##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
 
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 or
 o
    
    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: 1-14310
 
 
 IMATION CORP.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    41-1838504(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)1 Imation Way
    
    55128Oakdale, Minnesota
    
    (Zip Code)(Address of principal executive offices)
 (651) 704-4000  (Registrants telephone number, including area code)
 
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredCommon Stock, $.01 per share
    
    New York Stock Exchange, Inc.;Chicago Stock Exchange, IncorporatedPreferred Stock Purchase Rights
    
    New York Stock Exchange, Inc.;Chicago Stock Exchange, Incorporated
 
 Securities registered pursuant to Section 12(g) of the Act: None
 
  þ o
  o þ
  þ o
 o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if smaller reporting company)
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



IMATION CORP.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2007
 TABLE OF CONTENTS
 PagePART IItem 1
    
    Business
    
    2Item 1A
    
    Risk Factors
    
    10Item 1B
    
    Unresolved Staff Comments
    
    15Item 2
    
    Properties
    
    16Item 3
    
    Legal Proceedings
    
    17Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    18PART IIItem 5
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    18Item 6
    
    Selected Financial Data
    
    20Item 7
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    21Item 7A
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    39Item 8
    
    Financial Statements and Supplementary Data
    
    41Item 9
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    84Item 9A
    
    Controls and Procedures
    
    84Item 9B
    
    Other Information
    
    84PART IIIItem 10
    
    Directors, Executive Officers and Corporate Governance
    
    85Item 11
    
    Executive Compensation
    
    86Item 12
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    86Item 13
    
    Certain Relationships and Related Transactions, and Director Independence
    
    86Item 14
    
    Principal Accountant Fees and Services
    
    86PART IVItem 15
    
    Exhibits and Financial Statement Schedules
    
    87Signatures
    
    91Form of Amended and Restated Severance Agreement with Executive OfficersDirectors Compensation ProgramSubsidiariesConsent of Independent Registered Public Accounting FirmPower of AttorneySection 302 CertificationSection 302 CertificationSection 906 CertificationSection 906 Certification
  1




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##### Table of Contents



PART I
 
 Item 1. Business.
 General
   Strategy
    
    
    We began addressing a growing recordable optical media opportunity initially through the
Imation brand on a sourced basis into both commercial and consumer channels including a
series of agreements with Moser Baer India Ltd. (MBI) in 2003 that established MBI as a
significant, non-exclusive source for our optical media products and created a joint
venture sales and distribution company, Global Data Media (GDM). We hold a 51 percent
interest in GDM. As the controlling shareholder of the subsidiary, we consolidate the
results of GDM in our financial statements.
    
    An agreement with IBM in 2004 established us as the exclusive global distributor for IBM
branded tape media products, whether manufactured by Imation or others.
    
    On April 28, 2006, we acquired 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. This action strengthened our position in optical
products and accessories, especially in the U.S. retail channel. See Note
3 to the Consolidated Financial Statements for further information.
 2




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
    
    On July 9, 2007, we acquired certain assets of Memcorp, Inc., a Florida corporation, and
Memcorp Asia Limited, a corporation organized under the laws of Hong Kong (together
Memcorp), used in or relating to the sourcing and sale of branded consumer electronic
products, principally under the Memorex brand name. This action established a foundation
for the Company in consumer electronic products in the mass merchant channel and enabled us
to better manage the Memorex brand name across all retail channels in the U.S. See Note 3
to the Consolidated Financial Statements for further information.
    
    On July 31, 2007, we acquired 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 being sold under the TDK Life on Record brand
name (TDK Recording Media), from TDK Corporation, a Japanese corporation (TDK), including
the assets or capital stock of TDKs operating subsidiaries engaged in the TDK Recording
Media business. This action further strengthened our optical market position, especially in
the important consumer markets of Europe and Japan. See Note 3 to the Consolidated
Financial Statements for further information.
    
    An agreement with Sun Microsystems, Inc. in 2007 established us as the exclusive global
distributor for Sun StorageTek branded tape media products, whether manufactured by Imation
or others.
    
    An agreement with Hewlett-Packard Company (HP) in 2007 established us as the exclusive
global distributor for HP branded recordable optical media products.
    
    Other agreements have given us exclusive and non-exclusive distribution rights for
certain brands of recordable media in various regions or product categories. Examples of
other distribution agreements include those with ProStor Systems Inc. and Tandberg Data ASA
(Tandberg).
    
    A recent agreement in 2008 with Mtron, a Korean company, establishes Imation as the
exclusive global distributor, (except in Korea and Japan) for certain solid state drive
(SSD) products developed by Mtron for mobile computers and enterprise servers.
   
    
    Optimize our magnetic tape business.The magnetic tape market remains an attractive
market with growing demand for storage capacity across a substantial installed base of
commercial Information Technology (IT) users, a relatively small number of competitors, and
high barriers to entry. Imation enjoys a leading market share, significant intellectual
property portfolio, solid industry reputation and relationships among key original
equipment manufacturers (OEMs). To optimize our magnetic tape business and stabilize or
reduce our manufacturing costs, in May of 2007 we started a major restructuring of our
manufacturing operations. As a result we are concentrating our direct manufacturing
investments on coating operations and outsourcing other parts of manufacturing operations
for magnetic tape. See Note 9 to the Consolidated Financial Statements for further
information. We continue to invest broadly in tape technology and seek to maintain and
extend value-added technology capabilities in key areas, including precision thin film tape
coating and servo-writing.
    
    Grow the data storage media business across the four pillars of storage offering
products under multiple brands.Over the years, we have brought to market recordable media
products beyond magnetic
tape, including recordable optical media, removable USB flash drives and flash cards, and
external and removable hard disk products. We have also acquired additional brands, beyond
 3




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the Imation brand, and established distribution agreements for other brands, as described
above. In addition, with over half of our revenue coming from outside the United States, we
seek to leverage our global marketing and distribution capability in bringing products to
market across multiple geographies.
 
    
    Extend certain brands selectively across multiple product categories.We sell
accessories and certain consumer electronic products, selectively, under multiple brands in
various regions of the world. With the acquisition of Memcorp we entered into the consumer
electronics market to sell certain consumer electronic products which we did not offer
previously. Our product portfolio includes TVs and digital displays, including flat-panel
liquid crystal displays (LCD) and digital picture frames, IPod accessories, clock-radios
and MP3 players. The portfolio also includes home theater video, portable and fashion DVD
players, karaoke systems and office products such as voice recorders. The Memcorp
acquisition also included a brand licensing agreement with MTV Networks, a division of
Viacom International, to design and distribute consumer electronic items under certain
Nickelodeon character-based properties and the NPower brands.
 Industry Background
     4




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Business Segments
  Data Storage Media
     Electronic Products
  5




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Description of Business
 Products and Application Areas
  Years Ended December 31,2007
    
    
    2006
    
    
    2005% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of(Dollars in millions)
    
    Revenue
    
    
    Total
    
    
    Revenue
    
    
    Total
    
    
    Revenue
    
    
    TotalOptical
    
    $
    954.2
    
    
    
    46.3
    %
    
    $
    680.3
    
    
    
    42.9
    %
    
    $
    450.7
    
    
    
    35.8
    %Magnetic
    
    
    703.9
    
    
    
    34.1
    %
    
    
    660.8
    
    
    
    41.7
    %
    
    
    700.5
    
    
    
    55.7
    %Flash
    
    
    157.1
    
    
    
    7.6
    %
    
    
    146.6
    
    
    
    9.3
    %
    
    
    57.8
    
    
    
    4.6
    %Electronic products
    
    
    118.1
    
    
    
    5.7
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accessories & other
    
    
    128.7
    
    
    
    6.3
    %
    
    
    97.0
    
    
    
    6.1
    %
    
    
    49.1
    
    
    
    3.9
    %Total
    
    $
    2,062.0
    
    
    
    
    
    
    $
    1,584.7
    
    
    
    
    
    
    $
    1,258.1
    Customers, Marketing and Distribution
   6




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Executive Officers of the Registrant
 Competition
    Manufacturing
   7




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Raw Materials and Other Purchased Products
    Research and Development
  Intellectual Property
  8




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Employees
  Environmental Matters
  International Operations
   Executive Officers of the Registrant
  Frank P.
Russomanno,
 Bradley D. Allen,
 Jacqueline A. Chase,
 9




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James C. Ellis,
 Peter A. Koehn,
 Dr. Subodh Kulkarni,
 Stephen F. Moss ,
 Scott J. Robinson ,
 John L. Sullivan,
 Paul R. Zeller,
 Availability of SEC Reports
  
 Item 1A. Risk Factors .
  10




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If we do not achieve the expected benefit from TDK Recording Media, Memcorp and other
potential future acquisitions, our financial results may be negatively impacted.
  If we do not successfully manage the Memorex brand, our financial results may be negatively
impacted.
 If we do not successfully manage our multiple brands on a global basis, it could have a
material impact on our financial results.
 Our financial success depends in part on our ability to grow our business in the consumer
electronics market.
 11




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If we do not achieve the expected benefits from our joint venture with MBI as well as other
strategic relationships, our financial results may be negatively impacted.
 If we do not successfully implement our global manufacturing strategy for magnetic data
storage products and changes to the Research and Development organization and realize the benefits
expected from the restructuring, our financial results may be affected.
 We must make strategic decisions from time to time as to the products and technologies in
which we invest and if we choose the wrong product or technology, our financial results could be
adversely impacted.
 Unfavorable economic conditions could negatively affect our revenues and profitability.
 Because of the rapid technology changes in our industry, we may not be able to compete if we
cannot quickly develop, source and introduce differentiating and innovative products.
 Since price competition is a common factor in both the removable data storage media and
consumer electronics markets, we risk reducing profitability if we cannot reduce costs and manage
inventory in line with price declines.
 12




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We may be dependent on third parties for new product introductions or technologies in order to
introduce our own new products.
 Our financial success depends upon our ability to manufacture, source and deliver products to
our customers at acceptable quality, volume and cost levels.
 If we cannot obtain finished products, raw materials or critical components at projected
costs, we may not be able to maintain expected levels of profitability.
 A material change in customer relationships or in customer demand for products could have a
significant impact on our business.
 Our financial results may be affected by the political climate and laws in the countries in
which we do business and by fluctuations in world financial markets.
 Our success depends in part on our ability to obtain and protect our intellectual property
rights, including the TDK Life on Record and Memorex brands, and to defend ourselves against
intellectual property infringement claims of others, including the Philips patent cross-
 13




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license.
  If we are unable to attract and retain employees and key talent, we may incur a material
adverse impact on our business and financial results.
 Significant litigation matters could result in large costs and distraction to our business.
 An impairment in the carrying value of goodwill or other assets could negatively affect our
consolidated results of operations and net worth.
    14




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Our stock price may be subject to significant volatility due to our own results or market
trends.
 
 Item 1B. Unresolved Staff Comments.
  15




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Item 2. Properties.
  Facility
    
    FunctionElectronic ProductsKowloon, Hong Kong (leased)
    
    AdministrativeWeston, Florida (leased)
    
    Sales/Administrative/Distribution CenterData Storage MediaAmericasAnaheim, California (owned)
    
    Distribution CenterBogota, Columbia (leased)
    
    Sales/AdministrativeBuenas Aires, Argentina (leased)
    
    Sales/AdministrativeCamarillo, California (owned/leased)*
    
    Magnetic tape manufacturingCerritos, California (leased)
    
    Sales/AdministrativeLima, Peru (leased)
    
    Sales/AdministrativeLondon, Ontario, Canada (owned)
    
    Sales/AdministrativeMexico City, Mexico (leased)
    
    Sales/AdministrativePanama City, Panama (leased)
    
    Sales/AdministrativeOakdale, Minnesota (owned)
    
    Sales/Administrative/Laboratory facilitySantiago, Chile (owned)
    
    Sales/AdministrativeSao Paulo, Brazil (leased)
    
    Sales/AdministrativeSouthaven, Mississippi (leased)
    
    Distribution CenterWahpeton, North Dakota (owned/leased)*
    
    Magnetic tape manufacturingWeatherford, Oklahoma (owned)
    
    Magnetic tape manufacturingEuropeBracknell, United Kingdom (leased)
    
    Sales/AdministrativeCergy, France (leased)
    
    Sales/AdministrativeDubai, United Arab Emirates (leased)
    
    Sales/AdministrativeLangendorf, Switerland (leased)
    
    Sales/AdministrativeMadrid, Spain (leased)
    
    Sales/AdministrativeMilan, Italy (leased)
    
    Sales/AdministrativeNeuss, Germany (leased)
    
    Sales/AdministrativeParis, France (leased)
    
    Sales/AdministrativeRatingen, Germany (leased)
    
    Sales/AdministrativeSchiphol-rijk, Netherlands (leased)
    
    Sales/Administrative/European regional headquartersSegrate, Italy (leased)
    
    Sales/AdministrativeAsia PacificBaulkham Hills, Australia (leased)
    
    Sales/AdministrativeBeijing, China (leased)
    
    Sales/AdministrativeGuangzhou, China (leased)
    
    Sales/AdministrativeNew Delhi, India (leased)
    
    Sales/AdministrativeNorth Point, Hong Kong (leased)
    
    Sales/Administrative/Asia-Pacific regional headquartersSeoul, Korea (leased)
    
    Sales/AdministrativeShanghai, China (leased)
    
    Sales/AdministrativeSingapore (leased)
    
    Sales/AdministrativeTaipei, Taiwan (leased)
    
    Sales/AdministrativeTokyo, Japan (two leased locations)
    
    Sales/Administrative
 
 *
    
    In December 2003, we sold one of the buildings at our Camarillo, California facility and are
leasing a portion of the building. In 2002, we sold one of the buildings at our Wahpeton, North
Dakota facility and are leasing the building. 16




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Item 3. Legal Proceedings.
  Philips litigation:
   SanDisk litigation:
   17




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Item 4. Submission of Matters to a Vote of Security Holders.
  
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
    2007 Sales Prices
    
    2006 Sales PricesHigh
    
    Low
    
    High
    
    LowFirst quarter
    
    $
    49.20
    
    
    $
    38.96
    
    
    $
    50.93
    
    
    $
    41.97Second quarter
    
    $
    41.95
    
    
    $
    35.69
    
    
    $
    48.24
    
    
    $
    37.11Third quarter
    
    $
    37.89
    
    
    $
    23.71
    
    
    $
    44.34
    
    
    $
    37.60Fourth quarter
    
    $
    27.95
    
    
    $
    18.96
    
    
    $
    47.99
    
    
    $
    39.60
 18




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(c)
    
    
    (d)Total Number of
    
    
    Maximum Number(a)
    
    
    (b)
    
    
    Shares Purchased as
    
    
    of Shares that MayTotal Number of
    
    
    Average
    
    
    Part of Publicly
    
    
    Yet Be PurchasedShares
    
    
    Price Paid
    
    
    Announced Plans or
    
    
    Under the Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    Programs
    
    
    ProgramsOctober 1, 2007  October 31, 2007
    
    
    518,900
    
    
    $
    24.55
    
    
    
    518,900
    
    
    
    1,942,099November 1, 2007  November 30, 2007
    
    
    420,093
    
    
    $
    20.14
    
    
    
    419,700
    
    
    
    1,522,399December 1, 2007  December 31, 2007
    
    
    338,800
    
    
    $
    21.98
    
    
    
    338,800
    
    
    
    1,183,599Total
    
    
    1,277,793
    
    
    $
    22.42
    
    
    
    1,277,400
    
    
    
    1,183,599
 
 (a)
    
    The purchases in this column include shares repurchased as part of our publicly announced
program and in addition include 393 shares that were surrendered to Imation by participants in
our stock-based compensation plans (the Plans) to satisfy the tax obligations related to the
vesting of restricted stock awards.(b)
    
    The average price paid in this column includes shares repurchased as part of our publicly
announced program and shares that were surrendered to Imation by participants in the Plans to
satisfy the tax obligations related to the vesting of restricted stock awards.(c)
    
    The number of shares in this column represents the number of shares repurchased as part of
publicly announced programs to repurchase up to 5.0 million shares of our common stock.(d)
    
    On April 17, 2007, our Board of Directors authorized the repurchase of 5.0 million shares of
common stock. The previous share repurchase program, which had a remaining share repurchase
authorization of 2.4 million shares, was cancelled and replaced with the new authorization.
During 2007, 2006 and 2005, we repurchased 3.8 million shares, 0.9 million shares and 0.5
million shares, respectively. As of December 31, 2007, we had repurchased 3.8 million shares
under the latest authorization and held, in total, 4.5 million shares of treasury stock
acquired at an average price of $25.27 per share. Authorization for repurchases of an
additional 1.2 million shares remains outstanding as of December 31, 2007. On January 28,
2008, the Board of Directors authorized a share repurchase program increasing total
outstanding authorization to 3.0 million shares of common stock. The Companys previous
authorization was cancelled with the new authorization. 19




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Item 6. Selected Financial Data.*
 (Dollars in millions, except per share data)
    
    2007
    
    2006
    
    2005
    
    2004
    
    2003Statement of Operations Data:Net revenue
    
    $
    2,062.0
    
    
    $
    1,584.7
    
    
    $
    1,258.1
    
    
    $
    1,173.7
    
    
    $
    1,110.6Gross profit
    
    
    355.9
    
    
    
    344.1
    
    
    
    302.1
    
    
    
    287.8
    
    
    
    320.6Selling, general and administrative
    
    
    223.3
    
    
    
    174.0
    
    
    
    146.3
    
    
    
    161.5
    
    
    
    163.9Research and development
    
    
    38.2
    
    
    
    50.0
    
    
    
    51.3
    
    
    
    56.5
    
    
    
    56.4Goodwill impairment
    
    
    94.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Litigation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.0
    )Restructuring and other
    
    
    33.3
    
    
    
    11.9
    
    
    
    1.2
    
    
    
    25.2
    
    
    
    (0.7
    )Gain on sale of Color Proofing and
Color Software business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11.1
    )Loan impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.6Operating (loss) income
    
    
    (33.0
    )
    
    
    108.2
    
    
    
    103.3
    
    
    
    44.6
    
    
    
    108.5(Loss) income from continuing operations
    
    
    (34.6
    )
    
    
    75.2
    
    
    
    81.8
    
    
    
    36.5
    
    
    
    74.9Net (loss) income
    
    
    (50.4
    )
    
    
    76.4
    
    
    
    87.9
    
    
    
    29.9
    
    
    
    82.0(Loss) earnings per common share from
continuing operations:Basic
    
    
    (1.36
    )
    
    
    2.17
    
    
    
    2.41
    
    
    
    1.04
    
    
    
    2.11Diluted
    
    
    (1.36
    )
    
    
    2.14
    
    
    
    2.36
    
    
    
    1.03
    
    
    
    2.06Net (loss) earnings per common share:Basic
    
    
    (1.36
    )
    
    
    2.21
    
    
    
    2.59
    
    
    
    0.85
    
    
    
    2.31Diluted
    
    
    (1.36
    )
    
    
    2.17
    
    
    
    2.54
    
    
    
    0.84
    
    
    
    2.26Balance Sheet Data:Working capital
    
    $
    487.7
    
    
    $
    485.3
    
    
    $
    643.1
    
    
    $
    510.8
    
    
    $
    541.2Cash and cash equivalents (1)
    
    
    135.5
    
    
    
    252.5
    
    
    
    483.0
    
    
    
    397.1
    
    
    
    411.4Inventories, net
    
    
    366.1
    
    
    
    258.0
    
    
    
    134.9
    
    
    
    131.3
    
    
    
    159.4Property, plant and equipment, net
    
    
    171.5
    
    
    
    178.0
    
    
    
    195.0
    
    
    
    214.4
    
    
    
    226.5Total assets
    
    
    1,751.0
    
    
    
    1,382.9
    
    
    
    1,146.2
    
    
    
    1,110.6
    
    
    
    1,172.8Long-term debt
    
    
    21.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    697.2
    
    
    
    436.6
    
    
    
    290.9
    
    
    
    323.8
    
    
    
    352.5Total shareholders equity
    
    
    1,053.8
    
    
    
    946.3
    
    
    
    855.3
    
    
    
    786.8
    
    
    
    820.3Other Information:Current ratio
    
    
    1.8
    
    
    
    2.2
    
    
    
    3.6
    
    
    
    2.9
    
    
    
    2.8Days sales outstanding (2)
    
    
    64
    
    
    
    56
    
    
    
    46
    
    
    
    45
    
    
    
    46Days of inventory supply (2)
    
    
    65
    
    
    
    72
    
    
    
    56
    
    
    
    53
    
    
    
    71Return on average assets (3)
    
    
    N/M
    
    
    
    5.9
    %
    
    
    7.2
    %
    
    
    3.2
    %
    
    
    6.5
    %Return on average equity (3)
    
    
    N/M
    
    
    
    8.3
    %
    
    
    10.0
    %
    
    
    4.5
    %
    
    
    9.6
    %Dividends per common share
    
    $
    0.62
    
    
    $
    0.54
    
    
    $
    0.46
    
    
    $
    0.38
    
    
    $
    0.24Capital expenditures
    
    $
    14.5
    
    
    $
    16.0
    
    
    $
    21.6
    
    
    $
    35.8
    
    
    $
    75.1Number of employees
    
    
    2,250
    
    
    
    2,070
    
    
    
    2,100
    
    
    
    2,550
    
    
    
    2,800
 
 *
    
    See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations, for additional information regarding the financial information presented in this
table.N/M  Not meaningful. 20




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##### Table of Contents



(1)
    
    We invested certain funds in active cash management and classified those investments in other
current assets or other assets depending on remaining maturity. These amounts represented
$24.6 million, $42.5 million and $13.4 million as of December 31, 2005, 2004 and 2003,
respectively, in addition to cash and equivalents. These investments have since matured, which
resulted in no active cash management investment balance for the years ended December 31, 2007
and 2006.(2)
    
    These operational measures, which we regularly use, are provided to assist in the investors
further understanding of our operations. Days sales outstanding is calculated using the
count-back method, which calculates the number of days of most recent revenue that are
reflected in the net accounts receivable balance. Days of inventory supply is calculated using
the current period inventory balance divided by the average of the inventoriable portion of
cost of goods sold for the previous 12 months, expressed in days.(3)
    
    Return percentages are calculated using income from continuing operations. Our 2007 loss from
continuing operations resulted in return percentages that are not meaningful. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
     21




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##### Table of Contents



Factors Affecting Comparability of our Financial Results
 Acquisitions
 
    
    On July 31, 2007, we acquired the TDK Recording Media business.
    
    On July 9, 2007, we acquired the Memcorp business.
    
    On April 28, 2006, we acquired the Memorex business.
  Accounting for Uncertainty in Income Taxes
 Accounting for Uncertainty in Income Taxes
 Stock-Based Compensation
 Share-Based Payment Accounting for Stock Issued to Employees
 Executive Summary
 2007 Highlights
 
    
    We completed acquisitions of the TDK Recording Media and the Memcorp businesses in the
third quarter of 2007. The integration of our acquisitions is on track and they are
contributing positively to our results.
    
    We entered into several strategic relationships that enable us to continue exploring new
market opportunities where we can participate and use the strength of our global footprint
as well as our channel experience.
 22




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##### Table of Contents



2007 Consolidated Results of Operations
 
    
    Revenue of $2,062.0 million in 2007 was up 30.1 percent compared with revenue of
$1,584.7 million in 2006, due primarily to the acquisitions of the TDK Recording Media and
Memcorp businesses which closed in the third quarter of 2007 and incremental revenue from
the Memorex acquisition which closed in the second quarter of 2006.
    
    Gross margin of 17.3 percent in 2007 was down from 21.7 percent in 2006, due mainly to
product mix shifts. Gross profit rose to $355.9 million in 2007 compared with $344.1
million in 2006.
    
    Selling, general and administrative expense was 10.8 percent of revenue in 2007,
compared with 11.0 percent in 2006.
    
    Operating loss was $33.0 million in 2007, compared with operating income of $108.2
million in 2006. Operating loss in 2007 included a goodwill impairment charge of $94.1
million and restructuring and other charges of $33.3 million. Operating income in 2006
included restructuring and other charges of $11.9 million and there was no goodwill
impairment charge.
 2007 Cash Flow/Financial Condition
 
    
    Cash flow from operations totaled $87.5 million in 2007, compared with $97.5 million in
2006.
    
    Cash and liquid investments totaled $135.5 million at year-end.
    
    We repurchased approximately 3.8 million shares of common stock in the year for $108.2
million.
    
    Our Board of Directors declared dividends of $0.14 per share in February 2007, and $0.16
per share in May, August and November 2007, which represents our fifth year of paying
dividends and our fourth consecutive annual dividend increase.
 Results of Operations
 Net Revenue
 Years Ended December 31,

    
    Percent Change2007 vs.
    
    2006 vs.(Dollars in millions)
    
    2007
    
    2006
    
    2005
    
    2006
    
    2005Net revenue
    
    $
    2,062.0
    
    
    $
    1,584.7
    
    
    $
    1,258.1
    
    
    
    30.1
    %
    
    
    26.0
    %
   23




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##### Table of Contents



Gross Profit
 Years Ended December 31,

    
    Percent Change2007 vs.
    
    2006 vs.(Dollars in millions)
    
    2007
    
    2006
    
    2005
    
    2006
    
    2005Gross profit
    
    $
    355.9
    
    
    $
    344.1
    
    
    $
    302.1
    
    
    
    3.4
    %
    
    
    13.9
    %Gross margin
    
    
    17.3
    %
    
    
    21.7
    %
    
    
    24.0
    %
   Selling, General and Administrative (SG&A)
 Years Ended December 31,

    
    Percent Change2007 vs.
    
    2006 vs.(Dollars in millions)
    
    2007
    
    2006
    
    2005
    
    2006
    
    2005Selling, general and administrative
    
    $
    223.3
    
    
    $
    174.0
    
    
    $
    146.3
    
    
    
    28.3
    %
    
    
    18.9
    %As a percent of revenue
    
    
    10.8
    %
    
    
    11.0
    %
    
    
    11.6
    %
   Research and Development (R&D)
 Years Ended December 31,

    
    Percent Change2007 vs.
    
    2006 vs.(Dollars in millions)
    
    2007
    
    2006
    
    2005
    
    2006
    
    2005Research and development
    
    $
    38.2
    
    
    $
    50.0
    
    
    $
    51.3
    
    
    
    -23.6
    %
    
    
    -2.5
    %As a percent of revenue
    
    
    1.9
    %
    
    
    3.2
    %
    
    
    4.1
    %
  24




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##### Table of Contents



Goodwill Impairment
 Years Ended December 31,

    
    Percent Change2007 vs.
    
    2006 vs.(Dollars in millions)
    
    2007
    
    2006
    
    2005
    
    2006
    
    2005Goodwill impairment
    
    $
    94.1
    
    
    $
    
    
    
    $
    
    
    
    
    N/M
    
    
    
    N/M
 
 N/M  Not meaningful Critical Accounting Policies and Estimates
 Restructuring and Other
  Years Ended December 31,(In millions)
    
    2007
    
    
    2006
    
    
    2005RestructuringSeverance and severance related expense
    
    $
    23.6
    
    
    $
    8.6
    
    
    $
    Lease termination costs
    
    
    0.6
    
    
    
    1.4
    
    
    
    1.6Reversal of severance and severance relatedexpense from prior restructuring programs
    
    
    
    
    
    
    (0.9
    )
    
    
    (0.4
    )Total restructuring
    
    
    24.2
    
    
    
    9.1
    
    
    
    1.2Asset impairments
    
    
    8.4
    
    
    
    2.8
    
    
    
    Pension curtailment (Note 11)
    
    
    1.4
    
    
    
    
    
    
    
    Terminated employment agreement
    
    
    (0.7
    )
    
    
    
    
    
    
    Total
    
    $
    33.3
    
    
    $
    11.9
    
    
    $
    1.2
   25




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##### Table of Contents



Recognition of Liabilities in Connection with a Purchase
Business Combination
      Operating (Loss) Income
 Years Ended December 31,

    
    Percent Change2007 vs.
    
    2006 vs.(Dollars in millions)
    
    2007
    
    2006
    
    2005
    
    2006
    
    2005Operating (loss) income
    
    $
    (33.0
    )
    
    $
    108.2
    
    
    $
    103.3
    
    
    
    -130.5
    %
    
    
    4.7
    %As a percent of revenue
    
    
    -1.6
    %
    
    
    6.8
    %
    
    
    8.2
    %
   Other (Income) and Expense
 Years Ended December 31,(Dollars in millions)
    
    2007
    
    
    2006
    
    
    2005Interest expense
    
    $
    2.6
    
    
    $
    1.0
    
    
    $
    0.7Interest income
    
    
    (7.6
    )
    
    
    (12.6
    )
    
    
    (11.6
    )Other expense, net
    
    
    6.6
    
    
    
    8.0
    
    
    
    7.5Other (income) and expense
    
    $
    1.6
    
    
    $
    (3.6
    )
    
    $
    (3.4
    )As a percent of revenue
    
    
    0.1
    %
    
    
    -0.2
    %
    
    
    -0.3
    %
 26




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##### Table of Contents



Income Taxes
 Years Ended December 31,(Dollars in millions)
    
    2007
    
    2006
    
    2005Income taxes
    
    $
    15.8
    
    
    $
    36.6
    
    
    $
    24.9Effective tax rate
    
    
    N/M
    
    
    
    32.7
    %
    
    
    23.3
    %
 
 N/M  Not meaningful.   Income from Discontinued Operations
 Percent ChangeYears Ended December 31,
    
    2007 vs.
    
    2006 vs.(Dollars in millions)
    
    2007
    
    2006
    
    2005
    
    2006
    
    2005Income from discontinued operations,
net of income taxes
    
    $
    
    
    
    $
    1.2
    
    
    $
    6.1
    
    
    
    -100.0
    %
    
    
    -80.3
    %
  Segment Results
  27




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##### Table of Contents



Data Storage Media
 Americas
 Years Ended December 31,
    
    Percent Change2007 vs.
    
    2006 vs.(Dollars in millions)
    
    2007
    
    2006
    
    2005
    
    2006
    
    2005Net revenue
    
    $
    959.3
    
    
    $
    838.9
    
    
    
    577.3
    
    
    
    14.4
    %
    
    
    45.3
    %Operating income
    
    
    82.1
    
    
    
    128.9
    
    
    
    108.0
    
    
    
    -36.3
    %
    
    
    19.4
    %As a percent of revenue
    
    
    8.6
    %
    
    
    15.4
    %
    
    
    18.7
    %
    Europe
 Years Ended December 31,
    
    Percent Change2007 vs.
    
    2006 vs.(Dollars in millions)
    
    2007
    
    2006
    
    2005
    
    2006
    
    2005Net revenue
    
    $
    655.7
    
    
    $
    524.3
    
    
    $
    456.2
    
    
    
    25.1
    %
    
    
    14.9
    %Operating income
    
    
    45.2
    
    
    
    48.1
    
    
    
    51.3
    
    
    
    -6.0
    %
    
    
    -6.2
    %As a percent of revenue
    
    
    6.9
    %
    
    
    9.2
    %
    
    
    11.2
    %
   28




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##### Table of Contents



Asia Pacific
 Years Ended December 31,
    
    Percent Change2007 vs.
    
    2006 vs.(Dollars in millions)
    
    2007
    
    2006
    
    2005
    
    2006
    
    2005Net revenue
    
    $
    328.9
    
    
    $
    221.5
    
    
    $
    224.6
    
    
    
    48.5
    %
    
    
    -1.4
    %Operating income
    
    
    23.5
    
    
    
    17.1
    
    
    
    16.1
    
    
    
    37.4
    %
    
    
    6.2
    %As a percent of revenue
    
    
    7.1
    %
    
    
    7.7
    %
    
    
    7.2
    %
   Electronic Products
 Years Ended December 31,
    
    Percent Change2007 vs.
    
    2006 vs.(Dollars in millions)
    
    2007
    
    2006
    
    2005
    
    2006
    
    2005Net revenue
    
    $
    118.1
    
    
    $
    
    
    
    $
    
    
    
    
    N/M
    
    
    
    N/MOperating income
    
    
    5.5
    
    
    
    
    
    
    
    
    
    
    
    N/M
    
    
    
    N/MAs a percent of revenue
    
    
    4.7
    %
  Corporate and Unallocated
 Years Ended December 31,
    
    Percent Change2007 vs.
    
    2006 vs.(Dollars in millions)
    
    2007
    
    2006
    
    2005
    
    2006
    
    2005Operating loss
    
    $
    (189.3
    )
    
    $
    (85.9
    )
    
    $
    (72.1
    )
    
    
    120.4
    %
    
    
    19.1
    %
  29




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Financial Position
       30




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Liquidity and Capital Resources
      31




---



##### Table of Contents



32




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##### Table of Contents



Off-Balance Sheet Arrangements
  Summary of Contractual Obligations
 Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    More Than(In millions)
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsNotes payable (1)
    
    $
    31.3
    
    
    $
    10.0
    
    
    $
    21.3
    
    
    $
    
    
    
    $
    Operating leases obligations
    
    
    35.9
    
    
    
    16.7
    
    
    
    14.8
    
    
    
    3.8
    
    
    
    0.6Purchase obligations (2)
    
    
    116.0
    
    
    
    115.7
    
    
    
    0.3
    
    
    
    
    
    
    
    Contingent consideration payment (3)
    
    
    2.5
    
    
    
    2.5
    
    
    
    
    
    
    
    
    
    
    
    Other liabilities (4)
    
    
    47.9
    
    
    
    0.9
    
    
    
    1.3
    
    
    
    0.8
    
    
    
    44.9Total
    
    $
    233.6
    
    
    $
    145.8
    
    
    $
    37.7
    
    
    $
    4.6
    
    
    $
    45.5
 
 (1)
    
    Does not include interest payments on the debt of approximately $1.4 million, $1.2 million
and $0.2 million
which will be paid in 2008, 2009 and 2010, respectively.(2)
    
    The majority of the purchase obligations consist of 90-day rolling estimates. Each month, we
provide various 33




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##### Table of Contents



suppliers with rolling forecasts of our demand for products for the next three
months. The forecasted amounts are generally binding on us as follows: 100 percent for the
first month, 75 percent for the second month and 50 percent for the third month.(3)
    
    Additional cash consideration of a minimum of $2.5 million will be paid related to the
Memorex acquisition. Additional cash consideration of up to a maximum of $42.5 million could
be paid based on the financial performance of the acquisition through April 2009.(4)
    
    Except for the sale-leaseback payments recorded in long-term liabilities, timing of payments
for the vast majority of the remaining liabilities, primarily consisting of pension, cannot be
reasonably determined and as such have been included in the More Than 5 Years category.   Critical Accounting Policies and Estimates
   Income Tax Accruals and Valuation Allowances
  34




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Accounting for Uncertainty in
Income Taxes
 Litigation Accounting for Contingencies
 Goodwill and Other Intangibles Business Combinations Goodwill and
Other Intangible Assets
  35




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Accounting for the Impairment or Disposal of Long-Lived Assets,
    36




---



##### Table of Contents



Excess of fairvalue over(In millions)
    
    Goodwill
    
    carrying valueAmericas-Commercial
    
    $
    9.5
    
    
    $
    81.8Asia Pacific
    
    
    12.4
    
    
    
    69.0Electronic Products
    
    
    33.6
    
    
    
    18.8
  Change in Fair
    
    Change in FairValue from a
    
    Value from a1% Decrease in
    
    1% Increase in(In millions)
    
    Discount Rate
    
    Discount RateAmericas-Commercial
    
    $
    15.0
    
    
    $
    (15.0
    )Asia Pacific
    
    
    10.0
    
    
    
    (10.0
    )Electronic Products
    
    
    5.0
    
    
    
    (5.0
    )
  Excess Inventory and Obsolescence Accruals
 37




---



##### Table of Contents



Rebates
 Recently Issued Accounting Standards
 Fair Value Measurement Accounting
for Leases
 The Fair Value Option for Financial Assets and
Financial Liabilities  including an amendment to FAS 115
 , Business Combinations,
 , Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Accounting for the Income Tax Benefits of
Dividends on Share-Based Payment Awards
 2008 Outlook
  
    
    Revenue is targeted at approximately $2.4 billion, representing growth of approximately
16 percent over 2007.
 38




---



##### Table of Contents




    
    Operating income, including restructuring, is targeted to be in the range of $95 million
to $105 million. We currently anticipate restructuring charges to be in the range of $4
million to $6 million for 2008.
    
    Diluted earnings per share is targeted between $1.51 and $1.68 which includes the
negative impact of approximately $0.08 from restructuring charges.
    
    Capital spending is targeted in the range of $15 million to $20 million.
    
    The tax rate is anticipated to be in the range of 35 percent to 37 percent, absent any
one-time tax items that may occur.
    
    Depreciation and amortization expense is targeted to be in the range of $48 million to
$52 million.
  Forward-Looking Statements
   
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
  39




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40




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data.
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  Internal Control  Integrated Framework
 Accounting for Uncertainty in Income Taxes  an interpretation of
FASB Statement No. 109 Share-Based Payment Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans
  41




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##### Table of Contents



/s/ PricewaterhouseCoopers LLPPricewaterhouseCoopers LLPMinneapolis, MN  42




---



##### Table of Contents



IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
 Years Ended December 31,(In millions, except per share amounts)
    
    2007
    
    
    2006
    
    
    2005Net revenue
    
    $
    2,062.0
    
    
    $
    1,584.7
    
    
    $
    1,258.1Cost of goods sold
    
    
    1,706.1
    
    
    
    1,240.6
    
    
    
    956.0Gross profit
    
    
    355.9
    
    
    
    344.1
    
    
    
    302.1Operating expense:Selling, general and administrative
    
    
    223.3
    
    
    
    174.0
    
    
    
    146.3Research and development
    
    
    38.2
    
    
    
    50.0
    
    
    
    51.3Goodwill impairment
    
    
    94.1
    
    
    
    
    
    
    
    Restructuring and other
    
    
    33.3
    
    
    
    11.9
    
    
    
    1.2Total
    
    
    388.9
    
    
    
    235.9
    
    
    
    198.8Operating (loss) income
    
    
    (33.0
    )
    
    
    108.2
    
    
    
    103.3Other (income) and expense:Interest expense
    
    
    2.6
    
    
    
    1.0
    
    
    
    0.7Interest income
    
    
    (7.6
    )
    
    
    (12.6
    )
    
    
    (11.6
    )Other expense, net
    
    
    6.6
    
    
    
    8.0
    
    
    
    7.5Total
    
    
    1.6
    
    
    
    (3.6
    )
    
    
    (3.4
    )(Loss) income from continuing operations before income taxes
    
    
    (34.6
    )
    
    
    111.8
    
    
    
    106.7Income tax provision
    
    
    15.8
    
    
    
    36.6
    
    
    
    24.9(Loss) income from continuing operations
    
    
    (50.4
    )
    
    
    75.2
    
    
    
    81.8Discontinued operations:Income from operations of discontinued businesses, net of income taxes
    
    
    
    
    
    
    
    
    
    
    1.5Gain on disposal of discontinued businesses, net of income taxes
    
    
    
    
    
    
    1.2
    
    
    
    4.6Income from discontinued operations
    
    
    
    
    
    
    1.2
    
    
    
    6.1Net (loss) income
    
    $
    (50.4
    )
    
    $
    76.4
    
    
    $
    87.9(Loss) earnings per common share  basic:Continuing operations
    
    $
    (1.36
    )
    
    $
    2.17
    
    
    $
    2.41Discontinued operations
    
    $
    
    
    
    $
    0.03
    
    
    $
    0.18Net (loss) income
    
    $
    (1.36
    )
    
    $
    2.21
    
    
    $
    2.59(Loss) earnings per common share  diluted:Continuing operations
    
    $
    (1.36
    )
    
    $
    2.14
    
    
    $
    2.36Discontinued operations
    
    $
    
    
    
    $
    0.03
    
    
    $
    0.18Net (loss) income
    
    $
    (1.36
    )
    
    $
    2.17
    
    
    $
    2.54Weighted average basic shares outstanding
    
    
    37.0
    
    
    
    34.6
    
    
    
    33.9Weighted average diluted shares outstanding
    
    
    37.0
    
    
    
    35.2
    
    
    
    34.6Cash dividends paid per common share
    
    $
    0.62
    
    
    $
    0.54
    
    
    $
    0.46
  43




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IMATION CORP.
CONSOLIDATED BALANCE SHEETS
 As of December 31,(In millions, except per share amounts)
    
    2007
    
    
    2006AssetsCurrent assetsCash and cash equivalents
    
    $
    135.5
    
    
    $
    252.5Accounts receivable, net
    
    
    507.1
    
    
    
    308.1Inventories, net
    
    
    366.1
    
    
    
    258.0Other current assets
    
    
    109.9
    
    
    
    58.3Total current assets
    
    
    1,118.6
    
    
    
    876.9Property, plant and equipment, net
    
    
    171.5
    
    
    
    178.0Intangible assets, net
    
    
    371.0
    
    
    
    230.2Goodwill
    
    
    55.5
    
    
    
    67.6Other assets
    
    
    34.4
    
    
    
    30.2Total assets
    
    $
    1,751.0
    
    
    $
    1,382.9Liabilities and Shareholders EquityCurrent liabilitiesAccounts payable
    
    $
    350.1
    
    
    $
    227.3Accrued payroll
    
    
    13.5
    
    
    
    23.7Other current liabilities
    
    
    257.3
    
    
    
    140.6Current maturities of long-term debt
    
    
    10.0
    
    
    
    Total current liabilities
    
    
    630.9
    
    
    
    391.6Other liabilities
    
    
    45.0
    
    
    
    45.0Long-term debt, less current maturities
    
    
    21.3
    
    
    
    Commitments and contingenciesShareholders equityPreferred stock, $.01 par value, authorized 25 million shares, none issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, authorized 100 million shares, 42.9 million issued
    
    
    0.4
    
    
    
    0.4Additional paid-in capital
    
    
    1,109.0
    
    
    
    1,048.9Retained earnings
    
    
    101.5
    
    
    
    172.6Accumulated other comprehensive loss
    
    
    (44.1
    )
    
    
    (91.4
    )Treasury stock, at cost, 4.5 million and 7.9 million shares as of December 31, 2007
and 2006, respectively
    
    
    (113.0
    )
    
    
    (184.2
    )Total shareholders equity
    
    
    1,053.8
    
    
    
    946.3Total liabilities and shareholders equity
    
    $
    1,751.0
    
    
    $
    1,382.9
  44




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##### Table of Contents



IMATION CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 Unearned ESOPCommon
    
    
    Additional Paid-
    
    
    
    
    
    
    Accumulated Other
    
    
    Shares and Other
    
    
    Treasury
    
    
    Total Shareholders(In millions, except per share amounts)
    
    Stock
    
    
    in Capital
    
    
    Retained Earnings
    
    
    Comprehensive Loss
    
    
    Compensation
    
    
    Stock
    
    
    EquityBalance as of December 31, 2004
    
    $
    0.4
    
    
    $
    1,041.7
    
    
    $
    57.1
    
    
    $
    (85.1
    )
    
    $
    (1.7
    )
    
    $
    (225.6
    )
    
    $
    786.8Purchase of treasury stock (453,300 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15.9
    )
    
    
    (15.9
    )Exercise of stock options (968,953 shares)
    
    
    
    
    
    
    (0.4
    )
    
    
    (8.4
    )
    
    
    
    
    
    
    
    
    
    
    32.9
    
    
    
    24.1Restricted stock grants (113,461 shares) and other
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    
    
    
    
    (2.7
    )
    
    
    4.1
    
    
    
    1.0401(k) matching contribution (91,790 shares)
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.2
    
    
    
    3.6Tax benefit from shareholder transactions
    
    
    
    
    
    
    5.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.0Dividend payments
    
    
    
    
    
    
    
    
    
    
    (15.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15.7
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    87.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87.9Net change in cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19.3
    )
    
    
    
    
    
    
    
    
    
    
    (19.3
    )Minimum pension liability adjustments (net of
income tax benefit of $1.0)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.6
    )
    
    
    
    
    
    
    
    
    
    
    (2.6
    )Cash flow hedging (net of income tax provision of $0.3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    0.4Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66.4Balance as of December 31, 2005
    
    
    0.4
    
    
    
    1,046.7
    
    
    
    120.5
    
    
    
    (106.6
    )
    
    
    (4.4
    )
    
    
    (201.3
    )
    
    
    855.3Purchase of treasury stock (865,400 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35.6
    )
    
    
    (35.6
    )Exercise of stock options (1,204,781 shares)
    
    
    
    
    
    
    (8.8
    )
    
    
    (5.5
    )
    
    
    
    
    
    
    
    
    
    
    46.0
    
    
    
    31.7Restricted stock grants (96,960 shares) and other
    
    
    
    
    
    
    (6.1
    )
    
    
    
    
    
    
    
    
    
    
    4.4
    
    
    
    3.5
    
    
    
    1.8401(k) matching contribution (80,501 shares)
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.2
    
    
    
    3.4Stock-based compensation related to options
    
    
    
    
    
    
    8.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.8Tax benefit from shareholder transactions
    
    
    
    
    
    
    8.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.1Dividend payments
    
    
    
    
    
    
    
    
    
    
    (18.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18.8
    )Initial FAS 158 adjustment (net of income tax provision of $1.7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.2
    )
    
    
    
    
    
    
    
    
    
    
    (3.2
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    76.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76.4Net change in cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.4
    
    
    
    
    
    
    
    
    
    
    
    13.4Minimum pension liability adjustments (net of
income tax benefit of $2.6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.6
    
    
    
    
    
    
    
    
    
    
    
    4.6Cash flow hedging (net of income tax provision of $0.3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    0.4Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94.8Balance as of December 31, 2006
    
    
    0.4
    
    
    
    1,048.9
    
    
    
    172.6
    
    
    
    (91.4
    )
    
    
    0.0
    
    
    
    (184.2
    )
    
    
    946.3Purchase of treasury stock (3,816,401 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (108.2
    )
    
    
    (108.2
    )Exercise of stock options (293,954 shares)
    
    
    
    
    
    
    (2.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.0
    
    
    
    7.7Restricted stock grants (46,202 shares) and other
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.8
    
    
    
    2.7401(k) matching contribution (104,155 shares)
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.1
    
    
    
    3.4Stock-based compensation related to options
    
    
    
    
    
    
    7.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.9Terminated employment agreement
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.5
    )
    
    
    (0.9
    )TDK Recording Media acquisition (6,825,764 shares)
    
    
    
    
    
    
    51.7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165.0
    
    
    
    216.7FIN 48 adjustment
    
    
    
    
    
    
    
    
    
    
    2.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.5Tax benefit from shareholder transactions
    
    
    
    
    
    
    2.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.0Dividend payments
    
    
    
    
    
    
    
    
    
    
    (23.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23.2
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (50.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50.4
    )Net change in cumulative translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37.5
    
    
    
    
    
    
    
    
    
    
    
    37.5Pension adjustments (net of income tax
benefit of $5.0)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.2
    
    
    
    
    
    
    
    
    
    
    
    9.2Cash flow hedging (net of income tax provision of $0.2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    0.6Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.1
    )Balance as of December 31, 2007
    
    $
    0.4
    
    
    $
    1,109.0
    
    
    $
    101.5
    
    
    $
    (44.1
    )
    
    $
    0.0
    
    
    $
    (113.0
    )
    
    $
    1,053.8
  45




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##### Table of Contents



IMATION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended December 31,(In millions)
    
    2007
    
    
    2006
    
    
    2005Cash Flows from Operating Activities:Net (loss) income
    
    $
    (50.4
    )
    
    $
    76.4
    
    
    $
    87.9Adjustments to reconcile net (loss) income to net cash provided by operating activities:Depreciation
    
    
    28.6
    
    
    
    29.1
    
    
    
    33.0Amortization
    
    
    18.3
    
    
    
    9.3
    
    
    
    5.3Deferred income taxes
    
    
    (10.7
    )
    
    
    9.7
    
    
    
    23.9Goodwill impairment
    
    
    94.1
    
    
    
    
    
    
    
    Asset impairments
    
    
    8.4
    
    
    
    7.2
    
    
    
    Gain on sale of Specialty Papers
    
    
    
    
    
    
    (2.1
    )
    
    
    (7.3
    )Stock-based compensation
    
    
    10.2
    
    
    
    11.0
    
    
    
    Excess tax benefit from exercise of stock options
    
    
    
    
    
    
    (3.3
    )
    
    
    Other
    
    
    5.9
    
    
    
    2.3
    
    
    
    7.7Changes in operating assets and liabilities, net of effects from acquisitions:Accounts receivable
    
    
    (33.7
    )
    
    
    (37.6
    )
    
    
    (26.7
    )Inventories
    
    
    7.8
    
    
    
    (49.3
    )
    
    
    (11.9
    )Other assets
    
    
    (9.1
    )
    
    
    1.5
    
    
    
    (4.5
    )Accounts payable
    
    
    (8.7
    )
    
    
    30.5
    
    
    
    9.4Accrued payroll and other liabilities
    
    
    26.8
    
    
    
    12.8
    
    
    
    (8.2
    )Litigation settlement from discontinued operation
    
    
    
    
    
    
    
    
    
    
    (20.9
    )Net cash provided by operating activities
    
    
    87.5
    
    
    
    97.5
    
    
    
    87.7Cash Flows from Investing Activities:Capital expenditures
    
    
    (14.5
    )
    
    
    (16.0
    )
    
    
    (21.6
    )Acquisitions, net of cash acquired
    
    
    (68.3
    )
    
    
    (332.2
    )
    
    
    Purchase of investments
    
    
    
    
    
    
    (0.3
    )
    
    
    (16.1
    )Proceeds from sale of investments
    
    
    
    
    
    
    28.9
    
    
    
    31.4Proceeds from sale of businesses
    
    
    
    
    
    
    2.3
    
    
    
    16.0Other investing activities
    
    
    0.3
    
    
    
    3.2
    
    
    
    4.9Net cash (used in) provided by investing activities
    
    
    (82.5
    )
    
    
    (314.1
    )
    
    
    14.6Cash Flows from Financing Activities:Purchase of treasury stock
    
    
    (108.2
    )
    
    
    (35.6
    )
    
    
    (15.9
    )Exercise of stock options
    
    
    7.7
    
    
    
    31.7
    
    
    
    24.1Dividend payments
    
    
    (23.2
    )
    
    
    (18.8
    )
    
    
    (15.7
    )Debt repayment
    
    
    (6.3
    )
    
    
    
    
    
    
    Excess tax benefit from exercise of stock options
    
    
    
    
    
    
    3.3
    
    
    
    Net cash used in financing activities
    
    
    (130.0
    )
    
    
    (19.4
    )
    
    
    (7.5
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    8.0
    
    
    
    5.5
    
    
    
    (8.9
    )Change in cash and equivalents
    
    
    (117.0
    )
    
    
    (230.5
    )
    
    
    85.9Cash and cash equivalents  beginning of year
    
    
    252.5
    
    
    
    483.0
    
    
    
    397.1Cash and cash equivalents  end of year
    
    $
    135.5
    
    
    $
    252.5
    
    
    $
    483.0
  46




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##### Table of Contents



IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Background and Basis of Presentation
 Background
  Basis of Presentation
   Note 2  Summary of Significant Accounting Policies
 Use of Estimates.
 Foreign Currency.
 Cash Equivalents.
 Trade Accounts Receivables and Allowances.
 47




---



##### Table of Contents



Inventories.
 Investments.
  Derivative Financial Instruments. Accounting for Derivative
Instruments and Hedging Activities
 Other Financial Instruments.
 Property, Plant and Equipment.
  Intangible Assets.
  48




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##### Table of Contents



Goodwill Goodwill and Other Intangible Assets
  Impairment of Long-Lived Assets. Accounting for the
Impairment or Disposal of Long-Lived Assets
 Revenue Recognition Revenue Recognition,
 Concentrations of Credit Risk.
 Shipping and Handling Costs
 Research and Development Costs.
 49




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##### Table of Contents



Advertising Costs.
 Rebates.
 Income Taxes. Accounting for Income Taxes.
 Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109
 Treasury Stock.
 Stock-Based Compensation. . Share-Based Payment Accounting for Stock-Based Compensation
  Classification in the
Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a
Nonqualified Employee Stock Option
 50




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##### Table of Contents



Comprehensive Income.
 Weighted Average Basic and Diluted Shares Outstanding.
 Years Ended December 31,(In millions)
    
    2007
    
    
    2006
    
    
    2005Weighted average number of basic shares outstanding during the year
    
    
    37.0
    
    
    
    34.6
    
    
    
    33.9Dilutive effect of stock-based compensation plans
    
    
    
    
    
    
    0.6
    
    
    
    0.7Weighted average number of dilutive shares outstanding during the year
    
    
    37.0
    
    
    
    35.2
    
    
    
    34.6
  Recent Accounting Pronouncements
 Fair Value Measurement Accounting for Leases
 The Fair Value Option for Financial Assets and
Financial Liabilities  including an amendment to FAS 115
 , Business Combinations,
 , Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 51




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##### Table of Contents



Accounting for the Income Tax Benefits of
Dividends on Share-Based Payment Awards
 Note 3  Business Combinations
 2007 Acquisitions
 TDK Recording Media
       52




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##### Table of Contents



(In millions)
    
    AmountCash consideration
    
    $
    54.9Cash consideration to minority interest holders
    
    
    3.9Common stock issued
    
    
    216.7Direct acquisition costs
    
    
    8.2Restructuring and other
    
    
    31.2Total preliminary purchase price
    
    $
    314.9
  (In millions)
    
    AmountCash and cash equivalents
    
    $
    25.8Accounts receivable
    
    
    147.9Inventories
    
    
    91.5Other current assets
    
    
    18.8Property, plant and equipment
    
    
    16.3Goodwill
    
    
    55.9Intangibles
    
    
    132.1Other assets
    
    
    2.8Accounts payable
    
    
    (121.6
    )Accrued payroll
    
    
    (2.2
    )Other current liabilities
    
    
    (39.1
    )Deferred tax liability arising on acquisition
    
    
    (3.8
    )Other liabilities
    
    
    (9.5
    )$
    314.9
 53




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##### Table of Contents



WeightedAverage(In millions)
    
    Amount
    
    
    LifeTrade name
    
    $
    115.0
    
    
    30 yearsCustomer relationships
    
    
    16.0
    
    
    6 yearsOther
    
    
    1.1
    
    
    18 monthsIntangible assets acquired
    
    $
    132.1
   Memcorp
  54




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##### Table of Contents



(In millions)
    
    AmountCash consideration
    
    $
    31.8Promissory notes
    
    
    37.5Direct acquisition costs
    
    
    1.0Total preliminary purchase price
    
    $
    70.3
  (In millions)
    
    AmountInventories
    
    $
    13.9Other current liabilities
    
    
    (2.3
    )Goodwill
    
    
    33.6Intangibles
    
    
    25.1$
    70.3
  WeightedAverage(In millions)
    
    Amount
    
    
    LifeTrade name
    
    
    13.7
    
    
    12 yearsCustomer relationships
    
    
    10.0
    
    
    6 yearsOther
    
    
    1.4
    
    
    3 yearsIntangible assets acquired
    
    $
    25.1
   2006 Acquisition
 Memorex International Inc.
  55




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##### Table of Contents



(In millions)
    
    AmountCash and cash equivalents
    
    $
    329.3Direct acquisition costs
    
    
    6.4Memorex restructuring costs
    
    
    7.6Present value of minimum additional
purchase price consideration
    
    
    4.6$
    347.9
  (In millions)
    
    AmountCash and cash equivalents
    
    $
    3.5Accounts receivable
    
    
    68.3Inventories
    
    
    69.1Other current assets
    
    
    20.1Property, plant and equipment
    
    
    1.7Goodwill
    
    
    55.3Intangibles
    
    
    231.0Other assets
    
    
    0.7Accounts payable
    
    
    (61.8
    )Other current liabilities
    
    
    (29.1
    )Other liabilities
    
    
    (10.9
    )$
    347.9
  56




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##### Table of Contents



WeightedAverage(In millions)
    
    Amount
    
    
    LifeTrade name
    
    $
    200.0
    
    
    35 yearsCustomer relationships (1)
    
    
    28.9
    
    
    7 yearsOther
    
    
    2.1
    
    
    17 monthsIntangible assets acquired
    
    $
    231.0
 
 (1)
    
    Customer relationships represent an asset without U.S. tax basis. A deferred tax liability
was recorded in the purchase price allocation to reflect this basis difference.  Pro Forma Disclosure
  Years Ended December 31,(In millions, except per share amounts)
    
    2007
    
    2006Net revenue
    
    $
    2,492.5
    
    
    $
    2,523.5(Loss) income from continuing operations
    
    
    (60.7
    )
    
    
    98.1Net (loss) income
    
    
    (60.7
    )
    
    
    99.3(Loss) earnings per common share  basic:Continuing operations
    
    $
    (1.50
    )
    
    $
    2.37Net income
    
    $
    (1.50
    )
    
    $
    2.40(Loss) earnings per common share  diluted:Continuing operations
    
    $
    (1.50
    )
    
    $
    2.34Net income
    
    $
    (1.50
    )
    
    $
    2.36
  Note 4  Divestiture
 Divestiture Presented as Discontinued Operations
 Specialty Papers Business.
 57




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##### Table of Contents



Other Discontinued Operations Activity
  Years EndedDecember 31,(In millions)
    
    2006
    
    2005Net revenue
    
    $
    
    
    
    $
    20.1Income before income taxes
    
    
    
    
    
    
    2.4Income tax provision
    
    
    
    
    
    
    0.9Income from operations of discontinued businesses, net of income tax
    
    
    
    
    
    
    1.5Gain from disposal of discontinued businesses, net of income tax
    
    
    1.2
    
    
    
    4.6Income from discontinued operations
    
    $
    1.2
    
    
    $
    6.1
 58




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##### Table of Contents



Note 5  Supplemental Balance Sheet Information
 As of December 31,(In millions)
    
    2007
    
    
    2006Inventories, netFinished goods
    
    $
    308.7
    
    
    $
    217.6Work in process
    
    
    34.7
    
    
    
    19.6Raw materials and supplies
    
    
    22.7
    
    
    
    20.8Total inventories, net
    
    $
    366.1
    
    
    $
    258.0Other Current AssetsDeferred income taxes
    
    $
    53.1
    
    
    $
    26.0Other
    
    
    56.8
    
    
    
    32.3Total other current assets
    
    $
    109.9
    
    
    $
    58.3Property, Plant and EquipmentLand
    
    $
    10.4
    
    
    $
    1.7Buildings and leasehold improvements
    
    
    160.8
    
    
    
    148.3Machinery and equipment
    
    
    370.3
    
    
    
    478.5Construction in progress
    
    
    1.1
    
    
    
    6.2Total
    
    $
    542.6
    
    
    $
    634.7Less accumulated depreciation
    
    
    (371.1
    )
    
    
    (456.7
    )Property, plant and equipment, net
    
    $
    171.5
    
    
    $
    178.0Other AssetsDeferred income taxes
    
    $
    14.9
    
    
    $
    16.3Long term investments
    
    
    1.8
    
    
    
    2.0Other
    
    
    17.7
    
    
    
    11.9Total other assets
    
    $
    34.4
    
    
    $
    30.2Other Current LiabilitiesRebates
    
    $
    104.0
    
    
    $
    65.3Employee separation costs
    
    
    23.9
    
    
    
    2.2Income taxes
    
    
    18.2
    
    
    
    9.7Other
    
    
    111.2
    
    
    
    63.4Total other current liabilities
    
    $
    257.3
    
    
    $
    140.6Other LiabilitiesPension
    
    $
    7.7
    
    
    $
    9.8Deferred income taxes
    
    
    2.5
    
    
    
    5.7Other
    
    
    34.8
    
    
    
    29.5Total other liabilities
    
    $
    45.0
    
    
    $
    45.0Accumulated Other Comprehensive LossCumulative translation adjustment
    
    $
    (40.0
    )
    
    $
    (77.5
    )Pension adjustments, net of income tax
    
    
    (4.4
    )
    
    
    (13.6
    )Cash flow hedging and other, net of income tax
    
    
    0.3
    
    
    
    (0.3
    )Total accumulated other comprehensive loss
    
    $
    (44.1
    )
    
    $
    (91.4
    )
 59




---



##### Table of Contents



Note 5  Supplemental Balance Sheet Information
 As of December 31,2007
    
    
    2006Accounts(In millions)
    
    Inventory
    
    
    Receivable*Reserves and AllowancesBalance, as of December 31, 2004
    
    $
    11.5
    
    
    $
    12.8Additions
    
    
    5.0
    
    
    
    29.8Write-offs, net of recoveries
    
    
    (6.2
    )
    
    
    (32.4
    )Balance, as of December 31, 2005
    
    
    10.3
    
    
    
    10.2Additions
    
    
    3.8
    
    
    
    33.3Write-offs, net of recoveries
    
    
    (3.8
    )
    
    
    (30.7
    )Balance, as of December 31, 2006
    
    
    10.3
    
    
    $
    12.8Additions
    
    
    14.5
    
    
    
    57.4Write-offs, net of recoveries
    
    
    (4.6
    )
    
    
    (41.9
    )Balance, as of December 31, 2007
    
    $
    20.2
    
    
    $
    28.3
 
 *
    
    Accounts receivable reserves and allowances include estimated amounts for customer returns, terms
discounts and the inability of certain customers to make the required payment. Note 6  Intangible Assets and Goodwill
 Intangible Assets
  Trade
    
    
    
    
    
    
    Customer(In millions)
    
    Names
    
    
    Software
    
    
    Relationships
    
    
    Other
    
    
    TotalDecember 31, 2007Cost
    
    $
    330.0
    
    
    $
    54.6
    
    
    $
    60.9
    
    
    $
    8.8
    
    
    $
    454.3Accumulated amortization
    
    
    (12.2
    )
    
    
    (52.7
    )
    
    
    (12.8
    )
    
    
    (5.6
    )
    
    
    (83.3
    )Net
    
    $
    317.8
    
    
    $
    1.9
    
    
    $
    48.1
    
    
    $
    3.2
    
    
    $
    371.0December 31, 2006Cost
    
    $
    200.9
    
    
    $
    51.7
    
    
    $
    34.2
    
    
    $
    7.3
    
    
    $
    294.1Accumulated amortization
    
    
    (4.2
    )
    
    
    (50.0
    )
    
    
    (5.7
    )
    
    
    (4.0
    )
    
    
    (63.9
    )Net
    
    $
    196.7
    
    
    $
    1.7
    
    
    $
    28.5
    
    
    $
    3.3
    
    
    $
    230.2
  (In millions)
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012Amortization expense
    
    $
    21.6
    
    
    $
    20.5
    
    
    $
    19.9
    
    
    $
    19.7
    
    
    $
    17.3
 60




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##### Table of Contents



Goodwill
  Electronic(In millions)
    
    Americas
    
    
    Europe
    
    
    Asia Pacific
    
    
    Products
    
    
    TotalBalance as of December 31, 2005
    
    $
    8.0
    
    
    $
    2.5
    
    
    $
    1.8
    
    
    $
    
    
    
    $
    12.3Memorex acquisition
    
    
    55.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55.3Balance as of December 31, 2006
    
    
    63.3
    
    
    
    2.5
    
    
    
    1.8
    
    
    
    
    
    
    
    67.6Memorex post-closing purchase price
adjustments
    
    
    (7.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7.9
    )Memcorp acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33.6
    
    
    
    33.6TDK Recording Media acquisition
    
    
    11.7
    
    
    
    34.1
    
    
    
    10.1
    
    
    
    
    
    
    
    55.9Adjustments of acquisition tax liabilities
    
    
    (2.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.7
    )Foreign currency translation adjustment
    
    
    
    
    
    
    2.6
    
    
    
    0.5
    
    
    
    
    
    
    
    3.1Goodwill impairment
    
    
    (54.9
    )
    
    
    (39.2
    )
    
    
    
    
    
    
    
    
    
    
    (94.1
    )Balance as of December 31, 2007
    
    $
    9.5
    
    
    $
    
    
    
    $
    12.4
    
    
    $
    33.6
    
    
    $
    55.5
    61




---



##### Table of Contents



Excess of fairvalue over(In millions)
    
    Goodwill
    
    carrying valueAmericas-Commercial
    
    $
    9.5
    
    
    $
    81.8Asia Pacific
    
    
    12.4
    
    
    
    69.0Electronic Products
    
    
    33.6
    
    
    
    18.8
  Change in Fair
    
    Change in FairValue from a
    
    Value from a1% Decrease in
    
    1% Increase in(In millions)
    
    Discount Rate
    
    Discount RateAmericas-Commercial
    
    $
    15.0
    
    
    $
    (15.0
    )Asia Pacific
    
    
    10.0
    
    
    
    (10.0
    )Electronic Products
    
    
    5.0
    
    
    
    (5.0
    )
  62




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##### Table of Contents



Note 7  Investments
  Note 8  Debt
   63




---



##### Table of Contents



(In millions)
    
    AmountUnrestricted notes, due July 9, 2010, payable quarterly, bearing interest of 6%
    
    $
    27.5Offset notes, payable and due January 9, 2009, bearing interest of 6%
    
    
    3.8$
    31.3
    Note 9  Restructuring and Other Expense
  Years Ended December 31,(In millions)
    
    2007
    
    
    2006
    
    
    2005RestructuringSeverance and severance related expense
    
    $
    23.6
    
    
    $
    8.6
    
    
    $
    Lease termination costs
    
    
    0.6
    
    
    
    1.4
    
    
    
    1.6Reversal of severance and severance related
expense from prior restructuring programs
    
    
    
    
    
    
    (0.9
    )
    
    
    (0.4
    )Total restructuring
    
    
    24.2
    
    
    
    9.1
    
    
    
    1.2Asset impairments
    
    
    8.4
    
    
    
    2.8
    
    
    
    Pension curtailment (Note 11)
    
    
    1.4
    
    
    
    
    
    
    
    Terminated employment agreement
    
    
    (0.7
    )
    
    
    
    
    
    
    Total
    
    $
    33.3
    
    
    $
    11.9
    
    
    $
    1.2
 2007 Activity
 2007 Cost Reduction Restructuring Program
  64




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##### Table of Contents



Severance, severance related costs and lease termination costs.
   Liability as ofInitial Program
    
 Additional
    
  Cumulative
    
    December 31,(In millions)
    
    Amounts
    
    Charges
    
    Usage
    
    2007Severance and other
    
    $
    15.1
    
    
    $
    6.2
    
    
    $
    (7.7
    )
    
    $
    13.6
 Initial
    
    
    
    
    
    
    
    
    
    Balance as ofHeadcount
    
    
    
    
    
    Cumulative
    
    December 31,Amounts
    
    Additions
    
    Reductions
    
    2007Total employees affected
    
    
    675
    
    
    
    160
    
    
    
    (376
    )
    
    
    459
 Asset Impairments
  Pension Curtailment
  Terminated Employment Agreement
  65




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##### Table of Contents



TDK Recording Media Restructuring Costs
 Recognition of Liabilities in Connection with a Purchase Business Combination
 Liability as ofInitial Program
    
 Cumulative
    
    December 31,(In millions)
    
    Amounts
    
    Usage
    
    2007Severance and other
    
    $
    11.7
    
    
    $
    (2.3
    )
    
    
    $9.4
 Initial
 
    
    
    
    
    Balance as ofHeadcount
    
    Cumulative
    
    December 31,Amounts
    
    Reductions
    
    2007Total employees affected
    
    
    172
    
    
    
    (97
    )
    
    
    75
 2006 Imation and Memorex Restructuring Program
 Severance, severance related costs and lease termination costs.
 2006 Activity
 Severance, severance related costs and lease termination costs.
 66




---



##### Table of Contents



Asset Impairments.
 2005 Activity
 Severance, severance related costs and lease termination costs
 Note 10  Income Taxes
   67




---



##### Table of Contents



(In millions)
    
    AmountBalance at January 1, 2007
    
    $
    7.3Additions for tax positions of prior years
    
    
    7.0Reductions for tax positions of prior years
    
    
    (0.2
    )Settlements with taxing authorities
    
    
    (3.6
    )Lapse of the statue of limitations
    
    
    (1.0
    )Balance at December 31, 2007
    
    $
    9.5
     Years Ended December 31,(In millions)
    
    2007
    
    
    2006
    
    
    2005U.S.
    
    $
    (65.6
    )
    
    $
    81.1
    
    
    $
    83.2International
    
    
    31.0
    
    
    
    30.7
    
    
    
    23.5Total
    
    $
    (34.6
    )
    
    $
    111.8
    
    
    $
    106.7
  Years Ended December 31,(In millions)
    
    2007
    
    
    2006
    
    
    2005CurrentFederal
    
    $
    14.4
    
    
    $
    20.9
    
    
    $
    (0.2
    )State
    
    
    1.8
    
    
    
    3.3
    
    
    
    3.2International
    
    
    10.3
    
    
    
    2.7
    
    
    
    6.0DeferredFederal
    
    
    (10.1
    )
    
    
    16.5
    
    
    
    14.0State
    
    
    (1.5
    )
    
    
    1.2
    
    
    
    2.3International
    
    
    0.9
    
    
    
    (8.0
    )
    
    
    (0.4
    )Total
    
    $
    15.8
    
    
    $
    36.6
    
    
    $
    24.9
 68




---



##### Table of Contents



As of December 31,(In millions)
    
    2007
    
    
    2006Accounts receivable allowances
    
    $
    12.2
    
    
    $
    3.2Inventories
    
    
    13.9
    
    
    
    10.6Payroll, pension and severance
    
    
    13.7
    
    
    
    14.3State tax credit carryforwards
    
    
    8.2
    
    
    
    7.8Net operating loss carryforwards
    
    
    25.4
    
    
    
    18.5Accrued liabilities and other reserves
    
    
    19.6
    
    
    
    8.4Research and experimentation costs
    
    
    9.7
    
    
    
    17.5Other, net
    
    
    2.5
    
    
    
    0.9Gross deferred tax assets
    
    
    105.2
    
    
    
    81.2Valuation allowance
    
    
    (16.5
    )
    
    
    (9.4
    )Deferred tax assets
    
    
    88.7
    
    
    
    71.8Property, plant and equipment
    
    
    (14.6
    )
    
    
    (14.5
    )Intangible assets
    
    
    (7.2
    )
    
    
    (10.7
    )Payroll, pension and severance
    
    
    (1.3
    )
    
    
    (1.8
    )Other
    
    
    (0.1
    )
    
    
    (8.2
    )Deferred tax liabilities
    
    
    (23.2
    )
    
    
    (35.2
    )Net deferred tax assets
    
    $
    65.5
    
    
    $
    36.6
   Years Ended December 31,(In millions)
    
    2007
    
    
    2006
    
    
    2005Tax at statutory U.S. tax rate
    
    $
    (12.1
    )
    
    $
    39.1
    
    
    $
    37.3State income taxes, net of federal benefit
    
    
    1.2
    
    
    
    3.1
    
    
    
    4.0Net effect of international operations
    
    
    0.8
    
    
    
    1.4
    
    
    
    (1.2
    )Reversal of valuation allowances
    
    
    (2.5
    )
    
    
    (0.7
    )
    
    
    (4.3
    )International audit settlements
    
    
    
    
    
    
    (10.4
    )
    
    
    (12.0
    )Tax on foreign earnings
    
    
    
    
    
    
    8.2
    
    
    
    Goodwill impairment
    
    
    28.9
    
    
    
    
    
    
    
    Other
    
    
    (0.5
    )
    
    
    (4.1
    )
    
    
    1.1Income tax provision
    
    $
    15.8
    
    
    $
    36.6
    
    
    $
    24.9
   69




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##### Table of Contents



Note 11  Retirement Plans
  , Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans
 Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits
 70




---



##### Table of Contents



United States
    
    
    InternationalAs of December 31,
    
    
    As of December 31,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Change in benefit obligationBenefit obligation, beginning of year
    
    $
    131.9
    
    
    $
    135.0
    
    
    $
    73.1
    
    
    $
    68.8Acquisition
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    Service cost
    
    
    6.6
    
    
    
    8.3
    
    
    
    0.5
    
    
    
    0.5Interest cost
    
    
    7.4
    
    
    
    7.0
    
    
    
    3.6
    
    
    
    3.3Actuarial (gain) loss
    
    
    0.9
    
    
    
    (1.7
    )
    
    
    (10.2
    )
    
    
    6.9Benefits paid
    
    
    (30.7
    )
    
    
    (16.7
    )
    
    
    (2.5
    )
    
    
    (0.3
    )Foreign exchange rate changes
    
    
    
    
    
    
    
    
    
    
    4.8
    
    
    
    (6.3
    )Curtailments
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    Settlements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Projected benefit obligation, end of year
    
    $
    117.5
    
    
    $
    131.9
    
    
    $
    70.0
    
    
    $
    73.1Change in plan assetsFair value of plan assets, beginning of year
    
    $
    128.2
    
    
    $
    124.8
    
    
    $
    68.0
    
    
    $
    60.3Actual return on plan assets
    
    
    13.1
    
    
    
    13.1
    
    
    
    3.2
    
    
    
    4.3Foreign exchange rate changes
    
    
    
    
    
    
    
    
    
    
    2.7
    
    
    
    3.4Company contributions
    
    
    1.0
    
    
    
    7.0
    
    
    
    4.6
    
    
    
    6.2Benefits paid
    
    
    (30.7
    )
    
    
    (16.7
    )
    
    
    (2.5
    )
    
    
    (6.2
    )Fair value of plan assets, end of year
    
    $
    111.6
    
    
    $
    128.2
    
    
    $
    76.0
    
    
    $
    68.0Funded status of the plan, end of year
    
    $
    (5.9
    )
    
    $
    (3.7
    )
    
    $
    6.0
    
    
    $
    (5.1
    )Accumulated benefit obligation
    
    $
    116.2
    
    
    $
    131.2
    
    
    $
    67.7
    
    
    $
    71.4
  United States
    
    InternationalAs of December 31,
    
    As of December 31,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Noncurrent assets
    
    $
    
    
    
    
    
    
    
    $
    7.8
    
    
    
    1.0Noncurrent liabilities
    
    
    (5.9
    )
    
    
    (3.7
    )
    
    
    (1.8
    )
    
    
    (6.1
    )Accumulated
other comprehensive loss (gain) - pre-tax
    
    
    8.1
    
    
    
    11.7
    
    
    
    (0.6
    )
    
    
    9.3
  United States
    
    
    InternationalAs of December 31,
    
    
    As of December 31,(In millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    7.3
    
    
    $
    10.4
    
    
    $
    0.7
    
    
    $
    10.6Prior service cost (credit)
    
    
    0.8
    
    
    
    1.3
    
    
    
    (3.6
    )
    
    
    (3.6
    )Transition asset obligation
    
    
    
    
    
    
    
    
    
    
    2.3
    
    
    
    2.3Total
    
    $
    8.1
    
    
    $
    11.7
    
    
    $
    (0.6
    )
    
    $
    9.3
 71




---



##### Table of Contents



United States
    
    InternationalAs of December 31,
    

As of December 31,(In millions)
    
    2007
    
    2006
    
    2007
    
    2006Projected benefit obligation, end of year
    
    $
    117.5
    
    
    $
    131.9
    
    
    $
    
    
    
    $
    59.6Accumulated benefit obligation, end of year
    
    
    116.2
    
    
    
    131.2
    
    
    
    
    
    
    
    58.9Plan assets at fair value, end of year
    
    
    111.6
    
    
    
    128.2
    
    
    
    
    
    
    
    53.5
  United States
    
    
    InternationalYears Ended December 31,
    
    
    Years Ended December 31,(In millions)
    
    2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005Service cost
    
    $
    6.6
    
    
    $
    8.3
    
    
    $
    9.1
    
    
    $
    0.7
    
    
    $
    0.5
    
    
    $
    0.5Interest cost
    
    
    7.4
    
    
    
    7.0
    
    
    
    7.4
    
    
    
    3.6
    
    
    
    3.3
    
    
    
    3.2Expected return on plan assets
    
    
    (9.7
    )
    
    
    (9.8
    )
    
    
    (9.7
    )
    
    
    (4.1
    )
    
    
    (3.6
    )
    
    
    (3.2
    )Amortization of net actuarial loss
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    Amortization of prior service cost
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.1Amortization of transition obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Net periodic benefit cost
    
    $
    4.5
    
    
    $
    6.1
    
    
    $
    7.0
    
    
    $
    0.4
    
    
    $
    0.5
    
    
    $
    0.8Recognized net actuarial loss
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    0.1Settlements and curtailments
    
    
    2.4
    
    
    
    1.2
    
    
    
    2.2
    
    
    
    
    
    
    
    0.5
    
    
    
    0.7Total pension cost
    
    $
    6.9
    
    
    $
    7.3
    
    
    $
    9.5
    
    
    $
    0.4
    
    
    $
    1.0
    
    
    $
    1.6
   United States
    
    InternationalAs of December 31,
    
    As of December 31,2007
    
    2006
    
    2007
    
    2006Discount rate
    
    
    6.00
    %
    
    
    5.75
    %
    
    
    5.40
    %
    
    
    4.60
    %Rate of compensation increase
    
    
    4.75
    %
    
    
    4.75
    %
    
    
    3.70
    %
    
    
    3.75
    %
  United States
    
    InternationalAs of December 31,
    
    As of December 31,2007
    
    2006
    
    2005
    
    2007
    
    2006
    
    2005Discount rate
    
    
    5.90
    %
    
    
    5.50
    %
    
    
    5.75
    %
    
    
    4.75
    %
    
    
    4.45
    %
    
    
    5.00
    %Expected return on plan assets
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    5.75
    %
    
    
    5.70
    %
    
    
    5.70
    %Rate of compensation increase
    
    
    4.75
    %
    
    
    4.75
    %
    
    
    4.75
    %
    
    
    3.75
    %
    
    
    3.40
    %
    
    
    3.30
    %
 72




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##### Table of Contents



United States
    
    InternationalAs of December 31,
    
    As of December 31,2007
    
    2006
    
    2007
    
    2006Equity securities
    
    
    59
    %
    
    
    65
    %
    
    
    38
    %
    
    
    39
    %Debt securities
    
    
    19
    %
    
    
    17
    %
    
    
    36
    %
    
    
    35
    %Other
    
    
    22
    %
    
    
    18
    %
    
    
    26
    %
    
    
    26
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
   (In millions)
    
    United States
    
    International2008
    
    $
    29.0
    
    
    $
    2.42009
    
    $
    13.8
    
    
    $
    2.62010
    
    $
    16.6
    
    
    $
    2.92011
    
    $
    6.1
    
    
    $
    3.42012
    
    $
    7.2
    
    
    $
    3.42013-2017
    
    $
    40.9
    
    
    $
    19.3
 Note 12  Employee Savings and Stock Ownership Plans
   Note 13  Stock-Based Compensation
  73




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##### Table of Contents



Stock Options
 Accounting for Stock Issued to Employees
  74




---



##### Table of Contents



Year EndedDecember 31,(In millions, except per share amounts)
    
    2005Net income, as reported
    
    $
    87.9Add: Stock-based employee compensation expense
included in net income, net of income tax
    
    
    0.9Deduct: Total stock-based employee compensation
expense determined under fair value based method
of accounting, net of income tax
    
    
    (5.8
    )Pro forma net income
    
    $
    83.0Earnings per share:Basic  as reported
    
    $
    2.59Basic  pro forma
    
    $
    2.45Diluted  as reported
    
    $
    2.54Diluted  pro forma
    
    $
    2.37
  2007
    
    2006
    
    2005Volatility
    
    
    29
    %
    
    
    33
    %
    
    
    42
    %Risk-free interest rate
    
    
    4.60
    %
    
    
    4.99
    %
    
    
    3.89
    %Expected life (months)
    
    
    63
    
    
    
    58
    
    
    
    60Dividend yield
    
    
    1.7
    %
    
    
    1.3
    %
    
    
    1.2
    %
  WeightedAverageWeighted
    
    
    RemainingStock
    
    
    Average
    
    
    Contractual
    
    
    AggregateOptions
    
    
    Exercise Price
    
    
    Life (Years)
    
    
    Intrinsic ValueOutstanding December 31, 2005
    
    
    4,115,633
    
    
    $
    30.82Granted
    
    
    662,070
    
    
    
    41.76Exercised
    
    
    (1,204,781
    )
    
    
    26.20Canceled
    
    
    (57,004
    )
    
    
    24.49Forfeited
    
    
    (136,939
    )
    
    
    36.93Outstanding December 31, 2006
    
    
    3,378,979
    
    
    
    34.48
    
    
    
    6.1
    
    
    $
    40,385,150Granted
    
    
    606,312
    
    
    
    37.54Exercised
    
    
    (293,954
    )
    
    
    26.24Canceled
    
    
    (80,385
    )
    
    
    33.08Forfeited
    
    
    (461,191
    )
    
    
    39.34Outstanding December 31, 2007 *
    
    
    3,149,761
    
    
    $
    35.16
    
    
    
    6.0
    
    
    $
    Exercisable as of December 31, 2007 *
    
    
    1,907,954
    
    
    $
    33.23
    
    
    
    4.6
    
    
    $
    
 
 *
    
    The aggregate intrinsic value at December 31, 2007 was not meaningful as our stock price of
$21.00 on December 31, 2007 was below the majority of the outstanding stock options exercise price. 75




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##### Table of Contents



Outstanding Options
    
    
    Exercisable OptionsWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageRange of Exercise
    
    Stock
    
    
    Contractual
    
    
    Exercise
    
    
    Stock
    
    
    ExercisePrices
    
    Options
    
    
    Life (Years)
    
    
    Price
    
    
    Options
    
    
    Price$14.15 to $19.20
    
    
    108,459
    
    
    
    1.1
    
    
    $
    17.66
    
    
    
    108,459
    
    
    $
    17.66$19.56 to $23.95
    
    
    203,497
    
    
    
    3.4
    
    
    
    23.22
    
    
    
    203,497
    
    
    
    23.22$24.10 to $28.70
    
    
    1,370
    
    
    
    2.4
    
    
    
    25.15
    
    
    
    1,370
    
    
    
    25.15$28.75 to $39.38
    
    
    1,885,640
    
    
    
    6.6
    
    
    
    34.52
    
    
    
    1,054,505
    
    
    
    32.99$39.45 to $41.75
    
    
    905,895
    
    
    
    6.0
    
    
    
    40.83
    
    
    
    526,723
    
    
    
    40.54$41.76 to $46.97
    
    
    44,900
    
    
    
    8.4
    
    
    
    44.27
    
    
    
    13,400
    
    
    
    43.99$14.15 to $46.97
    
    
    3,149,761
    
    
    
    6.0
    
    
    $
    35.16
    
    
    
    1,907,954
    
    
    $
    33.23
  WeightedAverageGrant DateStock
    
    
    Fair ValueNon-vested Stock Options
    
    Options
    
    
    Per ShareNon-vested stock options outstanding as of December 31, 2005
    
    
    1,839,542
    
    
    $
    12.76Granted
    
    
    662,070
    
    
    
    13.52Vested
    
    
    (632,180
    )
    
    
    13.21Forfeited
    
    
    (136,939
    )
    
    
    13.98Non-vested stock options outstanding as of December 31, 2006
    
    
    1,732,493
    
    
    
    12.79Granted
    
    
    606,312
    
    
    
    10.95Vested
    
    
    (635,807
    )
    
    
    13.78Forfeited
    
    
    (461,191
    )
    
    
    10.13Non-vested stock options outstanding as of December 31, 2007
    
    
    1,241,807
    
    
    $
    12.36
  76




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##### Table of Contents



Restricted Stock
  WeightedAverage GrantDate FairRestricted
    
    
    Value PerStock
    
    
    ShareOutstanding December 31, 2005
    
    
    157,059
    
    
    $
    35.51Granted
    
    
    112,996
    
    
    
    41.91Vested
    
    
    (47,976
    )
    
    
    36.08Forfeited
    
    
    (7,916
    )
    
    
    36.87Outstanding December 31, 2006
    
    
    214,163
    
    
    
    38.71Granted
    
    
    118,143
    
    
    
    38.08Vested
    
    
    (69,834
    )
    
    
    38.57Forfeited
    
    
    (55,243
    )
    
    
    38.33Outstanding December 31, 2007
    
    
    207,229
    
    
    $
    38.52
  Note 14  Derivatives and Hedging Activities
   Cash Flow Hedges
   77




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##### Table of Contents



Other Hedges
  Fair Value Disclosure
  Note 15  Leases
 Operating Leases
  (In millions)
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    Thereafter
    
    
    TotalMinimum lease payments
    
    $
    16.7
    
    
    $
    10.5
    
    
    $
    4.3
    
    
    $
    2.9
    
    
    $
    0.9
    
    
    $
    0.6
    
    
    $
    35.9
 Sale-Leaseback Transactions
  78




---



##### Table of Contents



(In millions)
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    Thereafter
    
    
    TotalMinimum lease payments
    
    $
    0.9
    
    
    $
    0.8
    
    
    $
    0.5
    
    
    $
    0.4
    
    
    $
    0.4
    
    
    $
    3.8
    
    
    $
    6.8
 Note 16  Shareholders Equity
     Note 17  Business Segment Information and Geographic Data
   79




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##### Table of Contents



Years Ended December 31,(In millions)
    
    2007
    
    
    2006
    
    
    2005Net RevenueAmericas
    
    $
    959.3
    
    
    $
    838.9
    
    
    $
    577.3Europe
    
    
    655.7
    
    
    
    524.3
    
    
    
    456.2Asia Pacific
    
    
    328.9
    
    
    
    221.5
    
    
    
    224.6Electronic Products
    
    
    118.1
    
    
    
    
    
    
    
    Total
    
    $
    2,062.0
    
    
    $
    1,584.7
    
    
    $
    1,258.1Operating IncomeAmericas
    
    $
    82.1
    
    
    $
    128.9
    
    
    $
    108.0Europe
    
    
    45.2
    
    
    
    48.1
    
    
    
    51.3Asia Pacific
    
    
    23.5
    
    
    
    17.1
    
    
    
    16.1Electronic Products
    
    
    5.5
    
    
    
    
    
    
    
    Corporate and unallocated
    
    
    (189.3
    )
    
    
    (85.9
    )
    
    
    (72.1
    )Total
    
    $
    (33.0
    )
    
    $
    108.2
    
    
    $
    103.3
   Years Ended December 31,(In millions)
    
    2007
    
    
    2006
    
    
    2005Optical products
    
    $
    954.2
    
    
    $
    680.3
    
    
    $
    450.7Magnetic products
    
    
    703.9
    
    
    
    660.8
    
    
    
    700.5Flash media products
    
    
    157.1
    
    
    
    146.6
    
    
    
    57.8Electronic products
    
    
    118.1
    
    
    
    
    
    
    
    Accessories and other
    
    
    128.7
    
    
    
    97.0
    
    
    
    49.1Total
    
    $
    2,062.0
    
    
    $
    1,584.7
    
    
    $
    1,258.1
  Years Ended December 31,(In millions)
    
    2007
    
    
    2006
    
    
    2005Net RevenueUnited States
    
    $
    958.2
    
    
    $
    722.7
    
    
    $
    450.9International
    
    
    1,103.8
    
    
    
    862.0
    
    
    
    807.2Total
    
    $
    2,062.0
    
    
    $
    1,584.7
    
    
    $
    1,258.1
 80




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##### Table of Contents



As of December 31,(In millions)
    
    2007
    
    
    2006
    
    
    2005Long-Lived AssetsUnited States
    
    $
    167.0
    
    
    $
    174.6
    
    
    $
    190.9International
    
    
    4.5
    
    
    
    3.4
    
    
    
    4.1Total
    
    $
    171.5
    
    
    $
    178.0
    
    
    $
    195.0
 Note 18  Commitments and Contingencies
 Accounting for Contingencies
  Philips
   81




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##### Table of Contents



SanDisk
     Jazz Photo Corp.
  Environmental Matters
  Note 19  Related Party Transactions
  82




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##### Table of Contents



Note 20  Quarterly Data (Unaudited)
 (In millions, except per share amounts)
    
    First
    
    Second
    
    Third
    
    Fourth
    
    Total(1)2007Net revenue
    
    $
    421.9
    
    
    $
    412.8
    
    
    $
    525.5
    
    
    $
    701.8
    
    
    $
    2,062.0Gross profit
    
    
    81.8
    
    
    
    72.5
    
    
    
    85.7
    
    
    
    115.9
    
    
    
    355.9Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94.1
    
    
    
    94.1Operating (loss) income
    
    
    23.6
    
    
    
    (2.6
    )
    
    
    16.3
    
    
    
    (70.3
    )
    
    
    (33.0
    )Net income (loss)
    
    
    15.7
    
    
    
    (1.4
    )
    
    
    9.4
    
    
    
    (74.1
    )
    
    
    (50.4
    )Earnings (loss) per common share:Basic
    
    $
    0.45
    
    
    $
    (0.04
    )
    
    $
    0.24
    
    
    $
    (1.91
    )
    
    $
    (1.36
    )Diluted
    
    
    0.44
    
    
    
    (0.04
    )
    
    
    0.24
    
    
    
    (1.91
    )
    
    
    (1.36
    )2006Net revenue
    
    $
    335.2
    
    
    $
    365.8
    
    
    $
    424.7
    
    
    $
    459.0
    
    
    $
    1,584.7Gross profit
    
    
    79.2
    
    
    
    84.2
    
    
    
    88.3
    
    
    
    92.4
    
    
    
    344.1Operating income
    
    
    29.3
    
    
    
    18.6
    
    
    
    28.3
    
    
    
    32.0
    
    
    
    108.2Income from continuing operations
    
    
    19.4
    
    
    
    12.9
    
    
    
    18.5
    
    
    
    24.4
    
    
    
    75.2Discontinued operations
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    1.2Net income
    
    
    19.4
    
    
    
    14.1
    
    
    
    18.5
    
    
    
    24.4
    
    
    
    76.4Earning per common share, continuing operations:Basic
    
    $
    0.56
    
    
    $
    0.37
    
    
    $
    0.54
    
    
    $
    0.70
    
    
    $
    2.17Diluted
    
    
    0.55
    
    
    
    0.37
    
    
    
    0.53
    
    
    
    0.69
    
    
    
    2.14Earnings per
common share, discontinued operations:Basic
    
    $
    
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    
    
    
    $
    0.03Diluted
    
    
    
    
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    0.03Earnings per common share, net income:Basic
    
    $
    0.56
    
    
    $
    0.41
    
    
    $
    0.54
    
    
    $
    0.70
    
    
    $
    2.21Diluted
    
    
    0.55
    
    
    
    0.40
    
    
    
    0.53
    
    
    
    0.69
    
    
    
    2.17
 
 (1)
    
    The sum of the quarterly earnings per share may not equal the annual earnings per share due
to changes in average shares outstanding. 83




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Controls.
 Managements Report on Internal Control over Financial Reporting.
  Internal
ControlIntegrated Framework.
  Attestation Report of Independent Registered Public Accounting Firm.
 
 Item 9B. Other Information.
  84




---



##### Table of Contents



PART III
  
 Item 10. Directors, Executive Officers and Corporate Governance.
 Board of Directors
              85




---



##### Table of Contents



Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
  
 Item 14. Principal Accountant Fees and Services.
  86




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
 List of Documents Filed as Part of this Report
 Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    41Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005
    
    43Consolidated Balance Sheets as of December 31, 2007 and 2006
    
    44Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for theYears Ended December 31, 2007, 2006 and 2005
    
    45Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005
    
    46Notes to Consolidated Financial Statements
    
    47
 Financial Statement Schedules
  87




---



##### Table of Contents



Exhibits
  Number
    
    Description of Exhibit2.1
    
    Asset Purchase Agreement, dated May 7, 2007, among Hopper Radio of Florida, Inc., Memcorp, Inc., Memcorp Asia
Limited and Imation Corp. (incorporated by reference to Exhibit 2.1 of Imations Form 10-Q for the quarter ended March
31, 2007)2.2+
    
    Acquisition Agreement, dated April 19, 2007, by and between Imation Corp. and TDK Corporation (incorporated by
reference to Exhibit 2.1 to Imations Form 8-K Current Report filed on April 25, 2007)2.3
    
    Acquisition Agreement, dated January 19, 2006, by and between Imation Corp. and Memorex International Inc.
(incorporated by reference to Exhibit 2.1 to Imations Form 8-K Current Report filed on January 25, 2006)2.4
    
    Inducement Agreement, dated January 19, 2006, among Hanny Holding Limited, Hanny Magnetics (B.V.I.) Limited,
Investor Capital Management Asia Limited, Investor Capital Partners  Asia Fund L.P, Global Media Limited, Memorex
Holdings Limited and Imation Corp. (incorporated by reference to Exhibit 2.2 to Imations Form 8-K Current Report filed
on January 25, 2006)3.1
    
    Restated Certificate of Incorporation of Imation (incorporated by reference to Exhibit 3.1 to Registration Statement on
Form 10, No. 1-14310)3.2
    
    Amended and Restated Bylaws of Imation (incorporated by reference to Exhibit 3.1 of Imations Form 10-Q for the
quarter ended March 31, 2007)4.1
    
    Rights Agreement between Imation and The Bank of New York, as Rights Agent, dated as of June 21, 2006
(incorporated by reference to Exhibit 4.1 to Imations Registration Statement on Form 8-A filed on June 23, 2006)4.2
    
    First Amendment to Rights Agreement, dated as of July 30, 2007 (incorporated by reference to Exhibit 4.3 to Imations
Registration Statement on Form 8-A/A filed on August 1, 2007)4.3
    
    Amended and Restated Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred
Stock (incorporated by reference to Exhibit 4.2 to Imations Registration Statement on Form 8-A filed on June 23, 2006)10.1*
    
    Form of Amended and Restated Severance Agreement with Executive Officers10.2*
    
    Employment Closure Agreement between Imation Corp. and Mr. Henderson (incorporated by reference to Exhibit 10.1
to Imations Form 8-K Current Report filed on April 2, 2007)10.3*
    
    Directors Compensation Program, as amended10.4+
    
    Trademark License Agreement, dated July 31, 2007, by and between Imation Corp. and TDK Corporation
(incorporated by reference to Exhibit 10.2 to Imations Form 8-K Current Report filed on August 3, 2007)10.5+
    
    IMN Trademark License Agreement, dated July 31, 2007, by and between IMN Data Storage Holdings C.V.
and TDK Corporation (incorporated by reference to Exhibit 10.3 to Imations Form 8-K Current Report
filed on August 3, 2007)10.6+
    
    Supply Agreement, dated July 31, 2007, by and between Imation Corp. and TDK Corporation (incorporated
by reference to Exhibit 10.4 to Imations Form 8-K Current Report filed on August 3, 2007)10.7
    
    Investor Rights Agreement, dated July 31, 2007, by and between Imation Corp. and TDK Corporation
(incorporated by reference to Exhibit 10.1 to Imations Form 8-K Current Report filed on August 3, 2007)10.8*
    
    Imation 1996 Employee Stock Incentive Program (incorporated by reference to Exhibit 10.8 to Registration Statement on
Form 10, No. 1-14310)10.9*
    
    Imation Excess Benefit Plan (incorporated by reference to Exhibit 10.10 to Registration Statement on Form 10, No. 1-
14310)10.10*
    
    Form of Indemnity Agreement between Imation and each of its directors (incorporated by reference to Exhibit 10.13 to
Annual Report on Form 10-K for the year ended December 31, 1996)10.11*
    
    Imation 2000 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.7 to Annual Report on Form 10-
K for the year ended December 31, 2003)10.12*
    
    1996 Directors Stock Compensation Program, as amended May 8, 2002 (incorporated by reference to Exhibit 10.1 of
Imations Form 10-Q for the quarter ended June 30, 2002)10.13
    
    Shareholders Agreement in relation to Global Data Media FZ-LLC (incorporated by reference to Exhibit 10.11 to Annual
Report on Form 10-K for the year ended December 31, 2003)10.14
    
    Amendment Agreement to Shareholders Agreement in relation to Global Data Media FZ-LLC (incorporated by
reference to Exhibit 10.1 to Imations Form 8-K Current Report filed on January 26, 2006)10.15*
    
    Form of Restricted Stock Award Agreement between Imation and Frank Russomanno (incorporated by reference to
Exhibit 10.12 to Imations Form 8-K Current Report filed on May 9, 2005)10.16*
    
    Description of Compensatory arrangement between Imation and Frank Russomanno (incorporated by reference to
Imations Form 8-K Current Report filed on November 14, 2006)10.17*
    
    Employment Agreement dated May 13, 2004 between Imation and Bruce A. Henderson (incorporated by reference to
Exhibit 10.1 of Imations Form 10-Q for the quarter ended June 30, 2004)
 88




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##### Table of Contents



Number
    
    Description of Exhibit10.18*
    
    Amendment to Performance Stock Option Agreement between Imation and Bruce A. Henderson dated February 2, 2005
(incorporated by reference to Exhibit 1.01 to Imations Form 8-K Current Report filed on February 7, 2005)10.19*
    
    Amendment to Mr. Hendersons Performance Option Agreement (incorporated by reference to Exhibit 10.3 to Imations
Form 8-K Current Report filed on February 13, 2006)10.20*
    
    Amendment to Employment Agreement between Imation and Bruce Henderson (incorporated by reference to
Exhibit 10.1 to Imations Form 8-K Current Report filed on March 3, 2006)10.21*
    
    Form of 2000 Stock Incentive Plan Restricted Stock Award Agreement  Executive Officers (incorporated by reference
to Exhibit 10.9 to Imations Form 8-K Current Report filed on May 9, 2005)10.22*
    
    Amendment to 2000 Stock Incentive Plan Restricted Stock Award Agreement  Executive Officers (incorporated by
reference to Exhibit 10.8 to Imations Form 8-K Current Report filed on May 9, 2005)10.23*
    
    Form of Amendment to 2000 Employee Stock Incentive Plan Restricted Stock Award Agreements  Executive Officer
(incorporated by reference to Exhibit 10.2 to Imations Form 8-K Current Report filed on February 13, 2006)10.24*
    
    Form of 2000 Stock Incentive Plan Stock Option Agreement  Executive Officers (incorporated by reference to
Exhibit 10.11 to Imations Form 8-K Current Report filed on May 9, 2005)10.25*
    
    Form of 2000 Stock Incentive Plan Stock Option Agreement  Employees (incorporated by reference to Exhibit 10.10 to
Imations Form 8-K Current Report filed on May 9, 2005)10.26*
    
    Form of Restricted Stock Award Agreement  Employees 2004 (incorporated by reference to Exhibit 10.1 of Imations
Form 10-Q for the quarter ended September 30, 2004)10.27*
    
    Form of Restricted Stock Award Agreement  Executive Officers 2004 (incorporated by reference to Exhibit 10.2 of
Imations Form 10-Q for the quarter ended September 30, 2004)10.28*
    
    Form of Stock Option Agreement  Employees 2004 (incorporated by reference to Exhibit 10.3 of Imations Form 10-Q
for the quarter ended September 30, 2004)10.29*
    
    Form of Stock Option Agreement  Executive Officers 2004 (incorporated by reference to Exhibit 10.4 of Imations
Form 10-Q for the quarter ended September 30, 2004)10.30*
    
    Description of 2007 Annual Bonus Plan Target Approval (incorporated by reference to Imations Form 8-K Current
Report filed on January 12, 2007)10.31*
    
    Description of 2008 Annual Bonus Plan Target Approval (incorporated by reference to Imations Form 8-K Current
Report filed on January 25, 2008)10.32*
    
    Imation 2005 Stock Incentive Plan, as amended November 9, 2005 (incorporated by reference to Exhibit 10.1 to Imations
Form 8-K Current Report filed on November 16, 2005)10.33*
    
    Imation 2005 Stock Incentive Plan Stock Option Agreement  Employees (incorporated by reference to Exhibit 10.2 to
Imations Form 8-K Current Report filed on May 9, 2005)10.34*
    
    Imation 2005 Stock Incentive Plan Stock Option Agreement  Executive Officers (incorporated by reference to
Exhibit 10.3 to Imations Form 8-K Current Report filed on May 9, 2005)10.35*
    
    Form of Amendment to 2005 Stock Incentive Plan Option Agreements  Executive Officer (incorporated by reference to
Exhibit 10.5 to Imations Form 8-K Current Report filed on February 13, 2006)10.36*
    
    Imation 2005 Stock Incentive Plan Stock Option Agreement  Directors (incorporated by reference to Exhibit 10.4 to
Imations Form 8-K Current Report filed on May 9, 2005)10.37*
    
    Amendment to 2005 Stock Incentive Plan Stock Option Agreement  Directors (incorporated by reference to
Exhibit 10.2 to Imations Form 8-K Current Report filed on November 16, 2005)10.38*
    
    Imation 2005 Stock Incentive Plan Restricted Stock Award Agreement  Employees (incorporated by reference to
Exhibit 10.5 to Imations Form 8-K Current Report filed on May 9, 2005)10.39*
    
    Imation 2005 Stock Incentive Plan Restricted Stock Award Agreement  Executive Officers (incorporated by reference
to Exhibit 10.6 to Imations Form 8-K Current Report filed on May 9, 2005)10.40*
    
    Form of Amendment to 2005 Stock Incentive Plan Restricted Stock Award Agreements  Executive Officer
(incorporated by reference to Exhibit 10.6 to Imations Form 8-K Current Report filed on February 13, 2006)10.41*
    
    Imation 2005 Stock Incentive Plan Restricted Stock Award Agreement  Directors (incorporated by reference to
Exhibit 10.7 to Imations Form 8-K Current Report filed on May 9, 2005)10.42*
    
    Amendment to 2005 Stock Incentive Plan Restricted Stock Award Agreement  Directors (incorporated by reference to
Exhibit 10.3 to Imations Form 8-K Current Report filed on November 16, 2005)10.43*
    
    Form of Amendment to 2004 and 2005 Executive Officer Option Agreements under the 2000 Employee Stock Incentive
Plan (incorporated by reference to Exhibit 10.1 to Imations Form 8-K Current Report filed on February 13, 2006)10.44*
    
    Form of Amendment to 2005 Stock Option Agreements  Non-Employee Directors (incorporated by reference to
Exhibit 10.7 to Imations Form 8-K Current Report filed on February 13, 2006)10.45*
    
    Form of Non-Employee Director Option Agreement (incorporated by reference to Exhibit 10.12 to Imations Form 8-K
Current Report filed on February 13, 2006)
 89




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##### Table of Contents



Number
    
    Description of Exhibit10.46*
    
    Form of Amendment to 2005 Restricted Stock Award Agreements  Non-Employee Directors (incorporated by reference
to Exhibit 10.8 to Imations Form 8-K Current Report filed on February 13, 2006)10.47*
    
    Form of Non-Employee Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.13 to
Imations Form 8-K Current Report filed on February 13, 2006)10.48*
    
    Form of Executive Officer Option Agreement (incorporated by reference to Exhibit 10.10 to Imations Form 8-K Current
Report filed on February 13, 2006)10.49*
    
    Form of Executive Officer Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.11 to Imations
Form 8-K Current Report filed on February 13, 2006)10.50*
    
    Form of Non-Employee Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.13 to
Imations Form 8-K Current Report filed on February 13, 2006)10.51*
    
    Form of Executive Officer Option Agreement (incorporated by reference to Exhibit 10.10 to Imations Form 8-K Current
Report filed on February 13, 2006)10.52*
    
    Form of Executive Officer Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.11 to Imations
Form 8-K Current Report filed on February 13, 2006)10.53*
    
    Credit Agreement between Imation and a Consortium of Lenders dated as of March 29, 2006 (incorporated by reference
to Exhibit 10.1 to Imations Form 8-K Current Report filed on April 5, 2006)10.54*
    
    Amendment to the Credit Agreement between Imation Corp. and Consortium of Lenders dated as of July 24, 2007
(incorporated by reference to Exhibit 10.1 to Imations Form 8-K Current Report filed on July 30, 2007)21.1
    
    Subsidiaries of Imation Corp.23.1
    
    Consent of Independent Registered Public Accounting Firm24.1
    
    Power of Attorney31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Items that are management contracts or compensatory plans or arrangements required to be
filed as an exhibit pursuant to Item 15(b) of Form 10-K.+
    
    Pursuant to Rule 24b-2 of the Exchange Act, confidential portions of this exhibit have been
deleted and filed separately with the SEC pursuant to a request for confidential treatment. 90




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##### Table of Contents



SIGNATURES
  IMATION CORP.
 By:
    /s/ FRANK P. RUSSOMANNOFrank P. RussomannoPresident and Chief Executive Officer  91




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##### Table of Contents



Signature
    
    Title
    
    Date/s/ FRANK P. RUSSOMANNO
    
    President and Chief Executive Officer
    
    February 29, 2008Frank P. Russomanno
    
    (Principal Executive Officer)/s/ PAUL R. ZELLER
    
    Vice President and Chief Financial Officer
    
    February 29, 2008Paul R. Zeller
    
    (Principal Financial Officer)/s/ SCOTT J. ROBINSON
    
    Corporate Controller and Chief Accounting Officer
    
    February 29, 2008Scott J. Robinson
    
    (Principal Accounting Officer)*
    
    Director
    
    February 29, 2008Michael S. Fields*
    
    Director
    
    February 29, 2008Charles A. Haggerty*
    
    Director
    
    February 29, 2008Linda W. Hart*
    
    Director
    
    February 29, 2008Ronald T. LeMay*

Raymond Leung
    
    Director
    
    February 29, 2008*
    
    Director
    
    February 29, 2008Mark E. Lucas*
    
    Director
    
    February 29, 2008L. White Matthews, III*
    
    Director
    
    February 29, 2008Charles Reich*
    
    Director
    
    February 29, 2008Glen A. Taylor*
    
    Director
    
    February 29, 2008Daryl J. White
 *By:
    
    /s/ JOHN L. SULLIVANJohn L. SullivanAttorney-in-fact
 92




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibit10.1
    
    Form of Amended and Restated Severance Agreement with Executive Officers10.3
    
    Directors Compensation Program, as amended21.1
    
    Subsidiaries of Imation Corp.23.1
    
    Consent of Independent Registered Public Accounting Firm24.1
    
    Power of Attorney31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 93