<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)
   [X]        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES EXCHANGE ACT OF 1934

              For the quarterly period ended         JULY 1, 2001
                                               --------------------------------

                                       OR

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

              For the transition period from                 to
                                             ---------------     --------------

                          Commission File Number 1-4085


                              POLAROID CORPORATION
-------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


          DELAWARE                                          04-1734655
-------------------------------                    ----------------------------
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                          Identification No.)


               784 MEMORIAL DRIVE, CAMBRIDGE, MASSACHUSETTS 02139
-------------------------------------------------------------------------------
               (Address of principal executive offices) (Zip Code)


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


     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 and Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days Yes [X] No [ ]


                      Shares of Common Stock, $1 par value,
                    outstanding at August 6, 2001: 47,855,390


                        This document contains 45 pages.
                       Exhibit Index appears on page 44.

<PAGE>


                         PART I - FINANCIAL INFORMATION


ITEM 1.    FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
Periods ended July 2, 2000 and July 1, 2001

<TABLE>
<CAPTION>

POLAROID CORPORATION AND SUBSIDIARY COMPANIES                        SECOND QUARTER              SIX MONTHS
(IN MILLIONS, EXCEPT PER SHARE DATA)                               2000         2001          2000         2001
---------------------------------------------------------------   -------      -------      -------       -------
                                                                                   (UNAUDITED)
<S>                                                               <C>          <C>          <C>           <C>
NET SALES                                                         $ 485.6      $ 333.5      $ 887.9       $ 664.3

   Cost of goods sold                                               262.0        241.9        486.3         455.1
   Marketing, research, engineering and administrative
     expenses                                                       172.9        143.4        341.7         299.0
   Restructuring and other charges                                     --           --           --          80.0
                                                                  -------      -------      -------       -------

TOTAL COSTS                                                         434.9        385.3        828.0         834.1

PROFIT/(LOSS) FROM OPERATIONS                                        50.7        (51.8)        59.9        (169.8)

   Other income                                                      11.6         25.2         20.2          26.5
   Interest expense                                                  21.3         24.8         41.2          47.9
                                                                  -------      -------      -------       -------

PROFIT/(LOSS) BEFORE INCOME TAX EXPENSE                              41.0        (51.4)        38.9        (191.2)
   Federal, state and foreign income tax expense                     14.4         58.5         13.7           9.6
                                                                  -------      -------      -------       -------

NET EARNINGS/(LOSS)                                               $  26.6      $(109.9)     $  25.2       $(200.8)
                                                                  =======      =======      =======       =======

BASIC EARNINGS/(LOSS) PER COMMON SHARE                            $  0.59      $ (2.36)     $  0.56       $ (4.35)

DILUTED EARNINGS/(LOSS) PER COMMON SHARE                          $  0.59      $ (2.36)     $  0.56       $ (4.35)

CASH DIVIDENDS PER COMMON SHARE                                   $  0.15           --      $  0.30            --

Weighted average common shares used for basic earnings/(loss)
   per common share calculation (in thousands)                     44,826       46,605       44,749        46,211

Weighted average common shares used for diluted
   earnings/(loss) per common share calculation (in thousands)     45,176       46,605       45,102        46,211

Common shares outstanding at end of period (in thousands)          44,912       47,036       44,912        47,036
</TABLE>

See accompanying notes to condensed consolidated financial statements


                                                                               1
<PAGE>


CONDENSED CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>

POLAROID CORPORATION AND SUBSIDIARY COMPANIES                      DECEMBER 31,        JULY 1,
(IN MILLIONS)                                                          2000             2001
-----------------------------------------------------------        ------------      -----------
                                                                                     (UNAUDITED)
<S>                                                                 <C>               <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                        $   97.2          $   94.0
   Receivables                                                         435.4             291.6
   Inventories:
     Raw materials                                                      86.6              89.1
     Work-in-process                                                   164.0             148.8
     Finished goods                                                    231.9             202.5
                                                                    --------          --------
   Total inventories                                                   482.5             440.4
   Prepaid expenses and other current assets                           103.5             113.5
                                                                    --------          --------
TOTAL CURRENT ASSETS                                                 1,118.6             939.5

PROPERTY, PLANT AND EQUIPMENT:
   Total property, plant and equipment                               1,967.5           1,924.0
   Less accumulated depreciation                                     1,398.3           1,413.4
                                                                    --------          --------
NET PROPERTY, PLANT AND EQUIPMENT                                      569.2             510.6

DEFERRED TAX ASSETS                                                    279.5             281.8
OTHER ASSETS                                                            75.7              78.1
                                                                    --------          --------
TOTAL ASSETS                                                        $2,043.0          $1,810.0
                                                                    ========          ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Short-term debt                                                  $  363.7          $  524.5
   Payables and accruals                                               334.1             259.6
   Compensation and benefits                                            76.7              96.7
   Federal, state and foreign income taxes                              18.8              20.8
                                                                    --------          --------
TOTAL CURRENT LIABILITIES                                              793.3             901.6

LONG-TERM DEBT                                                         573.5             423.9
ACCRUED POSTRETIREMENT BENEFITS                                        222.7             221.2
OTHER LONG-TERM LIABILITIES                                             78.3              87.7

COMMON STOCKHOLDERS' EQUITY:
   Common stock, $1 par value                                           75.4              75.4
   Additional paid-in capital                                          363.1             296.6
   Retained earnings                                                 1,219.5           1,018.7
   Accumulated other comprehensive income                              (68.9)            (76.6)
   Less:  Treasury stock, at cost                                    1,213.8           1,138.5
          Deferred compensation                                           .1                --
                                                                    --------          --------
TOTAL COMMON STOCKHOLDERS' EQUITY                                      375.2             175.6
                                                                    --------          --------

TOTAL LIABILITIES AND COMMON STOCKHOLDERS' EQUITY                   $2,043.0          $1,810.0
                                                                    ========          ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                                                               2
<PAGE>


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six month period ended July 2, 2000 and July 1, 2001

<TABLE>
<CAPTION>

POLAROID CORPORATION AND SUBSIDIARY COMPANIES                                         SIX MONTHS
(IN MILLIONS)                                                                   2000              2001
----------------------------------------------------------------------         -------          --------
                                                                                     (UNAUDITED)
<S>                                                                            <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net earnings/(loss)                                                         $ 25.2           $(200.8)
   Depreciation of property, plant and equipment                                 52.8              55.0
   Gain on the sale of real estate                                              (12.9)            (18.5)
   Other non-cash items                                                           9.4              42.4
   Decrease in receivables                                                       62.0             144.3
   Decrease/(increase) in inventories                                           (70.2)             33.9
   Increase in prepaids and other assets                                        (13.7)            (12.3)
   Decrease in payables and accruals                                            (39.8)           (104.9)
   Increase/(decrease) in compensation and benefits                             (60.2)             28.6
   Increase/(decrease) in federal, state and foreign income taxes
     payable                                                                      8.1               (.4)
                                                                               ------           -------
   Net cash used by operating activities                                        (39.3)            (32.7)

CASH FLOWS FROM INVESTING ACTIVITIES
   Decrease/(increase) in other assets                                            4.7              (1.2)
   Additions to property, plant and equipment                                   (67.4)            (33.4)
   Proceeds from the sale of property, plant and equipment                       49.0              54.2
                                                                               ------           -------
   Net cash provided/(used) by investing activities                             (13.7)             19.6

CASH FLOWS FROM FINANCING ACTIVITIES
   Net increase in short-term debt (maturities of 90 days or less)               47.3              12.1
   Proceeds from issuance of stock incentives                                      .1                --
   Cash dividends paid                                                          (13.5)               --
                                                                               ------           -------
   Net cash provided by financing activities                                     33.9              12.1

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                          (4.8)             (2.2)
                                                                               ------           -------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                       (23.9)             (3.2)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                 92.0              97.2
                                                                               ------           -------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                     $ 68.1           $  94.0
                                                                               ======           =======
</TABLE>

See accompanying notes to condensed consolidated financial statements.


                                                                               3
<PAGE>


POLAROID CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Periods Ended July 2, 2000 and July 1, 2001


1.  BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the
accounts of Polaroid Corporation and its domestic and foreign subsidiaries, all
of which are either wholly owned or majority owned (collectively, "the
Company"). Intercompany transactions have been eliminated. This is an interim
unaudited report that is subject to year-end audit adjustments. The information
furnished, however, reflects all adjustments (consisting of normal recurring
accruals) which, in the opinion of management, are necessary for a fair
presentation of the results of the interim period. The information included in
the interim financial statements and notes in this Form 10-Q should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's 2000 Annual Report on Form 10-K which was filed with
the Securities and Exchange Commission on April 2, 2001. Certain prior year
information has been reclassified to conform with the current year presentation.

2.  DEBT RESTRUCTURING

On July 16, 2001, the Company did not make scheduled interest payments
totaling $10.5 million on its 6 3/4% Notes due January 15, 2002 (the "2002
Notes") and its 7 1/4% Notes due January 15, 2007 (the "2007 Notes") and, on
August 15, 2001, will not make a scheduled interest payment of $15.8 million
on its 11 1/2% Notes due February 15, 2006 (the "2006 Notes" and, with the
2002 Notes and the 2007 Notes, collectively, the "Notes"). The failure to
make the interest payments on the 2002 Notes and 2007 Notes constituted
defaults under the indenture pursuant to which the 2002 Notes and 2007 Notes
were issued. Under the indenture governing the 2002 Notes and 2007 Notes,
because the defaults will not be cured within 30 days of their occurrence,
the defaults will become events of default under the indenture, which will
give the holders of the 2002 Notes and the 2007 Notes the right to accelerate
the maturity of all principal and past due interest on the 2002 Notes and the
2007 Notes, which aggregated $310.5 million at July 15, 2001. The failure to
cure the default under the 2006 Notes within 30 days of August 15, 2001 will
similarly give rise to an event of default under the indenture pursuant to
which the 2006 Notes were issued, which will give the holders of the 2006
Notes the right to accelerate the maturity of all principal and past due
interest on the 2006 Notes, which aggregated $288.2 million at July 15, 2001.
Holders of the Notes also have the right to sue the Company to collect
interest that is accrued and unpaid when due and payable. When the defaults
regarding the 2002 Notes and 2007 Notes become events of default, these
payment defaults will also result in events of default under the indenture
pursuant to which the 2006 Notes were issued, the Company's domestic credit
agreement (as amended, the "Amended Credit Agreement") and the credit
agreement of the Company's wholly-owned subsidiary, Polaroid U.K. Limited,
for which the Company acts as a guarantor (as amended, the "U.K. Credit
Agreement") under cross-default provisions in those agreements. While these
defaults under the Amended Credit Agreement and U.K. Credit Agreement have
been waived by the lenders thereunder through October 12, 2001, the holders
of the 2006 Notes may accelerate the maturity of their obligations. In
addition, the indenture governing the 2006 Notes, the Amended Credit
Agreement and the U.K. Credit Agreement contain certain cross-acceleration
provisions, allowing these holders or lenders, under certain circumstances,
to accelerate the maturity of the obligations owed to them if other holders
or lenders do the same. The Company has not received notice that any holder
of the Notes has taken action or notified


                                                                               4
<PAGE>


POLAROID CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Periods Ended July 2, 2000 and July 1, 2001


2.  DEBT RESTRUCTURING (CONTINUED)

the Company that it will take action, to enforce its rights or remedies against
the Company as a result of the defaults described above.

The Company has announced its intent to negotiate with the holders of the Notes
regarding a potential restructuring of the Company's debt with the objective of
developing a capital structure that is more consistent with and will better
support the Company's long-term business objectives. The Company is pursuing
this debt restructuring plan but is unable to predict when or if it will be
accepted by the holders of the Notes and, if applicable, the lenders under the
Amended Credit Agreement and the U.K. Credit Agreement. If either (1) the
Company makes any of the July 15, 2001 or August 15, 2001 interest payments or
(2) the trustee under the indentures pursuant to which any series of the Notes
were issued or if persons purporting to constitute holders of at least 25% of
the outstanding principal amount of any series of Notes accelerate the maturity
of their Notes and unpaid interest on the Notes or seek legal action to
collect the unpaid interest, then the waivers to the Amended Credit Agreement
and the U.K. Credit Agreement would lapse. In that event, the Company does
not expect it could meet its accelerated payment obligations. The Amended
Credit Agreement, the U.K. Credit Agreement and the waivers under these
agreements are discussed below in Note 3, Short-term Debt.

3.  SHORT-TERM DEBT

At July 1, 2001, the Company had $524.5 million outstanding in short-term debt.
The amount of short-term debt outstanding was comprised of $310.0 million under
the Amended Credit Agreement, $46.6 million under the U.K. Credit Agreement,
$149.8 million under the 2002 Notes and $18.1 million under uncommitted
short-term lines of credit.

The Amended Credit Agreement initially provided for a maximum commitment of
$350.0 million on a revolving basis and is scheduled to mature on December 31,
2001. In connection with the Amended Credit Agreement and the waivers to it,
which are summarized below, the Company granted the lenders under the Amended
Credit Agreement a first security interest in substantially all of the Company's
domestic personal property and mortgages on certain real estate, except for
principal properties, in each case, as permitted by the indentures pursuant
to which the Notes were issued. Funds borrowed under the Amended Credit
Agreement initially bore interest, at the Company's option, at either the
prime rate of J.P. Morgan Chase & Co. ("Prime") plus a margin or LIBOR on
euro-dollar loans plus a margin. The margins ranged from 0% to 1.275% for
prime based loans and from .190% to 2.275% for euro-dollar loans based on the
Company's credit rating. In addition, the Company has paid the lenders a
facility fee ranging from .085% to .725% depending on the Company's credit
rating, a


                                                                               5
<PAGE>


POLAROID CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Periods Ended July 2, 2000 and July 1, 2001


3.  SHORT-TERM DEBT (CONTINUED)

commitment fee on unused commitments ranging from 0% to .025% depending on the
Company's credit rating and a fee to the administrative agent.

The U.K. Credit Agreement initially provided for a maximum commitment of 72.5
million euros and is scheduled to mature on December 31, 2001. In connection
with the U.K. Credit Agreement and the waivers to it, which are summarized
below, Polaroid U.K. Limited granted the lenders a security interest in
certain of its and the Company's other subsidiaries' accounts receivable and
inventories. Funds borrowed under the U.K. Credit Agreement initially bore
interest at approximately 25 basis points higher than that paid for
euro-dollar loans under the Amended Credit Agreement. In addition, the
Company initially paid a facility fee ranging from .085% to .75% depending on
the Company's credit rating, an arrangement fee and a fee to the
administrative agent.

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

On February 16, 2001, the Company entered into a waiver with the lenders under
the Amended Credit Agreement and the U.K. Credit Agreement, each of which has
been amended and supplemented a number of times since then, most recently on
July 12, 2001. The waivers, as extended by the amendments and supplements,
expire on October 12, 2001. The waivers waive, until their expiration date,
existing defaults and potential defaults of the Debt/EBITDA Ratio and Interest
Coverage Ratio and any events of default under the Amended Credit Agreement and
the U.K. Credit Agreement that will result from the Company's failure to make
the scheduled interest payments on any series of Notes (see Note 2), so long
as either (1) the Company does not make any of the July 15, 2001 or August 15,
2001 interest payments or (2) the trustee under the indentures pursuant to which
the Notes were issued or persons purporting to constitute holders of at least
25% of the outstanding principal amount of any series of Notes do not
accelerate the maturity of the Notes or commence legal proceedings to collect
unpaid interest on their Notes.


                                                                               6
<PAGE>


POLAROID CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Periods Ended July 2, 2000 and July 1, 2001


3.  SHORT-TERM DEBT (CONTINUED)

Under the waiver to the Amended Credit Agreement:

         o        the maximum available borrowings are limited to $316 million,
                  but the Company expects the limit will increase by
                  approximately $800,000 per month, not to exceed $7 million, as
                  the Company makes payments on the lease it entered into in
                  connection with the sale of its 56-acre reservoir site in
                  Waltham, Massachusetts less any cash the Company receives from
                  the buyer in connection with the deferred portion of the
                  purchase price (see Note 10);

         o        additional covenants restrict, among other things, the
                  Company's ability to make certain capital expenditures, make
                  certain payments for the repurchase of stock or dividends to
                  shareholders, make certain interest payments, enter into
                  certain hedging transactions and make certain acquisitions and
                  investments;

         o        additional covenants also require the Company to maintain
                  certain minimum cash flow amounts, increase the Company's
                  reporting obligations to the lenders, provide security
                  interests in substantially all of the Company's domestic
                  personal property and mortgages on certain real estate, except
                  for principal properties, in each case, as permitted by the
                  indentures pursuant to which the Notes were issued and require
                  the Company to commence preparation of a plan of restructuring
                  of its capital structure; and

         o        during the waiver period of July 12, 2001 through October 12,
                  2001, borrowings will bear interest, at the Company's option,
                  at either Prime plus 2.525% or LIBOR plus 3.525% regardless of
                  the Company's credit rating and, the Company will pay the
                  lenders a facility fee of .725%, a commitment fee on unused
                  commitment of .025% and a fee to the administrative agent.

Under the waiver to the U.K. Credit Agreement:

         o        the maximum available borrowings are limited to 57 million
                  euros or approximately $49 million at July 1, 2001;

         o        many of the additional covenants contained in the waiver to
                  the Amended Credit Agreement were incorporated into the waiver
                  under the U.K. Credit Agreement and the Company expects to
                  provide a security interest in substantially all of the
                  personal property and real estate of Polaroid U.K. Limited;
                  and


                                                                               7
<PAGE>


POLAROID CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Periods Ended July 2, 2000 and July 1, 2001


3.  SHORT-TERM DEBT (CONTINUED)

         o        during the waiver period of July 12, 2001 through October 12,
                  2001, borrowings will bear interest at LIBOR plus 3.5%
                  regardless of the Company's credit rating and the Company will
                  pay the lenders a facility fee of .75%, an arrangement fee and
                  a fee to the administrative agent.

At July 1, 2001, the weighted average interest rate on amounts outstanding under
the Amended Credit Agreement was approximately 7.9% and the weighted average
interest rate on amounts outstanding under the U.K. Credit Agreement was
approximately 6.8%.

The Company is involved in on-going discussions with its bank lenders to extend
the existing waivers to the Amended Credit Agreement and the U.K. Credit
Agreement beyond their current expiration date of October 12, 2001, to allow the
Company more time to develop and seek agreement from its creditors regarding a
debt restructuring plan and to refinance and/or restructure the Amended Credit
Agreement and the U.K. Credit Agreement. If the Company is unsuccessful in its
negotiations with its existing bank lenders, the lenders will have the right to
demand repayment of their loans when the waivers expire, because the Company
will then be in default under the Amended Credit Agreement and the U.K. Credit
Agreement. There can be no assurance that the Company's existing bank lenders
will agree to extend the waivers beyond October 12, 2001 or that the trustee or
the holders of any series of Notes will not accelerate the maturity of their
Notes or seek legal action to collect the unpaid interest as described above. If
either (1) the holders of any series of Notes were to accelerate the
maturity of their Notes or seek legal action to collect unpaid interest or (2)
the Company were to make any of the July 15, 2001 or August 15, 2001 interest
payments, the waivers to the Amended Credit Agreement and the U.K. Credit
Agreement would lapse. In its current financial condition, the Company does not
expect that it could raise the required funds to repay outstanding borrowings
under or refinance the Amended Credit Agreement and the U.K. Credit Agreement if
the lenders demand repayment of their loans under these agreements.

The Company has retained financial and legal advisors to assist it in conducting
the negotiations described in Notes 2 and 3, considering its refinancing and
restructuring options and exploring a number of strategic alternatives,
including the sale of assets, a merger or sale of the Company and/or a strategic
partnership. See "Financial Liquidity and Capital Resources" within
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional information regarding the Company's financial
condition.


                                                                               8
<PAGE>


POLAROID CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Periods Ended July 2, 2000 and July 1, 2001


4.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standards Board Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was subsequently amended by Financial
Accounting Standards Board Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," and Financial Accounting Standards Board Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FASB Statement No. 133" (collectively, "FAS 133"). FAS 133
establishes accounting and reporting requirements for derivative instruments and
for hedging activities. FAS 133 requires companies to recognize all derivatives
as either assets or liabilities in the statement of financial position at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge of the exposures to changes in fair value of recognized
assets or liabilities or unrecognized firm commitments, a hedge of the exposure
to variable cash flows of a forecasted transaction, or a hedge of the foreign
currency exposure of a net investment in a foreign operation, unrecognized firm
commitments, an available-for-sale security or a foreign-currency denominated
forecasted transaction. The accounting for changes in fair value under FAS 133
depends on the intended use of the derivative and the resulting designation.

The Company generates a substantial portion of its revenues in international
markets, which subjects its operations and cash flows to the exposure of
currency exchange fluctuations. Because the impact of currency exchange rate
movement can be positive or negative in any given period, the Company seeks to
minimize the risk associated with currency exchange fluctuations by entering
into derivative contracts. The Company adopted FAS 133 effective January 1,
2001, and the related transition adjustments resulted in a non-cash, pre-tax
charge of $.7 million recorded in other income/expense, and an unrealized gain
of $.9 million (net of tax of $.5 million) recorded in other comprehensive
income, in each case, related to marking outstanding derivative contracts to
fair value.

The Company enters into U.S. dollar call/foreign currency put options that are
designated as cash flow hedges with the objective of minimizing the impact of
exchange rate risk related to a portion of its forecasted foreign-currency
denominated intercompany sales. The notional value of the Company's outstanding
option contracts at July 1, 2001, all of which will expire in the next twelve
months, totaled $132.6 million and consisted of $66.6 million of options
contracts denominated in euros and $66.0 million of options contracts
denominated in Japanese yen. At July 1, 2001, the fair value of outstanding
option contracts, which was reported in other current assets, was $5.2 million.


                                                                               9
<PAGE>


POLAROID CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Periods Ended July 2, 2000 and July 1, 2001


4.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED)

The Company measures hedge effectiveness based on the changes in intrinsic value
of its option contracts relative to the changes in the cash inflows of the
anticipated transaction. Unrealized gains on these contracts are deferred in
other comprehensive income until the option contract is exercised and the
anticipated transaction occurs. At exercise date of an option contract, the
Company reclassifies gains related to the contract from other comprehensive
income to cost of goods sold. Changes in the time value of its option contracts,
which the Company considers to be ineffective, are recorded in other
income/expense. The Company reclassified $1.9 million and $2.3 million of
realized gains from other comprehensive income to cost of goods sold during the
second quarter of 2001 and the first half of 2001, respectively. Pre-tax gains
of $2.8 million, as of July 1, 2001, could be reclassified to cost of goods sold
over the next twelve months; however, that amount can increase or decrease over
time depending on movements in the underlying exchange rates. Hedge
ineffectiveness, including changes in the time value of option contracts, was
not material to the Company's results of operations or financial position in the
second quarter of 2001 or in the first half of 2001.

The Company enters into forward exchange contracts to minimize the impact of
currency fluctuations on its net monetary assets denominated in currencies other
than the relevant functional currency ("nonfunctional currencies"). The Company
does not apply hedge accounting to these contracts. Forward exchange contracts
are remeasured at fair value monthly with changes in fair value recorded in net
earnings at the same time the net monetary assets denominated in nonfunctional
currencies are remeasured. Both the change in fair value of forward exchange
contracts and the remeasurement of net monetary assets denominated in
nonfunctional currencies are recorded in other income/expense. The notional
value of the Company's outstanding foreign exchange contracts at July 1, 2001,
all of which expire in the next three months, totaled $35.1 million and
consisted of $11.5 million of forward exchange contracts denominated in euros
and $23.6 million of forward exchange contracts denominated in other foreign
currencies. At July 1, 2001, the fair value of outstanding forward exchange
contracts was not material to the Company's financial position.

5.  INCOME TAXES

Prepaid income taxes and deferred income taxes result from future tax benefits
and expenses related to the difference between the tax basis of assets and
liabilities and the amounts reported in the financial statements. These
differences predominantly relate to U.S. operations. Carryforwards and tax
credits are also included in prepaid income taxes. The net of prepaid income tax
assets, deferred income tax liabilities and valuation allowances against
deferred tax assets reflected in the condensed consolidated balance sheet was a
net asset of approximately $331.0 million at July 1, 2001.


                                                                              10
<PAGE>


POLAROID CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Periods Ended July 2, 2000 and July 1, 2001


5.  INCOME TAXES (CONTINUED)

A valuation allowance of approximately $61.0 million was reflected in the
condensed consolidated balance sheet at July 1, 2001. The valuation allowance at
July 1, 2001 includes a charge of approximately $53.0 million that was recorded
in the second quarter of 2001 because the Company determined it was "more likely
than not" that some portion of the deferred tax assets will not be realized over
a reasonable period of time.

6.  EARNINGS PER SHARE

<TABLE>
<CAPTION>

                                                          NET
                                                        EARNINGS/                             PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)                  (LOSS)             SHARES             AMOUNT
-------------------------------------------------------------------------------------------------------
<S>                                                    <C>                  <C>               <C>
Quarter ended July 2, 2000
   Basic earnings per share                            $  26.6               44.8              $  .59
   Diluted earnings per share                             26.6               45.2                 .59

Six Months ended July 2, 2000
   Basic earnings per share                               25.2               44.8                 .56
   Diluted earnings per share                             25.2               45.1                 .56

QUARTER ENDED JULY 1, 2001
   BASIC LOSS PER SHARE                                (109.9)               46.6              (2.36)
   DILUTED LOSS PER SHARE                              (109.9)               46.6              (2.36)

SIX MONTHS ENDED JULY 1, 2001
   BASIC LOSS PER SHARE                                (200.8)               46.2              (4.35)
   DILUTED LOSS PER SHARE                              (200.8)               46.2              (4.35)
</TABLE>

The calculation of earnings/(loss) per share for the quarters and six month
periods ended July 2, 2000 and July 1, 2001 does not include the effects of
outstanding options for shares of common stock totaling 5.8 million and 4.6
million, respectively, because the effects were anti-dilutive. In addition, the
effect of .4 million and 2.4 million of other potentially dilutive shares, which
include performance accelerated restricted stock and other performance based
stock award programs under which shares have not been issued, for the quarters
and six month periods ended July 2, 2000 and July 1, 2001, respectively, were
not included because the effects were anti-dilutive or because the performance
criteria had not been satisfied.


                                                                              11
<PAGE>


POLAROID CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Periods Ended July 2, 2000 and July 1, 2001


7.  COMPREHENSIVE INCOME

The Company's total comprehensive income/(loss) was as follows:

<TABLE>
<CAPTION>

                                                     QUARTER ENDED                 SIX MONTH PERIOD ENDED
                                                JULY 2,          JULY 1,          JULY 2,          JULY 1,
(IN MILLIONS)                                    2000             2001             2000             2001
-----------------------------------------------------------------------------------------------------------
<S>                                              <C>             <C>              <C>              <C>
Net earnings/(loss)                              $26.6           $(109.9)         $ 25.2           $(200.8)

Other comprehensive income:
   Currency translation adjustment                (8.7)               .1           (15.3)             (9.1)
   Unrealized gain on derivative
     instruments, net of tax                        --              (1.1)             --               1.8
   Unrealized gain/(loss) on
     available-for-sale securities, net
     of tax                                         .1                .3             (.5)              (.4)
                                           ----------------------------------------------------------------
Total comprehensive income/(loss)                $18.0           $(110.6)          $ 9.4           $(208.5)
                                           ================================================================
</TABLE>

8.  SEGMENTS

The following is a summary of information related to the Company's segments:

<TABLE>
<CAPTION>

                                                      QUARTER ENDED                SIX MONTH PERIOD ENDED
                                                 JULY 2,          JULY 1,         JULY 2,         JULY 1,
(IN MILLIONS)                                     2000             2001            2000            2001
---------------------------------------------------------------------------------------------------------
<S>                                              <C>              <C>             <C>             <C>
Net sales to customers:
   Americas Region                               $310.9           $225.3          $549.1          $449.9
   European Region                                 99.8             62.1           185.9           123.6
   Asia Pacific Region                             74.9             46.1           152.9            90.8
   Global Operations                                 --               --              --              --
   Research and Development                          --               --              --              --
                                           --------------------------------------------------------------
Segment net sales to customers                    485.6            333.5           887.9           664.3
   Corporate                                         --               --              --              --
                                           --------------------------------------------------------------
Total net sales to customers                     $485.6           $333.5          $887.9          $664.3
                                           ==============================================================
</TABLE>


                                                                              12
<PAGE>


POLAROID CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Periods Ended July 2, 2000 and July 1, 2001


8.  SEGMENTS (CONTINUED)

<TABLE>
<CAPTION>

                                                      QUARTER ENDED               SIX MONTH PERIOD ENDED
                                                 JULY 2,          JULY 1,         JULY 2,         JULY 1,
(IN MILLIONS)                                     2000             2001            2000            2001
---------------------------------------------------------------------------------------------------------
<S>                                              <C>              <C>             <C>            <C>
Profit/(loss) from operations:
   Americas Region                               $102.8           $ 39.3          $166.1         $  88.3
   European Region                                 14.8              2.4            25.2              .7
   Asia Pacific Region                             20.0             10.1            41.5            15.1
   Global Operations                              (25.7)           (50.8)          (50.3)          (79.2)
   Research and Development                       (19.2)           (16.8)          (40.0)          (39.3)
                                           ---------------------------------------------------------------
Segment profit/(loss) from operations
                                                   92.7            (15.8)          142.5           (14.4)
   Corporate                                      (42.0)           (36.0)          (82.6)         (155.4)
                                           ---------------------------------------------------------------
Total profit/(loss) from operations              $ 50.7           $(51.8)         $ 59.9         $(169.8)
                                           ===============================================================
</TABLE>

9.  RESTRUCTURING AND OTHER CHARGES

In June 2001, the Company announced a major global restructuring designed to
reduce its costs and improve its cash flows. This announcement was in addition
to the 2001-Q1 Program (defined below) under which the Company recorded $80
million of restructuring and other charges. In connection with its latest
announcement, the Company expects to record a series of pre-tax restructuring
and other charges beginning in the third quarter of 2001 and continuing through
2002. The series of charges (collectively, the "June 2001 Program") will be
allocated to the non-segment Corporate category and are expected to range
between $150 million and $175 million. The June 2001 Program will consist of
severance costs related to an involuntary severance program under which the
Company will eliminate approximately 2,000 positions, asset write-offs primarily
related to the reconfiguration of the Company's Global Operations segment and
exit costs related to certain of the Company's operations that will be
restructured. The Company believes approximately 50% of the positions to be
eliminated under the June 2001 Program will be from the Global Operations
segment, approximately 33% from the regional sales and marketing segments and
the remainder from the Research and Development segment and the non-segment
Corporate category.


                                                                              13
<PAGE>


POLAROID CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Periods Ended July 2, 2000 and July 1, 2001


9.  RESTRUCTURING AND OTHER CHARGES (CONTINUED)

In the first quarter of 2001, the Company recorded restructuring and other
charges of $80 million which consisted of severance costs and impairment charges
related to certain long-lived assets and an intangible asset. These charges
(collectively, the "2001-Q1 Program") were allocated to the non-segment
Corporate category and were undertaken to reduce overhead costs and realign the
Company's resources.

Approximately $50 million of the charges recorded in the first quarter of 2001
for the 2001-Q1 Program related to an involuntary severance program under which
approximately 950 employees (consisting of sales and marketing employees in the
regional segments: Americas - 14%; European - 6%; Asia Pacific - 3%;
manufacturing employees in Global Operations - 49%; research and engineering
employees in Research and Development - 14%; and administrative employees in the
non-segment Corporate category - 14%), are expected to leave the Company.
Approximately 600 of the expected 950 terminations under the 2001-Q1 Program had
occurred in the first half of 2001 with the remaining terminations expected to
be substantially complete by the end of 2001. The major impact of the 2001-Q1
Program on the Company's segments and the non-segment Corporate category will be
the reduction in the number of employees and, as a result, streamlined overhead
structures and a reduction in the Company's excess manufacturing capacity.

In addition to severance costs, the asset impairment portion of the 2001-Q1
Program totaled approximately $30 million in the first quarter of 2001. Of this
amount, approximately $12 million related to assembly equipment that was used to
produce other core products but will be scrapped because the Company has decided
to out-source the manufacture of these products. Approximately $11 million of
the write-offs related to surplus instant film assembly equipment, primarily
related to certain newer core products, that will either be abandoned in place
or scrapped based on a strategic decision to consolidate manufacturing
operations. The write-offs also included approximately $7 million of goodwill
that related to a non-strategic software company that was determined to be
impaired.


                                                                              14
<PAGE>


POLAROID CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Periods Ended July 2, 2000 and July 1, 2001


9.  RESTRUCTURING AND OTHER CHARGES (CONTINUED)

The reserves established for the 2001-Q1 Program and the related cash and
non-cash charges are as follows:

<TABLE>
<CAPTION>

                                                               PENSION            ASSET
(IN MILLIONS)                             SEVERANCE          CURTAILMENT       IMPAIRMENTS           TOTAL
-----------------------------------------------------------------------------------------------------------
<S>                                        <C>                 <C>                <C>               <C>
Balance at January 1, 2001                 $   --              $  --              $   --            $   --
   Restructuring and
     other charges                           50.0                 --                30.0              80.0
   Cash charges                              (1.3)                --                  --              (1.3)
   Reclassification of pension
     curtailment                             (3.9)               3.9                  --                --
   Non-cash charges                            --               (3.9)              (30.0)            (33.9)
                                     ----------------------------------------------------------------------
Balance at April 1, 2001                     44.8                 --                  --              44.8
   Cash charges                             (11.9)                --                  --             (11.9)
                                     ----------------------------------------------------------------------
Balance at July 1, 2001                    $ 32.9              $  --              $   --            $ 32.9
                                     ======================================================================
</TABLE>

10.  SALE OF REAL ESTATE

In the second quarter of 2001, the Company sold its 56-acre reservoir site in
Waltham, Massachusetts, with a net book value of approximately $11 million, for
approximately $69 million. In connection with this sale, the Company accrued
approximately $18 million of costs directly related to the decision to sell this
site that related primarily to relocating certain manufacturing operations and
administrative functions located at this site to other locations. As part of the
sale agreement, the Company entered into a lease for certain portions of the
reservoir site for periods of up to seven years. The Company has deferred
approximately $22 million of gains on the sale which it will realize ratably
over the term of the lease because it leased back a major portion of the
reservoir site. As a condition to the lease, the receipt of approximately $15
million of the sales price was deferred and will be released to the Company,
over the term of the lease, as certain conditions are met.


                                                                              15
<PAGE>


POLAROID CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Periods Ended July 2, 2000 and July 1, 2001


11.  NEW ACCOUNTING STANDARDS

In May 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-14, ACCOUNTING FOR CERTAIN SALES INCENTIVES ("EITF 00-14") which
applies to the recognition, measurement and income statement classification of
sales incentives offered to customers such as discounts, coupons, rebates and
free product or services. The Company adopted the provisions of EITF 00-14
effective January 1, 2001 and, as a result, immaterial amounts of sales
incentives that had been recorded as marketing expenses in prior years were
reclassified primarily as sales adjustments. The adoption of EITF 00-14 did not
have any impact on the Company's results of operations or financial position.

In April 2001, the EITF reached a consensus on Issue No. 00-25, VENDOR INCOME
STATEMENT CHARACTERIZATIONS OF CONSIDERATION TO A PURCHASER OF THE VENDOR'S
PRODUCTS OR SERVICES ("EITF 00-25") which addresses the statement of earnings
classification of slotting fees, cooperative advertising arrangements and
buydowns. The consensus will require certain payments made by the Company to
customers related to promotions that are currently classified as marketing
expenses be classified as reductions of revenue. The Company is still
evaluating the impact of the adoption of EITF 00-25 on its consolidated
financial statements. The adoption of EITF 00-25 will have no impact on the
Company's profit from operations or net earnings. The Company will adopt EITF
00-25 no later than January 1, 2002.

 In July 2001, the Financial Standards Accounting Board ("FASB") issued
Financial Accounting Standards Board Statement No. 141, BUSINESS COMBINATIONS
("FAS 141") and Financial Accounting Standards Board Statement No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS ("FAS 142"). FAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. FAS 141 also specifies the criteria that intangible assets acquired in
a purchase method business combination must meet to be recognized and reported
apart from goodwill. FAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment, at least annually, in accordance with the provisions of FAS 142. FAS
142 will also require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and be reviewed for impairment in accordance with Financial
Accounting Standards Board Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF.


                                                                              16
<PAGE>


POLAROID CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Periods Ended July 2, 2000 and July 1, 2001


11.  NEW ACCOUNTING STANDARDS (CONTINUED)

The provisions of FAS 141 are effective immediately, except with regard to
business combinations initiated prior to July 1, 2001. FAS 142 will be effective
as of January 1, 2002. Goodwill and other intangible assets acquired in business
combinations completed before July 1, 2001, will continue to be amortized prior
to the adoption of FAS 142. The Company is currently evaluating the effect that
the adoption of FAS 141 and FAS 142 will have on its results of operations and
its financial position.

12.  LEGAL PROCEEDINGS

The Company is involved in various legal proceedings and claims arising in the
ordinary course of business. The Company believes that the disposition of these
matters will not have a materially adverse effect on its results of operations
or financial condition. Legal proceedings are discussed in Part II, Item 1 of
this filing on Form 10-Q.

13.  INDEPENDENT ACCOUNTANTS' REVIEW REPORT

The July 2, 2000 and July 1, 2001 condensed consolidated financial statements
included in this filing on Form 10-Q have been reviewed by KPMG LLP, independent
certified public accountants, in accordance with established professional
standards and procedures for such review. The report by KPMG LLP commenting upon
their review of the condensed consolidated financial statements appears on the
following page.


                                                                              17
<PAGE>


                     INDEPENDENT ACCOUNTANTS' REVIEW REPORT


The Board of Directors
Polaroid Corporation:

We have reviewed the condensed consolidated balance sheet of Polaroid
Corporation and subsidiary companies as of July 1, 2001 and the related
condensed consolidated statement of earnings for the three and six month periods
ended July 2, 2000 and July 1, 2001 and the condensed consolidated statement of
cash flows for the six month periods then ended. These condensed consolidated
financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

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

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Polaroid Corporation and subsidiary companies as of December 31, 2000, and the
related consolidated statements of earnings, cash flows and changes in common
stockholders' equity for the year then ended (not presented herein); and in our
report dated January 22, 2001, except as to Note 6, Note 15 and Paragraph 6 of
Note 14 which are as of March 27, 2001, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 2000 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company did not make its July 16, 2001 interest
payments on its 2002 Notes and 2007 Notes and will not make its scheduled
August 15, 2001 interest payment on its 2006 Notes. The failure to make the
interest payments on the 2002 and 2007 Notes constituted a default under the
indenture pursuant to which the 2002 Notes and 2007 Notes were issued and
because the defaults will not be cured within 30 days of their occurrence,
the defaults will become events of default under the indenture and will give
the holders of the 2002 Notes and 2007 Notes the right to accelerate the
maturity of all principal and past due interest, which aggregated $310.5
million at July 15, 2001. Management's plans in regard to these matters are
described in Notes 2 and 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

                                          /S/ KPMG LLP

Boston, Massachusetts
July 16, 2001, except as to Notes 2 and 3 which are as of August 8, 2001


                                                                              18
<PAGE>


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

GENERAL

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

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

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

The Company discusses sales and profit from operations in terms of its core
instant business, digital products, other core products and non-core businesses.
The core instant business consists of traditional instant camera and film
products and newer instant camera and film products. The traditional camera and
film products are larger instant formats consisting primarily of the 600 and
Spectra series of instant cameras and film and other instant film formats used
primarily for commercial applications while the newer camera and film formats
are medium and smaller instant formats consisting primarily of JoyCam and I-Zone
instant cameras and film. Digital products consist primarily of the PHOTOMAX
line of digital cameras and other digital products. Other core products consist
of unique ID products, medical imaging products, sunglasses, videotapes and
conventional 35mm cameras and film. Non-core businesses consist of businesses
exited by the Company.


                                                                              19
<PAGE>


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

WORLDWIDE RESULTS FOR THE SECOND QUARTER OF 2001
  COMPARED WITH THE SECOND QUARTER OF 2000

NET SALES

In the second quarter of 2001, on a unit basis, worldwide shipments to customers
of traditional cameras decreased approximately 10% and worldwide shipments to
customers of traditional film decreased approximately 20% compared with the same
period of 2000. In addition, worldwide shipments to customers of newer cameras
decreased approximately 45% and worldwide shipments to customers of newer film
decreased approximately 25% in the second quarter of 2001 compared with the
second quarter of 2000. Worldwide shipments to customers of digital cameras
increased approximately 5% in the second quarter of 2001 compared with the same
period of 2000.

Worldwide net sales to customers decreased 31% to $333 million in the second
quarter of 2001 from $486 million in the second quarter of 2000. The decrease
was due to lower sales of traditional film and, to a lesser degree, newer
cameras, other core products, digital products, newer film and traditional
cameras. In addition, but to a lesser degree, the unfavorable impact of foreign
exchange also contributed to the decrease in worldwide net sales. The decrease
in sales of traditional and newer camera and film products in the second quarter
of 2001 was caused by weakening economies and the negative impact of growing
demand for digital and other media formats that compete with the Company's
traditional camera and film products in all of the Company's Regions. The
combination of these factors resulted in lower customer demand for the Company's
products and retailers reducing their inventories of the Company's products.
Worldwide net sales in the second quarter of 2000 included the impact of new
instant camera and film product introductions in the Americas and European
Regions.

In the Americas Region, on a unit basis, shipments to customers of traditional
cameras and film each decreased approximately 15% in the second quarter of 2001
compared with the second quarter of 2000. In addition, shipments to customers of
newer cameras decreased approximately 40% and shipments to customers of newer
film decreased approximately 20% in the second quarter of 2001 compared with the
same period of 2000. Shipments to customers of digital cameras were essentially
the same in the second quarters of 2001 and 2000.


                                                                              20
<PAGE>


Net sales in the Americas Region decreased 28% to $225 million in the second
quarter of 2001 from $311 million in the second quarter of 2000. The decrease in
sales was due to lower sales of traditional film and, to a lesser degree, newer
cameras, digital products, other core products, traditional cameras and newer
film. The decrease in sales of traditional and newer camera and film products
was caused by lower customer demand for these products. In addition to lower
shipments, the Company liquidated, at lower prices, certain slow-moving or
discontinued models and product lines.

In the European Region, on a unit basis, shipments to customers of traditional
cameras decreased approximately 10% and shipments to customers of traditional
film decreased approximately 30% in the second quarter of 2001 compared with the
second quarter of 2000. In addition, shipments to customers of newer cameras
decreased approximately 60% and shipments to customers of newer film decreased
approximately 20% in the second quarter of 2001 compared with the same period of
2000.

Net sales in the European Region decreased 38% to $62 million in the second
quarter of 2001 from $100 million in the second quarter of 2000. The decrease
was due to lower sales of traditional film and, to a lesser degree, other core
products and newer cameras. In addition, but to a lesser degree, the unfavorable
impact of foreign exchange also contributed to the decrease in sales in the
Region. The decrease in sales of traditional and newer camera and film products
was caused by lower customer demand for these products and retailers reducing
their inventories of these products.

In the Asia Pacific Region, on a unit basis, shipments to customers of
traditional cameras decreased approximately 15% and shipments to customers of
traditional film decreased approximately 20% in the second quarter of 2001
compared with the second quarter of 2000. In addition, shipments to customers of
newer cameras decreased approximately 50% and shipments to customers of newer
film decreased approximately 40% in the second quarter of 2001 compared with the
same period of 2000.

Net sales in the Asia Pacific Region decreased 38% to $46 million in the second
quarter of 2001 from $75 million in the second quarter of 2000. The decrease was
due to lower sales of traditional film and, to a lesser degree, newer cameras
and film. In addition, but to a lesser degree, the unfavorable impact of foreign
exchange also contributed to the decrease in sales in the Region. The decrease
in sales of traditional and newer camera and film products was caused by lower
customer demand for these products and retailers reducing their inventories of
these products.

PROFIT/(LOSS) FROM OPERATIONS

Worldwide loss from operations in the second quarter of 2001 was $52 million
compared with profit from operations of $51 million in the second quarter of
2000. The decrease was due to the impact of lower sales of traditional film
products and digital products, higher manufacturing costs and, to a lesser
degree, the impact of lower sales of newer cameras and film. The decreases were
offset, in part, by lower spending on advertising and promotional activities and
selling, general and administrative expenses.


                                                                              21
<PAGE>


In the second quarter of 2001, the Company's gross margin decreased to 28% of
net sales compared with 46% of net sales in the second quarter of 2000. The
decrease was caused by the impact of higher manufacturing costs in the second
quarter of 2001 that were driven by reductions in the Company's production
schedules, the impact of the Company liquidating certain slow-moving or
discontinued models and product lines and the mix of products sold in the
quarter.

Profit from operations in the Americas Region was $39 million in the second
quarter of 2001 compared with $103 million in the second quarter of 2000. The
decrease was due to the impact of lower sales of traditional film and digital
products and, to a lesser degree, newer cameras and film. In addition to the
impact of lower shipments, the Company liquidated, at lower prices, certain
slow-moving or discontinued models and product lines. The decreases were offset,
in part, by lower spending on selling, general and administrative expenses and
advertising and promotional activities.

Profit from operations in the European Region was $2 million in the second
quarter of 2001 compared with $15 million in the second quarter of 2000. The
decrease was due to the impact of lower sales of traditional film and, to a
lesser degree, the unfavorable impact of foreign exchange. The decreases were
offset, in part, by lower spending on advertising and promotional activities and
selling, general and administrative expenses.

Profit from operations in the Asia Pacific Region was $10 million in the second
quarter of 2001 compared with $20 million in the second quarter of 2000. The
decrease was due to the impact of lower sales of traditional film and, to a
lesser degree, newer cameras and film. The decreases were offset, in part, by
lower spending on selling, general and administrative expenses and advertising
and promotional activities.

Global Operations costs were $51 million in the second quarter of 2001 compared
with $26 million in the second quarter of 2000. The increase in Global
Operations costs related to higher manufacturing costs in the second quarter of
2001 that were driven by the inefficiencies of reduced production schedules.

Research and Development costs were $17 million in the second quarter of 2001
compared with $19 million in the second quarter of 2000.

Corporate costs were $36 million in the second quarter of 2001 compared with $42
million in the second quarter of 2000. The decrease was due primarily to lower
general and administrative expenses.

Other income was $25 million in the second quarter of 2001 compared with $12
million in the same period of 2000. In the second quarter of 2001, other income
included gains of approximately $18 million related to the sale of the Company's
56-acre reservoir site in Waltham, Massachusetts and approximately $7 million
related to a distribution on the Company's investment in a joint venture
developing certain real estate in Cambridge, Massachusetts. In the second
quarter of 2000, other income included $10 million of gains on the sale of real
estate.


                                                                              22
<PAGE>


Interest expense increased to $25 million in the second quarter of 2001 compared
with $21 million in the second quarter of 2000. The increase was due to higher
average amounts of debt outstanding during the period offset, in part, by lower
average interest rates.

Income tax expense in the second quarter of 2001 was $59 million on a reported
loss before income taxes of $51 million. Income tax expense recorded in the
second quarter of 2001 included a charge of approximately $53 million for the
establishment of a valuation allowance against certain deferred tax assets. The
valuation allowance, which reduced the deferred tax asset, was recorded because
the Company has determined that it is "more likely than not" that some portion
of the deferred tax benefits will not be realized over a reasonable period of
time. In the second quarter of 2000, the Company recorded income tax expense of
$14 million or 35% of reported earnings before income taxes of $41 million.

In the second quarter of 2001, the Company recorded a net loss of $110 million,
or $2.36 basic loss per common share compared with a net earnings of $27 million
or $.59 basic earnings per common share in the second quarter of 2000. Diluted
earnings/loss per common share was the same as basic earnings/loss per common
share in the first quarter of 2001 and 2000.

WORLDWIDE RESULTS FOR THE FIRST SIX MONTHS OF 2001
  COMPARED WITH THE FIRST SIX MONTHS OF 2000

NET SALES

In the first half of 2001, on a unit basis, worldwide shipments to customers of
traditional cameras decreased approximately 4% and worldwide shipments to
customers of traditional film decreased approximately 20% compared with the same
period of 2000. In addition, worldwide shipments to customers of newer cameras
decreased approximately 30% and worldwide shipments to customers of newer film
decreased approximately 5% in the first half of 2001 compared with the first
half of 2000. Worldwide shipments to customers of digital cameras increased
approximately 3% in the first half of 2001 compared with the same period of
2000.

Worldwide net sales to customers decreased 25% to $664 million in the first half
of 2001 from $888 million in the first half of 2000. The decrease was due to
lower sales of traditional film and, to a lesser degree, newer cameras, other
core products, digital products, and traditional cameras. In addition, but to a
lesser degree, the unfavorable impact of foreign exchange also contributed to
the decrease in worldwide sales. The decrease in sales of traditional and newer
camera and film products in the first half of 2001 was caused by weakening
economies and the negative impact of growing demand for digital and other media
formats which compete with the Company's traditional camera and film products in
all of the Company's Regions. The combination of these factors resulted in lower
customer demand for the Company's products and retailers reducing their
inventories of the Company's products.


                                                                              23
<PAGE>


In the Americas Region, on a unit basis, shipments to customers of traditional
cameras increased approximately 3% and shipments of instant film decreased
approximately 15% in the first half of 2001 compared with the first half of
2000. In addition, shipments to customers of newer cameras decreased
approximately 10% and shipments to customers of newer film increased
approximately 15% in the first half of 2001 compared with the same period of
2000. Shipments to customers of digital cameras decreased approximately 3% in
the first half of 2001 compared to the same period in 2000.

Net sales in the Americas Region decreased 18% to $450 million in the first half
of 2001 from $549 million in the first half of 2000. The decrease was due to
lower sales of traditional film and, to a lesser degree, other core products,
digital products, newer cameras and traditional cameras. These decreases were
offset, to a lesser degree, by higher sales of newer film. The decrease in sales
of traditional camera and film products and newer cameras was caused by lower
customer demand for these products and retailers reducing their inventories of
these products. In addition to lower shipments, the Company liquidated, at lower
prices, certain slow-moving or discontinued models and product lines.

In the European Region, on a unit basis, shipments to customers of traditional
cameras decreased approximately 5% and shipments to customers of traditional
film decreased approximately 30% in the first half of 2001 compared with the
first half of 2000. In addition, shipments to customers of newer cameras
decreased approximately 60% and shipments to customers of newer film decreased
approximately 20% in the first half of 2001 compared with the same period of
2000.

Net sales in the European Region decreased 34% to $124 million in the first half
of 2001 from $186 million in the first half of 2000. The decrease was due to
lower sales of traditional film and, to a lesser degree, newer cameras and other
core products. In addition, but to a lesser degree, the unfavorable impact of
foreign exchange also contributed to the decrease in sales in the Region. The
decrease in sales of traditional film and newer camera and film products was
caused by lower customer demand for these products and retailers reducing their
inventories of these products.

In the Asia Pacific Region, on a unit basis, shipments to customers of
traditional cameras and film decreased approximately 25% in the first half of
2001 compared with the first half of 2000. In addition, shipments to customers
of newer cameras decreased approximately 40% and shipments to customers of newer
film decreased approximately 30% in the first half of 2001 compared with the
same period of 2000.

Net sales in the Asia Pacific Region decreased 41% to $91 million in the first
half of 2001 from $153 million in the first half of 2000. The decrease was due
to lower sales of traditional film and, to a lesser degree, newer cameras and
film, other core products and traditional cameras. In addition, but to a lesser
degree, the unfavorable impact of foreign exchange also contributed to the
decrease in sales in the Region. The decrease in sales of traditional and newer
camera and film products was caused by lower customer demand for these products
and retailers reducing their inventories of these products.


                                                                              24
<PAGE>


PROFIT/(LOSS) FROM OPERATIONS

Worldwide loss from operations in the first half of 2001 was $170 million
compared with profit from operations of $60 million in the first half of 2000.
Worldwide loss from operations in the first half of 2001 included $80 million
for restructuring and other charges recorded in the first quarter of 2001. Refer
to the section titled "Restructuring and Other Charges" for information
concerning these charges. In addition to restructuring and other charges, the
decrease in profit from operations was due primarily to the impact of lower
sales of traditional film products and, to a lesser degree digital products.
Higher manufacturing costs and the impact of lower sales of newer camera and
film products and traditional cameras also contributed to the decrease in profit
from operations. The decreases were offset, in part, by lower spending on
selling, general and administrative expenses and advertising and promotional
activities.

In the first half of 2001, the Company's gross margin decreased to 31% of net
sales compared with 45% of net sales in the first half of 2000. The decrease was
caused by the impact of higher manufacturing costs in the first half of 2001
that were driven by reductions in the Company's production schedules, the mix of
products sold in the quarter and, to a lesser degree, the impact of the Company
liquidating certain slow-moving or discontinued models and product lines.

Profit from operations in the Americas Region was $88 million in the first half
of 2001 compared with $166 million in the first half of 2000. The decrease was
due to the impact of lower sales of traditional film and, to a lesser degree,
digital products and traditional and newer cameras. In addition the impact of
lower shipments, the Company liquidated, at lower prices, certain slow-moving or
discontinued models and product lines. The decreases were offset, in part, by
lower spending on advertising and promotional activities and selling, general
and administrative expenses.

Profit from operations in the European Region was $1 million in the first half
of 2001 compared with $25 million in the first half of 2000. The decrease was
due to the impact of lower sales of traditional film and, to a lesser degree,
the unfavorable impact of foreign exchange. The decreases were offset, in part,
by lower spending on selling, general and administrative expenses and
advertising and promotional activities.

Profit from operations in the Asia Pacific Region was $15 million in the first
half of 2001 compared with $42 million in the first half of 2000. The decrease
was due to the impact of lower sales of traditional film and, to a lesser
degree, newer film and cameras. The decreases were offset, in part, by lower
spending on selling, general and administrative expenses and advertising and
promotional activities.

Global Operations costs were $79 million in the first half of 2001 compared with
$50 million in the first half of 2000. The increase in Global Operations costs
related to higher manufacturing costs in the first half of 2001 that were driven
by the inefficiencies of reduced production schedules.


                                                                              25
<PAGE>


Research and Development costs were $39 million in the first half of 2001
compared with $40 million in the first half of 2000.

Corporate costs were $155 million in the first half of 2001 compared with $83
million in the first half of 2000. The increase was due to restructuring and
other charges of $80 million recorded in the first quarter of 2001 offset, in
part, by lower general and administrative expenses.

Other income was $27 million in the first half of 2001 compared with $20 million
in the same period of 2000. In the first half of 2001, other income included
gains of approximately $18 million on the sale of real estate and approximately
$7 million related to a distribution on the Company's investment in a joint
venture developing certain real estate in Cambridge, Massachusetts. In the first
half of 2000, other income included $13 million of gains on the sale of real
estate and, to a lesser degree, gains on the sale of investments.

Interest expense increased to $48 million in the first half of 2001 compared
with $41 million in the first half of 2000. The increase was due to higher
average amounts of debt outstanding during the period offset, in part, by lower
average interest rates.

Income tax expense in the first half of 2001 was $10 million on a reported loss
before income taxes of $191 million. Income tax expense recorded in the first
half of 2001 included a charge of approximately $53 million for the
establishment of a valuation allowance against certain deferred tax assets. The
valuation allowance, which reduced the deferred tax asset, was recorded because
the Company has determined that it is "more likely than not" that some portion
of the deferred tax benefits will not be realized over a reasonable period of
time. In the first half of 2000, the Company recorded income tax expense of $14
million or 35% of reported earnings before income taxes of $39 million.

In the first half of 2001, the Company recorded a net loss of $201 million, or
$4.35 basic loss per common share compared with a net earnings of $25 million or
$.56 basic earnings per common share in the first half of 2000. Diluted
earnings/loss per common share was the same as basic earnings/loss per common
share in the first half of 2001 and 2000.


                                                                              26
<PAGE>


RESTRUCTURING AND OTHER CHARGES

In June 2001, the Company announced a major global restructuring designed to
reduce its costs and improve its cash flows. This announcement was in
addition to the 2001-Q1 Program (defined below) under which the Company
recorded $80 million of restructuring and other charges. In connection with
its latest announcement, the Company expects to record a series of pre-tax
restructuring and other charges beginning in the third quarter of 2001 and
continuing through 2002. The series of charges (collectively, the "June 2001
Program") will be allocated to the non-segment Corporate category and are
expected to range between $150 million and $175 million. The June 2001
Program will consist of severance costs related to an involuntary severance
program under which the Company will eliminate approximately 2,000 positions,
asset write-offs primarily related to the reconfiguration of the Company's
Global Operations segment and exit costs related to certain of the Company's
operations that will be restructured. The Company believes approximately 50%
of the positions to be eliminated under the June 2001 Program will be from
the Global Operations segment, approximately 33% from the regional sales and
marketing segments and the remainder from the Research and Development
segment and the non-segment Corporate category.

In the first quarter of 2001, the Company recorded restructuring and other
charges of $80 million which consisted of severance costs and impairment charges
related to certain long-lived assets and an intangible asset. These charges
(collectively, the "2001-Q1 Program") were allocated to the non-segment
Corporate category and were undertaken to reduce overhead costs and realign the
Company's resources.

Approximately $50 million of the charges recorded in the first quarter of 2001
for the 2001-Q1 Program related to an involuntary severance program under which
approximately 950 employees (consisting of sales and marketing employees in the
regional segments: Americas - 14%; European - 6%; Asia Pacific - 3%;
manufacturing employees in Global Operations - 49%; research and engineering
employees in Research and Development - 14%; and administrative employees in the
non-segment Corporate category - 14%), are expected to leave the Company.
Approximately 600 of the expected 950 terminations under the 2001-Q1 Program had
occurred in the first half of 2001 with the remaining terminations expected to
be substantially complete by the end of 2001. Approximately $13 million of cash
payments had been made to employees that left the Company under the 2001-Q1
Program in the first half of 2001, with the remaining cash severance payments of
approximately $33 million expected to be substantially complete by the end of
the first quarter of 2002. Of the total amount provided for severance
approximately $4 million related to pension curtailment costs. The major impact
of the 2001-Q1 Program on the Company's segments and the non-segment Corporate
category will be the reduction in the number of employees and, as a result,
streamlined overhead structures and a reduction in the Company's excess
manufacturing capacity.


                                                                              27
<PAGE>


In addition to severance costs, the asset impairment portion of the 2001-Q1
Program totaled approximately $30 million in the first quarter of 2001. Of this
amount, approximately $12 million related to assembly equipment that was used to
produce other core products but will be scrapped because the Company has decided
to out-source the manufacture of these products. Approximately $11 million of
the write-offs related to surplus instant film assembly equipment, primarily
related to certain newer core products, that will either be abandoned in place
or scrapped based on a strategic decision to consolidate manufacturing
operations. The write-offs also included approximately $7 million of goodwill
that related to a non-strategic software company that was determined to be
impaired.

Under the 2001-Q1 Program, the Company expects to realize cost savings of
approximately $60 million on an annualized basis after the savings are fully
realized. The Company expects to realize additional cost savings of between $175
million and $200 million after the savings are fully realized under the June
2001 Program. The Company has begun to realize some of the savings under the
2001-Q1 Program and expects to realize the full savings from the 2001-Q1 Program
by the end of 2002 and the full savings from the June 2001 Program by the end of
2003.

FINANCIAL LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $94 million at July 1, 2001 and $97 million at
December 31, 2000. Net cash used in operating activities was $33 million in the
first half of 2001. The net loss, adjusted for non-cash items (i.e.
depreciation, gains on the sale of real estate and other non-cash items) and
restructuring charges decreased cash flow from operations by $72 million, and a
decrease in accounts payable and accruals reduced cash flow from operations by
an additional $105 million. The decreases were offset, in part, by a $144
million decrease in accounts receivable and a $34 million decrease in
inventories. Net cash provided by investing activities was $20 million in the
first half of 2001 and related to $54 million of proceeds from the sale of
property, plant and equipment offset by $33 million of capital spending. Net
cash provided by financing of $12 million in the first half of 2001 related to
an increase in the amount of short-term debt outstanding.

Working capital, defined as current assets less current liabilities, was $38
million at July 1, 2001 and $325 million at December 31, 2000. Excluding the
restructuring charges recorded in the first quarter of 2001 and the
reclassification of $150 million of debt from long-term to short-term because it
is due in less than twelve months, working capital, as adjusted, was $238
million at July 1, 2001. The decrease in working capital, as adjusted, relates
to decreases in accounts receivable and inventory offset, in part, by decreases
in accounts payable and accruals and compensation and benefits.


                                                                              28
<PAGE>


The decrease in accounts receivable was the result of lower sales in the first
half of 2001 compared with the first half of 2000 and the Company's focused
collection efforts during the first half of 2001. Inventories, which are also
part of the Company's focus to improve cash flow, decreased because of
reductions in production schedules and the liquidation of certain slow-moving or
discontinued models and product lines. The decrease in accounts payable and
accruals relates to cost cutting initiatives and reduced production schedules
implemented in the first half of 2001. The decrease in compensation and
benefits, excluding the impact of restructuring charges, relates to reduced
headcount caused by employees that left the Company in the first half of 2001
under the 2001-Q1 Program.

In the second quarter of 2001, the Company sold its 56-acre reservoir site in
Waltham, Massachusetts for approximately $69 million. As part of the sale
agreement, the Company entered into a lease for certain portions of the
reservoir site for periods of up to seven years. As a result, receipt of
approximately $15 million of the sales price was deferred and will be released
to the Company, over the term of the lease, as certain conditions are met. A
portion of the net cash proceeds from the sale were used by the Company to repay
outstanding borrowings under the Amended Credit Agreement. In addition, the
Company received a cash distribution of approximately $12 million from a real
estate joint venture developing certain real estate in Cambridge, Massachusetts.

In the first half of 2001, capital spending totaled $33 million compared with
$67 million for the same period of 2000. The decrease, which is consistent with
the Company's goal to reduce capital spending from $129 million in 2000 to
approximately $80 million in 2001, was due to lower spending on manufacturing
capacity related to the Company's newer camera and film products and the
Company's enterprise-wide software system.

At July 1, 2001, the Company had $525 million outstanding in short-term debt and
$424 million outstanding in long-term debt. The amount of short-term debt
outstanding was comprised of $310 million under the Amended Credit Agreement,
$47 million under the U.K. Credit Agreement, $150 million under its 6 3/4% Notes
due January 15, 2002 (the "2002 Notes") and $18 million under uncommitted
short-term lines of credit. The amount of long-term debt outstanding was
comprised of $275 million under its 11 1/2% Notes due February 15, 2006 (the
"2006 Notes") and $149 million under its 7 1/4% Notes due January 15, 2007 (the
"2007 Notes" and, with the 2002 Notes and the 2006 Notes, collectively, the
"Notes").


                                                                              29
<PAGE>


The Company's domestic credit agreement (as amended, the "Amended Credit
Agreement") initially provided for a maximum commitment of $350 million on a
revolving basis and is scheduled to mature on December 31, 2001. In connection
with the Amended Credit Agreement and the waivers to it, which are summarized
below, the Company granted the lenders under the Amended Credit Agreement a
first security interest in substantially all of the Company's domestic personal
property and mortgages on certain real estate, except for principal properties,
in each case, as permitted by the indentures pursuant to which the Notes were
issued. Funds borrowed under the Amended Credit Agreement initially bore
interest, at the Company's option, at either the prime rate of J.P. Morgan Chase
& Co. ("Prime") plus a margin or LIBOR on euro-dollar loans plus a margin. The
margins ranged from 0% to 1.275% for prime based loans and from .190% to 2.275%
for euro-dollar loans based on the Company's credit rating. In addition, the
Company has paid the lenders a facility fee ranging from .085% to .725%
depending on the Company's credit rating, a commitment fee on unused commitments
ranging from 0% to .025% depending on the Company's credit rating and a fee to
the administrative agent.

The credit agreement of the Company's wholly-owned subsidiary, Polaroid U.K.
Limited, for which the Company acts as a guarantor (as amended, the "U.K.
Credit Agreement") initially provided for a maximum commitment of 72.5
million euros and is scheduled to mature on December 31, 2001. In connection
with the U.K. Credit Agreement and the waivers to it, which are summarized
below, Polaroid U.K. Limited granted the lenders a security interest in
certain of its and the Company's other subsidiaries' accounts receivable and
inventories. Funds borrowed under the U.K. Credit Agreement initially bore
interest at approximately 25 basis points higher than that paid for
euro-dollar loans under the Amended Credit Agreement. In addition, the
Company initially paid a facility fee ranging from .085% to .75% depending on
the Company's credit rating, an arrangement fee and a fee to the
administrative agent.

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


                                                                              30
<PAGE>


On February 16, 2001, the Company entered into a waiver with the lenders
under the Amended Credit Agreement and the U.K. Credit Agreement, each of
which has been amended and supplemented a number of times since then, most
recently on July 12, 2001. The waivers, as extended by the amendments and
supplements, expire on October 12, 2001. The waivers waive, until their
expiration date, existing defaults and potential defaults of the Debt/EBITDA
Ratio and Interest Coverage Ratio and any events of default under the Amended
Credit Agreement and the U.K. Credit Agreement that will result from the
Company's failure to make the scheduled interest payments on any series of
Notes (described below), so long as either (1) the Company does not make any
of the July 15, 2001 or August 15, 2001 interest payments or (2) the trustee
under the indentures pursuant to which any series of Notes were issued or
persons purporting to constitute holders of at least 25% of the outstanding
principal amount of any series of the Notes do not accelerate the maturity of
their Notes or commence legal proceedings to collect unpaid interest on their
Notes.

Under the waiver to the Amended Credit Agreement:

         o        the maximum available borrowings are limited to $316 million,
                  but the Company expects the limit will increase by
                  approximately $800,000 per month, not to exceed $7 million, as
                  the Company makes payments on the lease it entered into in
                  connection with the sale of its 56-acre reservoir site in
                  Waltham, Massachusetts less any cash the Company receives from
                  the buyer in connection with the deferred portion of the
                  purchase price;

         o        additional covenants restrict, among other things, the
                  Company's ability to make certain capital expenditures, make
                  certain payments for the repurchase of stock or dividends to
                  shareholders, make certain interest payments, enter into
                  certain hedging transactions and make certain acquisitions and
                  investments;

         o        additional covenants also require the Company to maintain
                  certain minimum cash flow amounts, increase the Company's
                  reporting obligations to the lenders, provide security
                  interests in substantially all of the Company's domestic
                  personal property and mortgages on certain real estate, except
                  for principal properties, in each case, as permitted by the
                  indentures pursuant to which the Notes were issued and require
                  the Company to commence preparation of a plan of restructuring
                  of its capital structure; and

         o        during the waiver period of July 12, 2001 through October 12,
                  2001, borrowings will bear interest, at the Company's option,
                  at either Prime plus 2.525% or LIBOR plus 3.525% regardless of
                  the Company's credit rating and, the Company will pay the
                  lenders a facility fee of .725%, a commitment fee on unused
                  commitment of .025% and a fee to the administrative agent.


                                                                              31
<PAGE>


Under the waiver to the U.K. Credit Agreement:

         o        the maximum available borrowings are limited to 57 million
                  euros or approximately $49 million at July 1, 2001;

         o        many of the additional covenants contained in the waiver to
                  the Amended Credit Agreement were incorporated into the
                  waivers under the U.K. Credit Agreement and the Company
                  expects to provide a security interest in substantially all
                  of the personal property and real estate of Polaroid U.K.
                  Limited; and

         o        during the waiver period of July 12, 2001 through October 12,
                  2001, borrowings will bear interest at LIBOR plus 3.5%
                  regardless of the Company's credit rating and the Company will
                  pay the lenders a facility fee of .75%, an arrangement fee and
                  a fee to the administrative agent.

At July 1, 2001, the weighted average interest rate on amounts outstanding under
the Amended Credit Agreement was approximately 7.9% and the weighted average
interest rate on amounts outstanding under the U.K. Credit Agreement was
approximately 6.8%.

The indenture, pursuant to which the 2006 Notes were issued, contains covenants
that restrict, among other things, the Company's ability to do the following:
make certain payments for the repurchase stock or dividends to shareholders;
incur additional debt or issue preferred stock; incur certain liens; make
certain investments; enter into certain sale and leaseback transactions; enter
into certain transactions with affiliates; and merge, consolidate, sell or
transfer all or substantially all of the Company's assets subject to certain
financial conditions.

On July 16, 2001, the Company did not make scheduled interest payments
totaling $10.5 million on its 2002 Notes and its 2007 Notes and, on August
15, 2001, will not make a scheduled interest payment of $15.8 million on its
2006 Notes. The failure to make the interest payments on the 2002 Notes and
2007 Notes constituted defaults under the indenture pursuant to which the
2002 Notes and 2007 Notes were issued. Under the indenture governing the 2002
Notes and 2007 Notes, because the defaults will not be cured within 30 days
of their occurrence, the defaults will become events of default under the
indenture, which will give the holders of the 2002 Notes and the 2007 Notes
the right to accelerate the maturity of all principal and past due interest
on the 2002 Notes and the 2007 Notes, which aggregated $310.5 million at July
15, 2001. The failure to cure the default under the 2006 Notes within 30 days
of August 15, 2001 will similarly give rise to an event of default under the
indenture pursuant to which the 2006 Notes were issued, which will give the
holders of the 2006 Notes the right to accelerate the maturity of all
principal and past due interest on the 2006 Notes, which aggregated $288.2
million at July 15, 2001. Holders of the Notes also have the right to sue the
Company to collect interest that is accrued and unpaid when due and payable.
When the defaults regarding the 2002 Notes and 2007 Notes become events of
default, these payment defaults will also result in events of default under
the indenture pursuant to which the 2006 Notes were issued, the Amended
Credit Agreement and the U.K. Credit Agreement under the cross-default
provisions in those agreements. While these defaults under the Amended Credit
Agreement and U.K. Credit Agreement have been waived by the lenders
thereunder through October 12, 2001, the holders of the 2006 Notes may
accelerate the maturity of their obligations.


                                                                              32
<PAGE>


In addition, the indenture governing the 2006 Notes, the Amended Credit
Agreement and the U.K. Credit Agreement contain certain cross-acceleration
provisions, allowing these holders or lenders, under certain circumstances,
to accelerate the maturity of the obligations owed to them if other holders
or lenders do the same. The Company has not received notice that any holder
of the Notes has taken action or notified the Company that it will take
action, to enforce its rights or remedies against the Company as a result of
the defaults described above.

The Company has announced its intent to negotiate with the holders of the
Notes regarding a potential restructuring of the Company's debt with the
objective of developing a capital structure that is more consistent with and
will better support the Company's long-term business objectives. The Company
is pursuing this debt restructuring plan but is unable to predict when or if
it will be accepted by the holders of the Notes and, if applicable, the
lenders under the Amended Credit Agreement and the U.K. Credit Agreement. If
either (1) the Company makes any of the July 15, 2001 or August 15, 2001
interest payments or (2) the trustee under the indentures pursuant to which
any series of the Notes were issued or if persons purporting to constitute
holders of at least 25% of the outstanding principal amount of any series of
Notes accelerate the maturity of their Notes and unpaid interest on the Notes
or seek legal action to collect the unpaid interest, then the waivers to the
Amended Credit Agreement and the U.K. Credit Agreement would lapse. In that
event, the Company does not expect it could meet its accelerated payment
obligations.

The Company is involved in on-going discussions with its bank lenders to
extend the existing waivers to the Amended Credit Agreement and the U.K.
Credit Agreement beyond their current expiration date of October 12, 2001, to
allow the Company more time to develop and seek agreement from its creditors
regarding a debt restructuring plan and to refinance and/or restructure the
Amended Credit Agreement and the U.K. Credit Agreement. If the Company is
unsuccessful in its negotiations with its existing bank lenders, the lenders
will have the right to demand repayment of their loans when the waivers
expire, because the Company will then be in default under the Amended Credit
Agreement and the U.K. Credit Agreement. There can be no assurance that the
Company's existing bank lenders will agree to extend the waivers beyond
October 12, 2001 or that the trustee or the holders of any series of Notes
will not accelerate the maturity of their Notes or seek legal action to
collect the unpaid interest as described above. If either (1) the holders of
the any series of Notes were to accelerate the maturity of their Notes or
seek legal action to collect unpaid interest or (2) the Company were to make
any of the July 15, 2001 or August 15, 2001 interest payments, the waivers to
the Amended Credit Agreement and the U.K. Credit Agreement would lapse. In
its current financial condition, the Company does not expect that it could
raise the required funds to repay outstanding borrowings under or refinance
the Amended Credit Agreement and the U.K. Credit Agreement if the lenders
demand repayment of their loans under these agreements.

At this time, the Company is considering all of its options regarding how to
refinance and/or restructure its outstanding debt and capital structure,
including by a consensual, negotiated restructuring and/or other possible
methods, and is exploring a number of strategic alternatives that could include
the sale of assets, a merger of sale of the Company and/or a strategic
partnership. On July 11, 2001, the Company announced that it has retained
financial and legal advisors to assist it in conducting these negotiations.


                                                                              33
<PAGE>


The following is a summary of the Company's credit ratings as of August 5, 2001:

<TABLE>
<CAPTION>

                                               CORPORATE                SENIOR UNSECURED
                                             CREDIT RATING                DEBT RATING
                                         --------------------------------------------------
<S>                                               <C>                          <C>
Fitch Inc.                                        DDD                          D
Moody's Corporation                               Caa1                         Ca
Standard & Poor's Rating Service                   D                           D
</TABLE>

In 2001, the Company's corporate credit ratings were downgraded four times by
Fitch Inc. ("Fitch") from BB to DDD, twice by Moody's Corporation ("Moody's")
from Ba2 to Caa1 and four times by Standard & Poor's Rating Service ("S&P") from
BB- to D. In addition, the Company's senior unsecured debt ratings were
downgraded four times by Fitch from BBB- to D, three times by Moody's from Ba3
to Ca and four times by S&P from B+ to D. Each of the rating agencies noted
above have a negative outlook for the Company's corporate credit rating and its
senior unsecured debt rating.

FOREIGN CURRENCY EXCHANGE

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


                                                                              34
<PAGE>


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

To minimize the impact of currency fluctuations on its net monetary assets
denominated in currencies other than the relevant functional currency
("nonfunctional currencies") the Company engages in nonfunctional currency
denominated borrowings. The Company determines the aggregate amount of such
borrowings based on forecasts of each entity's nonfunctional currency
denominated net monetary asset position and the relative strength of the
functional currencies compared with the nonfunctional currencies. These
borrowings create nonfunctional currency denominated liabilities that hedge the
Company's nonfunctional currency denominated net monetary assets. Upon receipt
of the borrowed nonfunctional currency denominated funds, the Company converts
those funds to the functional currency at the spot exchange rate. Exchange gains
and losses on the nonfunctional currency denominated borrowings are recognized
in earnings as incurred. The amount of the Company's outstanding short-term debt
incurred for hedging purposes was $65 million at July 1, 2001.

Alternatively, the Company may use forward exchange contracts to minimize the
impact of currency fluctuations on its net monetary assets denominated in
nonfunctional currencies. The term of these contracts typically does not exceed
six months and the Company does not enter into forward exchange contracts for
trading purposes. The notional value of the Company's outstanding forward
exchange contracts at July 1, 2001, all of which expire in the next three
months, totaled $35 million and consisted of $11 million of forward exchange
contracts denominated in euros and $24 million of forward exchange contracts
denominated in other foreign currencies.

The Company has limited flexibility to increase prices in local currencies and
offset the adverse impact of foreign exchange. As a result, the Company
purchases U.S. dollar call/foreign currency put options with the objective of
minimizing the impact of exchange rate risk related to a portion of its
forecasted foreign-currency denominated intercompany sales. The term of
purchased options typically does not exceed 18 months and all of the option
contracts outstanding at July 1, 2001 will expire in the next twelve months. The
Company does not write options or purchase options for trading purposes. At July
1, 2001, the notional value of the Company's outstanding option contracts
totaled $133 million, consisting of $67 million of option contracts denominated
in euros and $66 million of option contracts denominated in Japanese yen.


                                                                              35
<PAGE>


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.

EURO CONVERSION

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

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

FACTORS THAT MAY AFFECT FUTURE RESULTS

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


                                                                              36
<PAGE>


         o        to refinance, restructure and/or extend the maturities of its
                  existing credit facilities, which mature on December 31, 2001,
                  and the Company's outstanding Notes and, to negotiate new
                  terms of these facilities and Notes to allow the Company to
                  operate with less debt, but with sufficient liquidity and
                  operating flexibility, so that it can continue to implement
                  its business strategy;

         o        to cure the events of default under the indenture governing
                  the 2002 Notes and 2007 Notes, which will arise in the third
                  quarter of 2001 from the Company's failure to make scheduled
                  interest payments on these Notes, and to cure the event of
                  default under the indenture governing the 2006 Notes which
                  will likely arise on September 15, 2001, following the
                  Company's failure to make a scheduled interest payment on the
                  2006 Notes, which will give the trustee and the holders of
                  the Notes the right to accelerate the maturity of the Notes
                  and commence legal proceedings to collect the unpaid interest
                  on the Notes, which cause the waivers of these agreements to
                  lapse;

         o        to manage the Company's relationships with its creditors,
                  including the holders of the Notes, bank lenders, and vendors,
                  employees and customers given its current financial condition;

         o        to access alternative sources of financing if it is unable to
                  refinance, restructure and/or renegotiate the Amended Credit
                  Agreement and the U.K. Credit Agreement in order to finance
                  the implementation of its business strategy and short-term
                  liquidity needs;

         o        to limit the amount of time that the Company's senior
                  management must devote to negotiating the restructuring,
                  refinancing and/or extending the maturities of its debt
                  agreements and pursuing strategic alternatives so that
                  management will have time to focus on the implementation of
                  the Company's financial and business strategies;

         o        to retain a number of key senior managers and other employees
                  and to be able to attract and retain qualified senior managers
                  and other employees who can implement the Company's financial
                  and business strategies;

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


                                                                              37
<PAGE>


         o        to implement its business strategies of reducing costs and
                  improving cash flow; manage the instant imaging business for
                  cash and profitability and develop its instant digital
                  printing and other digital products, which will require, among
                  other things:

                  -        further reducing costs, which may prove challenging
                           for several reasons, including the fact that the
                           Company has already undergone several restructurings
                           and several quarters in which it has already realized
                           significant efficiencies, while continuing to support
                           the development of its instant digital printing
                           business;
                  -        maximizing the profitability of and cash flow from
                           the Company's instant imaging business, which
                           includes anticipating which of its current and new
                           instant imaging products will be most profitable in
                           the short-term and phasing out less profitable
                           instant imaging products; and
                  -        continuing to develop and market instant digital
                           printing products profitably, including the
                           development of partnerships and alliances with other
                           companies, which may prove challenging given the
                           Company's financial condition, and by anticipating
                           and responding to trends in the rapidly changing,
                           competitive and costly digital imaging market;

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

         o        to retain its top customers and limit the Company's
                  vulnerability to general adverse economic conditions,
                  particularly the current economic slow-down, and the impact of
                  digital and other competing media formats which has resulted
                  in lower customer demand for the Company's products and
                  retailers reducing their inventories;

         o        to increase its ability to compete with competitors that are
                  less leveraged and have greater financial and other resources;
                  increase its ability to fund future working capital needs,
                  capital expenditures, research and development costs and other
                  general corporate requirements; and increase its flexibility
                  to react to changes in the businesses and industry in which it
                  operates;

         o        to sell and market its products worldwide particularly in
                  light of the major risks associated with worldwide operations
                  such as various local laws and customs and the Company's
                  exposure to fluctuation of foreign exchange rates,
                  particularly the Japanese yen and euro;


                                                                              38
<PAGE>


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

         o        to find suitable manufacturers to which the Company can
                  outsource the manufacture of certain products;

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

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

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


                                                                              39
<PAGE>


                           PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

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

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

Due to a wide range of estimates with regard to response costs at those sites
and various other uncertainties, the Company cannot firmly establish its
ultimate liability concerning those sites. In each case in which the Company is
able to determine the likely exposure, such amount has been included in the
Company's reserve for environmental liabilities. Where a range of comparably
likely exposures exists, the Company has included in its reserve at least the
minimum amount of the range. The Company's aggregate reserve for these
liabilities was $.8 million as of July 1, 2001 and the Company currently
estimates that the majority of the reserve will be payable over the next two to
three years. The Company reviews the analysis of the data that supports the
adequacy of this reserve on a quarterly basis. The reserve for such liability
does not provide for associated litigation costs, which, if any, are expected to
be inconsequential in comparison with the amount of the reserve. The Company
will continue to accrue in its reserve appropriate amounts from time to time as
circumstances warrant. This reserve does not take into account potential
recoveries from third parties.

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

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


                                                                              40
<PAGE>


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

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

a)  Not applicable.

b) Not applicable.

c) Not applicable.

d) Not applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

On July 16, 2001, the Company did not make scheduled interest payments
totaling $10.5 million on its 6 3/4% Notes due January 15, 2002 (the "2002
Notes") and its 7 1/4% Notes due January 15, 2007 (the "2007 Notes") and, on
August 15, 2001, will not make a scheduled interest payment of $15.8 million
on its 11 1/2% Notes due February 15, 2006 (the "2006 Notes" and, with the
2002 Notes and the 2007 Notes, collectively, the "Notes"). The failure to
make the interest payments on the 2002 Notes and 2007 Notes constituted a
default under the indenture pursuant to which the 2002 Notes and 2007 Notes
were issued. Under the indenture governing the 2002 Notes and 2007 Notes,
because the defaults will not be cured within 30 days of their occurrence,
the defaults will become events of default under the indenture, which will
give the holders of the 2002 Notes and the 2007 Notes the right to accelerate
the maturity of all principal and past due interest on the 2002 Notes and the
2007 Notes, which aggregated $310.5 million at July 15, 2001. The failure to
cure the default under the 2006 Notes within 30 days of August 15, 2001 will
similarly give rise to an event of default under the indenture pursuant to
which the 2006 Notes were issued, which will give the holders of the 2006
Notes the right to accelerate the maturity of all principal and past due
interest on the 2006 Notes, which aggregated $288.2 million at July 15, 2001.
Holders of the Notes also have the right to sue the Company to collect
interest that is accrued and unpaid when due and payable. When the defaults
regarding the 2002 Notes and 2007 Notes become events of default, these
payment defaults will also result in events of default under the indenture
pursuant to which the 2006 Notes were issued, the Company's domestic credit
agreement (as amended, the "Amended Credit Agreement") and the credit
agreement of the Company's wholly-owned subsidiary, Polaroid U.K. Limited,
for which the Company acts as a guarantor (as amended, the "U.K. Credit
Agreement") under the cross-default provisions in those agreements. While
these defaults under the Amended Credit Agreement and U.K. Credit Agreement
have been waived by the lenders thereunder through October 12, 2001, the
holders of the 2006 Notes may accelerate the maturity of their obligations.
In addition, the indenture governing the 2006 Notes, the Amended Credit
Agreement and the U.K. Credit Agreement contain certain cross-acceleration
provisions, allowing these holders or lenders, under certain circumstances,
to accelerate the maturity of the obligations owed to them if other holders
or lenders do the same. The Company has not received notice that any holder
of the Notes has taken action or notified the Company that it will take
action, to enforce its rights or remedies against the Company as a result of
the defaults described above.


                                                                              41
<PAGE>


The Company has announced its intent to negotiate with the holders of the Notes
regarding a potential restructuring of the Company's debt with the objective of
developing a capital structure that is more consistent with and will better
support the Company's long-term business objectives. The Company is pursuing
this debt restructuring plan but is unable to predict when or if it will be
accepted by the holders of the Notes and, if applicable, the lenders under the
Amended Credit Agreement and the U.K. Credit Agreement. If either (1) the
Company makes any of the July 15, 2001 or August 15, 2001 interest payments or
(2) the trustee under the indentures pursuant to which any series of the Notes
were issued or if persons purporting to constitute holders of at least 25% of
the outstanding principal amount of any series of Notes accelerate the
maturity of their Notes and unpaid interest on the Notes or seek legal action to
collect the unpaid interest, then the waivers to the Amended Credit Agreement
and the U.K. Credit Agreement would lapse. In that event, the Company does not
expect it could meet its accelerated payment obligations.

The Company is involved in on-going discussions with its bank lenders to
extend the existing waivers to the Amended Credit Agreement and the U.K.
Credit Agreement beyond their current expiration date of October 12, 2001, to
allow the Company more time to develop and seek agreement from its creditors
regarding a debt restructuring plan and to refinance and/or restructure the
Amended Credit Agreement and the U.K. Credit Agreement. If the Company is
unsuccessful in its negotiations with its existing bank lenders, the lenders
will have the right to demand repayment of their loans when the waivers
expire, because the Company will then be in default under the Amended Credit
Agreement and the U.K. Credit Agreement. There can be no assurance that the
Company's existing bank lenders will agree to extend the waivers beyond
October 12, 2001 or that the trustee or the holders of any series of Notes
will not accelerate the maturity of their Notes or seek legal action to
collect the unpaid interest as described above. If either (1) the holders of
any series of Notes were to accelerate the maturity of their Notes and unpaid
interest on the Notes or seek legal action to collect unpaid interest or (2)
the Company were to make any of the July 15, 2001 or August 15, 2001 interest
payments, the waivers to the Amended Credit Agreement and the U.K. Credit
Agreement would lapse. In its current financial condition, the Company does
not expect that it could raise the required funds to repay outstanding
borrowings or refinance the Amended Credit Agreement and the U.K. Credit
Agreement if the lenders demand repayment of their loans under these
agreements.

The Company has retained financial and legal advisors to assist it in conducting
the negotiations described above, considering its refinancing and restructuring
options and exploring a number of strategic alternatives, including the sale of
assets, a merger or sale of the Company and/or a strategic partnership. See
"Financial Liquidity and Capital Resources" within "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for additional
information regarding the Company's financial condition.


                                                                              42
<PAGE>


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The 2001 Annual Meeting of Shareholders of Polaroid Corporation was held on May
8, 2001. The owners of 39,701,725 shares, or approximately 85% of the shares of
common stock entitled to vote at this meeting, were present either in person or
represented by proxy. The following were the voting results for the meeting:

         o        the stockholders elected the nominated slate of directors to
                  hold office until the next annual meeting with the following
                  votes:

<TABLE>
<CAPTION>

                                                             VOTED               WITHHELD
                                                      --------------------------------------
                  <S>                                      <C>                 <C>
                  Gary T. DiCamillo                        34,019,159          5,682,566
                  Stephen A. Bernazzani                    34,481,186          5,220,539
                  Stephen B. Kaufman                       34,538,140          5,163,585
                  John W. Loose                            34,498,902          5,202,823
                  Albin F. Moschner                        34,456,799          5,244,926
                  Alfred Poe                               34,449,700          5,252,025
                  Dr. Ralph Z. Sorenson                    34,454,255          5,247,470
                  Carole F. St. Mark                       34,482,830          5,218,895
                  Bernee D.L. Strom                        34,424,586          5,277,139
                  Alfred M. Zeien                          34,416,749          5,284,976
</TABLE>

         o        the shareholder proposal concerning the Polaroid Stock
                  Incentive Plan was ratified with 16,374,315 shares voting for,
                  8,768,845 shares voting against and 14,558,565 shares
                  abstaining.

         o        the stockholders ratified the appointment of KPMG LLP,
                  Independent Public Accountants, as the Company's auditors for
                  2001 with 37,364,959 shares voting for, 1,925,472 shares
                  voting against and 411,294 shares abstaining.

ITEM 5.  OTHER INFORMATION

Not applicable.


                                                                              43
<PAGE>


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

a)  EXHIBITS

<TABLE>
<CAPTION>

   EXHIBIT NO.    DESCRIPTION
--------------------------------------------------------------------------------
    <S>           <C>
     3.1(*)       By-Laws of Polaroid Corporation amended and restated as of May
                  16, 2001.

    10.1(*)       Employment Agreement dated as of June 6, 2001 between Polaroid
                  Corporation and William L. Flaherty.

    10.2(*)       Change in Control and Severance Agreement dated as of June 6,
                  2001 between Polaroid Corporation and William L. Flaherty.

    10.3(*)       Employment Agreement dated as of July 1, 2001 between
                  Polaroid Corporation and Neal D. Goldman.

    12(*)         Ratio of Earnings to Fixed Charges.

    15(*)         Letter re Unaudited Interim Financial Information.
--------------------------------------------------------------------------------
</TABLE>

(*) - Filed herewith.

     Exhibits are not included in copies to this Form 10-Q except those copies
filed with the Securities and Exchange Commission. A copy of these exhibits will
be furnished to stockholders upon written request.


b)  REPORTS ON FORM 8-K

     During the second quarter of 2001, the Company filed the following:

         o        Current Report on Form 8-K dated April 19, 2001, (the Company
                  filed a press release as Exhibit 99.1 announcing the results
                  for the three months ended April 1, 2001);

         o        Current Report on Form 8-K dated May 31, 2001, (the Company
                  filed a press release as Exhibit 99.1 announcing two new
                  digital printing strategies and outlining its new business
                  model for instant and digital businesses);

         o        Current Report on Form 8-K dated June 7, 2001, (the Company
                  filed a press release as Exhibit 99.1 announcing the
                  appointment of a new chief financial officer);

         o        Current Report on Form 8-K dated June 13, 2001, (the Company
                  filed a press release as Exhibit 99.1 announcing a
                  restructuring plan); and

         o        Current Report on Form 8-K dated June 20, 2001, (the Company
                  filed an Amended and Restated Rights Agreement dated as of
                  July 1, 2001, between Polaroid Corporation and Fleet National
                  Bank, as rights agent).


                                                                              44
<PAGE>


                                   SIGNATURES

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

                              POLAROID CORPORATION
                                  (Registrant)

                              By /s/ William L. Flaherty
                                 ---------------------------
                                 William L. Flaherty
                                 Executive Vice President
                                 and Chief Financial Officer




                                                                              45