GlassBridge Enterprises, Inc. - Quarter Report: 2007 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

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

For the transition period from                      to                     

IMATION CORP.

(Exact name of registrant as specified in its charter)

Delaware		41-1838504
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
1 Imation Way
Oakdale, Minnesota		55128
(Address of principal executive offices)		(Zip Code)

(651) 704-4000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ           Accelerated filer o           Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 39,304,186 shares of Common Stock, par value $0.01 per share, were outstanding at October 31, 2007.

 

 

IMATION CORP.
TABLE OF CONTENTS

						PAGE
PART I				FINANCIAL INFORMATION
		ITEM 1.		FINANCIAL STATEMENTS
				Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006			3
				Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006			4
				Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006			5
				Notes to Condensed Consolidated Financial Statements			6
				Report of Independent Registered Public Accounting Firm			20
		ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			21
		ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			31
		ITEM 4.		CONTROLS AND PROCEDURES			31
PART II				OTHER INFORMATION
		ITEM 1.		LEGAL PROCEEDINGS			32
		ITEM 1A.		RISK FACTORS			33
		ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			33
		ITEM 3.		DEFAULTS UPON SENIOR SECURITIES			34
		ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			34
		ITEM 5.		OTHER INFORMATION			34
		ITEM 6.		EXHIBITS			34
SIGNATURE							35
EXHIBIT INDEX							36
Awareness Letter
Section 302 Certification
Section 302 Certification
Section 906 Certification
Section 906 Certification

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

IMATION CORP.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Net revenue		$	525.5			$	424.7			$	1,360.2			$	1,125.7
Cost of goods sold			439.8				336.4				1,120.2				874.0
Gross profit			85.7				88.3				240.0				251.7
Operating expense (income):
Selling, general and administrative			61.6				47.4				151.5				127.1
Research and development			8.5				12.6				30.5				37.7
Restructuring and other			(0.7	)			—				20.7				10.7
Total			69.4				60.0				202.7				175.5
Operating income			16.3				28.3				37.3				76.2
Other (income) and expense:
Interest income			(1.5	)			(2.2	)			(6.5	)			(9.8	)
Interest expense			0.8				0.3				1.4				0.7
Other expense, net			1.5				0.8				3.7				6.4
Total			0.8				(1.1	)			(1.4	)			(2.7	)
Income from continuing operations before income taxes			15.5				29.4				38.7				78.9
Income tax provision			6.1				10.9				15.0				28.1
Income from continuing operations			9.4				18.5				23.7				50.8
Gain on disposal of discontinued business, net of income taxes			—				—				—				1.2
Net income		$	9.4			$	18.5			$	23.7			$	52.0
Earnings per common share — basic:
Continuing operations		$	0.24			$	0.54			$	0.65			$	1.47
Discontinued operations		$	—			$	—			$	—			$	0.03
Net income		$	0.24			$	0.54			$	0.65			$	1.50
Earnings per common share — diluted:
Continuing operations		$	0.24			$	0.53			$	0.64			$	1.44
Discontinued operations		$	—			$	—			$	—			$	0.03
Net income		$	0.24			$	0.53			$	0.64			$	1.48
Weighted average basic shares outstanding			39.4				34.5				36.4				34.6
Weighted average diluted shares outstanding			39.7				35.1				36.8				35.2
Cash dividends paid per common share		$	0.16			$	0.14			$	0.46			$	0.40

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

IMATION CORP.

		September 30,				December 31,
		2007				2006
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	133.1			$	252.5
Accounts receivable, net			457.0				308.1
Inventories, net			377.7				258.0
Other current assets			104.0				58.3
Total current assets			1,071.8				876.9
Property, plant and equipment, net			183.3				178.0
Intangible assets, net			376.1				230.2
Goodwill			130.8				67.6
Other assets			30.7				30.2
Total assets		$	1,792.7			$	1,382.9
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	318.3			$	227.3
Accrued payroll			14.9				23.7
Other current liabilities			229.8				140.6
Current portion of long-term debt			10.0				—
Total current liabilities			573.0				391.6
Other liabilities			54.4				45.0
Long-term debt			23.8				—
Commitments and contingencies
Shareholders’ equity			1,141.5				946.3
Total liabilities and shareholders’ equity		$	1,792.7			$	1,382.9

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

IMATION CORP.

		Nine Months Ended
		September 30,
		2007				2006
Cash Flows from Operating Activities:
Net income		$	23.7			$	52.0
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			33.4				28.1
Stock-based compensation			7.6				8.0
Excess tax benefits from exercise of stock options			(0.2	)			(2.8	)
Deferred income taxes			(2.0	)			(2.9	)
Gain on sale of Specialty Papers			—				(2.1	)
Non-cash restructuring and other charges			2.8				1.1
Other			2.9				6.7
Changes in operating assets and liabilities:
Accounts receivable			2.4				(7.5	)
Inventories			(11.6	)			(34.6	)
Other assets			(9.8	)			1.4
Accounts payable			(33.1	)			21.6
Accrued payroll and other liabilities			(2.7	)			22.9
Net cash provided by operating activities			13.4				91.9
Cash Flows from Investing Activities:
Acquisition of businesses, net of cash acquired			(33.0	)			(331.9	)
Capital expenditures			(11.8	)			(12.1	)
Purchase of investments			(0.2	)			(0.2	)
Proceeds from sale of investments			—				28.9
Proceeds from sale of Specialty Papers			—				2.3
Other, net			0.1				3.2
Net cash used in investing activities			(44.9	)			(309.8	)
Cash Flows from Financing Activities:
Purchase of treasury stock			(79.6	)			(35.6	)
Dividend payments			(16.9	)			(13.9	)
Repayment of debt			(3.8	)			—
Exercise of stock options			7.5				22.9
Excess tax benefits from exercise of stock options			0.2				2.8
Net cash used in financing activities			(92.6	)			(23.8	)
Effect of exchange rate changes on cash and cash equivalents			4.7				3.9
Net change in cash and cash equivalents			(119.4	)			(237.8	)
Cash and cash equivalents — beginning of period			252.5				483.0
Cash and cash equivalents — end of period		$	133.1			$	245.2

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

IMATION CORP.

Note 1 — Basis of Presentation

     The interim Condensed Consolidated Financial Statements of Imation Corp. (Imation, the Company, we, us or our) are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair statement of financial position, results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal, recurring items. The results of operations for any interim period are not necessarily indicative of full year results. The Condensed Consolidated Financial Statements and Notes are presented in accordance with the requirements for Form 10-Q and do not contain certain information included in our annual Consolidated Financial Statements and Notes.

     The preparation of the interim Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim Condensed Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting periods. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.

     The December 31, 2006 Condensed Consolidated Balance Sheet data was derived from the audited Consolidated Financial Statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. This Form 10-Q should be read in conjunction with our Consolidated Financial Statements and Notes included in our Annual Report on Form 10-K for the year ended December 31, 2006.

Note 2 — Taxes

     We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN 48, we recognized a cumulative effect benefit of approximately $2.5 million. The benefit was comprised of previously unrecognized tax benefits in the amount of $1.5 million, which were realized in the second quarter of 2007 as a result of finalizing an Internal Revenue Service (IRS) audit, and a reduction of international tax reserves in the amount of $1.0 million. This cumulative effect was accounted for as an increase to the January 1, 2007 balance of retained earnings.

     Unrecognized tax benefits are the differences between a tax position taken, or expected to be taken in a tax return, and the benefit recognized for accounting purposes pursuant to FIN 48. The total amount of our unrecognized tax benefits was $7.3 million as of January 1, 2007. Our unrecognized tax benefits, if recognized, would impact the effective tax rate. Included in the balance of unrecognized tax benefits at January 1, 2007 is $1.4 million related to tax positions for which it is reasonably possible that the amounts could change during the next twelve months. This potential change represents a decrease in unrecognized tax benefits comprised of items related to expiring statutes in foreign jurisdictions.

     We recognize interest and, if applicable, penalties in income tax expense. We have accrued approximately $1.5 million for the payment of interest as of January 1, 2007.

     We file income tax returns in the United States (U.S.) federal jurisdiction, and various states and foreign jurisdictions. Some state and foreign jurisdiction tax years remain open to examination for years before 2002; however, we believe any additional assessments for years before 2002 will not be material to our consolidated financial statements. The IRS completed an examination of our U.S. income tax returns for 2003 through 2005 in the second quarter of 2007. The IRS proposed certain adjustments which resulted in a net assessment due to the IRS in the amount of approximately $3 million. We previously recorded a liability for the proposed assessment and we paid it in the third quarter of 2007.

     Taxes collected from customers and remitted to governmental authorities that were included in revenue in the three-month periods ended September 30, 2007 and 2006 were $17.6 million and $7.3 million, respectively. Taxes collected from customers and remitted to governmental authorities that were included in revenue in the nine-month periods ended September 30, 2007 and 2006 were $42.1 million and $21.1 million, respectively.

Note 3 — Weighted Average Basic and Diluted Shares Outstanding

     Basic earnings per share is calculated using the weighted average number of shares outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average basic shares outstanding including all potentially dilutive shares issuable under our stock-based compensation plans using the “treasury stock” method. The following table sets forth the computation of the weighted average basic and diluted shares outstanding:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions)		2007				2006				2007				2006
Weighted average number of shares outstanding during the period			39.4				34.5				36.4				34.6
Dilutive effect of stock-based compensation plans			0.3				0.6				0.4				0.6
Weighted average number of diluted shares outstanding during the period			39.7				35.1				36.8				35.2

     As of September 30, 2007 and 2006, certain options to purchase approximately 2,829,000 and 1,656,000 shares for the three-month and nine-month periods ended September 30, 2007, respectively, and approximately 900,000 and 26,000 shares for the three-month and nine-month periods ended September 30, 2006, respectively, were anti-dilutive and, therefore, were not included in the computation of diluted shares outstanding.

Note 4 — Stock-Based Compensation

     We have stock options and restricted stock outstanding under our 1996 Employee Stock Incentive Program (Employee Plan), our 1996 Directors Stock Compensation Program (Directors Plan), our 2000 Stock Incentive Plan (2000 Incentive Plan) and our 2005 Stock Incentive Plan (2005 Incentive Plan) (collectively, the Stock Plans). No further shares are available for grant under the Employee Plan, Directors Plan or the 2000 Incentive Plan. As of September 30, 2007, there were 962,861 shares available for grant under our 2005 Incentive Plan. Total stock-based compensation expense (income) recognized in the Condensed Consolidated Statements of Operations associated with the Stock Plans for the three-month periods ended September 30, 2007 and 2006 was $(0.3) million and $3.0 million, respectively, and for the nine-month periods ended September 30, 2007 and 2006 was $7.6 million and $8.0 million, respectively. Stock-based compensation expense in the three and nine-month periods ended September 30, 2007, included income of $3.1 and $0.9 million, respectively, recorded in restructuring and other charges related to a terminated employment agreement (see Note 8).

Stock Options

     The following table summarizes our stock option activity for the nine-month period ended September 30, 2007:

						Weighted
		Stock				Average
		Options				Exercise Price
Outstanding December 31, 2006			3,378,979			$	34.48
Granted			596,312				37.63
Exercised			(285,632	)			26.48
Forfeited			(394,262	)			38.48
Outstanding September 30, 2007			3,295,397			$	35.26

     The weighted average grant-date fair value of options that were granted during the nine-month period ended September 30, 2007 was $10.98. The total intrinsic value of stock options exercised during the nine-month period ended September 30, 2007 was $3.4 million. As of September 30, 2007, there was $13.5 million of total unrecognized compensation expense related to non-vested stock options granted under our Stock Plans. That expense is expected to be recognized over a weighted average period of 2.55 years.

Note 5 — Supplemental Balance Sheet Information

		September 30,				December 31,
(In millions)		2007				2006
		(Unaudited)
Accounts Receivable
Accounts receivable		$	474.8			$	320.9
Less allowances			(17.8	)			(12.8	)
Accounts receivable, net		$	457.0			$	308.1
Inventories
Finished goods		$	316.2			$	217.6
Work in process			32.8				19.6
Raw materials and supplies			28.7				20.8
Total inventories, net		$	377.7			$	258.0
Other Current Assets
Deferred income taxes		$	39.6			$	26.0
Other			64.4				32.3
Total other current assets		$	104.0			$	58.3
Property, Plant and Equipment
Property, plant and equipment		$	630.9			$	634.7
Less accumulated depreciation			(447.6	)			(456.7	)
Property, plant and equipment, net		$	183.3			$	178.0
Other Assets
Deferred income taxes		$	16.9			$	16.3
Other			13.8				13.9
Total other assets		$	30.7			$	30.2
Other Current Liabilities
Employee separation costs		$	17.9			$	2.2
Rebates			96.8				65.3
Income taxes			3.3				9.7
Liability for cash settlement			25.0				—
Other			86.8				63.4
Total other current liabilities		$	229.8			$	140.6
Other Liabilities
Pension		$	6.1			$	9.8
Deferred income taxes			9.4				5.7
Other			38.9				29.5
Total other liabilities		$	54.4			$	45.0

Note 6 — Acquisitions

2007 Acquisitions

TDK Recording Media

     On July 31, 2007, we completed the acquisition of substantially all of the assets relating to the marketing, distribution, sales, customer service and support of removable recording media products, accessory products and ancillary products under the TDK brand name (TDK Recording Media), from TDK Corporation, a Japanese corporation (TDK), pursuant to an acquisition agreement dated April 19, 2007, between Imation and TDK (the TDK Acquisition Agreement).

     As provided in the TDK Acquisition Agreement, we acquired substantially all of the assets of TDK Recording Media operations, including the capital stock of certain of TDK’s operating subsidiaries engaged in TDK Recording Media operations, and use of the TDK brand name for current and future recording media products including magnetic tape, optical media, flash media and accessories.

     We issued to TDK approximately 6.8 million shares of Imation common stock, representing 16.6 percent of shares outstanding after issuance of the shares to TDK. The shares were valued at $31.75 based on average market value of Imation’s shares for the two day period prior to the date for which the shares to be exchanged was determined. We paid $29.5 million in cash to TDK. The purchase price also included approximately $8.2 million for customary closing costs, accounting and advisory fees and a payment of $3.9 million made to a third party to acquire their minority interest in a TDK international subsidiary. We may pay additional cash consideration of up to $70 million to TDK, contingent on future financial performance of the acquired business. Additional cash consideration, if paid, will be recorded as additional goodwill.

     The TDK Acquisition Agreement provides for a future purchase price adjustment related to the target working capital amount at the date of acquisition. If the closing date working capital amount is more than or less than the target working capital amount, the parties will be required to increase or decrease the purchase price for the difference between the actual and target working capital amounts as defined in the TDK Acquisition Agreement. Further, the TDK Acquisition Agreement assumed that no cash or debt would be transferred to or assumed by Imation in the transaction. TDK operating subsidiaries purchased in the transaction did not settle their cash prior to acquisition, and as such, we acquired cash in the transaction. We paid cash of approximately $25 million back to TDK in November of 2007.

     As a result of the transaction, TDK became our largest shareholder, and has the right to nominate a representative to serve on the Imation Board of Directors and as such Raymond Leung, TDK’s nominee, was elected to serve as a Class III member of the Board of Directors on November 7, 2007. Pursuant to an Investor Rights Agreement, dated July 31, 2007, TDK’s ownership stake will be permitted to increase up to 21 percent of Imation common stock on a fully diluted basis through open market purchases. TDK received certain preemptive rights and registration rights, and TDK agreed to a standstill on further acquisitions of Imation common stock above the 21 percent threshold (except as a result of stock repurchases initiated by Imation, in which event TDK’s ownership will not be permitted to exceed 22 percent of the then outstanding shares). TDK also agreed to a voting agreement with respect to certain matters presented to Imation shareholders and a three-year lock-up on sales of the Imation shares acquired in the transaction.

     TDK and Imation also entered into two long-term Trademark License Agreements, dated July 31, 2007, with respect to the TDK brand, which TDK will have the right to terminate at the end of 25 years (10 years in the case of headphones, speakers or wholly new products) or earlier in the event of a material breach of the Trademark License Agreement, specific change of control events or default by Imation. One of the agreements licenses the trademark to Imation for the U.S territory, while the other licenses the trademark to an Imation affiliate outside the U.S. The trademark licenses provide us exclusive use of the TDK LIFE ON RECORD logo for marketing and sales of current and successor magnetic tape, optical media, and flash memory products, certain accessories, headphones and speakers, and certain future removable recording media products. TDK will continue its R&D and manufacturing operations for recording media products including audio, video and data storage tape, and Blu-ray optical discs, which TDK will supply to us as well as its other OEM customers.

     We also entered into a Supply Agreement, dated July 31, 2007, with TDK to purchase Imation’s requirements of removable recording media products and accessory products for resale under the TDK brand to the extent TDK can supply such products on competitive terms, and TDK agreed not to sell any such products to third parties for resale under the TDK brand during the term of the Trademark License Agreement. The Supply Agreement will continue for the greater of five years or for so long as TDK manufactures and continues to sell any of the products.

     The following table summarizes our preliminary estimated purchase price as of September 30, 2007:

(In millions)		Amount
Cash consideration		$	29.5
Cash consideration to minority interest holders			3.9
Common stock issued			216.7
Liability for cash settlement			25.0
Direct acquisition costs			8.2
Other			5.1
Total preliminary purchase price		$	288.4

     The preliminary purchase price allocation resulted in goodwill of $38.5 million. A portion of the goodwill is deductible for tax purposes. The following illustrates our preliminary allocation of the purchase price to the assets acquired and liabilities assumed:

(In millions)		Amount
Cash and cash equivalents		$	27.6
Accounts receivable			145.1
Inventories			90.1
Other current assets			14.9
Property, plant and equipment			16.3
Goodwill			38.5
Intangibles			132.1
Other assets			2.8
Accounts payable			(120.6	)
Accrued payroll			(2.2	)
Other current liabilities			(42.3	)
Deferred tax liability arising on acquisition			(4.2	)
Other liabilities			(9.7	)
		$	288.4

Memcorp

     On July 9, 2007, we completed the acquisition of certain assets of Memcorp, Inc., a Florida corporation, and Memcorp Asia Limited, a corporation organized under the laws of Hong Kong (together Memcorp, subsidiaries of Hopper Radio of Florida, Inc., a Florida corporation), pursuant to an asset purchase agreement dated as of May 7, 2007 (the Memcorp Purchase Agreement). As provided in the Memcorp Purchase Agreement, we acquired the assets of Memcorp used in or relating to the sourcing and sale of consumer electronics products, principally sold under the Memorex brand name, including inventories, equipment and other tangible personal property and intellectual property. The acquisition also included existing brand licensing agreements, including Memcorp’s agreement with MTV Networks, a division of Viacom International, to design and distribute specialty consumer electronics under certain Nickelodeon properties and brands. We paid $27.3 million at closing and we issued three-year promissory notes in the aggregated amount of $37.5 million. Certain inventory purchases are in the process of being finalized. An earn-out payment may be paid three years after closing of up to $20 million, dependent on financial performance of the purchased business. Additional cash consideration, if paid, will be recorded as additional goodwill.

     The following table summarizes our preliminary estimated purchase price as of September 30, 2007:

(In millions)		Amount
Cash consideration		$	27.3
Promissory notes			37.5
Direct acquisition costs			1.1
Total preliminary purchase price		$	65.9

     The preliminary purchase price allocation resulted in goodwill of $32.5 million. The goodwill is deductible for tax purposes. The following illustrates our preliminary allocation of the purchase price to the assets acquired and liabilities assumed:

(In millions)		Amount
Inventories		$	10.9
Other current liabilities			(2.6	)
Goodwill			32.5
Intangibles			25.1
		$	65.9

     With respect to the promissory notes, $30 million will be paid in quarterly installments over three years from the closing date with an interest rate of six percent per annum, secured by an irrevocable letter of credit issued pursuant to Imation’s credit agreement, and not subject to offset. The remaining $7.5 million will be paid to Memcorp in a lump sum payment 18 months from the closing date, with an interest rate of six percent per annum, are unsecured and subject to satisfy any indemnification claims; provided that if an existing obligation of Memcorp is satisfied prior to the 18-month maturity date, $3.75 million of such note will be paid in advance of the maturity date. Memcorp resolved the outstanding obligation and we paid the $3.75 million during the third quarter of 2007.

     The following table summarizes our promissory notes liability as of September 30, 2007:

(In millions)		Amount
Unrestricted notes, due July 9, 2010, payable quarterly, bearing interest of 6%		$	30.0
Offset notes, payable and due January 9, 2009, bearing interest of 6%			3.8
		$	33.8

     Maturities of promissory notes outstanding at September 30, 2007 for each of the next three years ending September 30 are as follows: $10.0 million in 2008, $13.8 million in 2009 and $10.0 million in 2010.

     The operating results for the TDK Recording Media and Memcorp businesses are included in our consolidated results of operations from the date of acquisition. Our Condensed Consolidated Balance Sheet as of September 30, 2007 reflects the allocation of the preliminary purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. This allocation is preliminary, pending the completion of detailed analyses and appraisals of the fair values of the assets acquired, as well as completion of management’s integration plans. Once these analyses, appraisals and plans have been completed, the allocation of the purchase price will be finalized. We have announced our intention to implement certain restructuring activities. However, to ensure that we continue to meet customer expectations, significant analysis is required before such plans can be finalized. To the extent the activities to be exited are associated with the historical operations of the TDK Recording Media or Memcorp businesses we would adjust the preliminary purchase price allocation to reflect additional restructuring liabilities (see Note 8). If the exited activities are associated with Imation historical operating activities, the restructuring costs would be reflected in our consolidated statements of operations.

     In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, we will not amortize the goodwill from these acquisitions but will evaluate it for impairment on an annual basis or whenever events or circumstances occur which indicate that goodwill might be impaired.

     A final determination of fair values from these acquisitions may differ materially from the preliminary estimates presented above and will include management’s final valuation of the fair values of assets acquired and liabilities assumed. This final valuation will be based on the actual net tangible assets of the Memcorp and TDK Recording Media businesses that existed as of the date of the acquisition. The final valuation may change the allocation of purchase prices, which could affect the fair value assigned to the assets and liabilities and could result in a change to the unaudited pro forma financial information presented below.

2006 Acquisition

     Memorex International Inc.

     On April 28, 2006, we closed on the acquisition of substantially all of the assets of Memorex International Inc. (Memorex), including the Memorex brand name and the capital stock of its operating subsidiaries engaged in the business of the design, development, sourcing, marketing, distribution and sale of hardware, media and accessories used for the storage of electronic data under the Memorex brand name. Memorex’s product portfolio includes recordable CDs and DVDs, branded accessories, USB flash drives, and magnetic and optical drives.

     The estimated cash purchase price for the acquisition at the time of closing was $329.3 million. This amount excludes the cost of integration, as well as other indirect costs related to the transaction. Additional cash consideration of a minimum of $5.0 million will be paid, and may range up to a maximum of $45.0 million over a period of up to three years after close, contingent on financial performance of the purchased business. During the second quarter of 2007 we paid $2.5 million related to the minimum additional cash consideration. The financial performance is measured by the net earnings before interest, income taxes, depreciation and amortization (EBITDA) of the purchased business as defined in the Acquisition Agreement previously filed by Imation as Exhibit 2.1 to our Current Report on Form 8-K filed January 25, 2006.

     We placed $33.0 million of the purchase price paid at closing in escrow to address potential indemnification claims. From this escrowed amount $16.5 million was released to the seller during the third quarter of 2007 and $15.1 million will be released in the fourth quarter of 2007. We submitted a claim against the remaining amount of $1.4 million. In addition, we placed $8.0 million of the purchase price paid at closing in escrow until the determination of any required post-closing purchase price adjustments under the acquisition agreement were finalized. On March 30, 2007, we received $7.9 million of this escrow amount in a settlement of post-closing adjustments relating to working capital. The remaining escrow balance of $0.1 million was released to the seller. As set forth in Note 7 below, the finalization of working capital adjustments resulted in a decrease to the goodwill balance during the nine-month period ended September 30, 2007.

     Memorex operating results are included in our consolidated results of operations from the date of acquisition. Our Consolidated Balance Sheet as of December 31, 2006 reflects the allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of the acquisition. This allocation is presented in the Notes to Consolidated Financial Statements appearing in our Form 10-K for the year ended December 31, 2006.

     The following unaudited pro forma financial information presents operating results as if the acquisitions had occurred at the beginning of the respective periods:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions, except per share amounts)		2007				2006				2007				2006
Net revenue		$	581.4			$	645.5			$	1,790.7			$	1,893.8
Income from continuing operations			7.6				25.5				15.8				57.4
Net income			7.6				26.7				15.8				58.6
Earnings per common share — basic:
Continuing operations		$	0.19			$	0.62			$	0.39			$	1.39
Net income		$	0.19			$	0.65			$	0.39			$	1.42
Earnings per common share — diluted:
Continuing operations		$	0.19			$	0.61			$	0.38			$	1.37
Net income		$	0.19			$	0.64			$	0.38			$	1.40

     The pro forma operating results are presented for comparative purposes only. They do not represent the results which would have been reported had the acquisitions occurred on the dates assumed, and they are not necessarily indicative of future operating results.

Note 7 — Intangible Assets and Goodwill

     The breakdown of intangible assets as of September 30, 2007 and December 31, 2006 was as follows:

		Trade								Customer
(In millions)		Names				Software				Relationships				Other				Total
September 30, 2007
Cost		$	329.9			$	53.8			$	60.2			$	9.1			$	453.0
Accumulated Amortization			(9.9	)			(51.5	)			(10.0	)			(5.5	)			(76.9	)
Net		$	320.0			$	2.3			$	50.2			$	3.6			$	376.1
December 31, 2006
Cost		$	200.9			$	51.7			$	34.2			$	7.3			$	294.1
Accumulated Amortization			(4.2	)			(50.0	)			(5.7	)			(4.0	)			(63.9	)
Net		$	196.7			$	1.7			$	28.5			$	3.3			$	230.2

     Based on the intangible assets in service as of September 30, 2007, estimated amortization expense for each of the next five years ending September 30 is as follows:

(In millions)		2008				2009				2010				2011				2012
Amortization expense		$	22.5			$	20.9			$	19.7			$	19.2			$	19.1

     Our preliminary allocation of the Memcorp and TDK Recording Media purchase price to the assets acquired and liabilities assumed resulted in the recognition of the following intangible assets.

Weighted

TDK

Weighted

Average

Recording

Average

(In millions)

Memcorp

Life

Media

Life

Tradename license

$

13.7

12 years

$

115.0

30 years

Customer relationships

10.0

6 years

16.0

6 years

Other

1.4

3 years

1.1

18 months

Identifiable intangible assets acquired

$

25.1

$

132.1

     Intangible assets are amortized over lives associated with the economic benefits derived from these assets. For the three-month period ended September 30, 2007, we recorded amortization expense of $0.8 million and $1.2 million for Memcorp and TDK Recording Media intangible assets, respectively. The amount assigned to intangible assets acquired, as well as the related amortization periods, may change once our detailed analyses and appraisals of fair value are completed.

     Changes in the carrying value of goodwill by segment were as follows:

(In millions)		Americas				Europe				Asia Pacific				Total
Balance as of December 31, 2006		$	63.3			$	2.5			$	1.8			$	67.6
Memorex post-closing purchase price adjustments			(7.9	)			—				—				(7.9	)
Memcorp acquisition			32.5												32.5
TDK Recording Media acquisition (1)			10.7				17.8				10.0				38.5
Other adjustments, net			0.2				—				—				0.2
Foreign currency translation adjustment			—				(0.1	)			—				(0.1	)
Balance as of September 30, 2007		$	98.8			$	20.2			$	11.8			$	130.8

Note 8 — Restructuring and Other

     The components of our restructuring and other expense (income) included in the Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2007 were as follows:

		Three Months				Nine Months
		Ended				Ended
		September 30,				September
(In millions)		2007				30, 2007
Restructuring
Severance and other		$	2.9			$	18.0
Pension curtailment (Note 10)			—				1.4
Lease termination costs			0.2				0.6
Total restructuring			3.1				20.0
Terminated employment agreement			(3.8	)			(0.7	)
Asset impairments			—				1.4
Total		$	(0.7	)		$	20.7

Restructuring

     2007 Cost Reduction Restructuring Program

     In 2007, we announced a strategy focused on transforming Imation to a brand and product management company with a balanced portfolio of strong commercial and consumer brands. Consequently, we started a cost reduction restructuring program in our manufacturing, research and development (R&D), administrative and sales organizations to align our resources with our strategic direction. This program includes a reorganization of our magnetic data storage tape manufacturing operations and changes to our R&D organization to support an increasing focus on engineering and rapid prototyping of consumer technologies as well as in qualification of new products. We will focus manufacturing on magnetic tape coating operations at our existing plants in Camarillo, California and Weatherford, Oklahoma, and we will consolidate and outsource all converting operations for magnetic tape cartridges that are currently spread among three plants. We plan to discontinue all manufacturing operations at our Wahpeton, North Dakota plant, which we plan to exit by mid-2009. The R&D organization will be aligned to focus on key programs in support of future advanced magnetic tape formats and our increased growth and focus on consumer digital storage products and accessories.

     During the second quarter of 2007, we recorded restructuring charges of $16.5 million related to our cost reduction program for our manufacturing and R&D organizations. The charges in the second quarter of 2007 consisted of estimated severance and related benefits of $15.1 million and a pension curtailment loss of $1.4 million discussed in Note 10. During the third quarter of 2007, we recorded additional restructuring charges of $3.1 million related to reorganization of certain administrative and sales organizations.

     As of September 30, 2007, we estimate that a total of 835 positions will be eliminated under our cost reduction restructuring program by mid-2009, primarily in our manufacturing organization. The program is expected to result in $25 million to $30 million in annualized cost savings once the program is fully implemented. We expect to incur a total of $35 million to $40 million in restructuring charges over two years related to this cost reduction program.

     The following tables summarize the restructuring activity related to our 2007 cost reduction restructuring program.

														Liability
		Initial				Adjustments								as of
		Program				to Initial				Cumulative				September 30,
(In millions)		Amounts				Amounts				Usage				2007
Severance and other		$	15.1			$	2.9			$	(2.7	)		$	15.3

		Initial												Balance as of
		Headcount								Cumulative				September 30,
		Amounts				Additions				Reductions				2007
Total employees affected			675				64				(98	)			641

     TDK Restructuring Costs

     We recorded restructuring accruals of $2.6 million as we reorganized in conjunction with the TDK Recording Media acquisition and integration. These amounts were not reflected in our Condensed Consolidated Statement of Operations but were recorded as adjustments to goodwill. We are working to finalize our restructuring plans which may result in additional liabilities which will increase goodwill. The following tables summarize the restructuring activity related to the 2007 TDK restructuring program.

										Liability
		Initial								as of
		Program				Cumulative				September 30,
(In millions)		Amounts				Usage				2007
Severance and other		$	2.6			$	—			$	2.6

Initial

Balance as of

Headcount

Cumulative

September 30,

Amounts

Reductions

2007

Total employees affected

162

—

162

     2006 Imation and Memorex Restructuring Program

     During the first quarter of 2007, we recorded lease termination costs of $0.4 million related to our 2006 Imation and Memorex restructuring program, which began in the second quarter of 2006. The 2006 Imation and Memorex restructuring program was substantially completed as of June 30, 2007.

Terminated Employment Agreement

     During the second quarter of 2007, the Board of Directors of the Company and Mr. Henderson mutually determined that Mr. Henderson would resign as Chairman of the Board and Chief Executive Officer of the Company effective as of the close of business on April 2, 2007 due to his continuing health issues. Mr. Henderson’s employment agreement also terminated effective as of that date. The Company and Mr. Henderson entered into an employment closure agreement dated April 2, 2007 setting forth the items described below. Mr. Henderson continued as an inactive employee of the Company, receiving his 2007 salary, benefits and 2007 bonus eligibility under the Company’s annual bonus plan through May 9, 2007. Mr. Henderson applied for and received benefits under the Company’s long-term disability plan. Mr. Henderson was also receiving other benefits as provided to all other similarly situated Company employees who receive benefits under the Company’s long-term disability plan. These benefits included: (i) coverage under the Company’s medical insurance plans (with Mr. Henderson continuing to pay the required employee premium for such benefits); and (ii) continued vesting of his stock options (other than his performance-based stock options, which were forfeited) and restricted stock in accordance with their regular schedules; and (iii) continued accrual of pension benefits, but his pension benefits will vest only if Mr. Henderson remains eligible to receive long-term disability benefits until May 13, 2009.

     Costs recorded in the second quarter of 2007 associated with the terminated employment agreement totaled $3.1 million and comprised of $3.2 million of stock compensation costs for unvested awards expected to vest over the remaining term of the stock awards, $0.9 million of separation pay and other benefits and a reversal of $1.0 million of costs previously recorded under performance-based stock options due to the forfeiture of these awards under the agreements with Mr. Henderson. Costs for unvested stock awards were fully accrued in the second quarter as no future service was expected due to Mr Henderson’s status as a disabled employee. On November 5, 2007, Mr. Henderson passed away which resulted in the accounting recognition of a change in estimate resulting in the reversal of $3.8 million of expense for the unvested stock awards and other costs recorded during the second quarter which will not be incurred due to the passing of Mr. Henderson.

Asset impairments

     During the first and second quarter of 2007, we incurred asset impairment charges of $0.2 million and $1.2 million, respectively, related to abandonment of certain manufacturing assets as a result of the manufacturing reorganization discussed above.

Note 9 — Comprehensive Income (Loss)

     Accumulated other comprehensive loss consisted of the following:

		September 30,				December 31,
(In millions)		2007				2006
Cumulative currency translation adjustment		$	(51.6	)		$	(77.5	)
Pension liability adjustments, net of income tax			(9.2	)			(13.6	)
Cash flow hedging and other, net of income tax			(0.8	)			(0.3	)
Total accumulated other comprehensive loss		$	(61.6	)		$	(91.4	)

     Comprehensive income for the three-month and nine-month periods ended September 30, 2007 and 2006 consisted of the following:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions)		2007				2006				2007				2006
Net income		$	9.4			$	18.5			$	23.7			$	52.0
Currency translation adjustment			11.0				(1.8	)			25.9				6.9
Pension liability adjustments, net of income tax
Prior service cost			—				—				0.3				—
Net actuarial (gain)/loss			(2.1	)			—				4.3				—
Less: amortization of costs included in net periodic pension cost			—				—				(0.2	)			—
Cash flow hedging and other, net of income tax			0.2				0.4				(0.5	)			1.0
Total comprehensive income		$	18.5			$	17.1			$	53.5			$	59.9

Note 10 — Pension Plans

Employer Contributions

     During the nine-month period ended September 30, 2007, we contributed approximately $3.0 million to our pension plans. We presently anticipate making additional contributions in a range of $1 million to $2 million to fund our pension plans in 2007.

U.S. Pension Plan Curtailment and Settlement

     In connection with our actions taken under our 2007 cost reduction restructuring program, the number of employees accumulating benefits under the pension plan was reduced significantly, which resulted in the recognition of a curtailment loss of $1.4 million included as a component of restructuring and other in the Condensed Consolidated Statement of Operations in the second quarter of 2007. Further, as required by SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158) — an amendment of FASB Statements No. 87, 88, 106, and 132(R), we remeasured our pension liability as of the date of the curtailment.

     We also incurred a partial settlement loss of $0.7 million in the three-month period ended September 30, 2007 as participants in the pension plan have the option of receiving cash lump sum payments when exiting the plan. Several participants who exited the pension plan elected to receive lump sum payments and in accordance with SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, once lump sum payments exceeded our 2007 service cost a partial settlement event occurred and we recognized a pro rata portion of the previously unrecognized net actuarial loss. Further, as required by SFAS No. 158, we remeasured our pension liability as of the date of the settlement.

     The effect of the second and third quarter remeasurements resulted in a pension liability of $0.8 million and accumulated other comprehensive loss of $2.7 million, net of a deferred tax asset of $1.7 million, as of September 30, 2007.

Components of Net Periodic Pension Cost

		United States								International								United States								International
		Three Months Ended September 30,																Nine Months Ended September 30,
(In millions)		2007				2006				2007				2006				2007				2006				2007				2006
Service cost		$	1.6			$	2.3			$	0.1			$	0.2			$	5.1			$	6.9			$	0.3			$	0.4
Interest cost			1.9				1.8				0.9				0.9				5.6				5.4				2.6				2.5
Expected return on plan assets			(2.5	)			(2.4	)			(1.0	)			(1.0	)			(7.4	)			(7.4	)			(2.9	)			(2.6	)
Amortization of unrecognized items			—				0.1				0.1				0.1				0.1				0.5				0.2				0.3
Net periodic pension cost		$	1.0			$	1.8			$	0.1			$	0.2			$	3.4			$	5.4			$	0.2			$	0.6
Curtailment loss			—				—				—				—				1.4				—				—				—
Settlement loss			0.7				—				—				—				0.7				—				—				—
Total pension cost		$	1.7			$	1.8			$	0.1			$	0.2			$	5.5			$	5.4			$	0.2			$	0.6

     The weighted average discount rate assumption used in the remeasurement of our United States pension plan benefit obligation changed from 5.75 percent as of our December 31, 2006 measurement date to 6.00 percent as of the measurement dates of June 1, 2007 and September 30, 2007. No other assumptions were materially changed.

Note 11 — Derivatives and Hedging Activities

Cash Flow Hedges

     As of September 30, 2007, our cash flow hedges ranged in duration from less than one month to three months and had a total notional amount of $71.9 million. Hedge costs, representing the premiums previously paid on expired options net of hedge gains and losses, of $0.4 million were recognized in the Condensed Consolidated Statement of Operations during the three-month period ended September 30, 2007. The amount of net deferred losses on foreign currency cash flow hedges included in accumulated other comprehensive loss in shareholders’ equity as of September 30, 2007 was $1.2 million, pre-tax, which, depending on market factors, is expected to reverse in the balance sheet or be recognized in operations in 2007.

Other Hedges

     We enter into foreign currency forward contracts, generally with durations of less than two months, to manage the foreign currency exposure related to our monetary assets and liabilities denominated in foreign currencies. We record the estimated fair value of these forward contracts within other current assets or other current liabilities in the Condensed Consolidated Balance Sheet, and all changes in their fair value are immediately recognized in the Condensed Consolidated Statement of Operations. As of September 30, 2007, we had a notional amount of forward contracts of $119.2 million to hedge our recorded balance sheet exposures.

Fair Value Disclosure

     As of September 30, 2007, the negative fair value of our foreign currency forward and option contracts outstanding was $1.9 million. The estimated fair market values were determined using available market information or other appropriate valuation methodologies.

Note 12 — Business Segment Information

     We operate in one industry segment selling removable data storage media, accessories and electronic products. Our company is organized, managed and internally reported as segments differentiated by the regional markets we serve: Americas, Europe and Asia Pacific. Each of these segments has the responsibility for selling virtually all of our product lines. We evaluate segment performance based on net revenue and operating income. Net revenue for each segment is generally based on customer location. The operating income reported in our segments excludes corporate and other unallocated amounts. Although such amounts are excluded from the business segment results, they are included in reported consolidated operating income (loss). Corporate and unallocated amounts include research and development expense, corporate expense, stock-based compensation expense and restructuring and other expense which are not allocated to the regional segments. We believe this presentation permits a more accurate assessment of the regional segment operating income.

     Net revenue and operating income (loss) by regional segment were as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions)		2007				2006				2007				2006
Net Revenue
Americas		$	288.5			$	248.1			$	733.0			$	577.0
Europe			152.4				125.2				421.8				379.5
Asia Pacific			84.6				51.4				205.4				169.2
Total		$	525.5			$	424.7			$	1,360.2			$	1,125.7
Operating Income (Loss)
Americas		$	14.6			$	31.4			$	61.2			$	92.9
Europe			10.8				11.2				29.8				35.7
Asia Pacific			4.4				3.7				14.8				13.4
Corporate and unallocated			(13.5	)			(18.0	)			(68.5	)			(65.8	)
Total		$	16.3			$	28.3			$	37.3			$	76.2

     Corporate and unallocated amounts above include restructuring and other expense of $20.7 million and $10.7 million for the nine-month periods ended September 30, 2007 and 2006, respectively.

     We have three major product categories in each of our regional segments: magnetic, optical and flash. The other category consists of several products including electronic products, accessories and removable hard disks. Net revenue by product category was as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In millions)		2007				2006				2007				2006
Net Revenue
Magnetic		$	177.6			$	161.0			$	490.4			$	493.4
Optical			234.3				191.2				619.6				473.0
Flash			39.2				46.1				117.7				92.7
Electronic Products, Accessories & Other			74.4				26.4				132.5				66.6
Total		$	525.5			$	424.7			$	1,360.2			$	1,125.7

Note 13 — Litigation, Commitments and Contingencies

     In the normal course of business, we periodically enter into agreements that incorporate general indemnification language. Performance under these indemnities would generally be triggered by a breach of terms of the contract or by a third-party claim. There have historically been no material losses related to such indemnifications, and we do not expect any material adverse claims in the future.

     We are the subject of various pending or threatened legal actions in the ordinary course of our business. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. While these matters could materially affect operating results depending upon the final resolution in future periods, it is our opinion that after final disposition, any monetary liability beyond that provided in the Condensed Consolidated Balance Sheet as of September 30, 2007 would not have a material adverse impact on our financial statements.

Philips litigation

     We filed a Declaratory Judgment Action on October 27, 2006, in Federal District Court in St. Paul, Minnesota requesting that the court resolve an ongoing dispute with Philips Electronics N.V., U.S. Philips Corporation and North American Philips Corporation (collectively Philips). Philips has asserted that (1) the patent cross-license between 3M Company and Philips was not validly assigned to Imation in connection with the spin-off of Imation from 3M in 1996; (2) Imation’s 51 percent owned subsidiary Global Data Media (GDM) is not a “subsidiary” as defined in the cross-license; (3) the coverage of the cross-license does not apply to Imation’s acquisition of Memorex; (4) the cross-license does not apply to DVD discs; (5) certain Philips patents that are not covered by the cross-license are infringed by Imation; and (6) as a result, Imation owes Philips royalties for the prior and future sales of CD and DVD discs. We believe that these allegations are without merit and filed a Declaratory Judgment Action to have a court reaffirm Imation’s rights under the cross-license. On February 26, 2007, the parties signed a Standstill Agreement and the litigation was voluntarily dismissed without prejudice. Imation and Philips held settlement negotiations but were unable to come to an agreement. Imation re-filed its Declaratory Judgment Action on August 10, 2007. Philips filed its Answer and Counterclaims against Imation and Moser Baer India Limited (Imation’s partner in GDM, referred to above). Philips alleges that (1) the cross-license does not apply to companies that Imation purchased or created after March 1, 2000, (2) GDM is not a legitimate subsidiary of Imation; (3) Imation’s formation of GDM is a breach of the cross-license resulting in termination of the cross-license at that time; (4) Imation (including Memorex and GDM) infringes various patents that would otherwise be licensed under the cross-license; and (5) Imation (including Memorex and GDM) infringe one or more patents that are not covered by the cross-license. Philips requests damages of $655 million plus interest and costs, and requests trebling of that amount. Imation was aware of these claims prior to filing its Declaratory Judgment Action. Imation believed then and continues to believe that Philips’ claims are without merit.

     On October 30, 2007, Imation filed its answers to Philips’ counterclaims and a Motion for Partial Summary Judgment on the issue of whether the patent cross-license was validly assigned by 3M to Imation. The hearing on the motion is scheduled for December 14, 2007.

SanDisk litigation

     On July 11, 2007, SanDisk Corporation filed a patent infringement action in U.S. District Court, Northern District of California, against Imation Corp. and its subsidiary, Memorex Products, Inc. This action alleged that we have infringed a patent held by SanDisk (U.S. Patent 5,602,987) by offering and selling USB flash drives. On September 6, 2007, SanDisk voluntarily withdrew its lawsuit without prejudice.

     On October 24, 2007, SanDisk Corporation filed another patent infringement action in U.S. District Court, Western District of Wisconsin, against Imation Corp. and its subsidiaries Imation Enterprises Corp. and Memorex Products, Inc. The lawsuit also names over twenty other companies as defendants. This action alleges that we have infringed five patents held by SanDisk: US Patent 6,426,893; 6,763,424; 5,719,808; 6,947,332; and 7,137,011. SanDisk alleges that our sale of various flash memory products, such as USB flash drives and certain flash card formats, infringe these patents.

     Also on October 24, 2007, SanDisk filed a complaint with the United States International Trade Commission (ITC) against the same Imation entities listed above, as well as over twenty other companies. This action involves the same patents and the same products as described above.

     We are currently reviewing SanDisk’s allegations and our strategy to defend this matter. Many of our suppliers are already licensed by SanDisk and we are indemnified by our suppliers against claims for patent infringement.

Note 14 — Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurement. Companies are required to adopt the new standard for fiscal periods beginning after November 15, 2007. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment to FAS 115. This statement permits companies to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. Companies are required to adopt the new standard for fiscal periods beginning after November 15, 2007. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.

Note 15 — Review Report of Independent Registered Public Accounting Firm

     PricewaterhouseCoopers LLP, our independent registered public accounting firm, has performed a review of the unaudited interim Condensed Consolidated Financial Statements included herein and their report thereon accompanies this filing. This report is not a “report” within the meaning of Sections 7 and 11 of the Securities Act of 1933, as amended, and the independent registered public accounting firm’s liability under Section 11 does not extend to it.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Imation Corp.:

     We have reviewed the accompanying condensed consolidated balance sheet of Imation Corp. and its subsidiaries as of September 30, 2007, and the related condensed consolidated statements of operations for each of the three-month and nine-month periods ended September 30, 2007 and 2006 and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2007 and 2006. These interim financial statements are the responsibility of the Company’s management.

     We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), 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 accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

     We previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2006, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and of cash flows for the year then ended (not presented herein), and in our report dated February 22, 2007, we expressed an unqualified opinion on those consolidated financial statements (our opinion contained an explanatory paragraph stating the Company changed the manner in which it accounts for share-based compensation effective January 1, 2006 and defined benefit pension plans effective December 31, 2006). In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

Minneapolis, Minnesota
November 9, 2007

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

     Imation Corp. (Imation, the Company, we, us or our) is a leading provider of removable data storage media products designed to help our customers capture, create, protect, preserve and retrieve valuable digital assets. Our products are sold in approximately 100 countries to commercial organizations and individual consumers. Our commercial customers range from managers of large data centers to distributed network administrators to small business owners who rely on our magnetic tape cartridges for data processing, security, business continuity, backup and archiving applications. Our commercial and consumer customers rely on our recordable optical discs, USB flash drives, flash cards, removable hard drives and audio and video tape to store, edit and manage data, photos, video, images and music. We also sell a range of storage accessories globally and specialty consumer video, audio and home electronics products through retailers in North America.

     The data storage market presents attractive growth opportunities as well as challenges. Demand for storage capacity is growing rapidly. Industry and market research estimates project compound annual growth in demand for storage capacity from 2002 to 2011 to vary between approximately 28 percent for magnetic tape to approximately 35 percent for optical discs and flash media. However, new formats deliver greater capacity in a single piece of storage media, which results in overall revenue growth being significantly lower than the overall growth in demand for storage capacity. The market is highly competitive, may be subject to consolidation and is characterized by continuing changes in technology, ongoing variable price erosion, diverse distribution channels and a large variety of brands and formats for tape, optical, flash and removable hard disk products.

     We deliver a broad portfolio of products across multiple brands through diverse distribution channels and geographies. We manufacture the majority of our magnetic tape products and source the majority of our other products. Success in the market is dependent on several factors, including being early to market with new formats and products; having efficient manufacturing, sourcing, logistics and supply chain operations; working closely with leading original equipment manufacturers (OEMs) to develop new formats or enhancements to existing formats; offering a broad assortment of products; having broad geographic and market coverage and managing a portfolio of strong brands across diverse regions, distribution channels and product categories.

     The highest revenue growth opportunities include removable flash memory, recordable optical discs, higher capacity tape formats, removable hard disks, consumer electronics and accessories. These higher revenue growth opportunities provide revenue streams that are typically at lower gross profit margins than our historical gross profit margins on our proprietary magnetic media products.

     In the second quarter of 2007, we communicated our strategy and direction through 2011 which is intended to increase our presence in the consumer storage and technology product arena through brand acquisition and extensions, while maintaining our existing significant position in the commercial data storage tape market. This strategy provides significant growth opportunities for us; however, these markets are subject to greater volatility in pricing and are more difficult to predict than the commercial data storage tape market in which we have historically operated.

     On July 31, 2007, we completed the acquisition of substantially all of the assets relating to the marketing, distribution, sales, customer service and support of removable recording media products, accessory products and ancillary products under the TDK brand name (TDK Recording Media), from TDK Corporation, a Japanese corporation (TDK), pursuant to an Acquisition Agreement dated April 19, 2007, between Imation and TDK (the TDK Acquisition Agreement).

     On July 9, 2007, we completed the acquisition of certain assets of Memcorp, Inc., a Florida corporation, and Memcorp Asia Limited, a corporation organized under the laws of Hong Kong (together Memcorp, subsidiaries of Hopper Radio of Florida, Inc., a Florida corporation), pursuant to an Asset Purchase Agreement dated as of May 7, 2007 (the Memcorp Purchase Agreement). As provided in the Memcorp Purchase Agreement, we acquired the assets of Memcorp used in or relating to the sourcing and sale of consumer electronics products, principally sold under the Memorex brand name, including inventories, equipment and other tangible personal property and intellectual property. The acquisition also included existing brand licensing agreements, including Memcorp’s agreement with MTV Networks, a division of Viacom International, to design and distribute specialty consumer electronics under certain Nickelodeon properties and brands.

     With the recent acquisitions of the TDK Recording Media and Memcorp businesses in addition to the acquisition of substantially all of the assets of Memorex International Inc. (Memorex) in 2006 (see Note 6 to the Condensed Consolidated Financial Statements), we are building a portfolio of brands that we own, manage or distribute in both consumer retail and commercial markets. We are optimizing our position in magnetic tape as we continue to invest in current and future tape formats. In addition, we are growing our consumer product portfolio across multiple brands and extending brands selectively into the consumer electronics arena.

     Our plan is to grow revenue organically and through mergers and acquisitions, distribution agreements and other strategic actions without adding significant additional infrastructure. We continually evaluate operating expense and structure based on what is affordable under our expected business results, thus maintaining a relatively flat and efficient organizational structure. In further support of implementing an efficient operating model, we continue to implement lean enterprise principles that emphasize speed, quality and competitive cost across all key functions and processes. We believe this strategy over the longer term can deliver increased gross margin dollars and operating profit growth on increased revenue as well as a return on capital employed above our weighted average cost of capital.

Factors Affecting Comparability of our Financial Results

     In July 2007, we completed the acquisition of the TDK Recording Media and Memcorp businesses. Further, in April 2006, we closed on the acquisition of Memorex, including the Memorex brand name and the capital stock of its operating subsidiaries engaged in the business of the design, development, marketing, sourcing, distribution and sale of hardware, media and accessories used for the storage of electronic data under the Memorex brand name.

     TDK Recording Media, Memcorp and Memorex operating results are included in our consolidated results of operations from the date of acquisition. For further information see Note 6 to the Condensed Consolidated Financial Statements.

     For purposes of comparability and to enhance investors’ understanding of our business operations and results, “Management Discussion and Analysis of Financial Condition and Results of Operations” contains certain financial information that excludes the results of TDK Recording Media, Memcorp and Memorex operations. This information should not be construed as an alternative to the reported results determined in accordance with accounting principles generally accepted in the United States of America.

Executive Summary

Consolidated Results of Operations for the Three-Month Period Ended September 30, 2007

	•		Revenue of $525.5 million, including revenue of $140.6 million from the acquired TDK Recording Media and Memcorp businesses, in the three-month period ended September 30, 2007, increased 23.7 percent over the same period last year.
	•		Operating income of $16.3 million in the three-month period ended September 30, 2007 is compared with operating income of $28.3 million in the same period last year.
	•		Diluted earnings per share of $0.24 for the three-month period ended September 30, 2007 is compared with diluted earnings per share of $0.53 for the same period last year.

Consolidated Results of Operations for the Nine-Month Period Ended September 30, 2007

	•		Revenue of $1,360.2 million, including revenue of $140.6 million from the acquired TDK Recording Media and Memcorp businesses, in the nine-month period ended September 30, 2007, was up 20.8 percent over the same period last year.
	•		Operating income of $37.3 million in the nine-month period ended September 30, 2007 is compared with $76.2 million of operating income in the same period last year.
	•		Restructuring and other charges of $20.7 million and $10.7 million were included in operating income for the nine-month periods ended September 30, 2007 and 2006, respectively.
	•		Diluted earnings per share from continuing operations of $0.64 for the nine-month period ended September 30, 2007 is compared with diluted earnings per share from continuing operations of $1.44 for the same period last year.

Cash Flow/Financial Condition for the Nine-Month Period Ended September 30, 2007

	•		Cash flow from operations totaled $13.4 million in the nine-month period ended September 30, 2007.
	•		Total cash and cash equivalents were $133.1 million as of September 30, 2007, compared with $252.5 million at year-end 2006. The reduction of $119.4 million is mainly due to share repurchase activity of $79.6 million and payments associated with the acquisitions of the TDK Recording Media and Memcorp businesses of $42.3 million.
	•		We issued approximately 6.8 million common shares during the third quarter of 2007 to TDK in connection with the TDK Recording Media acquisition.
	•		We repurchased approximately 2.5 million shares during the first nine months of 2007 for $79.6 million.
	•		We paid dividends of $0.14 per share in March 2007 and dividends of $0.16 per share in June and September 2007.

Results of Operations

Net Revenue

		Three Months Ended												Nine Months Ended
		September 30,								Percent				September 30,								Percent
(Dollars in millions)		2007				2006				Change				2007				2006				Change
Net revenue		$	525.5			$	424.7				23.7	%		$	1,360.2			$	1,125.7				20.8	%

     Our revenue growth in the third quarter of 2007 was driven by volume increases of approximately 34 percent and a foreign currency benefit of approximately two percent, partially offset by price declines of approximately 12 percent. Our revenue growth in the nine-month period ended September 30, 2007 was driven by volume increases of approximately 31 percent and a foreign currency benefit of approximately two percent, partially offset by price declines of approximately 12 percent. Revenue for the three-month and nine-month periods ended September 30, 2007 included revenue of $140.6 million from the acquired TDK Recording Media and Memcorp businesses. This increase during the third quarter of 2007 was offset in part by a revenue decline in our Global Data Media (GDM) joint venture which had previously included TDK brand revenue. In addition, during the third quarter of 2007 the Company experienced anticipated revenue declines in magnetic products driven by entry level tape and diskettes. During the nine-month period ended September 30, 2007, revenue also benefited from growth in our optical products, due to the addition of Memorex brand revenue following the close of the acquisition on April 28, 2006.

Gross Profit

		Three Months Ended												Nine Months Ended
		September 30,								Percent				September 30,								Percent
(Dollars in millions)		2007				2006				Change				2007				2006				Change
Gross profit		$	85.7			$	88.3				-2.9	%		$	240.0			$	251.7				-4.6	%
Gross margin			16.3	%			20.8	%							17.6	%			22.4	%

     Our gross margins for the three-month and nine-month periods ended September 30, 2007 decreased as compared with year ago periods, due in part to USB Flash products where the combination of losses in the U.S. retail channel and inventory valuation accruals reduced gross margin by $6.7 million or 1.3 percent during the third quarter of 2007. Other factors contributing to declines in both periods include declining gross margins on certain legacy products and incremental costs associated with various logistics and IT systems conversions.

Selling, General and Administrative (SG&A)

		Three Months Ended												Nine Months Ended
		September 30,								Percent				September 30,								Percent
(Dollars in millions)		2007				2006				Change				2007				2006				Change
Selling, general and administrative		$	61.6			$	47.4				30.0	%		$	151.5			$	127.1				19.2	%
As a percent of revenue			11.7	%			11.1	%							11.1	%			11.3	%

     The increase in SG&A expense for the third quarter of 2007, as compared with the same period last year, was due to the SG&A of $15.8 million associated with acquired TDK Recording Media and Memcorp businesses. The increase in SG&A expenses for the nine-month period ended September 30, 2007, as compared with the same period last year, was due to additional SG&A expense noted above as well as incremental Memorex SG&A expense.

Research and Development (R&D)

		Three Months Ended												Nine Months Ended
		September 30,								Percent				September 30,								Percent
(Dollars in millions)		2007				2006				Change				2007				2006				Change
Research and development		$	8.5			$	12.6				-32.5	%		$	30.5			$	37.7				-19.1	%
As a percent of revenue			1.6	%			3.0	%							2.2	%			3.3	%

     The decrease in R&D expense for the three-month and nine-month periods ended September 30, 2007, as compared to the three-month and nine-month periods ended September 30, 2006, was due primarily to cost savings from restructuring activities initiated in the second quarter of 2007.

Restructuring and Other

		Three Months Ended												Nine Months Ended
		September 30,								Percent				September 30,								Percent
(Dollars in millions)		2007				2006				Change				2007				2006				Change
Restructuring and other		$	(0.7	)		$	—			n/m				$	20.7			$	10.7				93.5	%
As a percent of revenue			-0.1	%			n/m								1.5	%			1.0	%

n/m: not meaningful

     In 2007, we announced a strategy focused on transforming Imation to a brand and product management company with a balanced portfolio of strong commercial and consumer brands. Consequently, we started a cost reduction restructuring program in our manufacturing, research and development (R&D), administrative and sales organizations to align our resources with our strategic direction. This program includes a reorganization of our magnetic data storage tape manufacturing operations and changes to our R&D organization to support an increasing focus on engineering and rapid prototyping of consumer technologies as well as in qualification of new products. We will focus manufacturing on magnetic tape coating operations at our existing plants in Camarillo, California and Weatherford, Oklahoma, and we will consolidate and outsource all converting operations for magnetic tape cartridges that are currently spread among three plants. We plan to discontinue all manufacturing operations at our Wahpeton, North Dakota plant, which we plan to exit by mid-2009. The R&D organization will be aligned to focus on key programs in support of future advanced magnetic tape formats and our increased growth and focus on consumer digital storage products and accessories.

     During the third quarter of 2007, we recorded restructuring charges of $3.1 million related to reorganization of certain administrative and sales organizations as well as reversal of other charges of $3.8 million related to a terminated employment agreement. Our nine-month period ended September 30, 2007 included restructuring and other charges of $20.7 million, which included $19.6 million for the cost reduction program noted above, $1.4 million in asset impairments and income of $0.7 million associated with a terminated employment agreement. See Note 8 to the Condensed Consolidated Financial Statements for further information.

     As of September 30, 2007, we estimate that a total of 835 positions will be eliminated under our cost reduction restructuring program by mid-2009, primarily in our manufacturing organization. The program is expected to result in $25 million to $30 million in annualized cost savings once the program is fully implemented. We expect to incur a total of $35 million to $40 million in restructuring charges over two years related to this cost reduction program.

     During the nine-month period ended September 30, 2006, we recorded restructuring and other charges of $10.7 million. Restructuring charges of $8.9 million related to the Memorex integration process were recorded in the second quarter of 2006. During the first quarter of 2006, we recorded restructuring charges of $1.8 million related to employee reductions in our Wahpeton, North Dakota and Camarillo, California production facilities consisting of estimated severance payments and related benefits.

Operating Income

		Three Months Ended												Nine Months Ended
		September 30,								Percent				September 30,								Percent
(Dollars in millions)		2007				2006				Change				2007				2006				Change
Operating income		$	16.3			$	28.3				-42.4	%		$	37.3			$	76.2				-51.0	%
As a percent of revenue			3.1	%			6.7	%							2.7	%			6.8	%