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U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|(Mark One)                                                                        |                                                                                         
|--------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                                                 | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934    
|For the Fiscal Year Ended December 31, 2004                                      
|or                                                                               
|o                                                                                 | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|For the Period
From                             to           
                  .

Commission File Number: 000-50661

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

|Delaware(State or other jurisdiction of
incorporation or organization) |  | 22-3856538(I.R.S. employer
identification number)
|---------------------------------------------------------------------- |  | -------------------------------------------------

1265 Main Street
Waltham, Massachusetts 02451(Address of principal executive offices and zip code)

(781) 386-2000(Registrant's telephone number, including area code)

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Securities
registered pursuant to Section 12(b) of the Act: None

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Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share

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Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. YES ý    NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

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

As of March 7, 2005, the number of outstanding shares of the Registrant's Common Stock was 34,956,069. The information in this report gives effect to a
10-for-1 stock split that occurred on July 24, 2003.

In
reliance on Rule 12b-21 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), this Annual Report on Form 10-K does not include
financial information of Primary PDC, Inc. for periods prior to January 1, 2002 as required by Form 10-K.



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TABLE OF CONTENTS



|PART I  
|--------
|ITEM 1. 
|ITEM 2. 
|ITEM 3. 
|ITEM 4. 
|PART II 
|ITEM 5. 
|ITEM 6. 
|ITEM 7. 
|ITEM 7A.
|ITEM 8. 
|ITEM 9. 
|ITEM 9A.
|ITEM 9B.
|PART III
|ITEM 10.
|ITEM 11.
|ITEM 12.
|ITEM 13.
|ITEM 14.
|PART IV 
|ITEM 15.

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Forward-Looking Statements

Some statements in this report may be forward looking in nature, or "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as "believe", "expect", "anticipate", "should", "plan", "seek", "goal", "outlook",
"target", "intend", "will", "estimate" and "potential" among others. Actual results may differ materially from those projected in or implied by any forward-looking statement as a result of a wide
variety of factors, which include, but are not limited to those set forth in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Registrant assumes no
obligation to update forward-looking statements whether as a result of new information, future events or otherwise.

PART I

Item 1. Business

Nature of Operations

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

The
Company has made a significant investment in instant digital printing applications but has not commercialized any products in that area. There can be no assurance that any of these
digital printing applications will be commercialized. The Company is exploring strategic alternatives for the instant digital printing assets and related activities, including a potential sale. Unless
the Company finds outside investors or has a change in circumstances, the Company intends to cease investing significant resources in this area after the second quarter of 2005. As previously
disclosed, the Company made a decision in the second quarter of 2004 to terminate the test marketing and development of its instant digital printing kiosk and does not plan to commercialize this
product in the future.

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

The Merger

On January 7, 2005, the Company entered into a merger agreement with Petters Group Worldwide, LLC and its wholly-owned subsidiary, Petters Consumer
Brands, LLC (collectively "Petters"). If the merger is completed, the Company will become a wholly-owned subsidiary of Petters Group Worldwide, LLC and each outstanding share of the Company's
Common Stock will be converted into the right to receive $12.08 in cash and, under certain circumstances, the right to receive additional cash consideration if the Company sells its instant digital
printing assets for consideration in excess of an amount determined pursuant to the merger agreement. One Equity Partners LLC ("OEP"), the private equity firm that owns a majority of the Company's
Common Stock, has entered into a voting agreement with Petters to vote its shares during the term of the voting agreement in favor of the adoption of the merger agreement and to exercise its
contractual "drag along" rights under the Amended and Restated Securities Holders Agreement to require certain other shareholders, including all of the Company's directors and executive officers, to
vote their shares in favor of the merger. The closing of the merger is subject to various conditions.

1

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The
Company has filed a preliminary proxy statement and will file a definitive proxy statement with the Securities and Exchange Commission ("SEC") to be used to solicit
stockholder approval of the proposed merger. The Company's stockholders are urged to read the definitive proxy statement and any other relevant documents filed with the SEC when they become available
because they will contain important information.

Background

Prior to August 2002, the business of the Company was operated by Primary PDC, Inc., formerly known as Polaroid Corporation, and its subsidiaries
(collectively "Primary"). In October 2001, Primary PDC, Inc. and twenty of its domestic subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in
the U.S. Bankruptcy Court in the District of Delaware. The Company, through certain of its subsidiaries, acquired substantially all of the domestic assets and businesses of Primary and its domestic
subsidiaries and the capital stock of its foreign subsidiaries on July 31, 2002 in a sale transaction approved by an order of the U.S. Bankruptcy Court (the "Transaction"). Pursuant to the
Transaction, the Company also assumed certain of the liabilities and obligations of Primary. Holding was formed in 2002 as a Delaware corporation for the purpose of completing the Transaction.
Holding's principal office is located at 1265 Main Street, Waltham, Massachusetts 02451. The Company maintains a website located atwww.polaroid.com.Primary PDC, Inc. continues to exist as a distinct legal entity.

THE INFORMATION PRESENTED BELOW DOES NOT INCLUDE FINANCIAL INFORMATION ON PRIMARY FOR PERIODS PRIOR TO JANUARY 1, 2002 SINCE AUDITED INFORMATION ON THOSE PERIODS
IS NOT AVAILABLE TO THE COMPANY. AS A RESULT, THIS DOCUMENT DOES NOT CONTAIN ALL OF THE FINANCIAL INFORMATION THAT IS REQUIRED BY THE RULES AND REGULATIONS APPLICABLE TO THIS REPORT REGARDING THE
BUSINESS OPERATIONS ACQUIRED BY THE COMPANY IN THE TRANSACTION. THE ABSENCE OF FINANCIAL INFORMATION FOR PRIMARY PRIOR TO JANUARY 1, 2002 COULD BE MATERIAL TO INVESTORS. FURTHER, INVESTORS SHOULD NOT
ASSUME THAT THE RESULTS OF OPERATIONS FOR THE PERIODS CONTAINED HEREIN BEAR ANY CORRELATION TO THE RESULTS OF OPERATIONS OF PRIMARY FOR PERIODS PRIOR TO 2002.

The July 2002 Transaction

The total purchase price for the Transaction consisted of cash consideration of $255 million adjusted for approximately $58 million of cash payments
made by Primary prior to or at the closing. The Company also recorded liabilities of approximately $224 million related to the Transaction. In addition, at the closing of the Transaction,
Holding issued to Primary 10,769,230 shares of the 30,769,230 then outstanding shares of its Common Stock, par value $0.001 per share (the "Common Stock"), and 312,300 shares of the 892,300 then
outstanding shares of its Series A 8.0% Cumulative Compounding Preferred Stock, par value $0.001 per share (the "Preferred Stock"). Refer to Note 1 of the consolidated financial
statements contained in Item 8.Financial Statements and Supplementary Datafor more information on the Transaction.

Business Strategy

The Company's financial success will largely be dependent on its generation of cash flow, primarily from its instant camera and film products, effective
management of working capital, as well as managing the decline in the Company's instant camera and film business. The Company has made a significant investment in instant digital printing applications
but has not commercialized any products in that area. The Company is exploring strategic alternatives for the instant digital printing assets and related activities, including a potential sale. Unless
the Company finds outside investors or has a

2

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change
in circumstances, the Company intends to cease investing significant resources in this area after the second quarter of 2005. The market for instant photography cameras and film has been
experiencing a significant and steady decline in demand due to competition from digital camera products and media formats. This declining demand continues to have a negative impact on sales of the
Company's instant camera and film products and its net earnings. The Company's strategy is to manage the decline in its instant photography business.

To
manage the decline in its instant photography business the Company plans to:



The
Company seeks to identify and secure business partnerships and alliances to support its products and services, extend its markets, and build upon its research and development
initiatives. These efforts include the Company's brand and technology licensing activity.

Principal Products and Technology

Instant Photography

The Company's instant photography products consist of instant cameras and film in a variety of styles and in large and small formats. Instant cameras and film
accounted for approximately 83% of the Company's net sales for the twelve-month period ending December 31, 2004.

The
larger format instant camera and film products consist primarily of:



The
instant camera and film products in the smaller instant format are the Company's Polaroid i-Zone products. The larger format products have historically had higher margins
than the smaller formats. Sales of the smaller instant format products account for substantially less revenue and gross profit than the larger format products.

Instant Digital Printing

The Company has made a significant investment in instant digital printing applications but has not commercialized any products in that area. There can be no
assurance that any of these digital printing applications will be commercialized. The Company is exploring strategic alternatives for the instant

3

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digital
printing assets and related activities, including a potential sale. Unless the Company finds outside investors or has a change in circumstances, the Company intends to cease investing
significant resources in this area after the second quarter of 2005. As previously disclosed, the Company made a decision in the second quarter of 2004 to terminate the test marketing and development
of its instant digital printing kiosk and does not plan to commercialize this product in the future.

Polaroid Brand Licensing

The Polaroid brand is recognized and respected worldwide, providing a strong foundation for the Company's licensing strategy based on both enhancing the
reputation of the brand and generating income. Brand licensing also offers opportunities to extend the Company's distribution in multiple business markets.

Technology Licensing

Technology licensing generates revenue from the Company's portfolio of patents. The Company has many proprietary technologies available for licensing.

Other Products

The Company also designs, manufactures and sells eyewear, principally sunglasses, secure identification systems for commercial applications, and photographic
hardware accessories. In addition, the Company performs contract manufacturing for third parties.

Regional Sales and Marketing Operations

In each sales and marketing region, the Company has two principal markets for its traditional products: consumer photography and commercial photography. While the
products are similar worldwide, the mix between consumer and commercial photography varies by region and country. Because of this, the Company develops regional marketing strategies. This permits the
Company's management in each region the opportunity to develop advertising and promotional programs, organize its distribution structure, target its communications, and tailor its product portfolio to
meet the needs of the regional marketplace. Regional management of the sales and marketing functions enables the Company to deliver products to its customers in a cost-effective manner.
The Company has shifted the market structure for many of its sales regions from a direct subsidiary model to a distributor model as a means to drive efficiency and reduce cost. In addition, the
company is pursuing an e-commerce strategy in select developed markets to drive efficiency and reduce costs.

Competition

The Company operates in the worldwide photography market, which is highly competitive in design, product performance, quality, service and price. Instant silver
halide, conventional 35mm and digital imaging products manufactured by others compete with the Company's products. The Company has competitors worldwide, including large global corporations, most of
which have greater financial resources than the Company. The Company also faces competition from local and regional companies, which may be more specialized than the Company. In the instant
photography market, the Company faces direct competition from Fuji Photo Film Co., Ltd. ("Fuji"), which sells instant photography products in Asia, Europe, Canada and the United States. The
Company's instant cameras and film products also face competition from Eastman Kodak Company, Hewlett-Packard Company, Canon U.S.A., Inc., Sony Corporation, Epson America, Inc. Olympus
Corporation, Hi-Touch Imaging Technologies, Inc. and others.

4

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Customers

In the United States, the Company sells its products to a variety of customers (refer to "Nature of Operations" section above). Internationally, products are sold
to a variety of customers and unaffiliated distributors primarily through a direct sales force.

Sales
to one customer, Wal-Mart Stores, Inc., accounted for approximately 13% and 14% of the Company's worldwide net sales in 2004 and 2003, respectively.
Substantially all of the sales to Wal-Mart Stores, Inc. occurred in the Americas Region. No other customer accounted for more than 10% of the Company's total net sales in the years
ended December 31, 2004 and 2003.

Manufacturing

The Company manufactures its instant film and some of its cameras. For certain of its instant cameras, hardware and other products, it uses third-party
manufacturers. The Company's products, whether manufactured in-house or by third parties, are shipped primarily from facilities in the United States and the Netherlands. Product sourcing
decisions are made on a worldwide basis to optimize cost and customer service.

The
Company has manufacturing sites located in Waltham, Norwood, and New Bedford, Massachusetts; Dumbarton, Scotland; Enschede, the Netherlands; Queretaro, Mexico; and Shanghai, China.
The Company believes that the capacity of its manufacturing facilities is sufficient to meet the current demand for its products. The Company performs the final assembly of instant cameras at its
facilities in Scotland and China or contracts with third parties who manufacture cameras to the Company's design specifications. Refer to Item 2. Propertiesbelow for more information.

The
manufacture of instant film is a vertically integrated process that has two major steps: the production of photographic materials, principally photographic negatives; and the
assembly of film packs. The Company makes photographic negatives by purchasing and producing custom chemicals and coating them on the film sheets using proprietary technology. In addition, most of the
Company's instant integral films use batteries that it manufactures. The non-assembly processes, located in the United States, are capital intensive. By contrast, the assembly of film
packs is highly mechanized and occurs in The Netherlands, Scotland and Mexico, as well as the United States. The Company continues to explore opportunities to outsource certain of its manufacturing
operations and to eliminate underutilized capacity by consolidating its manufacturing facilities.

Research and Development

The Company conducts research and development ("R&D") to create value through the development of proprietary technology platforms with broad product
applicability. During 2004, most of the Company's research and development resources were dedicated to instant digital printing solutions and services. The balance was largely related to new instant
camera designs. The Company is exploring strategic alternatives for the instant digital printing assets and related activities, including a potential sale. Unless the Company finds outside investors
or has a change in circumstances, the Company intends to cease investing significant resources in the instant digital printing area after the second quarter of 2005.

Raw Materials, Supplies and Contract Manufacturing

The Company uses a variety of raw materials and supplies in the manufacture of its products, including chemicals, polyester film base, specialty papers and
electronic components. It purchases these products from third-party suppliers, except for a few self-manufactured raw materials used in low volumes. The Company believes these raw
materials and supplies will continue to be available in sufficient quantities to meet the current demand for its products. The Company is dependent on some

5

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sole
source suppliers for certain finished goods and components, some of which are critical to the manufacture of instant film.

Employees

As of December 31, 2004, the Company had approximately 2,850 employees. Approximately two-thirds of the Company's employees are in
manufacturing operations.

Environmental Compliance

The Company's environmental compliance is primarily associated with its manufacturing and logistics, and research and development operations. The Company is
subject to various laws and governmental regulations concerning environmental matters. Some of the U.S. federal environmental legislation having an impact on the Company's manufacturing operations
includes the Toxic Substances Control Act, the Resource Conservation and Recovery Act, the Clean Air Act, Clean Water Act, and the Comprehensive Environmental Response, Compensation, and Liability
Act. It is the Company's policy to carry out its business activities in a manner consistent with sound health, safety and environmental management practices, and to comply with applicable health,
safety and environmental laws and regulations. The Company continues to engage in a program for environmental protection and control.

Business Segments

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

The
Company has one category called Corporate, which is not classified as a segment. This category includes: central marketing; centralized information systems; general and
administrative functions; worldwide finished goods planning activities; and certain other corporate functions. The Corporate category also includes costs related to restructuring activities, certain
incentive compensation costs and certain other non-operating items. For more information regarding the net sales, profit/(loss) from operations and total assets of each of the business
segments and net sales and long-lived assets by geographic area, refer to Note 15 of the consolidated financial statements contained in Item 8.Financial
Statements and Supplementary Data.

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Item 2. Properties

The Company's worldwide headquarters are located in Waltham, Massachusetts. The Company has manufacturing facilities and marketing and distribution centers
throughout the world. The following is a summary of real estate owned and leased by the Company and the business segments to which such real estate relates as of December 31, 2004:

Properties Occupied by the Company
at December 31, 2004Owned

Leased

Total(in thousands of square feet)Location:Americas Region

30

17

47International Region

35

115

150Global Manufacturing

2,028

715

2,743R&D

185



185All Other

8

18

26Subtotal Segments

2,286

865

3,151Corporate

333

204

537Total

2,619

1,069

3,688


The
Company currently maintains distribution centers located in Norton, Massachusetts and in Enschede, the Netherlands. In the Americas Region, the Company also has two regional sales
offices in the United States, as well as offices in Mexico and Canada. The International Region has marketing subsidiaries and sales offices located in the United Kingdom, France, Germany, Italy,
Switzerland, and certain other European countries. It also has marketing subsidiaries and offices located in China, Hong Kong, and Japan.

At
December 31, 2004, based on square footage, approximately 99% of the properties owned or leased by the Company in the United States were located in Massachusetts. The following
table gives the approximate size of each property located in Massachusetts and whether the space is owned or leased:

Massachusetts Properties
at December 31, 2004Owned

Leased

Total(in thousands of square feet)Location:Waltham

1,013

167

1,180New Bedford

739



739Norwood



139

139Norton



336

336Total

1,752

642

2,394


The
Company's United States manufacturing occurs in properties owned or leased by the Company in Waltham, Norwood and New Bedford, Massachusetts. Most of the Company's central or
corporate marketing, research and administrative offices are located in Waltham, Massachusetts. In addition to the properties owned by the Company in Waltham and New Bedford, the Company also has
leased properties in Waltham, Norwood, and Norton with leases that expire between 2005 and 2014. All of the Company's owned properties are subject to mortgages in favor of the lenders under the
Company's Credit Agreement.

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The
Company's main properties located outside the United States house manufacturing facilities, regional marketing subsidiaries and sales offices. The principal non-U.S.
manufacturing facilities are located in Enschede, the Netherlands; Dumbarton, Scotland; Queretaro, Mexico; and Shanghai, China. These facilities also contain some administrative and regional marketing
activities. The following table gives the approximate size of each property located outside of the United States and whether the space is owned or leased:

Manufacturing Facilities Outside
of the United States
at December 31, 2004Owned

Leased

Total(in thousands of square feet)Location:The Netherlands

475



475Scotland

206

166

372Mexico

147



147China



115

115Total

828

281

1,109


Reducing
costs is a continuing objective of the Company in 2005. The Company expects to continue to consolidate underutilized facilities, sell certain facilities as market conditions
permit and replace certain space through leasing rather than acquisitions, subject to the restrictions contained in the Company's Credit Agreement. For more information on the Company's Credit
Agreement, refer to "Financial Liquidity and Capital Resources" in Item 7.Management's Discussion and Analysis of Financial Condition and Results of
Operationsand Note 8 to the consolidated financial statement in Item 8.Financial Statements and Supplementary Data.

Item 3. Legal Proceedings

The Company is involved in legal proceedings and claims arising in the normal course of business.

On
July 7, 2003, five former employees of Primary filed a complaint against Primary, the Company and OEP in the United States District Court for the District of Massachusetts on
behalf of a purported class of over 100 individuals. In response, Primary invoked the automatic stay provision of the Bankruptcy Code, and the Company and OEP both moved to transfer the case to the
District of Delaware (the site of Primary's bankruptcy proceedings) or, alternatively, to dismiss the complaint. The Company and OEP also filed an adversary complaint in the bankruptcy court seeking a
declaration that the complaint is barred by the 2002 order of the court which approved the sale of the assets of Primary to the Company. In November 2003, the plaintiffs filed an amended
complaint dismissing OEP and Primary, abandoning five of six counts against the Company, and continuing their action against the Company on the one remaining count and adding an individual defendant.
In response, the Company renewed its motions to dismiss or to transfer the case to the District of Delaware. In addition, the Company filed a new adversary complaint with the bankruptcy court, seeking
a declaration that the amended complaint, like the original complaint, is barred by the sale order. That matter remains pending before the bankruptcy court. In September 2004, the plaintiffs
filed a second amended complaint, that dropped the class allegations and added a second count against the individual defendant. In October 2004, the Company renewed its motions to transfer the case to
the District of Delaware or, alternatively, to dismiss the complaint. Those motions remain pending before the court. In the second amended complaint, the plaintiffs claim that the Company conspired
with Primary to wrongfully interfere with plantiffs' right to receive paid-for medical coverage that Primary had allegedly promised them, in alleged violation of the Employee Retirement
Income Security Act ("ERISA"). The plaintiffs seek an injunction ordering the Company to assume Primary's alleged obligations to them and

8

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to
pay them damages stemming from the alleged ERISA violations. The amount of alleged damages claimed is not specified. While there can be no assurance of the outcome of this litigation, the Company
does not believe that the disposition of these matters will have a material adverse effect on its results of operations or financial condition.

On
December 1, 2003, Primary filed a motion (the "Estate Costs Motion") in the U.S. Bankruptcy Court for the District of Delaware (the "U.S. Bankruptcy Court") seeking to compel
the Company to satisfy its purported obligation under the asset purchase agreement between the Company and Primary to pay $7.0 million of estate costs to Primary. On December 9, 2003,
the Company filed an objection to the relief requested in the Estate Costs Motion on the basis that the conditions giving rise to the Company's alleged obligations under the asset purchase agreement
to provide $7.0 million were not satisfied. By orders entered on December 29, 2003 and on December 31, 2003 (collectively the "Estate Cost Orders"), the U.S. Bankruptcy Court
granted the Estate Costs Motion, and directed the Company to fund the $7.0 million in estate costs. The Company filed a notice on February 6, 2004 appealing the
U.S. Bankruptcy Court's approval of the Estate Costs Motion (the "Appeal"). In connection with the Appeal, the Company was required to post a $7.5 million bond and provide cash collateral equal
to that amount. The Company posted this bond in January 2004. The Company had accrued $7.0 million for its potential liability for the estate costs as of December 31, 2003. The
cash payment by the Company to collateralize the bond in January 2004 was recorded in other current assets. In December, 2004, the Company and Primary entered into a mutually acceptable
settlement of this and other disputes, including those related to Primary's ability to put shares to the Company under certain circumstances. That settlement was approved by the Bankruptcy Court on
January 10, 2005. Under the terms of the settlement agreement, $5.5 million of the cash collateral, as well as other consideration, was paid to Primary in January 2005 with the
balance of the cash collateral, and certain other consideration, including the relinquishment of Primary's right to sell shares of the Company's Common Stock back to the Company under certain
circumstances, being received by the Company.

On
January 10, 2005, Leonard Shapiro filed a purported class action complaint in the Court of Chancery of the State of Delaware, New Castle County, on behalf of the stockholders
unaffiliated with the defendants, against Jacques A. Nasser, Joseph E. Antonini, Charles F. Auster, Paolo Cantarella, William J. Cosgrove, Lee M. Gardner, James W. Koven, Rick A. Lazio, Joseph G.
Michels, Stanley P. Roth, J. Michael Pocock and the Company. The complaint alleges, among other things, that the Company's directors violated their fiduciary duties by approving the merger agreement
with Petters without engaging in arm's length negotiations. The complaint seeks, among other things, to enjoin the defendants from completing the merger or, in the event the merger is completed, to
rescind the merger and to award compensatory damages. On January 18, 2005, the plaintiff filed an amended complaint in which the only substantive change was to add One Equity Partners as a
defendant. The amended complaint was served on the Company on February 28, 2005. The Company believes that the allegations in the complaint and the amended complaint are without merit and
intends to vigorously defend against this action.

The
Company owns 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 releases of hazardous substances. Certain of these laws and regulations may impose joint and several liabilities on the Company for the costs of
investigation or remediation of such contamination, regardless of fault or the legality of the disposal.

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

None.

9

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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

As of December 31, 2004, Holding's Common Stock was publicly traded on the National Association of Securities Dealers ("NASD") OTC Bulletin Board, and
Holding had five hundred and eighteen (518) holders of record of its Common Stock. Holding has never paid a cash dividend on its Common Stock. The Company's Credit Agreement prohibits the
declaration and payment of dividends on the Common Stock. As of December 31, 2004, the Company's Preferred Stock had been redeemed.

Information
regarding repurchases by the Company of its Common Stock and Series A Preferred Stock during 2004 follows:

Common Stock

|Period                          |  | Total Number
of Shares
Purchased |     | Average
Price Paid
per Share(1) |      | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs |   | Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs
|------------------------------- |  | -------------------------------- | --- | ------------------------------- | ---- | -------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------
|January 1 through February 1    |  | 384,615.00                       | (1) | $                               | 0.04 |                                                                                  | 0 |                                                                               
|February 2 through February 29  |  | 0                                |     |                                 | n/a  |                                                                                  | 0 |                                                                               
|March 1 through March 28        |  | 170,901.00                       | (2) | $                               | 5.59 |                                                                                  | 0 |                                                                               
|March 29 through May 2          |  | 0                                |     |                                 | n/a  |                                                                                  | 0 |                                                                               
|May 3 through May 30            |  | 0                                |     |                                 | n/a  |                                                                                  | 0 |                                                                               
|May 31 through June 27          |  | 88,412.50                        | (1) | $                               | 0.04 |                                                                                  | 0 |                                                                               
|June 28 through August 1        |  | 0                                |     |                                 | n/a  |                                                                                  | 0 |                                                                               
|August 2 through August 29      |  | 0                                |     |                                 | n/a  |                                                                                  | 0 |                                                                               
|August 30 through September 26  |  | 80,312.50                        | (1) | $                               | 0.04 |                                                                                  | 0 |                                                                               
|September 27 through October 31 |  | 0                                |     |                                 | n/a  |                                                                                  | 0 |                                                                               
|November 1 through November 28  |  | 0                                |     |                                 | n/a  |                                                                                  | 0 |                                                                               
|November 29 through December 31 |  | 0                                |     |                                 | n/a  |                                                                                  | 0 |                                                                               
|                                |  |                                  |     |                                 |      |                                                                                  |   |                                                                               
|Total                           |  | 724,241.00                       |     | $                               | 1.35 |                                                                                  | 0 |                                                                               
|                                |  |                                  |     |                                 |      |                                                                                  |   |                                                                               

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10

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Series A 8% Cumulative Compounding Preferred Stock

|Period                          |  | Total Number
of Shares
Purchased |  | Average
Price Paid
per Share |        | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs |         | Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs
|------------------------------- |  | -------------------------------- |  | ---------------------------- | ------ | -------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------
|January 1 through February 1    |  | 0                                |  |                              | n/a    |                                                                                  | 0       |                                                                               
|February 2 through February 29  |  | 0                                |  |                              | n/a    |                                                                                  | 0       |                                                                               
|March 1 through March 28        |  | 0                                |  |                              | n/a    |                                                                                  | 0       |                                                                               
|March 29 through May 2          |  | 223,075                          |  | $                            | 100.00 |                                                                                  | 223,075 | (1)                                                                           
|May 3 through May 30            |  | 0                                |  |                              | n/a    |                                                                                  | 0       |                                                                               
|May 31 through June 27          |  | 0                                |  |                              | n/a    |                                                                                  | 0       |                                                                               
|June 28 through August 1        |  | 0                                |  |                              | n/a    |                                                                                  | 0       |                                                                               
|August 2 through August 29      |  | 0                                |  |                              | n/a    |                                                                                  | 0       |                                                                               
|August 30 through September 26  |  | 0                                |  |                              | n/a    |                                                                                  | 0       |                                                                               
|September 27 through October 31 |  | 0                                |  |                              | n/a    |                                                                                  | 0       |                                                                               
|November 1 through November 28  |  | 0                                |  |                              | n/a    |                                                                                  | 0       |                                                                               
|November 29 through December 31 |  | 223,075                          |  | $                            | 101.69 |                                                                                  | 223,075 | (2)                                                                           
|                                |  |                                  |  |                              |        |                                                                                  |         |                                                                               
|Total                           |  | 446,150                          |  | $                            | 100.85 |                                                                                  | 446,150 |                                                                               
|                                |  |                                  |  |                              |        |                                                                                  |         |                                                                               

---

11

---



MARKET PRICE AND DIVIDEND DATA

The following table sets forth, on a quarterly basis, the highest and lowest sale price on the OTC Bulletin Board for the Company's Common Stock for the period
from May 14, 2004 to December 31, 2004. The Company's Common Stock began trading on the OTC Bulletin Board on May 14, 2004.

Year Ended December 31, 2004

High

LowMay 14, 2004 to June 27, 2004

$
16.25

$
11.95Fiscal Quarter Ended September 26, 2004


14.10


10.70Fiscal Quarter Ended December 31, 2004


12.75


9.55


The
Company has never paid a cash dividend on its Common Stock. The Company's Credit Agreement prohibits the declaration and payment of dividends on the Company's Common Stock. Refer to
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operationsfor more information on the Company's Credit Agreement.

Item 6. Selected Financial Data

The information below is derived from the audited financial statements of the Company for 2004 and 2003 and the period from Inception (refer to Note 1 of
the consolidated financial statements contained
in Item 8.Financial Statements and Supplementary Data) to December 31, 2002, and of Primary for the period from January 1 to
July 31, 2002.

THE INFORMATION PRESENTED BELOW DOES NOT INCLUDE FINANCIAL INFORMATION ON PRIMARY FOR PERIODS PRIOR TO JANUARY 1, 2002 SINCE AUDITED INFORMATION ON THOSE PERIODS
IS NOT AVAILABLE TO THE COMPANY. AS A RESULT, THIS DOCUMENT DOES NOT CONTAIN ALL OF THE FINANCIAL INFORMATION THAT IS REQUIRED BY THE RULES AND REGULATIONS APPLICABLE TO THIS REPORT REGARDING THE
BUSINESS OPERATIONS ACQUIRED BY THE COMPANY IN THE TRANSACTION. THE ABSENCE OF FINANCIAL INFORMATION FOR PRIMARY PRIOR TO JANUARY 1, 2002 COULD BE MATERIAL TO INVESTORS. FURTHER, INVESTORS SHOULD NOT
ASSUME THAT THE RESULTS OF OPERATIONS FOR THE PERIODS CONTAINED HEREIN BEAR ANY CORRELATION TO THE RESULTS OF OPERATIONS OF PRIMARY FOR PERIODS PRIOR TO 2002.

12

---



Selected Financial Data
(in millions, except share and per share data)

|                                                                                                          |                                                              | Company |        |       |   | Primary |      
|--------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------- | ------ | ----- | - | ------- | -----
|
|
|
|Consolidated Statement of Earnings                                                                        |                                                              |         |        |       |   |         |      
|Net sales                                                                                                 |                                                              | $       | 656.2  |       | $ | 752.7   |      
|                                                                                                          |                                                              |         |        |       |   |         |      
|                                                                                                          | Cost of goods sold                                           |         |        | 368.2 |   |         | 378.4
|                                                                                                          | Marketing, research, engineering and administrative expenses |         |        | 242.1 |   |         | 278.3
|                                                                                                          | Restructuring and other charges                              |         |        | 14.9  |   |         | 4.7  
|                                                                                                          |                                                              |         |        |       |   |         |      
|Total costs                                                                                               |                                                              |         | 625.2  |       |   | 661.4   |      
|                                                                                                          |                                                              |         |        |       |   |         |      
|Profit/(loss) from operations                                                                             |                                                              |         | 31.0   |       |   | 91.3    |      
|                                                                                                          | Other income/(expense), net                                  |         |        | (0.6  | ) |         | 3.7  
|                                                                                                          | Interest expense                                             |         |        | (2.8  | ) |         | (3.4 
|                                                                                                          | Reorganization loss                                          |         |        |      |   |         |     
|                                                                                                          |                                                              |         |        |       |   |         |      
|Earnings/(loss) before extraordinary gain and income tax expense/(benefit)                                |                                                              |         | 27.6   |       |   | 91.6    |      
|                                                                                                          | Federal, state and foreign income tax expense/(benefit)      |         |        | (34.3 | ) |         | 22.9 
|                                                                                                          |                                                              |         |        |       |   |         |      
|Earnings/(loss) before extraordinary gain                                                                 |                                                              |         | 61.9   |       |   | 68.7    |      
|                                                                                                          | Extraordinary gain                                           |         |        |      |   |         | 2.6  
|                                                                                                          |                                                              |         |        |       |   |         |      
|Net earnings/(loss)                                                                                       |                                                              | $       | 61.9   |       | $ | 71.3    |      
|                                                                                                          |                                                              |         |        |       |   |         |      
|Net earnings/(loss) available to common stockholders                                                      |                                                              | $       | 59.6   |       | $ | 64.3    |      
|Basic earnings/(loss) per common share before extraordinary gain                                          |                                                              | $       | 1.85   |       | $ | 1.99    |      
|Basic earnings/(loss) per common share                                                                    |                                                              | $       | 1.85   |       | $ | 2.07    |      
|Diluted earnings/(loss) per common share before extraordinary gain                                        |                                                              | $       | 1.72   |       | $ | 1.95    |      
|Diluted earnings/(loss) per common share                                                                  |                                                              | $       | 1.72   |       | $ | 2.03    |      
|Cash dividends per common share                                                                           |                                                              |         |       |       |   |        |      
|Weighted average number of common shares used for basic earnings/(loss) per common share (in thousands)   |                                                              |         | 32,272 |       |   | 31,123  |      
|Weighted average number of common shares used for diluted earnings/(loss) per common share (in thousands) |                                                              |         | 34,678 |       |   | 31,640  |      
|Common shares outstanding at end of period (in thousands)                                                 |                                                              |         | 34,956 |       |   | 34,836  |      
|Other Statistical Data:                                                                                   |                                                              |         |        |       |   |         |      
|Additions to property, plant and equipment                                                                |                                                              | $       | 28.9   |       | $ | 22.6    |      
|Depreciation                                                                                              |                                                              | $       | 4.6    |       | $ | 2.2     |      

13

---



|                                   |                                   | Company
|---------------------------------- | --------------------------------- | -------
|
|
|Selected Balance Sheet Information |                                   |        
|                                   | Working capital                   |        
|                                   | Net property, plant and equipment |        
|                                   | Total assets                      |        
|                                   | Preferred Stock                   |        
|                                   | Common stockholders' equity       |        

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Business

The Company designs, develops, manufactures and markets instant and digital imaging products and related products. The Company's principal products are instant
cameras and instant film, which are marketed worldwide. In addition to its principal products, the Company designs, develops, manufactures and/or markets photographic hardware accessories for the
instant photography market. The Company's other products and services consist of eyewear, principally sunglasses, and secure identification systems for commercial applications. The Company also
performs contract manufacturing for and licenses its brand and technology to third parties. The Company has made a significant investment in instant digital printing but has not commercialized any
products in this area. There can be no assurance that any of these digital printing applications will be commercialized. The Company is exploring strategic alternatives for the instant digital
printing assets and related activities, including a potential sale. Unless the Company finds outside investors or has a change in circumstances, the Company intends to cease investing significant
resources in this area after the second quarter of 2005.

Background

The following sections should be read in conjunction with the information on the Company in Item 1.Business; Item
6.Selected Financial Data; and the information on the Company and Primary in Item 8.Financial Statements and Supplementary
Data.

Reorganization Proceedings Under Chapter 11 Of The Bankruptcy Code Prior To The July 2002 Transaction

On October 12, 2001, Primary PDC, Inc. and twenty of its subsidiaries incorporated in the United States (collectively the "Debtors") filed voluntary
petitions for relief (the "Filing") under Chapter 11 of the Bankruptcy Code, in the U.S. Bankruptcy Court. The subsidiaries of Primary PDC, Inc. incorporated outside of the United States were
not included in the Filing. Prior to the Transaction, the Debtors continued to manage their properties and operate their business as "debtors-in-possession" under the
jurisdiction of the U.S. Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code. Under the rules of the SEC, Primary is deemed to be the predecessor of the Company for
financial reporting purposes.

The
Company was formed in March 2002 for the purpose of acquiring substantially all of the assets of the Debtors, including the stock of the foreign subsidiaries of Primary
PDC, Inc. that were not part of the Filing. On July 31, 2002, the Company purchased substantially all of the assets of the Debtors and the capital stock of the foreign subsidiaries of
Primary PDC, Inc. in a Section 363 asset sale that was approved by the U.S. Bankruptcy Court. For more information regarding the Transaction, refer to Item 1. Businessand Note 1 of the
consolidated financial statements contained in Item 8.

14

---



Financial Statements and Supplementary Data. Following the Transaction, Primary remained a separate legal entity.

Comparability of Financial Results

The discussion of the results of operations below is significantly affected by the recent history of the Company and Primary. The Company commenced operations as
of the date of the Transaction. As a result of actions taken during the period following the Filing and leading up to and as a result of the Transaction, the financial results of the Company and
Primary are not comparable. The key events that affect the comparability of results are the following, in chronological order:



DepreciationProduction costs

$
34Operating expenses


21Total

$
55




15

---





Overview of 2004 Results

The Company earns its revenues and profits primarily from the sale of instant film and cameras to consumers and businesses. The market for instant photography has
been experiencing a significant and steady decline in demand due to competition from digital camera products and media formats. The Company's financial success will largely be dependent on its
generation of cash flow, primarily from its instant camera and film products, effective management of working capital, as well as managing the decline in the Company's instant camera and film
business. The Company's net sales in 2004 were $656 million, which includes a favorable impact from foreign exchange of approximately $18 million compared to 2003. In 2004, the Company
incurred $15 million of restructuring expenses and its manufacturing costs and sales and marketing expenses included a total of approximately $21 million of unfavorable foreign exchange
compared to 2003. Profit from operations in 2004 was $31 million.

The
Company's income tax benefit in 2004 was $34 million, primarily due to the use of foreign tax credits in the U.S., including a projected foreign tax credit carryback,
generated as a result of dividends paid from certain of the Company's foreign subsidiaries, the settlement of a tax audit in the Netherlands which resulted in a tax refund, the release of certain tax
reserves as a result of the resolution of certain foreign tax issues offset, in part, by an increase in valuation allowances related to certain deferred tax assets. The Company's net earnings in 2004
were $62 million, or $1.72 per common share on a diluted basis. During 2004, the Company's net cash provided by operating activities was approximately $9 million. In 2004, the Company
paid $2.6 million of dividends on its Preferred Stock, and redeemed all of its outstanding Preferred Stock for $44.6 million. At December 31, 2004, the Company had cash and cash
equivalents of approximately $114 million and no outstanding debt.

Declining
demand for the Company's instant camera and film products is expected to continue and to continue to have a negative impact on the Company's net sales. The rate of decline of
the Company's net sales of instant cameras and film may increase or decrease in the future. During 2004, the Company was unable to reduce its costs in line with the decline in its instant camera and
film sales, and as a result the Company's gross margin declined significantly. The Company will continue to be challenged to reduce its fixed as well as variable costs in the future to keep them in
line with reduced net sales. A failure to reduce these costs in line with the reductions in its net sales will result in continued declines in the Company's profit from operations and net earnings.

In
the fourth quarter of 2004, the Company had net sales of $160 million, a loss from operations of $14 million and a gross margin of 34%. The Company's gross margin for
the first nine months of 2004 was 47%. The loss from operations and the reduction in gross margin in the fourth quarter of 2004 were primarily due to the impact of lower net sales, primarily of
instant film, the mix of products sold, higher manufacturing costs, primarily related to reduced instant film production, and a quality problem in the manufacturing operation that supports the
Company's eyewear business. In the fourth quarter of 2004, the Company had an income tax benefit of $25 million primarily due to the use of foreign tax credits in the U.S., including a foreign
tax credit carryback, generated as a result of dividends paid from certain of the Company's foreign subsidiaries, the settlement of a tax audit in the Netherlands which resulted in a tax refund, the
release of certain tax reserves as a result of the resolution of certain foreign tax issues offset, in part, by an increase in valuation allowances related to certain deferred tax assets.

General

The Company's reportable business segments are: the Americas Region; the International Region; Global Manufacturing; and R&D. The Company also has an All Other
segment that includes: the eyewear business; the commercial secure identification systems business; brand and technology licensing operations; and contract manufacturing. The Americas Region consists
of sales, marketing and distribution operations in the United States of America and other countries in North and South

16

---



America.
The International Region consists of sales, marketing and distribution operations outside the Americas Region. Global Manufacturing includes worldwide activities associated with
manufacturing, procurement, developing manufacturing processes for new products and inventory management. R&D consists of the Company's research and development activities.

The
Company has one category called Corporate, which is not classified as a business segment. This category includes: central marketing; centralized information systems; general and
administrative functions; worldwide finished goods planning activities; and certain other corporate functions. The Corporate category also includes costs related to restructuring activities, certain
incentive compensation costs and certain non-operating items. For more information regarding the Company's business segments, refer to Note 15 of the consolidated financial
statements contained in Item 8.Financial Statements and Supplementary Data.

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

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

Critical Accounting Estimates

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

Revenue Recognition:

The Company recognizes net sales when all of the following criteria have been met: evidence of an arrangement with the customer exists; the product has been
shipped and title has passed to the customer; the sales price to the customer has been fixed or is determinable; and collectability of the sales price is reasonably assured. Provisions for estimated
sales returns and allowances are made at the time the products are sold. To arrive at net sales, the Company records reductions to net sales for the cost of programs offered to customers that include
cash and volume discounts and cooperative and other advertising allowances. The Company recognizes the liability for these programs at the time the related sales are recorded. The Company determines
the cost of these programs based on the terms of the programs, estimates using its historical experience and internal and customer data. The Company adjusts net sales for the cost of price protection
programs associated with customer inventories, as well as for the cost of promotional allowances and other fees and coupons, at the time it can reasonably

17

---



estimate
this cost. To the extent actual experience differs from the estimates, adjustments to net sales could be recognized, which could have an impact on the Company's net sales and net earnings.

Allowance for Doubtful Accounts:

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

Inventory:

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

Income Taxes:

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

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

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

Stock-Based Compensation:

The Company has sold shares of restricted Common Stock and granted options to purchase shares of restricted Common Stock to certain of its directors and
executives. The purchase price of the restricted Common Stock sold was nominal and the exercise price of the options granted was equal to

18

---



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

Pension Benefit Costs:

The calculation of the Company's defined pension benefit costs and obligations are dependent on the assumptions used by its actuaries. These assumptions, which
are reviewed by the Company annually, include discount rates, salary growth rates, expected long-term return on plan assets, and other factors. The significant factors utilized by the
Company's actuaries are discussed in further detail in Note 13 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for the year ended
December 31, 2004. To the extent actual experience differs from the Company's assumptions, the differences are recorded as unrecognized gains and losses, which are amortized to net earnings
over the estimated future service period of plan participants, if the cumulative amount of the unamortized gains or losses exceeds 10% of the greater of the plan's projected benefit obligation or
market-related value of plan assets. Significant differences in actual experience to assumptions or significant changes in future assumptions would affect the Company's pension benefit obligations and
costs, which could have a positive or negative impact on the Company's net earnings.

Restructuring Charges:

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

Results of Operations

The following table presents selected financial information regarding the Company's results of operations for the years ended December 31, 2004 and
December 31, 2003 and the five-month period ended December 31, 2002; Primary's results of operations for the seven-month period ended July 31, 2002; and the combined results of
operations for the year ended December 31, 2002 for the Company and Primary. This table is presented for use in the discussion of operating results below. Due to the

19

---



factors
described in the "Comparability of Financial Results" section above, however, the Company does not believe certain information of Primary is comparable to the Company's information nor does it
believe that the combined results for 2002 are necessarily indicative of the Company's operating results on an annual basis.

The
information on the results of operations is as follows (in millions, except for percentages):

|                                                                            |                                                              |   |     |     |   |     |     |   |     |     |   |  |   |      |     
|--------------------------------------------------------------------------- | ------------------------------------------------------------ | - | --- | --- | - | --- | --- | - | --- | --- | - |  | - | ---- | ----
|
|
|
|Net sales                                                                   |                                                              | $ | 656 |     | $ | 753 |     | $ | 364 |     |   |  | $ | 444  |     
|                                                                            | Cost of goods sold                                           |   |     | 368 |   |     | 379 |   |     | 213 |   |  |   |      | 291 
|                                                                            |                                                              |   |     |     |   |     |     |   |     |     |   |  |   |      |     
|Gross margin                                                                |                                                              |   | 288 |     |   | 374 |     |   | 151 |     |   |  |   | 153  |     
|                                                                            | % of Net sales                                               |   |     | 44  | % |     | 50  | % |     | 41  | % |  |   |      | 34  
|                                                                            | Marketing, research, engineering and administrative expenses |   |     | 242 |   |     | 278 |   |     | 121 |   |  |   |      | 185 
|                                                                            | Restructuring and other charges                              |   |     | 15  |   |     | 5   |   |     | 5   |   |  |   |      | 12  
|                                                                            |                                                              |   |     |     |   |     |     |   |     |     |   |  |   |      |     
|Profit/(loss) from operations                                               |                                                              |   | 31  |     |   | 91  |     |   | 25  |     |   |  |   | (44  | )   
|                                                                            | Other income/ (expense), net                                 |   |     |    |   |     | 4   |   |     | (1  | ) |  |   |      | (2  
|                                                                            | Interest expense                                             |   |     | (3  | ) |     | (3  | ) |     | (2  | ) |  |   |      | (2  
|                                                                            | Reorganization loss                                          |   |     |    |   |     |    |   |     |    |   |  |   |      | (771
|                                                                            |                                                              |   |     |     |   |     |     |   |     |     |   |  |   |      |     
|Earnings/(loss) before extraordinary gain and income tax expense/ (benefit) |                                                              |   | 28  |     |   | 92  |     |   | 22  |     |   |  |   | (819 | )   
|                                                                            | Federal, state and foreign income tax expense/(benefit)      |   |     | (34 | ) |     | 23  |   |     | 7   |   |  |   |      | 13  
|                                                                            |                                                              |   |     |     |   |     |     |   |     |     |   |  |   |      |     
|Earnings/(loss) before extraordinary gain                                   |                                                              |   | 62  |     |   | 69  |     |   | 15  |     |   |  |   | (832 | )   
|                                                                            | Extraordinary gain                                           |   |     |    |   |     | 2   |   |     | 123 |   |  |   |      |    
|                                                                            |                                                              |   |     |     |   |     |     |   |     |     |   |  |   |      |     
|Net earnings/(loss)                                                         |                                                              | $ | 62  |     | $ | 71  |     | $ | 138 |     |   |  | $ | (832 | )   
|                                                                            |                                                              |   |     |     |   |     |     |   |     |     |   |  |   |      |     

Consolidated Worldwide Results for years ended December 31, 2004 and 2003

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

2004

2003Net sales

$
656

$
753Gross margin


288


374% of Net sales


44
%

50
%


In
2004 compared to 2003, the Company's consolidated net sales decreased by $97 million, or approximately 13%, primarily related to lower net sales of instant film and, to a
lesser degree, instant cameras. The net sales in 2004 included the favorable impact of approximately $18 million of foreign exchange when compared to 2003. The net sales in 2004 also included a
favorable impact of approximately $3 million from the resolution of a post audit claim by a major customer and the favorable impact of approximately $9 million related to lower net costs
for marketing programs compared to 2003. Excluding the favorable impact of foreign exchange, the post audit claim resolution

20

---



and
the lower net costs for marketing programs related to instant camera and film products, the Company's net sales of instant cameras and film declined by approximately 20% in 2004 compared to 2003.
Net sales of instant cameras and film in 2004 continued to be negatively impacted by competition from digital camera products and media formats.

The
Company had a gross margin of $288 million or 44% in 2004 compared to a gross margin of $374 million or 50% in 2003. The decrease in gross margin of 6 percentage
points was primarily the result of: the impact of lower net sales, primarily of instant film, which decreased gross margin by approximately 4 percentage points; higher manufacturing costs,
including the net impact of foreign exchange, which decreased gross margin by approximately 3 percentage points; and higher costs related to a quality problem in the Company's manufacturing
operation that produces lenses for the eyewear business, which decreased gross margin by approximately 1 percentage point. These decreases were offset, in part, by the net favorable impact of
foreign exchange, which increased gross margin by approximately 1 percentage point, and the favorable impact of the post audit claim resolution and the lower net costs for marketing programs
which increased gross margin by approximately 1 percentage point.

The
Company's selling, general and administrative ("SG&A") expenses were approximately $199 million and $240 million for 2004 and 2003, respectively. The Company's SG&A
expenses are its marketing, research, engineering and administrative expenses, excluding R&D segment expenses of $43 million in 2004 and $38 million in 2003 discussed below. The decrease
of $41 million or approximately 17% in SG&A expenses in 2004 compared to 2003 reflects a reduction of approximately $41 million in regional sales and marketing expenses to approximately
$102 million in 2004 from approximately $143 million in 2003, due to lower advertising expenses, the favorable impact of restructuring programs and approximately $2 million from
the closeout of certain 2003 and 2002 promotional programs. The decrease in SG&A expenses in 2004 compared to 2003 also reflects approximately $12 million of lower costs in the
non-segment Corporate category for employee incentive compensation to approximately $8 million in 2004 from approximately $20 million in 2003. The $8 million for
employee incentive compensation in 2004 included approximately $4 million of non-cash costs related to stock-based compensation awards and approximately $4 million related to
employee cash incentive compensation that was approved in the fourth quarter 2004. The approximately $20 million for employee incentive compensation in 2003 primarily related to provisions for
the Company's employee cash incentive compensation program. In 2004, the Company sold certain held for sale property located in Germany and other property located in the United Kingdom for aggregate
net cash proceeds of approximately $6 million. The Company recorded the gain on these sales of approximately $3 million in general and administrative expenses in the
non-segment Corporate category.

The
decreases in SG&A expenses in 2004 compared to 2003 were offset, in part, by planned increases of approximately $4 million in certain marketing expenses related to new
products as well as approximately $7 million of increases mainly in certain infrastructure costs, including increases in the non-segment Corporate category in the cost of corporate
governance and costs related to the proposed merger with Petters. The increases in SG&A expenses also included approximately $4 million from the unfavorable impact of foreign exchange on sales
and marketing expenses in 2004. The majority of the Company's SG&A expenses were recorded in the Americas Region and International Region segments with the remainder recorded primarily in the
non-segment Corporate category.

In
2004 and 2003, the Company recorded restructuring charges of approximately $15 million and approximately $5 million, respectively, in the non-segment
Corporate category. The charges in 2004 primarily related to involuntary severance programs intended to downsize and consolidate certain of the Company's manufacturing, sales and marketing and
non-segment Corporate category administrative operations. Under these programs, a total of approximately 525 employees were expected to leave the Company by early 2005. The cash payments
under these programs, some of which are being paid as a

21

---



stream
of payments, are expected to be substantially completed by the end of 2005. The restructuring charges in 2003 primarily related to involuntary severance programs intended to downsize and
consolidate certain of the Company's sales and marketing, non-U.S. manufacturing and non-segment Corporate category administrative operations. Under these programs, a total of
approximately 135 employees left the Company by early 2004. The cash payments under the 2003 programs were substantially completed by the end of the second quarter of 2004. The Company expects the
pre-tax savings from the restructuring charges recorded in 2004 to be approximately $30 million on an annualized basis, a portion of which has been realized in 2004. Refer to
Note 4 of the consolidated financial statements contained in Item 8.Financial Statements and Supplementary Datafor more information on the
Company's restructuring programs.

The
gross margin and expenses discussed above resulted in profit from operations of $31 million 2004 compared to a profit from operations of $91 million in 2003.

The
net of other income and expense in 2004 was less than one million compared to $4 million of net other income in 2003. The net of other income and expense in 2004 primarily
related to: foreign currency transaction losses of approximately $7 million and a charge related to periods prior to 2004 which was determined not to be material of approximately
$1 million related to defined benefit pension plans of certain non-U.S. marketing subsidiaries; offset, in part, by a gain of approximately $2 million related to a settlement
agreement reached with Primary regarding the obligation of the Company to reimburse Primary for certain estate costs incurred by Primary, which had been previously recorded as a liability by the
Company; a gain of approximately $2 million related to the sale of the Company's equity interest in a private company; approximately $2 million of interest income and approximately
$1 million related to the return of pension plan assets of a subsidiary that had been liquidated. The net of other income and expense in 2003 was income of approximately $4 million that
consisted primarily of approximately $3 million of distributions from a real estate joint venture that had been developing property in Cambridge, Massachusetts, and approximately
$2 million of interest income offset, in part, by net foreign exchange losses of approximately $1 million. The foreign exchange net loss in 2003 was made up of net foreign exchange
transaction losses of approximately $8 million and the recognition of a net foreign translation gain of approximately $7 million previously recorded in stockholders' equity that resulted
from the liquidation of certain non-U.S. subsidiaries.

The
Company's income tax benefit was $34 million on reported earnings before income taxes of $28 million in 2004 compared to an income tax expense of $23 million, on
reported earnings before income taxes of $92 million in 2003. The decrease in the Company's income taxes in 2004 compared to
2003 was primarily related to the use of foreign tax credits in the U.S., including a projected foreign tax credit carryback, generated as a result of dividends paid from certain of the Company's
foreign subsidiaries, the settlement of a tax audit in the Netherlands which resulted in a tax refund, the release of certain tax reserves as a result of the resolution of certain foreign tax issues
offset, in part, by an increase in valuation allowances related to certain deferred tax assets. The factors contributing to the magnitude of the Company's tax benefits in 2004 are not expected to be
repeated in future periods.

In
2004 the Company's net earnings were $62 million compared to net earnings of $71 million in 2003. Basic and diluted earnings per common share based on earnings available
to common stockholders were $1.85 and $1.72, respectively, in 2004, and $2.07 and $2.03, respectively, for basic and diluted earnings per common share based on earnings available to common
stockholders in 2003. Net earnings in 2003 include an extraordinary gain of $2 million which related to adjustments required under purchase accounting for the fair values of certain liabilities
assumed by the Company in its asset purchase from Primary on July 31, 2002.

In
2004, the Company recorded a charge of $17.5 million in accumulated other comprehensive income in stockholders' equity related to a non-U.S. pension plan with
certain benefit obligations in excess of the fair value of plan assets.

22

---



The following is a summary of the net sales and profit from operations by business segment (in millions):

|                               |                      |                   |     |     |     |     |     |     |     |     |     |  |   |     |    
|------------------------------ | -------------------- | ----------------- | --- | --- | --- | --- | --- | --- | --- | --- | --- |  | - | --- | ---
|
|
|Net sales to customers:        |                      |                   |     |     |     |     |     |     |     |     |     |  |   |     |    
|                               | Americas Region      |                   | $   | 345 |     | $   | 423 |     | $   | 203 |     |  |   | $   | 251
|                               | International Region |                   |     | 229 |     |     | 250 |     |     | 135 |     |  |   |     | 155
|                               | Global Manufacturing |                   |     |    |     |     |    |     |     |    |     |  |   |     |   
|                               | R&D                  |                   |     |    |     |     |    |     |     |    |     |  |   |     |   
|                               | All Other            |                   |     | 82  |     |     | 80  |     |     | 26  |     |  |   |     | 38 
|                               |                      |                   |     |     |     |     |     |     |     |     |     |  |   |     |    
|                               |                      | Subtotal Segments |     |     | 656 |     |     | 753 |     |     | 364 |  |   |     |    
|                               | Corporate            |                   |     |    |     |     |    |     |     |    |     |  |   |     |   
|                               |                      |                   |     |     |     |     |     |     |     |     |     |  |   |     |    
|Total                          |                      | $                 | 656 |     | $   | 753 |     | $   | 364 |     |     |  | $ | 444 |    
|                               |                      |                   |     |     |     |     |     |     |     |     |     |  |   |     |    
|Profit/(loss) from operations: |                      |                   |     |     |     |     |     |     |     |     |     |  |   |     |    
|                               | Americas Region      |                   | $   | 123 |     | $   | 152 |     | $   | 69  |     |  |   | $   | 68 
|                               | International Region |                   |     | 65  |     |     | 62  |     |     | 26  |     |  |   |     | 16 
|                               | Global Manufacturing |                   |     | (44 | )   |     | (16 | )   |     | (27 | )   |  |   |     | (45
|                               | R&D                  |                   |     | (43 | )   |     | (38 | )   |     | (13 | )   |  |   |     | (22
|                               | All Other            |                   |     | 23  |     |     | 19  |     |     | 5   |     |  |   |     | 5  
|                               |                      |                   |     |     |     |     |     |     |     |     |     |  |   |     |    
|                               |                      | Subtotal Segments |     |     | 124 |     |     | 179 |     |     | 60  |  |   |     |    
|                               | Corporate            |                   |     | (93 | )   |     | (88 | )   |     | (35 | )   |  |   |     | (66
|                               |                      |                   |     |     |     |     |     |     |     |     |     |  |   |     |    
|Total                          |                      | $                 | 31  |     | $   | 91  |     | $   | 25  |     |     |  | $ | (44 | )  
|                               |                      |                   |     |     |     |     |     |     |     |     |     |  |   |     |    

The
profit from operations information presented above for the Company and Primary are not comparable due to the factors as described in the "Comparability of Financial Results" section
above.

Americas Region

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

2004

2003Net sales

$
345

$
423Profit from operations


123


152


Net
sales in the Americas Region decreased by $78 million, or approximately 18%, in 2004 compared to 2003, primarily due to lower net sales of instant film and, to a lesser
degree, instant cameras. The net sales in the region in 2004 include the favorable impact of approximately $3 million related to the resolution of a post audit claim by a major customer and a
favorable impact of approximately $6 million of lower net costs for marketing programs in 2004 compared to the same period in 2003. Excluding the favorable impact of the post audit claim
resolution and the lower net costs for marketing programs, net sales in the Americas Region declined by approximately $87 million, or approximately 21%, in 2004
compared to 2003. Competition from digital camera products and media formats continued to negatively impact the Company's net sales in 2004.

Profit
from operations in the Americas Region declined by $29 million to $123 million in 2004 compared to profit from operations of $152 million in 2003. The profit
from operations in 2004

23

---



includes
approximately $3 million related to the favorable impact of the post audit claim resolution and the favorable impact of approximately $6 million related to the lower net costs
for marketing programs compared to 2003 offset, in part, by approximately $2 million from the unfavorable impact of foreign exchange on standard cost of sales compared to 2003. Excluding the
favorable impact of the post audit claim resolution and the lower net costs for marketing programs, profit from operations in the Americas Region in 2004 compared to 2003 declined by
$36 million. This decrease was primarily due to the impact of lower net sales in 2004, offset, in part, by lower selling and administrative expenses, primarily related to lower advertising
costs and savings from restructuring.

International Region

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

2004

2003Net sales

$
229

$
250Profit from operations


65


62


Net
sales in the International Region declined by $21 million, or approximately 8%, to $229 million in 2004 from $250 million in 2003. The net sales in the
International Region in 2004 included approximately $15 million from the favorable impact of foreign exchange and $3 million related to lower net costs for marketing programs in 2004
compared to 2003. Excluding the favorable impact of foreign exchange and the lower net costs for marketing programs, net sales in the International Region declined by approximately $39 million,
or approximately 16%, in 2004 compared to 2003, primarily due to lower net sales of instant film and, to a lesser degree, instant cameras. Net sales in the International Region in 2004 continue to be
negatively impacted by competition from digital camera products and media formats.

Profit
from operations in the International Region was $65 million in 2004 compared to $62 million in 2003. The increase of $3 million included approximately
$9 million from the net favorable impact of foreign exchange, approximately $3 million related to lower net costs for marketing programs compared to 2003 and approximately
$2 million related to the closeout of certain prior year promotional programs. Excluding the impact of foreign exchange, lower net costs for marketing programs and the closeout of promotional
programs, profit from operations in the International Region declined by approximately $11 million in 2004 compared to 2003, primarily due to the impact of the lower net sales in 2004 compared
to 2003 offset, in part, by the favorable impact of lower selling and administrative expenses in 2004, primarily due to lower advertising costs and savings from restructuring.

Global Manufacturing

The manufacturing costs in the Global Manufacturing segment consist of non-standard costs, including variances from standard costs, procurement costs,
inventory management costs, and development costs for manufacturing processes ("manufacturing non-standard costs"). Manufacturing non-standard costs were $44 million in
2004 compared to $16 million in 2003. The increase of $28 million in manufacturing non-standard costs in 2004 compared to 2003 was a result of the following: approximately
$8 million of inventory write-offs of certain raw and in-process material that was no longer required and approximately $9 million of other unfavorable
manufacturing non-standard costs, primarily related to reductions in the Company's production volumes; approximately $6 million of costs related to a quality problem in the
Company's manufacturing operation that produces lenses for the eyewear business; approximately $3 million of vendor termination costs and fixed asset write-offs in 2004 related to
the Company's decision to terminate the manufacturing development and test marketing of its instant digital printing kiosks; and approximately $2 million of unfavorable foreign exchange
variances in 2004.

24

---



R&D

R&D segment expenses were $43 million in 2004 compared to $38 million in 2003. The increase of $5 million primarily related to increases in
spending related to the Company's instant digital printing activities in 2004. Approximately 82% of the Company's total research and development expenses in 2004 were related to the Company's instant
digital printing activities with the balance primarily related to the Company's instant photographic activities. The Company is exploring strategic alternatives for the instant digital printing assets
and related activities, including a potential sale. Unless the Company finds outside investors or has a change in circumstances, the Company intends to cease investing significant resources in its
instant digital printing activities after the second quarter of 2005.

All Other

Net sales in the All Other segment increased by $2 million, or approximately 3%, to $82 million in 2004 compared to $80 million in 2003. The
increase was primarily related to an increase in net sales of the Company's licensing operations of approximately $5 million and in the net sales of its eyewear business of approximately
$3 million, primarily related to the favorable impact of foreign exchange. These increases were offset, in part, by a reduction in net sales from the Company's third party contract
manufacturing and commercial ID operations in 2004 compared to 2003.

Profit
from operations in the All Other segment increased by $4 million to $23 million in 2004 compared to $19 million in 2003. The increase in profit from
operations in 2004 primarily reflects the impact of the increase in licensing and eyewear net sales. These increases were offset, in part, by the impact of the decrease in the net sales related to
third party contract manufacturing and commercial ID operations.

Consolidated Worldwide Results for years ended December 31, 2003 and 2002

The Company's consolidated net sales and gross margin for 2003 compared to the combined results of the Company and Primary for 2002 were as follows (dollars in
millions):

Company
2003

Combined
2002Net sales

$
753

$
808Gross margin


374


304% of Net sales


50
%

38
%


In
2003 compared to the combined 2002, the Company's consolidated net sales decreased by $55 million or approximately 7%, primarily as a result of lower net sales of instant film
and, to a lesser degree, instant cameras. These decreases were offset, in part, by approximately $27 million from the favorable impact of foreign exchange and increases of approximately
$14 million in net sales in the Company's contract manufacturing operations and, to a lesser degree, licensing. Excluding the favorable impact of foreign exchange, the Company's net sales of
instant film and cameras declined by approximately 13% in 2003 compared to the combined 2002. The net sales of instant film and cameras in 2003 continue to be negatively impacted by competition from
digital camera products and media formats.

The
gross margins for 2003 and the combined 2002 are not comparable due to certain factors as described in the "Comparability of Financial Results" section above. The Company had a gross
margin of 50% in 2003 compared to a gross margin of 38% in the combined 2002. The increase of approximately 12% was primarily the result of: lower manufacturing costs in 2003 due to the Company's
efforts to consolidate its underutilized manufacturing facilities which represented approximately 8 percentage points of this change; the favorable margin impact from the mix of higher margin
products sold in 2003 compared to the combined 2002, including the impact of depreciation

25

---



related
to the Transaction, which represented approximately 3 percentage points of this change; and the favorable impact of foreign exchange, which represented approximately 1 percentage
point of this change.

The
Company's SG&A expenses were $240 million in 2003 and $271 million in the combined 2002. The Company's SG&A expenses are its marketing, research, engineering and
administrative expenses, excluding R&D segment expenses of $38 million in 2003 and $35 million in the combined 2002 as discussed below. These SG&A expenses are not comparable due to
certain of the factors as described in the "Comparability of Financial Results" section above. The decrease of $31 million or approximately 11% in SG&A expenses in 2003 compared to the combined
2002 primarily reflects a reduction of approximately $41 million in regional sales and marketing expenses to approximately $134 million in 2003 from approximately $175 million in
the combined 2002 and a decrease of approximately $7 million in the non-segment Corporate category expenses in 2003 compared to the combined 2002. These decreases were primarily due
to the favorable impact of restructuring programs described below and essentially no depreciation expense, primarily in the non-segment Corporate category. Due to the impact on the
acquired assets of the Company's purchase accounting related to the Transaction, essentially no depreciation expense was recorded in 2003. These reductions were offset, in part, by approximately
$9 million of unfavorable foreign exchange in 2003, an increase of approximately $8 million in 2003 related to employee incentive compensation, which is considered a
non-segment Corporate category administrative expense. The majority of the SG&A expenses were recorded in the Americas and International Region segments with the remainder recorded
primarily in the non-segment Corporate category.

In
2003, restructuring and other charges decreased to $5 million from $17 million in the combined 2002. The charges in 2003 were recorded in the non-segment
Corporate category and primarily related to involuntary severance programs intended to downsize and consolidate certain of the Company's sales and marketing, non-U.S. manufacturing and
Corporate administrative operations. Under these programs, approximately 135 employees left the Company by early 2004. The cash payments under this program were substantially completed by the end of
the second quarter of 2004.

In
the combined 2002, restructuring and other charges were $17 million consisting of $12 million recorded by Primary and $5 million recorded by the Company. These
charges were recorded in the non-segment Corporate category. The $5 million charge recorded by the Company in the five month period ended December 31, 2002, primarily related
to involuntary severance programs intended to downsize and consolidate certain of the Company's sales and marketing and non-U.S. manufacturing operations. Approximately 120 employees left
the Company under these programs. In the period from January 1 to July 31, 2002, Primary recorded a charge of approximately $8 million, primarily related to an involuntary
severance program designed to reduce overhead costs and realign its resources. Under this program, approximately 225 sales and marketing employees left Primary, mostly from the International Region.
This charge was offset, in part, by a reversal by Primary of approximately $4 million of previously recorded involuntary severance charges.

In
addition, the restructuring and other charges recorded by Primary in the period from January 1 to July 31, 2002, included approximately $4 million for an
impairment charge related to certain marketing operations that were exited, approximately $3 million of costs related to internal use software that was no longer required to support certain
marketing activities, and approximately $1 million of fixed asset write-offs and exit costs primarily related to a number of non-US activities that were exited. The exit
costs were substantially paid by Primary as of July 31, 2002.

The
restructuring programs implemented by the Company favorably affected the Company's cost and expense levels in 2003. Refer to Note 4 of the consolidated financial statements
contained in Item 8.Financial Statements and Supplementary Datafor more information on the restructuring programs of the Company and Primary.

26

---



In
the second quarter of 2002, based on the available information relative to the anticipated sale of substantially all of the assets and businesses of its domestic subsidiaries and the
capital stock of its foreign subsidiaries in the Transaction, Primary recorded an impairment charge of $330 million in its reorganization loss to write off the carrying value of its property,
plant and equipment. In July 2002, Primary recorded a loss on the Transaction of $213 million. This loss was recorded in Primary's reorganization loss. Effective July 31, 2002,
the Pension Benefit Guaranty Corporation ("PBGC") assumed the U.S. pension plan of Primary and as a result, Primary recorded a charge of $184 million related to a minimum pension liability cost
that had been previously recorded in accumulated other comprehensive income, a component of stockholders' equity. In the seven-month period ended July 31, 2002, Primary recorded a cost of
$42 million related to prepetition claims that were expected to be allowed by the U.S. Bankruptcy Court. Both the charge of $184 million related to the U.S. pension plan and the
$42 million related to prepetition claims costs were recorded in Primary's reorganization loss.

Profit
from operations in 2003 and the combined 2002 are not comparable due to certain factors described in the "Comparability of Financial Results" section above. The gross margin and
expenses discussed above resulted in profit from operations of $91 million in 2003 compared to a loss from operations of $19 million in the combined 2002.

The
net of other income and expense in 2003 was income of approximately $4 million that consisted primarily of approximately $3 million of distributions from a real estate
joint venture that had been developing property in Cambridge, Massachusetts, and approximately $2 million of interest income offset, in part, by net foreign exchange losses of approximately
$1 million. The foreign exchange net loss in 2003 was made up of net foreign exchange transaction losses of approximately $8 million and the recognition of a net foreign translation gain
of approximately $7 million previously recorded in stockholders' equity that resulted from the liquidation of certain non-U.S. subsidiaries. Other expense in the combined 2002 was
$3 million and primarily related to foreign exchange transaction losses offset, in part, by approximately $4 million of distributions from a real estate joint venture that had been
developing property in Cambridge, Massachusetts and approximately $2 million of interest income. In the combined 2002, Primary recorded a $771 million reorganization loss, primarily
related to the asset impairment loss of $330 million, the loss on the Transaction of $213 million, the charge of $184 million related to the assumption of Primary's U.S. pension
plan by the PBGC, pre-petition claims costs of $42 million, professional fees and expenses of $13 million incurred in connection with the Filing and the Chapter 11 process,
$10 million in gains on asset sales and $1 million of interest income.

Income
tax expense was $23 million or approximately 25% on reported earnings before income taxes of $92 million in 2003, compared to an income tax expense of
$20 million on a reported loss before income taxes of $797 million in the combined 2002. The Company's income tax expense in the five month period ended December 31, 2002 was
approximately $7 million, or approximately 31% on reported earnings before income taxes of approximately $22 million. The Company's income tax expense in 2003 was lower as a percentage
of pre-tax earnings primarily due to the use of tax benefits from certain of the Company's foreign operations. The income tax expense of $13 million for Primary in the period from
January 1 to July 31, 2002, primarily represented the income tax expense of certain of its foreign operations. Primary did not record any income tax benefits associated with the
significant losses it incurred during the period from January 1 to July 31, 2002 because it determined it was more likely than not that those benefits would not be realized.

In
2003, the Company's net earnings were $71 million and basic and diluted earnings per common share based on net earnings available to common stockholders were $2.07 and $2.03,
respectively. The Company's net earnings in 2003 include an extraordinary gain of approximately $2 million related to adjustments required under purchase accounting of the fair values of
certain held for sale assets and liabilities acquired in the Transaction. Excluding the extraordinary gain, the Company's basic and diluted earnings per common share in 2003 were $1.99 and $1.95,
respectively.

27

---



In
the five month period ended December 31, 2002, the Company recorded an extraordinary gain of $123 million related to the Transaction. Refer to the section titled
"Transaction" in Item 1.Businessand in Note 1 of the consolidated financial statements contained in Item 8. Financial Statements and Supplementary Datafor more information concerning the Company's asset purchase from Primary PDC, Inc. and its domestic
subsidiaries. The Company's net earnings in the five month period ended December 31, 2002, including the impact of the extraordinary gain, were $138 million and its basic and diluted
earnings per common share based on net earnings available to common stockholders were $4.38. Excluding the extraordinary gain, the Company's basic and diluted earnings per common share in the five
month period ended December 31, 2002 were $0.40. The net loss of Primary was $832 million in the seven month period ended July 31, 2002. The earnings per share information for the
combined 2002 is not meaningful due to the differences in capital structure between the Company and Primary, the factors described in the "Comparability of Financial Results" section above, and the
reorganization loss recorded by Primary.

Americas Region

The net sales and profit from operations for the Americas Region in 2003 and the combined 2002, were as follows (in millions):

Company
2003

Combined
2002Net sales

$
423

$
454Profit from operations


152


137


Net
sales in the Americas Region decreased by $31 million or approximately 7% in 2003 compared to the combined 2002, primarily due to lower net sales of instant film offset, in
part, by increased sales of instant cameras. Competition from digital camera products and media formats continued to negatively impact the Company's net sales of instant film in the Americas Region in
2003.

Profit
from operations for the Americas Region in 2003 and the combined 2002 are not comparable due to certain of the factors as described in the "Comparability of Financial Results"
section above. Profit from operations in the Americas Region increased by $15 million or approximately 11% in 2003 compared to the combined 2002. The increase in profit from operations in 2003
related to lower selling and administrative expenses, primarily due to savings from restructuring and, to a lesser degree, lower advertising expenses, and essentially no depreciation expense on the
acquired assets due to impact of the Company's purchase accounting related to the Transaction. This decrease was offset, in part, by the impact of the lower net sales in 2003 compared to the combined
2002 and approximately $2 million from the unfavorable impact of foreign exchange on standard cost of sales.

International Region

The net sales and profit from operations for the International Region for 2003 and the combined 2002 were as follows (in millions):

Company
2003

Combined
2002Net sales

$
250

$
290Profit from operations


62


42


Net
sales in the International Region decreased by $40 million or approximately 14% in 2003 compared to the combined 2002. The decrease primarily related to lower net sales of
instant film and, to a lesser degree, instant cameras offset, in part, by approximately $22 million from the net favorable impact of foreign exchange. Excluding the favorable impact of foreign
exchange, net sales in the International Region decreased approximately $62 million or approximately 21% in 2003 compared to

28

---



the
combined 2002. The Company's net sales of instant film and cameras in the International Region in 2003 continued to be negatively impacted by competition from digital camera products and media
formats.

Profit
from operations for the International Region in 2003 and the combined 2002 are not comparable due to certain of the factors described in the "Comparability of Financial Results"
section above. Profit from operations in the International Region increased $20 million or approximately 48% in 2003 compared to the combined 2002. The increase in profit from operations in
2003 primarily reflects the favorable impact of foreign exchange, lower selling and administrative expenses in 2003 due to the impact of the Company's restructuring programs, and, to a lesser degree,
essentially no depreciation expense on the acquired assets due to impact of the Company's purchase accounting related to the Transaction. These increases in operating profit in 2003 were offset, in
part, by the impact of the lower net sales in 2003 compared to the combined 2002 and higher advertising expenses in 2003.

Global Manufacturing

Manufacturing non-standard costs in the Global Manufacturing segment decreased by $56 million or approximately 78% to $16 million in
2003 compared to $72 million in the combined 2002. The manufacturing non-standard costs in 2003 and the combined 2002 are not comparable due to certain factors described in the
"Comparability of Financial Results" section above. The decrease in these costs in 2003 primarily reflects the Company's efforts to reduce its underutilized manufacturing capacity through the
consolidation of certain facilities and, to a lesser degree, the impact of inventory write-offs of obsolete material and products in the combined 2002 that did not occur in 2003, and
certain planned reductions in film manufacturing development costs in 2003. These decreases were offset, in part, by the unfavorable impact of approximately $5 million of foreign exchange.

R&D

R&D segment expenses increased by $3 million or approximately 9% to $38 million in 2003 from $35 million in the combined 2002. R&D expenses
in 2003 and the combined 2002 are not comparable due to certain of the factors described in the "Comparability of Financial Results" section above. The increase in R&D expenses in 2003 primarily
related to planned increases in the Company's instant digital printing research and development activities. Approximately three-quarters of the total research and development expenses in 2003 and the
combined 2002 were related to instant digital printing activities, with the balance primarily related to core instant photographic activities, mainly for new instant camera designs in 2003.

All Other

Net sales in the All Other segment increased by $16 million or approximately 25% to $80 million in 2003 compared to $64 million in the
combined 2002. This increase was primarily related to an increase in revenues from certain third party contract manufacturing operations and, to a lesser degree, increased licensing revenues in 2003.

Profit
from operations in the All Other segment increased $9 million to $19 million in 2003 compared to $10 million in the combined 2002. Profit from operations in
the All Other segment in 2003 and the combined 2002 is not comparable due to certain of the factors described in the "Comparability of Financial Results" section above. The increase in profit from
operations in 2003 primarily reflects the margin impact of the increased revenues in the Company's third party contract manufacturing and licensing operations.

29

---



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

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

CompanyThree month
period ended
December 31,
2004

Three month
period ended
December 31,
2003Net sales

$
160

$
188Cost of goods sold


105


98Gross margin


55


90% of Net sales


34
%

48
%Marketing, research, engineering and administrative expenses


63


76Restructuring and other charges


6


3Profit/(loss) from operations


(14
)

11Other expense, net


(2
)

(4
)Interest expense


(1
)

(1
)Earnings/(loss) before income tax expense


(17
)

6Federal, state and foreign income tax expense/(benefit)


(25
)

1Net earnings

$
8

$
5


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

Q4
2004

Q4
2003Net sales

$
160

$
188Gross margin


55


90% of Net sales


34
%

48
%


In
the fourth quarter of 2004 compared to the same period of 2003, the Company's consolidated net sales decreased by $28 million or approximately 15%, primarily related to lower
net sales of instant film and, to a lesser degree, instant cameras offset, in part, by approximately $3 million from the favorable impact of foreign exchange and approximately $5 million
from an increase in the net sales of the All Other segment and other products. Excluding the favorable impact of foreign exchange, the Company's net sales of instant film and cameras decreased by
approximately 21% in the fourth quarter of 2004 compared to the same period of 2003. The net sales of instant film and cameras in the fourth quarter of 2004 were negatively impacted by competition
from digital camera products and media formats.

The
Company had a gross margin of $55 million or 34% in the fourth quarter of 2004 compared to a gross margin of $90 million or 48% in the fourth quarter of 2003. The
decrease in gross margin of 14 percentage points was primarily due to the impact of lower net sales, primarily of instant film, and mix which decreased gross margin by approximately
7 percentage points. The decrease in net sales resulted in lower production volumes. This in turn resulted in an increase in manufacturing costs due to certain costs which were not reduced in
line with the lower production volumes which decreased margin by approximately 6 percentage points. The decrease in gross margin also included the impact of

30

---



costs
in the fourth quarter of 2004 related to a quality problem in manufacturing operations that support the Company's eyewear business, which decreased gross margin by approximately
2 percentage points. The decreases in gross margin were offset, in part, by the favorable impact of foreign exchange on net sales in the fourth quarter of 2004, which increased gross margin by
approximately 1 percentage point.

The
Company's SG&A expenses were $50 million and $64 million, for the fourth quarter of 2004 and 2003, respectively. The Company's SG&A expenses are its marketing,
research, engineering and administrative expenses, excluding the R&D segment expenses of $13 million in the fourth quarter of 2004 and $12 million in the fourth quarter of 2003,
discussed below. The decrease of $14 million or approximately 22% in SG&A expenses in the fourth quarter of 2004 compared to the same period in 2003 reflects a reduction of approximately
$14 million in regional sales and marketing expenses to approximately $22 million in the fourth quarter of 2004 from approximately $36 million in the same period in 2003. This
decrease was primarily due to lower advertising expenses and the favorable impact of restructuring programs. The decrease in SG&A expenses in the fourth quarter of 2004 compared to the same period in
2003 also reflects a net decrease of costs in the non-segment Corporate category, including approximately $5 million primarily related to savings from restructurings and efforts to
consolidate operations, approximately $1 million for lower employee cash incentive compensation and approximately $1 million from a gain on the sale of property located in the United
Kingdom. The decreases in SG&A were offset, in part, by approximately $6 million of cost increases in the non-segment Corporate category, including increases in the cost of
corporate governance and costs related to the proposed merger with Petters, along with approximately $1 million from the unfavorable impact of foreign exchange on sales and marketing expenses.
The majority of the Company's SG&A expenses were recorded in the Americas and International Region segments with the remainder recorded primarily in the non-segment Corporate category.

In
the fourth quarter of 2004, the Company recorded restructuring charges of approximately $6 million compared to restructuring charges of $3 million in the same period in
2003. The charges in the fourth quarter of 2004 related to involuntary severance programs intended to downsize and consolidate the Company's manufacturing operations, sales and marketing, and
non-segment Corporate category administrative operations. The charges in the fourth quarter of 2003 primarily related to involuntary severance programs intended to downsize and consolidate
certain of the Company's sales and marketing, non-U.S. manufacturing and non-segment Corporate category administrative operations. A total of approximately 235 employees were
expected to leave the Company under the fourth quarter 2004 programs by early 2005. The Company expects to make most of the cash payments related to the fourth quarter 2004 restructuring charges, some
of which are paid as a stream of payments, by the end of 2005. Refer to Note 4 of the consolidated financial statements contained in Item 8.Financial Statements and
Supplementary Datafor more information on the Company's restructuring programs.

The
gross margin and expenses discussed above resulted in a loss from operations of $14 million in the fourth quarter of 2004 compared to a profit from operations of
$11 million in the fourth quarter of 2003.

The
net of other income and expense in the fourth quarter of 2004 was an expense of $2 million primarily related to approximately $5 million of foreign exchange transaction
losses and a charge related to periods prior to 2004 which was determined not to be material of approximately $1 million related to defined benefit pension plans of certain non-U.S.
marketing subsidiaries offset, in part, by a gain of approximately $2 million related to a settlement agreement reached with Primary regarding the obligation of the Company to reimburse Primary
for certain estate costs incurred by Primary and the related return of cash collateral to the Company provided to cover such costs, which had been previously recorded as a liability by the Company,
approximately $1 million of interest income and approximately $1 million related to the return of pension plan assets of a subsidiary that had been liquidated. The net of other income
and expense was an expense of $4 million in the fourth quarter of

31

---



2003
primarily related to foreign exchange transaction losses offset, in part, by a distribution from a real estate joint venture that was developing property located in Cambridge Massachusetts.

In
the fourth quarter of 2004, the Company revised its estimate of its income taxes for 2004 primarily due to lower than expected earnings in 2004, a foreign tax credit carryback, the
settlement of a tax audit in the Netherlands which resulted in a tax refund, the release of certain tax reserves as a result of the resolution of certain foreign tax issues offset, in part, by an
increase in valuation allowances related to certain deferred tax assets. As a result, the Company recorded an income tax benefit of $25 million on a reported loss before income taxes of
$17 million in the fourth quarter of 2004 compared to an income tax expense of $1 million, on reported earnings before income taxes of $6 million in the fourth quarter of 2003.
The factors contributing to the magnitude of the Company's tax benefits in 2004 are not expected to be repeated in future periods.

In
the fourth quarter of 2004 the Company's net earnings were $8 million compared to net earnings of $5 million in the fourth quarter of 2003. Basic and diluted earnings
per common share based on earnings available to common stockholders were $0.24 and $0.22, respectively, in the fourth quarter of 2004, compared to $0.11 and $0.10, respectively, for basic and diluted
earnings per common share based on earnings available to common stockholders in the fourth quarter of 2003.

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

Three month
period ended
December 31,
2004

Three month
period ended
December 31,
2003Net sales to customers:Americas Region

$
87

$
105International Region


52


64Global Manufacturing





R&D





All Other


21


19Subtotal Segments


160


188Corporate





Total

$
160

$
188Profit/(loss) from operations:Americas Region

$
29

$
37International Region


14


17Global Manufacturing


(19
)

(7
)R&D


(13
)

(12
)All Other


4


5Subtotal Segments


15


40Corporate


(29
)

(29
)Total

$
(14
)
$
11


32

---



Americas Region

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

Fourth
Quarter
2004

Fourth
Quarter
2003Net sales

$
87

$
105Profit from operations


29


37


Net
sales in the Americas Region decreased by $18 million, or approximately 17%, in the fourth quarter of 2004 compared to the same period in 2003, primarily related to lower net
sales of instant film and, to a lesser degree, instant cameras. Competition from digital camera products and media formats negatively impacted the Company's net sales in the Americas Region in the
fourth quarter of 2004.

Profit
from operations in the Americas Region for the fourth quarter of 2004 was $29 million compared to profit from operations of $37 million in the same period of 2003.
The decline in profit from operations in the Americas Region of $8 million was primarily due to the impact of lower net sales. This decrease was offset, in part, by lower selling and
administrative expenses, primarily related to lower advertising costs and savings from restructuring in the fourth quarter of 2004.

International Region

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

Fourth
Quarter
2004

Fourth
Quarter
2003Net sales

$
52

$
64Profit from operations


14


17


Net
sales in the International Region decreased by $12 million, or approximately 19%, to $52 million in the fourth quarter of 2004 from $64 million in the same
period of 2003, primarily due to lower net sales of instant film and, to a lesser degree, instant cameras. The net sales in the International Region in the fourth quarter of 2004 included
approximately $3 million related to the favorable impact of foreign exchange. Excluding the favorable impact of foreign exchange, net sales in the International Region declined by approximately
$15 million, or approximately 23%, in the fourth quarter of 2004 compared to the same period in 2003. Net sales in the International Region in the fourth quarter of 2004 were negatively
impacted by competition from digital camera products and media formats.

Profit
from operations in the International Region was $14 million in the fourth quarter of 2004 compared to $17 million in the same period in 2003. Profit from operations
in the fourth quarter of 2004 included the net favorable impact of approximately $1 million of foreign exchange. Excluding the net favorable impact of foreign exchange, profit from operations
in the International Region declined by approximately $4 million in the fourth quarter of 2004 compared to the same period in 2003. This decrease reflects the impact of lower net sales in the
International Region in the fourth quarter of 2004 compared to the same period in 2003 offset, in part, by the favorable impact of lower selling and administrative expenses in the fourth quarter of
2004, primarily due to lower advertising costs and, to a lesser degree, savings from restructuring.

33

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Global Manufacturing

Manufacturing non-standard costs were approximately $19 million in the fourth quarter of 2004 compared to $7 million in the fourth
quarter of 2003. The increase of $12 million in manufacturing non-standard costs in the fourth quarter of 2004 compared to the same period in 2003 included approximately
$5 million of inventory write-offs of certain raw and in-process material that was no longer required and an increase of approximately $3 million of other
manufacturing non-standard costs, primarily related to reductions in the Company's production volumes. The increase also consists of approximately $5 million of costs related to a
quality problem in the Company's manufacturing operation that produces lenses for the eyewear business. These increases were offset, in part, by the favorable impact of approximately $1 million
of lower development costs related to the Company's decision to terminate the development of its instant digital printing kiosks.

R&D

R&D segment expenses were $13 million in the fourth quarter of 2004 compared to $12 million in the same period in 2003. The increase of
$1 million primarily related to an increase in spending related to the Company's instant digital printing activities in the fourth quarter of 2004. Approximately 86% of the Company's total
research and development expenses in the fourth quarter of 2004 was related to the Company's instant digital printing activities with the balance primarily related to the Company's instant
photographic activities. The Company is exploring strategic alternatives for the instant digital printing assets and related activities, including a potential sale. Unless the Company finds outside
investors or has a change in circumstances, the Company intends to cease investing significant resources in its instant digital printing activities after the second quarter of 2005.

All Other

Net sales in the All Other segment were approximately $21 million in the fourth quarter of 2004 compared to $19 million in the fourth quarter of
2003. The increase of $2 million in net sales primarily related to an increase of approximately $5 million in the net sales of the Company's third party contract manufacturing and
licensing operations offset, in part, by a decrease of approximately $3 million in the net sales of the Company's eyewear business, primarily related to a lens quality problem.

Profit
from operations in the All Other segment was $4 million in the fourth quarter of 2004 compared to $5 million in the same period in 2003. The decrease of
$1 million in the fourth quarter of 2004 compared to the same period in 2003 reflected a reduction in profit from operations in the Company's eyewear business, primarily related to lower net
sales offset, in part, by an increase in profit from operations from the net sales related to the Company's licensing operations.

Financial Liquidity and Capital Resources

The Company's principal source of capital is provided by its cash flow from operating activities, which may be supplemented by borrowing under the Company's
revolving line of credit as discussed below. However, the revolving line of credit has not been used by the Company to date. A summary of the Company's cash flows in 2004 is as follows (in millions):

Cash provided by operating activities

$
9Cash used by investing activities


(18
)Cash used by financing activities


(48
)Effect of exchange rate changes on cash


4Net decrease in cash and cash equivalents

$
(53
)


34

---



The
Company's cash and cash equivalents were $114 million at December 31, 2004, a decrease of $53 million from $167 million at December 31, 2003. In
2004, net cash provided by the Company's operating activities was $9 million. Net earnings in 2004, adjusted for non-cash items (such as depreciation, deferred taxes and other
non-cash items) contributed approximately $65 million to cash flow from operating activities. A decrease in receivables, inventories,
and prepaid and other assets in 2004 increased cash flows from operating activities by $41 million. A decrease in accounts payables and accruals, compensation and benefits payable, and income
taxes payable decreased cash flows from operating activities by approximately $97 million in 2004. The decrease in compensation and benefits payable in 2004 includes the impact of cash payments
of approximately $20 million related to incentive compensation liabilities recorded in 2003.

Net
cash used by the Company for investing activities in 2004 was $18 million, primarily related to capital spending of approximately $29 million offset, in part, by a
decrease in other assets of approximately $5 million and approximately $6 million of proceeds from the sale of held for sale property located in Germany and other property located in the
United Kingdom. In 2004, capital spending related to: the acquisition of land adjacent to the Company's headquarters in Waltham, Massachusetts; facilities and equipment upgrades in Global
Manufacturing; and new products. The decrease in other assets in 2004 of approximately $6 million primarily related to the use of deposits related to the pre-tax proceeds from the
sale of certain of the Company's held for sale assets in 2003 that were used to acquire land adjacent to the Company's headquarters in Waltham, Massachusetts.

The
Company expects its capital spending in 2005 to be in the range of $15 to $20 million, primarily related to spending in support of new products, facilities and equipment
upgrades in Global Manufacturing, and Corporate property enhancements and information technology.

The
net cash used by the Company's financing activities in 2004 was $48 million. Approximately $47 million of this use was related to the redemption of the outstanding
shares of the Company's Preferred Stock and the payment of dividends on the outstanding shares of this stock immediately prior to the redemptions. Cash used by financing activities also reflects the
repurchase of approximately $1 million of restricted Common Stock from certain executives and a director in connection with a purchase by those individuals of shares of the Company's restricted
Common Stock in the first quarter of 2004. The Company utilized the purchase price it would otherwise have paid for the repurchase to pay a portion of the estimated income tax liability of those
individuals on the restricted Common Stock they purchased in the first quarter of 2004.

The
Company's working capital was $240 million at December 31, 2004 compared to $242 million at December 31, 2003.

As
of July 29, 2002, the Company entered into a three year, $100 million credit facility and accompanying security documents with a group of lenders (the "Credit
Agreement"). The Credit Agreement is secured by, among other things, a first priority security interest in substantially all of the Company's assets in the United States and most of the assets of the
Company's non-U.S. subsidiaries that are designated as borrowers or guarantors under the Credit Agreement. The Credit Agreement expires by its terms in July 2005. The Company is
considering a number of alternatives for replacing the Credit Agreement, including the negotiation of an extension of the Credit Agreement with the existing group of lenders. There can be no assurance
that the Company will be able to extend or replace this credit facility.

The
Credit Agreement provides for a three year $80 million revolving credit line, of which $50 million is available to be borrowed by the Company's U.S. operations and
$30 million is available to be borrowed by the Company's non-U.S. subsidiaries that are designated as borrowers under the Credit Agreement. Under the revolving credit line in the
Credit Agreement, the Company's borrowing availability is tied to a percentage of eligible domestic and foreign inventory and accounts receivable. Approximately $27 million was available to the
Company under the revolving line of credit at

35

---



December 31,
2004. The Credit Agreement also includes provisions for letters of credit in lieu of borrowings under the revolving credit line. In addition, the Credit Agreement contains
provisions for borrowings between the Company's subsidiaries that are designated as borrowers or guarantors. The Credit Agreement originally provided for a $20 million term loan. In 2003, the
Company repaid the term loan and this portion of the Credit Agreement is not available for future borrowings. There were no borrowings by the Company under the revolving line of credit in 2004, 2003
or 2002.

The
Credit Agreement contains certain restrictive covenants. Refer to Note 8 of the consolidated financial statements contained in Item 8.Financial
Statements and Supplementary Datafor more information on the restrictive covenants in the Credit Agreement. In 2003, the Credit Agreement was amended to provide a
$100 million discretionary basket for certain items otherwise restricted such as preferred stock redemptions and dividends, asset acquisitions, additional instant digital printing spending and
other investments, as long as certain of the Company's financial covenants are satisfied. In the fourth quarter of 2003, the Company paid approximately $10 million of dividends on its Preferred
Stock and redeemed 50% of the then outstanding shares of its Preferred Stock for approximately $44 million. In April 2004, the Company paid a further dividend of $1.3 million on
its Preferred Stock (representing all accrued and unpaid dividends on its Preferred Stock as of that date) and redeemed 50% of the then outstanding Preferred Stock for $22.3 million. In 2004,
the Company also used approximately $13 million of the discretionary basket for additional instant digital printing research and development spending. As a result, approximately
$9 million remained from the $100 million discretionary basket at December 31, 2004.

In
September 2004, the Company entered into an amendment to the Credit Agreement. This amendment provided for a reduction in the minimum earnings before interest, taxes,
depreciation and amortization ("EBITDA") covenant levels (calculated as of the end of each fiscal quarter on a rolling four quarter basis) for the third and fourth fiscal quarters of 2004 and the
first fiscal quarter of 2005 to $38.0 million, $12.5 million and $2.5 million, respectively. The EBITDA covenant level for the second fiscal quarter 2005, which is the final
period tested, was unchanged by this amendment and remained at $53.0 million. In addition, the amendment removed the ability of the Company to redeem shares of its outstanding Preferred Stock
and to pay dividends or make other distributions to any of its shareholders without approval of the lenders under the Credit Agreement. In connection with this amendment, the Company paid the lenders
under the Credit Agreement a fee of $0.2 million.

In
December 2004, the Company entered into an additional amendment to the Credit Agreement. This amendment permitted, among other things, the Company to redeem its Preferred Stock
(see Note 10) and pay a dividend on the Preferred Stock. Subsequently, in December 2004, the Company paid a
dividend of approximately $1.3 million on its Preferred Stock and redeemed the remaining outstanding shares of its Preferred Stock for approximately $22.3 million. This amendment limited
the Company's net use of cash up to $85 million through the expiration of the Credit Agreement in July 2005. In addition, the amendment permitted the Company to invest in various money
funds administered by the Company's lenders and utilize certain overdraft arrangements with the lenders under the Credit Agreement.

The
Company's obligations for non-cancelable operating leases and other purchase obligations as of December 31, 2004 were as follows (in millions):

Payments Due by PeriodTotal

Less than
1 Year

1 to 3
Years

4 to 5
Years

After
5 YearsNon-cancelable operating leases

$
46

$
9

$
18

$
9

$
10Purchase obligations


5


2


3





Total

$
51

$
11

$
21

$
9

$
10


36

---



The
Company's purchase obligations above include agreements to purchase goods and services that are legally binding and that include fixed or minimum quantities to be purchased; minimum
price provisions; or a specific timing of the related transaction. These obligations exclude agreements that are cancelable without penalty and do not include normal purchase orders for raw materials
or other goods and services. In addition, these obligations exclude current liabilities already recorded on the Company's balance sheet at December 31, 2004. These obligations are point in time
estimates based on the information currently available and actual payments could differ. The Company does not have any significant off-balance sheet arrangements.

Under
the Company's asset purchase agreement with Primary, the Company was required to reimburse Primary for certain costs incurred by Primary, if certain conditions were met. As of
December 31, 2003, the Company had recorded liabilities of $7 million for these costs and the Company cash collateralized the $7 million of liabilities for these costs in the
first quarter of 2004. In December of 2004, the Company reached a settlement agreement with Primary on the payment of these costs which was approved by the Bankruptcy Court at a hearing on
January 10, 2005. As a result, the Company recorded a gain of approximately $2 million in other income as of December 31, 2004.

Also,
under the provisions of the asset purchase agreement with Primary, if Primary incurred in excess of certain amounts for estate costs and did not have the funds necessary to pay for
them, Primary had the right to require the Company to purchase from it up to 4% of the total shares of Common and Preferred Stock of the Company outstanding at the date of the asset purchase from
Primary for up to $4.5 million. As part of the settlement agreement with Primary that was approved by the Bankruptcy Court in January 2005, Primary agreed to give up this right.

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

Foreign Currency Exchange

The Company generates a substantial portion of its business, including revenues and local purchases, in international markets, which subjects its operations and
cash flows to 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 and the sourcing of products and services in local markets. However, the Company has limited flexibility to increase prices in local currency to offset the
adverse impact of foreign exchange rate fluctuations. The Company is exposed to currency fluctuations primarily in the Euro, the Japanese Yen and the Pound Sterling.

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

Refer to Note 2 to the Company's consolidated financial statements contained in Item 8.Financial Statements and Supplementary
Datafor a full description of recent accounting pronouncements including the expected dates of adoption and effects on the Company's financial condition and results of
operations.

37

---



Factors That May Affect Future Results or the Value of Common Stock

The Company's business involves a number of risks, some of which are beyond the Company's control. Investing in the Company's Common Stock involves these and
other risks. The following is a description of a number of these risks; however, these are not the only risks and uncertainties the Company or holders of its Common Stock face. Additional risks and
uncertainties that exist include
risks of which the Company is not currently aware or does not currently believe to be material that may also adversely affect the Company's business.

Sales of Instant Photography Cameras and Film Continue to Decline.

The demand for the Company's instant photography cameras and film continues to experience a significant and steady decline due to competition from digital camera
products and media formats. This declining demand continues to have a negative impact on the net sales of the Company's instant camera and film products. The Company expects the decline to continue,
and there can be no assurance that this trend can be reversed or slowed. This trend has accelerated as digital imaging continues to grow in demand.

The Company May Not Be Able to Reduce Fixed Costs in Line with the Decline in Net Sales.

The
Company has been attempting to reduce its costs in line with the decline in its net sales. However, due to a number of fixed costs, particularly in the Company's manufacturing
operations, the Company has been and will continue to be challenged to reduce its costs in line with the decline in net sales. If the Company is unable to reduce its costs in line with the decline in
its net sales, this would have an adverse impact on the Company's operating results.

There Are Significant Pressures and Challenges in Implementing the Company's Strategy to Bring Instant Digital Printing Products to Market.

The
Company has experienced significant pressure and challenges in implementing its strategy to bring instant digital printing products to market, and it expects these challenges to
continue. In addition, with the proliferation of similar products, competition in this area is intensifying. The Company has made a significant investment in instant digital printing applications but
has not commercialized any products in that area. The Company is exploring strategic alternatives for the instant digital printing assets and related activities, including a potential sale. Unless the
Company finds outside investors or has a change in circumstances, the Company intends to cease investing significant resources in this area after the second quarter of 2005.

The Company Competes with Major Competitors that are Larger and More Diversified.

The
Company experiences intense competition for sales of its instant photography and digital imaging products. The Company's products compete with 35mm and digital-imaging products that
are widely advertised, well-known, branded products. In most of its markets, the Company has major competitors, most of which are larger and more diversified. Aggressive competition within
its markets to preserve, gain or regain market share can affect its results in any given period. More specific factors in this competitive marketplace that could adversely affect operating results
include the Company's failure to:



38

---





The Absence of 2001 and Prior Period Financial Information for Primary Could Be Material to Investors.

The
information presented herein does not include financial information on Primary for periods prior to January 1, 2002 since audited information on those periods is not available
to the Company. As a result, this document does not contain all of the financial information that is required by the rules and regulations applicable to this report regarding the results of operations
for the business operations acquired by the Company in the Transaction. The absence of 2001 and prior period financial information for Primary could be material to investors. Further, investors should
not assume that the results of operations for the periods contained herein bear any correlation to the results of operations of Primary for periods prior to 2002.

The Company Has a Major Stockholder Whose Interests May Conflict with the Interests of the Company's Other Stockholders.

As
of December 31, 2004, OEP owned a majority of the Company's outstanding Common Stock. Accordingly, OEP will be able to:



OEP
will also be able to prevent or cause a change in control of the Company and will be able to amend the Company's Certificate of Incorporation and Bylaws without the approval of any
other of the Company's stockholders. The interests of OEP may conflict with the interests of the Company's other stockholders.

39

---



There is Limited Market Activity for its Common Stock.

The
Company's Common Stock is traded on the NASD OTC Bulletin Board in limited volume. Therefore, the trading price of such securities could be highly volatile, particularly if the
merger agreement with Petters is terminated. If a large number of non-OEP affiliated holders of the Company's Common Stock were to seek to sell the securities at one time, then the trading
price of the securities could be adversely impacted.

The
market price of the Company's Common Stock may also be subject to significant fluctuations in response to other factors, including:



Consolidation of the Company's Manufacturing Operations Creates Inherent Risks.

The Company's instant camera and film manufacturing is concentrated into sole source locations. Due to the specialized nature of certain assets located at these
facilities, any suspension of operations as a result of a natural disaster, work stoppage, crisis in a country where manufacturing is concentrated or terrorism could have a material adverse effect on
the Company.

The Company May Continue to Experience Manufacturing Challenges Which Could Adversly Affect Operating Results

The Company has experienced quality problems in the manufacturing operation that supports its eyewear business. The Company continues to address these quality
problems, but there can be no assurance that these or similar quality problems in other of the Company's manufacturing operations will not occur in the future. If quality problems do occur, they could
adversely affect the Company's operating results.

Significant Sales and Operations Outside of the United States.

Sales outside of the United States represent a substantial portion of the Company's business. In addition, the majority of its film assembly facilities and many
suppliers are located outside of the United States. Therefore, factors that could adversely affect operating results include the Company's inability to:



40

---





The Inability of the Company to Consolidate and Restructure its Manufacturing Operations Could Have a Material Adverse Affect.

The
Company's instant camera and film manufacturing capacity is concentrated in facilities in the United States, Europe, Mexico and the Far East. The Company is consolidating and
restructuring its
manufacturing operations, including the consolidation of its film coating and assembly into sole source locations. Due to the specialized nature of certain assets located at these facilities, any
suspension of operations as a result of the consolidation and restructuring of these assets could have a material adverse effect on the Company's operating results.

The Inability of the Company to Negotiate Favorable Sole Source Agreements for Material and Supplies Could Have A Material Adverse Affect.

The
Company has certain sole source suppliers for material used in the development of the Company's products and out-sources the manufacture of certain products. The Company
is also exploring sole source suppliers for certain operations that have high fixed costs. The inability of the Company to negotiate favorable sole source agreements would have a material adverse
impact on the Company. In addition, in the event of a disruption in the Company's supply of these materials due to the financial or operational distress of the Company's suppliers or otherwise, the
Company's failure to find alternatives for raw materials, supplies and finished goods necessary for the manufacture and sale of its product could have a material adverse impact on the Company.

The Company's Failure to Manage its Intellectual Property and Licensing Agreements Could Adversely Affect its Profitability.

The
Company relies upon patent, copyright, trademark and trade secret laws in the United States and in other countries to establish and maintain its proprietary rights in technology,
products and its brands. The Company continues to develop and protect ownership of, and license as appropriate, valuable intellectual property rights. The Company's intellectual property rights could,
however, be challenged, invalidated or circumvented. The Company does not believe that its products infringe the intellectual property rights of others, but such claims, if established, could result
in material liabilities or loss of business.

The
Company's failure to properly manage the development of its intellectual property and enforce licensing agreements that provide a revenue stream in the form of royalties could
adversely affect the profitability of these operations.

The Company's Continued Restructuring Could Disrupt Business Operations.

The Company is continuing its worldwide program to improve operating efficiency. This includes, among other things, more efficient plant utilization and process
improvements, movement to a distributor model in select international markets and the continued reduction of its work force. There
can be no assurance that such actions will be accomplished as rapidly as anticipated or that the expected cost reductions will be achieved. There is also no assurance that the downsizing will not
disrupt business operations and undermine the cost management efforts.

Excess Inventory Could Require the Company to Reduce its Prices and Write Down Inventory.

The
Company must manage its inventory in order to meet the needs of its customers without creating excess capacity. Excess inventory could require the Company to reduce its prices and
write down inventory which could have a negative impact on revenue and earnings.

41

---



The Company's Different Distribution Methods Have Inherent Risks.

The Company uses a variety of different distribution methods to sell its products, including direct sales and distributors and third-party resellers. Since each
distribution method has distinct risks, failure to implement the most advantageous distribution model could adversely affect the Company's revenue and gross margins and therefore profitability.

The
Company is also developing e-commerce strategies. If these strategies are not successful, the Company's business could be adversely affected. In addition, since direct
sales may compete with the sales made by third-party resellers and distributors, these third-party resellers and distributors may elect to use other suppliers that do not directly sell their own
products or to reduce the retail shelf space available for the Company's products.

The Effect of Terrorism, Military Action or War May Impact the Company's Results.

Terrorism,
military action or war, as well as attendant political activity, may create an atmosphere of economic uncertainty throughout the world. The effects of those events may impact
the Company's results. A disruption in its supply chain as a result of such actions may significantly affect its business and its prospects. In addition, such events may also result in heightened
domestic security and higher costs for importing and exporting shipments of components and finished goods. Any of these occurrences may have a material adverse effect on the Company.

The Failure of the Company to Remain in Compliance with Environmental Laws Could Have a Material Adverse Effect on Operating
Results.

The
Company is subject to a 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 material. The failure of the Company to remain in compliance with these laws could have a material adverse effect on operating results.

If the Company Fails to Maintain an Effective System of Internal Controls, It May Not be Able to Accurately Report its Financial Results or Prevent
Fraud.

Effective
internal controls are necessary for the Company to provide reliable financial reports and effectively prevent fraud. Any inability to provide reliable financial reports or
prevent fraud could harm the Company's business. The Company is in the process of evaluating its internal procedures to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which requires
management and the Company's external auditors to evaluate and assess the effectiveness of the Company's internal controls. The Company is continuing to evaluate and, where appropriate, enhance its
policies, procedures and internal controls. Failure to maintain adequate internal controls could result in financial statements that do not accurately reflect the Company's financial condition or
results of operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates relative to its market risk sensitive instruments and
positions as described below.

Interest Rate Risks

The Company could be exposed to interest rate risk related to any borrowing activities. The Company had no outstanding debt at either December 31, 2003 or
2004.

42

---



Foreign Currency Exchange Risk

As more fully explained in Item 7.Management's Discussion and Analysis of Financial Condition and Results of
Operationsunder "Foreign Currency Exchange" the Company's operations are exposed to the impact of foreign currency exchange rate movements. The Company is primarily dependent
on the pricing and sourcing of its products in local markets to offset the impact of foreign exchange rate fluctuations. However, the Company has limited flexibility to increase prices in local
currency to offset the adverse impact of foreign exchange rate fluctuations. At December 31, 2004 and 2003, the Company had no derivative instruments. The Company does not quantify foreign
currency exchange rate risk associated with its expected foreign currency denominated revenues or its net monetary assets denominated in nonfunctional currencies.

Item 8. Financial Statements and Supplementary Data.

Table of Contents



|Report of Independent Registered Public Accounting Firm         
|----------------------------------------------------------------
|Consolidated Statement of Earnings                              
|Consolidated Balance Sheet                                      
|Consolidated Statement of Cash Flows                            
|Consolidated Statement of Changes in Common Stockholders' Equity
|Notes to Consolidated Financial Statements                      
|Schedule IIValuation and Qualifying Accounts                   

43

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors
Polaroid Holding Company and Subsidiary Companies

We
have audited the accompanying consolidated balance sheets of Polaroid Holding Company and Subsidiary Companies (the "Company") as of December 31, 2004 and 2003, and the related
consolidated statement of earnings, cash flows and changes in common stockholders' equity for the years ended December 31, 2004 and December 31, 2003 and the period from Inception (see
Note 1 to the consolidated financial statements) to December 31, 2002. We have also audited the consolidated statement of earnings, cash flows and changes in common stockholders' equity
for Primary PDC, Inc. (formerly named Polaroid Corporation) and Subsidiary Companies (the "Predecessor") for the period from January 1 through July 31, 2002. In connection with
our audit of the consolidated financial statements, we also audited the accompanying financial statement schedule of Valuation and Qualifying Accounts. These consolidated financial statements and
financial statement schedule are the responsibility of the Companies' managements. Our responsibility is to express an opinion on these consolidated financial statements and financial statement
schedule based on our audits.

We
conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 Holding Company and Subsidiary
Companies as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the years ended December 31, 2004 and December 31, 2003 and the period
from Inception (see Note 1 to the consolidated financial statements) through December 31, 2002, and the results of operations and cash
flows, of Primary PDC, Inc. for the period from January 1 through July 31, 2002 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As
discussed in Notes 1 and 2 to the consolidated financial statements, the Predecessor filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code on
October 12, 2001. In addition to the filing, the Predecessor's previous losses, its common stockholders' deficit and its default on certain debt obligations raised substantial doubts about the
Predecessor's ability to continue as a going concern. The consolidated financial statements of the Predecessor referred to above have been prepared assuming the Predecessor would continue as a going
concern. On July 31, 2002, the Company acquired substantially all of the domestic assets of the Predecessor and the capital stock of the Predecessor's foreign subsidiaries. This transaction was
accounted for as a purchase acquisition by the Company in accordance with Financial Accounting Standards Board Statement No. 141,Business
Combinations.As a result of the Transaction, the consolidated financial information for the periods after the Transaction is presented on a different cost basis than that for
the periods before the acquisition and, therefore, is not comparable.

KPMG
LLP
Boston, Massachusetts
March 11, 2005

44

---





Polaroid Holding Company and Subsidiary Companies        Consolidated Statement of Earnings        (in millions, except per share amounts)

|                                                                           |                                                                          |   |       |       |   |       |       |   |       |       |  
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------ | - | ----- | ----- | - | ----- | ----- | - | ----- | ----- | -
|
|
|Net sales                                                                  |                                                                          | $ | 656.2 |       | $ | 752.7 |       | $ | 363.9 |       |  
|                                                                           |                                                                          |   |       |       |   |       |       |   |       |       |  
|                                                                           | Cost of goods sold                                                       |   |       | 368.2 |   |       | 378.4 |   |       | 213.3 |  
|                                                                           | Marketing, research, engineering and administrative expenses (Note 3)    |   |       | 242.1 |   |       | 278.3 |   |       | 120.9 |  
|                                                                           | Restructuring and other charges (Note 4)                                 |   |       | 14.9  |   |       | 4.7   |   |       | 5.1   |  
|                                                                           |                                                                          |   |       |       |   |       |       |   |       |       |  
|Total costs                                                                |                                                                          |   | 625.2 |       |   | 661.4 |       |   | 339.3 |       |  
|                                                                           |                                                                          |   |       |       |   |       |       |   |       |       |  
|Profit/(loss) from operations                                              |                                                                          |   | 31.0  |       |   | 91.3  |       |   | 24.6  |       |  
|Other income and (expense):                                                |                                                                          |   |       |       |   |       |       |   |       |       |  
|                                                                           | Interest income                                                          |   |       | 1.5   |   |       | 1.5   |   |       | 1.2   |  
|                                                                           | Foreign currency transaction losses (Note 2)                             |   |       | (6.9  | ) |       | (8.3  | ) |       | (3.3  | )
|                                                                           | Foreign currency translation gains from subsidiary liquidations (Note 2) |   |       |      |   |       | 7.1   |   |       |      |  
|                                                                           | Other income                                                             |   |       | 4.8   |   |       | 3.4   |   |       | 1.5   |  
|                                                                           | Interest expense                                                         |   |       | (2.8  | ) |       | (3.4  | ) |       | (1.9  | )
|                                                                           | Reorganization loss (see Note 2)                                         |   |       |      |   |       |      |   |       |      |  
|                                                                           |                                                                          |   |       |       |   |       |       |   |       |       |  
|Earnings/(loss) before extraordinary gain and income tax expense/(benefit) |                                                                          |   | 27.6  |       |   | 91.6  |       |   | 22.1  |       |  
|                                                                           | Federal, state and foreign income tax expense/(benefit) (Note 6)         |   |       | (34.3 | ) |       | 22.9  |   |       | 6.9   |  
|                                                                           |                                                                          |   |       |       |   |       |       |   |       |       |  
|Earnings/(loss) before extraordinary gain                                  |                                                                          |   | 61.9  |       |   | 68.7  |       |   | 15.2  |       |  
|                                                                           | Extraordinary gain (Note 1)                                              |   |       |      |   |       | 2.6   |   |       | 122.6 |  
|                                                                           |                                                                          |   |       |       |   |       |       |   |       |       |  
|Net earnings/ (loss)                                                       |                                                                          | $ | 61.9  |       | $ | 71.3  |       | $ | 137.8 |       |  
|                                                                           |                                                                          |   |       |       |   |       |       |   |       |       |  
|Basic earnings/(loss) per common share (Note 2)                            |                                                                          |   |       |       |   |       |       |   |       |       |  
|                                                                           | Earnings/(loss) before extraordinary gain                                |   | $     | 1.85  |   | $     | 1.99  |   | $     | 0.40  |  
|                                                                           | Extraordinary gain                                                       |   |       |      |   | $     | 0.08  |   | $     | 3.98  |  
|                                                                           | Net earnings/(loss)                                                      |   | $     | 1.85  |   | $     | 2.07  |   | $     | 4.38  |  
|Diluted earnings/(loss) per common share (Note 2)                          |                                                                          |   |       |       |   |       |       |   |       |       |  
|                                                                           | Earnings/(loss) before extraordinary gain                                |   | $     | 1.72  |   | $     | 1.95  |   | $     | 0.40  |  
|                                                                           | Extraordinary gain                                                       |   |       |      |   | $     | 0.08  |   | $     | 3.98  |  
|                                                                           | Net earnings/(loss)                                                      |   | $     | 1.72  |   | $     | 2.03  |   | $     | 4.38  |  
|Cash dividends per common share                                            |                                                                          |   |      |       |   |      |       |   |      |       |  

See
accompanying notes to consolidated financial statements

45

---





Polaroid Holding Company and Subsidiary Companies        Consolidated Balance Sheet        (in millions, except share and per share amounts)

|                                           |                                                                                                                                                                                                                                                                | Company |      
|------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | -----
|
|Assets                                     |                                                                                                                                                                                                                                                                |         |      
|Current assets                             |                                                                                                                                                                                                                                                                |         |      
|                                           | Cash and cash equivalents                                                                                                                                                                                                                                      |         | $    
|                                           | Receivables, net of allowance of $8.1 in 2004 and $10.0 in 2003 (Note 8)                                                                                                                                                                                       |         |      
|                                           | Inventories (Notes 7 and 8)                                                                                                                                                                                                                                    |         |      
|                                           | Assets held for sale (Note 3)                                                                                                                                                                                                                                  |         |      
|                                           | Prepaid expenses and other assets (Notes 3, 6 and 8)                                                                                                                                                                                                           |         |      
|                                           |                                                                                                                                                                                                                                                                |         |      
|Total current assets                       |                                                                                                                                                                                                                                                                |         | 365.3
|Property, plant and equipment(Note 1)      |                                                                                                                                                                                                                                                                |         |      
|                                           | Land                                                                                                                                                                                                                                                           |         |      
|                                           | Buildings                                                                                                                                                                                                                                                      |         |      
|                                           | Machinery and equipment                                                                                                                                                                                                                                        |         |      
|                                           | Construction in progress                                                                                                                                                                                                                                       |         |      
|                                           |                                                                                                                                                                                                                                                                |         |      
|                                           | Total property, plant and equipment                                                                                                                                                                                                                            |         |      
|                                           | Less accumulated depreciation                                                                                                                                                                                                                                  |         |      
|                                           |                                                                                                                                                                                                                                                                |         |      
|Net property, plant and equipment          |                                                                                                                                                                                                                                                                |         | 55.7 
|Deferred tax assets(Note 6)                |                                                                                                                                                                                                                                                                |         | 6.7  
|Other non-current assets(Note 3)           |                                                                                                                                                                                                                                                                |         | 46.1 
|                                           |                                                                                                                                                                                                                                                                |         |      
|Total assets                               |                                                                                                                                                                                                                                                                | $       | 473.8
|                                           |                                                                                                                                                                                                                                                                |         |      
|Liabilities and stockholders' equity       |                                                                                                                                                                                                                                                                |         |      
|Current liabilities                        |                                                                                                                                                                                                                                                                |         |      
|                                           | Payables and accruals (Notes 1 and 9)                                                                                                                                                                                                                          |         | $    
|                                           | Compensation and benefits (Notes 12 and 13)                                                                                                                                                                                                                    |         |      
|                                           | Federal, state and foreign income taxes (Note 6)                                                                                                                                                                                                               |         |      
|                                           |                                                                                                                                                                                                                                                                |         |      
|Total current liabilities                  |                                                                                                                                                                                                                                                                |         | 125.1
|Non-current pension liabilities(Note 13)   |                                                                                                                                                                                                                                                                |         | 57.7 
|Other non-current liabilities(Note 6)      |                                                                                                                                                                                                                                                                |         | 15.7 
|Preferred Stock(Note 10)                   |                                                                                                                                                                                                                                                                |         |      
|                                           | Preferred Stock, authorized 2,000,000 shares of which 900,000 are designated as Series A, $.001 par value, liquidation preference value of $100 per share plus unpaid dividends, none and 446,150 shares issued and
outstanding in 2004 and 2003, respectively |         |      
|Common stockholders' equity(Note 11)       |                                                                                                                                                                                                                                                                |         |      
|                                           | Common Stock, $.001 par value, authorized 50,000,000 shares of which 34,956,069 and 34,836,410 shares issued and outstanding in 2004 and 2003, respectively                                                                                                    |         |      
|                                           | Additional paid-in capital                                                                                                                                                                                                                                     |         |      
|                                           | Retained earnings (Notes 1 and 10)                                                                                                                                                                                                                             |         |      
|                                           | Accumulated other comprehensive income (Note 2)                                                                                                                                                                                                                |         |      
|                                           | Treasury Stock                                                                                                                                                                                                                                                 |         |      
|                                           | Deferred compensation (Note 12)                                                                                                                                                                                                                                |         |      
|                                           |                                                                                                                                                                                                                                                                |         |      
|Total common stockholders' equity          |                                                                                                                                                                                                                                                                |         | 275.3
|                                           |                                                                                                                                                                                                                                                                |         |      
|Total liabilities and stockholders' equity |                                                                                                                                                                                                                                                                | $       | 473.8
|                                           |                                                                                                                                                                                                                                                                |         |      

See accompanying notes to consolidated financial statements.

46

---





Polaroid Holding Company and Subsidiary Companies        Consolidated Statement of Cash Flows        (in millions)

|                                                     |                                                                  |          |       |       |   |       |       |       |       |        |     
|---------------------------------------------------- | ---------------------------------------------------------------- | -------- | ----- | ----- | - | ----- | ----- | ----- | ----- | ------ | ----
|
|
|Cash flows from operating activities                 |                                                                  |          |       |       |   |       |       |       |       |        |     
|                                                     | Net earnings/(loss)                                              |          | $     | 61.9  |   | $     | 71.3  |       | $     | 137.8  |     
|                                                     | Extraordinary gain (Note 1)                                      |          |       |      |   |       | (2.6  | )     |       | (122.6 | )   
|                                                     | Depreciation of property, plant and equipment                    |          |       | 4.6   |   |       | 2.2   |       |       | 0.1    |     
|                                                     | Non-cash reorganization loss (Note 2)                            |          |       |      |   |       |      |       |       |       |     
|                                                     | Deferred taxes (Note 6)                                          |          |       | 4.6   |   |       | 9.3   |       |       | (3.8   | )   
|                                                     | Gain on sale of real estate                                      |          |       | (2.9  | ) |       |      |       |       |       |     
|                                                     | Other non-cash items (Note 3)                                    |          |       | (3.6  | ) |       | 4.0   |       |       | 5.4    |     
|                                                     | (Increase)/decrease in receivables                               |          |       | 12.4  |   |       | 31.5  |       |       | (23.2  | )   
|                                                     | Decrease in inventories                                          |          |       | 22.6  |   |       | 20.3  |       |       | 58.4   |     
|                                                     | (Increase)/decrease in prepaids and other assets                 |          |       | 6.5   |   |       | 7.3   |       |       | 6.2    |     
|                                                     | Decrease in Prepetition Liabilities                              |          |       |      |   |       |      |       |       |       |     
|                                                     | Increase/(decrease) in payables and accruals                     |          |       | (44.1 | ) |       | (21.7 | )     |       | 20.6   |     
|                                                     | Increase/(decrease) in compensation and benefits                 |          |       | (19.6 | ) |       | 7.7   |       |       | (2.7   | )   
|                                                     | Increase/(decrease) in federal, state and foreign income taxes   |          |       | (33.4 | ) |       | (15.6 | )     |       | 10.7   |     
|                                                     |                                                                  |          |       |       |   |       |       |       |       |        |     
|                                                     | Net cash provided by operating activities                        |          |       | 9.0   |   |       | 113.7 |       |       | 86.9   |     
|                                                     |                                                                  |          |       |       |   |       |       |       |       |        |     
|Cash flows from investing activities                 |                                                                  |          |       |       |   |       |       |       |       |        |     
|                                                     | (Increase)/decrease in other assets                              |          |       | 5.3   |   |       | (16.4 | )     |       | (1.2   | )   
|                                                     | Asset purchase Transaction, net of cash acquired (Note 1)        |          |       |      |   |       |      |       |       | (4.3   | )   
|                                                     | Proceeds from the sale of assets held for sale (Note 3)          |          |       | 4.0   |   |       | 18.3  |       |       | 1.4    |     
|                                                     | Proceeds from the sale of property, plant and equipment (Note 3) |          |       | 1.9   |   |       |      |       |       |       |     
|                                                     | Additions to property, plant and equipment                       |          |       | (28.9 | ) |       | (22.6 | )     |       | (10.4  | )   
|                                                     |                                                                  |          |       |       |   |       |       |       |       |        |     
|                                                     | Net cash used by investing activities                            |          |       | (17.7 | ) |       | (20.7 | )     |       | (14.5  | )   
|                                                     |                                                                  |          |       |       |   |       |       |       |       |        |     
|Cash flows from financing activities                 |                                                                  |          |       |       |   |       |       |       |       |        |     
|                                                     | Net decrease in short-term debt (maturities 90 days or less)     |          |       |      |   |       |      |       |       | (1.1   | )   
|                                                     | Short-term debt (maturities of more than 90 days):               |          |       |       |   |       |       |       |       |        |     
|                                                     |                                                                  | Proceeds |       |       |  |       |       |      |       |        | 20.0
|                                                     |                                                                  | Payments |       |       |  |       |       | (17.5 | )     |        | (2.5
|                                                     | Financing fees paid                                              |          |       |      |   |       |      |       |       | (5.0   | )   
|                                                     | Proceeds from issuance of Preferred Stock (Note 1)               |          |       |      |   |       |      |       |       | 58.0   |     
|                                                     | Proceeds from issuance of Common Stock (Note 1)                  |          |       |      |   |       |      |       |       | 2.0    |     
|                                                     | Repurchases of restricted Common Stock                           |          |       | (0.9  | ) |       |      |       |       |       |     
|                                                     | Dividends paid on Preferred Stock (Note 10)                      |          |       | (2.6  | ) |       | (9.7  | )     |       |       |     
|                                                     | Redemption of Preferred Stock (Note 10)                          |          |       | (44.6 | ) |       | (44.6 | )     |       |       |     
|                                                     |                                                                  |          |       |       |   |       |       |       |       |        |     
|                                                     | Net cash provided/(used) by financing activities                 |          |       | (48.1 | ) |       | (71.8 | )     |       | 71.4   |     
|                                                     |                                                                  |          |       |       |   |       |       |       |       |        |     
|Effect of exchange rate changes on cash              |                                                                  |          | 3.9   |       |   | 5.6   |       |       | (3.8  | )      |     
|                                                     |                                                                  |          |       |       |   |       |       |       |       |        |     
|Net increase/(decrease) in cash and cash equivalents |                                                                  |          | (52.9 | )     |   | 26.8  |       |       | 140.0 |        |     
|Cash and cash equivalents at beginning of period     |                                                                  |          | 166.8 |       |   | 140.0 |       |       |      |        |     
|                                                     |                                                                  |          |       |       |   |       |       |       |       |        |     
|Cash and cash equivalents at end of period           |                                                                  | $        | 113.9 |       | $ | 166.8 |       | $     | 140.0 |        |     
|                                                     |                                                                  |          |       |       |   |       |       |       |       |        |     

See accompanying notes to consolidated financial statements.

47

---





Polaroid Holding Company and Subsidiary Companies        Consolidated Statement of Changes in Common Stockholders' Equity        (in millions, except number of shares)

Company:

Year ended December 31, 2004

|                                      |                                                   | Common
Shares |   | Common
Stock |   | Additional
Paid-In
Capital |   | Retained
Earnings |   | Accumulated
Other
Comprehensive
Income |       | Treasury
Stock |   | Deferred
Compensation |       | Total
Common
Stockholders'
Equity |     
|------------------------------------- | ------------------------------------------------- | ------------- | - | ------------ | - | -------------------------- | - | ----------------- | - | -------------------------------------- | ----- | -------------- | - | --------------------- | ----- | --------------------------------- | ----
|Balance at January 1, 2004            |                                                   | 34,836,410    |   | $            |  |                            | $ | 3.5               |   | $                                      | 199.4 |                | $ | 17.0                  |       | $                                 |    
|Comprehensive income:                 |                                                   |               |   |              |   |                            |   |                   |   |                                        |       |                |   |                       |       |                                   |     
|                                      | Net earnings                                      |               |   |              |   |                            |   |                   |   |                                        |       | 61.9           |   |                       |       |                                   |     
|                                      | Other comprehensive income:                       |               |   |              |   |                            |   |                   |   |                                        |       |                |   |                       |       |                                   |     
|                                      | Foreign currency translation adjustments (Note 2) |               |   |              |   |                            |   |                   |   |                                        |       |                |   |                       | 11.8  |                                   |     
|                                      | Minimum pension liability adjustment (Note 13)    |               |   |              |   |                            |   |                   |   |                                        |       |                |   |                       | (17.5 | )                                 |     
|                                      |                                                   |               |   |              |   |                            |   |                   |   |                                        |       |                |   |                       |       |                                   |     
|Total comprehensive income            |                                                   |               |   |              |   |                            |   |                   |   |                                        |       |                |   |                       |       |                                   |     
|                                      |                                                   |               |   |              |   |                            |   |                   |   |                                        |       |                |   |                       |       |                                   |     
|Restricted stock issued               |                                                   | 843,900       |   |              |   |                            |   | 7.6               |   |                                        |       |                |   |                       |       |                                   |     
|Repurchase of treasury stock          |                                                   | (724,241      | ) |              |   |                            |   | (0.3              | ) |                                        |       |                |   |                       |       |                                   | (0.9
|Amortization of deferred compensation |                                                   |               |   |              |   |                            |   |                   |   |                                        |       |                |   |                       |       |                                   |     
|Dividends paid on Preferred Stock     |                                                   |               |   |              |   |                            |   |                   |   |                                        | (2.6  | )              |   |                       |       |                                   |     
|                                      |                                                   |               |   |              |   |                            |   |                   |   |                                        |       |                |   |                       |       |                                   |     
|Balance at December 31, 2004          |                                                   | 34,956,069    |   | $            |  |                            | $ | 10.8              |   | $                                      | 258.7 |                | $ | 11.3                  |       | $                                 | (0.9
|                                      |                                                   |               |   |              |   |                            |   |                   |   |                                        |       |                |   |                       |       |                                   |     

Year ended December 31, 2003

|                                      |                                                   | Common
Shares |  | Common
Stock |   | Additional
Paid-In
Capital |   | Retained
Earnings |  | Accumulated
Other
Comprehensive
Income |       | Deferred
Compensation |   | Total
Common
Stockholders'
Equity |     
|------------------------------------- | ------------------------------------------------- | ------------- |  | ------------ | - | -------------------------- | - | ----------------- |  | -------------------------------------- | ----- | --------------------- | - | --------------------------------- | ----
|Balance at January 1, 2003            |                                                   | 30,769,230    |  | $            |  |                            | $ | 3.1               |  | $                                      | 137.8 |                       | $ | 3.8                               |     
|Comprehensive income:                 |                                                   |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   |     
|                                      | Net earnings                                      |               |  |              |   |                            |   |                   |  |                                        |       | 71.3                  |   |                                   |     
|                                      | Other comprehensive income:                       |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   |     
|                                      | Foreign currency translation adjustments (Note 2) |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   | 12.4
|                                      | Minimum pension liability adjustment (Note 13)    |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   | 0.8 
|                                      |                                                   |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   |     
|Total comprehensive income            |                                                   |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   |     
|                                      |                                                   |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   |     
|Restricted stock issued               |                                                   | 4,067,180     |  |              |   |                            |   | 0.4               |  |                                        |       |                       |   |                                   |     
|Amortization of deferred compensation |                                                   |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   |     
|Dividends paid on Preferred Stock     |                                                   |               |  |              |   |                            |   |                   |  |                                        | (9.7  | )                     |   |                                   |     
|                                      |                                                   |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   |     
|Balance at December 31, 2003          |                                                   | 34,836,410    |  | $            |  |                            | $ | 3.5               |  | $                                      | 199.4 |                       | $ | 17.0                              |     
|                                      |                                                   |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   |     

48

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Polaroid Holding Company and Subsidiary Companies        Consolidated Statement of Changes in Common Stockholders' Equity (Continued)        (in millions, except number of shares)

Company:

Period from Inception (see Note 1) to December 31, 2002

|                                     |                                                   | Common
Shares |  | Common
Stock |   | Additional
Paid-In
Capital |   | Retained
Earnings |  | Accumulated Other
Comprehensive
Income |       | Deferred
Compensation |   | Total
Common
Stockholders'
Equity |     
|------------------------------------ | ------------------------------------------------- | ------------- |  | ------------ | - | -------------------------- | - | ----------------- |  | -------------------------------------- | ----- | --------------------- | - | --------------------------------- | ----
|Balance as of Inception (see Note 1) |                                                   |              |  | $            |  |                            | $ |                  |  | $                                      |      |                       | $ |                                  |     
|Common Stock issued                  |                                                   | 30,769,230    |  |              |   |                            |   | 3.1               |  |                                        |       |                       |   |                                   |     
|Comprehensive income:                |                                                   |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   |     
|                                     | Net earnings                                      |               |  |              |   |                            |   |                   |  |                                        |       | 137.8                 |   |                                   |     
|                                     | Other comprehensive income:                       |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   |     
|                                     | Foreign currency translation adjustments (Note 2) |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   | 4.6 
|                                     | Minimum pension liability adjustment (Note 13)    |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   | (0.8
|                                     |                                                   |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   |     
|Total comprehensive income           |                                                   |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   |     
|                                     |                                                   |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   |     
|Balance at December 31, 2002         |                                                   | 30,769,230    |  | $            |  |                            | $ | 3.1               |  | $                                      | 137.8 |                       | $ | 3.8                               |     
|                                     |                                                   |               |  |              |   |                            |   |                   |  |                                        |       |                       |   |                                   |     

---

Predecessor:

Period from January 1 to July 31, 2002

|                                                 |                                                                                                           | Common
Shares |  | Common
Stock |      | Additional
Paid-In
Capital |   | Retained
Earnings/
(Accumulated
Deficit) |  | Accumulated Other
Comprehensive
Income |        | Treasury
Stock |   | Total
Common
Stockholders'
Equity/(Deficit) |       
|------------------------------------------------ | --------------------------------------------------------------------------------------------------------- | ------------- |  | ------------ | ---- | -------------------------- | - | ---------------------------------------- |  | -------------------------------------- | ------ | -------------- | - | ------------------------------------------- | ------
|Balance at January 1, 2002                       |                                                                                                           | 49,479,894    |  | $            | 75.4 |                            | $ | 175.3                                    |  | $                                      | 602.1  |                | $ | (130.7                                      | )     
|Comprehensive income:                            |                                                                                                           |               |  |              |      |                            |   |                                          |  |                                        |        |                |   |                                             |       
|                                                 | Net loss                                                                                                  |               |  |              |      |                            |   |                                          |  |                                        |        | (832.2         | ) |                                             |       
|                                                 | Other comprehensive income:                                                                               |               |  |              |      |                            |   |                                          |  |                                        |        |                |   |                                             |       
|                                                 | Foreign currency translation adjustments (Note 2)                                                         |               |  |              |      |                            |   |                                          |  |                                        |        |                |   |                                             | 20.2  
|                                                 | Minimum pension liability adjustment (Note 13)                                                            |               |  |              |      |                            |   |                                          |  |                                        |        |                |   |                                             | (134.2
|                                                 | Minimum pension liability adjustment related to Transaction                                               |               |  |              |      |                            |   |                                          |  |                                        |        |                |   |                                             | 4.1   
|                                                 | Assumption of pension plan by Pension Benefit Guaranty Corporation                                        |               |  |              |      |                            |   |                                          |  |                                        |        |                |   |                                             | 183.7 
|                                                 | Reclassification to net loss of cumulative translation loss related to sale of non-U.S. entities (Note 2) |               |  |              |      |                            |   |                                          |  |                                        |        |                |   |                                             | 56.8  
|                                                 |                                                                                                           |               |  |              |      |                            |   |                                          |  |                                        |        |                |   |                                             |       
|Total comprehensive income                       |                                                                                                           |               |  |              |      |                            |   |                                          |  |                                        |        |                |   |                                             |       
|                                                 |                                                                                                           |               |  |              |      |                            |   |                                          |  |                                        |        |                |   |                                             |       
|Compensation and stock incentive plans (Note 12) |                                                                                                           |               |  |              |      |                            |   | 3.3                                      |  |                                        |        |                |   |                                             |       
|                                                 |                                                                                                           |               |  |              |      |                            |   |                                          |  |                                        |        |                |   |                                             |       
|Balance at July 31, 2002                         |                                                                                                           | 49,479,894    |  | $            | 75.4 |                            | $ | 178.6                                    |  | $                                      | (230.1 | )              | $ | (0.1                                        | )     
|                                                 |                                                                                                           |               |  |              |      |                            |   |                                          |  |                                        |        |                |   |                                             |       

See accompanying notes to consolidated financial statements.

49

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Transaction

Company:

On July 31, 2002, Polaroid Corporation, formerly known as OEP Imaging Operating Corporation ("Polaroid"), and certain of its subsidiaries acquired
substantially all of the domestic assets and businesses of Primary PDC, Inc., formerly named Polaroid Corporation ("Primary"), and its domestic subsidiaries and the capital stock of the foreign
subsidiaries of Primary (the "Transaction"). On July 3, 2002, this purchase was approved by the United States Bankruptcy Court for the District of Delaware (the "U.S. Bankruptcy Court").

To
accomplish this transaction, One Equity Partners LLC ("OEP"), a private equity investment unit of Bank One Corporation, formed Polaroid Holding Company, formerly known as OEP Imaging
Corporation ("Holding"), on March 25, 2002 ("Inception"), and Holding formed Polaroid on June 6, 2002. Both of these companies remained inactive from the date they were formed until the
Transaction on July 31, 2002. As part of the Transaction, Holding assigned its rights to purchase the assets of Primary to Polaroid and certain of its subsidiaries.

On
July 31, 2002, to finance a portion of the asset purchase price, Holding issued OEP 580,000 shares of its Series A Preferred Stock (see Note 10) for
$58.0 million and 20,000,000 shares of its common stock ("Common Stock") (see Note 11) for $2.0 million. This stock represented a 65% interest in Holding. The $60.0 million
received by Holding from this stock issuance was contributed to Polaroid on July 31, 2002. Also, as of July 31, 2002, Holding and its consolidated subsidiaries (the "Company") borrowed
$20.0 million under the term loan provision of its Credit Agreement (see Note 8).

The
asset purchase price consisted of: cash consideration of $255.0 million adjusted for approximately $58.2 million of cash payments primarily made by Primary to its
creditors just prior to or at the closing; approximately $224.1 million of assumed liabilities; and stock of Holding valued at $32.3 million (see Notes 10 and 11) consisting of
10,769,230 shares of Common Stock and 312,300 shares of Series A Preferred Stock. The stock issued to Primary represented a 35% interest in Holding.

As
required under Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 141,Business
Combinations("SFAS 141") (see Note 2), the Company recorded the assets purchased and the liabilities assumed at fair value. As of July 31, 2002, the fair
value of the assets purchased exceeded the cost of the acquisition. As required by SFAS 141, the fair value of most of the acquired property, plant and equipment and other
non-current assets, except for financial assets, deferred tax assets or pension assets, was reduced by the amount of the excess, resulting in a zero carrying value for those assets.

50

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The
following is a summary of the asset purchase from Primary and its domestic subsidiaries as of the date of the Transaction (in millions):

Assets and liabilities at fair value:Cash

$
201.1Accounts receivable


81.4Inventory


212.8Other current assets


50.0Non-current assets


39.1Total assets purchased


584.4Payable and accruals


130.7Other current liabilities


45.4Other non-current liabilities


48.0Total liabilities assumed


224.1Net assets purchased at fair value


360.3Less extraordinary gain


122.6Cost of acquisition

$
237.7
(a)


---

After
the fair value adjustments noted above, the Company recognized the net excess of fair value of the assets purchased over the fair value of the liabilities assumed and stockholders'
equity as an extraordinary gain of $122.6 million. This gain was based on all information available to the Company and was subject to adjustment over the year following the date of the
Transaction, if additional information became available affecting the Transaction estimates.

In
2003, as required under purchase accounting, the Company adjusted the fair value of certain of the assets acquired and the liabilities assumed in the Transaction based on additional
information that became available within the year subsequent to the date of the Transaction. As a result, the Company decreased the estimated fair value of some of the assets held for sale by
approximately $3.6 million and decreased the estimated fair value of certain of the assumed liabilities by approximately $6.2 million. The net of these adjustments of approximately
$2.6 million was recorded as an extraordinary gain in 2003.

In
connection with the Transaction, the Company incurred approximately $8.6 million of professional fees and expenses, excluding financing fees, that were directly related to the
Transaction. These fees
and expenses were recorded as a component of the purchase cost. The professional fees and expenses included approximately $5.3 million paid to OEP for financial advisory services, and related
expenses, performed in connection with the Transaction. In addition, the Company entered into a management agreement with OEP covering certain business and organizational strategy, and financial and
investment management services. Under the agreement, OEP received a retainer of $0.6 million in 2003 and has the option to provide any transaction-related services for any acquisition,
divestiture, financing or other transaction in which the Company may be involved for an additional fee.

The
Company's other accrued liabilities at December 31, 2004 and 2003 include $5.5 million and $7.0 million, respectively, of liabilities related to certain estate
costs of Primary that are required to be

51

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paid
by the Company to Primary under the asset purchase agreement (see discussion of settlement agreement with Primary in Note 3).

Following
the Transaction, Primary and its domestic subsidiaries continued to operate under the jurisdiction of the U.S. Bankruptcy Court. The financial information on those operations
are not included in the financial statements included herein.

Predecessor:

On October 12, 2001, as a result of declining cash flows from operations and other financing sources and the resulting inability to service its debt,
Primary and twenty of its subsidiaries incorporated in the United States (the "Debtors") filed voluntary petitions for relief (the "Filing") under Chapter 11 of the Bankruptcy Code, in the U. S.
Bankruptcy Court (jointly administered under case no. 01-10864) (see Note 2).

Prior
to the Filing, Primary and its consolidated subsidiaries, including its U.S. subsidiaries, (the "Predecessor") had conducted business operations worldwide. The subsidiaries of
Primary incorporated outside of the United States were not included in the Filing. The Debtors continued to manage their properties and operate their business as
"debtors-in-possession" under the jurisdiction of the U.S. Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code.

Each
of the Debtors continued to operate its business and manage its property as a debtor-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code.
As a result of the Filing, the creditors of the Debtors were precluded from collecting
prepetition debts without the approval of the U.S. Bankruptcy Court. Certain prepetition liabilities were paid after obtaining the approval of the U.S. Bankruptcy Court, including certain wages and
benefits of employees, insurance costs and payments to governmental agencies.

As
a result of the Filing, the Debtors incurred significant costs, including professional fees. These costs were expensed as incurred and were included in reorganization items in the
consolidated statement of earnings (see Note 2). Under the asset purchase agreement for the Transaction, the Company is required to reimburse Primary for certain costs incurred by Primary. As
noted above, the Company had recorded liabilities of $5.5 million and $7.0 million for these costs as of December 31, 2004 and 2003, respectively.

There
may be differences between the amounts at which liabilities were recorded in the Debtor's financial statements and the amount claimed by the creditors of the Debtors. Litigation,
including significant litigation, may be required for the Debtors to resolve any such disputes.

The
accompanying audited consolidated financial statements of the Predecessor for the period from January 1 to July 31, 2002, have been prepared on a going-concern basis
for comparative purposes.

Effective
for the second quarter of 2002, based on an evaluation of the available information on the expected proceeds and probability of the sale of substantially all of its domestic
assets and businesses and the capital stock of its foreign subsidiaries, the Predecessor determined that the carrying value of most of its long-lived assets would not be recoverable. As a
result, the Predecessor recognized a non-cash asset impairment charge of $329.9 million in its reorganization loss (see Note 2) in the second quarter of 2002. This charge
represented the excess of the carrying value over the estimated fair value of its property, plant and equipment based on a probability weighted estimate of the expected future discounted cash flows
relative to the net assets to be sold.

The
Predecessor recorded a loss on the Transaction of $213.5 million in its reorganization loss (see Note 2) in July 2002. Effective as of July 31, 2002, the
Pension Guaranty Benefit Corporation

52

---



("PBGC")
assumed the U.S. pension plan of the Predecessor. As a result, the Predecessor recognized a charge of $183.7 million related to a minimum pension liability cost that had been
previously recorded in accumulated other comprehensive income in stockholders' equity (see Note 2). In the seven-month period ended July 31, 2002, the Predecessor recorded a cost of
$41.7 million related to prepetition claims expected to be allowed by the U.S. Bankruptcy Court (see Note 2).

2.     Description of Business and Significant Accounting Policies

Description of Business:

Non-Comparability of Information:

The terms Company and Predecessor as used in the accompanying consolidated financial statements and these notes have different meanings as described in
Note 1. As a result of the Transaction (see Note 1), the accompanying consolidated financial statements of the Company are presented on a different basis from those of the Predecessor.
Therefore, the consolidated financial statements of the Company and the Predecessor are not comparable.

Company:

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

The
Company sells its products directly to and through mass merchandisers; food, drug, discount and department stores; photo retail and specialty stores; wholesalers; original equipment
manufacturers; independent agents; retail outlets and distributors. The Company also markets brand licensing contracts to manufacturers of imaging, consumer electronics and other products and
technology licensing contracts to manufacturers in chemical, photographic, electronic and other industries.

Predecessor:

The Predecessor designed, developed, manufactured, and marketed instant and digital imaging products and related products. The Predecessor's principal products
were instant film, instant and digital cameras, digital peripherals and secure identification systems with software and system solutions, which were marketed worldwide. In addition to its principal
products, the Predecessor designed, developed, manufactured and/or marketed photographic hardware accessories for the instant photography market, conventional 35mm cameras and film and videotapes. The
Predecessor's core instant photography business consisted of instant cameras and film. Its other core products consisted of digital cameras and other digital products, unique ID products, conventional
35mm cameras and film, videotapes, medical imaging products and eyewear, principally sunglasses.

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

53

---



Accounting Principles:

The Company's and the Predecessor's consolidated financial statements and accompanying notes have been prepared in conformity with accounting principles generally
accepted in the United States of America.

Principles of Consolidation:

The Company's consolidated financial statements include the accounts of Holding and its domestic and foreign subsidiaries, all of which are either wholly owned or
majority owned. The Predecessor's consolidated financial statements include the accounts of Primary and its domestic and foreign subsidiaries, all of which were either wholly owned or majority owned.

Basis of Presentation:

Company:

The accompanying consolidated statements of earnings, cash flows and changes in common stockholders' equity of the Company for 2002 reflect the period from
Inception (see Note 1) to December 31, 2002. The information in the Company's consolidated financial statements and related unaudited supplementary financial information (see
Note 19) has been restated to give effect to a ten (10) for one (1) stock split of the outstanding shares of Common Stock and Preferred Stock of Holding that took effect on
July 24, 2003.

Predecessor:

The financial statements of the Predecessor included herein are presented in accordance with American Institute of Certified Public Accountants Statement of
Position 90-7,Financial Reporting by Entities in Reorganization under the Bankruptcy Code("SOP 90-7") which does not change
the application of accounting principles generally accepted in the United States of America in the preparation of financial statements. However, it does require that the financial statements for
periods subsequent to the filing of a Chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.

Under
SOP 90-7, revenues, expenses (including professional fees), realized gains and losses, and provisions for losses that could be directly associated with the
reorganization and restructuring of the business were reported by the Predecessor separately as reorganization items in the consolidated statements of earnings. During the reorganization period, the
Predecessor's balance sheet distinguishes prepetition liabilities subject to compromise from those that are postpetition liabilities. Liabilities that could be affected by a reorganization plan are
reported at the amounts expected to be allowed, even if

54

---



they
might have been settled for lesser amounts. For the period from January 1 to July 31, 2002, the reorganization loss was as follows (in millions):

PredecessorPeriod from
January 1 to
July 31, 2002Asset impairment loss (see Note 1)

$
329.9Loss on Transaction (see Note 1)


213.5Charge related to assumption of U.S. pension plan by PBGC


183.7Prepetition claims cost


41.7Professional fees and expenses


13.3Gains on asset sales


(9.5
)Interest income, postpetition


(1.3
)Total reorganization loss

$
771.3


Approximately
$7 million of professional fees in the reorganization loss of the Predecessor were paid out in cash in the period from January 1 to July 31, 2002.

As
a result of the Filing and pursuant to SOP 90-7, the Predecessor was required to segregate prepetition liabilities that were subject to compromise and report them
separately on its balance sheet. Liabilities that may be affected by a plan of reorganization were recorded at the amount of the expected allowed claims, even if they may be settled for lesser
amounts. The Debtors' prepetition debt, in default, was classified within liabilities subject to compromise.

As
a result of the Filing, all existing debts, liabilities and obligations (collectively, the "Prepetition Liabilities") of the Debtors matured and became due and payable and all acts to
collect Prepetition Liabilities and to enforce other prepetition contractual obligations of the Debtors were stayed except for certain employee related obligations, certain obligations to critical
vendors, and certain other obligations as determined by the U.S. Bankruptcy Court.

The
U.S. Bankruptcy Court established May 31, 2002 as the bar date for all claims against the Predecessor. A bar date is the date by which claims against the Predecessor must be
filed if the claimants wish to participate in any distribution in the Chapter 11 case. Approximately 9,050 proofs of claim totaling approximately $6.0 billion that alleged a right to
payment from the Predecessor had been filed with the U.S. Bankruptcy Court in response to the bar date, which are discussed below. The U.S. Bankruptcy Court ultimately determines liability amounts
that will be allowed as part of the Chapter 11 process.

Of
the approximately 9,050 proofs of claim filed with the U.S. Bankruptcy Court, approximately 2,480 proofs of claim totaling approximately $1.0 billion had been allowed by the
U.S. Bankruptcy Court and were recorded by the Predecessor as prepetition liabilities as of July 31, 2002 in accordance with SOP 90-7.

In
its review of the filed claims, the Predecessor had identified and successfully objected to approximately 6,420 claims totaling approximately $4.9 billion which had been either
withdrawn or expunged and would be disallowed, unless the U.S. Bankruptcy Court order that expunged the claims was later vacated in connection with a specific claim or unless a withdrawn claim was
reinstated. These claims were primarily duplicate filings, claims that were subsequently amended, or claims which could not be supported. However, because the U.S. Bankruptcy Court could have vacated
the prior ruling to expunge, or a claimant could have reinstated a withdrawn claim, the Predecessor had not determined that the likelihood of acceptance of each claim was remote. Further, the
Predecessor was unable to

55

---



estimate
the value of claims which could have ultimately been allowed, if any, from this category of claims.

There
were an additional approximately 150 claims totaling approximately $139 million which were outstanding or pending resolution. Such claims were reviewed by the Predecessor
and either reconciliation or negotiation of a settlement was ongoing. These claims were considered to be reasonably possible of allowance. Based on its assessment of the range of allowed amounts of
these claims, the Predecessor estimated the allowed amount of these claims to be approximately $8.0 million which was recorded by the Predecessor as Prepetition Liabilities as of
July 31, 2002 in accordance with SOP 90-7.

The
Predecessor evaluated claims filed in the Chapter 11 case and recorded liability amounts for claims whose value could be reasonably estimated and which it believed were
probable of being allowed by the U.S. Bankruptcy Court. During the period from January 1 to July 31, 2002, the Predecessor recorded a net charge of $41.7 million to increase its
reserve in connection with the estimated value of allowed claims. At that time, it was impossible to reasonably estimate the value of all the claims that would ultimately be allowed by the U.S.
Bankruptcy Court. However, it was likely that the value of claims ultimately allowed by the US Bankruptcy Court would be different from the amounts recorded by the Predecessor as of July 31,
2002 and the amounts of any additional claims allowed by the U.S.
Bankruptcy Court could have been material to the Predecessor's financial position and results of operations.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the management of the
Company and required the management of the Predecessor 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 and Cash Equivalents:

The Company considers and the Predecessor considered all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.

Derivatives:

The Company did not have any derivative instruments at December 31, 2004 or 2003. As of January 1, 2002, the Predecessor had currency option
contracts which were not designated as hedges and were marked to market monthly until the contracts expired in the period from January 1 to July 31, 2002. The amounts recorded by the
Predecessor related to these contracts in the period from January 1 to July 31, 2002 were not material to its results of operations.

Inventories:

Inventories of the Company are valued and those of the Predecessor were valued on a first-in, first-out basis at the lower of cost or
market value, not in excess of net realizable value.

Income Taxes:

The Company's provision for income taxes includes and the provision for income taxes of the Predecessor included amounts currently payable or recoverable and
deferred taxes. Deferred taxes

56

---



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 considered more likely
than not that some portion or all of the deferred tax assets will not be realized.

Provision
for U.S. income taxes on the undistributed earnings of foreign subsidiaries is made by the Company and was made by the Predecessor only on those amounts in excess of the funds
considered to be permanently reinvested. The Company has not provided for U.S. federal income and foreign withholding taxes on $332.8 million of undistributed earnings from non-U.S.
operations as of December 31, 2004 because such earnings are intended to be reinvested indefinitely outside of the United States. If these earnings were distributed to the Company or one of its
U.S. subsidiaries, foreign tax credits may become available under current law to reduce or eliminate the resulting U.S. income tax liability. The Company has not reevaluated its position with respect
to the indefinite reinvestment of foreign earnings to take into account the possible election of the repatriation provisions contained in the American Jobs Creation Act of 2004 (the "Jobs Act"). The
status of the Company's evaluation of these provisions is described in Note 6.

Property, Plant and Equipment:

Property, plant and equipment of the Company purchased since the Transaction are and the property, plant and equipment of the Predecessor were stated at cost less
accumulated depreciation. (See Note 1 for information on the valuation of the property, plant and equipment purchased by the Company on July 31, 2002.) The estimated useful lives for
financial reporting of the Company assets are and the Predecessor's assets were 20-40 years for buildings and 3-15 years for machinery and equipment.

Long-Lived Assets:

The Company evaluates and the Predecessor evaluated 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 in accordance with SFAS No. 144,Accounting for the Impairment or Disposal
of Long-Lived Assets("SFAS 144"). The Company evaluates and the Predecessor evaluated 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 values of those assets are greater than the respective undiscounted future cash flows, the Company recognizes and the Predecessor recognized an impairment
loss for the amount by which the carrying value exceeds the fair value.

The
Company evaluates and the Predecessor evaluated 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 and the Predecessor recognized an impairment loss for the amount of that excess. The provisions of SFAS 144 were effective as of January 1, 2002. Effective for the second
quarter of 2002, the Predecessor recognized a non-cash asset impairment charge of $329.9 million in its reorganization loss in connection with the sale anticipated in the
Transaction (see Note 1).

57

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Patents and Trademarks:

The costs of patents and trademarks developed by the Company are expensed as incurred. Those acquired by the Company in the Transaction were not valued in the
Company's consolidated balance sheet (see Note 1). Patents and trademarks of the Predecessor were valued in its consolidated balance sheet at $1.

Foreign Currency Translation:

Most of the Company's subsidiaries outside the United States use and most of the Predecessor's subsidiaries outside the United States used the local currency as
the functional currency. Amounts recognized by the Company and the Predecessor in the financial statements related to foreign currency translation were determined using the principles of SFAS
No. 52,Foreign Currency Translation. Assets and liabilities denominated in foreign functional currencies are translated by the Company and were
translated by the Predecessor at the exchange rate as of the balance sheet date. Translation adjustments for the Company are and those for the Predecessor were recorded in accumulated other
comprehensive income, a separate component of stockholders' equity. Revenues, costs and expenses denominated in foreign functional currencies for the Company are and those for the Predecessor were
translated at the weighted average exchange rate for the period. The U.S. dollar is the functional currency for subsidiaries in highly inflationary economies for the Company and was the functional
currency for subsidiaries in highly inflationary economies for the Predecessor.

Foreign
exchange transaction losses of approximately $6.9 million in 2004, $8.3 million in 2003 and approximately $3.3 million for the period from Inception (see
Note 1) to December 31, 2002 for the Company, and approximately $8.1 million for the period from January 1 to July 31, 2002 for the Predecessor, resulting from the
remeasurement to the functional currency from the currency in which the transaction was denominated, were reported in other income and expense. In addition, the Company liquidated certain of its
non-U.S. subsidiaries during 2003. As a result, it recognized in other income a net of approximately $7.1 million related to foreign currency translation gains that had been
previously recorded in accumulated other comprehensive income. In July 2002, the Predecessor recognized in its net loss on the Transaction (see Note 1) approximately $56.8 million
of
foreign currency translation losses related to its foreign subsidiaries that were sold. These losses had been previously reported in accumulated other comprehensive income.

Accumulated Other Comprehensive Income:

Company:

The Company reports comprehensive income in its consolidated statement of changes in common stockholders' equity. Accumulated other comprehensive income as of
December 31, 2004 consisted of foreign currency translation adjustments of $28.8 million and an additional minimum pension liability adjustment of $17.5 million. Accumulated other
comprehensive income as of December 31, 2003 consisted of unrealized foreign currency translation adjustments of $17.0 million. There were no tax effects associated with the amounts
recorded in accumulated other comprehensive income related to the additional minimum pension liability adjustment at December 31, 2004 since the Company determined that it was "more likely than
not" that the deferred tax asset associated with the additional minimum pension liability adjustment would not be recovered and as a result, the Company has provided a full valuation allowance against
this deferred tax asset. For 2003, the $12.4 million foreign currency translation adjustment recognized in comprehensive income was net of reclassification

58

---



adjustments
of $7.1 million for foreign currency translation gains recognized in other income related to the liquidation of certain non-U.S. subsidiaries during 2003.

Predecessor:

The Predecessor reported comprehensive income in its consolidated statement of changes in common stockholders' equity. Accumulated other comprehensive income as
of July 31, 2002 consisted of $0.1 million of unrealized losses on investments. There was no tax effect associated with this amount at July 31, 2002. In connection with the
Transaction, the Predecessor sold the capital stock of its foreign subsidiaries. As a result, it recognized a non-cash charge of $4.1 million in its reorganization loss for a
minimum pension liability cost related to a non-U.S. pension plan that was previously recorded in accumulated other comprehensive income. Effective July 31, 2002, the Predecessor's
U.S. pension was assumed by the PBGC. As a result, the Predecessor recognized a charge of $183.7 million in its reorganization loss for a minimum pension liability cost related to its U.S.
pension plan that was previously recorded in accumulated other comprehensive income in stockholders'
equity. As a result of the Transaction, the Predecessor recognized $56.8 million of foreign currency translation losses in its reorganization loss (see Note 1) in July 2002. These
losses were previously recorded in accumulated other comprehensive income in stockholders' equity and related to its foreign subsidiaries that were sold.

Revenue Recognition:

The Company recognizes net sales when all of the following criteria have been met: evidence of an arrangement with the customer exists; the product has been
shipped and title has passed to the customer; the sales price to the customer has been fixed or is determinable; and collectability of the sales price is reasonably assured. Provisions for estimated
sales returns and allowances are made at the time the products are sold. To arrive at net sales, the Company records reductions to net sales for the cost of programs offered to customers that include
cash and volume discounts and cooperative and other advertising allowances. The Company recognizes the liability for these programs at the time the related sales are recorded. The Company determines
the cost of these programs based on the terms of the programs, estimates using its historical experience and internal and customer data. The Company adjusts net sales for the cost of price protection
programs associated with customer inventories, as well as for the cost of promotional allowances and other fees and coupons, at the time it can reasonably estimate this cost.

Allowance for Doubtful Accounts:

Company:

The Company reviews the allowance for doubtful accounts on a regular basis and this allowance is based on a variety of factors including: individual account risk
profiles which consider customer credit ratings and financial condition reviews; a review of individual accounts receivable aging; and new information that becomes available on specific customers,
economic trends and changes in customer payment terms.

Predecessor:

The Predecessor's allowance for doubtful accounts was reviewed on a regular basis and was based on a variety of factors including an analysis of the aging of its
accounts receivable, a review of individual accounts receivable, historical bad debts and allowances, concentration of accounts receivable

59

---



by
customer, customer credit ratings and financial condition reviews, and new information that became available on specific customers, economic trends and changes in customer payment terms.

Shipping and Handling Costs:

The Company's shipping and handling costs are and those of the Predecessor were recorded in marketing expenses. These costs were approximately
$11.8 million in 2004, $14.9 million in 2003 and approximately $11.9 million in the period from Inception (see Note 1) to December 31, 2002 for the Company, and
approximately $11.3 million in the period from January 1 to July 31, 2002 for the Predecessor.

Advertising Costs:

The Company expenses and the Predecessor expensed 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(see Note 3).

Stock-based Compensation:

The Company accounts and the Predecessor accounted for stock-based compensation under the intrinsic value method of accounting as defined by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations and provides disclosure related to its stock-based
compensation under the provisions of SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and for the Company, as amended by
SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure". The Company recognizes and the
Predecessor recognized the cost of fixed stock award plans on a straight-line basis over the vesting period.

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If
compensation cost for the Company's stock option awards (see Note 12) had been determined based on the fair value at grant date for awards under the plans consistent with
SFAS 123, the Company's net earnings and basic and diluted earnings per common share, based on net earnings available to common stockholders, would have been changed to the pro forma amounts as
follows (in millions except per share amounts):

Twelve month
period ended
December 31,
2004

Twelve month
period ended
December 31,
2003Net earnings, as reported

$
61.9

$
71.3Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effect


3.0


0.1Less: Stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effect


(3.3
)

(0.1
)Pro forma net earnings


61.6


71.3Less: Preferred dividends


(2.3
)

(7.0
)Pro forma net earnings available to common stockholders

$
59.3

$
64.3Basic earnings per share:As reported

$
1.85

$
2.07Pro forma

$
1.84

$
2.07Diluted earnings per share:As reported

$
1.72

$
2.03Pro forma

$
1.71

$
2.03


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

Dividend yield

Risk free interest rate

3.4%Expected option life

5 years


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

Dividend yield

Risk free interest rate

3.7%Expected volatility

50.0%Expected option life

5 years


61

---



Predecessor:

If compensation cost for the Predecessor's fixed stock option awards (see Note 12) had been determined based on fair value at grant date for awards under
the plans consistent with FAS 123, the Predecessor's net loss and basic and diluted loss per common share would have been changed to the pro forma amounts as follows (in millions except per
share amounts):

Period from
January 1 to
July 31,
2002Net loss:As reported

$
(832.2
)Pro forma


(832.3
)Basic loss per share:As reported


(16.82
)Pro forma


(16.82
)Diluted loss per share:As reported


(16.82
)Pro forma


(16.82
)


Earnings Per Common Share:

The Company's basic earnings per common share is and the basic loss per common share of the Predecessor was computed by dividing net earnings or loss by the
weighted average number of common shares outstanding for each company for the respective periods. Diluted earnings per common share for the Company is and diluted loss per common share for the
Predecessor was calculated by adjusting the weighted average number of common shares outstanding for the respective periods to assume that all potentially dilutive shares were issued.

62

---



The
numerators and denominators of the basic and diluted earnings/(loss) per common share computations for the reported net earnings of the Company and the reported net loss of the
Predecessor were as follows (in millions, except per share and share amounts):

|                                                                                                       |  |   |            |   |   |            |   |   |            |   | 
|------------------------------------------------------------------------------------------------------ |  | - | ---------- | - | - | ---------- | - | - | ---------- | - | 
|
|
|Earnings/(loss) before extraordinary gain                                                              |  | $ | 61.9       |   | $ | 68.7       |   | $ | 15.2       |   | 
|Less: dividends on Preferred Stock                                                                     |  |   | (2.3       | ) |   | (7.0       | ) |   | (3.0       | ) | 
|                                                                                                       |  |   |            |   |   |            |   |   |            |   | 
|Earnings/(loss) before extraordinary gain available to common stockholders                             |  |   | 59.6       |   |   | 61.7       |   |   | 12.2       |   | 
|Extraordinary gain                                                                                     |  |   |           |   |   | 2.6        |   |   | 122.6      |   | 
|                                                                                                       |  |   |            |   |   |            |   |   |            |   | 
|Net earnings/(loss) available to common stockholders                                                   |  | $ | 59.6       |   | $ | 64.3       |   | $ | 134.8      |   | 
|Weighted average number of common shares outstanding used for basic earnings/(loss) per common share   |  |   | 32,271,872 |   |   | 31,122,879 |   |   | 30,769,230 |   | 
|Weighted average number of potentially dilutive restricted common shares outstanding                   |  |   | 2,405,810  |   |   | 516,917    |   |   |           |   | 
|                                                                                                       |  |   |            |   |   |            |   |   |            |   | 
|Weighted average number of common shares outstanding used for diluted earnings/(loss) per common share |  |   | 34,677,682 |   |   | 31,639,796 |   |   | 30,769,230 |   | 
|Basic earnings/(loss) per common share:                                                                |  |   |            |   |   |            |   |   |            |   | 
|Earnings/(loss) before extraordinary gain                                                              |  | $ | 1.85       |   | $ | 1.99       |   | $ | 0.40       |   | 
|Extraordinary gain                                                                                     |  |   |           |   | $ | 0.08       |   | $ | 3.98       |   | 
|Net earnings/(loss)                                                                                    |  | $ | 1.85       |   | $ | 2.07       |   | $ | 4.38       |   | 
|Diluted earnings/(loss) per common share:                                                              |  |   |            |   |   |            |   |   |            |   | 
|Earnings/(loss) before extraordinary gain                                                              |  | $ | 1.72       |   | $ | 1.95       |   | $ | 0.40       |   | 
|Extraordinary gain                                                                                     |  |   |           |   | $ | 0.08       |   | $ | 3.98       |   | 
|Net earnings/(loss)                                                                                    |  | $ | 1.72       |   | $ | 2.03       |   | $ | 4.38       |   | 

The
calculation of diluted earnings per share of the Company in 2004 did not include the effects of outstanding options for approximately 0.3 million shares of Common Stock
because the effect was anti-dilutive.

The
calculation of diluted loss per share of the Predecessor in the period from January 1 to July 31, 2002 did not include the effects of outstanding options for
approximately 0.3 million shares of Common Stock because the effect was anti-dilutive.

New Accounting Standards:

Company:

In January 2003, the FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities("FIN 46"), which clarifies the application of Accounting Research Bulletin No. 51,Consolidated Financial Statements,relating to consolidation
of certain entities. FIN 46 requires the identification of the Company's participation in variable interest entities (VIE). FIN 46 was effective for all new

63

---



variable
interest entities created or acquired after January 31, 2003. For VIE created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. FIN 46 also requires certain disclosures regarding interests in VIE that are deemed significant, even if consolidation is not required.
In December 2003, the FASB issued a revision to FIN 46 ("FIN 46R"). Under this new guidance, special effective date provisions apply to enterprises that have fully or partially applied FIN 46
prior to issuance of this revised Interpretation. Otherwise, application of FIN 46R (or FIN 46) is required in financial statements of public entities that have interests in structures that are
commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of variable
interest entities is required in financial statements for periods ending after March 15, 2004. The Company adopted the provisions of Fin 46 in 2004 and this adoption did not have a material
effect on its financial position or results of operations.

FASB
Staff Position ("FSP") No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004" ("FSP 109-2"), provides guidance under FASB Statement No. 109, "Accounting for Income
Taxes," with respect to recording the potential impact of the repatriation provisions of the Jobs Act on enterprises' income tax expense and deferred tax liability. The Jobs
Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on
its plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. On January 15, 2005, the Internal Revenue Service and the U.S. Department
of Treasury issued Notice 2005-10, the first in a series of notices to provide guidance on the temporary reduced tax on repatriated earnings. Further guidance will be forthcoming. At this
time, there is insufficient information available for the Company to complete its evaluation of the impact of the repatriation provisions. Accordingly, as provided for in FSP 109-2, the
Company has not adjusted its tax expense or deferred tax liability as of December 31, 2004 to reflect the repatriation provisions of the Jobs Act.

In
November 2004, the FASB issued SFAS No. 151, "Inventory CostsAn Amendment of ARB No. 43, Chapter 4"
("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally,
SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is
effective for fiscal years beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of 2006. The Company is currently evaluating the effect that the
adoption of SFAS 151 will have on its results of operations and financial condition.

In
December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces
SFAS No. 123 and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after
June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The
Company is required to adopt SFAS 123R in the third quarter of fiscal 2005. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and

64

---



retroactive
adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method
requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods
would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company is evaluating the requirements of SFAS 123R. The
Company has not yet determined the method of adoption or the effect of adopting SFAS 123R, and it has not determined whether the adoption will result in amounts that are similar to the current
pro forma disclosures under SFAS 123.

In
December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary AssetsAn Amendment of APB Opinion No. 29, Accounting
for Nonmonetary Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets
in paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with an exception for exchanges that
do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective for fiscal periods beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of 2006. The Company is
currently evaluating the effect that the adoption of SFAS 153 will have on its consolidated results of operations and financial condition.

Reclassifications:

Certain prior year information of the Company and the Predecessor has been reclassified to conform with current year presentations.

3.     Supplemental Information

|                                                       |              |   |      |      |   |      |      |   |      |    
|------------------------------------------------------ | ------------ | - | ---- | ---- | - | ---- | ---- | - | ---- | ---
|
|
|
|Research, engineering and development costs            |              | $ | 43.0 |      | $ | 37.8 |      | $ | 13.2 |    
|Advertising costs                                      |              | $ | 21.0 |      | $ | 47.6 |      | $ | 25.7 |    
|Cash payments/(refunds) for interest and
income taxes: |              |   |      |      |   |      |      |   |      |    
|                                                       | Interest     |   | $    | 1.2  |   | $    | 1.6  |   | $    | 1.1
|                                                       | Income taxes |   | $    | (7.3 | ) | $    | 24.8 |   | $    | 2.3

Company:

In 2004, the Company recorded non-cash items of approximately $3.6 million in cash flow from operating activities, which primarily related to
foreign exchange adjustments. In 2003, the Company recorded non-cash items of approximately $4.0 million in cash flow from operating activities, which primarily related to foreign
exchange adjustments. In the period from Inception (see Note 1) to December 31, 2002, the Company recorded non-cash items of approximately $5.4 million in cash flow
from operating activities, which primarily related to exchange adjustments. In addition, the Company's non-cash financing activities in the period from Inception (see Note 1) to
December 31, 2002, consisted

65

---



of
the issuance of shares of the Company's preferred and common stock valued at approximately $31.2 million and approximately $1.1 million, respectively, as part of the Transaction.

Predecessor:

In the period from January 1 to July 31, 2002, the Predecessor recorded a non-cash reorganization loss of $759.3 million that
consisted of an asset impairment loss of $329.9 million (see Note 1), a non-cash loss on the Transaction of $213.5 million, a charge of $183.7 million related
to the assumptions of its U.S. pension plan by the PBGC, prepetition claims cost of $41.7 million and gains on asset sales of $9.5 million (see Note 2). Other non-cash
items in this period were $19.4 million and consisted primarily of a pension curtailment cost of $12.1 million, a pension settlement loss of $11.1 million (see Note 13),
partially offset by a curtailment credit of $12.1 million that was based on the termination of participants under the Predecessor's postemployment benefits coverage (see Note 13) as a
result of the Transaction.

Other Non-current Assets:

As of December 31, 2004, the Company had approximately $46.1 million of other non-current assets, which included approximately
$11.4 million to fully collateralize letters of credit and performance bonds. Approximately $8.3 million of those assets represented cash deposits that fully collateralize letters of
credit related to performance clauses in a lease for manufacturing facilities located in Waltham, Massachusetts that was assumed by the Company as part of the Transaction (see Note 1). In
addition, other non-current assets included approximately $17.2 million of prepaid expenses and approximately $10.7 of other assets related to certain non-U.S. pension
plans and approximately $3.5 million of restricted cash of certain non-U.S. subsidiaries, primarily for required deposits related to import duties.

As
of December 31, 2003, the Company had approximately $40.7 million of other non-current assets, which included approximately $11.2 million to fully
collateralize letters of credit and performance bonds. Approximately $8.2 million of those assets represented cash deposits that fully collateralize letters of credit related to performance
clauses in a lease for manufacturing facilities located in Waltham, Massachusetts that was assumed by the Company as part of the Transaction (see Note 1). In addition, other
non-current assets included approximately $16.6 million in prepaid expenses and approximately $6.3 million of other assets related to certain non-U.S. pension
plans (see Note 13) and approximately $3.4 million of restricted cash of certain non-U.S. subsidiaries, primarily for required deposits related to import duties.

Real Estate Joint Venture Distribution:

Company:

In 2004, 2003, and the period from Inception (see Note 1) to December 31, 2002, the Company received distributions of approximately
$0.1 million, $2.8 million and $1.0 million, respectively, from an interest in a real estate joint venture for the development of certain real estate in Cambridge, Massachusetts,
which had been acquired by the Company in the Transaction. These distributions were recorded in other income.

Predecessor:

In the period from January 1 to July 31, 2002, the Predecessor received a distribution of approximately $3.0 million from a real estate joint
venture that was developing real estate in Cambridge, Massachusetts. This distribution was recorded in other income.

66

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Assets Held for Sale:

In connection with the Transaction, the Company made the decision to sell approximately $26.8 million of property, plant and equipment representing the
estimated fair value, less cost to sell, of certain underutilized real estate, primarily in the Global Manufacturing and International Region segments, and therefore, these assets were designated as
held for sale (see Note 1). This amount was recorded as a current asset as of July 31, 2002, since the Company expected to recover these carrying values within the twelve months
following the Transaction. In November 2002, the Company sold certain of its assets classified as held for sale for the carrying value of those assets of approximately $1.4 million.

In
2003, the Company decreased the estimated fair value of certain of the assets held for sale by approximately $3.6 million (see Note 1) and sold certain of its assets
classified as held for sale, including its manufacturing facility located in Norwood Massachusetts, for cash proceeds of approximately $18.3 million. The carrying value of the assets sold was
approximately $17.6 million. Because the Company leased back more than a minor portion of the Norwood property, it was required to defer the net gain on the sale of approximately
$0.5 million which it will recognize ratably over the seven year term of the lease as a reduction of lease expense. Approximately $12.0 million of the proceeds from the sale of the
Norwood property was recorded in other current assets at December 31, 2003 and deposited with a third party to be used for qualified like-kind property exchanges that were required
to be completed within 180 days of the sale of this property. The remaining funds in this deposit at the end of the 180 day period of approximately $4.8 million were returned to
the Company. Under the terms of the sale agreement, the Company was also required to deposit approximately $2.1 million of the proceeds in escrow as security for the Company's performance of
certain shared services related to a third party lease that was assumed by the buyer. This deposit was recorded in other current assets. Portions of this escrow are being released to the Company as
lease payments are made by the third party. During 2003, the Company reduced the carrying value of these held for sale assets by approximately $1.0 million to reflect lower market values.

In
2004, the Company sold certain held for sale property located in Germany for net cash proceeds of approximately $4.0 million and reported a gain of approximately
$1.0 million on this sale in general and administrative expenses. The carrying value of the Company's remaining held for sale asset was
approximately $1.2 million at December 31, 2004. At December 31, 2004, the Company was still actively marketing this property.

Asset Sales:

In 2004, the Company sold certain excess real estate located in the United Kingdom for approximately $1.9 million and recognized this amount as a gain in
general and administrative expenses. Also in 2004, the Company received a cash distribution of $1.2 million related to the sale of the Company's equity interest in a private company. The gain
of $1.2 million from this sale was recorded in other income. In connection with this sale, the Company negotiated a settlement of a license agreement with the private company and, as a result,
received a cash payment of $0.4 million which was also recorded in other income.

In
the first quarter of 2002, with the approval of the U.S. Bankruptcy Court, the Predecessor sold its Polaroid Digital Solutions, Inc. assets for $4.5 million and
recognized a gain on this sale of approximately $4.7 million that was recorded as a reduction of its reorganization loss. Also in this period, with the approval of the U.S. Bankruptcy Court,
the Predecessor sold assets and recorded the gain on these sales of approximately $0.8 million as a reduction of its reorganization loss. In July 2002, the Predecessor sold certain
property in the U.K., previously used for administrative space, for net

67

---



proceeds
of approximately $6.4 million and recorded a gain on this sale of approximately $3.9 as a reduction of its reorganization loss.

Settlement Agreement with Primary:

Under the terms of the asset purchase agreement with Primary, the Company was required to reimburse Primary for certain costs incurred by Primary, if certain
conditions were met. As of December 31, 2003, the Company had recorded liabilities of approximately $7.0 million for these costs and the Company collateralized approximately
$7.5 million of cash related to these liabilities in the first quarter of 2004. In December 2004, the Company reached a settlement agreement with Primary on the payment of these costs
which was approved by the Bankruptcy Court at a hearing on January 10, 2005. Under the terms of the settlement agreement, $5.5 million was paid to Primary in January 2005 with the
balance of the cash collateral returned to the Company. As a result, the Company reduced its liability for these costs and recorded a gain of approximately $2.1 million in other income as of
December 31, 2004.

Other Business Risks:

The Company's instant film and camera manufacturing capacity is concentrated in facilities in the United States, Europe, Mexico and the Far East, respectively. It
is considered at least reasonably possible that the use of a facility located outside of the Company's home country could be disrupted in the near term. Due to the specialized nature of certain assets
located at these facilities, it would not be possible to find replacement capacity quickly. Accordingly, the loss of any of these facilities would have a materially adverse impact on the Company.

4.     Restructuring and Other Charges

Company:

The following table summarizes the Company's reserves established for restructuring and other charges (in millions):

Severance

Exit Costs

TotalAssumed liabilities in Transaction

$
4.3

$


$
4.3New liabilities of Company as of date of Transaction


4.0





4.0Restructuring and other charges


4.9


0.2


5.1Cash payments


(4.6
)




(4.6
)Balance at December 31, 2002

$
8.6

$
.2

$
8.8Restructuring and other charges


4.7





4.7Cash payments


(10.8
)

(0.2
)

(11.0
)Balance at December 31, 2003

$
2.5




$
2.5Restructuring and other charges


14.1


0.8


14.9Non-cash charges and reclassifications


(0.2
)




(0.2
)Cash payments


(11.8
)

(0.8
)

(12.6
)Balance at December 31, 2004

$
4.6




$
4.6


68

---





The Company recorded restructuring charges of $14.9 million in 2004. These charges were recorded in the non-segment Corporate category and
primarily represented charges for involuntary severance programs intended to downsize and consolidate certain sales and marketing operations, primarily in the International Region, certain operations
in Global Manufacturing and certain non-segment Corporate operations (see Note 15 for more information on the Company's business segments). These reductions were intended to further
reduce the Company's cost of manufacturing and its overhead costs. The cash payments under these programs, some of which are paid as a stream of payments, are expected to be substantially completed by
the end of 2005. The charges in 2004 also included $0.8 million of exit costs primarily related to the liquidation of certain non-U.S. marketing subsidiaries which were paid in
2004.

In
2003, as part of the Company's plan to reduce costs and streamline operations, it recorded restructuring and other charges of approximately $4.7 million. These charges were
allocated to the non-segment Corporate category and represented a charge for involuntary severance programs intended to downsize and consolidate certain sales and marketing operations,
non-U.S. operations in Global Manufacturing and certain non-segment Corporate operations. These reductions were the result of management's continuing assessment of the
Company's operations and are intended to further streamline operations and improve profitability by consolidating marketing and manufacturing facilities. The strategic objective of these reductions
was to reduce the cost of selling and manufacturing the Company's products; to improve business processes; to improve financial performance; and to improve the Company's global business operations.
The cash payments under these programs, some of which were paid as a stream of payments, were substantially completed by the end of the second quarter of 2004.

Approximately
$2.2 million and $0.7 million of the severance charges in 2004 and 2003, respectively, represented pension enhancement costs under a non-U.S.
pension plan. In 2004, approximately $2.7 million of cash payments were made to the local pension trust related to the pension enhancement costs previously recorded.

In
connection with the Transaction, the Company recorded a liability for compensation and benefits of approximately $8.3 million, which included approximately $4.3 million
for severance payments under assumed liabilities of Primary and its foreign subsidiaries. This liability also included approximately $4.0 million for severance payments to approximately 350
employees terminated under several non-U.S. severance programs, primarily in Global Manufacturing, as part of the Company's plan to downsize or exit certain activities that were begun as
of the date of the Transaction
(see Note 1). These programs were completed within a twelve-month period following the date of the Transaction. As of December 31, 2002, approximately $4.6 million of cash
payments had been made against this liability with the remaining payments substantially completed by the end of the third quarter of 2003.

In
December 2002, as part of its continuing plan to reduce costs and streamline operations, the Company recorded a restructuring and other charge of $5.1 million. This
charge was allocated to the non-segment Corporate category and consisted of a charge of approximately $4.9 million for involuntary severance programs intended to downsize and
consolidate certain sales and marketing and non-U.S. operations in Global Manufacturing. These reductions were the result of management's assessment of the Company's operations and were
intended to streamline operations and to improve profitability by consolidating marketing and manufacturing facilities. The strategic objective of these reductions was to reduce the cost of selling
and manufacturing the Company's products; to improve business processes; to improve financial performance; and to improve the Company's global business operations. In addition, the restructuring and
other charge(s) in December 2002 included a charge of approximately $0.2 million primarily for exit costs related to marketing subsidiaries that were closed.

69

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The
restructuring charges recognized in December 2002 related to approximately 120 employees (approximately 35% from the International Region and approximately 65% from Global
Manufacturing) who were expected to leave the Company over the twelve months following December 2002. No cash payments were made as of December 31, 2002 related to the charges recognized
in December 2002. The cash payments under these programs were substantially completed by the end of 2003.

Predecessor:

The following table summarizes the Predecessor's reserves established for restructuring and other charges (in millions):

Severance

Asset
Impairments/
Exit Costs

TotalBalance at January 1, 2002

$
25.2

$


$
25.2Restructuring and other charges


8.5


8.1


16.6Reversal of restructuring charges


(4.0
)




(4.0
)Non-cash charges and reclassifications


(10.9
)

(8.1
)

(19.0
)Cash payments


(14.5
)




(14.5
)Balance at July 31, 2002

$
4.3

$


$
4.3


In
the period from January 1 to July 31, 2002, the Predecessor recorded a net of approximately $12.6 million of restructuring and other charges of which
approximately $8.5 million was recorded primarily to adjust certain existing reserves and to further reduce overhead costs and realign its resources. Under this program, approximately 225 sales
and marketing employees left the Predecessor, primarily from the International Region. In addition, the Predecessor made approximately $14.5 million of cash payments under the program during
this period and reversed approximately $4.0 of severance reserves that the Predecessor determined were no longer required. The Predecessor's severance reserve included approximately
$10.9 million of severance liabilities that were classified as prepetition liabilities.
As part of the Transaction, the Company assumed $4.3 million of the remaining reserve for the Predecessor's severance program.

In
addition, the restructuring and other charges recorded by the Predecessor in the period from January 1 to July 31, 2002 included approximately $3.8 million
related to an impairment charge related to the Predecessor's marketing operations that were exited, approximately $2.9 million of costs related to internal use software that was no longer
required to support certain marketing activities, approximately $0.6 million for exit costs and approximately $0.8 million of fixed asset write-offs primarily related to a
number of non-U.S. activities that were exited. The exit costs were substantially paid by the Predecessor as of July 31, 2002.

5.     Financial Instruments

The Company generates and the Predecessor generated a substantial portion of their revenues in international markets, which subjects the Company's and subjected
the Predecessor's operations and cash flows to currency exchange rate fluctuations. The ability to counteract currency exchange rate movement of the Company is and of the Predecessor was primarily
dependent on pricing and sourcing of products and services in local markets. The Company has and the Predecessor had limited flexibility to increase prices in local currency to offset the adverse
impact of foreign exchange rate fluctuations. The Company did not purchase any derivative instruments in 2004, 2003 or in the period from

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Inception
(see Note 1) to December 31, 2002. The Predecessor did not purchase any derivative instruments in the period from January 1 to July 31, 2002.

Fair Value:

The carrying amounts of cash, cash equivalents, trade accounts receivables, short-term debt and trade accounts payable of the Company approximate and
of the Predecessor approximated fair value because of the short maturity of these financial instruments. The Company's other assets include investments in financial assets, which were recorded at fair
value as of the date of the Transaction.

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 and the Predecessor placed temporary cash investments in highly rated financial instruments. The Company primarily places these investments in
the financial institutions of its lenders as required under its Credit Agreement (see Note 8).

The
Company markets and the Predecessor marketed a substantial portion of their products to customers in the retail industry, a market in which a number of companies are highly
leveraged. The Company evaluates and the Predecessor evaluated the credit risk of these customers regularly and the Company believes and the Predecessor believed that their allowances for doubtful
accounts relative to trade accounts receivable are and were adequate, respectively.

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6.     Income Taxes

An analysis of income tax expense/(benefit) follows (in millions):

Company:

Current

Deferred

TotalYear ended December 31, 2004:Federal

$
(18.3
)
$
1.4

$
(16.9
)State


0.3





0.3Foreign


(20.9
)

3.2


(17.7
)Total

$
(38.9
)
$
4.6

$
(34.3
)Year ended December 31, 2003:Federal

$
8.0

$
7.3

$
15.3State


0.9





0.9Foreign


4.7


2.0


6.7Total

$
13.6

$
9.3

$
22.9Period from Inception (see Note 1) to December 31, 2002:Federal

$
10.4

$
(10.0
)
$
0.4State


0.7





0.7Foreign


(0.4
)

6.2


5.8Total

$
10.7

$
(3.8
)
$
6.9


---

Predecessor:

Current

Deferred

TotalPeriod from January 1 to July 31, 2002:Federal

$


$


$
State


(0.6
)




(0.6
)Foreign


2.1


11.4


13.5Total

$
1.5

$
11.4

$
12.9


---

Deferred
tax assets and deferred tax liabilities 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. The netting of deferred tax assets, deferred tax liabilities, and valuation allowances reflected on the consolidated balance sheet of the Company resulted in a
net deferred tax liability of $1.6 million and a net deferred tax asset of $3.1 million at December 31, 2004 and 2003, respectively. All domestic tax assets and tax liabilities of
the Predecessor as of the date of the Transaction remained

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with
the Predecessor. The significant components of the amounts shown on the Company's consolidated balance sheet as of December 31, 2004 and 2003 are as follows (in millions):

Company2004

2003Deferred tax assets:Property, plant and equipment and trademarks

$
20.0

$
18.0Inventory


7.6


10.1Compensation and benefits


5.0


3.9Loss and credit carryforwards


55.3


30.8All other


2.5


3.090.4


65.8Valuation allowance


(81.9
)

(49.5
)Total deferred tax assets


8.5


16.3Deferred tax liabilities:Property, plant and equipment and trademarks


7.0


9.7Compensation and benefits


0.7


2.7All other


2.4


0.8Total deferred tax liability


10.1


13.2Net deferred tax asset/(liability)

$
(1.6
)
$
3.1


As
of December 31, 2004, the Company's net deferred tax liability of $1.6 million included approximately $7.0 million of deferred taxes in other current assets and
approximately $6.7 million of non-current deferred tax assets. These amounts were offset by approximately $0.9 million of current deferred tax liabilities and
$14.4 million of deferred tax liabilities in other non-current liabilities.

As
of December 31, 2003, the Company's net deferred tax asset of $3.1 million included approximately $14.4 million of deferred taxes in other current assets and
approximately $1.9 million of non-current deferred tax assets. These amounts were offset by approximately $13.2 million of deferred tax liabilities in other
non-current liabilities.

The
Company had a valuation allowance of approximately $49.5 million at December 31, 2003 primarily associated with foreign deferred tax assets, inclucing foreign loss
carryforwards. In 2004, the Company increased its valuation allowance by approximately $32.4 million for the deferred taxes primarily associated with its foreign deferred tax assets, including
foreign loss carryforwards, and domestic credit carryforwards. The valuation allowances were recorded because the Company determined that it was considered more likely than not that the majority of
these deferred tax assets would not be realized over a reasonable period of time.

As
of December 31, 2004, the Company had U.S. Federal alternative minimum tax carryovers of approximately $3.6 million that do not expire, research credit carryovers of
approximately $4.4 million that expire in 2023 and 2024, and a foreign tax credit carryover of approximately $0.8 million that expires in 2014. As of December 31, 2004, the
Company also had loss carryforwards in international jurisdictions totaling approximately $140.3 million of which approximately $79.8 million does not expire and approximately
$60.5 million expires in various years beginning in 2009 through 2019.

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The
domestic and foreign components of the Company's and the Predecessor's earnings/ (loss) before extraordinary gain and income tax expense follows (in millions):

|         |       |   |       |      |   |      |      |   |      |      | 
|-------- | ----- | - | ----- | ---- | - | ---- | ---- | - | ---- | ---- | 
|
|
|Domestic |       | $ | 63.4  |      | $ | 45.9 |      | $ | (1.8 | )    | 
|Foreign  |       |   | (35.8 | )    |   | 45.7 |      |   | 23.9 |      | 
|         |       |   |       |      |   |      |      |   |      |      | 
|         | Total |   | $     | 27.6 |   | $    | 91.6 |   | $    | 22.1 | 
|         |       |   |       |      |   |      |      |   |      |      | 

A
reconciliation of differences between income tax expense/(benefit) computed at the statutory U.S. federal income tax rate (35% for 2004, 2003 and 2002) and the reported income tax
expense follows (in millions):

|                                                         |  |   |       |   |   |      |   |   |      |   | 
|-------------------------------------------------------- |  | - | ----- | - | - | ---- | - | - | ---- | - | 
|
|
|Income tax expense/(benefit) at U.S. statutory rate      |  | $ | 9.7   |   | $ | 32.1 |   | $ | 7.7  |   | 
|State taxes                                              |  |   | 0.2   |   |   | 0.6  |   |   | 0.4  |   | 
|Nondeductible expenses/(nontaxable income)               |  |   | (5.3  | ) |   | (5.2 | ) |   | 0.1  |   | 
|Foreign tax credit carryback                             |  |   | (14.0 | ) |   |     |   |   |     |   | 
|Tax benefit not expected to be realized                  |  |   |      |   |   |     |   |   |     |   | 
|Tax (benefit)/ expense resulting from foreign activities |  |   | (23.4 | ) |   | (7.7 | ) |   | (1.1 | ) | 
|Other                                                    |  |   | (1.5  | ) |   | 3.1  |   |   | (0.2 | ) | 
|                                                         |  |   |       |   |   |      |   |   |      |   | 
|Reported income tax expense/(benefit)                    |  | $ | (34.3 | ) | $ | 22.9 |   | $ | 6.9  |   | 
|                                                         |  |   |       |   |   |      |   |   |      |   | 

The
Company recorded an income tax receivable of approximately $15.3 million primarily related to a foreign tax credit carryback in 2004, which is classified in prepaid and other
current assets as of December 31, 2004.

In
the fourth quarter of 2004, the Company recorded a reduction in its tax reserves related to the resolution of certain foreign tax issues. As a result, the Company reduced its income
tax reserves by approximately $18.0 million in the fourth quarter of 2004.

The
Company has not provided for U.S. federal income and foreign withholding taxes on approximately $332.8 million of undistributed earnings from non-U.S. operations
as of December 31, 2004 because such earnings are intended to be reinvested indefinitely outside of the United States. If these earnings were distributed to the Company or one of its U.S.
subsidiaries, foreign tax credits may become available under current law to reduce or eliminate the resulting U.S. income tax liability. The Company has not reevaluated its position with respect to
the indefinite reinvestment of foreign earnings to take into account the possible election of the repatriation provisions contained in the Jobs Act. The status of the Company's evaluation of these
provisions is described in the following section.

74

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American Jobs Creation Act of 2004Repatriation of Foreign Earnings

The Jobs Act, enacted on October 22, 2004, provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated during a
one-year period. The deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must be reinvested in the
United States pursuant to a domestic reinvestment plan established by a company's chief executive officer and approved by the company's board of directors. Certain other criteria in the Jobs Act must
be satisfied as well. The maximum amount of the Company's foreign earnings that qualify for the temporary deduction is approximately $332.8 million. For the Company, the one-year
period during which the qualifying distributions can be made is the calendar year 2005.

The
Company is in the process of evaluating whether it will repatriate foreign earnings under the repatriation provisions of the Jobs Act, and if so, the amount that will be repatriated.
The range of reasonably possible amounts that the Company is considering for repatriation, which would be eligible for the temporary deduction, is zero to $45 million. The Company is awaiting
the issuance of further regulatory guidance and passage of statutory technical corrections with respect to certain provisions in the Jobs Act prior to determining the amounts it may repatriate. If
such regulatory guidance or technical corrections are favorable, the Company may repatriate up to $45 million. The Company expects to determine the amounts and sources of foreign earnings to be
repatriated, if any, during the third quarter of calendar year 2005.

The
Company is not yet in a position to determine the impact of a qualifying repatriation, should it choose to make one, on its income tax expense for the calendar year 2005, the amount
of its indefinitely reinvested foreign earnings, or the amount of its deferred tax liability with respect to foreign earnings. If the Company were to repatriate up to $45 million for the
temporary deduction, the Company estimates it would accrue additional tax expense in the calendar year 2005 in a range of approximately zero to approximately $0.3 million.

7.     Inventories

The classification of the Company's inventories at December 31, 2004 and 2003 follows (in millions):

Company2004

2003Raw materials

$
26.3

$
27.2Work-in-process


77.2


83.2Finished goods


33.9


36.5Total

$
137.4

$
146.9


8.     Short-term Debt

Company:

As of July 29, 2002, Holding, Polaroid and most of the major foreign subsidiaries of Polaroid entered into a three year, $100.0 million credit
facility and accompanying security documents with a group of lenders led by Citicorp USA, Inc. as Domestic Administrative Agent, Domestic Collateral Agent and Foreign Syndication Agent and Bank
of America, N.A. as Foreign Administrative Agent, Foreign Collateral Agent and Domestic Syndication Agent, (the "Credit Agreement"). The Credit Agreement is secured by, among other things, a first
priority security interest on substantially all of the Company's assets in the United States and most of the assets of the Company's non-U.S. subsidiaries

75

---



that
are designated as borrowers or guarantors under the Credit Agreement. Approximately $5.0 million of fees paid to the lenders under the Credit Agreement were recorded as deferred financing
fees as of July 31, 2002, and are being amortized on a straight-line basis over the three-year term of the Credit Agreement.

The
Credit Agreement provides for: a three year $80.0 million revolving credit line, of which $50.0 million is available to be borrowed by the Company's U.S. operations and
$30.0 million is available to be borrowed by the Company's non-U.S. subsidiaries that are designated as borrowers under the Credit Agreement. Under the revolving credit line in the
Credit Agreement, the Company's borrowing availability is tied to a percentage of eligible domestic and foreign inventory and accounts receivable. Approximately $27 million was available to the
Company under the revolving line of credit at December 31, 2004. The Credit Agreement also includes provisions for letters of credit in lieu of borrowings under the revolving credit line. In
addition the Credit Agreement contains provisions for borrowings between Company subsidiaries that are designated as borrowers or guarantors. The Credit Agreement originally provided for a
$20 million term loan. The Company had $17.5 million classified as short-term debt as of December 31, 2002, which represented the outstanding borrowings under the term
loan provision of the Credit Agreement. In 2003, the Company repaid the term loan portion of the Credit Agreement and the term loan is not available for future borrowings. As of December 31,
2004, there were no borrowings under the revolving credit line of the Credit Agreement.

The
Credit Agreement also contains provisions for the mandatory prepayment of the loans upon the occurrence of certain defined events and with the net cash proceeds from certain asset
sales, including those classified as assets held for sale (see Note 3) and from the excess cash flow of the Company, which is required to be computed annually.

Revolving
credit line borrowings under the Credit Agreement bear interest based on (i) a rate which is referenced to fluctuating market interest rates and (ii) an
applicable margin of 2.5% to 3.5% for the first year and thereafter 1.25% to 3.5%, depending on the Company's leverage ratio required under the Credit Agreement. The Company also pays the lenders an
unused line of credit fee, a fee on any letters of credit issued, and is obligated to pay the agents certain other customary administrative fees.

Interest
expense for 2003 included approximately $0.3 million of interest on the term loan borrowings. Interest expense for the period from Inception (see Note 1) to
December 31, 2002, included approximately $0.6 million of interest on the term loan borrowings. The weighted average interest rate for 2003 and the period from Inception (see
Note 1) to December 31, 2002 on the term loan borrowings was approximately 6.5% and approximately 7.1%, respectively. Interest expense for 2004, 2003 and the period from Inception (see
Note 1) to December 31, 2002 included approximately $1.6 million, $1.8 million and approximately $0.8 million, respectively, from the amortization of fees paid in
connection with the Transaction (see Note 1) and other fees primarily related to borrowings or maintenance fees under the Credit Agreement.

76

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Under the revolving credit line, the Company's borrowing availability is reported monthly and is tied to a percentage of eligible domestic and foreign inventories
and accounts receivable. Monthly reporting will continue as long as the Company maintains $25.0 million in excess availability, which is defined to include a significant portion of the
Company's cash and cash equivalents. If the excess availability falls below this threshold, weekly reporting will be required. The formula for computing the Company's borrowing availability also
includes limitations based on a percentage of the value of eligible assets and is subject to certain additional reserves imposed by the agents for the lenders under the Credit Agreement. Approximately
$27 million was available to the Company under the revolving line of credit at December 31, 2004.

The
Credit Agreement contains covenants requiring that the Company satisfy certain ongoing financial covenants relating to: maximum capital expenditures; maximum expenditures for instant
digital printing research and development expenditures; minimum earnings before interest, taxes, depreciation and amortization; maximum leverage ratio; and minimum tangible net worth. The Credit
Agreement also contains covenants restricting, among other things, the Company's ability to: borrow additional money; incur liens; pay dividends; sell assets; make additional corporate investments;
engage in transactions with the Company's international subsidiaries; enter sale and leaseback transactions; purchase margin stock; enter speculative transactions; cancel indebtedness owed to it; and
make subsidiary distributions.

In
addition, the Credit Agreement prohibits: a change in control without the consent of the lenders; fundamental changes; and changes in the nature of the Company's business.
Notwithstanding these covenants and restrictions the Credit Agreement was amended in 2003 to provide a $100.0 million discretionary basket for items otherwise restricted such as asset
acquisitions and investments as long as certain of the Company's financial covenants are satisfied.

In
November 2003, the Company paid approximately $9.7 million of Preferred Stock dividends and redeemed 50% of the outstanding shares of its Preferred Stock for
approximately $44.6 million (see Note 10.) As a result, approximately $45.7 million remained from the $100.0 million discretionary basket at December 31, 2003. In
April 2004, the Company paid a further dividend of $1.3 million on its Preferred Stock (representing all accrued and unpaid dividends on its Preferred Stock as of that date) and redeemed
50% of the then outstanding Preferred Stock for $22.3 million (see Note 10). In 2004, the Company also used approximately $13.1 million of the discretionary basket for additional
instant digital printing research and development spending. As a result, approximately $9.0 million remained from the $100.0 million discretionary basket at December 31, 2004. The
Company was in compliance with all of its requirements under the Credit Agreement as of December 31, 2004, 2003 and 2002.

In
the third quarter of 2004, the Company entered into an amendment to the Credit Agreement. The amendment provides for a reduction in the minimum earnings before interest, taxes,
depreciation and amortization ("EBITDA") covenant levels (calculated as of the end of each fiscal quarter on a rolling four quarter basis) for the third and fourth fiscal quarters of 2004 and the
first fiscal quarter of 2005 to $38.0 million, $12.5 million and $2.5 million, respectively. The EBITDA covenant level for the second fiscal quarter 2005, which is the final
period tested, was unchanged by this amendment and remained at $53.0 million. In addition, the amendment removed the ability of the Company to redeem shares of its outstanding Preferred Stock
and to pay dividends or make other distributions to any of its shareholders without approval of the lenders under the Credit Agreement. In connection with this amendment, the Company paid the lenders
under the Credit Agreement a fee of $0.2 million.

In
the fourth quarter of 2004, the Company entered into an additional amendment to the Credit Agreement. The amendment provides, among other things, that the Company may redeem its
Series A Preferred Stock (see Note 10) and pay a dividend on the Series A Preferred Stock. Subsequently, in

77

---



December 2004,
the Company paid a dividend of approximately $1.3 million and redeemed the remaining outstanding Series A Preferred Stock for approximately $22.3 million.
The amendment limits the Company's net use of cash through the expiration of the Credit Agreement in July 2005 to $85.0 million. In addition, the amendment permits the Company to invest
in various money funds administered by the Company's lenders and utilize certain overdraft arrangements with the lenders under the Credit Agreement.

Predecessor:

As of January 1, 2002, the Predecessor had approximately $926.6 million outstanding in short-term debt, of which $851.0 million
was classified as liabilities subject to compromise. The amounts outstanding were comprised of $277.1 million under the Amended Credit Agreement (defined below), $44.5 million under a
credit agreement in the U.K. (the "U.K. Credit Agreement") and $573.9 million of bonds, which had been reclassified from long-term debt to short-term debt prior to the
Filing. Since principal and interest payments could not be made on the bonds without the U.S. Bankruptcy Court's approval or until a reorganization plan or plans defining the repayment terms had been
confirmed by the U.S. Bankruptcy Court, interest on the bonds was not accrued by the Predecessor because it was not probable that it would be treated as an allowed claim. In addition, the Predecessor
had $31.1 million outstanding as of January 1, 2002 in bank overdraft borrowings which were required to be offset by a similar amount of cash deposits at the bank where the overdraft
amounts were located.

The
Predecessor had a credit agreement which, as amended, initially provided for a maximum commitment of $350.0 million on a revolving basis, (the "Predecessor Credit Agreement").
As of
January 1, 2002, the Debtors were liable to the lenders under the Predecessor Credit Agreement in the amount of approximately $277.1 million in respect of loans made and letters of
credit issued under the Predecessor Credit Agreement. In connection with the Predecessor Credit Agreement and the amendments and waivers to it, the Predecessor granted the lenders a first priority
security interest in substantially all of its domestic personal property and mortgages on certain real estate. As a result of the Filing, principal and interest payments could not be made with respect
to the Predecessor Credit Agreement without approval or until a reorganization plan or plans defining the repayment terms was confirmed.

In
the period from January 1 to July 31, 2002, with the approval of the U.S. Bankruptcy Court, the Predecessor repaid approximately $259.2 of the amount outstanding under
the Predecessor Credit Agreement from cash on hand and from the proceeds of certain asset sales including the proceeds from the Transaction.

As
of the Filing, Primary and Polaroid U.K. entered into a Standstill Agreement (the "Standstill Agreement") with the agents and lenders under the U.K. Credit Agreement whereby such
agents and lenders agreed to forbear from exercising any of their rights and remedies under the U.K. Credit Agreement until the earlier of certain events.

The
Standstill Agreement prohibited Polaroid U.K. from further committed borrowings under the U.K. Credit Agreement over the outstanding amount as of the date of the Standstill Agreement
of approximately 51.2 million euros less any required repayments; contained certain financial covenants; and contained certain cross-default provisions upon receipt of formal notice from the
lenders under the Standstill Agreement. In April 2002, the outstanding amount under the U.K. Credit Agreement was repaid in full.

Interest
expense on the Predecessor's short-term borrowings was $0.8 million in the period from January 1 to July 31, 2002. The weighted average interest
rates on these borrowings was 5.6% in the period from January 1 to July 31, 2002. Interest expense that was not recorded on the Predecessor's

78

---



outstanding
U.S. short-term debt, including the long-term debt that it reclassified to short-term, was approximately $36.9 million in the period from
January 1 to July 31, 2002. Interest expense in the period from January 1 to July 31, 2002 also includes approximately $1.6 million primarily related to fees paid on
the Predecessor's credit facilities.

9.     Payables and Accruals

The following items are included in the Company's payables and accruals at December 31, 2004 and 2003 (in millions):

Company2004

2003Trade accounts payable

$
32.6

$
44.0Accrual for marketing programs


21.8


40.5Other accrued expenses and current liabilities


36.5


53.0Total

$
90.9

$
137.5


10.   Preferred Stock

As of December 31, 2004, Holding had authorized 2,000,000 shares of Preferred Stock with a par value of $0.001 per share, of which 900,000 shares were
designated as Series A 8% Cumulative Compounding Preferred Stock (the "Preferred Stock"). As of December 31, 2004, no shares of the Company's Preferred Stock were outstanding.

As
of December 31, 2003, Holding had issued and outstanding 446,150 shares of Preferred Stock. In 2003, the Company paid from its retained earnings approximately
$9.7 million of cash dividends in arrears on the Preferred Stock and redeemed 446,150 shares of this Preferred Stock for approximately $44.6 million. As of December 31, 2003,
approximately $0.3 million, or approximately $0.01 per diluted
common share, of dividends on the Preferred Stock had accumulated in arrears and were undeclared and unpaid.

In
2004, the Company paid from its retained earnings approximately $2.6 million of cash dividends in arrears on the Preferred Stock and redeemed the outstanding shares of its
Preferred Stock for approximately $44.6 million.

11.   Common Stockholders' Equity

As of December 31, 2004, Holding had authorized 50,000,000 shares of Common Stock with a par value of $0.001 per share, of which 34,956,069 shares were
issued and outstanding. In connection with the Transaction (see Note 1) 20,000,000 shares of Holding's Common Stock were issued to OEP in exchange for a cash payment of $2.0 million and
10,769,230 shares of Common Stock were issued to Primary, which were valued at a total of $1.1 million. The excess of approximately $3.1 million of the cash payments and valuation over
the par value of the Common Stock as of July 31, 2002 was recorded in additional paid in capital.

In
2003, Holding sold 4,067,180 shares of restricted Common Stock to directors and certain key employees (see Note 12.) In 2004, Holding sold a total of 843,900 shares of
restricted Common Stock to directors and certain key employees and then repurchased 170,901 of those shares (see Note 12.) Also, in 2004, Holding exercised its right under the Amended and
Restated Securities Holders Agreement to repurchase 553,340 non-vested restricted shares of Common Stock from employees who left the Company at a purchase price of $0.04 per share.

79

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12.   Incentive Compensation and Stock Incentive Plans

Company:

The Company has annual incentive compensation programs covering substantially all domestic employees, employees of its manufacturing subsidiary in the United
Kingdom and certain key employees of its non-U.S. subsidiaries. Payments under these programs are based on a comparison of the performance of the Company and local operating units against
established financial and operational goals. The amount charged to operations in 2003 and the period from Inception (see Note 1) to December 31, 2002 for these incentive programs was
approximately $21.0 million and approximately $8.0 million, respectively. Cash payments of approximately $20.3 million and approximately $7.3 million under the 2003 and
2002 programs were made in 2004 and 2003, respectively. Approximately $0.7 million of the amounts recorded for both the 2003 and 2002 programs were not awarded to participants and were
recognized as reductions to incentive compensation costs in 2004 and 2003, respectively.

In
2004, the Company did not achieve its incentive compensation program performance goals but the Board of Directors in its discretion awarded $4.0 million of incentive
compensation to employees. The cash payments under the 2004 award of incentive compensation are expected to be made in the first and second quarters of 2005.

In
2003, Holding sold 4,067,180 restricted shares of its Common Stock for a nominal amount to certain executives, officers and directors of the Company pursuant to Holding's Restricted
Stock Purchase Program. These sales were exempt from registration under the Securities Act pursuant to Section 4(2) and pursuant to Rule 701 promulgated under the Securities Act. These
shares contain certain rights and restrictions with respect to voting rights, transfers, sales and other matters. The estimated fair value of these shares in excess of the proceeds received of
$0.4 million was recorded by the Company as deferred compensation in common stockholders' equity in 2003 and will be recognized in general and administrative expense on a straight line basis
over the four year vesting period for these shares. In both 2004 and 2003, approximately $0.1 million of incentive compensation cost was recognized in net earnings under this program.

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

Concurrent
with the sale of the restricted shares of Common Stock in 2004, Holding purchased 170,901 shares of the newly issued restricted shares of Common Stock for approximately
$0.9 million. Holding did not pay the purchase price directly to the sellers but instead used the purchase price of these shares to pay on such sellers' behalf a portion of each such seller's
income tax liability related to the original purchase of restricted shares of Common Stock. In addition, the Company awarded a bonus of $1.1 million in 2004 to the purchasers of the shares of
restricted Common Stock that was used to pay most of the purchasers' remaining income tax liability associated with the original purchase of restricted stock. The bonus was recorded in general and
administrative expenses in 2004. The deferred compensation of approximately $0.9 million related to the shares repurchased was recognized as a non-cash expense in general and
administrative expenses in 2004. The Company also recognized a non-cash expense in general and administrative expenses of approximately $1.6 million in 2004 based

80

---



on
a straight line amortization of the deferred compensation related to the grant of restricted shares of Common Stock in 2004.

The
Company has the right to purchase the non-vested restricted shares of Common Stock held by executives or directors who leave the Company or the Board of Directors,
respectively, for a nominal amount. Any repurchased shares are recorded as treasury stock and are available to be reissued. As of December 31, 2004, the Company has repurchased a total of
553,340 shares of non-vested restricted shares of Common Stock from executives who left the Company.

In
2004, Holding adopted the 2004 Stock Option Plan under which directors, executives and certain employees may be granted options to purchase restricted shares of Holding's Common Stock
(the "2004 Stock Option Plan"). Any shares of Common Stock issued upon exercise of options will be subject to restrictions, including restrictions on voting rights, transfers, sales and other matters,
and will be subject to repurchase by the Company under certain circumstances.

In
2004, Holding granted a total of 770,151 options to certain executives and a director pursuant to the 2004 Stock Option Plan. The options issued in 2004 have a term of ten years and
25% of the options vest one year after the date specified in the grant letters for the award (which in some cases is prior to the grant date) and an additional 12.5% vest every six months thereafter
over the following three year period.

As
of December 31, 2004, the Company has recorded any intrinsic value related to its stock-based compensation grants as deferred compensation in common stockholders' equity. This
deferred compensation is being amortized to general and administrative expenses over the respective vesting periods of these grants. In 2004, the Company recognized a non-cash expense in
general and administrative expenses of approximately $0.4 million related to the amortization of the intrinsic value related to the stock options granted in 2004. As of December 31,
2004, 915,735 options were authorized under the 2004 Stock Option Plan, 752,921 options had been granted and remained
outstanding under the 2004 Stock Option Plan, and 162,814 options were available for future grant under the 2004 Stock Option Plan.

A
summary of the Company's fixed stock option awards as of January 1, 2004 and the changes for the period from January 1 to December 31, 2004 is presented below:

Number of
Stock Options

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




Granted

770

$
7.29Exercised




Forfeited

(17
)
$
5.59Outstanding at December 31, 2004

753

$
7.33


81

---



Stock
options outstanding as of December 31, 2004:

Range of
Exercise Prices

Number of
Stock Options

Weighted-Average
Remaining
Contractual Life

Weighted-Average
Exercise Price(in thousands)

(years)$5.59

559

9.1

$
5.59$9.69 to $10.02

35

9.9

$
9.86$12.92

159

9.6

$
12.92$5.59 to $12.92

753

9.3

$
7.33


Stock
options exercisable as of December 31, 2004:

Exercise Price

Number of
Stock Options

Weighted-Average
Exercise Price(in thousands)$5.59

16

$
5.59


Predecessor:

In the period from January 1 to July 31, 2002, the Predecessor sought and obtained the approval of the U.S. Bankruptcy Court to pay approximately
$2.4 million of retention bonuses to certain key U.S. employees. The Predecessor also recorded an incentive compensation expense of approximately $0.6 million in the period from
January 1 to July 31, 2002 for retention bonuses for certain non-U.S. employees. These bonuses were charged to incentive compensation in the period from January 1 to
July 31, 2002, and were paid with the proceeds from the Transaction.

The
Predecessor had a stock incentive plan for executives and key employees. A summary of the Predecessor's fixed stock option awards as of January 1, 2002 and the changes for the
period from January 1 to July 31, 2002 is presented below:

Number of
Stock Options

Weighted-Average
Exercise Price(in thousands)Outstanding at January 1, 2002

3,544

$
13.32Granted




Exercised




Forfeited

(3,196
)
$
12.14Outstanding at July 31, 2002

348

$
24.19


Stock
options outstanding as of July 31, 2002:

Range of
Exercise Prices

Number of
Stock Options

Weighted-Average
Remaining
Contractual Life

Weighted-Average
Exercise Price(in thousands)

(years)$4

96

6.0

$
4.00$19 to $26

101

2.5

$
21.19$31 to $46

137

1.9

$
37.97$47 to $57

14

4.0

$
49.92$4 to $57

348

4.3

$
24.19


82

---



Stock
options exercisable as of July 31, 2002:

Range of
Exercise Prices

Number of
Stock Options

Weighted-Average
Exercise Price(in thousands)$4

96

$
4.00$19 to $26

100

$
21.20$31 to $46

137

$
37.97$47 to $57

14

$
49.92$4 to $57

347

$
24.20


As
of January 1, 2002, executives and key employees of the Predecessor had been granted shares of performance accelerated restricted stock (PARS) as a long-term
incentive. The PARS grants were subject to accelerated vesting of a portion of the award if the Predecessor achieved certain performance goals before 2003. If the acceleration terms were not
satisfied, the awards vested one third each year over the three year vesting period. One share of the Predecessor's Common Stock was to be issued for each share of PARS that vested. In the period from
January 1 to July 31, 2002, a total of 891,280 shares had been granted at prices of $19.06 and $18.06. A total of $0.6 million was charged to expense under this program. In the
period from January 1 to July 31, 2002, non-vested PARS grants were cancelled by the Predecessor and the vested grants were forfeited as participants left the employ of the
Predecessor.

As
of January 1, 2002, the Predecessor had made restricted stock grants to certain executives. These restricted stock awards vested over a two year period at a rate of
one-half each year. One share of the Predecessor's Common Stock was to be issued for each share of restricted stock that
vested. No shares of stock were issued on the award date. A total of 961,579 shares of restricted stock were granted prior to January 1, 2002 at a price of $7.63. The amount charged to expense
related to these restricted stock awards was $0.9 million in the period from January 1 to July 31, 2002. In the period from January 1 to July 31, 2002,
non-vested restricted stock grants were cancelled by the Predecessor and most of the vested grants were forfeited as participants left the employ of the Predecessor.

13.   Benefit Plans

Company:

The Company has adopted a defined contribution plan pursuant to the provisions of the Internal Revenue Code ("Code") for the benefit of substantially all of its
U.S. employees. This plan contains provisions for: rollovers from other qualified retirement plans; pre-tax employee contributions pursuant to Section 401(k) of the Code; a Company
match of up to 3% of eligible employee cash contributions pursuant to Section 401(k) of the Code beginning in 2003; after-tax employee contributions; and discretionary Company cash
contributions. In December 2002, the Company made a discretionary cash contribution to this plan of approximately $0.8 million, which represented 3% of the employees' base pay for the
period from October to December 2002. In 2004 and 2003, the Company made cash contributions to this plan of approximately $3.0 million and approximately $2.8 million,
respectively, which represented the Company's match of up to 3% of eligible employee cash contributions. The Company did not assume the domestic pension plan of the Predecessor in the Transaction. The
Company does not have a defined benefit pension plan for its U.S. employees.

Employees
of the Company's manufacturing subsidiaries in the United Kingdom and The Netherlands and certain non-U.S. marketing subsidiaries are covered by trusteed, defined
benefit pension plans. The Company uses a measurement date of December 31 for its defined benefit pension

83

---



plans.
Employees of most of the Company's other non-U.S. subsidiaries are covered by insured or government pension plans. Related obligations and assets of these other plans are not
material and therefore are not included in the information below.

In
2004, the Company recorded a charge of approximately $1.0 million in other income and expense related to defined benefit pension plans of certain non-U.S. marketing
subsidiaries in accordance with SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS 87"). The amount of this charge related to periods prior
to 2004 was determined not to be material. The Company has reflected the assets and obligations of these defined benefit pension plans in the reconciliation of pension plan assets and obligations
below.

Predecessor:

The Predecessor maintained a qualified noncontributory trusteed pension plan covering substantially all domestic employees. In general, the Predecessor's policy
was to fund its U.S. pension trust to the extent such contributions would be deductible under the funding standards established under the Internal Revenue Code. Plan assets consisted primarily of high
quality corporate and U.S. government bonds, asset backed securities, publicly traded stocks and investments in private equity, real estate and global asset funds. The Predecessor's U.S. pension plans
were not assumed by the Company in the Transaction. The Predecessor's U.S. pension plan was assumed by the PBGC effective as of July 31, 2002 (see Note 2).

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

Components
of the Company's and the Predecessor's net periodic pension cost are as follows (in millions):

|                             |                                 |   |       |      |   |       |   |   |      |   | 
|---------------------------- | ------------------------------- | - | ----- | ---- | - | ----- | - | - | ---- | - | 
|
|
|Service cost                 |                                 | $ | 4.9   |      | $ | 5.9   |   | $ | 2.4  |   | 
|Interest cost                |                                 |   | 16.2  |      |   | 14.8  |   |   | 5.4  |   | 
|Expected return on assets    |                                 |   | (19.1 | )    |   | (17.1 | ) |   | (7.0 | ) | 
|Amortization of:             |                                 |   |       |      |   |       |   |   |      |   | 
|                             | Unrecognized transition asset   |   |       |     |   |       |  |   |      |  | 
|                             | Unrecognized prior service cost |   |       | (0.2 | ) |       |  |   |      |  | 
|                             | Unrecognized gain               |   |       |     |   |       |  |   |      |  | 
|                             |                                 |   |       |      |   |       |   |   |      |   | 
|Net periodic pension cost    |                                 |   | 1.8   |      |   | 3.6   |   |   | 0.8  |   | 
|Curtailment cost             |                                 |   |      |      |   |      |   |   |     |   | 
|Settlement loss              |                                 |   |      |      |   |      |   |   |     |   | 
|Special Termination Benefits |                                 |   | 2.2   |      |   | 0.7   |   |   |     |   | 
|                             |                                 |   |       |      |   |       |   |   |      |   | 
|Net pension cost             |                                 | $ | 4.0   |      | $ | 4.3   |   | $ | 0.8  |   | 
|                             |                                 |   |       |      |   |       |   |   |      |   | 

84

---



The
following table sets forth the plans' reconciliation of projected benefit obligations, plan assets and funded status to the amounts recognized in the consolidated balance sheet for
the Company for the years ended December 1, 2004 and 2003 (in millions):

Year ended
December 31,
2004

Year ended
December 31,
2003Projected benefit obligation at beginning of period

$
299.3

$
253.4Service cost


4.9


5.9Interest cost


16.2


14.8Plan participants' contributions


1.7


1.3Special termination benefits


2.2


0.7Actuarial (gain)/loss


31.6


(7.6
)Addition of plans


13.3


Plan amendment


(4.3
)

Benefits paid


(10.6
)

(8.8
)Foreign currency exchange rate change


30.3


39.6Projected benefit obligation at end of period

$
384.6

$
299.3Fair value of plan assets at beginning of period

$
262.6

$
213.7Actual return on plan assets


22.5


16.5Employer contributions


8.8


3.7Plan participants' contributions


1.7


1.3Benefits paid


(10.6
)

(8.8
)Addition of plans


3.0


Foreign currency exchange rate change


25.9


36.2Fair value of plan assets at end of period

$
313.9

$
262.6Plan assets below projected benefit obligation

$
(70.7
)
$
(36.7
)Unrecognized prior service cost


(4.6
)

Unrecognized net loss


48.4


17.4Net accrued liability recognized at end of period

$
(26.9
)
$
(19.3
)


Amounts
recognized in the Company's consolidated balance sheet at December 31, 2004 and 2003 were as follows (in millions):

2004

2003Accrued benefit liability

$
(61.6
)
$
(33.6
)Prepaid benefit cost


17.2


14.3Accumulated other comprehensive income


17.5


Net accrued liability recognized at end of year

$
(26.9
)
$
(19.3
)


The
accumulated benefit obligation for the Company's non-U.S. pension plans as of December 31, 2004 and 2003 were as follows (in millions):

2004

2003Accumulated Benefit Obligation

$
370.2

$
288.3


85

---



The
projected benefit obligation and fair value of plan assets for the Company's non-U.S. pension plans with projected benefit obligations in excess of plan assets as of
December 31, 2004 and 2003 were as follows (in millions):

2004

2003Fair value of plan assets

$
124.2

$
102.1Projected benefit obligation

$
196.7

$
140.7


The
accumulated benefit obligation and fair value of plan assets for the Company's non-U.S. pension plans with accumulated benefit obligations in excess of plan assets as of
December 31, 2004 and 2003 were as follows (in millions):

2004

2003Fair value of plan assets

$
124.2

$
102.1Accumulated benefit obligation

$
184.7

$
132.4


As
of December 31, 2004, the Company had approximately $9.4 million of insurance investments that were purchased to offset a portion of the obligations of the defined
benefit pension plan of one of the Company's non-U.S. marketing subsidiaries. Since the Company could use these investments for other purposes, they may not be included as plan assets in
the information on the assets of the Company's defined benefit pension plan under SFAS 87. These assets are included in other non-current assets and are considered by the Company to be
available to fund the liabilities of this pension plan.

In
the period from Inception (see Note 1) to December 31, 2002, the Company recorded a charge of $0.8 million in accumulated other comprehensive income in
stockholders' equity related to a non-U.S. pension plan with accumulated benefit obligations in excess of the fair value of plan assets. There was no tax effect associated with this charge
since realization was not considered to be more likely than not. In December 2003, the Company determined this amount was no longer required and removed it from accumulated other comprehensive
income. In 2004, the Company recorded a charge of $17.5 million in accumulated other comprehensive income in stockholders' equity related to a non-U.S. pension plan with accumulated
benefit obligations in excess of the fair value of plan assets. There was no tax effect associated with this charge since realization was not considered to be more likely than not.

In
the period from January 1 to July 31, 2002, the Predecessor recorded a pension curtailment cost of $12.1 million that was related to the number of employees who
terminated under the involuntary severance program and a pension settlement loss of $11.1 million related to the amount of lump sum payments made to plan participants in this period. In this
period, the Predecessor also recorded a charge of approximately $134.2 million in accumulated other comprehensive income in stockholders' equity to recognize an additional minimum pension
liability related to the underfunded position of its U.S. pension plan. This entry increased the amount of the Predecessor's liability to its U.S. pension plan.

86

---



The
weighted average assumptions used by the Company for its defined benefit pension plans which have a significant effect on the amounts reported for pension expense were as follows:

|                                                             |  |      |  |      |  |      |  |  |  |     
|------------------------------------------------------------ |  | ---- |  | ---- |  | ---- |  |  |  | ----
|
|
|Weighted average discount rate                               |  | 5.5% |  | 5.6% |  | 5.9% |  |  |  | 6.7%
|Weighted average rate of increase in compensation levels     |  | 3.6% |  | 3.6% |  | 3.6% |  |  |  | 3.7%
|Weighted average expected long-term rate of return on assets |  | 7.1% |  | 7.4% |  | 8.2% |  |  |  | 8.4%

The
assumptions used by the Company which have a significant effect on the amounts reported for the Company's pension obligations as of December 31, 2004 and 2003 were as follows:

Company2004

2003Weighted average discount rate

5.0%

5.5%Weighted average rate of increase in compensation levels

3.4%

3.6%


The
Company's weighted-average target and asset allocations for the Company's defined benefit pension plans as of December 31, 2004 and 2003 were as follows:

Actual AllocationPlan Asset Category

Target
Allocation
20042004

2003Equities securities

41%

41%

40%Debt securities

59%

59%

60%Total

100%

100%

100%


Most
of the Company's non-U.S. defined benefit pension plans are governed by local boards of trustees that include members elected by employees and retirees along with
representatives appointed by the Company. The trustees have adopted investment policies for the pension plan assets designed to meet the expected rate of return on plan assets assumption with an
investment mix and risk profile consistent with the obligations of the plan. To achieve this goal, the pension plans retain professional investment managers who invest plan assets in equity and fixed
income securities.

Within
the equity securities asset class, the investment policies provide for investments in a broad range of publicly traded securities and indexed funds designed to match the
performance of the domestic and international equity markets. Within the fixed income securities asset class, the investment policies provide for investments in government and corporate debt
securities with a high quality credit ratings and in indexed funds designed to match the performance of long-dated and index-linked issues. Periodic studies are undertaken to determine the
asset mix that will meet pension obligations at a reasonable cost and risk and that are consistent with the fiduciary requirements of local pension regulations.

The
approach used to determine the expected rate of return on plan assets for the Company's defined benefit pension plans was to generally apply an asset allocation policy to the
expected real returns for the plans' equity and fixed income investments. On periodic basis, the trustees review the

87

---



historical
returns for the plans and consult with their investment managers to determine the expected long-term rates of return. The expected real rates of return are then weighted based
on the specific asset allocation mix and adjusted for inflation. The horizon for this exercise is generally 5-10 years. This approach resulted in a weighted average expected rate of
return on plan assets assumption of approximately 7.1% for 2004.

The
Company expects to contribute approximately $12 million to its defined benefit pension plans in 2005. In general, the Company's policy is to fund these pension plans through
agreement with local pension plan trustee boards in accordance with local statutory funding regulations and taking into consideration local labor agreements, practices and economic conditions. The
Company's policy is to contribute sufficient cash to its defined benefit pension plans in order to meet at least the minimum contribution requirements, as established by local funding, government and
taxing authorities.

The
Company estimates that the future benefits payable for its defined benefit pension plans are as follows at December 31, 2004:

2005

$
11.32006


11.62007


12.02008


13.42009


14.22010 to 2014


77.8


As
a result of the Filing, the Predecessor was required to offer COBRA medical coverage to its U.S. retirees and their spouses who were under age 65 on the filing date. As part of the
Transaction (see Note 1), the remaining amount of this liability of the Predecessor on July 31, 2002 of approximately $3.8 million for COBRA medical coverage to retirees and their
spouses was assumed by the Company. In 2004, 2003 and the period from Inception (see Note 1) to December 31, 2002, the Company made cash payments of approximately $0.9 million,
approximately $0.9 million, and approximately $0.4 million, respectively, against this liability.

In
July 2002, the Predecessor recognized a non-cash curtailment credit of $12.1 million related to certain postemployment medical benefits provided primarily to
individuals who terminated from the Predecessor on July 31, 2002.

14.   Rental Expense and Lease Commitments

The Company's minimum annual rental commitments at December 31, 2004, under noncancelable leases, principally for real estate, are payable as follows (in
millions):

2005

$
9.22006


8.62007


8.72008


5.12009


4.02010 and thereafter


10.2Total minimum lease payments

$
45.8


88

---





Minimum payments have not been reduced by minimum sublease rentals of $5.8 million due in the future under noncancelable subleases. Many of the leases
contain renewal options and some contain escalation clauses that require payments of additional rent to the extent of increases in the related operating costs.

Rental
and lease expenses consisted of the following (in millions):

|                |  |   |      |  |   |      |  |   |      | 
|--------------- |  | - | ---- |  | - | ---- |  | - | ---- | 
|
|
|Minimum rentals |  | $ | 16.2 |  | $ | 16.9 |  | $ | 11.6 | 

Sublease
income for the Company amounted to approximately $0.8 million for 2004, $0.5 million for 2003 and approximately $0.8 million for the period from Inception
(see Note 1) to December 31, 2002. Sublease income for the Predecessor amounted to approximately $2.6 million for the period from January 1 to July 31, 2002.

15.   Business Segments

Company:

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

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

The
Company has one category called Corporate, which is not classified as a segment. This category includes: central marketing; centralized information systems; general and
administrative functions; worldwide finished goods planning activities; and certain other corporate functions. The non-segment Corporate category also includes costs related to
restructuring activities, certain incentive compensation costs and certain other non-operating items. For the Predecessor it also included gains or losses on the sale of property, plant
and equipment and assets of small businesses.

Assets
in the regional sales and marketing segments consist primarily of trade accounts receivable and fixed assets related to sales and administrative activities. Global Manufacturing
segment assets

89

---



consist
primarily of worldwide inventories and fixed assets related to manufacturing facilities. The assets in the R&D segment consist of fixed assets related to the Company's research and development
activities. The assets in the Corporate category include cash and cash equivalents, prepaid expenses and other assets, assets held for sale, deferred tax assets, and other non-current
assets.

Predecessor:

The business segment information presented below for the Predecessor has been reformatted to conform with the business segment information for the Company.

The
following is a summary of information related to the Company's business segments for the years ended December 31, 2004 and 2003 and the period from Inception (see
Note 1) to December 31, 2002 and the Predecessor's business segments for the period from January 1 to July 31, 2002 (in millions):

|                               |                   |   |       |       |   |       |       |   |       |       | 
|------------------------------ | ----------------- | - | ----- | ----- | - | ----- | ----- | - | ----- | ----- | 
|
|
|Net sales to customers:        |                   |   |       |       |   |       |       |   |       |       | 
|Americas Region                |                   | $ | 345.5 |       | $ | 422.7 |       | $ | 203.0 |       | 
|International Region           |                   |   | 229.0 |       |   | 250.2 |       |   | 134.8 |       | 
|Global Manufacturing           |                   |   |      |       |   |      |       |   |      |       | 
|R&D                            |                   |   |      |       |   |      |       |   |      |       | 
|All Other                      |                   |   | 81.7  |       |   | 79.8  |       |   | 26.1  |       | 
|                               |                   |   |       |       |   |       |       |   |       |       | 
|                               | Subtotal Segments |   |       | 656.2 |   |       | 752.7 |   |       | 363.9 | 
|Corporate                      |                   |   |      |       |   |      |       |   |      |       | 
|                               |                   |   |       |       |   |       |       |   |       |       | 
|Total                          |                   | $ | 656.2 |       | $ | 752.7 |       | $ | 363.9 |       | 
|                               |                   |   |       |       |   |       |       |   |       |       | 
|Profit/(loss) from operations: |                   |   |       |       |   |       |       |   |       |       | 
|Americas Region                |                   | $ | 122.6 |       | $ | 152.4 |       | $ | 69.3  |       | 
|International Region           |                   |   | 65.2  |       |   | 62.5  |       |   | 25.5  |       | 
|Global Manufacturing           |                   |   | (44.1 | )     |   | (16.4 | )     |   | (26.5 | )     | 
|R&D                            |                   |   | (43.0 | )     |   | (37.8 | )     |   | (13.2 | )     | 
|All Other                      |                   |   | 22.9  |       |   | 18.8  |       |   | 4.8   |       | 
|                               |                   |   |       |       |   |       |       |   |       |       | 
|                               | Subtotal Segments |   |       | 123.6 |   |       | 179.5 |   |       | 59.9  | 
|Corporate (1)                  |                   |   | (92.6 | )     |   | (88.2 | )     |   | (35.3 | )     | 
|                               |                   |   |       |       |   |       |       |   |       |       | 
|Total                          |                   | $ | 31.0  |       | $ | 91.3  |       | $ | 24.6  |       | 
|                               |                   |   |       |       |   |       |       |   |       |       | 

---

90

---



|                     |                   | Company
|-------------------- | ----------------- | -------
|
|Assets:              |                   |        
|Americas Region      |                   | $      
|International Region |                   |        
|Global Manufacturing |                   |        
|R&D                  |                   |        
|All Other            |                   |        
|                     |                   |        
|                     | Subtotal Segments |        
|Corporate            |                   |        
|                     |                   |        
|Total                |                   | $      
|                     |                   |        

|                                    |                   |   |      |      |   |      |      |   |      |    
|----------------------------------- | ----------------- | - | ---- | ---- | - | ---- | ---- | - | ---- | ---
|
|
|Depreciation and amortization       |                   |   |      |      |   |      |      |   |      |    
|Americas Region                     |                   | $ |     |      | $ |     |      | $ |     |    
|International Region                |                   |   | 0.1  |      |   |     |      |   |     |    
|Global Manufacturing                |                   |   | 3.1  |      |   | 1.6  |      |   | 0.1  |    
|R&D                                 |                   |   | 0.1  |      |   |     |      |   |     |    
|All Other                           |                   |   | 0.3  |      |   |     |      |   |     |    
|                                    |                   |   |      |      |   |      |      |   |      |    
|                                    | Subtotal Segments |   |      | 3.6  |   |      | 1.6  |   |      | 0.1
|Corporate                           |                   |   | 1.0  |      |   | 0.6  |      |   |     |    
|                                    |                   |   |      |      |   |      |      |   |      |    
|Total                               |                   | $ | 4.6  |      | $ | 2.2  |      | $ | 0.1  |    
|                                    |                   |   |      |      |   |      |      |   |      |    
|Expenditures for long-lived assets: |                   |   |      |      |   |      |      |   |      |    
|Americas Region                     |                   | $ |     |      | $ | 0.3  |      | $ |     |    
|International Region                |                   |   | 0.1  |      |   | 0.3  |      |   | 0.3  |    
|Global Manufacturing                |                   |   | 16.3 |      |   | 14.1 |      |   | 5.4  |    
|R&D                                 |                   |   | 0.3  |      |   | 0.2  |      |   |     |    
|All Other                           |                   |   | 0.7  |      |   | 0.2  |      |   |     |    
|                                    |                   |   |      |      |   |      |      |   |      |    
|                                    | Subtotal Segments |   |      | 17.4 |   |      | 15.1 |   |      | 5.7
|Corporate                           |                   |   | 11.5 |      |   | 7.5  |      |   | 4.7  |    
|                                    |                   |   |      |      |   |      |      |   |      |    
|Total                               |                   | $ | 28.9 |      | $ | 22.6 |      | $ | 10.4 |    
|                                    |                   |   |      |      |   |      |      |   |      |    

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|                           |  |   |       |  |   |       |  |   |       | 
|-------------------------- |  | - | ----- |  | - | ----- |  | - | ----- | 
|
|
|Geographic Information:    |  |   |       |  |   |       |  |   |       | 
|Net sales to customers (1) |  |   |       |  |   |       |  |   |       | 
|United States              |  | $ | 345.1 |  | $ | 417.2 |  | $ | 192.5 | 
|Foreign countries          |  |   | 311.1 |  |   | 335.5 |  |   | 171.4 | 
|                           |  |   |       |  |   |       |  |   |       | 
|Total                      |  | $ | 656.2 |  | $ | 752.7 |  | $ | 363.9 | 
|                           |  |   |       |  |   |       |  |   |       | 

---

|                   |       | Company
|------------------ | ----- | -------
|
|Long-lived assets: |       |        
|United States      |       | $      
|Foreign countries  |       |        
|                   |       |        
|                   | Total |        
|                   |       |        

The
Company's principal products (see Note 2) represented approximately 83%, 87% and 90% of its net sales in 2004, 2003 and the period from Inception (see Note 1) to
December 31, 2002, respectively. The Predecessor's principal products (see Note 2) represented approximately 91% of its net sales in the period from January 1 to July 31,
2002. Sales of instant cameras and film represented approximately 88% of the Predecessor's net sales in the period from January 1 to July 31, 2002.

Sales
by the Company to one customer, Wal-Mart Stores, Inc., amounted to approximately 13%, approximately 14% and 13% of the Company's total net sales in 2004, 2003
and the period from Inception (see Note 1) to December 31, 2002, respectively. Sales to one customer, Wal-Mart Stores, Inc., amounted to approximately 11% of the
Predecessor's total net sales in the period from January 1 to July 31, 2002. The sales to this customer by the Company and the Predecessor were recorded primarily in the Americas Region.

16.   Contingencies

Company:

The Company is involved in legal proceedings and claims arising in the normal course of business.

On
July 7, 2003, five former employees of Primary filed a complaint against Primary, the Company and OEP in the United States District Court for the District of Massachusetts on
behalf of a purported class of over 100 individuals. In response, Primary invoked the automatic stay provision of the Bankruptcy Code, and the Company and OEP both moved to transfer the case to the
District of Delaware (the site of Primary's bankruptcy proceedings) or, alternatively, to dismiss the complaint. The Company and OEP also filed an adversary complaint in the bankruptcy court seeking a
declaration that the complaint is barred by the 2002 order of the court which approved the sale of the assets of Primary to the Company. In November 2003, the plaintiffs filed an amended
complaint dismissing OEP and Primary, abandoning five of six counts against the Company, and continuing their action against the

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Company
on the one remaining count and adding an individual defendant. In response, the Company renewed its motions to dismiss or to transfer the case to the District of Delaware. In addition, the
Company filed a new adversary complaint with the bankruptcy court, seeking a declaration that the amended complaint, like the original complaint, is barred by the sale order. That matter remains
pending before the bankruptcy court. In September 2004, the plaintiffs filed a second amended complaint, that dropped the class allegations and added a second count against the individual
defendant. In October 2004, the Company renewed its motions to transfer the case to the District of Delaware or, alternatively, to dismiss the complaint. Those motions remain pending before the court.
In the second amended complaint, the plaintiffs claim that the Company conspired with Primary to wrongfully interfere with plantiffs' right to receive paid-for medical coverage that
Primary had allegedly promised them, in alleged violation of the Employee Retirement Income Security Act ("ERISA"). The plaintiffs seek an injunction ordering the Company to assume Primary's alleged
obligations to them and to pay them damages stemming from the alleged ERISA violations. The amount of alleged damages claimed is not specified. While there can be no assurance of the outcome of this
litigation, the Company does not believe that the disposition of these matters will have a material adverse effect on its results of operations or financial condition.

On
December 1, 2003, Primary filed a motion (the "Estate Costs Motion") in the U.S. Bankruptcy Court for the District of Delaware (the "U.S. Bankruptcy Court") seeking to compel
the Company to satisfy its purported obligation under the asset purchase agreement between the Company and Primary to pay $7.0 million of estate costs to Primary. On December 9, 2003,
the Company filed an objection to the relief requested in the Estate Costs Motion on the basis that the conditions giving rise to the Company's alleged obligations under the asset purchase agreement
to provide $7.0 million were not satisfied. By orders entered on December 29, 2003 and on December 31, 2003 (collectively the "Estate Cost Orders"), the U.S. Bankruptcy Court
granted the Estate Costs Motion, and directed the Company to fund the $7.0 million in estate costs. The Company filed a notice on February 6, 2004 appealing the U.S. Bankruptcy Court's
approval of the Estate Costs Motion (the "Appeal"). In connection with the Appeal, the Company was required to post a $7.5 million bond and provide cash collateral equal to that amount. The
Company posted this bond in January 2004. The Company had accrued $7.0 million for its potential liability for the estate costs as of December 31, 2003. The cash payment by the
Company to collateralize the bond in January 2004 was recorded in other current assets. In December, 2004, the Company and Primary entered into a mutually acceptable settlement of this and
other disputes, including those related to Primary's ability to put shares to the Company under certain circumstances. That settlement was approved by the Bankruptcy Court on January 10, 2005.
Under the terms of the settlement agreement, $5.5 million of the cash collateral, as well as other consideration, was paid to Primary in January 2005 with the balance of the cash
collateral, and certain other consideration, including the relinquishment of Primary's right to sell shares of the Company's Common Stock back to the Company under certain circumstances, being
received by the Company.

On
January 10, 2005, Leonard Shapiro filed a purported class action complaint in the Court of Chancery of the State of Delaware, New Castle County, on behalf of the stockholders
unaffiliated with the defendants, against Jacques A. Nasser, Joseph E. Antonini, Charles F. Auster, Paolo Cantarella, William J. Cosgrove, Lee M. Gardner, James W. Koven, Rick A. Lazio, Joseph G.
Michels, Stanley P. Roth, J. Michael Pocock and the Company. The complaint alleges, among other things, that the Company's directors violated their fiduciary duties by approving the merger agreement
without engaging in arm's length negotiations. The complaint seeks, among other things, to enjoin the defendants from completing the merger or, in the event the merger is completed, to rescind the
merger and to award compensatory damages. On January 18, 2005, the plaintiff filed an amended complaint in which the only substantive change was to add One Equity Partners as a defendant. The
amended complaint was served on the Company on February 28, 2005. The Company believes that the

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allegations
in the complaint and the amended complaint are without merit and intends to vigorously defend against this action.

The
Company owns 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 releases of hazardous substances. Certain of these laws and regulations may impose joint and several liabilities on the Company for the costs of
investigation or remediation of such contamination, regardless of fault or the legality of the disposal. There were no liabilities recorded by the Company for environmental liabilities as of
December 31, 2004 or December 31, 2003.

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 material adverse effect on its financial condition
or results of operations.

Predecessor:

On October 12, 2001, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court. The
Predecessor's subsidiaries incorporated outside of the United States were not included in the Filing. The Debtors continued to manage their properties and operate their business as
"debtors-in-possession" under the jurisdiction of the U.S. Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code (see Note 1 for
additional information).

The
Predecessor owned and operated facilities that were 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
Predecessor for the costs of investigation or remediation of such contamination, regardless of fault or the legality of original disposal.

The
Predecessor, together with other parties, was 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 Predecessor believed that its potential liability with respect to any site and with respect to all sites in the
aggregate would not have a materially adverse effect on its financial condition or results of operations.

Due
to a wide range of estimates with regard to response costs at those sites and various other uncertainties, the Predecessor was not able to firmly establish its ultimate liability
concerning those sites. In each case in which the Predecessor was able to determine the likely exposure, such amount was included in the Predecessor's reserve for environmental liabilities. Where a
range of comparably likely exposures exists, the Predecessor included in its reserve at least the minimum amount of the range. The Predecessor reviewed the analysis of the data that supported the
adequacy of this reserve on a quarterly basis. The reserve for such liability did not provide for associated litigation costs, which, if any, were expected to be inconsequential in comparison with the
amount of the reserve. This reserve did not take into account potential recoveries from third parties. These liabilities were not assumed by the Company in the Transaction and they remained
prepetition liabilities of the Predecessor.

Federal
law provides that PRPs may be held jointly and severally liable for response costs. Based on estimates of those costs and after consideration of the potential estimated
liabilities of other PRPs

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with
respect to those sites and their respective estimated levels of financial responsibility, the Predecessor did not believe its potential liability would be materially enlarged by the fact that
liability was joint and several.

The
Predecessor reviewed its recurring internal expenditures on environmental matters, as well as capital expenditures related to environmental compliance, on a monthly basis, and
reviewed its third-party expenditures on environmental matters on a quarterly basis. The Predecessor believed that these expenditures did not have a materially adverse effect on its financial
condition or results of operations.

Following
the issuance of the independent examiner's findings, former shareholders of the Predecessor filed a lawsuit on August 26, 2003 in the United States District Court for
the Southern District of New York alleging securities fraud against KPMG LLP, auditors for both the Predecessor and the Company, as well as certain other individuals who were former officers of the
Predecessor. The lawsuit alleges
that the financial statements of the Predecessor contained material misstatements and omitted to state material facts necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading, and that the defendants knowingly and/or recklessly caused such financial statements to be issued. Specifically, the examiner raised issues related to the
timing of issuing "going concern" opinions on the Predecessor's financial statements by KPMG LLP, the provision of valuation allowances on deferred tax assets in 2000 and 2001, and the release of
excess restructuring accruals in the Predecessor's financial statements in 2000. Since August 26, 2003, there have been a number of additional lawsuits filed that mirror the allegations raised
in this lawsuit and other lawsuits (which also name the Chief Financial Officer of the Company as a defendant) making similar allegations as well as lawsuits alleging ERISA violations.

17.   Related Party Transactions

The
Company paid approximately $5.3 million to OEP for financial advisory services and expenses performed in connection with the July 2002 Transaction. In addition, at the
time of the July 2002 Transaction the Company entered into a ten-year management agreement with OEP covering certain business and organizational strategy, and financial and
investment management services. Under the agreement, OEP will receive an annual retainer of $0.6 million, which is payable quarterly and has the option to provide any transaction-related
services for any acquisition, divestiture, financing or other transaction in which the Company may be involved for an additional fee. Jacques Nasser, Lee Gardner, Charles Auster and James Koven,
directors of the Company, are a senior partner, a senior partner, a partner and a vice president, respectively, of OEP.

In
2003, Mr. Nasser received $350,000 from the Company as compensation for his services as Non-executive Chair. In addition, Mr. Nasser purchased 1,061,010
shares of restricted stock pursuant to the Restricted Stock Purchase Program. In January 2004, the Board authorized the Company to begin to make an annual payment of $350,000 to
Mr. Nasser through OEP in compensation for his services to the Company as Non-executive Chair. In 2004, the Company made cash payments to OEP of approximately $1.0 million,
which included the annual retainer and the annual payment for Mr. Nasser.

In
2004, JPMorgan Chase and Co. merged with Bank One Corporation to form JPMorgan Chase. In 2004, the Company made cash payments for financial advisory services to JPMorgan Chase of
$0.3 million. One of the Company's directors, Mr. Lazio, is an Executive Vice President of JPMorgan Chase.

18.   Subsequent Event

On January 7, 2005, the Company entered into a merger agreement with Petters Group Worldwide, LLC and its wholly-owned subsidiary, Petters Consumer
Brands, LLC (collectively

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"Petters").
If the merger is completed, the Company will become a wholly-owned subsidiary of Petters Group Worldwide, LLC and each outstanding share of the Company's Common Stock will be
converted into the right to receive $12.08 in cash and, under certain circumstances, the right to receive additional cash consideration if the Company sells its instant digital printing assets for
consideration in excess of an amount determined pursuant to the merger agreement. OEP, the private equity firm that owns a majority of the Company's Common Stock, has entered into a voting agreement
with Petters to vote its shares during the term of the voting agreement in favor of the adoption of the merger agreement and to exercise its contractual "drag along" rights under the Amended and
Restated Securities Holders Agreement to require certain other shareholders, including all of the Company's directors and executive officers, to vote their shares in favor of the merger. The closing
of the merger is subject to various conditions.

The
Company has filed a preliminary proxy statement and will file a definitive proxy statement with the Securities and Exchange Commission ("SEC") to be used to solicit
stockholder approval of the proposed merger. The Company's stockholders are urged to read the definitive proxy statement and any other relevant documents filed with the SEC when they become available
because they will contain important information.

19.   Supplementary Financial Information (unaudited)

This section entitled Supplementary Financial Information has not been audited by the Company's independent auditors. The auditors of the Company have, however,
made a limited review of the quarterly data in accordance with standards established by the Public Company Accounting Oversight Board and that information is incorporated herein by reference. Because
the Company's independent auditors did not audit the quarterly data, they express no opinion on such data.

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Quarterly Financial Data
(in millions, except per share data) (unaudited)

Company:

|Year ended December 31, 2004      |  | First |       | Second |   | Third |  | Fourth |       | Year
|--------------------------------- |  | ----- | ----- | ------ | - | ----- |  | ------ | ----- | ----
|Net sales                         |  | $     | 171.5 |        | $ | 172.1 |  | $      | 152.6 |     
|Profit/(loss) from operations     |  |       | 15.7  |        |   | 17.5  |  |        | 11.6  |     
|Net earnings                      |  |       | 12.5  |        |   | 21.9  |  |        | 19.3  |     
|Basic earnings per common share   |  |       | 0.36  |        |   | 0.67  |  |        | 0.58  |     
|Diluted earnings per common share |  |       | 0.34  |        |   | 0.62  |  |        | 0.54  |     
|Cash dividends per common share   |  |       |      |        |   |      |  |        |      |     

|Year ended December 31, 2003                                |  | First |       | Second |   | Third |  | Fourth |       | Year
|----------------------------------------------------------- |  | ----- | ----- | ------ | - | ----- |  | ------ | ----- | ----
|Net sales                                                   |  | $     | 183.0 |        | $ | 195.8 |  | $      | 185.5 |     
|Profit from operations                                      |  |       | 22.9  |        |   | 29.7  |  |        | 27.9  |     
|Net earnings before extraordinary item                      |  |       | 16.2  |        |   | 16.5  |  |        | 31.2  |     
|Net earnings                                                |  |       | 16.2  |        |   | 16.5  |  |        | 33.8  |     
|Basic earnings before extraordinary item per
common share   |  |       | 0.47  |        |   | 0.47  |  |        | 0.94  |     
|Basic earnings per common share                             |  |       | 0.47  |        |   | 0.47  |  |        | 1.02  |     
|Diluted earnings before extraordinary item per
common share |  |       | 0.47  |        |   | 0.46  |  |        | 0.92  |     
|Diluted earnings per common share                           |  |       | 0.47  |        |   | 0.46  |  |        | 1.00  |     
|Cash dividends per common share                             |  |       |      |        |   |      |  |        |      |     

---

Note:
The sum of quarterly earnings per share amounts may not equal annual earnings per share amounts due to changes in number of weighted average shares outstanding.

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Schedule IIValuation and Qualifying Accounts        Polaroid Holding Company and Subsidiary Companies        (in millions)

Company:

Year ended December 31, 2004

|                                                   |  |   |      | Additions |   |     |  |  
|-------------------------------------------------- |  | - | ---- | --------- | - | --- |  | -
|
|Allowance for doubtful accounts and
cash discounts |  | $ | 10.0 |           | $ | 9.0 |  | 

Year ended December 31, 2003

|                                                   |  |   |      | Additions |   |      |  |  
|-------------------------------------------------- |  | - | ---- | --------- | - | ---- |  | -
|
|Allowance for doubtful accounts and
cash discounts |  | $ | 14.8 |           | $ | 14.7 |  | 

Period from Inception (see Note 1 to consolidated financial statements) to December 31, 2002

|                                                   |  |   |      | Additions |   |     |  |  
|-------------------------------------------------- |  | - | ---- | --------- | - | --- |  | -
|
|Allowance for doubtful accounts and
cash discounts |  | $ | 21.3 |           | $ | 7.2 |  | $

---

Primary PDC, Inc. and Subsidiary Companies 
(in millions)

Predecessor:

Period from January 1 to July 31, 2002

|                                                   |  |   |      | Additions |   |     |  |  
|-------------------------------------------------- |  | - | ---- | --------- | - | --- |  | -
|
|Allowance for doubtful accounts and
cash discounts |  | $ | 24.0 |           | $ | 3.7 |  | $

---

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

The Company's management conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures under the
supervision of the Chief Executive Officer and the Chief Financial Officer. Based on the Company's evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of
December 31, 2004, the Company's disclosure controls and procedures provided reasonable assurance that the material information that will be required to be included in the Company's SEC reports
is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms. There are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can
only provide reasonable assurance of achieving their control objectives.

As
of the date of filing this Form 10-K, the Company is in the process of conducting an evaluation of its internal control over financial reporting in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires an annual management report on the effectiveness of the Company's internal control over financial reporting and for
the Company's independent auditor to attest to this report. Management has not yet completed its assessment and has not yet identified any deficiencies, which, individually or in the aggregate, would
constitute a material weakness. The Company is eligible for the 45 day extension of time allowed by the SEC for companies of a certain size to file a report on the effectiveness of its internal
control over financial reporting and the auditor's attestation. The Company has elected to utilize this 45 day extension and, therefore, this Form 10-K does not include these reports.

There
has been no change in the Company's internal control over financial reporting during the Company's fiscal year ended December 31, 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 9B. Other Information

None

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PART III

Item 10. Directors and Executive Officers of the Registrant

Directors of the RegistrantThe following table lists the names, ages and positions held by the
Company's directors and executive officers. Officers are elected annually by the Board of Directors. No family relationships exist between any of the directors or officers. Refer to Item 13. Certain Relationships and Related
Transactionsfor additional information with regard to voting arrangements for the election of members to the
Company's Board of Directors.

|Name                |  | Age |  | Position                                                   
|------------------- |  | --- |  | -----------------------------------------------------------
|Jacques A. Nasser   |  | 57  |  | Director and Non-Executive Chairman                        
|Joseph E. Antonini  |  | 63  |  | Director                                                   
|Charles F. Auster   |  | 53  |  | Director                                                   
|Paolo Cantarella    |  | 60  |  | Director                                                   
|William J. Cosgrove |  | 59  |  | Director                                                   
|Lee M. Gardner      |  | 58  |  | Director                                                   
|James W. Koven      |  | 31  |  | Director                                                   
|Rick A. Lazio       |  | 47  |  | Director                                                   
|Joseph G. Michels   |  | 40  |  | Director                                                   
|Stanley P. Roth     |  | 68  |  | Director                                                   
|J. Michael Pocock   |  | 54  |  | Director, President and Chief Executive Officer            
|William L. Flaherty |  | 57  |  | Executive Vice President and Chief Financial Officer       
|Robert B. Gregerson |  | 45  |  | Vice President and General Manager, Americas and
E-Commerce
|Gianfranco Palma    |  | 48  |  | Vice President, International and Eyewear                  
|Ira H. Parker       |  | 48  |  | Vice President, Chief Legal Officer and Secretary          
|Mark H. Payne       |  | 37  |  | Vice President, Operations                                 

Jacques A. Nasserwas elected director and non-executive Chairman of the Board in November 2002. Since
November 2002, Mr. Nasser has been a Senior Partner of OEP. From 1998 to 2001 he served as a member of the Board of Directors and as President and Chief Executive Officer of Ford Motor
Company. He also serves as a Director of News Corporation's British Sky Broadcasting Group and on the International Advisory Board of Allianz A.G., Quintiles Transnational, Brambles Industries
Limited, and Brambles Industries plc.

Joseph E. Antoniniwas elected director in March 2003. Since retiring as President, Chief Executive Officer, and Chairman of the
Board of Kmart Corporation in 1995, Mr. Antonini has been investing in and advising various small businesses on the subjects of operations, sales and marketing. He also served on the Board of
Directors and Audit Committee of Shell Oil Company from 1990 to 2001.

Charles F. Austerwas elected director in June 2002. Since 2002, Mr. Auster has been a Partner of OEP. From 2000 to 2001,
Mr. Auster was the Director, President and Chief Executive Officer of Infocrossing, Inc. (an information technology infrastructure outsourcing company). From 1998 to 2000,
Mr. Auster was an Executive Vice President, Chief Operating Officer and a director of IXNET, Inc., (a telecommunications company). From 1995 to 1998, he was the President and Chief
Executive Officer and a Director of Voyager Networks (a server hosting and data networking company). He is also a Director of Video Network Communications, Inc. (a company that designs,
develops and markets video distribution systems), L'Enfant Trust (a charity which holds and administers conservation easements to protect historic buildings and neighborhoods), Last
Mile Connections (a company that builds and operates competitive carrier networks and exchange markets), Vercuity Corporation (a telecom expense

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management
provider), and WestCom Corporation (a private telecommunications company that provides network services to financial services firms).

Paolo Cantarellawas elected director in July 2003. Mr. Cantarella was Chief Executive Officer of Fiat S.p.A. from 1996 to
2002. He has served on the Board of Directors of Alcatel, CNH N.V., and several other European companies and was president of the European Automobile Manufacturers Association
in 2000 and 2001. Mr. Cantarella currently serves on the Board of Directors of the Organizing Committee of the XX Olympic 2006 Winter Games in Torino (TOROC), and on the Board of Directors of
Terna S.p.A. (a company that specializes in the operation, maintenance and development of national electricity transmission grids).

William J. Cosgrovewas elected director in October 2003. He worked for Ford Motor Company from 1972 until he retired in
February 2003. He was the Corporate Controller of Ford from 1996 until 1998. In December 1998, he was elected a vice-president of Ford for Corporate Strategy. In
August 1999, he was appointed CFO and Chief of Staff, Premier Automotive Group, Ford Motor Company. Mr. Cosgrove was on Ford's Policy and Strategy Committee, Product Committee and
Operating Committee. He has done consulting for Jaguar Racing and was also on the board of Jaguar Racing (ultimate owner, Ford Motor Company) and numerous subsidiaries of Ford Motor Company. He is on
the Advisory Board of Hartwell, Plc, a privately owned company headquartered in England.

Lee M. Gardnerwas elected director in October 2003. Since July 2001 Mr. Gardner has been Senior Partner of OEP. From 1987
to 2001, Mr. Gardner was President and Chief Operating Officer of MascoTech, Inc. (a manufacturer of metalworked components for the automotive and transportation industry). MascoTech had
revenues of $1.8 billion and was publicly traded prior to being taken private in November 2000. Before joining MascoTech in 1987, Mr. Gardner spent 14 years with
Borg-Warner Corporation. Mr. Gardner served on the board of directors of Metaldyne Corporation (manufacturer of automotive components) and MSX International, Inc. (provider
of technology-driven business services to clients primarily from the auto industry). He is a director of Mauser-Werke GmbH (a Germany based OEP portfolio company that is a supplier of industrial
packaging services).

James W. Kovenwas elected director in July 2002. Since 2001, Mr. Koven has been a vice president of OEP. During 2001,
Mr. Koven was an Associate, Investment Banking, at Wm Sword & Company. From 1993 through 2000, Mr. Koven was a member of the U.S. National Rowing Team and the U.S. Olympic Rowing
Team. In 1999, he was an Investment Banking Analyst at State Street Capital Corporation. He is also a director of Rotable Asset Management LLC (a company providing long-lived spare parts
management services to airlines).

Rick A. Laziowas elected director in July 2002. Since October 2004, Mr. Lazio has served as an Executive Vice
President of JPMorgan Chase. He also serves as a member of JPMorgan Chase's Executive Committee. JPMorgan Chase is the ultimate parent of OEP. Prior to joining JPMorgan Chase, Mr. Lazio served
as President and Chief Executive Officer of the Financial Services Forum, an organization formed in 2000 by the chief executive officers of twenty large financial institutions to shape the financial
future of the nation. From 1992 to 2000, Mr. Lazio served as a member of the U. S. House of Representatives. He is a director of TB Woods Corporation (an electronic and mechanical industrial
power transmission products company) as well as the World Rehabilitation Fund and Audubon New York. Mr. Lazio also serves on Advisory Committees of The Ad Council.

Joseph G. Michelswas elected director in December 2002. Since 2000, Mr. Michels has been Director for Research Initiatives
at the Princeton Institute for the Science and Technology of Materials, Princeton University. From 1998 to 2000 he was Science Policy Advisor to U.S. Senator Richard Lugar; from 1998 to 1999 he was
Instrument Operations Scientist at Smithsonian Astrophysical Observatory; and from 1997 to 1998 he was awarded a Congressional Science Fellowship and served as science policy advisor to U.S. Senator
Joseph Lieberman. Since January 2004, Mr. Michels has been Director and President of The Society for Environmental and Energy Research (SEER), a charitable, scientific and

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educational
not-for-profit corporation founded to promote the exploration and development of new technologies which utilize renewable energy resources. Mr. Michels
received his Ph.D. in physics from the University of Oxford in 1994.

Stanley P. Rothwas elected director in July 2002. Since 1976, Mr. Roth controls and has been the Chairman of North American
Capital Corp. (a private merchant banking firm). Mr. Roth is the Chairman of Royal-Pioneer Industries, Inc.; Director and non-executive Vice Chairman of Delta & Pine
Land Company (a cotton seed company) and Chairman of its Audit Committee; and a Director of both Hollis Corp. (a cotton warehousing and packaging company) and GPC International, Inc. (an art
materials and supplies and fine writing instruments company). He is also a certified public accountant.

J. Michael Pocockwas elected director, President and Chief Executive Officer of the Company effective March 1, 2003. Previously,
Mr. Pocock held various senior leadership positions at Compaq Computer Corporation including: from 2001 to 2002 he was Vice President of Corporate Strategy; Vice President and General Manager
of the Commercial Products Group from 1999 to 2001; and from 1996 to 1999 he was Vice President and General Manager of North America Sales. Earlier in his career, Mr. Pocock served in a variety
of management positions with increasing responsibility during 10 years at General Electric Company. He was also a member of a leadership team that founded Epson America. Mr. Pocock also
serves as Director and member of the Audit Committee of Stratus Technologies, Inc. (a company that provides computer servers.)

William L. Flahertyjoined the Company as Executive Vice President and Chief Financial Officer in August 2002. Prior to joining the
Company, from June 2001 until July 2002, Mr. Flaherty served as Executive Vice President and Chief Financial Officer of Primary. Prior to that, from 1996 to 2000,
Mr. Flaherty served as Chief Financial Officer at Avid Technology, Inc. (a digital imaging systems company).

Robert B. Gregersonjoined the Company as Vice President and General Manager, Americas and E-Commerce in May 2003.
Prior to joining the Company, from January 2001 to May 2003, Mr. Gregerson was President of PC Connection Sales Corporation, a wholly owned subsidiary of PC
Connection, Inc. (a direct marketer of computers). From November 1997 to December 2000, he held
various positions including his last position as Vice President, North America Partner Sales and Marketing at Compaq Computer Corporation.

Gianfranco Palmajoined the Company as Vice President in August 2002. Mr. Palma is currently Vice President, International
and Eyewear. Prior to joining the Company, he was employed by Primary in various management positions at Polaroid (Italia) S.p.A.: from January 2001 to August 2002 he served as Vice
President, Europe, European Distributor Markets and Eyewear; from January 2000 to January 2001 he was Vice President, Europe; from 1999 to 2000 he was Vice President Southern and Mid
European Clusters; from 1997 to 1998 he was Lead General Manager, Southern European Cluster and European Photo Retail.

Ira H. Parkerjoined the Company as Vice President, Chief Legal Officer and Secretary in February 2004. Prior to joining the
Company he was employed by Genuity, Inc. (an Internet infrastructure services provider), as President and Chief Executive Officer from February 2003 to December 2003, and
Executive Vice President, General Counsel and Corporate Secretary from June 2000 to February 2003. He was Vice President and Deputy General Counsel at GTE Corporation and General Counsel
of GTE Internetworking from November 1997 to June 2000. From July 1993 to November 1997, he was a Partner in the Washington DC office of the law firm of Alston &
Bird.

Mark H. Paynejoined the Company as Vice President, Operations Planning in May 2003 and became Vice President, Operations in
March 2004. Prior to joining the Company, from September 2002 to May 2003, Mr. Payne was Director of Product Development and Strategic Sales at SymphonyRPM (a performance
management solutions company). From June 1998 to September 2002, Mr. Payne held

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various
positions at Compaq Computer Corporation: from October 2001 to September 2002 he was Executive Director, Order Management Integration for the Hewlett Packard merger; from
April 2001 to October 2001 he was Executive Director, North America Operations; from March 2000 to April 2001 he was Executive Director, Commercial Direct Initiative; and
from June 1998 to March 2000 he was Director, North America Distributor Sales Operations.

Meetings and Committees of the Board of Directors

TheAudit Committeewas established to assist the Board in monitoring the adequacy and effectiveness of the
internal and external audit functions, the Company's system of internal accounting controls, the Company's financial accounting and reporting, and the adequacy and effectiveness of systems for
ensuring the Company's compliance with federal, state and local laws and regulations. The Audit Committee meets at least quarterly with management and the Company's independent auditors to review the
Company's quarterly financial statements. It also reviews and approves fees paid to auditors. The Audit Committee operates under a written charter adopted by the Board of Directors. The
members of the Audit Committee are: William J. Cosgrove, Chairman; Joseph E. Antonini, Lee M. Gardner, James W. Koven, and Stanley P. Roth. The Board of Directors has determined that William J.
Cosgrove is an "audit committee financial expert" as defined by Securities and Exchange Commission regulations and is "independent" as defined by the listing standards of the New York Stock Exchange.

The Compensation Committeewas established to assist the Board in determining the remuneration of the Company's officers and other senior
personnel, including base salary and incentive compensation for the Chief Executive Officer and other Company officers. The Compensation Committee administers the Company's stock compensation plans
and proposes the adoption of various employee benefit plans. The Compensation Committee operates under a written charter adopted by the Board of Directors. The members of the Compensation Committee
are: Joseph E. Antonini, Chairman; Charles F. Auster, Paolo Cantarella and Lee M. Gardner.

TheGovernance/Nominating Committeewas established to assist the Board in formulating, reviewing and recommending governance standards to
the Board and reviews director nominees. The Governance/Nominating Committee operates under a written charter adopted by the Board of Directors. The Committee will consider director nominations
brought by stockholders if properly submitted in compliance with the Company's bylaws and Delaware General Corporation Law. Stockholder recommendations must be in writing, addressed to the Corporate
Secretary at Polaroid Holding Company, 1265 Main Street, Waltham, Massachusetts 02451, and should include a statement describing the qualifications and experience of the proposed candidate and the
basis for nomination. The members of the Governance/Nominating Committee are: Rick Lazio, Chairman; Charles F. Auster, William J. Cosgrove, Joseph G. Michels and J. Michael Pocock.

During
2004, each director attended not less than 75% of the meetings of the Board and the committees of which they were members, except that Mr. Pocock only attended two of the
three (66.67%) Governance Committee meetings in 2004.

Executive officers of the RegistrantThe following table lists the names, ages and positions held by the Company's executive
officers. Officers are elected annually by the Board of Directors. No family relationships exist between any of the officers or the directors of the Company. Refer to Item 13.

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Certain Relationships and Related Transactionsfor additional information with regard to voting arrangements for the election of members to the Company's Board of Directors.

|Name                |  | Age |  | Position                                                   
|------------------- |  | --- |  | -----------------------------------------------------------
|J. Michael Pocock   |  | 54  |  | Director, President and Chief Executive Officer            
|William L. Flaherty |  | 57  |  | Executive Vice President and Chief Financial Officer       
|Robert B. Gregerson |  | 45  |  | Vice President and General Manager, Americas and
E-Commerce
|Gianfranco Palma    |  | 48  |  | Vice President, International and Eyewear                  
|Ira H. Parker       |  | 48  |  | Vice President, Chief Legal Officer and Secretary          
|Mark H. Payne       |  | 37  |  | Vice President, Operations                                 

J. Michael Pocockwas elected director, President and Chief Executive Officer of the Company effective March 1, 2003. Previously,
Mr. Pocock held various senior leadership positions at Compaq Computer Corporation including: from 2001 to 2002 he was Vice President of Corporate Strategy; Vice President and General Manager
of the Commercial Products Group from 1999 to 2001; and from 1996 to 1999 he was Vice President and General Manager of North America Sales. Earlier in his career, Mr. Pocock served in a variety
of management positions with increasing responsibility during 10 years at General Electric Company. He was also a member of a leadership team that founded Epson America. Mr. Pocock also
serves as a director and as a member of the Audit Committee of Stratus Technologies, Inc. (a company that provides computer services).

William L. Flahertyjoined the Company as Executive Vice President and Chief Financial Officer in August 2002. Prior to joining the
Company, from June 2001 until July 2002, Mr. Flaherty served as Executive Vice President and Chief Financial Officer of Primary. Prior to that, from 1996 to 2000,
Mr. Flaherty served as Chief Financial Officer at Avid Technology, Inc. (a digital imaging systems company).

Robert B. Gregersonjoined the Company as Vice President and General Manager, Americas and E-Commerce in May 2003.
Prior to joining the Company, from January 2001 to May 2003, Mr. Gregerson was President of PC Connection Sales Corporation, a wholly owned subsidiary of PC
Connection, Inc. (a direct marketer of computers). From November 1997 to December 2000, he held various positions including his last position as Vice President, North America
Partner Sales and Marketing at Compaq Computer Corporation.

Gianfranco Palmajoined the Company as Vice President in August 2002. Mr. Palma is currently Vice President, International
and Eyewear. Prior to joining the Company, he was employed by Primary in various management positions at Polaroid (Italia) S.p.A.: from January 2001 to August 2002 he served as Vice
President, Europe, European Distributor Markets and Eyewear; from January 2000 to January 2001 he was Vice President, Europe; from 1999 to 2000 he was Vice President Southern and Mid
European Clusters; from 1997 to 1998 he was Lead General Manager, Southern European Cluster and European Photo Retail.

Ira H. Parkerjoined the Company as Vice President, Chief Legal Officer and Secretary in February 2004. Prior to joining the
Company he was employed by Genuity, Inc. (an Internet infrastructure services provider), as President and Chief Executive Officer from February 2003 to December 2003, and
Executive Vice President, General Counsel and Corporate Secretary from June 2000 to February 2003. He was Vice President and Deputy General Counsel at GTE Corporation and General Counsel
of GTE Internetworking from November 1997 to June 2000. From July 1993 to November 1997, he was a Partner in the Washington DC office of the law firm of Alston &
Bird.

Mark H. Paynejoined the Company as Vice President, Operations Planning in May 2003 and became Vice President Operations in
March 2004. Prior to joining the Company, from September 2002 to May 2003, Mr. Payne was Director of Product Development and Strategic Sales at SymphonyRPM

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(a
performance management solutions company). From June 1998 to September 2002, Mr. Payne held various positions at Compaq Computer Corporation: from October 2001 to
September 2002 he was Executive Director, Order Management Integration; for the Hewlett Packard merger; from April 2001 to October 2001 he was Executive Director, North America
Operations; from March 2000 to April 2001 he was Executive Director, Commercial Direct Initiative; and from June 1998 to March 2000 he was Director, North America
Distributor Sales Operations.

Code of Ethics

The Company has a code of ethics which is on the Company's website at www.polaroid.com/media/com/pdfs/ethics_a917.pdf.

Section 16 Beneficial Ownership

Based solely on its review of the Forms 3, 4 and 5 furnished to the Company for the fiscal year ended December 31, 2004, the Company has determined that
its directors, executive officers and greater than 10% beneficial owners complied with all applicable Section 16 filing requirements, except as described below.

Messrs. Auster,
Gardner, Koven and Roth, each a director of the Company, and One Equity Partners LLC and certain of its affiliates, which together own more than 10% of the
Company's Common Stock, failed to timely report on Form 4 the redemption of their respective shares of the Company's Series A Preferred Stock on December 27, 2004. Each of these
transactions were subsequently reported by such persons on Form 4.

Item 11. Executive Compensation

Summary Compensation Table

The following table sets forth the compensation paid to the Company's executive officers in 2004 and 2003.

|                                                                                |  |           |  | Annual Compensation
|------------------------------------------------------------------------------- |  | --------- |  | -------------------
|
|J. Michael Pocock
President and Chief Executive Officer                         |  | 2004
2003 |  | 636,935
484,630    
|William L. Flaherty
Executive Vice President and Chief Financial Officer        |  | 2004
2003 |  | 419,228
391,800    
|Robert B. Gregerson
Vice President and General Manager, Americas and E-Commerce |  | 2004
2003 |  | 347,132
189,111    
|Gianfranco Palma
Vice President, International and
Eyewear (2) (7)              |  | 2004
2003 |  | 388,482
330,543    
|Ira H. Parker
Vice President, Chief Legal Officer
and Secretary                 |  | 2004      |  | 281,250            

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Retirement Plans

All named executive officers, other than Mr. Palma, are employees of Polaroid living in the United States and participants in the Polaroid Savings Plan.
This plan contains provisions for rollovers from other qualified retirement plans; pre-tax employee contributions pursuant to Section 401(k) of the Code; a Company match of up to 3%
of eligible employee cash contributions pursuant to Section 401(k) of the Code beginning in 2003, after-tax employee contributions; and discretionary Company cash contributions.

Mr. Gianfranco
Palma is a participant in the Italian compulsory contractual pension plan that operates in addition to the national/government social security pension plan
(collectively, the "Plan"). Upon retirement, Mr. Palma is guaranteed a lump sum or a monthly payment under the Plan, in addition to his social security pension. The contribution to the Plan is
a fixed percentage paid by Polaroid (Italia) S.p.A. and a fixed percentage withheld from Mr. Palma's gross salary. The fixed contribution percentage is 3.7% of Mr. Palma's gross salary.
Mr. Palma's contribution percentage is 0.7% of his gross salary.

Board of Directors Compensation

Directors not affiliated with One Equity Partners LLC or the Company ("Outside Directors") receive $3,500 per board meeting attended in person; $1,000 per board
committee meeting attended in person as a regular member; $2,000 per board committee meeting attended in person as a chairman; and a $5,000 additional annual stipend is paid to the Audit Committee
Chairman. Also, Outside Directors who are members of the Technology Investments Committee, an operating committee of the

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Company,
receive $1,000 per meeting attended in person. In 2004, the Company paid $350,000 to Mr. Nasser through OEP in compensation for his services to the Company as Non-executive
Chair.

Employment Agreements

Effective March 1, 2003, Polaroid entered into a three-year employment contract with Mr. Pocock, as its President and Chief Executive
Officer. This contract is automatically renewed unless either party gives the other 180 days prior written notice of its or his intention not to renew this Agreement. In addition to the normal
benefits provided to any executive, Mr. Pocock's contract provides if his employment is terminated without "Cause" or for "Good Reason" (as each such term is defined), and if after a
30 day notice period the breach is not cured, Mr. Pocock is entitled to receive severance benefits for a twenty-four month period and cash equal to 200% of his base pay
(which was equal to $618,000 as of December 31, 2004), payable in two installments, half on termination and the second payment one year following Mr. Pocock's termination. In addition to
the cash severance payment, Mr. Pocock shall be entitled to a pro rata annual bonus, medical, dental, disability and life insurance for the severance period and outplacement services up to
$35,000.

On
July 31, 2002, Polaroid entered into a three-year employment contract with William L. Flaherty as its Executive Vice President and Chief Financial Officer. In
addition to the normal benefits provided to any executives at this level, his contract provides: if his employment is terminated without "Cause" or for "Good Reason" (as each such term is defined),
and if after a 30 day notice period the breach is not cured, Mr. Flaherty is entitled to receive severance benefits for an eighteen month severance period. These benefits include base
salary (which was equal to $406,000 as of December 31, 2004) continuation and medical, dental, disability and life insurance for the severance period. In addition, Mr. Flaherty is
entitled to a pro rata annual bonus in the year of termination and outplacement services up to $35,000.

On
May 1, 2003, Polaroid entered into an employment agreement with Robert B. Gregerson, as its Vice President, General Manager, Americas which was subsequently amended on
January 3, 2005. In addition to the normal benefits provided to any executives at this level, Mr. Gregerson's agreement, as amended, provides if his employment is terminated without
"Cause" or for "Good Reason" (as such each such term is defined) on or before December 20, 2005, Mr. Gregerson is entitled to receive severance benefits for a twelve month severance
period. These benefits include base salary continuation (which was $336,000 as of December 31, 2004) and medical, dental, and life insurance for the severance period. In addition,
Mr. Gregerson is entitled to a pro rata annual bonus in the year of termination and outplacement services up to $15,000.

On
January 27, 2004, the Company entered into an employment agreement with Ira H. Parker as the Company's Vice President, Chief Legal Officer and Secretary which was subsequently
amended on January 3, 2005. In addition to the normal benefits provided to any executives at this level, Mr. Parker's agreement, as amended, provides if his employment is terminated
without "Cause" or for "Good Reason" (as each such such term is defined), on or before December 20, 2005, Mr. Parker is entitled to receive severance benefits for a twelve month
severance period. These benefits include base salary continuation (which was $325,000 as of December 31, 2004) and medical, dental, and life insurance for the severance period. In addition,
Mr. Parker is entitled to a pro rata annual bonus in the year of termination.

On
May 7, 2003, Polaroid entered into an employment agreement with Mark H. Payne as Vice President, Operations which was subsequently amended on January 3, 2005. In
addition to the normal benefits provided to any executives at this level, Mr. Payne's agreement, as amended, provides if his employment is terminated without "Cause" or for "Good Reason" (as
each such term is defined) on or before December 20, 2005, Mr. Payne is entitled to receive severance benefits for a twelve month severance period. These benefits include base salary
continuation (which was $263,000 as of December 31, 2004) and medical, dental and life insurance for the severance period. In addition, Mr. Payne is entitled to a pro rata annual bonus
in the year of termination.

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On April 9, 2004, Polaroid (Italia) S.p.A., one of the consolidated subsidiaries of Holding, entered into an employment agreement with Gianfranco Palma, Vice President,
International and Eyewear. In addition to the normal benefits provided to any executives at this level, Mr. Palma's agreement provides a base salary of 310,565 euros as may be adjusted from
time to time by the Board of Directors and the use of a Company car.

Executive Programs

Restricted Stock Purchase Program

Refer to "Stockholder Agreement" in Item 13.Certain Relationships and Related Transactions, below.

Annual Bonus Awards

All of the Company's executive officers and other senior managers are eligible for annual cash bonuses pursuant to the Polaroid Executive Incentive Plan. The
primary factor that determines whether an award is paid is the Company's corporate performance based on its "Revenue," "EBITDA" and "Year-End Adjusted Net Cash" (as such terms are
defined). For senior managers who are responsible for regional performance, certain corporate and regional factors are considered. Factors that are considered in the region include the regional
revenue and operating profit. In 2004, the Company did not achieve the relevant targets but the Board of Directors elected to award discretionary bonuses to the Company's employees, including the
Company's executive officers and senior managers. These bonuses are expected to be paid to the Company's executive officers and certain senior managers in one payment in June of 2005 and to the
remainder of the Company's senior managers in equal installments during February and June of 2005.

Additional Information with Respect to Compensation Committee

In December 2003, the Company established a Compensation Committee. During 2004, decisions regarding compensation of officers were made by the entire Board
of Directors. No officer or employee participated in these decisions.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table contains certain information regarding the beneficial ownership of the Company's outstanding Common Stock as of March 10, 2005, by each
person or entity who is known by the Company to own beneficially more than 5% of the Common Stock of the Company, each of the named executive officers of the Company, executive officers and each
director of the Company; and all Directors and Executive Officers as a group. The table does not show the Common Stock beneficially owned by Petters pursuant to the Voting Agreement. The table does
not include shares of the Company's Common Stock subject to options that are not currently exercisable or will not become exercisable within 60 days of March 10, 2005. Individuals have
sole voting and investment power with regard to the stock unless otherwise indicated in the footnotes.

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|                                                                      |  | Common Stock | 
|--------------------------------------------------------------------- |  | ------------ | 
|
|Directors and Named Executive Officers (2)                            |  |              | 
|Jacques A. Nasser                                                     |  | 1,061,010    | 
|Joseph E. Antonini                                                    |  | 42,440       | 
|Charles F. Auster                                                     |  | 75,000       | 
|Paolo Cantarella                                                      |  | 42,440       | 
|Lee M. Gardner                                                        |  | 16,667       | 
|James W. Koven                                                        |  | 4,167        | 
|Rick A. Lazio                                                         |  | 42,440       | 
|Joseph G. Michels                                                     |  | 42,440       | 
|Stanley P. Roth (3)                                                   |  | 72,095       | 
|William J. Cosgrove (4)                                               |  | 35,128       | 
|J. Michael Pocock                                                     |  | 707,340      | 
|William L. Flaherty                                                   |  | 442,090      | 
|Gianfranco Palma                                                      |  | 170,730      | 
|Robert B. Gregerson                                                   |  | 353,670      | 
|Ira H. Parker (5)                                                     |  | 120,016      | 
|Mark H. Payne                                                         |  | 176,830      | 
|All Directors and Executive Officers as a Group (16 persons)          |  | 3,362,062    | 
|Five Percent Owners                                                   |  |              | 
|One Equity Partners LLC (1) (6)
320 Park Avenue
New York, NY 10022    |  | 18,745,000   | 
|Primary PDC, Inc.
1265 Main Street
Waltham, MA 02451                  |  | 1,890,804    | 
|Petters Consumer Brands, LLC (7)
4400 Baker Road
Minnetonka, MN 55343 |  | 3,980,703    | 

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All
officers and directors other than Messrs. Koven, Auster and Gardner own their shares pursuant to a Restricted Stock Award with graduated vesting. As of March 10, 2005,
62.5% of the shares listed above are vested for Messrs. Nasser, Antonini, Lazio, Michels, Roth, Cosgrove, Pocock, Flaherty and Palma; 37.5% of the shares listed above are vested for
Messrs. Cantarella, Payne and Gregerson.; and 25% of the shares listed above are vested for Mr. Parker.

2004 Equity Compensation Plan Information

|                                                           |  | (a)     |  | (b) |      | (c)
|---------------------------------------------------------- |  | ------- |  | --- | ---- | ---
|
|Equity compensation plans approved by security holders     |  | 752,921 |  | $   | 7.33 |    
|Equity compensation plans not approved by security holders |  |        |  |     |     |    
|                                                           |  |         |  |     |      |    
|Total                                                      |  | 752,921 |  | $   | 7.33 |    
|                                                           |  |         |  |     |      |    

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Item 13. Certain Relationships and Related Transactions

The Company paid approximately $5.3 million to OEP for financial advisory services and expenses performed in connection with the July 2002
Transaction. In addition, at the time of the July 2002 Transaction the Company entered into a ten-year management agreement with OEP covering certain business and organizational
strategy, and financial and investment management services. Under the agreement, OEP will receive an annual retainer of $0.6 million, which is payable quarterly and has the option to provide
any transaction-related services for any acquisition, divestiture, financing or other transaction in which the Company may be involved for an additional fee. Jacques Nasser, Lee Gardner, Charles
Auster and James Koven, directors of the Company, are a senior partner, a senior partner, a partner and a vice president, respectively, of OEP.

In
2003, Mr. Nasser received $350,000 from the Company as compensation for his services as Non-executive Chair. In addition, Mr. Nasser purchased 1,061,010
shares of restricted stock pursuant to the Restricted Stock Purchase Program. In January 2004, the Board authorized the Company to begin to make the annual payment of $350,000 to
Mr. Nasser through OEP in compensation for his services to the Company as Non-executive Chair. In 2004, the Company made cash payments to OEP of approximately $1 million,
which included the annual retainer and the annual payment for Mr. Nasser.

In
2004, JPMorgan Chase and Co. merged with Bank One Corporation to form JPMorgan. In 2004, the Company made cash payments for advisory services to JPMorgan Chase of $0.3 million.
One of the Company's directors, Mr. Lazio, is an Executive Vice President of JPMorgan Chase.

Stockholders Agreement

General

Holding and OEP have entered into an Amended and Restated Securities Holders Agreement (the "Securities Holders Agreement") among the Company, OEP and certain
members of management who have purchased stock pursuant to the Restricted Stock Purchase Program described below. Each party to the Securities Holders Agreement other than Holding is called an
"Investor." The Securities Holders Agreement contains provisions regarding the voting, sale or other transfer of the securities governed thereby and also contains provisions applicable to a sale of
Holding. These provisions are summarized below. The following description of the material terms of the Securities Holders Agreement is qualified
in its entirety by the Securities Holders Agreement, a copy of which is filed as an exhibit hereto. Individuals agreeing to be bound by its terms signed the initial document or a joinder.

In
connection with the definitive merger agreement between the Company and Petters, OEP has agreed to vote its shares of Common Stock of the Company in favor of the merger and to
exercise its right under the Securities Holders Agreement to require all of the other Investors to vote their shares in favor of the merger as described below.

Transfer Restrictions

Pursuant to the Securities Holders Agreement, an Investor (other than OEP) can only transfer Holding's securities to immediate family members and certain trusts
for estate planning purposes.

Sale of the Company

If OEP approves a sale of Holding (whether by merger, consolidation, sale of outstanding capital stock, sale of all or substantially all of its assets or
otherwise) prior to Holding's first qualified public offering, all of the other Investors can be required to vote in favor of such sale of Holding and sell their shares on the same terms as OEP.
Additionally, all of the other Investors agree to take all necessary and desirable actions in connection with the consummation of the sale of Holding (including foregoing dissenters' and appraisal
rights). A "qualified public offering" is a public offering that results

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in
proceeds to Holding of at least $50,000,000. In connection with the definitive merger agreement between the Company and Petters, OEP has agreed to vote its shares of Common Stock of the Company in
favor of the merger and to exercise its right to require all of the other Investors to vote their shares in favor of the merger.

Sale of Company Common Stock by OEP

Except in certain instances, OEP may not sell any of its Common Stock unless all other Investors are given the opportunity to sell their shares on a pro rata
basis and on the same terms as OEP. Instances where OEP can sell its Common Stock without triggering any of these rights held by other Investors include (i) sales of Common Stock that in the
aggregate do not exceed 15% of the outstanding
Common Stock, (ii) sales in connection with a sale of Holding, (iii) sales in a public offering and (iv) sales to OEP affiliates and permitted transferees of OEP.

Voting Agreements

So long as OEP and its affiliates and permitted transferees own 35% of the outstanding Common Stock, each Investor agrees to take all necessary actions to ensure
that the size and composition of the Board of Directors of the Company is consistent with OEP's designation (including resignations and replacements).

Termination

The rights of OEP in connection with a sale of Holding, the rights of Investors in connection with a sale of Common Stock by OEP, and the voting agreement
provisions in the Securities Holders Agreement terminate upon the first qualified public offering by the Company.

Management Investors

The Company implemented a Restricted Stock Program in 2003. Directors and Officers of the Company who purchase Common Stock pursuant to the Restricted Stock
Purchase Program are called "Management Investors." The purchase price of such shares is nominal. Pursuant to the Securities Holders Agreement, the Company has special rights with regards to the
Common Stock held by the Management Investors. For example, the Company has the right to repurchase the Common Stock held by Management Investor if such Management Investor leaves the Company. If such
Management Investor's employment or service on the Board of Directors is terminated for Cause, the purchase price for his or her Common Stock is the lower of fair market value as determined by the
Board of Directors or the original cost of such Common Stock to the Management Investor. If such Management Investor's employment or service on the Board of Directors is terminated for any other
reason, the purchase price for his or her vested shares of Common Stock will be the fair market value of such shares, and the purchase price for his or her unvested shares will be $0.04 per share (as
subsequently adjusted for any stock dividend upon, or subdivision or combination of, or like change). Twenty-five percent of the total number of shares granted to each Management Investor
vests on the anniversary of the Management Investor's Closing Date (as defined in the Securities Holders Agreement) and 12.5% of the total grant vests each six months thereafter.

Registration Rights Agreement with OEP and Other Investors

General

Holding and OEP have entered into an Amended and Restated Registration Rights Agreement (the "Registration Rights Agreement") among the Company, OEP and certain
members of management who have purchased stock pursuant to the Restricted Stock Purchase Program described above. The following description of the material terms of the Registration Rights Agreement
is

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qualified
in its entirety by the Registration Rights Agreement, a copy of which is filed as an exhibit hereto. Individuals agreeing to be bound by its terms signed the initial document or a joinder.

Piggyback Registration Rights

The Registration Rights Agreement grants investors who are a party to the agreement the right to participate as a selling stockholder in any registered offerings
of Holding's securities, other than debt offerings and offerings related to employee stock and option plans. These rights are exercisable six months after the Company's first qualified public
offering. The Company shall have priority in any registered offering that was initiated for the Company's own account, and OEP and its affiliates and permitted transferees shall have priority in any
registered offering initiated for their own accounts. For any underwritten registration other than a demand registration described below, the Company shall have the right to select the underwriters.

Demand Registration Rights

Pursuant to the Registration Rights Agreement, OEP, its affiliates and permitted transferees have the right to demand an unlimited number of registrations for
their Common Stock and Preferred Stock. These demand rights are exercisable at any time, including prior to the Company's first qualified public offering, subject to any "blackout period." If a demand
registration is an underwritten offering, OEP has the right to select the underwriters, subject to the Company's approval.

Blackouts

The Company has the customary right to suspend, at any time (but not to exceed one time in any twelve-month period), the registration process, and/or suspend a
holder's ability to use a prospectus if certain significant corporate events are contemplated.

Expenses

The Company shall pay all customary costs and expenses associated with each registration, including for each registration statement prepared, the reasonable fees
and expenses of one firm of attorneys selected by the holders of a majority of the shares of registrable securities covered by such registration. Holders of registrable securities being covered by a
registration will pay underwriting discounts, commissions and applicable transfer taxes, if any, on shares sold by them.

Termination

The Registration Rights Agreement terminates on the tenth anniversary of the date of the agreement.

113

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Item 14. Principal Accountant Fees and Services

KPMG LLP has been the Company's independent auditors since the Transaction. KPMG LLP was Primary's independent auditors prior to the Transaction. The Audit
Committee of the Board of Directors manages the Company's relationship with KPMG LLP as its independent auditors and has adopted policies and procedures which require the Audit Committee to
pre-approve all audit, audit-related, non-audit and tax services.

The
following table shows the fees paid, accrued or incurred by the Company for audit, audit-related, tax and other services provided by KPMG LLP for the periods presented below.

CompanyYear ended
December 31,
2004

Year ended
December 31,
2003Audit Fees (1)

$
2,971,710

$
1,636,550Audit-Related Fees (2)


216,300


314,737Tax Fees (3)


588,555


502,408All Other Fees (4)





1,133Total

$
3,776,565

$
2,454,828


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All
of the services described above for the Company were approved by the Company's Board of Directors or Audit Committee.

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PART IV

Item 15. Exhibits and Financial Statement Schedules



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Agreement and Plan of Merger dated as of January 7, 2005 by and among Petters Group Worldwide, LLC, Petters Consumer Brands, LLC and Polaroid Holding Company (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|2.2         |  | Amendment No. 1, dated as of March 9, 2005, to the Agreement and Plan of Merger dated as of January 7, 2005, by and among Petters Group Worldwide, LLC, Petters Consumer Brands, LLC and Polaroid Holding
Company (6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|3.1         |  | Restated Certificate of Incorporation of Polaroid Holding Company, dated as of February 6, 2004 (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|3.2         |  | Amended and Restated Bylaws of Polaroid Holding Company as of May 21, 2003 (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.1         |  | Article Fourth, Section A(2), Series A 8% Cumulative Compounding Preferred Stock in Restated Certificate of Incorporation (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.2         |  | Amended and Restated Registration Rights Agreement by and among Polaroid Holding Company, One Equity Partners, LLC and "Other Investors" dated as of February 5, 2003 (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.1(a)     |  | Management Agreement between One Equity Partners LLC and OEP Imaging Operating Corporation, dated as of July 31, 2002 (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|10.1(b)*    |  | Form of Restricted Stock Purchase Agreement by and among Polaroid Holding Company and The Management Investors (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.1(c)*    |  | Polaroid Holding Company 2004 Stock Option Plan (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.1(d)*    |  | Form of Polaroid Holding Company Bonus Agreement (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.1(e)     |  | Amended and Restated Securities Holders Agreement dated as of February 5, 2003, by and among Polaroid Holding Company, One Equity Partners LLC and The Other Investors (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.1(f)     |  | Amendment No. 1, dated as of January 7, 2005, to the Amended and Restated Securities Holders Agreement by and among Polaroid Holding Company, One Equity Partners LLC and the Other Management Investors Named Therein dated
as of February 5, 2003 (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.1(g)*    |  | Letter Agreement, dated July 23, 2004, between Polaroid Corporation and Ira H. Parker regarding a modification to an option grant award                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.2        |  | $100,000,000 Credit Agreement dated as of July 29, 2002 among OEP Imaging Corporation (to be renamed Polaroid Holding Company) as the Company, and OEP Imaging Operating Corporation (to be renamed Polaroid Corporation),
Polaroid Contracting C.V., Polaroid (Europa) B.V., Polaroid Trading B.V., Polaroid Canada Inc., Polaroid GmbH, Polaroid (U.K.) Limited, Polaroid Far East Limited and Nippon Polaroid K. K. as Borrowers, and The Lenders and Issuers Party Hereto, and
Citicorp USA, Inc. as Domestic Administrative Agent and Domestic Collateral Agent, and Bank of America, N.A. as Foreign Administrative Agent and Foreign Collateral Agent, and Citicorp USA, Inc. as Foreign Syndication Agent, and Bank of America, N.A.
as Domestic Syndication Agent (2)
|10.2(a)     |  | Fifth Waiver and Amendment Letter to the Credit Agreement as of July 29, 2002, dated August 5, 2003 (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.2(b)     |  | Sixth Waiver and Amendment Letter to the Credit Agreement as of July 29, 2002, dated November 14, 2003 (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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|10.2(c)  |  | Seventh Waiver and Amendment Letter to the Credit Agreement as of July 29, 2002, effective September 24, 2004 (4)                                                            
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.2(d)  |  | Eighth Waiver and Amendment Letter to the Credit Agreement as of July 29, 2002, effective December 8, 2004 (5)                                                               
|10.3(a)* |  | Employment Agreement, effective May 30, 2003, between Polaroid Holding Company and Polaroid Corporation and John Michael Pocock (2)                                          
|10.3(b)* |  | Amendment dated August 7, 2003, to Employment Agreement dated May 30, 2003, by and among Polaroid Holding Company, Polaroid Corporation and John Michael Pocock (2)          
|10.3(c)* |  | Employment Agreement, effective July 31, 2002, between Polaroid Corporation and William L. Flaherty (2)                                                                      
|10.3(d)* |  | Employment Agreement, effective May 27, 2003, between Polaroid Corporation and Robert B. Gregerson (2)                                                                       
|10.3(e)* |  | Employment Agreement, dated April 9, 2004, between Polaroid (Italia) S.p.A. and Gianfranco Palma (2)                                                                         
|10.3(f)* |  | Temporary Assignment Agreement, effective April 2, 2002, between Polaroid (Italia) S.p.A. and Gianfranco Palma (2)                                                           
|10.3(g)* |  | Employment Agreement, effective February 23, 2004, between Polaroid Corporation and Ira H. Parker (2)                                                                        
|10.3(h)* |  | Employment Agreement, dated May 6, 2003, between Polaroid Corporation and Mark H. Payne (2)                                                                                  
|10.3(i)* |  | Restated Enhanced Severance Agreement, dated December 20, 2005 and entered into by Polaroid Corporation with Robert B. Gregerson on January 3, 2005                          
|10.3(j)* |  | Restated Enhanced Severance Agreement, dated December 20, 2005 and entered into by Polaroid Corporation with Ira H. Parker on January 3, 2005                                
|10.4(a)  |  | Escrow Agreement dated as of January 7, 2005 by and among Petters Group Worldwide, LLC, Petters Consumer Brands, LLC, Polaroid Holding Company and Wells Fargo Bank, N.A. (1)
|10.4(b)  |  | Escrow Agreement dated as of January 7, 2005 by and among Petters Group Worldwide, LLC, Petters Consumer Brands, LLC, Polaroid Holding Company and Wells Fargo Bank, N.A. (1)
|14       |  | Code of Ethics and Business Conduct, effective September 1, 2003 (2)                                                                                                         
|21       |  | Subsidiaries of Registrant                                                                                                                                                   
|31.1     |  | Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                             
|31.2     |  | Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                              
|32       |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                       

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116

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117

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

| |  | POLAROID HOLDING COMPANY
| |  | ------------------------
| |  | By:                     

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant on the dates and in the capacities
indicated.

|Name                                      |  | Title                                                                                             |  | Date          
|----------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | --------------
|                                          |  |                                                                                                   |  |               
|/s/JACQUES A. NASSERJacques A. Nasser     |  | Director and Non-Executive Chairperson                                                            |  | March 16, 2005
|/s/J. MICHAEL POCOCKJ. Michael Pocock     |  | Director, Chief Executive Officer and President (principal executive officer)                     |  | March 16, 2005
|/s/WILLIAM L. FLAHERTYWilliam L. Flaherty |  | Executive Vice President and Chief Financial Officer (principal financial and accounting officer) |  | March 16, 2005
|/s/JOSEPH E. ANTONINIJoseph E. Antonini   |  | Director                                                                                          |  | March 16, 2005
|/s/CHARLES F. AUSTERCharles F. Auster     |  | Director                                                                                          |  | March 16, 2005
|/s/PAOLO CANTARELLAPaolo Cantarella       |  | Director                                                                                          |  | March 16, 2005
|/s/WILLIAM J. COSGROVEWilliam J. Cosgrove |  | Director                                                                                          |  | March 16, 2005
|/s/LEE M. GARDNERLee M. Gardner           |  | Director                                                                                          |  | March 16, 2005
|                                          |  |                                                                                                   |  |               

118

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|/s/JAMES W. KOVENJames W. Koven       |  | Director |  | March 16, 2005
|------------------------------------- |  | -------- |  | --------------
|/s/RICK A. LAZIORick A. Lazio         |  | Director |  | March 16, 2005
|/s/JOSEPH G. MICHELSJoseph G. Michels |  | Director |  | March 16, 2005
|/s/STANLEY P. ROTHStanley P. Roth     |  | Director |  | March 16, 2005

119

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