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MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS

GENERAL

Polaroid Corporation and subsidiary companies (collectively, "the Company")
is managed in five primary segments: the Americas Region; the European
Region; the Asia Pacific Region; Global Operations; and Research and
Development. The Americas Region is comprised of all the countries in North
and South America. The European Region includes all the countries of
continental Europe, the United Kingdom, Russia, the Middle-Eastern countries
and the African continent. The Asia Pacific Region includes Japan, Australia
and the Asian continent, excluding Russia. Each of these regions consist of
sales and marketing operations. Global Operations consists of worldwide
activities associated with manufacturing, logistics, procurement, developing
manufacturing processes for new products and inventory management. Research
and Development is comprised of corporate research and engineering activities.

Additionally, the Company has one category called Corporate, which it does not
consider to be a segment. This category includes central marketing, centralized
information systems, general and administrative functions and certain other
corporate functions. Corporate also includes costs related to restructuring
activities and certain other non-operating items.

The Company evaluates the performance of its segments based on profit from
operations with consideration of assets employed. In the regional sales and
marketing segments, profit from operations is based on standard product costs
excluding intercompany margins and therefore reflects contribution to worldwide
Company profits from third party sales. Non-standard manufacturing costs along
with the cost of developing manufacturing processes for new products and
regional warehousing and distribution costs are reported as incurred in the
Global Operations segment. Costs related to research and engineering activities
are reported as incurred in the Research and Development segment.

The Company discusses sales and profit from operations in terms of its core
instant business, other core products and non-core businesses. The core instant
business consists of instant cameras and film. Other core products consist of
digital cameras and other digital products, unique ID products, conventional
35mm cameras and film, videotapes, medical imaging products and sunglasses.
Non-core businesses consist of businesses exited by the Company and include
graphics which was contributed to a joint venture in 1999 and polarizer and
holography which had been exited by the end of the first quarter of 2000.

The Company periodically evaluates its products to determine their relevance to
the Company's long-term strategy. As a result of these evaluations, certain
products may be reclassified among core products, other core products and
non-core businesses.



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The Company has reclassified certain prior year information to conform with the
current year presentation.

WORLDWIDE RESULTS FOR 2000 COMPARED WITH 1999

SALES

Worldwide net sales to customers decreased 6% to $1,856 million in 2000
compared with $1,979 million in 1999. The decrease was due primarily to lower
sales of instant film in all of the Company's regions, lower sales of other
core products consisting primarily of videotapes and conventional 35mm
cameras and film and, to a lesser degree, the unfavorable impact of foreign
exchange and the absence of sales from non-core businesses that the Company
exited. The decreases were offset, in part, by higher sales of digital and
instant cameras. The decrease in sales of instant film was caused by changes
in the product mix from traditional film formats to newer film formats as
higher unit sales were more than offset by the impact of the lower average
selling prices of the newer products. Inventory reductions at retailers that
resulted in lower unit sales of traditional film formats also contributed to
the decrease in sales of instant film. The increase in sales of instant
cameras was the result of higher unit sales offset, in part, by a change in
product mix similar to the change described above.

Worldwide net sales to customers in 2000 included approximately $430 million
related to new instant cameras and film, digital cameras and other commercial
imaging products introduced in the last three years compared with approximately
$270 million in 1999. These new products include, but are not limited to, the
I-Zone Instant Pocket Camera and film, the JoyCam Instant Camera and film, the
PhotoMAX line of digital cameras and the SP-350 retail document photo system.
New instant camera and film products are priced to appeal to a broader range of
customers and, in general, carry lower average selling prices than the
traditional instant camera and film products.

On a worldwide basis, unit shipments to customers of instant cameras increased
approximately 35% to 13.1 million units in 2000 compared with 9.7 million units
in 1999. Worldwide unit shipments to customers of instant film increased
approximately 3% in 2000 compared with 1999. In addition, worldwide shipments to
customers of digital cameras, most of which occurred in the United States,
increased to approximately 1.3 million units in 2000, which is an increase of
approximately three times over 1999.



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In the Americas Region, on a unit basis, shipments to customers of instant
cameras increased approximately 65% while unit shipments to customers of
instant film increased by approximately 5% in 2000 compared with 1999. Sales
in the Americas Region decreased 2% to $1,209 million in 2000 compared with
$1,230 million in 1999. The decrease in sales was due to lower sales of other
core products excluding digital cameras and, to a lesser degree, lower sales
of instant film and the absence of sales from non-core businesses that the
Company exited. The decreases were offset, in part, by higher sales of
digital and instant cameras. The decrease in sales of instant film was
impacted by changes in product mix from traditional film formats to newer
film formats as higher unit sales were more than offset by the impact of the
lower average selling prices of the newer products. In addition, a slowing
economy in the United States contributed to the decrease in instant film as
it resulted in lower retail demand for traditional film formats and retailers
reducing their inventories of these products. The increase in sales of
instant cameras was the result of higher unit sales offset, in part, by a
change in product mix similar to the change described above. The decrease in
sales of other core products related primarily to videotapes, which the
Company is phasing out of its product line in the United States and Canada,
and conventional 35mm cameras and film.

In the European Region, on a unit basis, shipments to customers of instant
cameras increased approximately 41% while unit shipments to customers of instant
film decreased by approximately 2% in 2000 compared with 1999. Sales in the
European Region decreased 17% to $354 million in 2000 compared with $428 million
in 1999. The decrease in sales was due to the unfavorable impact of foreign
exchange and, to a lesser degree, lower sales of instant film and the absence of
sales from non-core businesses that the Company exited. The decreases were
offset, in part, by higher sales of instant cameras. The decrease in sales of
instant film was due primarily to a shift in commercial end-user demand to other
media formats. The increase in sales of instant cameras was impacted by changes
in the product mix from traditional camera formats to newer camera formats as
higher unit sales were offset, in part, by the impact of lower average selling
prices of the newer products.

In the Asia Pacific Region, on a unit basis, shipments to customers of instant
cameras decreased approximately 14% while unit shipments to customers of instant
film increased by approximately 3% in 2000 compared with 1999. Sales in the Asia
Pacific Region decreased 9% to $293 million in 2000 compared with $321 million
in 1999. The decrease was due to lower sales of instant cameras and film and, to
a lesser degree, the absence of sales from non-core businesses that the Company
exited. The decreases were offset, in part, by the favorable impact of foreign
exchange. The decrease in sales of instant cameras and film, which occurred in
Japan and included both traditional and new formats, was the result of a product
transition to the next generation of I-Zone and JoyCam cameras in the middle of
2000 and lower demand for traditional products at retail.



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PROFIT/(LOSS) FROM OPERATIONS

Worldwide profit from operations was essentially unchanged at $109 million in
2000 compared with $108 million in 1999. In 2000, worldwide profit from
operations increased due to lower manufacturing costs, including savings from
restructuring, the absence of a $40 million charge recorded in 1999 that related
to the Company's graphic arts business (refer to the section titled "Worldwide
Results for 1999 Compared with 1998" for information on this charge) and, to a
lesser degree, the impact of higher sales of instant cameras. The increases were
offset by the impact of lower sales of instant film and, to a lesser degree, the
impact of lower sales of other core products, planned increases in spending on
advertising and promotional activities and higher corporate costs related to
centralized information systems and central marketing activities.

Profit from operations in the Americas Region was $325 million in 2000 compared
with $333 million in 1999. The decrease was due to the impact of lower sales of
other core products excluding digital cameras, higher costs related to a planned
increase in spending on advertising supporting new products and, to a lesser
degree, the impact of lower sales of instant film. The decreases were offset, in
part, by the impact of higher sales of instant cameras, the absence of a charge
recorded in 1999 that related to the Company's graphic arts business and the
absence of losses from non-core businesses that the Company exited. The impact
on profit from operations from lower sales of instant film due to changes in
product mix were largely offset by improved margins on these products.

Profit from operations in the European Region was $40 million in 2000 compared
with $81 million in 1999. The decrease was due to the unfavorable impact of
foreign exchange and, to a lesser degree, the impact of lower sales of instant
film and a planned increase in spending on advertising and promotional
activities supporting new products. The decreases were offset, in part, by the
impact of higher sales of instant cameras.

Profit from operations in the Asia Pacific Region was $72 million in 2000
compared with $77 million in 1999. The decrease was due to lower sales of
instant film offset, in part, by the favorable impact of foreign exchange.

Global Operations costs were $96 million in 2000 compared with $164 million in
1999. The decrease was due to continued cost savings and manufacturing
efficiencies, the absence of a charge recorded in 1999 that related to the
Company's graphic arts business and the favorable impact of foreign exchange.

Research and Development costs were $83 million in 2000 compared with $85
million in 1999. In 2000, the Company increased spending on research and
engineering activities related to its new instant and digital imaging products,
but the increase was more than offset by the absence of costs for activities
associated with non-core businesses that the Company exited.



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Corporate costs were $149 million in 2000 compared with $134 million in 1999.
The increase was due to the absence of a $25 million settlement gain recorded in
1999 that related to the Company's pension plan, higher expenses, including
depreciation, for centralized information systems and a planned increase in
spending for central marketing activities primarily in support of the Company's
new products. The increases were offset, in part, by the absence of a $21
million charge recorded in 1999 that related to the Company's graphic arts
business and, to a lesser degree, the impact of restructuring charges, which
related primarily to accrued severance costs, that were reversed in the fourth
quarter of 2000 to reflect the completion of the Company's restructuring program
(refer to the section titled "Restructuring and Other Charges" for information
on the restructuring program).

The net of other income and expense was income of $34 million in 2000 compared
with an expense of $17 million in 1999. In 2000, other income included
approximately $22 million of gains on the sale of real estate and, to a lesser
degree, other gains primarily from the sale of certain investments. In 1999,
other expense included a non-cash charge of $35 million to write-off the
carrying value of the Company's preferred stock investment in Sterling Dry
Imaging Systems, Inc., offset, in part, by approximately $12 million of gains on
the sale of real estate.

Interest expense increased to $85 million in 2000 compared with $77 million for
the same period in 1999. The increase was due to a higher average interest rate
on the amounts of short-term debt outstanding and, to a lesser degree, higher
average amounts of short-term debt outstanding during 2000.

Income tax expense was $20 million or 35% of reported earnings before income
taxes in 2000 compared with income tax expense of $5 million or 35% of reported
earnings before income taxes in 1999.

In 2000, the Company recorded net earnings of $38 million, or $.84 basic
earnings per common share compared with net earnings of $9 million, or $.20
basic earnings per common share in 1999. Diluted earnings per common share was
the same as basic earnings per common share in 2000 and 1999.

WORLDWIDE RESULTS FOR THE FOURTH QUARTER OF 2000 COMPARED WITH THE FOURTH
     QUARTER OF 1999

SALES

Worldwide net sales to customers decreased 22% to $506 million in the fourth
quarter of 2000 compared with $650 million in the fourth quarter of 1999. The
decrease was due to lower sales of instant film in all of the Company's regions
and, to a lesser degree, lower sales of other core products excluding digital
cameras, the unfavorable impact of foreign exchange and lower sales of instant
cameras. The decreases were offset, in part, by higher sales of digital cameras.



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The Company estimates that approximately $70 million of the decrease in sales of
instant film was caused by inventory reductions at retailers that resulted in
lower unit sales of traditional film formats and that an additional $20 million
was due to softer consumer demand for traditional film products. The decrease in
sales of traditional film formats more than offset the increase in sales of
newer film formats. The decrease in sales of instant cameras was the result of
changes in the product mix from traditional camera formats to newer camera
formats as higher unit sales were more than offset by the impact of the lower
average selling prices of the newer products. The decrease in sales of other
core products related primarily to videotapes and conventional 35mm cameras and
film which accounted for approximately $20 million of the decline. The
unfavorable impact of foreign exchange also reduced sales by approximately $20
million.

Worldwide net sales to customers in the fourth quarter of 2000 included
approximately $150 million related to new instant cameras and film, digital
cameras and other commercial imaging products introduced in the last three years
compared with $130 million in the fourth quarter of 1999. These new products
include, but are not limited to, the I-Zone Instant Pocket Camera and film, the
JoyCam Instant Camera and film, the PhotoMAX line of digital cameras and the
SP-350 retail document photo system. New instant camera and film products are
priced to appeal to a broader range of customers and, in general, carry lower
average selling prices than the traditional instant camera and film products.

On a worldwide basis, unit shipments to customers of instant cameras increased
approximately 5% to 4.7 million units in the fourth quarter of 2000 compared
with 4.5 million units in the fourth quarter of 1999. Worldwide unit shipments
to customers of instant film decreased approximately 14% in the fourth quarter
of 2000 compared with the fourth quarter of 1999. In addition, worldwide
shipments to customers of digital cameras, most of which occurred in the United
States, increased to approximately 600,000 units in the fourth quarter of 2000,
which is an increase of approximately 70% over the same period of 1999.



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In the Americas Region, on a unit basis, shipments to customers of instant
cameras increased approximately 18% while unit shipments to customers of
instant film decreased by approximately 10% in the fourth quarter of 2000
compared with the fourth quarter of 1999. Sales in the Americas Region
decreased 15% to $353 million in the fourth quarter of 2000 compared with
$417 million in the fourth quarter of 1999. The decrease in sales was due to
lower sales of instant film, other core products excluding digital cameras
and, to a lesser degree, instant cameras. The decreases were offset, in part,
by higher sales of digital cameras. The decrease in sales of instant film was
the result of lower unit sales of traditional film formats and was caused by
a slowing economy in the United States that resulted in retailers reducing
their inventories and lower demand for these products at retail. The decrease
in sales of instant cameras was the result of changes in the product mix from
traditional camera formats to newer camera formats as higher unit sales were
more than offset by the impact of the lower average selling prices of the
newer products. Lower sales of other core products related primarily to
videotapes, which the Company is phasing out of its product line in the
United States and Canada, and conventional 35mm cameras and film.

In the European Region, on a unit basis, shipments to customers of instant
cameras decreased approximately 15% while unit shipments to customers of instant
film decreased by approximately 22% in the fourth quarter of 2000 compared with
the fourth quarter of 1999. Sales in the European Region decreased 35% to $91
million in the fourth quarter of 2000 compared with $141 million in the fourth
quarter of 1999. The decrease in sales was due to lower sales of instant film,
the unfavorable impact of foreign exchange and, to a lesser degree, lower sales
of instant cameras and other core products. The decrease in instant film sales
reflected lower unit sales of all traditional formats and was caused by changes
in retailer buying patterns and a shift in commercial-user demand to other media
formats.

In the Asia Pacific Region, on a unit basis, shipments to customers of instant
cameras decreased approximately 3% while unit shipments to customers of instant
film decreased by approximately 16% in the fourth quarter of 2000 compared with
the fourth quarter of 1999. Sales in the Asia Pacific Region decreased 33% to
$62 million in the fourth quarter of 2000 compared with $92 million in the
fourth quarter of 1999. The decrease in sales was due to lower sales of instant
film and, to a lesser degree, instant cameras. The decreases in sales of instant
cameras and film, which occurred primarily in Japan and included both
traditional and new formats, were the result of changes in retailer buying
patterns, adjustments in retailer inventory levels and lower demand for
traditional products at retail.



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PROFIT/(LOSS) FROM OPERATIONS

Worldwide profit from operations in the fourth quarter of 2000 was $1 million
compared with profit from operations of $62 million in the fourth quarter of
1999. The decrease was due to the impact of lower sales of instant film and, to
a lesser degree, the impact of lower sales of other core products excluding
digital cameras. The decreases were offset, in part, by lower manufacturing
costs. The Company's gross margin decreased to 36% in the fourth quarter of 2000
from 41% in the fourth quarter of 1999. The decrease was caused primarily by the
mix of products sold in the quarter, principally instant film, and by the impact
of reductions in manufacturing production schedules.

Profit from operations in the Americas Region was $74 million in the fourth
quarter of 2000 compared with $100 million in the fourth quarter of 1999. The
decrease was due to the impact of lower sales of instant film and, to a lesser
degree, other core products excluding digital cameras. The decreases were
offset, in part, by lower marketing overhead costs.

Profit from operations in the European Region was $5 million in the fourth
quarter of 2000 compared with $25 million in the fourth quarter of 1999. The
decrease was due to the unfavorable impact of foreign exchange and the impact of
lower sales of instant film offset, in part, by lower marketing overhead costs.

Profit from operations in the Asia Pacific Region was $9 million in the fourth
quarter of 2000 compared with $20 million in the fourth quarter of 1999. The
decrease was due primarily to the impact of lower sales of instant film.

Global Operations costs were $31 million in the fourth quarter of 2000 compared
with $46 million in the fourth quarter of 1999. The decrease was due to the
favorable impact of foreign exchange on manufacturing costs. In the fourth
quarter of 2000, lower manufacturing costs were offset, in part, by
manufacturing inefficiencies that resulted from reductions in the Company's
production schedules. The changes to production schedules were made to respond
to the economic factors that impacted sales in the fourth quarter of 2000.

Research and Development costs were $22 million in the fourth quarter of 2000
compared with $21 million in the fourth quarter of 1999.

Corporate costs were $34 million in the fourth quarter of 2000 compared with $16
million in the fourth quarter of 1999. The increase was due to the absence of a
$25 million settlement gain recorded in the fourth quarter of 1999 that related
to the Company's pension plan. The increase was offset, in part, by the impact
of restructuring charges, which related primarily to accrued severance costs,
that were reversed in the fourth quarter of 2000 to reflect the completion of
the Company's restructuring program (refer to the section titled "Restructuring
and Other Charges" for information on the restructuring program).


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The net of other income and expense was income of $13 million in the fourth
quarter of 2000 compared with income of $2 million in the fourth quarter of
1999. In the fourth quarter of 2000, other income included approximately $9
million of gains on the sale of real estate and, to a lesser degree, gains on
certain investments.

Interest expense increased to $23 million in the fourth quarter of 2000 compared
with $20 million for the same period in 1999. The increase was due to higher
average amounts of short-term debt outstanding during the fourth quarter of
2000.

Income tax benefit was $3 million or 36% of the reported loss before income
taxes in the fourth quarter of 2000 compared with income tax expense of $15
million or 35% of reported earnings before income taxes in the fourth quarter of
1999.

In the fourth quarter of 2000, the Company recorded a net loss of $6 million, or
$.13 basic loss per common share compared with net earnings of $29 million, or
$.64 basic earnings per common share in the fourth quarter of 1999. Diluted
earnings/loss per common share was the same as basic earnings/loss per common
share in the fourth quarters of 2000 and 1999.

WORLDWIDE RESULTS FOR 1999 COMPARED WITH 1998

SALES

Worldwide net sales to customers increased 7% to $1,979 million in 1999 compared
with $1,846 million in 1998. The increase was due to sales of new products in
all of the Company's regions. The increase was offset, in part, by lower sales
of other core products.

In 1999, on a unit basis, worldwide shipments to customers of instant cameras
increased 106% to 9.7 million from 4.7 million in 1998 while shipments to
customers of instant film increased by approximately 12% compared with 1998. The
increase in shipments of instant cameras was due primarily to new products and,
to a lesser degree, instant cameras other than new products. The increase in
shipments of instant film was due to new products.

Sales in the Americas Region increased 9% to $1,230 million in 1999 compared
with $1,131 million in 1998. The increase was due to sales of new products
primarily in the United States offset, in part, by lower sales of other core
products. Sales in the Region during 1998 declined following a decision, made in
conjunction with the Company's major dealers, to reduce inventories at the
dealer level in the United States.


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In the Americas Region, on a unit basis, shipments to customers of instant
cameras increased 79% while shipments to customers of instant film increased by
approximately 4% in 1999 compared with 1998. The increase in shipments of
instant cameras and film was due to sales of new products. At the retail level
in the United States, based on an independent survey of retail sales of the
Company's products at food, drug and mass retailers by ACNielsen, dollar sales
of instant cameras increased 30% while dollar sales of integral film increased
by approximately 4% in 1999 compared with 1998.

Sales in the European Region decreased 5% to $428 million in 1999 compared with
$449 million in 1998. The decrease was due to lower sales of other core
products, the sales mix of instant film other than new products and the
unfavorable impact of foreign exchange. The decrease was offset, in part, by
sales of new products and, to a lesser degree, returns of instant film other
than new products from dealers in Russia that occurred in 1998 and did not recur
in 1999. The loss associated with those returns was offset by reducing a reserve
established in 1998 for that purpose.

In the European Region, on a unit basis, shipments to customers of instant
cameras increased 97% while shipments to customers of instant film increased by
approximately 4% in 1999 compared with 1998. The increase in shipments of
instant cameras and film reflected sales of new products.

Sales in the Asia Pacific Region increased 21% to $321 million in 1999 compared
with $266 million in 1998. The increase was due to sales of new products,
principally in Japan, and to a lesser degree, the favorable impact of foreign
exchange. The increase was offset, in part, by a decrease in sales of other core
products.

In the Asia Pacific Region, on a unit basis, shipments to customers of instant
cameras increased 180% while shipments to customers of instant film increased by
approximately 5% in 1999 compared with 1998. The increase in shipments of
instant cameras and film was due to sales of new products.


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PROFIT/(LOSS) FROM OPERATIONS

Worldwide profit from operations in 1999 was $108 million compared with a loss
from operations of $49 million in 1998. Profit from operations in 1999 included
a charge of $40 million related to the Company's graphics art business. Profit
from operations in 1999 also included a settlement gain of $25 million related
to the Company's pension plan which essentially offset approximately $24 million
of charges and losses recorded in the fourth quarter of 1999 primarily
associated with certain non-core businesses that were being rationalized or
exited during 1999 and certain core products being phased out. Profit from
operations in 1998 included a restructuring charge of $50 million and asset
write-offs unrelated to restructuring of $53 million. Excluding the charges,
losses, write-offs and settlement gain described above, profit from operations
increased to $147 million in 1999 compared with $54 million in 1998. The
increase was due to lower manufacturing costs, savings from restructuring and
the impact of higher sales of new products. These increases were offset, in
part, by the impact of lower sales of other core products and the unfavorable
impact of foreign exchange.

In the third quarter of 1999, the Company agreed to contribute the net assets
of its graphics arts business to a joint venture in exchange for a redeemable
preferred equity interest and a less than 20% common equity interest in the
joint venture. In connection with this transaction, the Company recorded
charges of $16 million to increase reserves primarily for trade accounts
receivable and inventories, $4 million for liabilities related to the
disposition of the business and $3 million for severance costs related to
approximately 30 employees who were terminated as a result of the agreement.
The majority of these liabilities were paid by the end of 2000. In addition,
the Company recorded an impairment loss of $17 million based on its
evaluation of the estimated fair value of its investment in the new joint
venture. The transaction was completed during the fourth quarter of 1999.
Under the terms of the agreement, the Company is not required to provide any
future funding to the joint venture. Of the total $40 million charge related
to the graphics arts business, approximately $25 million was recorded in cost
of goods sold and $15 million was recorded in marketing and administrative
expenses. On a segment basis, the Company allocated $5 million to the
Americas Region, $3 million to the European Region, $11 million to Global
Operations and $21 million to the non-segment Corporate category.

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In connection with the Company's strategy to focus on its core imaging business,
the Company began a process in 1998 to rationalize or exit certain non-core
businesses and less profitable core products in order to maximize shareholder
value. The $24 million of charges and losses incurred in the fourth quarter of
1999 was a continuation of that strategy and included $17 million related to
non-core businesses and $7 million related to less profitable core products. Of
the $24 million, $14 million primarily related to inventory write-offs,
approximately half of which reflected lower of cost or market adjustments and
half of which related to obsolete products. The amount of the inventory
write-offs was based on individual assessments of the recoverability of the net
carrying value of the assets and reflects adjustments of the net carrying values
to fair market values. The $24 million also included $10 million of fourth
quarter operating losses related primarily to non-core businesses that were
being rationalized or exited. The Company recorded approximately $17 million of
these charges in cost of goods sold and $7 million in marketing and
administrative expense. On a segment basis, the Company allocated $12 million to
the Americas Region, $1 million to the European Region and $11 million to Global
Operations.

The settlement gain of approximately $25 million was a non-cash item recorded in
the fourth quarter of 1999 related to the large number of employees that left
the Company, primarily under the Company's involuntary severance program, and
elected to receive lump sum distributions under the Company's pension plan in
1999. The lump sum distributions eliminated the obligation of the pension plan
to make future payments to those employees. As a result, the Company was
required to recognize certain deferred gains that had accumulated primarily from
favorable investment experience on pension assets. The Company recorded
approximately half of this gain in cost of goods sold and half in marketing and
administrative expense. The gain was allocated to the non-segment Corporate
category.

In 1998, the Company recorded a restructuring charge of $50 million that related
to an extension of the Company's 1997 restructuring program. Refer to the
section titled "Restructuring and Other Charges" for information on the
restructuring program.


<PAGE>


The asset write-offs in 1998 consisted of $30 million related to the Company's
operations in Russia and an additional $23 million associated with a number of
non-core businesses and less profitable products. The write-offs related to the
Company's total investment in its Russian operations included $10 million in
reserves for trade accounts receivable recorded in the second quarter of 1998
and an additional $10 million in reserves for trade accounts receivable recorded
in the fourth quarter of 1998. The remainder of the $30 million consisted of $4
million of prepaid expenses, $3 million of abandoned fixed assets, $2 million of
inventory and $1 million of liquidation costs. These charges reflected the
collapse of the Russian economy in 1998 and, due to the lack of liquidity in
Russia, the low likelihood of realizing value for those assets. The likelihood
of realizing value for the trade accounts receivable was further reduced because
the Russian legal system provided limited potential to enforce collection of
those accounts. The Company also reassessed its business model in Russia and
determined that the continuation of the subsidiary operating structure had
become untenable because of the precipitous decline in the level of business and
the complicated governmental regulatory environment. The Company subsequently
closed its Russian subsidiary and relocated its sales operations to subsidiaries
outside of Russia. Of the total $30 million, the Company recorded $28 million of
these write-offs in marketing and administrative expenses and $2 million in cost
of goods sold. On a segment basis, the entire $30 million was allocated to the
European Region.

The remaining write-offs of $23 million recorded in the fourth quarter of 1998
related to a number of non-core businesses and less profitable core products
that resulted from the Company's strategy to refocus on its core imaging
business in order to maximize shareholder value. In connection with this
strategy, the Company began a process of rationalizing or exiting certain
non-core businesses. These charges primarily represented an adjustment of
recorded asset values to fair market value and were based on individual
assessments of the recoverability of the assets net carrying value. The $23
million consisted of $12 million of inventory reserves related to a number of
products that were being phased out to reflect lower of cost or market exposure
based on lower selling prices, $5 million of tooling and equipment write-offs
associated with the phased out products, $4 million of reserves for trade
accounts receivable and $2 million of penalty costs associated with the
cancellation of certain contracts and distributor agreements. Of the total $23
million, the Company recorded $19 million in cost of goods sold and $4 million
in marketing and administrative expenses. On a segment basis, approximately $11
million was allocated to the Americas Region and $12 million to Global
Operations.

Profit from operations in the Americas Region was $333 million in 1999 compared
with $318 million in 1998. The increase was due to the impact of higher sales of
new products and, to a lesser degree, the impact of sales mix and a change in
the Company's promotional strategy for instant film other than new products.


<PAGE>


Profit from operations in the European Region was $81 million in 1999 compared
with $36 million in 1998. The change reflected $30 million of asset write-offs
recorded in 1998 that did not recur in 1999. The asset write-offs related to the
Company's operations in Russia as described above. Profit from operations also
increased due to lower marketing and administrative expenses, primarily
reflecting the consolidation of the operations in the Region, and, to a lesser
degree, the impact of higher sales of new products. These increases were offset,
in part, by the impact of sales mix for instant film other than new products,
the impact of lower sales of other core products and the unfavorable impact of
foreign exchange.

Profit from operations in the Asia Pacific Region was $77 million in 1999
compared with $59 million in 1998. The increase was due to the impact of higher
sales of new products and, to a lesser degree, the favorable impact of foreign
exchange. These increases were offset, in part, by higher spending on
advertising and promotional activities and the impact of lower sales of other
core products.

Global Operations costs were $164 million in 1999 compared with $187 million in
1998. The decrease was primarily the result of lower manufacturing costs
(including savings from restructuring) in 1999. Global Operations costs in 1998
were unfavorably impacted by reduced production volumes and start-up costs for
new products.

Research and Development costs were $85 million in 1999 compared with $120
million in 1998. The decrease was the result of savings from restructuring and
the continuing focus of the Company's research and development activities on its
core imaging business.

Corporate costs were $134 million in 1999 compared with $155 million in 1998.
Corporate costs in 1999 included a settlement gain of approximately $25 million
and asset write-offs related to the Company's graphics arts business of
approximately $21 million. Corporate costs in 1998 included a restructuring
charge of $50 million. Excluding the settlement gain, asset write-offs and the
restructuring charge described above, Corporate costs were $123 million in 1999
and $105 million in 1998. This increase was due to higher expenses, including
depreciation, for centralized information systems and increased central
marketing activities.


<PAGE>


The net of other income and expense was an expense of $17 million in 1999
compared with income of $68 million in 1998. In 1999, the Company recorded a
non-cash charge of $35 million to write-off the carrying value of its preferred
stock investment in Sterling Dry Imaging Systems, Inc. ("SDIS"), a subsidiary of
SDI Holding Corporation ("SDHI"). The Company had obtained investment positions
in SDHI and SDIS in exchange for the Company's Helios medical diagnostic imaging
equipment line. In 1999, a third party acquired SDHI, excluding SDIS, which
under the acquisition agreement was spun-off to a liquidating trust. Based on
available information, the Company determined that SDIS was not viable as a
stand-alone business and the proceeds of the liquidating trust were not
sufficient to redeem the Company's investment. In addition, the decrease in
other income from 1998 to 1999 was due to lower gains on the sale of real estate
which totaled $12 million in 1999 and $68 million in 1998. The decreases were
offset, in part, by an increase in royalty income associated with certain
technology licensing agreements.

Interest expense increased to $77 million in 1999 compared with $58 million for
the same period in 1998. The increase was due to higher interest rates on
outstanding debt and, to a lesser degree, higher levels of debt outstanding
during 1999.

Income tax expense in 1999 was $5 million, or 35% of a reported profit before
income taxes of $13 million. Income tax expense of $12 million was recorded in
1998 on a reported loss before income taxes of $39 million. In 1998, although a
tax benefit on the net operating loss generated in the United States was
reflected at the U.S. statutory rate of 35%, the tax benefit was more than
offset by taxable income generated in certain foreign jurisdictions, and taxable
losses and special charges in other countries for which no or little tax benefit
was provided, such as the case of losses and asset write-downs in Russia.

The Company recorded net income of $9 million, or $.20 basic earnings per common
share in 1999, compared with a net loss of $51 million, or $1.15 basic loss per
common share in 1998. Diluted earnings/loss per common share was the same as
basic earnings/loss per common share in 1999 and 1998.


<PAGE>


RESTRUCTURING AND OTHER CHARGES

In 1997, the Company recorded restructuring and other charges of $340 million
which consisted of severance costs, impairment losses on certain long-lived
assets, other asset write-downs and exit costs associated with certain
businesses. Of this amount, approximately $17 million represented inventory
write-downs which were included in cost of goods sold. In 1998, the Company
recorded a $50 million restructuring charge related to an expansion of the
severance component of the 1997 program. These charges (collectively, the "1997
Program") were allocated to the non-segment Corporate category and were
undertaken as the result of management's assessment of the Company's
infrastructure, to strengthen its competitive cost position, to streamline
operations and to improve profitability by consolidating and selling
manufacturing facilities and reducing corporate overhead. The strategic
objective of the 1997 Program was to reduce the cost of developing,
manufacturing, selling and distributing the Company's products; to change and
improve business processes; to deliver new products more efficiently; to improve
financial performance; and to fundamentally alter how the Company conducts
business globally.

Approximately $150 million of the charges recorded in 1997 for the 1997 Program
related to an involuntary severance program under which approximately 1,800
employees (consisting of sales and marketing employees in the regional segments:
Americas - 16%; Europe - 24%; Asia Pacific - 9%; primarily manufacturing
employees in Global Operations - 36%; research and engineering employees in
Research and Development - 5%; and administrative employees in the non-segment
Corporate category - 10%) were expected to leave the Company. The 1998 extension
to this involuntary severance program added approximately 1,000 additional
employees (consisting of sales and marketing employees in the regional segments:
Americas - 7%; Europe - 14%; Asia Pacific - 3%; primarily manufacturing
employees in Global Operations - 65%; research and engineering employees in
Research and Development - 10%; and administrative employees in the non-segment
Corporate category - 1%). Of the total amount provided for severance under the
1997 Program, approximately $10 million related to pension curtailment costs and
$5 million related to pension enhancement costs incurred primarily for certain
non-U.S. employees that were terminated under this program.

In the Americas, European and Asia Pacific segments, the major impact of the
1997 Program consisted of reducing the number of employees associated with sales
and marketing activities. The impact of the 1997 Program in the European segment
also consisted of consolidating back office activities in a centralized
location.

The impact of the 1997 Program in Global Operations consisted of reducing the
number of direct and indirect employees located at manufacturing facilities in
both the United States and Europe that were associated with the manufacture of
instant film and, to a lesser degree, instant hardware, along with employees
required to procure goods and services and distribute finished products. The
1997 Program in Global Operations also included employees at the Company's
chemical manufacturing facility in Freetown, Massachusetts that the Company sold
in February 1998.


<PAGE>


The impact of the 1997 Program in the Research and Development segment
consisted of reducing the number of employees associated with research and
engineering activities in the United States and to focus the Company's
research and development activities on its core imaging business.

The 1997 Program affected the non-segment Corporate category by reducing the
number of employees in the United States that support functions such as
central marketing, finance, legal, information management, administration,
human resources and facilities support.

In addition to severance, the asset impairment portion of the 1997 Program
amounted to approximately $163 million. Of the $163 million, approximately
$106 million 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 New Bedford coating facility was designed and
specially built to manufacture large volumes of high quality media for the
Company's graphics and medical diagnostic imaging businesses. However, growth
of these businesses did not materialize as planned and, as a result, the
Company continues to pursue several strategic options for the future use of
this facility, including outright sale. Approximately $22 million of the
asset impairment related to the write-off of battery assembly equipment that
was not required to support anticipated production requirements. This
equipment was initially constructed in anticipation of significant growth in
instant film sales in the emerging markets of Russia and Asia. During 1997,
it became clear that these volume assumptions were no longer valid based on
weakness in demand and an unfavorable outlook in those emerging markets. In
1997, the Company abandoned this special-purpose equipment in place because
it believed that it had no future use or salvage value and sale to a third
party was not likely.

The $163 million also included a loss of approximately $22 million on the
sale of the Company's underutilized chemical manufacturing facility in
Freetown, Massachusetts. The Freetown facility was used to manufacture
certain chemical components of the Company's instant film. Because of
competitive changes in the specialty chemical industry and the fact that the
Company's expectation of future sales of instant film in certain emerging
markets did not materialize, the Company sought the outright sale of the
Freetown facility. The write-down of the Freetown facility was based on the
terms of a purchase and sale agreement and the terms of a long-term supply
agreement under which the Company agreed to purchase certain chemicals used
to manufacture its instant film. The Company entered the purchase and sale
agreement and the long-term supply agreement in the fourth quarter of 1997.
The sale of the Freetown facility was completed in the first quarter of 1998.
Additionally, the asset impairment portion of the 1997 Program included
approximately $13 million related to other fixed assets which were not
individually material. The write-down of these fixed assets occurred because
the assets were no longer required in its U.S. manufacturing operations due
primarily to the consolidation of certain manufacturing operations. The
assets related to the asset impairment portion of the 1997 Program were
primarily located in Global Operations. The Company also recorded
approximately $4 million for exit costs and, to a lesser degree, severance
liabilities related to the sale of the Freetown facility.

<PAGE>

In addition to the severance and asset write-downs, the balance of the 1997
Program consisted of approximately $17 million of inventory write-downs and
approximately $6 million of exit costs. The inventory write-downs consisted
of reserves for chemical inventories made obsolete by the sale of the
Freetown facility, lower of cost or market provisions on inventories of a
first generation digital camera and, to lesser degree, inventory reserves
related to the Company's decision to exit a portion of its holography
business. The exit costs related primarily to lease and contract terminations
and other costs directly related to restructuring.

Employee terminations under the 1997 Program were completed during the fourth
quarter of 2000. As a result, the Company reversed approximately $6 million
of restructuring charges in the fourth quarter of 2000 that related primarily
to accrued severance costs. The remaining accrual relates to a series of cash
payments, totaling approximately $5 million, that the Company will make in
2001 to certain employees who terminated in 2000. Approximately $177 million
of cash payments related to severance were made from the inception of the
1997 Program through December 31, 2000 to the approximately 2,700 employees
who were terminated under the 1997 Program. The Company expects to realize a
benefit of approximately $140 million on an annualized basis from the 1997
Program.

In February 2001, the Company announced a worldwide restructuring program
designed to reduce overhead costs, realign the Company's resources and allow
the Company to accelerate the implementation of its digital strategy.
Accordingly, the Company will record pre-tax restructuring and other charges
of approximately $80 million in the first quarter of 2001. The charges, which
will be allocated to the non-segment Corporate category, will include
approximately $50 million of severance costs related to an involuntary
severance program and approximately $30 million of asset write-offs. The
Company expects to generate savings of approximately $60 million on an
annualized basis from this program. The severance components of this program
will result in the reduction of approximately 950 jobs over the next twelve
months. Nearly half of the employees in this program will be from the Global
Operations segment and the remainder from the Company's other segments and
the non-segment Corporate category.

FINANCIAL LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents were $97 million at December 31, 2000
and $92 million at December 31, 1999. Net cash used by operating activities
in 2000 was $1 million. Net earnings, adjusted for non-cash items (i.e.,
depreciation, gains on the sale of real estate and other non-cash items),
provided $153 million to cash flow from operating activities and a decrease
in accounts receivable provided an additional $42 million. The increases in
cash flow were offset by a decrease in current liabilities, excluding
short-term debt, of $127 million and an increase in inventories of $101
million. Lower than anticipated shipments in the second half of 2000 were the
primary reason for the decrease in accounts receivable and the increase in
inventories. The decrease in current liabilities, which related primarily to
accrued compensation and benefits, was primarily the result of severance
payments made under the 1997 Program.

Net cash used by investing activities was $68 million in 2000 and consisted
primarily of $129 million of additions to property, plant and equipment
offset, in part, by $57 million of proceeds related primarily to the sale of
real estate and the Company's technical polarizer and display film business.
Net cash provided by financing activities was $81 million in 2000 and related
to an increase in short-term debt of $108 million offset by $27 million of
dividend payments to stockholders.

<PAGE>

Working capital, defined as current assets less current liabilities, was $325
million at December 31, 2000 compared with $358 million at December 31, 1999.
The decrease was due primarily to an increase in the level of short-term debt
and a decrease in accounts receivable offset, in part, by an increase in
inventories. In 2001, the Company expects to reduce inventories and accounts
receivable and the cash generated from these reductions, along with other
sources of cash, will be used to reduce the amount of debt outstanding. The
Company plans to reduce its inventories by selling the excess that built up
in the second half of 2000 and implementing production schedules consistent
with its conservative economic outlook for the first half of 2001. The
Company expects that receivable balances will decrease as the Company
implements procedures to reduce the number of days sales outstanding.

In 2000, capital spending totaled $129 million compared with $171 million for
the same period of 1999. The decrease was the result of lower spending on the
Company's enterprise-wide software system, new products (consistent with the
Company's launch schedule) and capital improvements related to the
consolidation of the Company's real estate holdings. The decreases were
offset, in part, by higher spending on the Company's Internet initiatives.
The Company expects total capital spending to be $115 million or less in 2001.

The Company has financed its operations with the following sources of debt:
the Amended Credit Agreement (defined below); the U.K. Credit Agreement
(defined below); short-term lines of credit; and the Company's outstanding 6
3/4% Notes due January 15, 2002 (the "2002 Notes"), 7 1/4% Notes due January
15, 2007 (the "2007 Notes") and 11 1/2% Notes due February 15, 2006 (the
"2006 Notes").

At December 31, 2000, the Company had $364 million outstanding in short-term
debt which was comprised of $320 million under the Amended Credit Agreement,
$31 million under the U.K. Credit Agreement and $13 million under uncommitted
short-term lines of credit. At December 31, 1999, the Company had $259
million outstanding in short-term debt which was comprised of $235 million
under the Amended Credit Agreement, $8 million under the U.K. Credit
Agreement and $16 million under uncommitted short-term lines of credit.

<PAGE>

The Company's domestic credit agreement (as amended, the "Amended Credit
Agreement") provided for a maximum commitment of $350 million on a revolving
basis and is scheduled to mature on December 31, 2001. In connection with the
Amended Credit Agreement, the Company entered into a security agreement and
certain related documents that granted the lenders a first security interest
in certain of the Company's domestic inventories and trade accounts
receivable. Funds borrowed under the Amended Credit Agreement have borne
interest, at the Company's option, at either the prime rate of J.P. Morgan
Chase & Co. ("Prime") plus a margin or LIBOR on euro-dollar loans plus a
margin. The margins ranged from 0% to 1.275% for Prime-based loans and from
0.190% to 2.275% for euro-dollar loans based on the Company's credit rating.
In addition, the Company has paid the lenders a facility fee ranging from
0.085% to 0.725% depending on the Company's credit rating, a commitment fee
on unused commitments ranging from 0% to 0.025% on an annual basis depending
on the Company's credit rating and a fee to the administrative agent. The
weighted average interest rate on amounts outstanding under the Amended
Credit Agreement was 8.7% at December 31, 2000 and 7.6% at December 31, 1999.

The credit facility of the Company's wholly-owned subsidiary, Polaroid (U.K.)
Limited ("Polaroid U.K."), for which the Company acts as guarantor, provided
for a maximum commitment of 72.5 million euros or approximately $67 million
at December 31, 2000 and $73 million at December 31, 1999 (the "U.K. Credit
Agreement") and is scheduled to mature on December 31, 2001. Several of the
Company's foreign subsidiaries granted the lenders under this facility a
security interest in certain foreign inventories and receivables. Borrowings
under the U.K. Credit Agreement have borne a margin of approximately 25 basis
points higher than that paid under the Amended Credit Agreement. The
weighted-average interest rate of amounts outstanding under the U.K. Credit
Agreement was 7.6% at December 31, 2000 and 7.5% at December 31, 1999.

<PAGE>

The Amended Credit Agreement and the U.K. Credit Agreement require the
Company to maintain financial ratios related to the maximum level of debt to
earnings before interest, taxes, depreciation, and amortization (as defined
in the Amended Credit Agreement) of 3.30 to 1 (the "Debt/EBITDA Ratio") and
minimum interest coverage (as defined in the Amended Credit Agreement) of
3.00 to 1 (the "Interest Coverage Ratio"). In addition to financial ratios,
the Amended Credit Agreement and the U.K. Credit Agreement contain certain
covenants that restrict, among other things, the Company's ability to do the
following: make certain capital expenditures; make certain payments; incur
debt in addition to the 2006 Notes; incur certain liens; make certain
investments; enter into certain sale leaseback transactions; merge,
consolidate, sell or transfer all or substantially all of the Company's
assets subject to certain financial conditions; enter into certain
transactions with affiliates; and pay dividends and repurchase stock. The
Company complied with the covenants and requirements of the Amended Credit
Agreement and the U.K. Credit Agreement in 2000.

The Company entered into a waiver to the Amended Credit Agreement effective
as of February 16, 2001, which waives defaults and potential defaults of the
Interest Coverage Ratio and Debt/EBITDA Ratio covenants until May 15, 2001.
The waiver provides for the availability of borrowings for actual cash needs
arising in the ordinary course of business up to the maximum commitment of
$350 million and grants the lenders a securitiy interest in substantially all
of the Company's personal property including equipment, patents, trademarks
and other intellectual property and the capital stock of its subsidiaries and
a mortgage on certain real estate, in each case, as permitted by the
indentures under which certain of the Company's debt was issued. Because the
U.K. Credit Agreement incorporates the covenants contained in the Amended
Credit Agreement, a waiver of the U.K. Credit Agreement was entered into
effective as of February 16, 2001, that waives defaults and potential
defaults for the same period as the waiver to the Amended Credit Agreement.
The waiver to the U.K. Credit Agreement provides for the availability of
borrowings to a maximum commitment of 57 million euros or approximately $52
million at March 23, 2001.

During the waiver period, funds borrowed under the Amended Credit Agreement
will bear interest, at the Company's option, at either Prime plus 1.525% or
LIBOR plus 2.525% regardless of the Company's credit rating. In addition, the
Company will pay the lenders a facility fee of 0.725%, a commitment fee on
unused commitments of 0.025% and a fee to the administrative agent. Funds
borrowed under the U.K. Credit Agreement will bear interest at LIBOR plus
2.5%. At March 23, 2001, the weighted average interest rate on amounts
outstanding under the Amended Credit Agreement was approximately 7.5% and the
weighted average interest rate on amounts outstanding under the U.K. Credit
Agreement was approximately 6.5%.

<PAGE>

If the Company is unsuccessful in its negotiations with its existing lenders,
the lenders will have the right to demand repayment of their loans when the
waivers expire, because the Company believes it will then be in default of
the Amended Credit Agreement and the U.K. Credit Agreement. In addition, if
the lenders under the Amended Credit Agreement and the U.K. Credit Agreement
were to demand repayment of their loans, the Company could also be required
to repay the amounts of debt outstanding that were issued under the Company's
indentures because of the cross-default provisions in the indentures. There
can be no assurance that the Company's existing lenders will agree to extend
the waivers or to amend the Amended Credit Agreement and the U.K. Credit
Agreement in order to eliminate the potential covenant violations that are
expected to exist when the waivers expire or that the Company will be able to
raise the required funds to refinance the Amended Credit Agreement and the
U.K. Credit Agreement at maturity or earlier if the waivers expire without an
extension or an amendment in place and the lenders demand repayment of their
loans under these agreements.

The Company is considering all of its options with respect to amending and
refinancing the Amended Credit Agreement, the U.K. Credit Agreement and the
2002 Notes due January 15 and has retained a financial advisor to assist it
with these matters. The Company is currently involved in negotiations with
its existing lenders with respect to amendments to the Amended Credit
Agreement and the U.K. Credit Agreement and with several other financial
institutions with respect to the possible refinancing of these agreements and
the 2002 Notes. Based on these negotiations, the Company believes that it
will be able to either extend the waivers or obtain amendments of the Amended
Credit Agreement and the U.K. Credit Agreement through December 31, 2001
prior to the expiration of the waivers. The Company expects to complete the
refinancing of the Amended Credit Agreement, the U.K. Credit Agreement and,
if necessary the 2002 Notes, in the second half of 2001. The Company expects
that the implementation of its refinancing strategy and its plans to reduce
costs and generate cash flow (as discussed in "Outlook" below) will provide
the liquidity necessary to pay down the 2002 Notes.

Subject to the negotiation of amendments to and refinancing of the Amended
Credit Agreement and the U.K. Credit Agreement, the Company believes that the
availability of funds under the Amended Credit Agreement and the U.K. Credit
Agreement and any related refinancing, including the 2002 Notes, combined
with funds generated from operations and proceeds from the sale of assets,
will be adequate to meet working capital needs and fund spending for growth
and maintenance of existing operations for at least the next twelve months.
See "Factors That May Affect Future Results."

In addition to its short-term debt, the Company had $574 million outstanding
in long-term debt at December 31, 2000. The amounts outstanding were
comprised of $150 million of 2002 Notes, $149 million of 2007 Notes and $275
million of 2006 Notes.

The indenture, pursuant to which the 2006 Notes were issued, contains certain
covenants that restrict, among other things, the Company's ability to do the
following: make certain restricted payments, including dividends on and the
purchase of the Company's common stock; incur additional debt and issue
preferred stock; incur certain liens; enter into sale leaseback transactions;
enter into certain transactions with affiliates; and enter into certain
mergers and consolidations or sell all or substantially all of the properties
or assets of the Company.

<PAGE>

In the fourth quarter of 2000, the Company's credit ratings and long-term
debt ratings were downgraded to BB- and B+, respectively, by both Standard &
Poor's ("S&P") and Fitch IBCA, Duff & Phelps ("Fitch"). S&P and Fitch have
both reported that they have a negative outlook for the Company's credit
ratings. In March 2001, Moody's downgraded its credit rating for the Company
and its long-term debt to B3 and B2, respectively. Moody's also reported that
it has a negative outlook for the Company's credit ratings.

On February 12, 2001, the Company announced that it was suspending its
quarterly dividend which will save the Company approximately $27 million on
an annualized basis that can be used for general corporate purposes.

The Company estimates that its short-term debt was approximately $544 million
at March 23, 2001, compared with $364 million on December 31, 2000. The
amount of short-term debt outstanding at March 23, 2001, was comprised of
approximately $320 million under the Amended Credit Agreement, $47 million
under the U.K. Credit Agreement, $27 million under uncommitted short-term
lines of credit and $150 million of the 2002 Notes, which has been
reclassified as short-term debt because the 2002 Notes are due in less than
twelve months. At March 23, 2001, the Company had approximately $30 million
available for borrowing under the Amended Credit Agreement and approximately
$5 million available under the U.K. Credit Agreement.

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 exchange rate movement can be positive
or negative in any given period. The Company's ability to counteract currency
exchange rate movement is primarily dependent on pricing in local markets
and, to a lesser degree, in the short-term, on hedging through nonfunctional
currency denominated borrowings, forward exchange contracts and the purchase
of currency options.

The Company maintains a Monetary Control Center (the "MCC") which operates
under written policies and procedures that define its day-to-day operating
guidelines. In addition, the MCC is subject to random independent audits and
reports to a supervisory committee comprised of members of the Company's
senior management. The MCC publishes regular reports to the supervisory
committee detailing foreign currency activities. Exposure limits for
nonfunctional currency denominated borrowings and forward exchange contracts
are outlined in the MCC's policies and procedures. Currency option purchases
require approval from the Company's senior management.

To minimize the impact of currency fluctuations on its net monetary assets
denominated in currencies other than the relevant functional currency
("nonfunctional currencies") the Company engages in nonfunctional currency
denominated borrowings. The Company determines the aggregate amount of such
borrowings based on forecasts of each entity's nonfunctional currency
denominated net monetary asset position and the relative strength of the
functional currencies compared with the nonfunctional currencies. These
borrowings create nonfunctional currency denominated liabilities that hedge
the Company's nonfunctional currency denominated net monetary 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. The amount of the
Company's outstanding short-term debt incurred for hedging purposes was $44
million at December 31, 2000 and $24 million at December 31, 1999.

<PAGE>

Alternatively, the Company may use forward exchange contracts to minimize the
impact of currency fluctuations on its net monetary assets denominated in
nonfunctional currencies. The term of these contracts typically does not
exceed six months and the Company does not enter into forward exchange
contracts for trading purposes. The aggregate notional value of the Company's
outstanding forward exchange contracts was $76 million at December 31, 2000
and $102 million at December 31, 1999.

The Company has limited flexibility to increase prices in local currencies
and offset the adverse impact of foreign exchange. As a result, the Company
purchases U.S. dollar call/foreign currency put options which allows it to
protect a portion of its expected foreign currency denominated revenues from
adverse currency exchange movement. The term of purchased options typically
does not exceed 18 months and all of the option contracts outstanding at
December 31, 2000 expire in 2001. The Company does not write options or
purchase options for trading purposes. The notional value of the Company's
outstanding option contracts, all of which were denominated in Japanese yen
or euros, was $126 million at December 31, 2000 and $131 million at December
31, 1999.

IMPACT OF INFLATION

Inflation continues to be a factor in many of the countries in which the
Company does business. The Company's pricing strategy and continuing
efficiency improvements have offset inflation and normal cost increases to a
considerable degree. The overall inflationary impact on the Company's
earnings has not been material.

NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"), that establishes
accounting and reporting requirements for derivative instruments and for
hedging activities. FAS 133 requires companies to recognize all derivatives
as either assets or liabilities in the statement of financial position at
fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge of the exposures to changes in fair value of recognized
assets or liabilities or unrecognized firm commitments, a hedge of the
exposure to variable cash flows of a forecasted transaction, or a hedge of
the foreign currency exposure of a net investment in a foreign operation,
unrecognized firm commitments, an available-for-sale security or a
foreign-currency denominated forecasted transaction. The accounting for
changes in fair value under FAS 133 depends on the intended use of the
derivative and the resulting designation.

<PAGE>

In June 1999, the FASB issued Statement of Financial Accounting Standards
Board Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," which
delayed the effective date of FAS 133 by one year to fiscal years beginning
after June 15, 2000. In June 2000, the FASB issued Statement of Financial
Accounting Standards Board No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of FASB Statement
No. 133" ("FAS 138"), which will be adopted concurrently with FAS 133. FAS
138 amends the accounting and reporting standards of FAS 133 for certain
derivative instruments and hedging activities and incorporates conclusions
reached by the FASB related to the Derivatives Implementation Group process.
The Company does not believe that the adoption of these standards will have a
material impact on its results of operations or its financial position.

EURO CONVERSION

On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies (the "legacy currencies") and one common currency (the "euro").
The participating countries adopted the euro as their common currency on
January 1, 1999. The euro is now traded on currency exchanges and may be used
in business transactions. On January 1, 2002, new euro-denominated bills and
coins will be issued by the participating countries. The legacy currencies
will then be withdrawn and will cease to be legal tender effective June 30,
2002. During the period from January 1, 1999 to June 30, 2002, parties may
use either the euro or a participating country's legacy currency as legal
tender.

In 1998, the Company formed an Economic and Monetary Union Steering Committee
and Project Team (the "EMU Committee"). The EMU Committee has analyzed the
impact of the euro conversion on the Company in a number of areas, including
the Company's information systems, product pricing, finance and banking
resources, foreign exchange management, contracts and accounting and tax
departments. While the Company is in the process of making certain
adjustments to its business and its operations to accommodate the euro
conversion, the Company believes, based on information available at this time
and on several assumptions, that the euro conversion process will not have a
material adverse impact on its results of operations or its financial
position.

<PAGE>


OUTLOOK

The following, together with statements under "Financial Liquidity and Capital
Resources" above, is an overview of the Company's outlook for the future and
contains forward-looking statements. Actual results are dependent on a number of
factors that are described under "Factors That May Affect Future Results." As a
result, actual results could differ materially from those outlined below.

The Company believes that the factors that negatively impacted its results in
the fourth quarter of 2000, including inventory reductions at retailers and
softer demand for traditional film formats at retail, will continue to have a
negative impact on its results for at least the first half of 2001. The Company
expects these factors, combined with the potential for the unfavorable impact of
foreign exchange, could result in a loss from operations between $30 and $40
million in the first quarter of 2001 and, although it has forecasted a profit
from operations for the second quarter of 2001, the Company's expectation is
that it will be less than the $51 million recorded in the second quarter of
2000. Although the Company anticipates that its results in the second half of
2001 will improve, it believes that net sales and operating profit for the full
year will approximate those of 2000.

Reducing costs and improving cash flow will be a principal objective of the
Company in 2001 and to achieve the objective the Company has started to
implement the following strategies:

     -   reducing accounts receivable and inventories;

     -   selling certain assets, including real estate;

     -   reducing excess manufacturing capacity by consolidating facilities and
         moving some production offshore or to contract manufacturers;

     -   streamlining the Company's overhead structure and implementing tight
         cost controls over all aspects of its business; and

     -   reducing capital spending to $115 million or less.

The Company anticipates that it will begin to accrue the benefits from these
strategies in 2001.

The Company believes that the strategies outlined above will not impact its
efforts to revitalize its core imaging business or impact its ability to
accelerate its instant digital printing strategy. Currently, the Company's
digital products carry lower profit margins relative to its instant imaging
products but new digital printing solutions will include media platforms
which the Company anticipates will carry higher margins than digital
hardware. The Company also expects that its strategies could translate into
growth of sales and operating profits over the next several years.

<PAGE>


FACTORS THAT MAY AFFECT FUTURE RESULTS

Some statements in this report, including those under "Financial Liquidity and
Capital Resources" and "Outlook" above, may be forward looking in nature, or
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995 (the "Act"). These statements may be identified by the use of
forward-looking words or phrases such as "expect", "anticipate", "plan",
"intend", "will", "estimate", "potential", "strategy" and "forecast" among
others. The Company desires to take advantage of the "safe harbor" provisions of
the Act. Many of the important factors below have been discussed in prior
filings by the Company with the Securities and Exchange Commission. The Company
therefore cautions shareholders and investors that actual results may differ
materially from those projected in or implied by any forward-looking statement
as a result of a wide variety of factors which include, but are not limited to
the Company's ability:

     -   to market its core imaging products which requires, among other things:

         - introducing a number of new products each year;

         - expanding certain profitable businesses;

         - increasing revenues while managing the mix of new and traditional
           products and retail buying patterns; and

         - continuing to reduce costs through operating efficiencies, including
           savings from restructuring;

     -   to penetrate new demographic markets such as children, teens and young
         adults for its products and new technologies through product
         innovations, marketing campaigns and expanded distribution;

     -   to develop and implement its digital imaging strategy which requires,
         among other things:

         - applying the Company's technology and expertise in instant imaging to
           the developing market for digital imaging products;

         - marketing of successful new digital imaging products;

         - successfully developing partnerships and alliances with other
           companies in the digital imaging market; and

         - accurately anticipating and responding to trends in the rapidly
           changing digital imaging market;

     -   to compete successfully in the instant imaging market against larger
         and stronger competitors like Fuji Photo Film Co., Ltd. ("Fuji"), and
         in the digital imaging market against competitors like Eastman Kodak
         Company, Fuji, Hewlett-Packard Company, Cannon U.S.A., Inc. and Sony
         Corporation;


<PAGE>


     -   to implement its strategies to reduce costs and improve cash flow which
         requires, among other things:

         - the sale of certain assets and working capital reductions to generate
           cash flow and allow the Company to reduce its debt;

         - the consolidation of manufacturing facilities and streamlining of the
           Company's overhead structure; and

         - capital spending reductions while continuing to support new
           product sales and development;

     -   to avoid periods of net losses which could require the Company to find
         additional sources of financing to fund operations, implement its
         business strategy, meet anticipated capital expenditures, research and
         development costs and financing commitments;

     -   to implement its strategies to amend and refinance the Amended
         Credit Agreement, the U.K. Credit Agreement and the 2002 Notes;

     -   to reduce its debt and limit the Company's vulnerability to general
         adverse economic conditions; increase its ability to compete with
         competitors that are less leveraged; increase its ability to fund
         future working capital needs, capital expenditures, acquisitions,
         research and development costs and other general corporate
         requirements; and increase its flexibility to react to changes in the
         businesses and industry in which it operates;

     -   to comply with the covenants in the Amended Credit Agreement, the U.K.
         Credit Agreement, the indentures governing the 2002 Notes, 2006 Notes
         and 2007 Notes and certain of the agreements governing short-term lines
         of credit the failure of which could result in an event of default;

     -   to retain its top customers at essentially their current purchasing
         levels;

     -   to sell and market its products worldwide particularly in light of the
         major risks associated with worldwide operations such as various local
         laws and customs;

     -   to manage its exposure to fluctuation of foreign exchange rates,
         particularly the Japanese yen and euro;

     -   to further reduce its cycle time in bringing new products to market;


<PAGE>


     -   to retain certain sole source suppliers, or find timely alternatives,
         for raw materials, supplies and finished goods necessary for the
         manufacture and sale of its products, including chemicals, polyester
         film base, specialty paper and certain components;

     -   to develop and continue to protect ownership of, and license as
         appropriate, valuable intellectual property rights;

     -   to comply with the large number of federal, state and local
         environmental laws and regulations that govern, among other things, the
         discharge of hazardous materials into the air and water as well as the
         handling, storage and disposal of such materials; and;

     -   to retain a number of key senior managers and to be able to attract and
         retain qualified senior managers who can implement the Company's
         business strategy.

There can be no assurance that the Company will be successful in accomplishing
its objectives and meeting the challenges summarized above. If the Company is
not successful, the Company's business and results of operations could be
negatively impacted.


<PAGE>


INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Polaroid Corporation

We have audited the accompanying consolidated balance sheets of Polaroid
Corporation and Subsidiary Companies as of December 31, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of their
operations and cash flows for each of the years in the three-year period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.


                                                    /S/ KPMG LLP


Boston, Massachusetts
January 22, 2001, except as to Note 6, Note 15
      and Paragraph 6 of Note 14
      which are as of March 27, 2001


<PAGE>


MANAGEMENT'S REPORT

Financial Reporting and Controls

The financial statements presented in this report were prepared in accordance
with accounting principles generally accepted in the United States of America.
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 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
     -------------------------------------------------
     Chairman
     and Chief Executive Officer

/S/  CARL L. LUEDERS
     -------------------------------------------------
     Vice President and Acting Chief
     Financial Officer


<PAGE>


FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF EARNINGS

<TABLE>
<CAPTION>

POLAROID CORPORATION AND SUBSIDIARY COMPANIES                                    Years ended December 31,
(IN MILLIONS, EXCEPT PER SHARE DATA)                                       1998            1999           2000
--------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>             <C>
NET SALES                                                                $1,845.9          $1,978.6      $1,855.6

   Cost of goods sold                                                     1,108.4           1,170.5       1,055.9
   Marketing, research, engineering and administrative
     expenses (Note 2)                                                      736.5             700.5         696.4
   Restructuring charges/(credits)(Note 2)                                   50.0                --          (5.8)
                                                                       -------------- --------------- --------------

TOTAL COSTS                                                               1,894.9           1,871.0       1,746.5
                                                                       -------------- --------------- --------------

PROFIT/(LOSS) FROM OPERATIONS                                               (49.0)            107.6         109.1

   Other income/(expense):
     Interest income                                                          2.9               2.7           5.5
     Other                                                                   64.8             (19.5)         28.6
                                                                       -------------- --------------- --------------

   Total other income/(expense)                                              67.7             (16.8)         34.1
   Interest expense                                                          57.6              77.4          85.3
                                                                       -------------- --------------- --------------

EARNINGS/(LOSS) BEFORE INCOME TAX EXPENSE                                   (38.9)             13.4          57.9
   Federal, state and foreign income tax expense (Note 4)                    12.1               4.7          20.2
                                                                       -------------- --------------- --------------

NET EARNINGS/(LOSS)                                                       $ (51.0)           $  8.7        $ 37.7
                                                                       ============== =============== ==============

BASIC EARNINGS/(LOSS) PER COMMON SHARE (NOTE 1)                           $ (1.15)           $  .20        $  .84

DILUTED EARNINGS/(LOSS) PER COMMON SHARE (NOTE 1)                         $ (1.15)           $  .20        $  .84

CASH DIVIDENDS PER COMMON SHARE                                           $   .60            $  .60        $  .60
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


<PAGE>


CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>

POLAROID CORPORATION AND SUBSIDIARY COMPANIES                                               December 31,
(IN MILLIONS, EXCEPT NUMBER OF SHARES)                                                 1999              2000
--------------------------------------------------------------------------------- ---------------- -----------------
<S>                                                                               <C>              <C>
ASSETS
CURRENT ASSETS
   Cash and cash equivalents                                                           $   92.0          $   97.2
   Receivables, less allowances of $23.9 in 1999 and $23.8 in 2000 (Note 6)               489.7             435.4
   Inventories (Notes 5 and 6)                                                            395.6             482.5
   Prepaid expenses and other assets (Note 4)                                             130.8             103.5
                                                                                  ---------------- -----------------
TOTAL CURRENT ASSETS                                                                    1,108.1           1,118.6

PROPERTY, PLANT AND EQUIPMENT:
   Land                                                                                    14.7               6.9
   Buildings                                                                              322.7             313.5
   Machinery and equipment                                                              1,620.1           1,597.5
   Construction in progress                                                                65.5              49.6
                                                                                  ---------------- -----------------
   Total property, plant and equipment                                                  2,023.0           1,967.5
     Less accumulated depreciation                                                      1,423.8           1,398.3
                                                                                  ---------------- -----------------
NET PROPERTY, PLANT AND EQUIPMENT                                                         599.2             569.2

DEFERRED TAX ASSETS (NOTE 4)                                                              243.7             279.5
OTHER ASSETS                                                                               89.0              75.7
                                                                                  ---------------- -----------------
TOTAL ASSETS                                                                           $2,040.0          $2,043.0
                                                                                  ================ =================

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
   Short-term debt (Note 6)                                                            $  259.4          $  363.7
   Payables and accruals (Note 7)                                                         338.0             334.1
   Compensation and benefits (Notes 10 and 11)                                            138.1              76.7
   Federal, state and foreign income taxes (Note 4)                                        14.7              18.8
                                                                                  ---------------- -----------------
TOTAL CURRENT LIABILITIES                                                                 750.2             793.3

LONG-TERM DEBT (NOTE 8)                                                                   573.0             573.5
ACCRUED POSTRETIREMENT BENEFITS (NOTE 11)                                                 234.8             222.7
OTHER LONG-TERM LIABILITIES                                                               111.5              78.3
                                                                                  ---------------- -----------------
TOTAL LIABILITIES                                                                       1,669.5           1,667.8

PREFERRED STOCK, Series A and D, $1 par value, authorized 20,000,000 shares;
   all shares unissued                                                                       --                --

COMMON STOCKHOLDERS' EQUITY (NOTE 9)
   Common stock, $1 par value, authorized 150,000,000 shares (75,427,550 shares
     issued in 1999 and 2000)                                                              75.4              75.4
   Additional paid-in capital                                                             395.2             363.1
   Retained earnings                                                                    1,208.8           1,219.5
   Accumulated other comprehensive income                                                 (48.9)            (68.9)
   Less: Treasury stock, at cost (30,811,263 and 29,895,578 shares in 1999 and
         2000, respectively)                                                            1,259.7           1,213.8
         Deferred compensation                                                               .3                .1
                                                                                  ---------------- -----------------
Total common stockholders' equity                                                         370.5             375.2
                                                                                  ---------------- -----------------

TOTAL LIABILITIES AND COMMON STOCKHOLDERS' EQUITY                                      $2,040.0          $2,043.0
                                                                                  ================ =================
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


<PAGE>


CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>

POLAROID CORPORATION AND SUBSIDIARY COMPANIES                                   Year ended December 31,
(IN MILLIONS)                                                             1998            1999            2000
-------------------------------------------------------------------- --------------- --------------- ---------------
<S>                                                                  <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net earnings/(loss)                                                   $ (51.0)        $   8.7         $  37.7
   Depreciation of property, plant and equipment                            90.7           105.9           113.9
   Gain on the sale of real estate                                         (68.2)          (11.7)          (21.8)
   Other non-cash items                                                     62.2            73.8            22.9
   Decrease/(increase) in receivables                                       79.0           (52.7)           41.8
   Decrease/(increase) in inventories                                      (28.4)           88.0          (100.6)
   Decrease in prepaids and other assets                                    39.0            62.4            32.9
   Increase/(decrease) in payables and accruals                             25.3           (16.5)            9.2
   Decrease in compensation and benefits                                   (21.0)          (72.5)         (105.0)
   Decrease in federal, state and foreign income taxes payable             (29.9)          (54.0)          (31.5)
                                                                     --------------- --------------- ---------------
   Net cash provided/(used) by operating activities                         97.7           131.4             (.5)
                                                                     --------------- --------------- ---------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Decrease/(increase) in other assets                                     (25.4)           16.5             4.5
   Additions to property, plant and equipment                             (191.1)         (170.5)         (129.2)
   Proceeds from the sale of property, plant and equipment                 150.5            36.6            56.6
   Acquisitions, net of cash acquired                                      (18.8)             --              --
                                                                     --------------- --------------- ---------------
   Net cash used by investing activities                                   (84.8)         (117.4)          (68.1)
                                                                     --------------- --------------- ---------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase/(decrease) in short-term debt (maturities 90 days
     or less)                                                              131.2           (86.2)          108.2
   Short-term debt (maturities of more than 90 days)
     Proceeds                                                               73.0            41.8              --
     Payments                                                             (117.2)          (24.9)             --
   Proceeds from issuance of long-term debt                                   --           268.2              --
   Repayment of long-term debt                                                --          (200.0)             --
   Cash dividends paid                                                     (26.5)          (26.6)          (27.0)
   Purchase of treasury stock                                              (45.5)             --              --
   Proceeds from issuance of shares in connection with stock
     incentive plan                                                          6.0              .3              .1
                                                                     --------------- --------------- ---------------
   Net cash provided/(used) by financing activities                         21.0           (27.4)           81.3
                                                                     --------------- --------------- ---------------

Effect of exchange rate changes on cash                                      3.1              .4            (7.5)
                                                                     --------------- --------------- ---------------

Net increase/(decrease) in cash and cash equivalents                        37.0           (13.0)            5.2

Cash and cash equivalents at beginning of year                              68.0           105.0            92.0
                                                                     --------------- --------------- ---------------

Cash and cash equivalents at end of year                                 $ 105.0         $  92.0         $  97.2
                                                                     =============== =============== ===============
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


<PAGE>

CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

POLAROID CORPORATION AND SUBSIDIARY COMPANIES
(IN MILLIONS EXCEPT NUMBER OF SHARES)                                        Years ended December 31, 1998, 1999 and 2000
--------------------------------------------------------------- --------------------------------------------------------------
                                                                                                                Accumulated
                                                                                    Additional                     Other
                                                       Common           Common       Paid-In       Retained    Comprehensive
1998                                                     Shares         Stock        Capital       Earnings        Income
------------------------------------------------------ ------------- ------------- ------------- ------------- ---------------
<S>                                                    <C>           <C>           <C>           <C>           <C>

Balance at beginning of period                         44,536,300         $75.4        $425.2      $1,304.1          $(39.8)
Comprehensive income:
   Net loss                                                                                           (51.0)
   Other comprehensive income:
     Unrealized gain/(loss) on available-for-sale
       securities (net of tax of $1.0)                                                                                  1.4
     Foreign currency translation adjustments (Note 1)                                                                  5.0

   Total comprehensive income/(loss)
Stock options exercised - tax benefit                                                      .9
Issuance of shares in connection with compensation
   and stock incentive plans (Note 10)                    192,197                        (4.1)
Dividends declared - common stock                                                                     (26.4)
Repurchase of shares                                   (1,213,600)
Common stock issued to ESOP (Notes 9 and 11)              474,720                        (8.6)
                                                       ------------- ------------- ------------- ------------- ---------------
Balance at end of period                               43,989,617         $75.4        $413.4      $1,226.7          $(33.4)
                                                       ============= ============= ============= ============= ===============
</TABLE>


<TABLE>
<CAPTION>

POLAROID CORPORATION AND SUBSIDIARY COMPANIES
(IN MILLIONS EXCEPT NUMBER OF SHARES)
---------------------------------------------------------------------------- ------------------
                                                                                     Total
                                                                                     Common
                                                        Treasury      Deferred    Stockholders'
1998                                                     Stock      Compensation     Equity
------------------------------------------------------------------- ------------- -------------
<S>                                                   <C>            <C>          <C>

Balance at beginning of period                         $(1,279.4)         $(1.1)      $484.4
Comprehensive income:
   Net loss                                                                            (51.0)
   Other comprehensive income:
     Unrealized gain/(loss) on available-for-sale
       securities (net of tax of $1.0)                                                   1.4
     Foreign currency translation adjustments (Note 1)                                   5.0
                                                                                  -------------
   Total comprehensive income/(loss)                                                   (44.6)
Stock options exercised - tax benefit                                                     .9
Issuance of shares in connection with compensation
   and stock incentive plans (Note 10)                       9.7             .4          6.0
Dividends declared - common stock                                                      (26.4)
Repurchase of shares                                       (45.5)                      (45.5)
Common stock issued to ESOP (Notes 9 and 11)                23.7                        15.1
                                                      ------------- ------------- -------------
Balance at end of period                               $(1,291.5)         $ (.7)      $389.9
                                                      ============= ============= =============
</TABLE>


<PAGE>


CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (CONTINUED)

<TABLE>
<CAPTION>
                                                                                                                Accumulated
                                                                                    Additional                     Other
                                                         Common                      Paid-In       Retained    Comprehensive
1999                                                     Shares      Common Stock    Capital       Earnings        Income
------------------------------------------------------ ------------- ------------- ------------- ------------- ---------------
<S>                                                    <C>           <C>           <C>           <C>           <C>
Balance at beginning of period                         43,989,617         $75.4        $413.4      $1,226.7          $(33.4)
Comprehensive income:
   Net earnings                                                                                         8.7
   Other comprehensive income:
     Unrealized gain/(loss) on available-for-sale
       securities (net of tax of $.3)                                                                                    .5
     Foreign currency translation adjustments (Note 1)                                                                (16.0)
   Total comprehensive income/(loss)
Issuance of shares in connection with compensation
   and stock incentive plans (Note 10)                      6,330                         (.4)
Dividends declared - common stock                                                                     (26.6)
Common stock issued to ESOP (Notes 9 and 11)              620,340                       (17.8)
                                                       ------------- ------------- ------------- ------------- ---------------
Balance at end of period                               44,616,287         $75.4        $395.2      $1,208.8          $(48.9)
                                                       ============= ============= ============= ============= ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                                       Total
                                                                                       Common
                                                          Treasury      Deferred    Stockholders'
1999                                                       Stock      Compensation     Equity
------------------------------------------------------  ------------- ------------- -------------
<S>                                                     <C>           <C>           <C>
Balance at beginning of period                          $(1,291.5)          $(.7)      $389.9
Comprehensive income:
   Net earnings                                                                           8.7
   Other comprehensive income:
     Unrealized gain/(loss) on available-for-sale
       securities (net of tax of $.3)                                                      .5
     Foreign currency translation adjustments (Note 1)                                  (16.0)
                                                                                    -------------
   Total comprehensive income/(loss)                                                     (6.8)
Issuance of shares in connection with compensation
   and stock incentive plans (Note 10)                         .6            .4            .6
Dividends declared - common stock                                                       (26.6)
Common stock issued to ESOP (Notes 9 and 11)                 31.2                        13.4
                                                       ------------- ------------- -------------
Balance at end of period                                $(1,259.7)          $(.3)      $370.5
                                                       ============= ============= =============
</TABLE>


<PAGE>


CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (CONTINUED)

<TABLE>
<CAPTION>
                                                                                                                Accumulated
                                                                                    Additional                     Other
                                                         Common                      Paid-In       Retained    Comprehensive
2000                                                     Shares      Common Stock    Capital       Earnings        Income
------------------------------------------------------ ------------- ------------- ------------- ------------- ---------------
<S>                                                    <C>           <C>           <C>           <C>           <C>
Balance at beginning of period                         44,616,287         $75.4        $395.2      $1,208.8          $(48.9)
Comprehensive income:
   Net earnings                                                                                        37.7
   Other comprehensive income:
     Unrealized gain/(loss) on available-for-sale
       securities (net of tax benefit of $.6)                                                                          (1.1)
     Foreign currency translation adjustments (Note 1)                                                                (18.9)
   Total comprehensive income/(loss)
Issuance of shares in connection with compensation
   and stock incentive plans (Note 10)                      4,860                        (2.8)
Dividends declared - common stock                                                                     (27.0)
Common stock issued to ESOP (Notes 9 and 11)              910,825                       (29.3)
                                                       ------------- ------------- ------------- ------------- ---------------
Balance at end of period                               45,531,972         $75.4        $363.1      $1,219.5          $(68.9)
                                                       ============= ============= ============= ============= ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                                       Total
                                                                                       Common
                                                          Treasury      Deferred    Stockholders'
2000                                                       Stock      Compensation     Equity
------------------------------------------------------  ------------- ------------- -------------
<S>                                                     <C>           <C>           <C>
Balance at beginning of period                           $(1,259.7)          $(.3)      $370.5
Comprehensive income:
   Net earnings                                                                           37.7
   Other comprehensive income:
     Unrealized gain/(loss) on available-for-sale
       securities (net of tax benefit of $.6)                                             (1.1)
     Foreign currency translation adjustments (Note 1)                                   (18.9)
                                                                                    -------------
   Total comprehensive income/(loss)                                                       17.7
Issuance of shares in connection with compensation
   and stock incentive plans (Note 10)                         4.6            .2           2.0
Dividends declared - common stock                                                        (27.0)
Common stock issued to ESOP (Notes 9 and 11)                  41.3                        12.0
                                                        ------------- ------------- -------------
Balance at end of period                                 $(1,213.8)          $(.1)      $375.2
                                                        ============= ============= =============
</TABLE>


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the accounts of Polaroid
Corporation and its domestic and foreign subsidiaries, all of which are either
wholly owned or majority owned (collectively, "the Company"). 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 investments with maturities of three
months or less when purchased to be cash equivalents.

DERIVATIVES:

The Company uses forward exchange contracts and purchased currency options to
manage its exposure to foreign exchange rate fluctuations. The Company applies
hedge accounting to these instruments based on its determination that these
instruments effectively reduce the Company's exposure to foreign exchange rate
fluctuations. The determination of hedge effectiveness is performed at the
inception of the hedge and periodically over the life of the hedge.

Forward exchange contracts are contracts to exchange the currencies of two
different countries at a specified price on a specified date. Exchange gains and
losses on the foreign currency component of the contract are recognized in
earnings as incurred. Purchased currency option contracts allow, but do not
require, the Company to exchange currencies at a specified price on a specified
date. The Company amortizes the premium it pays on purchased currency options
over the term of the contract and defers gains until the option exercise date.

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.


<PAGE>


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES:

The provision for income taxes includes amounts currently payable or recoverable
and deferred taxes. 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:

Property, plant and equipment are stated at cost less accumulated depreciation.
The estimated useful lives of the Company's assets for financial reporting are
20-40 years for buildings and 3-15 years for machinery and equipment.

LONG-LIVED ASSETS:

The Company evaluates its long-lived assets and certain identifiable intangible
assets for impairment as events or changes in circumstances indicate that the
carrying value of those assets may not be fully recoverable. The Company
evaluates the recoverability of long-lived assets to be held and used by
estimating the undiscounted future cash flows associated with the expected use
and eventual disposition of those assets and compares that amount to the
carrying value of those assets. When these comparisons indicate that the
carrying value of those assets are greater than the respective undiscounted
future cash flows, the Company recognizes an impairment loss for the amount that
the carrying value exceeds the fair value. The Company evaluates the
recoverability of long-lived assets to be disposed of, whether by sale or
abandonment, by comparing the carrying value of those assets to their estimated
fair value less costs to sell them. If the carrying value of assets to be
disposed of exceeds the respective fair value less expected costs to sell, the
Company recognizes an impairment loss for the amount of that excess.

OTHER LONG-TERM LIABILITIES:

Other long-term liabilities include amounts that are not expected to be settled
within the next twelve months. Those amounts include pension, postemployment
benefits and other non-current liabilities.


<PAGE>


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FOREIGN CURRENCY TRANSLATION:

Amounts in the financial statements related to foreign currency translation are
determined using the principles of Financial Accounting Standards Board
Statement No. 52, "Foreign Currency Translation." 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 continues to be the functional currency for
subsidiaries in highly inflationary economies.

PATENTS AND TRADEMARKS:

Patents and trademarks are valued at $1.

REVENUE RECOGNITION:

The Company recognizes revenue when all of the following criteria have been met:
evidence exists that the customer is bound to the transaction; the product has
been shipped to the customer; the sales price to the customer has been fixed or
is determinable; and collectibility of the sales price is reasonably assured.
Provisions for estimated sales returns and allowances are made at the time the
products are sold.

PRODUCT WARRANTY:

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

SHIPPING AND HANDLING FEES AND COSTS:

The Company records shipping and handling fees and costs in marketing
expenses and estimates that they were approximately $23.0 million in 1998 and
approximately $26.0 million in both 1999 and 2000.

ADVERTISING COSTS:

The Company expenses the cost of advertising in the year incurred in accordance
with American Institute of Certified Public Accountants' Statement of Position
93-7, "Reporting on Advertising Costs."


<PAGE>


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK INCENTIVE PLANS:

The Company accounts for its stock-based compensation under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations and provides disclosure related to its
stock-based compensation under the provisions of Financial Accounting Standards
Board Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123").
The Company allocates the cost of fixed stock award plans, including those with
pro-rata vesting, on a straight-line basis over the vesting period.

EARNINGS/(LOSS) PER COMMON SHARE:

Basic earnings/(loss) per common share is computed by dividing net
earnings/(loss) by the weighted average number of common shares outstanding for
the period. Diluted earnings/(loss) per common share is calculated by adjusting
the weighted average number of common shares outstanding for the period to
assume that all potentially dilutive shares were issued. The numerators and
denominators of the basic and diluted earnings/(loss) per common share
computations for the Company's reported net earnings/(loss) are as follows:

<TABLE>
<CAPTION>
                                                             NET
                                                          EARNINGS/        NUMBER OF         PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)                    (LOSS)        COMMON SHARES        AMOUNT
------------------------------------------------------ ----------------- ---------------- -----------------
<S>                                                    <C>               <C>              <C>

1998
----
Basic loss per share                                         $(51.0)             44.2           $(1.15)
                                                       ================= ================ =================

Diluted loss per share                                       $(51.0)             44.2           $(1.15)
                                                       ================= ================ =================

1999
----
Basic earnings per share                                       $ 8.7             44.3             $ .20
                                                       ================= ================ =================

Diluted earnings per share                                     $ 8.7             44.3             $ .20
                                                       ================= ================ =================

2000
----
BASIC EARNINGS PER SHARE                                      $ 37.7             45.0             $ .84
                                                       ================= ================ =================

DILUTED EARNINGS PER SHARE                                    $ 37.7             45.1             $ .84
                                                       ================= ================ =================
</TABLE>


<PAGE>


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The weighted average of common shares outstanding for the calculation of diluted
earnings/(loss) per share in 2000 includes the effect of certain stock awards
granted during 2000 for which common shares have not been issued. The
calculation of diluted earnings/(loss) per share in 1998, 1999 and 2000 does not
include the effects of outstanding options for shares of common stock totaling
5.8 million, 6.2 million and 1.7 million, respectively, because the effects were
anti-dilutive. In addition, the effect of .2 million, .3 million and .3 million
of outstanding performance shares for 1998, 1999 and 2000, respectively, were
not included because all of the performance criteria had not been satisfied.

NEW ACCOUNTING STANDARDS:

In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"), that expresses the
views of the SEC staff regarding the application of generally accepted
accounting principles to certain revenue recognition issues. In June 2000, the
SEC issued SAB No. 101B, "Second Amendment: Revenue Recognition in Financial
Statements," which delayed the effective date of SAB 101 to periods no later
than the fourth quarter of fiscal years beginning after December 15, 1999. The
adoption of SAB 101 did not have a material impact on the Company's results of
operations or financial position.

In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs," which
the Company adopted at the beginning of the fourth quarter of 2000. The
accounting applies to income statement classification of shipping and handling
fees. The adoption of EITF Issue No. 00-10 did not have a material impact on the
Company's results of operations or financial position.


<PAGE>


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"), that establishes
accounting and reporting requirements for derivative instruments and for
hedging activities. FAS 133 requires companies to recognize all derivatives
as either assets or liabilities in the statement of financial position at
fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge of the exposures to changes in fair value of recognized
assets or liabilities or unrecognized firm commitments, a hedge of the
exposure to variable cash flows of a forecasted transaction, or a hedge of
the foreign currency exposure of a net investment in a foreign operation,
unrecognized firm commitments, an available-for-sale security or a
foreign-currency denominated forecasted transaction. The accounting for
changes in fair value under FAS 133 depends on the intended use of the
derivative and the resulting designation.

In June 1999, the FASB issued FAS 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133," which delayed the effective date of FAS 133 by one year to fiscal years
beginning after June 15, 2000. In June 2000, the FASB issued FAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FASB Statement No. 133" ("FAS 138"), which will be adopted
concurrently with FAS 133. FAS 138 amends the accounting and reporting standards
of FAS 133 for certain derivative instruments and hedging activities and
incorporates conclusions reached by the FASB related to the Derivatives
Implementation Group process. The Company does not believe that the adoption of
these standards will have a material impact on the results of operations of
financial position.

In May 2000, the EITF reached a consensus on Issue No. 00-14, "Accounting for
Certain Sales Incentives" ("EITF 00-14"), which is effective for periods no
later than the fiscal quarter beginning after March 31, 2001. This accounting
applies to the recognition, measurement and income statement classification
of sales incentives offered to customers such as discounts, coupons, rebates
and free products or services. The Company will adopt the provisions of EITF
00-14 as of January 1, 2001 and, as a result, will reclassify certain sales
incentives previously reported in marketing expenses as sales adjustments.
However, the Company does not believe that the adoption of EITF 00-14 or the
related reclassification will have a material impact on its results of
operations or financial position.

RECLASSIFICATION:

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

2. SUPPLEMENTAL INFORMATION

RESEARCH, ENGINEERING AND DEVELOPMENT COSTS:

<TABLE>
<CAPTION>

(IN MILLIONS)                                                         1998          1999          2000
----------------------------------------------------------------- ------------- ------------- -------------
<S>                                                               <C>           <C>           <C>
Research, engineering and development costs                           $119.9         $85.5         $83.4
</TABLE>


<PAGE>


2. SUPPLEMENTAL INFORMATION (CONTINUED)

ADVERTISING COSTS:

<TABLE>
<CAPTION>

(IN MILLIONS)                                                        1998          1999          2000
---------------------------------------------------------------- ------------- ------------- -------------
<S>                                                              <C>           <C>           <C>
Advertising costs                                                     $112.1        $138.5        $160.2
</TABLE>

At December 31, 1999, the amount of advertising costs reported as prepaid
expenses on the consolidated balance sheet was $1.4 million. There were no
advertising costs reported as a prepaid expense on the balance sheet at December
31, 2000.

INTEREST CAPITALIZATION:

The Company has capitalized interest costs relating to certain qualifying
assets. In 1998, 1999 and 2000, the amounts of interest costs capitalized were
$2.2 million, $3.0 million and $2.3 million, respectively.

CASH FLOW INFORMATION:

Cash payments for interest and income taxes were:

<TABLE>
<CAPTION>

(IN MILLIONS)                                                          1998          1999         2000
----------------------------------------------------------------- ------------- ------------- -------------
<S>                                                               <C>           <C>           <C>
Interest                                                                $56.0         $72.6         $81.7
Income taxes                                                             12.9          11.9          15.3
</TABLE>

In 1998, the Company recorded non-cash items of $62.2 million in cash flow from
operating activities which consisted primarily of $46.9 million for write-off of
assets not related to restructuring and $15.1 million for the issuance of shares
relating to the Retirement Savings Plan.

In 1999, the Company recorded non-cash items of $73.8 million in cash flow from
operating activities which consisted primarily of $44.0 million of charges
related to non-core businesses being rationalized or exited, $35.0 million to
write-off the carrying value of its investment in Sterling Dry Imaging Systems,
Inc. (see Note 2) and $13.4 million for the issuance of shares relating to the
Retirement Savings Plan. Non-cash items also included a settlement gain of $24.5
million related to the Company's pension plan (see Note 11).

In 2000, the Company recorded non-cash items of $22.9 million in cash flow from
operating activities which consisted primarily of $12.0 million for the issuance
of shares relating to the Retirement Savings Plan.


<PAGE>


2. SUPPLEMENTAL INFORMATION (CONTINUED)

ACQUISITIONS:

In 1998, the Company acquired two companies in the digital imaging industry, NBS
Imaging Systems, Inc. and Appraisers Choice, Inc., for a total purchase price of
$18.8 million.

RESTRUCTURING AND OTHER CHARGES:

In 1997, the Company recorded restructuring and other charges of $340.0 million
which consisted of $151.5 million of severance costs, $162.5 million of
impairment losses on certain long-lived assets and other asset write-downs and
$9.5 million of exit costs associated with certain businesses. In addition,
restructuring and other charges included approximately $16.5 million of
inventory write-downs that were included in cost of goods sold. In 1998, the
Company recorded a $50.0 million restructuring charge related to an expansion of
the severance component of the 1997 program. These charges (collectively, the
"1997 Program") were allocated to the non-segment Corporate category and were
undertaken as the result of management's assessment of the Company's
infrastructure, to strengthen its competitive cost position, to streamline
operations and to improve profitability by consolidating and selling
manufacturing facilities and reducing corporate overhead. The strategic
objective of the 1997 Program was to reduce the cost of developing,
manufacturing, selling and distributing the Company's products; to change and
improve business processes; to deliver new products more efficiently; to improve
financial performance; and to fundamentally alter how the Company conducts
business globally.

Approximately $150.0 million of the charges recorded in 1997 for the 1997
Program related to an involuntary severance program under which approximately
1,800 employees (consisting of sales and marketing employees in the regional
segments: Americas - 16%; Europe - 24%; Asia Pacific - 9%; primarily
manufacturing employees in Global Operations - 36%; research and engineering
employees in Research and Development - 5%; and administrative employees in the
non-segment Corporate category - 10%) were expected to leave the Company. The
1998 extension to this involuntary severance program added approximately 1,000
additional employees (consisting of sales and marketing employees in the
regional segments: Americas - 7%; Europe - 14%; Asia Pacific - 3%; primarily
manufacturing employees in Global Operations - 65%; research and engineering
employees in Research and Development - 10%; and administrative employees in the
non-segment Corporate category - 1%). Of the total amount provided for
severance, approximately $10.1 million related to pension curtailment costs and
$4.7 million related to pension enhancement costs incurred primarily for certain
non-U.S. employees that were terminated under this program.


<PAGE>

2. SUPPLEMENTAL INFORMATION (CONTINUED)

In the Americas, European and Asia Pacific segments, the major impact of the
1997 Program consisted of reducing the number of employees associated with sales
and marketing activities. The impact of the 1997 Program in the European segment
also consisted of consolidating back office activities in a centralized
location.

The impact of the 1997 Program in Global Operations consisted of reducing the
number of direct and indirect employees located at manufacturing facilities in
both the United States and Europe that were associated with the manufacture of
instant film and, to a lesser degree, instant hardware, along with employees
required to procure goods and services and distribute finished products. The
1997 Program in Global Operations also included employees at the Company's
chemical manufacturing facility in Freetown, Massachusetts that the Company sold
in February 1998.

The impact of the 1997 Program in Research and Development consisted of reducing
the number of employees associated with research, engineering and development
activities in the United States and to focus the Company's research and
development activities on its core imaging business.

The 1997 Program affected the non-segment Corporate category by reducing the
number of employees in the United States that support functions such as central
marketing, finance, legal, information management, administration, human
resources and facilities support.

Employee terminations under the 1997 Program were completed during the fourth
quarter of 2000. As a result, the Company reversed $5.8 million of restructuring
charges in the fourth quarter of 2000 that related primarily to accrued
severance costs. The remaining accrual relates to a series of cash payments,
totaling $5.1 million, that the Company will make in 2001 to certain employees
who terminated in 2000. The Company has made $176.6 million of cash payments
related to severance from the inception of the 1997 Program through December 31,
2000 to approximately 2,700 employees who were terminated under the 1997
Program.


<PAGE>


2. SUPPLEMENTAL INFORMATION (CONTINUED)

The reserves established for the 1997 Program and related cash and non-cash
charges are as follows:

<TABLE>
<CAPTION>

                                                                  PENSION
                                                              ENHANCEMENT AND
(IN MILLIONS)                                 SEVERANCE        CURTAILMENTS       EXIT COSTS       TOTAL
---------------------------------------------------------------------------------------------------------
<S>                                           <C>             <C>                 <C>              <C>
Balance at January 1, 1997                        $142.4                 $ --           $9.5        $151.9

Restructuring charges                               47.4                  2.6             --          50.0
Reclassification of pension enhancements            (2.4)                 2.4             --            --
Cash charges                                       (69.2)                  --           (7.1)        (76.3)
Non-cash charges                                      --                 (5.0)            --          (5.0)
                                            --------------------------------------------------------------

Balance at December 31, 1998                       118.2                   --            2.4         120.6

Reclassification of pension enhancements             (.7)                  .7             --            --
Cash charges                                       (68.9)                  --            (.2)        (69.1)
Non-cash charges                                      --                  (.7)            --           (.7)
                                            --------------------------------------------------------------

Balance at December 31, 1999                        48.6                   --            2.2          50.8

Cash charges                                       (38.5)                  --           (1.4)        (39.9)
Reversal of restructuring charges                   (5.0)                  --           (0.8)         (5.8)
                                            --------------------------------------------------------------

Balance at December 31, 2000                       $ 5.1                 $ --           $ --         $ 5.1
                                            ==============================================================
</TABLE>

MEDICAL IMAGING

In the fourth quarter of 1996, the Company sold its Helios medical diagnostic
imaging equipment line to Sterling Dry Imaging Systems, Inc. ("SDIS"), a
subsidiary of SDI Holding Corporation ("SDHI"), and acquired a minority interest
in the buyer (i.e., SDIS) and its parent company (i.e., SDHI).


<PAGE>

2. SUPPLEMENTAL INFORMATION (CONTINUED)

The Company's interest as of December 31, 1998 consisted of: (1) 14% of the
common stock of SDHI with a carrying value of approximately $14.0 million; (2)
preferred stock of SDIS with a carrying value of approximately $35.0 million;
and (3) 111 shares of SDIS common stock valued at $.01 per share. These
investments were made in cash and were carried at cost. The carrying value of
these investments was initially supported by an independent third-party business
valuation and was subsequently confirmed periodically by comparing SDHI's actual
operating results, including SDIS, with SDHI's original and revised business
plans.

In January 1999, Agfa-Gevaert N.V. ("AGFA") agreed to acquire SDHI, excluding
SDIS which, under the acquisition agreement, would not be acquired by AGFA and
which would be spun off to a liquidating trust, the proceeds of which would be
distributed to the shareholders of SDHI. In the first quarter of 1999, the
Company recorded a non-cash charge of $35.0 million in other income and expense
to write-off the carrying value of its preferred stock investment in SDIS
because it was probable based on available information that SDIS was not viable
as a stand-alone business and that the proceeds from the liquidation were not
sufficient to redeem the preferred stock. During the second quarter of 1999,
AGFA completed its acquisition of SDHI and the Company received cash proceeds of
approximately $16.0 million in return for its investment in SDHI. The net gain
of approximately $2.0 million on the transaction was recorded in other income
and expense.

In a related transaction, during the second quarter of 1999, the Company
acquired certain assets of SDIS consisting of machinery and equipment and
intellectual property in return for the Company's preferred and common stock
in SDIS, forgiveness of approximately $2.0 million of amounts owed the
Company by SDIS and the Company's rights under certain supply and technology
agreements with SDIS. The machinery and equipment and intellectual property
acquired from SDIS were deemed to have no value by the Company. The Company
recognized the cost of forgiveness of approximately $2.0 million in other
income and expense.


<PAGE>

2. SUPPLEMENTAL INFORMATION (CONTINUED)

GRAPHIC ARTS

In October 1999, the Company contributed the net assets of its graphics arts
business to a joint venture. Under the terms of the agreement, the Company
will not be required to provide any future funding to the joint venture. In
consideration for its contribution, the Company received a redeemable
preferred equity interest and a less than 20% common equity interest in the
joint venture. In connection with this transaction the Company recorded
charges of $15.7 million to increase reserves primarily for trade accounts
receivable and inventories; $4.4 million for liabilities related to the
disposition of this business and $3.0 million for severance costs related to
approximately 30 employees who were terminated as a result of the agreement.
The majority of these liabilities were paid by the end of 2000. In addition,
the Company recorded an impairment loss of approximately $16.9 million based
on its evaluation of the estimated fair value of its investment in the new
joint venture. Of the $40.0 million charge, approximately $25.4 million was
reported in cost of goods sold and approximately $14.6 million was reported
in marketing and administrative expenses. On a segment basis, the Company
allocated $5.2 million to the Americas Region; $2.5 million to the European
Region; $11.1 million to Global Operations and $21.2 million to the
non-segment Corporate category.

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 currency exchange
fluctuations. The impact of currency exchange rate movement can be positive or
negative in any given period. The Company's ability to counteract currency
exchange rate movement is primarily dependent on pricing in local markets and,
to a lesser degree, in the short-term, on hedging through nonfunctional currency
denominated borrowings, forward exchange contracts and the purchase of currency
options.

The Company may use forward exchange contracts to minimize the impact of
currency fluctuations on its net monetary assets denominated in nonfunctional
currencies. The term of these contracts typically does not exceed six months and
the Company does not enter into forward exchange contracts for trading purposes.
At December 31, 1999 and 2000, the aggregate notional value of the Company's
outstanding forward exchange contracts was $101.6 million and $76.4 million,
respectively.


<PAGE>

3.  FINANCIAL INSTRUMENTS (CONTINUED)

Alternatively, 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 currency denominated net monetary
asset position and the relative strength of the functional currencies compared
with the nonfunctional currencies. These borrowings create nonfunctional
currency denominated liabilities that hedge the Company's nonfunctional currency
denominated net monetary 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, 1999 and 2000, the amount of the Company's outstanding
short-term debt incurred for hedging purposes was $24.4 million and $43.7
million, respectively (see Note 6).

The Company has limited flexibility to increase prices in local currency to
offset the adverse impact of foreign exchange. As a result, the Company
primarily purchases U.S. dollar call/foreign currency put options which allows
it to protect a portion of its expected foreign currency denominated revenues
from adverse currency exchange movement. The term of purchased options typically
does not exceed 18 months and all of the options outstanding at December 31,
2000 expire in 2001. The Company does not write options or purchase call options
for trading purposes. The notional value of the Company's outstanding option
contracts, all of which were denominated in Japanese yen or euros, was $131.0
million and $126.1 million at December 31, 1999 and December 31, 2000,
respectively.

FAIR VALUE:

The carrying amounts of cash, cash equivalents, trade accounts receivable,
short-term debt and trade accounts payable approximate fair value because of the
short maturity of these financial instruments. Other assets include investments
in non-marketable private companies, publicly traded companies and certain
equity investments held in a trust. Investments in private companies 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, 1999 and 2000. Investments in publicly traded companies and equity
investments held in the trust are reported at fair value with related unrealized
gains and losses reported, net of tax, in accumulated other comprehensive
income. The investments reported at fair value and the related unrealized and
realized gains and losses were not material to the Company's financial position
for the years ended December 31, 1999 and 2000.


<PAGE>

3.  FINANCIAL INSTRUMENTS (CONTINUED)

The estimated fair value of the Company's forward exchange contracts and
currency options generally reflect 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. At
December 31, 1999 and 2000, the net carrying value and fair value of derivative
financial instruments were not material to the financial position of the
Company.

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. The carrying amount and
fair value of the Company's long-term debt was $573.0 million and $532.9
million, respectively at December 31, 1999 and $573.5 million and $344.3
million, respectively at December 31, 2000.

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. In addition, 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 forward
exchange contract or a currency option were to fail to meet its contractual
obligation, in which case the Company would be required to replace the contract
at the 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 forward exchange contracts and
purchased currency 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 trade
accounts receivable are adequate.


<PAGE>

4. INCOME TAXES

An analysis of income tax expense follows:

<TABLE>
<CAPTION>
(IN MILLIONS)                                                       CURRENT        DEFERRED       TOTAL
--------------------------------------------------------------------------------------------------------
<S>                                                                 <C>            <C>            <C>
1998
----
Federal                                                                $  .9        $  (.3)       $   .6
State                                                                     .5            --            .5
Foreign                                                                 16.6          (5.6)         11.0
                                                                  ---------------------------------------

    Total                                                              $18.0        $ (5.9)        $12.1
                                                                  =======================================

1999
----
Federal                                                                $ 1.1        $(17.2)       $(16.1)
State                                                                     .5           2.3           2.8
Foreign                                                                  5.6          12.4          18.0
                                                                  ---------------------------------------

    Total                                                              $ 7.2        $ (2.5)       $  4.7
                                                                  =======================================

2000
----
Federal                                                                $ 1.6           $.4        $  2.0
State                                                                    (.2)           --           (.2)
Foreign                                                                 14.8           3.6          18.4
                                                                  ---------------------------------------

    Total                                                              $16.2        $  4.0        $ 20.2
                                                                  =======================================
</TABLE>

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 $330.4 million at December 31,
1999 and $327.7 million at December 31, 2000. The significant components of the
amounts shown on the balance sheet as of December 31 are as follows:


<PAGE>

4. INCOME TAXES (CONTINUED)

<TABLE>
<CAPTION>
(IN MILLIONS)                                                         1999          2000
-------------------------------------------------------------------------------------------
<S>                                                                   <C>           <C>
Deferred tax assets:
   Property, plant and equipment and trademarks                      $ (22.8)       $  (6.7)
   Inventory                                                            35.2           34.5
   Compensation and benefits                                            41.6           28.1
   Postretirement and postemployment benefits                          110.6          108.3
   Loss and credit carryforwards                                       202.6          202.1
   All other                                                             4.8          (14.7)
                                                                  --------------------------
                                                                       372.0          351.6
   Valuation allowance                                                 (30.3)         (10.6)
                                                                  --------------------------
Total deferred tax assets                                              341.7          341.0

Deferred tax liabilities:
   Property, plant and equipment and trademarks                          6.6            6.6
   Inventory                                                             4.9            4.6
   Compensation and benefits                                             1.5            2.6
   All other                                                            (1.7)           (.5)
                                                                  --------------------------
Total deferred tax liability                                            11.3           13.3
                                                                  --------------------------

   Net deferred tax asset                                             $330.4         $327.7
                                                                  ==========================
</TABLE>

Valuation allowances of $30.3 million and $10.6 million were established at
December 31, 1999 and 2000, respectively, for the prepaid taxes primarily
associated with foreign tax credits. 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,
1999 and 2000, the Company did not believe it was more likely than not that it
would generate a sufficient level and proper mix of taxable income within the
appropriate period to utilize all the foreign tax credits.

Management believes that it 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 when combined with effective tax strategies
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, planned tax strategies and the fact that the
temporary differences related to postretirement and other postemployment
benefits are deductible over a period of 30 to 40 years.


<PAGE>

4. INCOME TAXES (CONTINUED)

Management considered that as of December 31, 2000, the Company has a net
operating loss carryforward of $498.4 million, of which $77.9 million expires
in 2012; $145.7 million expires in 2018; $195.0 expires in 2019; and $79.8
million expires in 2020. The Company also has a foreign tax credit
carryforward of $10.6 million (against which, there is a full valuation
allowance) and an alternative minimum tax credit carryforward of $8.7 million
as of December 31, 2000. Approximately $2.3 million of the foreign tax credit
expires in 2001; $4.4 million expires in 2002; and $3.9 million expires in
2003. 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. Nevertheless, there can be no
assurance that the Company will generate any specific level of continuing
earnings or where these earnings will be generated.

For alternative minimum tax purposes, the Company had an alternative minimum tax
net operating loss carryforward of $418.7 million at the end of 2000, of which
$51.3 will expire in 2012; $103.6 will expire in 2018; $126.1 million will
expire in 2019; and $137.7 million will expire in 2020. In addition, the Company
had an alternative minimum tax foreign tax credit carryforward at the end of
2000 of $11.2 million. Approximately $3.1 million expires in 2001; $4.5 million
expires in 2002; and $3.6 million expires in 2003.

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

<TABLE>
<CAPTION>
(IN MILLIONS)                                                         1998           1999          2000
--------------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>            <C>
Domestic                                                             $(33.6)        $(52.8)        $11.6
Foreign                                                                (5.3)          66.2          46.3
                                                                  ---------------------------------------

    Total                                                            $(38.9)        $ 13.4         $57.9
                                                                  =======================================
</TABLE>


<PAGE>

4. INCOME TAXES (CONTINUED)

A reconciliation of differences between income tax computed at the statutory
U.S. federal income tax rate (35% for all years presented) and the Company's
reported income tax expense follows:

<TABLE>
<CAPTION>
(IN MILLIONS)                                                          1998          1999          2000
--------------------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>           <C>
Income tax expense/(benefit) at U.S. statutory rate                   $(13.6)        $ 4.7         $20.2
State taxes                                                              1.5           2.6           (.1)
Benefit plan deductions                                                   .1          (2.8)         (1.4)
Loss carryforwards                                                      (4.0)           --            --
Nondeductible expenses/nontaxable income                                 1.0            .9            .7
Valuation allowance change                                               2.9            --         (19.7)
Tax effect resulting from foreign activities                            23.6           (.9)         21.2
Other                                                                     .6            .2           (.7)
                                                                  ---------------------------------------

Reported income tax expense                                           $ 12.1         $ 4.7         $20.2
                                                                  =======================================
</TABLE>

Undistributed earnings of foreign subsidiaries held for reinvestment in overseas
operations amounted to $474.7 million at December 31, 2000. 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 $24.9 million would be
payable.

5.  INVENTORIES

The classification of inventories at December 31 follows:

<TABLE>
<CAPTION>
(IN MILLIONS)                                                           1999          2000
-------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>
Raw materials                                                          $ 84.3        $ 86.6
Work-in-process                                                         135.8         164.0
Finished goods                                                          175.5         231.9
                                                                  --------------------------

    Total                                                              $395.6        $482.5
                                                                  ==========================
</TABLE>


<PAGE>

6. SHORT-TERM DEBT

At December 31, 2000, the Company had $363.7 million outstanding in short-term
debt. The amounts outstanding were comprised of $320.0 million under the Amended
Credit Agreement (defined below), $30.4 million under the U.K. Credit Agreement
(defined below) and $13.3 million under uncommitted short-term lines of credit.
At December 31, 1999, the Company had $259.4 million outstanding in short-term
debt and the amounts outstanding were comprised of $235.0 million under the
Amended Credit Agreement, $8.4 million under the U.K. Credit Agreement and $16.0
million under uncommitted short-term lines of credit.

In December 1998, the Company entered into a credit agreement for a maximum
commitment of $350 million on a revolving basis that is scheduled to mature
on December 31, 2001 (as amended, the "Amended Credit Agreement"). In
connection with the Amended Credit Agreement, the Company entered into a
security agreement and certain related documents that granted the lenders a
first security interest in certain of the Company's domestic inventories and
trade accounts receivable. Funds borrowed under the Amended Credit Agreement
have borne interest, at the Company's option, at either the prime rate of J.P
Morgan Chase & Co. ("Prime") plus a margin or LIBOR on euro-dollar loans plus
a margin. The margins range from 0% to 1.275% for Prime-based loans and from
0.190% to 2.275% for euro-dollar loans based on the Company's credit rating.
In addition, the Company has paid the lenders a facility fee ranging from
0.085% to 0.725% depending on the Company's credit rating, a commitment fee
on unused commitments ranging from 0% to 0.025% depending on the Company's
credit rating and a fee to the administrative agent. The weighted average
interest rate on amounts outstanding under the Amended Credit Agreement was
7.6% and 8.7% at December 31, 1999 and 2000, respectively.

In August 1999, the Company's wholly-owned subsidiary, Polaroid (U.K.)
Limited ("Polaroid U.K."), as borrower, and the Company as guarantor, entered
into a loan agreement for a maximum commitment of 72.5 million euros or
approximately $73.0 million at December 31, 1999 and $67.5 million at
December 31, 2000 (the "U.K. Credit Agreement") that is scheduled to mature
on December 31, 2001. Several of the Company's foreign subsidiaries granted
the lenders under this facility a security interest in certain foreign
inventories and receivables. Borrowings under the U.K. Credit Agreement
facility have borne a margin approximately 25 basis points higher than that
paid under the Amended Credit Agreement. The weighted average interest rate
on amounts outstanding under the U.K. Credit Agreement was 7.5% and 7.6% at
December 31, 1999 and 2000, respectively.

<PAGE>

6. SHORT-TERM DEBT (CONTINUED)

The Amended Credit Agreement and the U.K. Credit Agreement require the
Company to maintain financial ratios related to the maximum level of debt to
earnings before interest, taxes, depreciation, and amortization (the
"Debt/EBITDA ratio") and minimum interest coverage (the "Interest Coverage
ratio"). In addition to financial ratios, the Amended Credit Agreement and
the U.K. Credit Agreement restrict, among other things, the Company's ability
to do the following: make certain capital expenditures; make certain
payments; incur debt in addition to the 2006 Notes (see Note 8); incur
certain liens; make certain investments; enter into certain sale and
leaseback transactions; merge, consolidate, sell or transfer all or
substantially all of the Company's assets subject to certain financial
conditions; enter into certain transactions with affiliates; and pay
dividends and repurchase stock.

The Company entered into a waiver to the Amended Credit Agreement effective
as of February 16, 2001, which waives defaults and potential defaults of the
Interest Coverage Ratio and Debt/EBITDA Ratio covenants until May 15, 2001.
The waiver provides for the availability of borrowings for actual cash needs
arising in the ordinary course of business up to the maximum commitment of
$350 million and grants the lenders a security interest in substantially all
of the Company's personal property including equipment, patents, trademarks
and other intellectual property and the capital stock of its subsidiaries and
a mortgage on certain real estate, in each case, as permitted by the
indentures under which certain of the Company's debt was issued. Because the
U.K. Credit Agreement incorporates the covenants contained in the Amended
Credit Agreement, a waiver of the U.K. Credit Agreement was entered into as
of February 16, 2001, that waives defaults and potential defaults for the
same period and under the same conditions as the waiver to the Amended Credit
Agreement. The waiver to the U.K. Credit Agreement limits the availability of
borrowings to a maximum commitment of 57 million euros or approximately $52
million at March 23, 2001.

During the waiver period, funds borrowed under the Amended Credit Agreement
will bear interest, at the Company's option, at either Prime plus 1.525% or
LIBOR plus 2.525% regardless of the Company's credit rating. In addition, the
Company will pay the lenders a facility fee of 0.725%, a commitment fee on
unused commitments of 0.025% and a fee to the administrative agent. Funds
borrowed under the U.K. Credit Agreement will bear interest at LIBOR plus
2.5%.

<PAGE>

6. SHORT-TERM DEBT (CONTINUED)

If the Company is unsuccessful in its negotiations with its existing lenders,
the lenders will have the right to demand repayment of their loans when the
waivers expire, because the Company believes it will then be in default of
the Amended Credit Agreement and the U.K. Credit Agreement. In addition, if
the lenders under the Amended Credit Agreement and the U.K. Credit Agreement
were to demand repayment of their loans, the Company could also be required
to repay the amounts of debt outstanding that were issued under the Company's
indentures because of the cross-default provisions in the indentures. There
can be no assurance that the Company's existing lenders will agree to extend
the waivers or to amend the Amended Credit Agreement and the U.K. Credit
Agreement to eliminate the potential covenant violations that are expected to
exist when the waivers expire or that the Company will be able to raise the
required funds to refinance the Amended Credit Agreement and the U.K. Credit
Agreement at maturity or earlier if the waivers expire without an extension
or an amendment in place and the lenders demand repayment of their loans
under these agreements.

The Company is considering all of its options with respect to amending and
refinancing of the Amended Credit Agreement, the U.K. Credit Agreement and
the 2002 Notes due January 15 (see Note 8) and has retained a financial
advisor to assist it with these matters. The Company is currently involved in
negotiations with its existing lenders with respect to amendments to the
Amended Credit Agreement and the U.K. Credit Agreement and with several other
financial institutions with respect to the possible refinancing of these
agreements and the 2002 Notes. Based on these negotiations, the Company
believes that it will be able to either extend the waivers or obtain
amendments of the Amended Credit Agreement and the U.K. Credit Agreement
through December 31, 2001 prior to the expiration of the waivers. The Company
expects to complete the refinancing of the Amended Credit Agreement, the U.K.
Credit Agreement and, if necessary, the 2002 Notes, in the second half of
2001.

In addition to the Amended Credit Agreement and the U.K. Credit Agreement,
the Company has several uncommitted short-term lines of credit with maximum
commitments of $23.0 million and $30.2 million at December 31, 1999 and 2000,
respectively, with a number of commercial banks outside of the United States.
The weighted average interest rates on amounts outstanding under these lines
of credit was 3.2% and 3.6% at December 31, 1999 and 2000, respectively.

Interest expense on U.S. short-term borrowings was $8.9 million, $17.5
million and $25.3 million in 1998, 1999 and 2000, respectively. The weighted
average interest rates on these borrowings were 6.6%, 7.6% and 8.7% in 1998,
1999 and 2000, respectively. Interest expense on foreign short-term
borrowings was $8.4 million, $3.9 million and $2.6 million in 1998, 1999 and
2000, respectively. The weighted average interest rates on these borrowings
were 4.4%, 4.3% and 5.2% in 1998, 1999 and 2000, respectively.


<PAGE>

7.  PAYABLES AND ACCRUALS

The following items are included in payables and accruals at December 31:

<TABLE>
<CAPTION>
(IN MILLIONS)                                                          1999          2000
-------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>
Trade accounts payable                                                 $180.0        $199.3
Reserve for marketing programs                                           31.0          38.2
Other accrued expenses and current liabilities                          127.0          96.6
                                                                  --------------------------

   Total                                                               $338.0        $334.1
                                                                  ==========================
</TABLE>

8.  LONG-TERM DEBT

Long-term debt outstanding as of December 31 was as follows:

<TABLE>
<CAPTION>
(IN MILLIONS)                                                           1999          2000
-------------------------------------------------------------------------------------------
<S>                                                                     <C>           <C>
6 3/4% Notes due January 15, 2002                                       $149.3        $149.7
7 1/4% Notes due January 15, 2007                                        148.7         148.8
11 1/2% Notes due February 15, 2006                                      275.0         275.0
                                                                  --------------------------

    Total                                                               $573.0        $573.5
                                                                  ==========================
</TABLE>

In January 1997, the Company issued $300.0 million in debt securities consisting
of $150 million 6 3/4% Notes due January 15, 2002 (the "2002 Notes") and $150
million 7 1/4% Notes due January 15, 2007 (the "2007 Notes") to refinance
existing debt. The 2002 Notes were placed with a discount, at a price of 99.53%
of par with a yield of 6.86%. The 2007 Notes were placed with a discount, at a
price of 99.43% of par with a yield of 7.33%. The net proceeds from the sale of
the Notes were used primarily for the payment of $150.0 million principal amount
of the Company's 7 1/4% Notes due January 15, 1997 and to exercise the Company's
right to repurchase 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.


<PAGE>

8.  LONG-TERM DEBT (CONTINUED)

In February 1999, the Company issued $275 million of 11 1/2% Notes due February
15, 2006 (the "2006 Notes"). The 2006 Notes were placed at par value. The net
proceeds of $268 million from the sale of the 2006 Notes were used primarily for
the payment of $200 million aggregate principal amount of the Company's 8% Notes
which were due on March 15, 1999 and for general corporate purposes, including
reducing amounts outstanding under the Amended Credit Agreement and short-term
lines of credit. The indenture, pursuant to which the 2006 Notes were issued,
contains certain covenants that restrict, among other things, the Company's
ability to do the following: make certain restricted payments, including
dividends on and the purchase of the Company's common stock; incur additional
debt and issue preferred stock; incur certain liens; enter into sale and
leaseback transactions; enter into certain transactions with affiliates; and
enter into certain mergers and consolidations or sell all or substantially all
of the properties or assets of the Company. In addition, the indentures
pursuant to which the 2002 Notes, 2007 Notes and 2006 Notes were issued
contain cross-default provisions related to other debt, including the Amended
Credit Agreement and the U.K. Credit Agreement (see Note 6).

The aggregate scheduled repayments on the Company's long-term debt outstanding
at December 31, 2000 was $150.0 million in 2002 and $425.0 million in 2006 and
thereafter.

9.  COMMON STOCKHOLDERS' EQUITY

In 1999 and 2000, the Company contributed .6 and .9 million shares,
respectively, of its common stock valued at $13.4 million and $12.0 million,
respectively, to the Company's Retirement Savings Plan (see Note 11). Shares
held by the Company's Retirement Savings Plan on December 31, 1999 and 2000 were
7.4 million and 7.9 million, respectively, all of which were allocated to
participants.

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 $4.1 million in 1998, $15.2 million in 1999 and $.4 million in 2000.

In 1990, the Company adopted the 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.



<PAGE>

10.  INCENTIVE COMPENSATION AND STOCK INCENTIVE PLANS (CONTINUED)

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 was 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. As a
result, a maximum of 6,500,000 shares of the Company's common stock has been
authorized for use under the 1993 Plan, plus any shares that become available
under the 1990 Plan. In November 2000, as part of the Company's retention
program, option holders were given the opportunity to surrender outstanding
stock options which were not in the money, for a grant of restricted stock at a
ratio of one share of restricted stock for each five stock options surrendered.
In addition, supplemental restricted stock grants were made to certain
executives. A total of 3,547,886 stock options were cancelled in 2000 as a
result of this exchange. The number of common shares reserved for granting of
future awards for officers and key employees was 1,119,699 at December 31, 1998,
517,108 at December 31, 1999 and 3,241,435 at December 31, 2000.

Prior to 1999, the stock options typically vested proportionately over
approximately four years and could be exercised for approximately ten years from
the date of grant, if the holder remained in the employ of the Company. In 1999,
the Company changed the vesting period to three years for grants after September
1998 and the exercise period to seven years if the holder remained in the employ
of the Company for grants after August 1999. In general, if the option holder's
employment terminates for reasons other than a change of control or death no
further vesting can occur.

The Human Resource Committee of the Company's Board of Directors, composed 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"), granting 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.


<PAGE>

10. INCENTIVE COMPENSATION AND STOCK INCENTIVE PLANS (CONTINUED)

In May 1997, the Company, with shareholder approval, amended the Directors' Plan
to allow for awards of 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. Current non-employee directors are
also granted stock options annually valued at $35,000 (see Note 11).

Under the Directors' Plan, option awards are exercisable for a ten year period
from the date of grant for stock options issued through December 31, 1999 and
for a seven year period for stock options issued after December 31, 1999 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 stock
options within one year 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. As of December 31, 2000, a
cumulative total of 189,400 stock options have been granted at prices ranging
from $19.69 to $52.00 under the Directors' Plan.

A summary of the Company's fixed stock option awards as of December 31, 1998,
1999 and 2000 and changes during the years ending on those dates is presented
below:

<TABLE>
<CAPTION>

                                                      Number of Stock     Weighted-Average
                                                           Options         Exercise Price
                                                     ----------------------------------------
                                                       (IN THOUSANDS)
<S>                                                  <C>                  <C>
Outstanding at January 1, 1998                                  3,912               $37.16

   Granted                                                      2,159               $32.92
   Exercised                                                     (190)              $30.52
   Forfeited                                                     (114)              $39.38
                                                     -----------------
Outstanding at December 31, 1998                                5,767               $35.74

   Granted                                                      1,429               $25.63
   Exercised                                                       (9)              $24.80
   Forfeited                                                     (935)              $34.54
                                                     -----------------

OUTSTANDING AT DECEMBER 31, 1999                                6,252               $33.63

   Granted                                                        157               $17.76
   Exercised                                                       (5)              $24.79
   Forfeited                                                   (4,655)              $33.15
                                                     -----------------

OUTSTANDING AT DECEMBER 31, 2000                                1,749               $33.39
                                                     =================
</TABLE>

<PAGE>

10. INCENTIVE COMPENSATION AND STOCK INCENTIVE PLANS (CONTINUED)

Stock options exercisable at December 31:

<TABLE>
<CAPTION>
                                                                          Weighted-Average
                                                      Number of Stock          Exercise
                                                          Options              Price
                                                    ----------------------------------------
                                                      (IN THOUSANDS)
<S>                                                 <C>                   <C>
1998                                                            2,760             $35.87
1999                                                            3,515             $36.36
2000                                                            1,502             $35.18

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

1998                                                                               $9.14
1999                                                                               $8.58
2000                                                                               $7.34
</TABLE>

Stock options outstanding at December 31, 2000:

<TABLE>
<CAPTION>
                                                            Weighted-Average
         Range of                    Number of            Remaining Contractual        Weighted-Average
      Exercise Prices              Stock Options                  Life                  Exercise Price
----------------------------------------------------------------------------------------------------------
                                  (IN THOUSANDS)                 (YEARS)
<S>                               <C>                     <C>                          <C>
$12 to $18                                     106                        6.6                    $16.31
$19 to $28                                     510                        4.1                    $24.16
$31 to $46                                   1,115                        3.4                    $38.96
$47 to $57                                      18                        7.2                    $50.09
                             --------------------------
$12 to $57                                   1,749                        4.3                    $33.39
                             ==========================
</TABLE>

Stock options exercisable at December 31, 2000:

<TABLE>
<CAPTION>
         Range of                    Number of              Weighted-Average
      Exercise Prices              Stock Options             Exercise Price
--------------------------------------------------------------------------------
                                  (IN THOUSANDS)
<S>                               <C>                       <C>
$19 to $28                                     398                    $24.43
$31 to $46                                   1,088                    $38.90
$47 to $57                                      16                    $50.00
                             --------------------------
$19 to $57                                   1,502                    $35.18
                             ==========================
</TABLE>


<PAGE>

10. INCENTIVE COMPENSATION AND STOCK INCENTIVE PLANS (CONTINUED)

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 earnings/(loss) and basic
earnings/(loss) per common share would have been changed to the pro forma
amounts as follows:

<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE DATA)                                  1998           1999          2000
--------------------------------------------------------------------------------------------------------
<S>                                                                  <C>             <C>           <C>
Net earnings/(loss):
   As reported                                                       $(51.0)          $8.7         $37.7
   Pro forma                                                          (59.0)            .7          34.9
Basic earnings/(loss) per share:
   As reported                                                        (1.15)           .20           .84
   Pro forma                                                          (1.33)           .02           .78
Diluted earnings/(loss) per share:
   As reported                                                        (1.15)           .20           .84
   Pro forma                                                          (1.33)           .02           .77
</TABLE>

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:

<TABLE>
<CAPTION>
                                                                 1998            1999            2000
                                                            ---------------------------------------------
<S>                                                           <C>             <C>             <C>
Dividend yield                                                 1.9%            2.4%            3.4%
Expected volatility                                           25.6%           36.6%           38.6%
Risk free interest rate                                        4.9%            5.8%            6.5%
Expected option life                                           5.5 years       5.0 years       5.3 years
</TABLE>

Dividend equivalent payments on outstanding stock options of $1.3 million, $1.2
million and $.9 million were made in 1998, 1999 and 2000, respectively. No stock
options were granted in 1998, 1999 or 2000 with dividend equivalents.


<PAGE>

10. INCENTIVE COMPENSATION AND STOCK INCENTIVE PLANS (CONTINUED)

In January 2000, executives and key employees were granted shares of
performance accelerated restricted stock (PARS) as a long-term incentive. In
addition, a special grant of PARS was made to selected executives and key
employees in July 2000 as part of a retention program. The PARS grants are
subject to accelerated vesting of a portion of the award if the Company
achieves certain performance goals during any year between 2000 and 2003. If
the acceleration terms are not satisfied, the awards vest one third each year
over the three year vesting period. One share of the Company's common stock
will be issued for each share of PARS that vests. No shares of stock were
issued on the grant date. A total of 891,280 PARS shares were granted at
prices of $19.06 and $18.06. A total of $3.6 million was charged to expense
under this program in 2000.

Under the 1993 Plan, the Company awarded 25,000 shares of restricted stock at
$46.50 per share in 1995 and 15,000 shares of restricted stock at $45.88 per
share in 1996. The 1995 restricted shares vest proportionately each year over a
five year period. The 1996 restricted shares vested if the Company achieved
certain financial objectives within 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.
In 1999, 10,000 of the 1996 restricted shares were forfeited because the
financial objectives were not achieved. In addition, the Company awarded 10,000
shares of restricted stock in 1998 that vest proportionately over a four year
period. The receipt of the shares was deferred and the related cost is being
accrued over the vesting period. In November 2000, as part of the Company's
retention program, executives and key employees were given the opportunity to
surrender certain outstanding stock options which were not in the money, for a
grant of restricted stock at a ratio of one share of restricted stock for each
five stock options surrendered. In addition, supplemental restricted stock
grants were made to certain executives. This restricted stock award vests over a
two year period at a rate of one-half each year. One share of the Company's
common stock will be issued for each share of restricted stock that vests. No
shares of stock were issued on the award date. A total of 961,579 shares of
restricted stock were granted at a price of $7.63 under this program in 2000.
Amounts charged to expense related to restricted stock were $.1 million, $.3
million and $.5 million in 1998, 1999 and 2000, respectively. The Company's
balance sheet amounts for deferred compensation included $.3 million and $.1
million at December 31, 1999 and 2000, respectively, related to restricted stock
issued under the 1993 Plan.


<PAGE>

10. INCENTIVE COMPENSATION AND STOCK INCENTIVE PLANS (CONTINUED)

Officers and a limited number of senior executives of the Company are eligible
to receive performance share awards payable in shares of the Company's common
stock. These awards are tied to the achievement of specific financial metrics
critical to the long-term success of the Company. Performance is measured over a
three year period and is based on improvements in the Company's revenue and
return on net assets. Awards are valued at the fair value of the Company's
common stock on the date the awards are earned. No awards are made unless both
of the threshold performance targets are reached. Amounts charged or credited to
expense related to performance shares were $(.1) million, $2.3 million and
$(1.0) million in 1998, 1999 and 2000, respectively.

11.  BENEFIT PLANS

The Company maintains a qualified noncontributory trusteed pension plan covering
substantially all domestic employees. Through 1997, the benefits were based on
years of service and final average compensation at retirement. Effective January
1, 1998, the Company adopted a pension plan change for most of its U.S.
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 was reflected in the funded status of the Company's plans as of December
31, 1997. In general, the Company's policy is to fund the U.S. 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,
publicly traded common stocks and investments in private equity and 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.


<PAGE>


11.  BENEFIT PLANS (CONTINUED)

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

<TABLE>
<CAPTION>
(IN MILLIONS)                                                         1998          1999          2000
----------------------------------------------------------------- ------------- ------------- -------------
<S>                                                               <C>           <C>           <C>
Service cost                                                           $ 26.3       $ 26.7        $ 22.0
Interest cost                                                            83.3         84.4          83.8
Expected return on assets                                              (102.0)      (109.8)       (114.5)
Amortization of:
   Unrecognized transition asset                                        (11.1)       (11.1)        (10.0)
   Unrecognized prior service cost                                        3.4          3.6           3.5
   Unrecognized gain                                                      (.9)         (.4)         (1.4)
Curtailment cost                                                          2.6           --            --
Settlement gain                                                            --        (24.5)         (1.4)
                                                                  ------------- ------------- -------------

    Net periodic pension cost/(credit)                              $     1.6      $ (31.1)      $ (18.0)
                                                                  ============= ============= =============

</TABLE>

The following tables set forth the plans' reconciliations of projected benefit
obligations, plan assets, funded status and amounts recognized in the Company's
consolidated balance sheet at December 31:

<TABLE>
<CAPTION>
(IN MILLIONS)                                                            1999              2000
------------------------------------------------------------------ ----------------- -----------------
<S>                                                                <C>               <C>
Projected benefit obligation at beginning of year                        $1,339.9          $1,222.0
Service cost                                                                 26.7              22.0
Interest cost                                                                84.4              83.8
Plan participants' contributions                                               .7               1.1
Plan amendments                                                               4.5               2.9
Special termination benefits                                                   .7               1.3
Actuarial (gain)/loss                                                       (56.7)              2.7
Foreign currency exchange rate change                                       (17.5)            (15.3)
Transfers in                                                                  4.0                --
Benefits paid                                                              (164.7)           (123.7)
                                                                   ----------------- -----------------

   Projected benefit obligation at end of year                           $1,222.0          $1,196.8
                                                                   ================= =================

</TABLE>


<PAGE>

11.  BENEFIT PLANS (CONTINUED)

<TABLE>
<CAPTION>
(IN MILLIONS)                                                            1999              2000
------------------------------------------------------------------ ----------------- -----------------
<S>                                                                <C>               <C>
Fair value of plan assets at beginning of year                           $1,544.6          $1,507.7
Actual return on plan assets                                                145.8               7.6
Employer contributions                                                        4.6              18.9
Plan participants' contributions                                               .7               1.1
Transfers in                                                                  4.0                --
Benefits paid                                                              (164.7)           (123.7)
Foreign currency exchange rate change                                       (27.3)            (23.1)
                                                                   ----------------- -----------------

   Fair value of plan assets at end of year                              $1,507.7          $1,388.5
                                                                   ================= =================
</TABLE>

<TABLE>
<CAPTION>
(IN MILLIONS)                                                            1999              2000
------------------------------------------------------------------ ----------------- -----------------
<S>                                                                <C>               <C>
Plan assets in excess of projected benefit obligation                     $ 285.7            $191.7
Unrecognized:
   Transition asset                                                         (24.3)            (13.6)
   Prior service cost                                                        31.0              30.0
   Gain                                                                    (336.3)           (218.8)
                                                                   ----------------- -----------------

   Accrued liability at end of year                                        $(43.9)           $(10.7)
                                                                   ================= =================

</TABLE>

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:

<TABLE>
<CAPTION>
                                                                      1998          1999          2000
                                                                  ------------- ------------- -------------
<S>                                                               <C>           <C>           <C>
Weighted average discount rate                                          6.7%          7.3%          7.3%
Weighted average rate of increase in compensation levels                3.8%          3.8%          3.8%
Weighted average expected long-term rate of return on assets            9.3%          9.4%          9.3%

</TABLE>

The Company recorded a settlement gain of $24.5 million in 1999 related to the
large number of employees that left the Company, primarily under the Company's
involuntary severance program, and elected to receive lump sum benefit
distributions under the Company's pension plan in 1999. The Company recorded
approximately half of this gain in cost of goods sold and half in marketing and
administrative expense. The gain was allocated to the non-segment Corporate
category. In 2000, the Company recorded an additional settlement gain of $1.4
million related primarily to employees who left the Company in late 1999 and
elected to receive lump sum benefit distributions under the Company's pension
plan.


<PAGE>

11.  BENEFIT PLANS (CONTINUED)

Effective January 1998, the Company began contributing an amount of the
Company's common stock equal to 5% of each eligible domestic employees' pay to
the ESOP fund. The amount charged to expense for this contribution in 1998, 1999
and 2000 was $15.1 million, $13.4 million and $12.0 million, respectively. Also
in 1998, the Company began contributing an amount equal to 3% of each eligible
domestic employees' annual pay in cash to the Retirement Savings Plan. The
amount charged to expense for these cash contributions was $9.2 million, $8.2
million and $7.2 million in 1998, 1999 and 2000, respectively.

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.
Substantially all eligible retirees 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 intended to annually review the
amount it would contribute toward this coverage and intended, at its option,
to make adjustments to this amount based on several considerations including
financial factors, inflation of medical costs and other relevant factors. In
2000, the Company modified this benefit for a significant number of plan
participants to further reduce its exposure to future medical inflation.
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:

<TABLE>
<CAPTION>
(IN MILLIONS)                                                          1998           1999          2000
------------------------------------------------------------------ -------------- ------------- -------------
<S>                                                                <C>            <C>           <C>
Service cost                                                             $ 6.6          $6.2          $4.1
Interest cost                                                             16.8          17.2          16.8
Amortization of unrecognized prior service cost                          (10.6)         (9.0)         (9.4)
Curtailment gain                                                          (1.3)         (1.9)           --
                                                                   -------------- ------------- -------------

   Net periodic postretirement benefit cost                             $ 11.5         $12.5         $11.5
                                                                   ============== ============= =============

</TABLE>


<PAGE>


11.  BENEFIT PLANS (CONTINUED)

The following tables set forth the plan's reconciliations of accumulated
postretirement benefit obligation and plan assets, the funded status of the
plan and amounts recognized in the Company's consolidated balance sheet at
December 31:

<TABLE>
<CAPTION>
(IN MILLIONS)                                                          1999           2000
------------------------------------------------------------------ -------------- -------------
<S>                                                                <C>            <C>
Accumulated postretirement benefit obligation
   at beginning of year                                                 $265.4        $247.1
Service cost                                                               6.2           4.1
Interest cost                                                             17.2          16.8
Plan amendment                                                              --         (34.3)
Plan participants' contributions                                           1.3           2.0
Actuarial (gain)/loss                                                    (22.8)          4.2
Benefits paid                                                            (20.2)        (21.7)
                                                                   -------------- -------------

   Accumulated postretirement benefit obligation at end of
     year                                                               $247.1        $218.2
                                                                   ============== =============
</TABLE>

<TABLE>
<CAPTION>
(IN MILLIONS)                                                          1999           2000
------------------------------------------------------------------ -------------- -------------
<S>                                                                <C>            <C>
Fair value of plan assets at beginning of year                           $  --         $  --
Employer contributions                                                    18.9          19.7
Plan participants' contributions                                           1.3           2.0
Benefits paid                                                            (20.2)        (21.7)
                                                                   -------------- -------------

    Fair value of plan assets at end of year                             $  --         $  --
                                                                   ============== =============
</TABLE>

<TABLE>
<CAPTION>
(IN MILLIONS)                                                          1999           2000
------------------------------------------------------------------ -------------- -------------
<S>                                                                <C>            <C>
Plan obligations in excess of plan assets                               $(247.1)      $(218.2)
Unrecognized:
    Prior service cost                                                     (6.0)        (30.9)
    Loss                                                                     .2           4.4
                                                                   -------------- -------------

    Accrued liability at end of year                                    $(252.9)      $(244.7)
                                                                   ============== =============

</TABLE>

The Accumulated Postretirement Benefit Obligation ("APBO") at both December 31,
1999 and 2000 was determined using a discount rate of 7.5%. The assumed health
care cost trend rate used in measuring the APBO at both December 31, 1999 and
2000 was 7.5%, declining gradually to an ultimate rate of 6% in 2007. These
trend rates reflect the Company's current experience and expectation that future
rates will decline.


<PAGE>

11.  BENEFIT PLANS (CONTINUED)

The assumptions used above have an effect on the amounts reported. A one
percentage point change in the Company's assumed health care cost trend rates
would have the following effects for the year ended December 31, 2000:

<TABLE>
<CAPTION>
(IN MILLIONS)                                                        1% Increase        1% Decrease
----------------------------------------------------------------- ------------------ ------------------
<S>                                                               <C>                <C>
Effect on total of service and interest cost                                $.1               $(.1)

Effect on accumulated postretirement benefit obligation                    $1.5              $(1.3)

</TABLE>

The Company has a Board of Directors' Retirement Plan (the "Directors'
Retirement Plan") primarily for the benefit of former non-employee directors.
The estimated present value of future benefit payments under the Directors'
Retirement Plan is accrued annually based on the credited service up to the
participants' actual retirement dates and is charged to expense. For the years
1998, 1999 and 2000, $.2 million, $.2 million and $.1 million, respectively, was
charged to expense for the Directors' Retirement Plan.

12.  RENTAL EXPENSE AND LEASE COMMITMENTS

Minimum annual rental commitments at December 31, 2000, under noncancelable
leases, principally for real estate, are payable as follows:

<TABLE>
<CAPTION>
              (IN MILLIONS)
              <S>                                                <C>
              2001                                               $21.6
              2002                                                19.0
              2003                                                15.3
              2004                                                14.1
              2005                                                13.8
              2006 and thereafter                                 80.2
                                                        -----------------
              Total minimum lease payments                      $164.0
                                                        =================
</TABLE>

Minimum payments have not been reduced by minimum sublease rentals of $1.4
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.


<PAGE>


12.  RENTAL EXPENSE AND LEASE COMMITMENTS (CONTINUED)

Rental and lease expenses consisted of the following:

<TABLE>
<CAPTION>
(IN MILLIONS)                                                         1998          1999          2000
----------------------------------------------------------------- ------------- ------------- -------------
<S>                                                               <C>           <C>           <C>
Minimum rentals                                                          $26.5         $28.4         $28.4
Contingent rentals                                                         4.9           2.1           2.0
                                                                  ------------- ------------- -------------

    Total                                                                $31.4         $30.5         $30.4
                                                                  ============= ============= =============

</TABLE>

Sublease income amounted to $1.7 million, $1.5 million and $3.5 million in 1998,
1999 and 2000, respectively.

13.  BUSINESS

NATURE OF OPERATIONS

The Company designs, develops, manufactures, and markets instant and digital
imaging products and certain related products that include digital
peripherals and software and system solutions. The Company's principal
products, which are marketed in all of the Company's sales and marketing
segments, are instant film, instant and digital cameras, digital peripherals
and secure identification systems with software and systems solutions. In
addition to its principle products, the Company designs, develops,
manufactures and/or markets hardware accessories for the instant imaging
market, conventional 35mm cameras and film and videotapes. The Company has
also operated certain non-core businesses such as graphics, which was
contributed to a joint venture in 1999 and polarizer and holography which had
been exited by the end of the first quarter of 2000.

The Company sells its products directly to and through mass merchandisers; food,
drug, discount and department stores; specialty stores; wholesalers; original
equipment manufacturers; independent agents; retail outlets; and distributors.

SEGMENTS OF BUSINESS

The Company is managed in five primary segments: the Americas Region; the
European Region; the Asia Pacific Region; Global Operations; and Research and
Development. The Americas, European and Asia Pacific segments consist of
sales and marketing operations. The Global Operations segment consists of
worldwide activities associated with manufacturing, logistics, procurement,
developing manufacturing processes for new products and inventory management.
Research and Development consists of activities related to corporate research
and engineering activities.


<PAGE>


13.  BUSINESS (CONTINUED)

Each of the Company's segments are managed by senior executives who are directly
responsible for the marketing, operational or technical strategies employed in
that segment. The Company evaluates the performance of its segments based on
profit from operations with consideration of assets employed. In the regional
sales and marketing segments, profit from operations is based on standard
product costs excluding intercompany margins and therefore reflects contribution
to worldwide Company profits from third party sales. Non-standard manufacturing
costs along with the cost of developing manufacturing processes for new products
and regional warehousing and distribution costs are reported as incurred in the
Global Operations segment. Costs related to research and engineering activities
are reported as incurred in the Research and Development segment. The financial
results of each segment are reviewed by the Company's chief operating
decision-maker.

In addition to its segments, the Company has one category called Corporate,
which it does not consider to be a segment. This category includes central
marketing, centralized information systems, general and administrative functions
and certain other corporate functions. Corporate also includes costs related to
restructuring activities and certain other non-operating items.

Assets in the regional sales and marketing segments consist primarily of
trade accounts receivable and fixed assets related to sales and
administrative activities. Global Operations assets consist primarily of
worldwide inventories and fixed assets related to manufacturing and
distribution facilities. Research and Development assets consist primarily of
fixed assets related to research and engineering activities. The assets in
the Corporate category include cash and cash equivalents, prepaid expenses
and other assets, deferred tax assets and other non-current assets.

The following is a summary of information related to the Company's segments at
December 31. Certain prior year segment information has been reclassified to
conform with the current year presentation.

SEGMENT INFORMATION

<TABLE>
<CAPTION>
(IN MILLIONS)                                                1998             1999              2000
------------------------------------------------------ ----------------- ---------------- -----------------
<S>                                                    <C>               <C>              <C>
NET SALES TO CUSTOMERS
Americas Region                                              $1,131.0          $1,230.1          $1,208.7
European Region                                                 449.0             427.7             353.9
Asia Pacific Region                                             265.9             320.8             293.0
Global Operations                                                  --                --                --
Research and Development                                           --                --                --
                                                       ----------------- ---------------- -----------------
    Subtotal Segments                                         1,845.9           1,978.6           1,855.6
Corporate                                                          --                --                --
                                                       ----------------- ---------------- -----------------
    Total                                                    $1,845.9          $1,978.6          $1,855.6
                                                       ================= ================ =================

</TABLE>


<PAGE>


13.  BUSINESS (CONTINUED)

<TABLE>
<CAPTION>
(IN MILLIONS)                                                1998             1999              2000
------------------------------------------------------ ----------------- ---------------- -----------------
<S>                                                    <C>               <C>              <C>
PROFIT/(LOSS) FROM OPERATIONS
Americas Region                                                $ 318.2          $ 332.7           $ 324.7
European Region                                                   36.1             81.3              40.2
Asia Pacific Region                                               59.0             76.6              72.0
Global Operations                                               (186.7)          (163.8)            (95.7)
Research and Development                                        (119.9)           (85.5)            (83.4)
                                                       ----------------- ---------------- -----------------
    Subtotal Segments                                            106.7            241.3             257.8
Corporate (1)                                                   (155.7)          (133.7)           (148.7)
                                                       ----------------- ---------------- -----------------
    Total                                                      $ (49.0)         $ 107.6           $ 109.1
                                                       ================= ================ =================
</TABLE>

(1) PROFIT/LOSS FROM OPERATIONS FOR CORPORATE INCLUDES WORLDWIDE
    RESTRUCTURING CHARGES OF $50.0 MILLION IN 1998 AND A REVERSAL OF
    RESTRUCTURING CHARGES TOTALING $5.8 MILLION IN 2000.

<TABLE>
------------------------------------------------------ ----------------- ---------------- -----------------
<S>                                                    <C>               <C>              <C>

ASSETS
Americas Region                                                $ 253.6          $ 287.0           $ 305.6
European Region                                                  187.4            177.0             146.3
Asia Pacific Region                                               62.7             69.8              57.6
Global Operations                                                924.8            794.8             841.5
Research and Development                                          36.4             31.6              28.8
                                                       ----------------- ---------------- -----------------
    Subtotal Segments                                          1,464.9          1,360.2           1,379.8
Corporate                                                        732.8            679.8             663.2
                                                       ----------------- ---------------- -----------------
    Total                                                     $2,197.7         $2,040.0          $2,043.0
                                                       ================= ================ =================

------------------------------------------------------ ----------------- ---------------- -----------------
DEPRECIATION AND AMORTIZATION
Americas Region                                                   $4.7            $ 4.3             $ 8.1
European Region                                                    4.7              7.1               7.7
Asia Pacific Region                                                2.0              1.0                .9
Global Operations                                                 59.0             66.0              69.2
Research and Development                                           8.0              7.2               6.9
                                                       ----------------- ---------------- -----------------
    Subtotal Segments                                             78.4             85.6              92.8
Corporate                                                         15.0             22.9              22.7
                                                       ----------------- ---------------- -----------------
    Total                                                        $93.4           $108.5            $115.5
                                                       ================= ================ =================

</TABLE>


<PAGE>


13. BUSINESS (CONTINUED)

<TABLE>
<CAPTION>
(IN MILLIONS)                                                1998             1999              2000
------------------------------------------------------ ----------------- ---------------- -----------------
<S>                                                    <C>               <C>              <C>
EXPENDITURES FOR LONG-LIVED ASSETS
Americas Region                                                  $10.4            $ 9.0             $20.0
European Region                                                    8.4              9.0               7.8
Asia Pacific Region                                                 .9               .5                .7
Global Operations                                                100.5             91.4              72.8
Research and Development                                           3.0              1.2               2.1
                                                       ----------------- ---------------- -----------------
    Subtotal Segments                                            123.2            111.1             103.4
Corporate                                                         67.9             59.4              25.8
                                                       ----------------- ---------------- -----------------
    Total                                                       $191.1           $170.5            $129.2
                                                       ================= ================ =================

</TABLE>


<TABLE>
<CAPTION>

GEOGRAPHIC INFORMATION
(IN MILLIONS)                                                1998             1999              2000
------------------------------------------------------ ----------------- ---------------- -----------------
<S>                                                    <C>               <C>              <C>
NET SALES TO CUSTOMERS (2)
United States                                                 $ 983.9          $1,082.6          $1,051.5
Other foreign countries                                         862.0             896.0             804.1
                                                       ----------------- ---------------- -----------------

    Total                                                    $1,845.9          $1,978.6          $1,855.6
                                                       ================= ================ =================
</TABLE>

(2)  NET SALES ARE ATTRIBUTABLE TO COUNTRIES BASED ON LOCATION OF THE ENTITY
     RECORDING THE SALE WHICH GENERALLY IS THE SAME AS THE LOCATION OF THE
     CUSTOMER.

<TABLE>
<CAPTION>

GEOGRAPHIC INFORMATION
(IN MILLIONS)                                                1998             1999              2000
------------------------------------------------------ ----------------- ---------------- -----------------
<S>                                                    <C>               <C>              <C>

LONG-LIVED ASSETS
United States                                                  $450.5            $443.3            $414.9
Other foreign countries                                         116.0             155.9             154.3
                                                       ----------------- ---------------- -----------------

    Total                                                      $566.5            $599.2            $569.2
                                                       ================= ================ =================

</TABLE>

The Company's principal products, which have been described above,
represented approximately 85% of the Company's net sales in 1998 and
approximately 90% in 1999 and in 2000, while sales of instant cameras and
film represented approximately 75% of the Company's net sales in 1998 and 80%
in both 1999 and 2000.

Sales to one customer, Wal-Mart Stores, Inc., amounted to approximately 13%
of the Company's total net sales in 1998 and approximately 15% in both 1999
and 2000. These sales were recorded primarily in the Americas Region.


<PAGE>


14. CONTINGENCIES

The Company owns and operates facilities that are subject to certain federal,
state and local laws and regulations relating to environmental protection,
including those governing the investigation and remediation of contamination
resulting from past or present releases of hazardous substances. Certain of
these laws and regulations may impose joint and several liability on the Company
for the costs of investigation or remediation of such contamination, regardless
of fault or the legality of original disposal.

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 those sites
and various other uncertainties, the Company cannot firmly establish its
ultimate liability concerning those 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 at least the
minimum amount of the range. The Company's aggregate reserve for these
liabilities as of December 31, 1999 and December 31, 2000 was $1.4 million and
$.8 million, respectively, and the Company currently estimates that the majority
of the reserve will be payable over the next two to three years. The Company
reviews the analysis of the data that supports the adequacy of this reserve 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 appropriate amounts from time to time as circumstances warrant.
This reserve does not take into account potential recoveries from third parties.

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 liability is joint and several.

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.


<PAGE>


14. CONTINGENCIES (CONTINUED)

A consolidated suit was filed in United States District Court for the
District of Massachusetts ("the Court") against the Company and certain of
its officers by individuals claiming to have purchased stock in the Company
and purporting to represent a class of its shareholders in actions alleging
violations of federal securities law regarding public disclosure of
information about the Company's business during a time between April 16, 1997
and August 28, 1998. On March 21, 2001, the Court issued an order dismissing
these suits. The plaintiffs in this matter have 30 days to appeal the
decision. The Company believes that these suits are without merit and will
continue to defend them vigorously.

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

15. SUBSEQUENT EVENTS

In February 2001, the Company announced a worldwide restructuring program
designed to reduce overhead costs, realign the Company's resources and allow
the Company to accelerate the implementation of its digital strategy.
Accordingly, the Company will record pre-tax restructuring and other charges
of approximately $80 million in the first quarter of 2001. The charges, which
will be allocated to the non-segment Corporate category, will include
approximately $50 million of severance costs and approximately $30 million of
asset write-offs. The severance component of this program will result in the
reduction of approximately 950 jobs over the next twelve months. Nearly half
of the employees in this program will be from the Global Operations segment
and the remainder from the Company's other segments and the non-segment
Corporate category.

16.  SUPPLEMENTARY FINANCIAL INFORMATION

The section on pages 43-45 entitled Supplementary Financial Information has not
been audited by the Company's independent auditors. Those auditors have,
however, made a limited review of the 1999 and 2000 quarterly data on page 43 in
accordance with standards established by the American Institute of Certified
Public Accountants and that information is incorporated herein by reference.
Because the Company's independent auditors did not audit the Company's quarterly
data for either year, they express no opinion on such data.


<PAGE>

<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA (UNAUDITED)
POLAROID CORPORATION AND SUBSIDIARY COMPANIES
(IN MILLIONS, EXCEPT PER SHARE AND STOCK PRICE DATA)

1999                                               FIRST             SECOND            THIRD            FOURTH            YEAR
--------------------------------------------- ----------------- ----------------- ---------------- ----------------- ---------------
<S>                                           <C>               <C>               <C>              <C>               <C>
Net sales                                              $379.0            $486.8           $463.0            $649.8         $1,978.6
Profit/(loss) from operations                            (6.9)             40.9             11.8              61.8            107.6
Net earnings/(loss)                                     (30.8)             14.8             (3.8)             28.5              8.7
Basic earnings/(loss) per common share                   (.70)              .33             (.09)              .64              .20
Diluted earnings/(loss) per common share                 (.70)              .33             (.09)              .64              .20
Cash dividends per common share                           .15               .15              .15               .15              .60
Stock prices*
   High                                                 24.74             27.75            30.06             27.81            30.06
   Low                                                  17.06             19.06            20.94             17.25            17.06
</TABLE>

*  RECORDED ON THE NEW YORK STOCK EXCHANGE COMPOSITE.


<PAGE>

<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE AND STOCK PRICE DATA)

2000                                               FIRST             SECOND            THIRD            FOURTH            YEAR
--------------------------------------------- ----------------- ----------------- ---------------- ----------------- ---------------
<S>                                           <C>               <C>               <C>              <C>               <C>
Net sales                                             $403.4            $487.8           $458.2             $506.2         $1,855.6
Profit/(loss) from operations                            9.2              50.7             48.5                 .7            109.1
Net earnings/(loss)                                     (1.4)             26.6             18.4               (5.9)            37.7
Basic earnings/(loss) per common share                  (.03)              .59              .41               (.13)             .84
Diluted earnings/(loss) per common share                (.03)              .59              .40               (.13)             .84
Cash dividends per common share                          .15               .15              .15                .15              .60
Stock prices*
   High                                                28.25             24.06            19.56              13.94            28.25
   Low                                                 17.94             17.31            13.44               5.56             5.56
</TABLE>

Stockholders of record as of January 31, 2001: 8,529

*  RECORDED ON THE NEW YORK STOCK EXCHANGE COMPOSITE.


<PAGE>

<TABLE>
<CAPTION>
TEN YEAR FINANCIAL SUMMARY (UNAUDITED)
Polaroid Corporation and Subsidiary Companies
Years ended December 31
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)

                                                                 1991           1992          1993           1994          1995
                                                               ------------ ------------- -------------- -------------- ------------
<S>                                                            <C>          <C>           <C>            <C>            <C>
CONSOLIDATED STATEMENT OF EARNINGS

NET SALES                                                       $2,070.6      $2,152.3       $2,244.9       $2,312.5       $2,236.9

   Cost of goods sold                                            1,082.5       1,178.0        1,296.5        1,324.2        1,298.6
   Marketing, research, engineering and administrative expenses    741.5         760.5          763.0          788.0          849.1
   Restructuring and other                                            --            --           44.0             --          247.0
   Special charges                                                    --            --             --             --             --
                                                               ------------ ------------- -------------- -------------- ------------

TOTAL COSTS                                                      1,824.0       1,938.5        2,103.5        2,112.2        2,394.7
                                                               ------------ ------------- -------------- -------------- ------------

PROFIT/(LOSS) FROM OPERATIONS                                      246.6         213.8          141.4          200.3         (157.8)

   Litigation settlement, net of employee incentives               871.6            --             --             --             --
   Other income                                                     23.4           7.8            8.2            7.0            8.5
   Interest expense                                                 58.4          58.5           47.9           46.6           52.1
                                                               ------------ ------------- -------------- -------------- ------------
EARNINGS/(LOSS) BEFORE INCOME TAX EXPENSE/(BENEFIT)              1,083.2         163.1          101.7          160.7         (201.4)
   Federal, state and foreign income tax expense/(benefit)         399.5          64.1           33.8           43.5          (61.2)
                                                               ------------ ------------- -------------- -------------- ------------

EARNINGS/(LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
   EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                     $  683.7      $   99.0       $   67.9       $  117.2       $ (140.2)
                                                               ============ ============= ============== ============== ============

NET EARNINGS/(LOSS)                                             $  683.7      $   99.0       $ (51.3)       $  117.2       $ (140.2)
                                                               ============ ============= ============== ============== ============

   Basic earnings/(loss) per common share before
     extraordinary item and cumulative effect of
     changes in accounting principle                            $  13.07      $   2.08       $   1.45       $   2.52       $ (3.09)
   Basic earnings/(loss) per common share                       $  13.07      $   2.08       $ (1.10)       $   2.52       $ (3.09)
   Diluted earnings/(loss) per common share before
     extraordinary item and cumulative effect of
     changes in accounting principle                            $  10.88      $   2.03       $   1.45       $   2.43       $ (3.09)
   Diluted earnings/(loss) per common share                     $  10.88      $   2.03       $ (1.10)       $   2.43       $ (3.09)
   Cash dividends per common share                              $    .60      $    .60       $    .60       $    .60       $    .60
   Common shares outstanding at end of year (in thousands)        48,919        46,668         46,806         45,998         45,533
</TABLE>


<PAGE>

<TABLE>
<CAPTION>
TEN YEAR FINANCIAL SUMMARY (UNAUDITED) (CONTINUED)
Polaroid Corporation and Subsidiary Companies
Years ended December 31
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)

                                                                1996           1997          1998           1999           2000
                                                            -------------- ------------- -------------- -------------- -------------
<S>                                                         <C>            <C>           <C>            <C>            <C>
CONSOLIDATED STATEMENT OF EARNINGS

NET SALES                                                      $2,275.2      $2,146.4       $1,845.9       $1,978.6       $1,855.6

   Cost of goods sold                                           1,283.8       1,229.8        1,108.4        1,170.5        1,055.9
   Marketing, research, engineering and
     administrative expenses                                      796.6         752.2          736.5          700.5          696.4
   Restructuring and other                                        110.0         323.5           50.0             --           (5.8)
   Special charges                                                 33.0            --             --             --             --
                                                            -------------- ------------- -------------- -------------- -------------

TOTAL COSTS                                                     2,223.4       2,305.5        1,894.9        1,871.0        1,746.5
                                                            -------------- ------------- -------------- -------------- -------------

PROFIT/(LOSS) FROM OPERATIONS                                      51.8         (159.1)        (49.0)         107.6          109.1

   Litigation settlement, net of employee incentives                 --            --             --             --             --
   Other income                                                    26.8          15.0           67.7          (16.8)          34.1
   Interest expense                                                47.4          47.8           57.6           77.4           85.3
                                                            -------------- ------------- -------------- -------------- -------------
EARNINGS/(LOSS) BEFORE INCOME TAX EXPENSE/(BENEFIT)                31.2         (191.9)        (38.9)          13.4           57.9
   Federal, state and foreign income tax expense/(benefit)         16.2          (65.2)         12.1            4.7           20.2
                                                            -------------- ------------- -------------- -------------- -------------

EARNINGS/(LOSS) BEFORE EXTRAORDINARY ITEM AND
   CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE         $   15.0        $(126.7)      $ (51.0)        $  8.7         $ 37.7
                                                            ============== ============= ============== ============== =============

NET EARNINGS/(LOSS)                                            $  (41.1)       $(126.7)      $ (51.0)        $  8.7         $ 37.7
                                                            ============== ============= ============== ============== =============

Basic earnings/(loss) per common share before
   extraordinary item and cumulative effect of
   changes in accounting principle                             $    .33        $(2.81)       $(1.15)         $  .20         $  .84
Basic earnings/(loss) per common share                         $  (.90)        $(2.81)       $(1.15)         $  .20         $  .84
Diluted earnings/(loss) per common share before
   extraordinary item and cumulative effect of
   changes in accounting principle                             $    .33        $(2.81)       $(1.15)         $  .20         $  .84
Diluted earnings/(loss) per common share                       $  (.90)        $(2.81)       $(1.15)         $  .20         $  .84
Cash dividends per common share                                $    .60        $   .60       $   .60         $  .60         $  .60
Common shares outstanding at end of year (in thousands)          44,819         44,536        43,990         44,616         45,532
</TABLE>


<PAGE>

<TABLE>
<CAPTION>
TEN YEAR FINANCIAL SUMMARY (UNAUDITED) (CONTINUED)
Polaroid Corporation and Subsidiary Companies
Years ended December 31
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)

                                                   1991           1992          1993          1994          1995
                                                ------------- ------------- ------------- ------------- -------------
<S>                                             <C>           <C>           <C>           <C>           <C>
SELECTED BALANCE SHEET INFORMATION

Working capital                                  $  684.7      $  778.5      $  826.7      $  879.7      $  730.3
Net property, plant and equipment                   549.4         657.3         718.2         747.3         691.0
Total assets                                      1,889.3       2,008.1       2,212.3       2,316.7       2,261.8
Long-term debt                                      471.8         637.4         602.3         566.0         526.7
Common stockholders' equity                         772.9         808.9         767.3         864.4         717.7

OTHER STATISTICAL DATA

Additions to property, plant and equipment       $  175.8      $  201.5      $  165.6      $  146.7      $  167.9
Depreciation                                     $   85.5      $   89.1      $  100.3      $  118.2      $  132.7
Payroll and benefits                             $  690.6      $  670.2      $  699.2      $  720.6      $  709.3
Number of employees, end of year                   12,003        12,359        12,048        12,104        11,662
Return on average common stockholders' equity*     148.6%         12.7%          9.3%         14.7%       (17.8%)
</TABLE>

<TABLE>
<CAPTION>
                                                   1996          1997           1998         1999           2000
                                                ------------- ------------- ------------- ------------- -------------
<S>                                             <C>           <C>           <C>           <C>           <C>
SELECTED BALANCE SHEET INFORMATION

Working capital                                  $  623.3      $  572.8      $  360.4      $  366.7      $  325.3
Net property, plant and equipment                   666.2         512.5         566.5         599.2         569.2
Total assets                                      2,201.6       2,132.7       2,197.7       2,040.0       2,043.0
Long-term debt                                      489.9         496.6         497.4         573.0         573.5
Common stockholders' equity                         658.2         484.4         389.9         370.5         375.2

OTHER STATISTICAL DATA

Additions to property, plant and equipment       $  121.8      $  134.3      $  191.1      $  170.5      $  129.2
Depreciation                                     $  118.3      $  111.5      $   90.7      $  105.9      $  113.9
Payroll and benefits                             $  641.2      $  608.6      $  564.4      $  545.2      $  498.0
Number of employees, end of year                   10,046        10,011         9,274         8,784         8,865
Return on average common stockholders' equity      (6.2%)       (19.7%)       (11.4%)          2.4%         10.1%
</TABLE>

* 1993 IS SHOWN PRIOR TO THE CUMULATIVE EFFECTS OF FAS 106, 109 AND 112.