##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the quarterly period ended June 30, 2008
 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 LOGO)
IMATION CORP.
  Delaware
    
    41-1838504(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)1 Imation WayOakdale, Minnesota
    
    55128(Address of principal executive offices)
    
    (Zip Code)
 (651) 704-4000
 Not Applicable
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



IMATION CORP.
TABLE OF CONTENTS
 PAGEPART I FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCondensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007
    
    
    3Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June
30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Report of Independent Registered Public Accounting Firm
    
    
    20ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
    
    
    21ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    31ITEM 4. CONTROLS AND PROCEDURES
    
    
    31PART II OTHER INFORMATION
    
    
    32ITEM 1. LEGAL PROCEEDINGS
    
    
    32ITEM 1A. RISK FACTORS
    
    
    33ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    33ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    34ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    34ITEM 5. OTHER INFORMATION
    
    
    34ITEM 6. EXHIBITS
    
    
    35SIGNATURE
    
    
    36EXHIBIT INDEX
    
    
    37Awareness LetterSection 302 CertificationSection 302 CertificationSection 906 CertificationSection 906 Certification




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Financial Statements.
 
 IMATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenue
    
    $
    547.0
    
    
    $
    412.8
    
    
    $
    1,077.9
    
    
    $
    834.7Cost of goods sold
    
    
    452.1
    
    
    
    340.3
    
    
    
    884.3
    
    
    
    680.4Gross profit
    
    
    94.9
    
    
    
    72.5
    
    
    
    193.6
    
    
    
    154.3Selling, general and administrative expense
    
    
    72.7
    
    
    
    44.7
    
    
    
    144.6
    
    
    
    89.9Research and development expense
    
    
    6.0
    
    
    
    9.6
    
    
    
    12.6
    
    
    
    22.0Restructuring and other expense
    
    
    4.0
    
    
    
    20.8
    
    
    
    4.7
    
    
    
    21.4Total
    
    
    82.7
    
    
    
    75.1
    
    
    
    161.9
    
    
    
    133.3Operating income (loss)
    
    
    12.2
    
    
    
    (2.6
    )
    
    
    31.7
    
    
    
    21.0Other (income) and expenseInterest income
    
    
    (0.7
    )
    
    
    (2.5
    )
    
    
    (1.6
    )
    
    
    (5.0
    )Interest expense
    
    
    0.3
    
    
    
    0.3
    
    
    
    1.0
    
    
    
    0.6Other expense, net
    
    
    2.0
    
    
    
    1.5
    
    
    
    3.4
    
    
    
    2.2Total
    
    
    1.6
    
    
    
    (0.7
    )
    
    
    2.8
    
    
    
    (2.2
    )Income (loss) before income taxes
    
    
    10.6
    
    
    
    (1.9
    )
    
    
    28.9
    
    
    
    23.2Income tax provision (benefit)
    
    
    3.4
    
    
    
    (0.5
    )
    
    
    10.7
    
    
    
    8.9Net income (loss)
    
    $
    7.2
    
    
    $
    (1.4
    )
    
    $
    18.2
    
    
    $
    14.3Earnings (loss) per common shareBasic
    
    $
    0.19
    
    
    $
    (0.04
    )
    
    $
    0.48
    
    
    $
    0.41Diluted
    
    
    0.19
    
    
    
    (0.04
    )
    
    
    0.48
    
    
    
    0.41Weighted average shares outstandingBasic
    
    
    37.4
    
    
    
    34.9
    
    
    
    37.6
    
    
    
    34.9Diluted
    
    
    37.5
    
    
    
    34.9
    
    
    
    37.7
    
    
    
    35.3Cash dividend paid per common share
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.32
    
    
    $
    0.30
  3




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IMATION CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    117.7
    
    
    $
    135.5Accounts receivable, net
    
    
    394.7
    
    
    
    507.1Inventories, net
    
    
    346.3
    
    
    
    366.1Other current assets
    
    
    111.8
    
    
    
    109.9Total current assets
    
    
    970.5
    
    
    
    1,118.6Property, plant and equipment, net
    
    
    163.1
    
    
    
    171.5Intangible assets, net
    
    
    366.5
    
    
    
    371.0Goodwill
    
    
    60.7
    
    
    
    55.5Other assets
    
    
    36.2
    
    
    
    34.4Total assets
    
    $
    1,597.0
    
    
    $
    1,751.0LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    287.1
    
    
    $
    350.1Accrued payroll
    
    
    15.8
    
    
    
    13.5Other current liabilities
    
    
    197.2
    
    
    
    257.3Current maturities of long-term debt
    
    
    
    
    
    
    10.0Total current liabilities
    
    
    500.1
    
    
    
    630.9Other liabilities
    
    
    44.8
    
    
    
    45.0Long-term debt, less current maturities
    
    
    
    
    
    
    21.3Commitments and contingenciesShareholders equity
    
    
    1,052.1
    
    
    
    1,053.8Total liabilities and shareholders equity
    
    $
    1,597.0
    
    
    $
    1,751.0
  4




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IMATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 Six Months EndedJune 30,2008
    
    
    2007Cash Flows from Operating Activities:Net income
    
    $
    18.2
    
    
    $
    14.3Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    25.3
    
    
    
    21.0Stock-based compensation
    
    
    4.6
    
    
    
    7.9Excess tax benefits from exercise of stock options
    
    
    
    
    
    
    (0.2
    )Deferred income taxes
    
    
    2.2
    
    
    
    0.8Non-cash restructuring and other charges
    
    
    
    
    
    
    2.8Other
    
    
    (0.2
    )
    
    
    1.8Changes in operating assets and liabilities:Accounts receivable
    
    
    126.2
    
    
    
    29.4Inventories
    
    
    29.0
    
    
    
    (33.1
    )Other assets
    
    
    0.5
    
    
    
    (3.9
    )Accounts payable
    
    
    (75.0
    )
    
    
    (8.5
    )Accrued payroll and other liabilities
    
    
    (52.5
    )
    
    
    (16.8
    )Net cash provided by operating activities
    
    
    78.3
    
    
    
    15.5Cash Flows from Investing Activities:Acquisitions, net of cash acquired
    
    
    (15.0
    )
    
    
    5.5Acquisition of minority interest
    
    
    (8.0
    )
    
    
    Capital expenditures
    
    
    (6.5
    )
    
    
    (9.4
    )Other, net
    
    
    0.1
    
    
    
    (0.2
    )Net cash used in by investing activities
    
    
    (29.4
    )
    
    
    (4.1
    )Cash Flows from Financing Activities:Debt repayment
    
    
    (31.3
    )
    
    
    Purchase of treasury stock
    
    
    (26.4
    )
    
    
    (17.8
    )Dividend payments
    
    
    (12.0
    )
    
    
    (10.5
    )Exercise of stock options
    
    
    0.4
    
    
    
    5.8Excess tax benefits from exercise of stock options
    
    
    
    
    
    
    0.2Net cash used in financing activities
    
    
    (69.3
    )
    
    
    (22.3
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    2.6
    
    
    
    1.1Net change in cash and cash equivalents
    
    
    (17.8
    )
    
    
    (9.8
    )Cash and cash equivalents  beginning of period
    
    
    135.5
    
    
    
    252.5Cash and cash equivalents  end of period
    
    $
    117.7
    
    
    $
    242.7
  5




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IMATION CORP.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Note 1  Basis of Presentation
    Note 2  Weighted Average Basic and Diluted Shares Outstanding
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average number of shares outstanding during the period
    
    
    37.4
    
    
    
    34.9
    
    
    
    37.6
    
    
    
    34.9Dilutive effect of stock-based compensation plans
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    0.4Weighted average number of diluted shares outstanding during the period
    
    
    37.5
    
    
    
    34.9
    
    
    
    37.7
    
    
    
    35.3
  Note 3  Fair Value Measurements
 Fair Value Measurements
 6




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Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 Effective Date of FASB Statement No. 157 Accounting for Leases
    Quoted prices inactive markets
    
    
    Significantfor identical
    
    
    other observable
    
    
    UnobservableJune 30,
    
    
    assets
    
    
    inputs
    
    
    inputs(In millions)
    
    2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Derivative assets
    
    $
    0.1
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    Derivative liabilities
    
    
    (2.2
    )
    
    
    (2.2
    )
    
    
    
    
    
    
    Total
    
    $
    (2.1
    )
    
    $
    (2.1
    )
    
    $
    
    
    
    $
    
  Note 4  Business Combinations
 Xtreme Accessories, LLC
   (In millions)
    
    AmountInventory
    
    $
    1.4Accounts receivable
    
    
    0.1Fixed assets
    
    
    0.2Intangibles
    
    
    4.8Goodwill
    
    
    4.8Accounts payable
    
    
    (4.0
    )$
    7.3
 7




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WeightedAverage(In millions)
    
    Amount
    
    
    LifeTrade names
    
    $
    2.0
    
    
    12 yearsIntellectual property
    
    
    1.8
    
    
    12 yearsCustomer Relationships
    
    
    0.8
    
    
    4 yearsNon-compete
    
    
    0.2
    
    
    3 years$
    4.8
   Imation Corporation Japan
 Consolidated Financial Statements
  (In millions)
    
    AmountCash consideration
    
    $
    8.0Interest acquired in historical book value of ICJ
    
    
    (7.1
    )Excess purchase price over historical book value
    
    $
    0.9
  (In millions)
    
    AmountCustomer relationships
    
    $
    0.8Inventory
    
    
    0.1Goodwill
    
    
    0.4Deferred tax liability
    
    
    (0.4
    )Excess purchase price over historical book value
    
    $
    0.9
  TDK Recording Media
  8




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Memcorp
    Pro Forma Disclosure
  Three Months
    
    Six MonthsEnded
    
    Ended(In millions, except per share amounts)
    
    June 30, 2007
    
    June 30, 2007Net revenue
    
    $
    580.0
    
    
    $
    1,209.3Net income
    
    
    (9.3
    )
    
    
    8.2Earnings per common shareBasic
    
    $
    (0.22
    )
    
    $
    0.20Diluted
    
    $
    (0.22
    )
    
    $
    0.20
  Memorex International Inc.
  9




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Note 5  Supplemental Balance Sheet Information
 June 30,
    
    
    December 31,(In millions)
    
    2008
    
    
    2007(Unaudited)Accounts ReceivableAccounts receivable
    
    $
    427.1
    
    
    $
    535.4Less allowances
    
    
    (32.4
    )
    
    
    (28.3
    )Accounts receivable, net
    
    $
    394.7
    
    
    $
    507.1InventoriesFinished goods
    
    $
    296.4
    
    
    $
    308.7Work in process
    
    
    29.1
    
    
    
    34.7Raw materials and supplies
    
    
    20.8
    
    
    
    22.7Total inventories, net
    
    $
    346.3
    
    
    $
    366.1Other Current AssetsDeferred income taxes
    
    $
    55.1
    
    
    $
    53.1Other
    
    
    56.7
    
    
    
    56.8Total other current assets
    
    $
    111.8
    
    
    $
    109.9Property, Plant and EquipmentProperty, plant and equipment
    
    $
    517.8
    
    
    $
    542.6Less accumulated depreciation
    
    
    (354.7
    )
    
    
    (371.1
    )Property, plant and equipment, net
    
    $
    163.1
    
    
    $
    171.5Other AssetsDeferred income taxes
    
    $
    15.9
    
    
    $
    14.9Other
    
    
    20.3
    
    
    
    19.5Total other assets
    
    $
    36.2
    
    
    $
    34.4
 10




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June 30,
    
    
    December 31,(In millions)
    
    2008
    
    
    2007(Unaudited)Other Current LiabilitiesRebates
    
    $
    81.8
    
    
    $
    104.0Employee separation costs
    
    
    13.6
    
    
    
    23.9Income taxes
    
    
    13.4
    
    
    
    18.2Other
    
    
    88.4
    
    
    
    111.2Total other current liabilities
    
    $
    197.2
    
    
    $
    257.3Other LiabilitiesPension
    
    $
    9.9
    
    
    $
    7.7Deferred income taxes
    
    
    6.7
    
    
    
    2.5Other
    
    
    28.2
    
    
    
    34.8Total other liabilities
    
    $
    44.8
    
    
    $
    45.0
 Note 6  Intangible Assets and Goodwill
  Customer(In millions)
    
    Trade Names
    
    
    Software
    
    
    Relationships
    
    
    Other
    
    
    TotalJune 30, 2008Cost
    
    $
    334.1
    
    
    $
    56.5
    
    
    $
    63.5
    
    
    $
    11.9
    
    
    $
    466.0Accumulated amortization
    
    
    (17.6
    )
    
    
    (54.3
    )
    
    
    (18.1
    )
    
    
    (9.5
    )
    
    
    (99.5
    )Net
    
    $
    316.5
    
    
    $
    2.2
    
    
    $
    45.4
    
    
    $
    2.4
    
    
    $
    366.5December 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
    
    
    $
    371.0
  Electronic(In millions)
    
    Americas
    
    
    Asia Pacific
    
    
    Products
    
    
    TotalBalance as of December 31,
2007
    
    $
    9.5
    
    
    $
    12.4
    
    
    $
    33.6
    
    
    $
    55.5TDK post-closing purchase
price adjustment
    
    
    (0.1
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    (1.2
    )Purchase of ICJ minority
interest
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    0.4Purchase of XtremeMac
    
    
    
    
    
    
    
    
    
    
    4.8
    
    
    
    4.8Foreign exchange impact
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    1.2Balance as of June 30, 2008
    
    $
    9.4
    
    
    $
    12.9
    
    
    $
    38.4
    
    
    $
    60.7
 Note 7  Stock-Based Compensation
  11




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Stock Options
  WeightedStock
    
    
    AverageOptions
    
    
    Exercise PriceOutstanding December 31, 2007
    
    
    3,149,761
    
    
    $
    35.16Granted
    
    
    1,218,013
    
    
    
    24.45Exercised
    
    
    (41,330
    )
    
    
    18.42Forfeited
    
    
    (141,425
    )
    
    
    37.28Outstanding June 30, 2008
    
    
    4,185,019
    
    
    $
    32.15Exercisable as of June 30, 2008
    
    
    2,301,972
    
    
    $
    34.44
  Note 8  Retirement Plans
 Employer Contributions
  12




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Components of Net Periodic Pension Cost
 United States
    
    
    International
    
    
    United States
    
    
    InternationalThree Months Ended June 30,
    
    
    Six Months Ended June 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Service cost
    
    $
    1.6
    
    
    $
    1.5
    
    
    $
    0.2
    
    
    $
    0.2
    
    
    $
    3.2
    
    
    $
    3.5
    
    
    $
    0.4
    
    
    $
    0.2Interest cost
    
    
    1.8
    
    
    
    1.9
    
    
    
    1.0
    
    
    
    0.9
    
    
    
    3.6
    
    
    
    3.7
    
    
    
    1.9
    
    
    
    1.7Expected return on plan assets
    
    
    (2.2
    )
    
    
    (2.5
    )
    
    
    (1.1
    )
    
    
    (1.1
    )
    
    
    (4.4
    )
    
    
    (4.9
    )
    
    
    (2.1
    )
    
    
    (1.9
    )Amortization of unrecognized items
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Net periodic pension cost
    
    $
    1.2
    
    
    $
    1.0
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    2.5
    
    
    $
    2.4
    
    
    $
    0.3
    
    
    $
    0.1Curtailment
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    
    
    
    
    Total pension costs
    
    $
    1.2
    
    
    $
    2.4
    
    
    $
    0.1
    
    
    $
    
    
    
    $
    2.5
    
    
    $
    3.8
    
    
    $
    0.3
    
    
    $
    0.1
 Note 9  Restructuring and Other Expense
  Three Months
    
    
    Six MonthsEnded
    
    
    Ended(In millions)
    
    June 30, 2008
    
    
    June 30, 2008RestructuringSeverance and severance-related expense
    
    $
    2.5
    
    
    $
    3.6Lease termination costs
    
    
    1.9
    
    
    
    3.5Total restructuring
    
    
    4.4
    
    
    
    7.1TDK post-closing purchase price adjustment
    
    
    
    
    
    
    (2.3
    )Other
    
    
    (0.4
    )
    
    
    (0.1
    )Total
    
    $
    4.0
    
    
    $
    4.7
   2007 Cost Reduction Restructuring Program
   Balance as of
    
    
    
    
    
    
    
    
    
    Balance as ofDecember 31,
    
    Additional
    
    
    
    
    
    June 30,(In millions)
    
    2007
    
    Charges
    
    Usage
    
    2008Severance and other liability
    
    $
    13.6
    
    
    $
    1.1
    
    
    $
    (7.5
    )
    
    $
    7.2
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Initial
    
    
    
    
    
    
    
    
    
    Liability as ofProgram
    
    Additional
    
    Cumulative
    
    June 30,(In millions)
    
    Amounts
    
    Charges
    
    Usage
    
    2008Severance and other liability
    
    $
    15.1
    
    
    $
    7.3
    
    
    $
    (15.2
    )
    
    $
    7.2
 Initial
    
    
    
    
    
    
    
    
    
    Balance as ofHeadcount
    
    
    
    
    
    Cumulative
    
    June 30,Amounts
    
    Additions
    
    Reductions
    
    2008Total employees affected
    
    
    675
    
    
    
    160
    
    
    
    (587
    )
    
    
    248
 TDK Recording Media Restructuring Costs
   Balance as of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as ofDecember 31,
    
    Additional
    
    Currency
    
    
    
    
    
    June 30,(In millions)
    
    2007
    
    Charges
    
    Impacts
    
    Usage
    
    2008Severance and other liability
    
    $
    9.4
    
    
    $
    2.3
    
    
    $
    0.5
    
    
    $
    (5.8
    )
    
    $
    6.4Lease termination costs
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    (0.1
    )
    
    $
    1.1
  Initial
    
    
    
    
    
    
    
    
    
    
    
    
    
    Liability as ofProgram
    
    Additional
    
    Currency
    
    Cumulative
    
    June 30,(In millions)
    
    Amounts
    
    Charges
    
    Impacts
    
    Usage
    
    2008Severance and other liability
    
    $
    11.7
    
    
    $
    2.3
    
    
    $
    0.5
    
    
    $
    (8.1
    )
    
    $
    6.4Lease termination costs
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    (0.1
    )
    
    
    1.1
 Initial
    
    
    
    
    
    
    
    
    
    Balance as ofHeadcount
    
    
    
    
    
    Cumulative
    
    June 30,Amounts
    
    Additions
    
    Reductions
    
    2008Total employees affected
    
    
    172
    
    
    
    40
    
    
    
    (134
    )
    
    
    78
 Note
10  Taxes
   14




---



##### Table of Contents



Note
11  Comprehensive Income (Loss)
  June 30,
    
    
    December 31,(In millions)
    
    2008
    
    
    2007Cumulative currency translation adjustment
    
    $
    (25.9
    )
    
    $
    (40.0
    )Pension adjustments, net of income tax
    
    
    (4.3
    )
    
    
    (4.4
    )Cash flow hedging and other, net of income tax
    
    
    (1.3
    )
    
    
    0.3Total accumulated other comprehensive loss
    
    $
    (31.5
    )
    
    $
    (44.1
    )
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    7.2
    
    
    $
    (1.4
    )
    
    $
    18.2
    
    
    $
    14.3Currency translation adjustment
    
    
    (1.3
    )
    
    
    7.6
    
    
    
    14.1
    
    
    
    14.9Pension liability adjustments, net of income tax
    
    
    0.1
    
    
    
    6.7
    
    
    
    0.1
    
    
    
    6.5Cash flow hedging and other, net of income tax
    
    
    2.5
    
    
    
    (0.1
    )
    
    
    (1.6
    )
    
    
    (0.7
    )Total comprehensive income
    
    $
    8.5
    
    
    $
    12.8
    
    
    $
    30.8
    
    
    $
    35.0
 Note
12  Segment Information
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net RevenueAmericas
    
    $
    190.2
    
    
    $
    229.4
    
    
    $
    404.9
    
    
    $
    444.5Europe
    
    
    185.3
    
    
    
    126.7
    
    
    
    361.4
    
    
    
    269.4Asia Pacific
    
    
    113.3
    
    
    
    56.7
    
    
    
    227.6
    
    
    
    120.8Electronic Products
    
    
    58.2
    
    
    
    
    
    
    
    84.0
    
    
    
    Total
    
    $
    547.0
    
    
    $
    412.8
    
    
    $
    1,077.9
    
    
    $
    834.7
 15




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Operating Income (Loss)Americas
    
    $
    17.5
    
    
    $
    22.1
    
    
    $
    41.3
    
    
    $
    46.6Europe
    
    
    7.2
    
    
    
    7.9
    
    
    
    12.9
    
    
    
    19.0Asia Pacific
    
    
    8.0
    
    
    
    4.0
    
    
    
    15.7
    
    
    
    10.4Electronic Products
    
    
    0.6
    
    
    
    
    
    
    
    (2.1
    )
    
    
    Corporate and unallocated
    
    
    (21.1
    )
    
    
    (36.6
    )
    
    
    (36.1
    )
    
    
    (55.0
    )Total
    
    $
    12.2
    
    
    $
    (2.6
    )
    
    $
    31.7
    
    
    $
    21.0
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net RevenueOptical products
    
    $
    264.3
    
    
    $
    192.6
    
    
    $
    525.9
    
    
    $
    385.3Magnetic products
    
    
    166.4
    
    
    
    150.4
    
    
    
    344.5
    
    
    
    312.8Flash media products
    
    
    27.0
    
    
    
    42.8
    
    
    
    53.9
    
    
    
    78.5Electronic products,
accessories and other
    
    
    89.3
    
    
    
    27.0
    
    
    
    153.6
    
    
    
    58.1Total
    
    $
    547.0
    
    
    $
    412.8
    
    
    $
    1,077.9
    
    
    $
    834.7
 Note 13  Litigation, Commitments and Contingencies
 Litigation
 Accounting for
Contingencies
   Philips
  16




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##### Table of Contents



SanDisk
    Note 14  Recent Accounting Pronouncements
 The Hierarchy of Generally Accepted Accounting Principles
 17




---



##### Table of Contents



Determination of the Useful Life of
Intangible Assets Goodwill and Other Intangible Assets
 Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133 .
 Business Combinations Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Note 15  Subsequent Event
   18




---



##### Table of Contents



Note 16  Review Report of Independent Registered Public Accounting Firm
  19




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      /s/
    PricewaterhouseCoopers LLPPricewaterhouseCoopers LLP 
 20




---



##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
        
    
    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 users, a relatively small number of
competitors, and high barriers to entry.
 21




---



##### Table of Contents



Imation enjoys a leading market share, significant
intellectual property portfolio, solid industry reputation and relationships among key
original equipment manufacturers (OEMs). The magnetic tape industry has consistently
addressed the growth in demand for storage capacity with higher capacity cartridges resulting
in lower cost per gigabyte and lower overall cartridge volume. To optimize our magnetic tape
business and stabilize or reduce our manufacturing costs, in May 2007 we started a major
restructuring of our manufacturing operations. We announced further manufacturing
optimization steps in July 2008 whereby we plan to focus our tape coating operations in our
Weatherford, Oklahoma plant and close our Camarillo, California plant by year end. We are
concentrating our direct manufacturing investments on coating operations and outsourcing
other parts of manufacturing operations for magnetic tape. We continue to have a focused investment 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 the Imation brand, and established distribution
agreements for other brands. In addition, with approximately 60 percent of our revenue
coming from outside the United States for the six months ended June 30, 2008, 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 the Memcorp business in the third
quarter of 2007, we entered into the consumer electronics market to sell certain consumer
electronic products primarily in North America, which we did not offer previously. Our
product portfolio includes flat panel displays and televisions, iPod accessories, and MP3
players, clock radios, CD and DVD players, karaoke machines, digital picture frames and
digital cameras. The Memcorp business 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.
 Factors Affecting Comparability of our Financial Results
    Executive Summary
 Consolidated Results of Operations for the Six Months Ended June 30, 2008
 
    
    Revenue of $1,077.9 million in the six months ended June 30, 2008 was up 29.1 percent
over the same period last year.
    
    Operating income of $31.7 million in the six months ended June 30, 2008 was up 51.0
percent compared to $21.0 million in the same period last year.
    
    Diluted earnings per share was $0.48 for the six months ended June 30, 2008 compared to
$0.41 for the same period last year.
 22




---



##### Table of Contents



Cash Flow/Financial Condition for the Six Months Ended June 30, 2008
 
    
    Cash flow from operations totaled $78.3 million in the six months ended June 30, 2008
compared to $15.5 million during the same period last year.
    
    Total cash and cash equivalents were $117.7 million as of June 30, 2008, compared to
$135.5 million at year-end 2007.
    
    Dividends of $0.16 per share were paid in June 2008.
 Results of Operations
 Net Revenue
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeNet revenue
    
    $
    547.0
    
    
    $
    412.8
    
    
    
    32.5
    %
    
    $
    1,077.9
    
    
    $
    834.7
    
    
    
    29.1
    %
  Gross Profit
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeGross profit
    
    $
    94.9
    
    
    $
    72.5
    
    
    
    30.9
    %
    
    $
    193.6
    
    
    $
    154.3
    
    
    
    25.5
    %Gross margin
    
    
    17.3
    %
    
    
    17.6
    %
    
    
    
    
    
    
    18.0
    %
    
    
    18.5
    %
  Selling, General and Administrative (SG&A)
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeSelling, general and
administrative
    
    $
    72.7
    
    
    $
    44.7
    
    
    
    62.6
    %
    
    $
    144.6
    
    
    $
    89.9
    
    
    
    60.8
    %As a percent of revenue
    
    
    13.3
    %
    
    
    10.8
    %
    
    
    
    
    
    
    13.4
    %
    
    
    10.8
    %
   23




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##### Table of Contents



Research and Development (R&D)
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeResearch and development
    
    $
    6.0
    
    
    $
    9.6
    
    
    
    -37.5
    %
    
    $
    12.6
    
    
    $
    22.0
    
    
    
    -42.7
    %As a percent of revenue
    
    
    1.1
    %
    
    
    2.4
    %
    
    
    
    
    
    
    1.2
    %
    
    
    2.6
    %
  Restructuring and Other
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeRestructuring and other
    
    $
    4.0
    
    
    $
    20.8
    
    
    
    -80.8
    %
    
    $
    4.7
    
    
    $
    21.4
    
    
    
    -78.0
    %As a percent of revenue
    
    
    
    %
    
    
    5.0
    %
    
    
    
    
    
    
    
    %
    
    
    2.6
    %
   Operating Income (Loss)
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeOperating income (loss)
    
    $
    12.2
    
    
    $
    (2.6
    )
    
    NM
    
    $
    31.7
    
    
    $
    21.0
    
    
    
    51.0
    %As a percent of revenue
    
    
    2.2
    %
    
    
    -0.6
    %
    
    
    
    
    
    
    2.9
    %
    
    
    2.5
    %
 
 NM Not Meaningful  Income Tax Provision (Benefit)
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeIncome tax provision (benefit)
    
    $
    3.4
    
    
    $
    (0.5
    )
    
    NM
    
    $
    10.7
    
    
    $
    8.9
    
    
    
    20.2
    %Effective tax rate
    
    
    32.1
    %
    
    
    26.3
    %
    
    
    
    
    
    
    37.0
    %
    
    
    38.3
    %
 
 NM Not Meaningful  24




---



##### Table of Contents



Segment Results
    Americas
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeNet revenue
    
    $
    190.2
    
    
    $
    229.4
    
    
    
    -17.1
    %
    
    $
    404.9
    
    
    $
    444.5
    
    
    
    -8.9
    %Operating income
    
    
    17.5
    
    
    
    22.1
    
    
    
    -20.8
    %
    
    
    41.3
    
    
    
    46.6
    
    
    
    -11.4
    %As a percent of revenue
    
    
    9.2
    %
    
    
    9.6
    %
    
    
    
    
    
    
    10.2
    %
    
    
    10.5
    %
   Europe
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeNet revenue
    
    $
    185.3
    
    
    $
    126.7
    
    
    
    46.3
    %
    
    $
    361.4
    
    
    $
    269.4
    
    
    
    34.1
    %Operating income
    
    
    7.2
    
    
    
    7.9
    
    
    
    -8.9
    %
    
    
    12.9
    
    
    
    19.0
    
    
    
    -32.1
    %As a percent of revenue
    
    
    3.9
    %
    
    
    6.2
    %
    
    
    
    
    
    
    3.6
    %
    
    
    7.1
    %
   25




---



##### Table of Contents



Asia Pacific


Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeNet revenue
    
    $
    113.3
    
    
    $
    56.7
    
    
    
    99.8
    %
    
    $
    227.6
    
    
    $
    120.8
    
    
    
    88.4
    %Operating income
    
    
    8.0
    
    
    
    4.0
    
    
    
    100.0
    %
    
    
    15.7
    
    
    
    10.4
    
    
    
    51.0
    %As a percent of revenue
    
    
    7.1
    %
    
    
    7.1
    %
    
    
    
    
    
    
    6.9
    %
    
    
    8.6
    %
   Electronic Products
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeNet revenue
    
    $
    58.2
    
    
    $
    
    
    
    NM
    
    $
    84.0
    
    
    $
    
    
    
    NMOperating income
    
    
    0.6
    
    
    
    
    
    
    NM
    
    
    (2.1
    )
    
    
    
    
    
    NMAs a percent of revenue
    
    NM
    %

    
    
    
    
    
    
    
    
    NM
    %
 
 NM Not Meaningful  Corporate and Unallocated
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    Percent
    
    June 30,
    
    Percent(Dollars in millions)
    
    2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    ChangeOperating costs
    
    $
    21.1
    
    
    $
    36.6
    
    
    
    -42.3
    %
    
    $
    36.1
    
    
    $
    55.0
    
    
    
    -34.4
    %
  Impact of Changes in Foreign Currency Rates
   26




---



##### Table of Contents



Financial Position
     Liquidity and Capital Resources
     27




---



##### Table of Contents



28




---



##### Table of Contents



Contractual Obligations
  Fair Value Measurements
 Fair Value Measurements
 Critical Accounting Policies and Estimates
   Recently Issued Accounting Standards
 The Hierarchy of Generally Accepted Accounting Principles
 Determination of
the Useful Life of Intangible Assets Goodwill and Other Intangible Assets
 Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133 .
 Business Combinations Business Combinations
 29




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##### Table of Contents



Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Subsequent Event
   Forward-Looking Statements and Risk Factors
   
    
    Revenue is targeted at approximately $2.4 billion, representing growth of approximately
16 percent over 2007.
    
    Operating income, including restructuring and other charges, is targeted to be in the
range of $80 million to $90 million. We anticipate restructuring and other charges to be in
the range of $17 million to $22 million for 2008. This change in outlook is the result of
the anticipated 2008 restructuring and related charges of $13 million to $16 million
associated with the manufacturing restructuring announced July 22, 2008. Previously,
operating income was targeted to be in the range of $95 million to $105 million with
restructuring and other charges in the range of $4 million to $6 million for 2008.
    
    Diluted earnings per share is targeted between $1.26 and $1.43 which includes the
negative impact of approximately $0.33 from restructuring and related charges. This outlook
reflects the restructuring and related charges discussed above. Previously, diluted
earnings per share was targeted between $1.51 and $1.68 which included the negative impact
of approximately $0.08 from restructuring and other 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 in the future.
 
    
    Depreciation and amortization expense is targeted in the range of $48 million to $52
million.
 30




---



##### Table of Contents



Quantitative and Qualitative Disclosures about Market Risk
   
 Controls and Procedures.
   31




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Legal Proceedings
 Accounting for
Contingencies
   Philips
     32




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##### Table of Contents



SanDisk
    
 Risk Factors
  
 Unregistered Sales of Equity Securities and Use of Proceeds.
    (c)Total Number of
    
    
    Maximum Number(a)
    
    
    (b)
    
    
    Shares Purchased
    
    
    of Shares that MayTotal Number
    
    
    Average
    
    
    as Part of Publicly
    
    
    Yet Be Purchasedof Shares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    Under the Plans orPeriod
    
    Purchased
    
    

per Share
    
    
    or Programs
    
    
    ProgramsApril 1, 2008  April 30, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    2,604,700May 1,
2008  May 31, 2008
    
    
    155,230
    
    
    
    25.55
    
    
    
    139,000
    
    
    
    2,465,700June 1,
2008  June 30, 2008
    
    
    129,800
    
    
    
    26.14
    
    
    
    129,800
    
    
    
    2,335,900Total
    
    
    285,030
    
    
    $
    25.82
    
    
    
    268,800
    
    
    
    2,335,900
 
 a)
    
    The purchases in this column include shares repurchased as part of our publicly
announced programs and include 16,230 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 programs 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. 33




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c)
    
    On April 17, 2007, our Board of Directors authorized and announced the
repurchase of 5.0 million shares of common stock. On January 28, 2008, the Board of
Directors authorized and announced a share repurchase program increasing total
outstanding share repurchase authorization to 3.0 million shares of common stock. The
Companys previous authorization, which had a remaining share repurchase authorization
of 0.8 million shares, was cancelled with the new authorization. During the three
months ended June 30, 2008, we repurchased 0.3 million shares. As of June 30, 2008, we
had repurchased 0.7 million shares under the latest authorization and held, in total,
16.7 million shares of treasury stock acquired at an average price of $27.57 per share.
Authorization for repurchases of an additional 2.3 million shares remained outstanding
as of June 30, 2008, and such authorization has no expiration date. 
 Defaults Upon Senior Securities.
  
 Submission of Matters to a Vote of Security Holders
  a)
    
    A proposal to elect five directors of Imation, with four directors (Ms. Hart
and Messrs. Leung and Lucas and Dr. Reich) being nominated for three-year terms ending
in 2011 and one director (Mr. Russomanno) being nominated for a two-year term ending in
2010, as follows:
 VotesDirectors
    
    Voted For
    
    WithheldLinda W. Hart
    
    
    31,734,532
    
    
    
    2,083,954Raymond Leung
    
    
    32,788,722
    
    
    
    1,029,764Mark E. Lucas
    
    
    32,874,193
    
    
    
    944,293Charles Reich
    
    
    31,902,438
    
    
    
    1,916,048Frank P. Russomanno
    
    
    32,725,347
    
    
    
    1,093,139
  b)
    
    A proposal to ratify the appointment of PricewaterhouseCoopers LLP to serve as
the independent registered public accounting firm of the Company for the year ending
December 31, 2008. The proposal received 33,488,569 votes for and 313,514 against
ratification. There were 16,403 abstentions and no broker non-votes.c)
    
    A proposal to approve the 2008 Stock Incentive Plan. The proposal received
26,234,851votes for and 2,783,646 against approval. There were 2,623,725 abstentions
and 2,176,264 broker non-votes.
 
 Other Information.
  34




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Exhibits.
  ExhibitNumber
    
    Description of Exhibit10.1
    
    
    Imation Corp. 2008 Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 to Imations Form 8-K Current Report filed on May 12, 2008)10.2
    
    
    Form of Non-Qualified Stock Option Agreement for Executive Officers under the Imation Corp. 2005 Stock Incentive Plan
(incorporated by reference to Exhibit 10.2 to Imations Form 8-K Current Report filed on May 12, 2008)10.3
    
    
    Form of Non-Qualified Stock Option Agreement for Executive Officers under the Imation Corp. 2008 Stock Incentive Plan
(incorporated by reference to Exhibit 10.3 to Imations Form 8-K Current Report filed on May 12, 2008)10.4
    
    
    Form of Non-Qualified Stock Option Agreement for Directors under the Imation Corp. 2008 Stock Incentive Plan
(incorporated by reference to Exhibit 10.4 to Imations Form 8-K Current Report filed on May 12, 2008)10.5
    
    
    Form of Restricted Stock Agreement for Executive Officers under the Imation Corp. 2008 Stock Incentive Plan
(incorporated by reference to Exhibit 10.5 to Imations Form 8-K Current Report filed on May 12, 2008)10.6
    
    
    Form of Restricted Stock Agreement for Directors under the Imation Corp. 2008 Stock Incentive Plan
(incorporated by reference to Exhibit 10.6 to Imations Form 8-K Current Report filed on May 12, 2008)15.1
    
    
    An awareness letter from the Companys independent registered public accounting firm regarding unaudited interim
financial statements31.1
    
    
    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
 35




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SIGNATURE
  Imation Corp.Date: August 1, 2008
    /s/ Paul R. ZellerPaul R. ZellerVice President and Chief Financial Officer
(duly authorized officer and principal
financial officer) 36




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EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibit15.1
    
    
    An awareness letter from the Companys independent registered public accounting firm regarding unaudited interim
financial statements31.1
    
    
    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
 37