
$3.2 million in 1996,  and $5.4 million in 1995. The weighted  average  interest
rate  on the  loan  was  4.9%,  4.8%  and  5.2%  during  1997,  1996  and  1995,
respectively.

In 1991,  the  Company  issued  $140.0  million of 8%  Subordinated  Convertible
Debentures due 2001 (the Debentures) as partial consideration for the repurchase
of its convertible  preferred stock and warrants  originally issued in 1989. The
Debentures  carried an annual interest rate of 8% and were convertible to common
stock at approximately  $32.50 per share. The Debentures were also  subordinated
in right of payment  to all  existing  debt of the  Company.  Subsequently,  the
holders of the Debentures  created a trust under which they retained  conversion
rights to convert the Debentures into approximately 4.3 million shares of common
stock of the Company but sold to institutional  investors the right to principal
and interest payments on the Debentures.

In June 1996, the Company  purchased the conversion rights for $53.8 million and
redeemed $.5 million of principal of the $140 million Debentures.  As the holder
of the conversion  rights,  the Company could have retired the Debentures at any
time on or before September 30, 1998. If the Debentures had not been redeemed by
the Company by September 30, 1998, the conversion  rights would have reverted to
the  holders  of the  Debentures.  The  purchase  of the  conversion  rights was
determined to be a substantive  modification  of the terms of the Debentures and
was accounted for as an extinguishment of debt and the issuance of new debt. The
cost of the  conversion  rights and the amount of the fair value of the new debt
over  the  carrying  value  of  the   extinguished   debt  was  recorded  as  an
extraordinary loss of $54.5 million (net of a tax benefit of $.4 million).

In December 1996, the Company gave  irrevocable  notice that it was repurchasing
the remaining $139.5 million of principal of the Debentures. The closing date of
this  transaction  was January 22, 1997. As a result of issuing the  irrevocable
notice, the Company recorded an extraordinary loss of $1.6 million (net of a tax
benefit  of  $1.1  million)  in the  fourth  quarter  of 1996  due to the  early
extinguishment of debt.

The $200  million 8% Notes (the 8% Notes) due March 15,  1999 were issued with a
discount,  at a price of  99.054%  of par with a yield of 8.18%,  and may not be
redeemed prior to maturity.

On January  14,  1997,  the Company  issued  $300.0  million in debt  securities
consisting  of $150  million  7-1/4% Notes due January 15, 2007 (the 2007 Notes)
and $150 million 6-3/4% Notes due January 15, 2002 (the 2002 Notes) to refinance
existing debt. The 2007 Notes were placed with a discount,  at a price of 99.43%
of par with a yield of 7.33%.  The 2002 Notes were placed with a discount,  at a
price of 99.53% of par with a yield of 6.86%.  The net proceeds from the sale of
the Notes were used primarily for the payment of $150 million  principal  amount
of the Company's 7-1/4% Notes due January 15, 1997 and to exercise the


                                                 Polaroid Annual Report 1997

<PAGE>


Company's right to the repurchase of the remaining principal amount of its
$139.5 million 8% Subordinated Convertible Debentures due 2001. The balance of
the net proceeds were used for general corporate purposes.

The  aggregate  scheduled  repayments  on the  Company's  long-term  debt are as
follows:

(In millions)
--------------------------------------------------------------------------------
1998                      $  0
1999                      $200.0
2000                      $  0
2001                      $  0
2002                      $150.0
2003 and thereafter       $150.0

9. COMMON STOCKHOLDERS' EQUITY
During 1997 the Company repurchased 1.3 million shares of common stock for $57.4
million.  During 1996, 1.1 million shares were repurchased for $43.6 million and
during 1995, 1.2 million shares were  repurchased for $40.2 million.  On October
21, 1997, the Company's Board of Directors  authorized a repurchase  program for
as many as 5 million  shares,  or 11% of outstanding  shares over the next three
years.  This program includes  approximately $30 million remaining from the $100
million common stock  repurchase  program  approved by the Board of Directors in
January 1995. As of December 31, 1997, up to  approximately  4.0 million  shares
remain to be purchased under the current stock repurchase  program.  The Company
may  repurchase  its common  stock on the open market,  in privately  negotiated
transactions or otherwise  (which may include  transactions  with Polaroid stock
option holders and with Polaroid retirement plans,  including the employee stock
ownership  plan).  The timing and  amounts  of any future  purchases  under this
program  depend upon many factors,  including  market  conditions as well as the
Company's business and financial condition.

Deferred   Compensation,   which  was  recorded  as  a  deduction   from  Common
Stockholders'  Equity,  was $1.1 million and $39.6  million at December 31, 1997
and 1996, respectively. Deferred compensation included $37.7 million at December
31, 1996 for the ESOP (see Notes 8 and 11) covering  substantially  all domestic
employees.  Shares held by the Company's  ESOP Trust on December 31, 1996 and by
the Company's Retirement Savings Plan in the ESOP Fund on December 31, 1997 were
as follows:

(In thousands)               1997        1996
--------------------------------------------------------------------------------
Allocated                   7,491       6,542
Suspense (unallocated)        --          949
                           -------     -------
Total                       7,491       7,491
                           =======     =======

Dividends paid on unallocated  ESOP shares of $.1 million in 1997,  $1.0 million
in 1996 and $1.6 million in 1995 were used to repay the ESOP loan. The remaining
dividends  for  allocated  shares  held  by the  ESOP  Trust  were  paid to ESOP
participants.  Deferred compensation also included $1.1 million and $1.9 million
at December 31, 1997 and 1996, respectively,  related to the 1993 Polaroid Stock
Incentive Plan (See Note 10).

10. INCENTIVE COMPENSATION AND STOCK INCENTIVE PLANS
The Company maintains annual incentive plans covering substantially all domestic
employees and employees of manufacturing  subsidiaries in the United Kingdom and
the  Netherlands.  Amounts charged to operations for these annual cash incentive
plans were $2.2 million in 1997, $25.8 million in 1996 and $4.8 million in 1995.

As of December 31, 1997, the Company had stock incentive plans which provided
fixed stock-based compensation awards as described below. Effective January 1,
1996, the Company adopted FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). Under FAS 123, the Company has elected not to adopt the
new accounting method and will continue to account for its stock-based
compensation under the existing provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, no compensation expense has been recognized.

In 1990, the Company  adopted its original  Polaroid  Stock  Incentive Plan (the
1990 Plan) under which  officers and other key employees  could be granted stock
options  (either  non-qualified  or incentive),  stock  appreciation  rights and
restricted stock as incentives to increase revenues and profits. Up to 3,000,000
shares of the Company's common stock have been authorized for use under the 1990
Plan. Only stock option awards were made under the 1990 Plan.

In May 1993,  the Company  adopted the 1993 Polaroid  Stock  Incentive Plan (the
1993 Plan) under which officers and other key employees may be granted awards in
the  form  of  stock  options  (either   non-qualified   or  incentive),   stock
appreciation  rights,  restricted  stock,  and any other form  determined by the
Board of  Directors  to be  consistent  with the 1993  Plan,  as  incentives  to
increase  revenues and profits.  A total of  3,000,000  shares of the  Company's
common stock were  authorized for use under the 1993 Plan plus any unused shares
from the 1990  Plan.  In March  1997,  the  Company  amended  the 1993  Plan and
authorized an additional  3,500,000  shares to be used under the plan. A maximum
of 6,500,000  shares of the Company's  common stock have been authorized for use
under the 1993 Plan, plus any shares that become  available under the 1990 Plan.
The  number of  common  shares  reserved  for  granting  of  future  awards  was
3,224,105,   482,966  and  1,127,591  at  December  31,  1997,  1996  and  1995,
respectively.


Polaroid Annual Report 1997

<PAGE>


The  options  which  have  been  awarded  under  the 1990 Plan and the 1993 Plan
typically vest  proportionately  over  approximately  a four year period and are
exercisable  for  approximately a ten year period from the date of grant, if the
holder remains in the employ of the Company.  Normally,  if the option  holder's
employment  terminates  for  reasons  other  than  change of  control,  death or
retirement,  no further vesting can occur.  When an option  holder's  employment
terminates for any reason other than retirement, death or disability, all vested
options must be  exercised  within  three  months from the  termination  date or
approximately ten years from the date of the grant, whichever is earlier.

The Human Resource Committee of the Company's Board of Directors (a Committee of
non-employee members of the Board) administers the 1990 Plan and the 1993 Plan
and, as such, can determine the vesting  period, performance factors or other
restrictions for an award.  The Committee may waive or amend conditions of the
option grant, such as accelerating  vesting terms during an early retirement or
severance program.

In 1990, the Company adopted the Polaroid Board of Directors'  Stock Option Plan
(the Directors'  Plan),  which granted each non-employee director an option to
purchase  3,000 shares of the  Company's  common stock.  For a new  non-employee
director, the date of the grant is the date the director joins the Board.  In
1996, the shareholders  approved an amendment to the Directors' Plan to award
each non-employee  director as of July 15, 1995 a one-time grant of an option to
purchase 2,000 shares of the Company's common stock at $42.63 per share. Vesting
of these option  grants will conform with the terms  outlined in the Directors'
Plan.

In May 1997, the Company, with shareholder approval, adopted the Board of
Directors' Stock Plan under which non-employee directors may be awarded stock
options, stock appreciation rights, restricted  stock and any other  form of
award.  Under this plan, the number of shares that may be awarded may not exceed
300,000 plus the number of shares  available  for  grant remaining  from the
Directors' Plan.  Under the Board of Directors' Stock Plan, directors who were
under 68 years of age on December 31, 1996 will be granted  1,500 stock  options
annually (See Note 11). In addition,  the  authorized  shares under the Board of
Directors'  Stock Plan are being  used to provide a portion of the  non-employee
directors' annual retainer fee in the Company's common stock.

Under the Directors' Plan and the Directors' Stock Plan, option awards are
exercisable for a ten year period from the date of grant if the director remains
on the Board. Any vesting ceases when an individual terminates as a director,
and a former director must exercise his or her vested options within three years
from the date of termination or ten years from the date of grant, whichever is
earlier. Up to 400,000 shares of the Company's authorized common stock may be
issued under the Directors' Plan and the Directors' Stock Plan. As of December
31, 1997, a cumulative total of 87,000 options have been granted at prices
ranging from $33.13 to $52.00 under the Directors' Plan and the Directors' Stock
Plan.

A summary of the  Company's  fixed stock option  awards as of December 31, 1997,
1996,  and 1995 and changes  during the years ending on those dates is presented
below:

                      Number of Options    Weighted-average
Fixed Options            (in thousands)      Exercise Price
--------------------------------------------------------------------------------

Outstanding at
    December 31, 1994            3,591           $   30.56

1995 Activity:
Granted                          1,029           $   36.58
Exercised                         (728)          $   26.74
Forfeited                          (29)          $   34.95
                                -------
Outstanding at
    December 31, 1995            3,863           $   32.85

1996 Activity:
Granted                            642           $   44.57
Exercised                         (329)          $   29.34
Forfeited                          (51)          $   41.14
                                -------
Outstanding at
    December 31, 1996            4,125           $   34.85

1997 ACTIVITY:
GRANTED                            812           $   43.17
EXERCISED                         (981)          $   32.33
FORFEITED                          (44)          $   39.01
                                -------
OUTSTANDING AT
    DECEMBER 31, 1997            3,912           $   37.16
                                =======

Options exercisable at December 31:
--------------------------------------------------------------------------------

                      Number of Options   Weighted-average
                         (in thousands)     Exercise Price
--------------------------------------------------------------------------------

1997                             2,247           $   33.96
1996                             2,524           $   32.46
1995                             1,813           $   32.10

Weighted-average fair value of options granted during the year:
--------------------------------------------------------------------------------

1997                            $13.19
1996                            $16.06
1995                            $13.26


                                                 Polaroid Annual Report 1997

<PAGE>



Options Outstanding at December 31, 1997
--------------------------------------------------------------------------------
                                      Weighted-average
Range of                  Number of          Remaining     Weighted-average
Exercise                    Options   Contractual Life             Exercise
  Prices             (in thousands)            (years)                Price
--------------------------------------------------------------------------------

$24 to $27                      510              3.1                 $24.90
$31 to $34                    1,405              5.2                 $32.54
$37 to $42                      981              8.7                 $41.78
$43 to $60                    1,016              6.4                 $45.21
                             -------
$24 to $60                    3,912              6.1                 $37.16
                             =======


Options Exercisable at December 31, 1997
--------------------------------------------------------------------------------

Range of                   Number of
Exercise                     Options        Weighted-average
  Prices              (in thousands)          Exercise Price
--------------------------------------------------------------------------------

$24 to $27                      510                   $24.90
$31 to $34                    1,074                   $32.40
$37 to $42                      197                   $41.92
$43 to $60                      466                   $44.09
                             -------
$24 to $60                    2,247                   $33.96
                             =======

If  compensation  cost for the Company's fixed stock option awards had been
determined based on fair value at grant date for awards under the plans
consistent with FAS 123, the Company's net loss and loss per common share would
have been increased to the pro forma amounts as follows:

(In millions, except per share data)      1997         1996           1995
--------------------------------------------------------------------------------

Net loss:
   As reported                         $(126.7)      $(41.1)       $(140.2)
   Pro forma                            (133.2)       (46.3)        (142.4)
Basic loss per common share:
   As reported                           (2.81)        (.90)         (3.09)
   Pro forma                             (2.95)       (1.02)         (3.14)

Diluted loss per common share for 1997, 1996 and 1995 was the same as basic loss
per common share.

The effect of applying  FAS 123 as shown in the above pro forma  disclosures  is
not  representative of the pro forma effect on net earnings in future  years
because  it does not take into consideration pro forma compensation  expense
related to grants made prior to 1995.

The fair value of each option  grant was  estimated  on the grant date using the
Black-Scholes   Option-Pricing   Model  with  the  following   weighted  average
assumptions:

                                          1997         1996           1995
--------------------------------------------------------------------------------

Dividend yield                            1.4%         1.4%           1.7%
Expected volatility                      22.4%        21.0%          22.2%
Risk free interest rate                   6.6%         6.3%           6.5%
Expected option life                      5.5 years    5.5 years      5.4 years

Dividend equivalent payments on outstanding stock options of $1.6 million, $2.1
million and $2.1 million were made in 1997, 1996 and 1995, respectively.
Approximately 80% of the options granted in 1996 were issued with dividend
equivalents. No options were granted in 1997 with dividend equivalents.

Under the 1993 Plan, the Company  awarded  15,000 shares of restricted  stock at
$45.88 in 1996 and  25,000  shares of  restricted  stock at $46.50  per share in
1995. The 1996 restricted  shares vest if the Company achieves certain financial
objectives  within  a  five-year   period.   The  1995  restricted  shares  vest
proportionately  each year over a five year period.  The value of the restricted
stock issued was  recorded as deferred  compensation  and is being  amortized to
compensation expense over a five year period from the award date.

11. BENEFIT PLANS
The Company maintains a qualified noncontributory trusteed pension plan covering
substantially  all domestic  employees.  Through 1997, the benefits are based on
years of service and final average  compensation  at  retirement.  The Company's
general  policy  is to fund  the  domestic  pension  trust  to the  extent  such
contributions would be deductible under the funding standards  established under
the  Internal  Revenue  Code.  Plan assets  consist  primarily  of high  quality
corporate and U.S. government bonds,  asset-backed  securities and common stocks
and investments in real estate.

Employees of the Company's manufacturing subsidiaries in the United Kingdom and
the Netherlands are covered by trusteed, contributory pension plans. Amounts are
funded in accordance with local laws and economic conditions.  Employees of most
other  foreign  subsidiaries  are covered by insured plans.  Related  expenses,
obligations  and assets of these other plans are not material and therefore are
not included in the information below.

Components of the Company's net periodic pension cost/(credit) are as follows:

(In millions)                             1997         1996           1995
--------------------------------------------------------------------------------
Service cost                             $23.8        $25.7          $26.5
Interest cost                             78.5         74.1           65.9
Actual return on assets                 (266.4)      (152.4)        (191.3)
Net amortization and deferral            160.9         51.9           99.2
                                        -------      -------        -------
Net periodic pension
   cost/(credit)                         $(3.2)        $(.7)          $ .3
                                        =======      =======        =======

Effective January 1, 1998, the Company adopted a pension plan change for most of
its domestic employees. The revised plan bases retirement benefits on an account
balance  that  accumulates  over the  employee's  working  career.  For  certain
employees, a ten year transition period from the previous pension formula to the
new formula will apply.  This plan change  necessitated  certain changes in plan
assumptions  including  the rate of changes in salary  increases.  The effect of
this plan change has been reflected in the funded status of the Company's  plans
as of December 31, 1997.


Polaroid Annual Report 1997

<PAGE>


The following  table sets forth the plans' funded status and amounts  recognized
in the Company's consolidated balance sheet at December 31:

(In millions)                                          1997               1996
--------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
   Vested benefit obligation                     $  1,139.7         $    948.6
   Nonvested benefit obligation                        53.3               45.6
                                                 -----------        -----------
   Accumulated benefit obligation                   1,193.0              994.2
   Effect of projected pay increases                   40.5               91.4
                                                 -----------        -----------
Projected benefit obligation                        1,233.5            1,085.6
Plan assets at fair market value                    1,350.5            1,160.5
                                                 -----------        -----------
Plan assets in excess of
   projected obligations                              117.0               74.9
Unrecognized prior service cost                        35.8               18.3
Unrecognized net gain                                (177.5)             (98.1)
Unrecognized net assets at transition,
   net of amortization                                (48.5)             (60.7)
                                                 -----------        -----------
Net pension liability                            $    (73.2)        $    (65.6)
                                                 ===========        ===========

Included  in  the  net  pension  liability  as of  December  31,  1997,  is  the
curtailment cost of $7.5 million recorded in the fourth quarter of 1997 which is
included as part of the Company's  restructuring and other charges (see Note 2).
This cost resulted from the number of employees  expected to terminate under the
involuntary severance program.

The  assumptions  used by the  Company  which have a  significant  effect on the
amounts reported for pension accounting as of December 31 were as follows:

                                                   1997      1996        1995
--------------------------------------------------------------------------------
Weighted average discount rate                     7.1%      7.5%        7.1%
Weighted average rate of increase
   in compensation levels                          3.9%      5.0%        5.0%
Expected long-term rate of
   return on assets                                9.3%      8.9%        8.8%

In 1988, the Company's  Board of Directors  approved the Polaroid ESOP primarily
for the  benefit of its  domestic  employees  (see Notes 8 and 9). The number of
shares  available for allocation to individual  accounts in any period was based
on principal  and interest  payments made on the ESOP loan.  Amounts  charged to
expense  represent  the  amount  of  principal  repayment  on the ESOP loan less
dividends paid on unallocated  shares.  Amounts charged to expense for this plan
were $37.6  million,  $38.7 million and $34.3 million in 1997,  1996,  and 1995,
respectively. In 1997, the ESOP was merged into the Company's Retirement Savings
Plan.

The Company  currently  provides  certain health and life insurance  benefits to
eligible retired employees. Substantially all domestic employees who retire from
the  Company,  and meet the minimum age and  service  requirements  of 55 and 10
years, respectively, become eligible for these benefits. The plans are currently
unfunded and may be modified in accordance with the terms of the plan documents.
The Company funds these benefits on a  pay-as-you-go  basis.  Eligible  retirees
under  age 65 are  required  to  contribute  to the  cost of their  health  care
benefits.  Upon reaching age 65, eligible retirees' health care benefit coverage
is  coordinated  with Medicare.  In 1995,  the Company  established an amount it
would  contribute  toward  the  cost  of the  retirees'  selected  medical  plan
coverage.  The  Company  intends to  annually  review the amount it  contributes
toward this coverage and will, at its option,  make  adjustments  to this amount
based on several  considerations  including financial factors,  inflation of
medical costs and other relevant factors.  Eligible retirees are not required to
contribute to the cost of their life  insurance  benefits.  Employees of most of
the  Company's  subsidiaries  outside  of  the  United  States  are  covered  by
government programs.

Components  of the  Company's  net periodic  postretirement  benefit cost are as
follows:

(In millions)                           1997            1996            1995
--------------------------------------------------------------------------------
Service cost                         $   6.3         $   6.4         $   8.7
Interest cost                           15.7            14.8            17.6
Amortization                           (10.7)          (11.0)           (6.1)
                                     --------        --------        --------
Net periodic postretirement
   benefit cost                      $  11.3         $  10.2         $  20.2
                                     ========        ========        ========

The following table sets forth the status of the plan and amounts  recognized in
the Company's consolidated balance sheet at December 31:

(In millions)                                           1997             1996
--------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
   Retirees                                         $  169.8         $  140.8
   Fully eligible active plan
     participants                                       47.4             32.8
   Other active plan participants                       46.9             36.5
                                                    ---------        ---------
Total accumulated postretirement
   benefit obligation                                  264.1            210.1
Plan assets at fair market value                          --               --
                                                    ---------        ---------
Accumulated obligation in excess
   of plan assets                                     (264.1)          (210.1)
Unrecognized net gain                                   29.0            (16.4)
Unrecognized prior service cost                        (28.8)           (39.8)
                                                    ---------        ---------
Net postretirement benefit liability                $ (263.9)        $ (266.3)
                                                    =========        =========

The Accumulated  Postretirement  Benefit  Obligation (APBO) at December 31, 1997
and 1996 was  determined  using a discount rate of 7.0% and 7.5%,  respectively.
The assumed  health care cost trend rate used in measuring  the APBO at December
31, 1997 and 1996 was 9% and 10%,


                                                 Polaroid Annual Report 1997

<PAGE>


respectively, declining gradually to an ultimate rate of 6% in 2003. These trend
rates reflect the Company's  current  experience and expectation that future
rates will decline.  The assumptions used above have an effect on the amounts
reported.  If the health care cost trend rate  assumptions  were increased by 1%
each  year,  the  APBO as of  December  31, 1997  and 1996 would  increase  by
approximately  $4.5 million and $6.7 million,  respectively.  The effect of a 1%
increase on the aggregate of service and interest  cost for 1997, 1996 and 1995
would have been an increase of approximately  $.4 million,  $.8 million and $4.5
million, respectively.

The  Company  has had a  Polaroid  Board  of  Directors'  Retirement  Plan  (the
Directors' Retirement Plan) which is a non-qualified  deferred compensation plan
under which fully vested (at least five complete  years of service on the Board)
non-employee  members of the Board who retire  receive  annual lump sum payments
equal to the  retainer  amount  they were  paid in the last  full year  prior to
retirement.  A participant  or surviving  spouse may receive  payments under the
Directors'  Retirement Plan for the lesser of twenty-five years or the number of
years that the person served as a non-employee  member of the Board prior to his
or her seventy-third  birthday.  This plan is available to retired directors and
directors  who were 68 years of age as of December 31, 1996.  Directors who were
not 68 years of age as of December 31, 1996 will receive no future accrual under
this plan (see Note 10).

The estimated  present value of future benefits under the Directors'  Retirement
Plan is accrued  annually  based on  credited  service  up to the  participants'
actual retirement dates and is charged to expense.  For the years 1997, 1996 and
1995,  $.8 million,  $.3 million and $.2 million,  respectively,  was charged to
expense for the Directors' Retirement Plan.

12. RENTAL EXPENSE AND LEASE COMMITMENTS
Minimum  annual rental  commitments  at December 31, 1997,  under  noncancelable
leases, principally for real estate, are payable as follows:

(In millions)
--------------------------------------------------------------------------------

1998                              $18.2
1999                               12.9
2000                                6.5
2001                                5.6
2002                                5.3
2003 and thereafter                17.3
                                 -------
Total minimum lease payments      $65.8
                                 =======

Minimum  payments  have not been  reduced  by minimum  sublease  rentals of $2.4
million due in the future under noncancelable subleases.

Many of the leases contain renewal options and some contain  escalation  clauses
which  require  payments of  additional  rent to the extent of  increases in the
related operating costs.

Rental and lease expenses consisted of the following:

(In millions)                 1997        1996         1995
--------------------------------------------------------------------------------

Minimum rentals              $27.4       $25.8        $26.4
Contingent rentals             4.6         2.0          8.8
                            -------     -------      -------
Total                        $32.0       $27.8        $35.2
                            =======     =======      =======

Sublease  income  amounted to $1.1 million in 1997,  $1.1 million in 1996,  $1.4
million in 1995.


Polaroid Annual Report 1997

<PAGE>


13. BUSINESS
Nature of Operations
Polaroid  designs,  develops,  manufactures  and markets imaging  products which
serve   customers  in  consumer  and   commercial   markets  around  the  world.
Photographic and other core products  represent over 90 percent of the Company's
total revenues and are marketed  globally  through  distributors and dealers for
consumer and professional photography,  business,  industry,  science, medicine,
government and education.  In addition, the Company is expanding its role in the
market for digital imaging products.  The Company's digital imaging products are
marketed worldwide through  distributors and directly to customers primarily for
consumer, medical, graphic arts and other business applications.

Segments of Business
During  1997,  1996  and 1995  sales to one  customer,  Wal-Mart  Stores,  Inc.,
amounted to 12.5%, 11.9%, and 10.9%, respectively, of the Company's total sales.

Intercompany  sales  between  geographic  areas  are  accounted  for  at  prices
representative of unaffiliated party transactions.

The  following  table  shows  certain  financial  information  relating  to  the
Company's operations in various geographic areas:

<TABLE>
<CAPTION>

GEOGRAPHIC AREAS
                                                                                        Years ended December 31,
(In millions)                                                                      1997           1996          1995
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>            <C>            <C>
SALES
UNITED STATES
   Customers                                                                 $  1,063.0     $  1,060.3     $  1,019.0
   Intercompany                                                                   415.9          445.7          479.4
                                                                             -----------    -----------    -----------
                                                                                1,478.9        1,506.0        1,498.4
                                                                             -----------    -----------    -----------
EUROPE
   Customers                                                                      582.1          663.6          738.8
   Intercompany                                                                   416.1          397.1          368.1
                                                                             -----------    -----------    -----------
                                                                                  998.2        1,060.7        1,106.9
                                                                             -----------    -----------    -----------
ASIA/PACIFIC, CANADA, LATIN AND SOUTH AMERICA
   Customers                                                                      501.3          551.3          479.1
   Intercompany                                                                    97.0          113.5          123.3
                                                                             -----------    -----------    -----------
                                                                                  598.3          664.8          602.4
                                                                             -----------    -----------    -----------
   Eliminations                                                                  (929.0)        (956.3)        (970.8)
                                                                             -----------    -----------    -----------
NET SALES                                                                    $  2,146.4     $  2,275.2     $  2,236.9
                                                                             ===========    ===========    ===========
-----------------------------------------------------------------------------------------------------------------------
PROFITS
   United States                                                             $   (119.2)    $     13.8     $   (179.4)
   Europe                                                                           9.2           19.0           20.6
   Asia/Pacific, Canada, Latin and South America                                   (6.6)          25.0           24.4
   General corporate expense                                                      (49.2)         (13.3)         (19.4)
   Eliminations                                                                     6.7            7.3           (4.0)
                                                                             -----------    -----------    -----------
PROFIT/(LOSS) FROM OPERATIONS                                                    (159.1)          51.8         (157.8)
   Other income/(expense)                                                         (32.8)         (20.6)         (43.6)
                                                                             -----------    -----------    -----------
EARNINGS/(LOSS) BEFORE INCOME TAX EXPENSE/(BENEFIT)                          $   (191.9)    $     31.2     $   (201.4)
                                                                             ===========    ===========    ===========
-----------------------------------------------------------------------------------------------------------------------
ASSETS
   United States                                                             $  1,442.0     $  1,490.0     $  1,526.1
   Europe                                                                         636.4          659.8          669.9
   Asia/Pacific, Canada, Latin and South America                                  297.6          279.9          258.4
   Corporate assets (cash, cash equivalents and short-term investments)            79.0           78.3           83.1
   Eliminations                                                                  (322.3)        (306.4)        (275.7)
                                                                             -----------    -----------    -----------
TOTAL ASSETS                                                                 $  2,132.7     $  2,201.6     $  2,261.8
                                                                             ===========    ===========    ===========
</TABLE>


                                                 Polaroid Annual Report 1997

<PAGE>


14. CONTINGENCIES
The Company,  together with other parties, is currently designated a Potentially
Responsible Party (PRP) by the United States Environmental Protection Agency and
certain  state  agencies  with respect to the response  costs for  environmental
remediation at several sites. The Company believes that its potential  liability
with respect to any site and with respect to all sites in the aggregate will not
have a materially adverse effect on the financial condition or operating results
of the Company.

Due to a wide range of  estimates  with regard to response  costs at these sites
and  various  other  uncertainties,  the Company  cannot  firmly  establish  its
ultimate liability  concerning these sites. In each case in which the Company is
able to  determine  the likely  exposure,  such amount has been  included in the
Company's  reserve for  environmental  liabilities.  Where a range of comparably
likely  exposures  exists,  the Company has  included in its reserve the minimum
amount of the range. The Company's aggregate reserve for these liabilities as of
December 31, 1997 and 1996 was $2.0 million and $4.0 million,  respectively. The
decrease in reserve  reflects a  reassessment  of the  Company's  liability  and
payments  that the Company  made  during  1997 to settle its  exposure at two of
these  sites.  The Company  currently  estimates  that the  majority of the $2.0
million amount reserved for environmental  liabilities on December 31, 1997 will
be payable  over the next two to three  years.  The  Company's  analysis of data
which underlies its  establishment  of this reserve is undertaken on a quarterly
basis. The reserve for such liability does not provide for associated litigation
costs,  which, if any, are expected to be inconsequential in comparison with the
amount of the reserve.  The Company will  continue to accrue in its reserve such
amounts as management  believes  appropriate  from time to time as circumstances
warrant. This reserve does not take into account potential recoveries from third
parties.

The  Company  reviews  its  recurring  internal  expenditures  on  environmental
matters, as well as capital expenditures related to environmental compliance, on
a monthly  basis,  and reviews its  third-party  expenditures  on  environmental
matters on a quarterly basis. The Company believes that these  expenditures have
not had and will not have a materially adverse effect on the financial condition
or operating results of the Company.

Federal law  provides  that PRPs may be held  jointly and  severally  liable for
response   costs.   Based  on  current   estimates  of  those  costs  and  after
consideration of the potential estimated  liabilities of other PRPs with respect
to  those   sites   and  their   respective   estimated   levels  of   financial
responsibility,  the Company does not believe its  potential  liability  will be
materially enlarged by the fact that the liability is joint and several.

The Company is involved in various other legal proceedings and claims arising in
the ordinary  course of business.  Management  believes that the  disposition of
these  matters  will not  have a  materially  adverse  effect  on the  financial
condition or results of operations of the Company.

15. SUPPLEMENTARY FINANCIAL INFORMATION
The section on pages 49-51 entitled Supplementary  Financial Information has not
been  audited  by the  Company's  independent  auditors.  Those  auditors  have,
however, made a limited review of the 1997 and 1996 quarterly data on page 49 in
accordance  with standards  established  by the American  Institute of Certified
Public  Accountants and that  information is  incorporated  herein by reference.
Since the Company's  independent  auditors did not audit the Company's quarterly
data for either year, they express no opinion on such data.


Polaroid Annual Report 1997

<PAGE>


<TABLE>
<CAPTION>

QUARTERLY FINANCIAL DATA (Unaudited)

Polaroid Corporation and Subsidiary Companies

(In millions, except per share and stock price data)
1997                                                              FIRST       SECOND        THIRD      FOURTH           YEAR
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>          <C>          <C>         <C>          <C>
Net sales                                                     $   457.5    $   564.9    $   516.4   $   607.6    $   2,146.4
Restructuring and other                                              --           --           --       323.5          323.5
Profit/(loss) from operations                                      19.2         64.2         51.0      (293.5)        (159.1)
Net earnings/(loss)                                                15.8         34.6         25.7      (202.8)        (126.7)
Basic earnings/(loss) per common share                               .35          .77          .57       (4.51)         (2.81)
Diluted earnings/(loss) per common share                             .35          .76          .55       (4.51)         (2.81)
Cash dividends per common share                                      .15          .15          .15         .15            .60
Stock prices*
   High                                                            46.38        53.38        60.25       52.50          60.25
   Low                                                             39.75        37.25        49.81       41.94          37.25
</TABLE>

<TABLE>
<CAPTION>
1996                                                              First       Second        Third      Fourth           Year
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>          <C>          <C>         <C>          <C>
Net sales                                                     $   461.1    $   581.6    $   569.1   $   663.4    $   2,275.2
Restructuring and other                                           110.0           --           --          --          110.0
Special charges                                                       --           --          --        33.0           33.0
Profit/(loss) from operations                                    (105.5)        56.1         65.3        35.9           51.8
Earnings/(loss) before extraordinary item                         (60.7)        28.5         34.2        13.0           15.0
Extraordinary item                                                   --        (54.5)          --        (1.6)         (56.1)
Net earnings/(loss)                                               (60.7)       (26.0)        34.2        11.4          (41.1)
Basic earnings/(loss) per common share:
   Earnings/(loss) before extraordinary item                      (1.33)         .63          .75         .29            .33
   Extraordinary item                                                --        (1.20)          --        (.04)         (1.23)
                                                              ----------   ----------   ----------  ----------   ------------
   Net earnings/(loss)                                            (1.33)        (.57)         .75         .25           (.90)

Diluted earnings/(loss) per common share:
   Earnings/(loss) before extraordinary item                      (1.33)         .60          .71         .29            .33
   Extraordinary item                                                --        (1.08)          --        (.04)         (1.23)
                                                              ----------   ----------   ----------  ----------   ------------
   Net earnings/(loss)                                             (1.33)        (.48)         .71         .25           (.90)
Cash dividends per common share                                      .15          .15          .15         .15            .60
Stock prices*
   High                                                            48.13        47.13        45.88       45.00          48.13
   Low                                                             41.13        43.00        42.00       39.38          39.38

Stockholders of record as of January 30, 1998.......9,882

<FN>
* Recorded on the New York Stock Exchange Composite.
</FN>
</TABLE>


                                                 Polaroid Annual Report 1997
<PAGE>


<TABLE>
<CAPTION>

TEN YEAR FINANCIAL SUMMARY (Unaudited)

Polaroid Corporation and Subsidiary Companies

Years ended December 31
(Dollars amounts in millions, except per share data)                                  1997             1996             1995
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>              <C>              <C>
NET SALES
   United States                                                              $    1,063.0     $    1,060.3     $    1,019.0
   International                                                                   1,083.4          1,214.9          1,217.9
                                                                              -------------    -------------    -------------
TOTAL NET SALES                                                                    2,146.4          2,275.2          2,236.9
                                                                              -------------    -------------    -------------
   Cost of goods sold                                                              1,229.8          1,283.8          1,298.6
   Marketing, research, engineering and administrative expenses                      752.2            796.6            849.1
   Restructuring and other                                                           323.5            110.0            247.0
   Special Charges                                                                    --               33.0             --
                                                                              -------------    -------------    -------------
TOTAL COSTS                                                                        2,305.5          2,223.4          2,394.7
                                                                              -------------    -------------    -------------
PROFIT/(LOSS) FROM OPERATIONS                                                       (159.1)            51.8           (157.8)
                                                                              -------------    -------------    -------------
   Litigation settlement, net of employee incentives                                    --               --               --
   Other income                                                                       15.0             26.8              8.5
   Interest expense                                                                   47.8             47.4             52.1
                                                                              -------------    -------------    -------------
EARNINGS/(LOSS) BEFORE INCOME TAX EXPENSE/(BENEFIT)                                 (191.9)            31.2           (201.4)
   Federal, state and foreign income tax expense/(benefit)                           (65.2)            16.2            (61.2)
                                                                              -------------    -------------    -------------
EARNINGS/(LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
   EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE                                  $     (126.7)    $       15.0     $     (140.2)
                                                                              =============    =============    =============
NET EARNINGS/(LOSS)                                                           $     (126.7)    $      (41.1)    $     (140.2)
                                                                              =============    =============    =============
   Basic earnings/(loss) per common share before extraordinary item
      and cumulative effect of changes in accounting principles               $      (2.81)    $        .33     $      (3.09)
   Basic earnings/(loss) per common share                                     $      (2.81)    $       (.90)    $      (3.09)
   Diluted earnings/(loss) per common share before extraordinary item
      and cumulative effect of changes in accounting principles               $      (2.81)    $        .33     $      (3.09)
   Diluted earnings/(loss) per common share                                   $      (2.81)    $       (.90)    $      (3.09)
   Cash dividends per common share                                            $        .60     $        .60     $        .60
   Common shares outstanding at end of year (in thousands)                          44,536           44,819           45,533

SELECTED BALANCE SHEET INFORMATION
   Working capital                                                            $      556.6     $      623.3     $      730.3
   Net property, plant and equipment                                                 512.5            666.2            691.0
   Total assets                                                                    2,132.7          2,201.6          2,261.8
   Long-term debt                                                                    496.6            489.9            526.7
   Redeemable preferred stock equity                                                    --               --               --
   Common stockholders' equity                                                       484.4            658.2            717.7

OTHER STATISTICAL DATA
   Additions to property, plant and equipment                                 $      134.3     $      121.8     $      167.9
   Depreciation                                                               $      111.5     $      118.3     $      132.7
   Payroll and benefits                                                       $      606.0     $      641.2     $      709.3
Number of employees, end of year                                                    10,011           10,046           11,662
Return on average common stockholders' equity*                                       (19.7)%           (6.2)%          (17.8)%

<FN>
* 1993 is shown prior to the cumulative effects of FAS 106, 109 and 112
</FN>
</TABLE>


Polaroid Annual Report 1997

<PAGE>


<TABLE>
<CAPTION>

TEN YEAR FINANCIAL SUMMARY (Unaudited) (Continued)

Polaroid Corporation and Subsidiary Companies

Years ended December 31
        1994            1993             1992            1991            1990            1989            1988
----------------------------------------------------------------------------------------------------------------
<S>  <C>             <C>              <C>             <C>             <C>             <C>             <C>
     $    1,160.3    $    1,178.8     $    1,145.7    $    1,113.6    $    1,058.3    $    1,091.8    $    1,048.3
          1,152.2         1,066.1          1,006.6           957.0           913.4           812.9           814.6
     -------------   -------------    -------------   -------------   -------------   -------------   -------------
          2,312.5         2,244.9          2,152.3         2,070.6         1,971.7         1,904.7         1,862.9
     -------------   -------------    -------------   -------------   -------------   -------------   -------------
          1,324.2         1,296.5          1,178.0         1,082.5         1,011.8           966.0         1,003.1
            788.0           763.0            760.5           741.5           675.6           634.5           686.0
               --            44.0               --              --              --            40.5           151.9
               --              --               --              --              --              --              --
     -------------   -------------    -------------   -------------   -------------   -------------   -------------
          2,112.2         2,103.5          1,938.5         1,824.0         1,687.4         1,641.0         1,841.0
     -------------   -------------    -------------   -------------   -------------   -------------   -------------
            200.3           141.4            213.8           246.6           284.3           263.7            21.9
     -------------   -------------    -------------   -------------   -------------   -------------   -------------
               --              --               --           871.6              --              --              --
              7.0             8.2              7.8            23.4            15.0            35.1            28.0
             46.6            47.9             58.5            58.4            81.3            86.2            29.0
     -------------   -------------    -------------   -------------   -------------   -------------   -------------
            160.7           101.7            163.1         1,083.2           218.0           212.6            20.9
             43.5            33.8             64.1           399.5            67.0            67.6            43.5
     -------------   -------------    -------------   -------------   -------------   -------------   -------------
     $      117.2    $       67.9     $       99.0    $      683.7    $      151.0    $      145.0    $      (22.6)
     =============   =============    =============   =============   =============   =============   =============
     $      117.2    $      (51.3)    $       99.0    $      683.7    $      151.0    $      145.0    $      (22.6)
     =============   =============    =============   =============   =============   =============   =============

     $       2.52    $       1.45     $       2.08    $      13.07    $       2.20    $       1.96    $       (.34)
     $       2.52    $      (1.10)    $       2.08    $      13.07    $       2.20    $       1.96    $       (.34)

     $       2.43    $       1.45     $       2.03    $      10.88    $       2.20    $       1.96    $       (.34)
     $       2.43    $      (1.10)    $       2.03    $      10.88    $       2.20    $       1.96    $       (.34)
     $        .60    $        .60     $        .60    $        .60    $        .60    $        .60    $        .60
           45,998          46,806           46,668          48,919          50,070          52,110          71,635

     $      879.7    $      826.7     $      778.5    $      684.7    $      600.7    $      635.2    $      946.4
            747.3           718.2            657.3           549.4           461.0           430.9           433.8
          2,316.7         2,212.3          2,008.1         1,889.3         1,701.3         1,776.7         1,957.2
            566.0           602.3            637.4           471.8           513.8           602.2           402.3
               --              --               --              --           348.6           321.9              --
            864.4           767.3            808.9           772.9           207.7           148.8         1,011.5

     $      146.7    $      165.6     $      201.5    $      175.8    $      120.9    $       94.5    $      127.0
     $      118.2    $      100.3     $       89.1    $       85.5    $       87.2    $       87.4    $       81.9
     $      720.6    $      699.2     $      670.2    $      690.6    $      587.6    $      546.7    $      725.9
           12,104          12,048           12,359          12,003          11,768          11,441          11,613
             14.7%            9.3%            12.7%          148.6%           63.3%           33.5%           (2.2)%
</TABLE>


Polaroid Annual Report 1997

<PAGE>


DIRECTORS

Gary T. DiCamillo 1
Chairman and Chief Executive Officer

Ralph E. Gomory 1,2,3,6
President,
Alfred P. Sloan Foundation

Frank S. Jones 2,4,6
Ford Professor of
Urban Affairs Emeritus,
Massachusetts Institute of Technology

Stephen P. Kaufman 3,6
Chairman, President and
Chief Executive Officer,
Arrow Electronics

John W. Loose 3,4,6
President,
Corning Communications, Corning Inc.

Albin F. Moschner 1,3,4,6
President and Chief Executive Officer,
MilleCom Corporation

Kenneth H. Olsen 5,6,7
Chairman,
Advanced Modular Solutions

Ronald F. Olsen 2
Mechanical Specialist,
Polaroid Corporation

Ralph Z. Sorenson 4,5,6
Professor Emeritus,
University of Colorado

Delbert C. Staley 1,2,4,6
Retired Chairman and
Chief Executive Officer,
Nynex Corporation

Bernee D.L. Strom 3,4,6
President and Chief Executive Officer,
The Strom Group

Alfred M. Zeien 1,4,5,6
Chairman and Chief Executive Officer,
The Gillette Company

1 Member, Executive Committee
  (Gary T. DiCamillo, Chairman)
2 Member, Audit Committee
  (Ralph E. Gomory, Chairman)
3 Member, Finance Committee
  (Albin F. Moschner, Chairman)
4 Member, Human Resources Committee
  (Delbert C. Staley, Chairman)
5 Member, Committee on Directors
  (Alfred M. Zeien, Chairman)
6 Member, Committee of Outside Directors
7 Will not be standing for re-election to
  the Board of Directors at the company's
  1998 annual meeting


Polaroid Annual Report 1997

<PAGE>


OFFICERS

[28 Photographs - Page 53]

Gary T. DiCamillo
Chairman and
Chief Executive Officer

William J. O'Neill, Jr.
Executive Vice President

Serafino Posa
Executive Vice President

Carole J. Uhrich
Executive Vice President

Robert M. Delahunt
Senior Vice President

Thomas M. Lemberg
Senior Vice President,
General Counsel and Secretary

Joseph G. Parham, Jr.
Senior Vice President

Satish C. Agrawal
Group Vice President

James R. Barron
Vice President

F. Richard Cottrell
Vice President and Senior
Engineering and Research Fellow

Hemang Dave
Vice President

Chris A. De Bleser
Vice President

Fawwaz N. Habbal
Vice President and Senior
Engineering and Research Fellow

John Jenkins
Vice President

Paul E. Lambert
Vice President

Michael J. LeBlanc
Vice President

Samuel H. Liggero
Vice President and Program Fellow

Carl L. Lueders
Vice President and Controller

Tadaaki Masuda
Vice President

Robert S. Murray
Vice President

Jeremiah J. Noonan
Vice President

Ralph M. Norwood
Vice President and Treasurer

Norman Perrault
Vice President

Brian Poggi
Vice President

Leonard Polizzotto
Vice President

J. Samuel Ridley
Vice President

Ian Shiers
Vice President

Marian J. Stanley
Vice President

All the photographs of corporate officers on this page were made with Polaroid's
new black and white 600 film.


                                                 Polaroid Annual Report 1997

<PAGE>


STOCKHOLDER INFORMATION


Annual Meeting
The Annual Meeting of Polaroid Corporation stockholders will be held on Tuesday,
May 5, 1998 at 3:00 p.m. at the American Academy of Arts and Sciences,  entrance
at 200 Beacon Street, Somerville, Massachusetts

Executive Office
549 Technology Square
Cambridge, Massachusetts 02139
(781) 386-2000

Investor Relations
575 Technology Square
Cambridge, Massachusetts 02139
(781) 386-6589

Independent Auditors
KPMG Peat Marwick LLP
99 High Street
Boston, Massachusetts 02110

Transfer Agent and Registrar for Common Stock
First National Bank of Boston
C/O Boston EquiServe
Shareholder Services
Mail Stop:  45-02-64
P.O. Box 644
Boston, MA  02102-0644
(781) 575-3170 or 1-800-730-4001

Stock Exchange Listings for Common Stock
New York Stock Exchange
Pacific Stock Exchange

Annual Report on Form 10-K
A copy of Polaroid's  Annual Report on Form 10-K to the  Securities and Exchange
Commission  may be obtained  without  charge by calling the  Investor  Relations
Department of Boston EquiServe, at (781) 575-3170 or 1-800-730-4001.

Dividend Reinvestment Plan
A  Dividend   Reinvestment   Plan  is  available  to  stockholders  of  Polaroid
Corporation.   For  information  or  an  authorization  card  write  to:  Boston
EquiServe,  Polaroid Dividend  Reinvestment Plan, Mail Stop: 45-02-09,  P.O. Box
644,  Boston,  MA  02102-0644.  All  correspondence  should  refer  to  Polaroid
Corporation.

Internet Address
http://www.polaroid.com

Before & After, CP-90, DryJet, Dry Tech, Extreme, Furore,  HighDefinition,  IQA,
KidCare,  LIFT,  Live  for  the  Moment,  OneStep,  PDC,  Polacolor,  PolaPrime,
Polaproof,  PolaPulse,  Polaroid,  Polaroid Make A Copy, Polaroid Make A Memory,
Polaroid Make A Print,  Polaroid PhotoMAX,  Polaroid QuickBadge,  Polaview,  Pop
Shots, ProPalette, See What Develops, SpiceCam, Studio Express, Studio Polaroid,
XOOR and design are trademarks of Polaroid Corporation.

All other product names may be the property of their respective owners.

The text pages of this  Annual  Report  are  printed on paper made from not less
than 50-percent  recovered  materials,  minimum 20-percent  post-consumer  waste
content.  Recycling  efforts of Polaroid  employees  in Waltham  and  Cambridge,
Massachusetts  produced a portion of the post-consumer  material.  The cover was
printed on recycled paper containing 10-percent post-consumer waste.



Polaroid Corporation
Technology Square
Cambridge, Massachusetts
02139



POLAROID

<PAGE>


APPENDIX TO FORM 10-K FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED AND
EDGAR-FILED TEXTS:

 (1) Boldface typeface is displayed with capital letters, italic typeface is
     displayed in normal type.

 (2) Because the printed page breaks are not reflected, certain tabular and
     columnar headings and symbols are displayed differently in this filing.

 (3) Bullet points and similar graphic signals are omitted.

 (4) Page numbering has been omitted.

 (5) The registered mark symbol has been replaced by (R).

 (6) The trade mark symbol has been replaced by (TM).