(FORTUNE Magazine) – POLAROID is pouring champagne, and with good reason. The 50-year-old company is recovering from a serious midlife crisis. Consumers had grown disenchanted with instant photography, and Polaroid sales suffered from a bad case of miniaturization. Now the company suddenly is up and moving again. Revenues for the first nine months of last year rose 29% to $1.1 billion, and profits more than quintupled to $64 million. Early last year Polaroid's victory in a patent suit forced Eastman Kodak out of the instant camera business. In addition to regaining its monopoly, Polaroid could win as much as $1 billion in damages from Kodak. The falling dollar gave a hefty boost to Polaroid's profits from abroad, a big part of its business. Most important, last April the company introduced Spectra, a new camera that reignited interest in instant photography. Spectra is Polaroid's first hit in eight years. Brenda Landry, an industry analyst at Morgan Stanley, estimates that 800,000 of them were sold last year. A big improvement over earlier models, Spectra produces pictures that sometimes rival those from inexpensive 35mm cameras. Polaroid ads used to emphasize the joy of seeing a picture right away; the Spectra campaign stresses the quality of the pictures. Consumer excitement about Spectra has spilled over to the company's old camera lines and triggered higher film sales. Wall Street had these events sharply in focus. Polaroid stock jumped 55% over the past 12 months to a recent price of $71 a share. ''What's really happened,'' says Landry of Morgan Stanley, ''is that the popularity of Spectra has turned around sales of instant film, and that's where the real profits are.'' Landry believes the stock should be selling around $100 a share. However, a hot new camera cools off after about two years. The big question facing Polaroid is what comes after Spectra. The answer, says Chief Executive Israel MacAllister Booth (Mac to his colleagues), is an electronic camera that will store photographs on a magnetic disk instead of film. That will pit the company directly against Kodak as well as electronic giants such as Sony and Matsushita, all working on electronic cameras. So Polaroid is gearing up for its toughest battle yet. Booth and Chairman William McCune have spent the past few years getting the company into fighting shape. They cut the work force from 20,000 to 13,000, reorganized the company into three profit centers (consumer, industrial, and magnetics, which makes floppy disks for computers), and created an entrepreneurial atmosphere by paying profit-based bonuses to the rank and file. They have also eliminated reams of red tape. Polaroid paid off all its $120 million of long-term debt last August and now finances growth out of cash flow.

Booth has also rebuilt morale. Founder Edwin Land was the soul of Polaroid until he retired in 1982. An aloof authoritarian but brilliant inventor -- only Thomas Edison held more U.S. patents -- Land left a tremendous void. Booth seems an unlikely choice for the role of a corporate Knute Rockne. He describes himself as ''dull and colorless,'' punctuates his conversation with ''gosh'' and ''heavens to Betsy,'' and commutes to his Cambridge, Massachusetts, office in a Jeep. Yet he is a driven leader who made his mark by building a pioneering color-film factory and bringing the three-year project in on time and within budget. Morale is on the upswing, Booth's subordinates say, because he is so willing to listen to new ideas. He wanders the halls and asks questions. A quiet, private man, Booth confesses that changing his management style was a tough personal challenge. ''In retrospect,'' he says, ''I have to give myself some bad marks for not going out and explaining our troubles to people. Talking is better than hiding in the closet. I hid in the closet but I wouldn't do that again.'' Booth rocked the technocrats at Polaroid by insisting that marketing had to become more important -- and get more sophisticated. Under Land, the corporate philosophy was to invent a new camera and then roll out a big ad campaign to sell consumers on the merits of the technology. For Spectra, Booth ordered unprecedented amounts of consumer research to guide the engineers toward a camera people really wanted. The research indicated that they wanted better picture quality and fancy features like auto focus. Polaroid is taking aim at a new market with Spectra. Since the 1960s the company has sold mostly low-price cameras to blue-collar people. Polaroid's old 600 series cameras sell for $25 to $80. Spectra retails for $150 and has a high-tech feel that one photo retailer calls ''the Porsche look.'' Spectra ads are aimed at people who can afford 35mm quality and nifty features. The company plans to bring out an even higher-priced Spectra later this year, and is redesigning the Spectra film to work in its cheaper cameras. BUT TO KEEP film profits rising, Polaroid will have to either truly match 35mm in quality or cut the price. Consumers pay about 80 cents each for instant pictures, vs. about 40 cents for conventional ones. William O'Neill Jr., head of consumer photography products, says that in the long run, Polaroid cannot charge more than a 20% premium for instant film. Booth would rather keep prices up. ''I think innovation is the way to go, not price,'' he says. Inventing an instant camera that takes pictures with the sharpness and rich tones of expensive 35mm cameras is a tough order. As Booth says, ''It will take some brilliant technological breakthroughs.'' If consumers turn fickle again before the breakthroughs come, Polaroid has a nice, steady commercial business to fall back on. The commercial division, which includes cameras for instant passport and driver's license photos, accounts for about 40% of sales. Its latest offering is FreezeFrame, a $1,900 black box that transforms video pictures into instant photographic prints or slides. On sale since October, the FreezeFrame is gaining popularity among television broadcasters, magazine publishers, and advertising agencies. The device enables a television news editor to play a videotape of, say, a plane crash, stop it at different places, and press a button to get Polaroid prints of the scenes. Polaroid also is working on a high-density floppy disk for personal computers that will hold more information than hard disks. The company loses money on its sales of conventional floppies. Most floppies on the market now hold about 360,000 characters of information; hard disks in personal computers hold up to 20 million. Polaroid claims its high-density floppy can handle up to 50 million. The advantage of a floppy over a hard disk is that a head crash, that terrifying accident in which a speck of dust destroys all your data, is not a worry. Polaroid is working with computer manufacturers to develop a disk drive for its floppy. If Polaroid can deliver on time and at the right price, the high-density floppy could become its first significant product outside of photography. ''I'm real excited,'' says Booth. ''High- density floppy disks could very quickly become a $50-million-a-year business for us.'' THE COMPANY is betting the most on the electronic still camera, the first new variety of instant photography. The company has developed components for it but doesn't have a prototype yet. Managers, though, are enthusiastic and think electronic cameras could revolutionize photography in the 1990s. The first version -- at least several years away -- will be a high-price item, perhaps as much as $2,500, aimed at professionals and buffs who love to be the first to have the latest gadget. Says Booth: ''I think it will be five to ten years until an electronic camera hits the mass market, but we're going at it like it might happen tomorrow.'' The electronic camera will look like an ordinary 35mm model but will be entirely different inside. It uses a computer chip called an image sensor instead of film to record pictures. Light passes through a lens and hits the image sensor, which converts it into an electronic signal. Another chip called an image processor adjusts the picture for sharpness and color. The electronic information is then stored on a two-inch magnetic disk that can hold as many as 30 pictures. The disks will be much cheaper than film, just as videotape sells for a small fraction of what movie film costs. The shutterbug will be able to look at what he snapped on his television screen before making instant prints of his favorite shots. $ At least a dozen companies have prototypes of electronic cameras, and Canon put a model on sale last year, priced at a breathtaking $6,000. But the quality of the prints is still poor, and Polaroid thinks it can come up with a much better product using its instant-picture technology. ''I think instant film is going to be the dominant factor in electronic photography, and we know more about that than anyone in the world,'' says Booth. A color photograph contains an astonishing number of dots called pixels, much like the ones that make up a pointillist painting. A fine-quality 35mm print has about 18 million pixels. One big problem with electronic cameras is that the image sensors used on today's versions usually translate what they see into 400,000 or fewer pixels, nowhere near the quality of film. Even if they could match film, today's electronic cameras use peripheral computer printers that cannot reproduce enough pixels to match the quality of even a newspaper photo. In its new $30-million microelectronics lab, Polaroid is developing an image sensor that it hopes will close the gap. The sensor may be able to translate light into one million pixels, which Polaroid's engineers think may produce a good enough picture -- about as good as today's Spectra prints -- to please consumers. The company is also betting that instant film, not a computer printer, is the best way to get high-quality prints from electronic cameras. Its scientists have developed a gallium arsenide chip that can convert the electronic information back into light rays that expose Polaroid instant film. The electronic camera is obviously a big gamble, but it probably is one Polaroid can't afford not to make. If the technology works, it could make cameras like the Spectra obsolete. If it doesn't, Booth believes, the champagne will continue to flow. Says he: ''Anyone who says instant photography is dying has his head in the sand.''

CHART: INVESTOR'S SNAPSHOT POLAROID SALES (LATEST FOUR QUARTERS) $1.5 BILLION CHANGE FROM YEAR EARLIER UP 24% NET PROFIT $90.1 MILLION CHANGE UP 325% RETURN ON COMMON STOCKHOLDERS' EQUITY 9% FIVE-YEAR AVERAGE 4% RECENT SHARE PRICE $71 PRICE/EARNINGS MULTIPLE 24 TOTAL RETURN TO INVESTORS (12 MONTHS TO 1/16) 48% PRINCIPAL MARKET NYSE