10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 OR

[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___TO ___.

Commission file number: 1-14310

IMATION CORP.

(Exact name of registrant as specified in its charter)

Delaware	41-1838504
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

1 Imation Place
Oakdale, Minnesota 55128
(Address of principal executive offices)

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ].

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 35,563,562 shares of Common Stock, par value $0.01 per share, were outstanding at July 31, 2004.

IMATION CORP.
INDEX

			PAGE(S)
PART I.		FINANCIAL INFORMATION
	ITEM 1.	FINANCIAL STATEMENTS
		Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003		3
		Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003		4
		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003		5
		Notes to Consolidated Financial Statements		6-14
		Report of Independent Registered Public Accounting Firm		15
	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		16-25
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		26
	ITEM 4.	CONTROLS AND PROCEDURES		26
PART II.		OTHER INFORMATION
	ITEM 1.	LEGAL PROCEEDINGS		27-29
	ITEM 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS		30
	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		30
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		31
	ITEM 5.	OTHER INFORMATION		31
	ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K		32
SIGNATURE				33
EXHIBIT INDEX
Amended and Restated Bylaws
Employment Agreement
Separation Agreement and General Release
Awareness Letter Regarding Unaudited Interim Financial Statements
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except for per share amounts)
(Unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
Net revenues	$	284.1		$	268.0		$	623.4		$	541.3
Cost of goods sold		213.9			186.5			459.7			372.7
Gross profit		70.2			81.5			163.7			168.6
Operating expenses:
Selling, general and administrative		42.2			42.2			87.0			83.6
Research and development		14.6			12.5			29.8			25.4
Restructuring and other		3.1			—			3.1			—
Total		59.9			54.7			119.9			109.0
Operating income		10.3			26.8			43.8			59.6
Other (income) and expense:
Interest income		(1.0	)		(1.7	)		(2.1	)		(3.5	)
Interest expense		0.2			0.3			0.3			0.6
Other, net		1.1			0.5			2.1			1.2
Total		0.3			(0.9	)		0.3			(1.7	)
Income from continuing operations before taxes		10.0			27.7			43.5			61.3
Income tax provision		2.7			8.8			14.5			20.9
Income from continuing operations		7.3			18.9			29.0			40.4
Gain (loss) from discontinued operations net of taxes		(0.5	)		0.5			(0.8	)		0.5
Net income	$	6.8		$	19.4		$	28.2		$	40.9
Earnings (loss) per common share — basic:
Continuing operations	$	0.21		$	0.54		$	0.82		$	1.14
Discontinued operations		(0.01	)		0.01			(0.02	)		0.01
Net income	$	0.20		$	0.55		$	0.80		$	1.15
Earnings (loss) per common share — diluted:
Continuing operations	$	0.20		$	0.52		$	0.80		$	1.11
Discontinued operations		(0.01	)		0.01			(0.02	)		0.01
Net income	$	0.19		$	0.53		$	0.78		$	1.12
Weighted average basic shares outstanding		35.5			35.5			35.5			35.5
Weighted average diluted shares outstanding		36.4			36.5			36.3			36.4

The accompanying notes to consolidated financial statements are an integral part of these statements.

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IMATION CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)
(Unaudited)

	June 30,		December 31,
	2004		2003
ASSETS
Current assets
Cash and equivalents	$	392.0	$	411.4
Accounts receivable, net		163.2		196.8
Inventories		192.7		159.4
Other current assets		44.8		70.8
Total current assets		792.7		838.4
Property, plant and equipment, net		221.1		226.5
Other assets		126.6		107.9
Total assets	$	1,140.4	$	1,172.8
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	117.5	$	148.3
Accrued payroll		16.5		22.2
Other current liabilities		106.3		126.7
Total current liabilities		240.3		297.2
Other liabilities		53.6		55.3
Shareholders’ equity		846.5		820.3
Total liabilities and shareholders’ equity	$	1,140.4	$	1,172.8

The accompanying notes to consolidated financial statements are an integral part of these statements.

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IMATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)
(Unaudited)

	Six months ended
	June 30,
	2004			2003
Cash Flows from Operating Activities:
Net income	$	28.2		$	40.9
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		25.2			18.8
Deferred income taxes		4.3			11.6
Restructuring and other		3.1			—
Accounts receivable		31.4			(1.5	)
Inventories		(35.1	)		(9.5	)
Other current assets		15.2			42.3
Accounts payable		(25.1	)		4.4
Accrued payroll and other current liabilities		(8.0	)		(63.2	)
Income taxes payable		(12.8	)		(2.2	)
Other		3.7			0.5
Net cash provided by operating activities		30.1			42.1
Cash Flows from Investing activities:
Capital expenditures		(20.3	)		(30.6	)
Purchase of investments		(26.2	)		—
Proceeds from sale of investments		6.1			—
Other		(0.8	)		(4.4	)
Net cash used in investing activities		(41.2	)		(35.0	)
Cash Flows from Financing Activities:
Net change in short-term debt		—			(3.0	)
Purchases of treasury stock		(14.0	)		(4.9	)
Dividend payments		(6.4	)		(2.8	)
Exercise of stock options and other		12.9			4.9
Decrease in unearned ESOP shares		—			1.5
Net cash used in financing activities		(7.5	)		(4.3	)
Effect of exchange rate changes on cash		(0.8	)		1.8
Net change in cash and equivalents		(19.4	)		4.6
Cash and equivalents — beginning of period		411.4			474.7
Cash and equivalents — end of period	$	392.0		$	479.3

The accompanying notes to consolidated financial statements are an integral part of these statements.

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IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. FINANCIAL STATEMENTS

The interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal, recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year. The consolidated financial statements and notes are presented as permitted by the requirements for Form 10-Q and do not contain certain information included in the Company’s annual consolidated financial statements and notes. The December 31, 2003 Condensed Consolidated Balance Sheet was derived from the audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. This Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes included in its Annual Report on Form 10-K for the year ended December 31, 2003.

2. STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation using the intrinsic value approach under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, compensation cost for employee stock options is measured as the excess, if any, of the quoted market price of the Company’s common stock at the date of the grant over the amount an employee must pay to acquire the stock.

The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation expense has been recognized for the stock option plans as all options granted have had no intrinsic value at the time of grant. The table below illustrates the effect on net income and earnings per share if the fair value of all options previously granted had been recognized as compensation expense on a straight-line basis over the vesting periods in accordance with the provisions of SFAS No. 123. See Note 14 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, for additional information regarding Employee Stock Plans.

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(In millions, except per share amounts)

	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
Net income, as reported	$	6.8		$	19.4		$	28.2		$	40.9
Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects		(2.9	)		(1.5	)		(4.2	)		(2.5	)
Pro forma net income	$	3.9		$	17.9		$	24.0		$	38.4
Earnings per share:
Basic — as reported	$	0.20		$	0.55		$	0.80		$	1.15
Basic — pro forma	$	0.11		$	0.50		$	0.68		$	1.08
Diluted — as reported	$	0.19		$	0.53		$	0.78		$	1.12
Diluted — pro forma	$	0.11		$	0.49		$	0.66		$	1.05

3. EARNINGS PER SHARE

Basic earnings per share is calculated using the weighted average number of shares outstanding during the period, adjusted for ESOP shares not allocated to employee accounts. Under the applicable accounting rules, unallocated shares held in the Company’s ESOP trust, which was established in 1996 as a way of funding certain employee retirement savings benefits, are not considered outstanding for purposes of calculating earnings per share. ESOP shares were fully allocated by March 31, 2004. Diluted earnings per share is computed on the basis of the weighted average basic shares outstanding plus the dilutive effect of outstanding stock options using the “treasury stock” method. The following table sets forth the computation of the weighted average basic and diluted shares outstanding:

	Three months ended					Six months ended
	June 30,					June 30,
(In millions)	2004		2003			2004		2003
Weighted average shares outstanding		35.5		35.6			35.5		35.6
Weighted average ESOP shares not yet allocated		—		(0.1	)		—		(0.1	)
Weighted average basic shares outstanding		35.5		35.5			35.5		35.5
Dilutive effect of employee stock options		0.9		1.0			0.8		0.9
Weighted average diluted shares outstanding		36.4		36.5			36.3		36.4

As of June 30, 2004 and 2003, certain options to purchase approximately 152,500 and 12,500 shares, respectively, of the Company’s common stock were outstanding that were not considered in the computation of potential common shares because the effect of the options would be antidilutive.

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4. SUPPLEMENTARY BALANCE SHEET INFORMATION

(In millions)

	June 30,			December 31,
	2004			2003
Accounts Receivable
Accounts receivable	$	175.7		$	211.5
Less allowances		(12.5	)		(14.7	)
Accounts receivable, net	$	163.2		$	196.8
Inventories
Finished goods	$	140.8		$	117.9
Work in process		23.5			15.0
Raw materials and supplies		28.4			26.5
Total inventories	$	192.7		$	159.4
Other Current Assets
Deferred income taxes	$	24.9		$	24.5
Restricted cash		—			8.3
Other		19.9			38.0
Total other current assets	$	44.8		$	70.8
Property, Plant and Equipment
Property, plant and equipment	$	753.9		$	748.2
Less accumulated depreciation		(532.8	)		(521.7	)
Property, plant and equipment, net	$	221.1		$	226.5
Other Assets
Deferred income taxes	$	43.1		$	50.1
Long-term investments		28.1			13.4
Intangible assets		28.6			27.2
Goodwill		12.2			2.6
Other		14.6			14.6
Total other assets	$	126.6		$	107.9
Other Current Liabilities
Rebates	$	33.2		$	37.6
Income taxes		14.6			27.4
Other		58.5			61.7
Total other current liabilities	$	106.3		$	126.7
Other Liabilities
Pension	$	27.4		$	25.4
Other		26.2			29.9
Total other liabilities	$	53.6		$	55.3

5. LITIGATION, COMMITMENTS AND CONTINGENCIES

Discussion of legal matters is cross-referenced to this Form 10-Q, Part II. Item 1, Legal Proceedings, and should be considered an integral part of the Consolidated Financial Statements and Notes.

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6. RESTRUCTURING

During the second quarter of 2004, the Company recorded restructuring charges of $3.1 million for employee reductions. The charges related to a plan to close the Company’s production facility in Tucson, Arizona and international administrative and sales employee reductions. The restructuring will impact approximately 280 positions. It is anticipated that the Tucson facility will be closed by December 31, 2005. Production from this facility will be shifted to other facilities as the shutdown occurs. The restructuring charge consists of estimated severance payments and related benefits, which are payable under the Company’s on-going severance benefit plan. No employee reductions or cash payments were made prior to June 30, 2004. In addition to these costs, the Company will also be incurring costs related to the Tucson facility closing such as scale-up costs at other facilities, equipment moves and relocation. These costs will be generally expensed as incurred, and are expected to total approximately $6 million, of which approximately $1.3 million are expected to be incurred in the last half of 2004.

All other previous restructuring programs were substantially complete as of March 31, 2004. See the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 for additional details regarding prior restructuring programs. There were no net adjustments related to these programs recorded in the three or six month periods ended June 30, 2004 or 2003.

7. RETIREMENT PLANS

Employer Contributions

During the six months ended June 30, 2004, $7 million of contributions have been made to the Company’s pension plans. The Company presently anticipates contributing an additional $5 million to $10 million to fund its pension plans during the last six months of 2004.

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Components of Net Periodic Pension Cost

(In millions)

	Three months ended						Six months ended
	June 30,						June 30,
U.S. Plan	2004			2003			2004			2003
Service cost	$	2.6		$	2.5		$	5.2		$	5.0
Interest cost		1.8			1.8			3.5			3.5
Expected return on plan assets		(2.1	)		(1.9	)		(4.3	)		(3.7	)
Amortization of prior service cost		—			0.1			0.1			0.1
Amortization of net loss		0.1			—			0.1			—
Special termination benefits (1)		0.4			—			0.4			—
Net periodic pension cost	$	2.8		$	2.5		$	5.0		$	4.9

(1) In the second quarter of 2004, $0.4 million was recognized for employee benefits associated with the restructuring charges recorded during the quarter.

	Three months ended						Six months ended
	June 30,						June 30,
International Plans	2004			2003			2004			2003
Service cost	$	0.2		$	0.1		$	0.3		$	0.3
Interest cost		0.7			0.7			1.5			1.4
Expected return on plan assets		(0.6	)		(0.6	)		(1.3	)		(1.2	)
Amortization of unrecognized items and other		0.1			0.1			0.3			0.2
Net periodic pension cost	$	0.4		$	0.3		$	0.8		$	0.7

8. COMPREHENSIVE INCOME

Accumulated other comprehensive (loss) income represents certain items which, according to the respective accounting rules, are required to be recorded directly to equity accounts and consists of the following:

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				Cash Flow
				Hedging and
				Adjustments			Minimum			Accumulated
	Cumulative			for			Pension			Other
	Translation			Available-for-Sale			Liability			Comprehensive
(In millions)	Adjustment			Securities			Adjustment			(Loss) Income
Balance, December 31, 2003	$	(76.6	)	$	(5.4	)	$	(15.6	)	$	(97.6	)
First quarter 2004 change		—			1.4			—			1.4
Balance, March 31, 2004		(76.6	)		(4.0	)		(15.6	)		(96.2	)
Second quarter 2004 change		(2.7	)		1.7			—			(1.0	)
Balance, June 30, 2004	$	(79.3	)	$	(2.3	)	$	(15.6	)	$	(97.2	)

Comprehensive income for the three and six months ended June 30, 2004 and 2003 consists of the following:

	Three months ended					Six months ended
	June 30,					June 30,
(In millions)	2004			2003		2004			2003
Net income	$	6.8		$	19.4	$	28.2		$	40.9
Changes in cumulative translation adjustments		(2.7	)		3.2		(2.7	)		6.0
Cash flow hedging and adjustments for available-for-sale securities, net		1.7			0.2		3.1			(0.6	)
Comprehensive income	$	5.8		$	22.8	$	28.6		$	46.3

9. BUSINESS SEGMENT INFORMATION

The Company’s current businesses are organized, managed and internally reported as segments differentiated primarily by their products and services and the markets and customers they serve. These segments, whose results are shown below, are Data Storage and Information Management, providing removable data storage media and services for use in the mobile and desktop, network and enterprise data center markets, and Specialty Papers, providing carbonless paper for use in the creation of multi-part business forms.

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Business			Data				Corporate,
Segment			Storage and				Other and
Information	Second		Information		Speciality		Unallocated			Total
(In millions)	Quarter		Management		Papers		(1)			Company
Net revenues		2004	$	272.3	$	11.8	$	—		$	284.1
		2003		254.7		13.3		—			268.0
Operating		2004	$	11.7	$	1.4	$	(2.8	)	$	10.3
income (loss)		2003		25.5		2.1		(0.8	)		26.8

Business			Data				Corporate,
Segment	Six		Storage and				Other and
Information	Months		Information		Speciality		Unallocated			Total
(In millions)	to Date		Management		Papers		(1)			Company
Net revenues		2004	$	598.6	$	24.8	$	—		$	623.4
		2003		514.7		26.6		—			541.3
Operating		2004	$	43.5	$	3.1	$	(2.8	)	$	43.8
income (loss)		2003		56.9		4.0		(1.3	)		59.6

(1) The operating loss for the three and six month periods ended June 30, 2004 includes a restructuring charge of $3.1 million.

Intersegment revenues are not material. The proportion of total assets by segment has not changed materially from December 31, 2003.

10. DERIVATIVES AND HEDGING ACTIVITIES

The Company maintains a foreign currency exposure management policy that allows for the use of derivative instruments, principally foreign currency forward and option contracts, to manage risks associated with exchange rate volatility. Generally, these contracts are entered into to fix the U.S. dollar amount of the eventual cash flows resulting from such transactions. The Company does not hold or issue derivative financial instruments for speculative or trading purposes and is not a party to leveraged derivatives.

The Company is exposed to credit loss in the event of nonperformance by counter-parties in foreign currency forward and option contracts, but does not anticipate nonperformance by any of these counter-parties. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting major international banks and financial institutions as counter-parties.

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Cash Flow Hedges- The Company attempts to mitigate a portion of the risk that forecasted cash flows associated with operating income denominated in foreign currencies may be adversely affected by changes in foreign currency exchange rates through a combination of foreign currency option and forward contracts. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge items. This process includes linking all derivatives to forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be highly effective as a hedge, the Company discontinues hedge accounting prospectively, with future gains and losses recognized in current period operations. As of June 30, 2004, cash flow hedges ranged in duration from one to six months and had a total notional amount of $66.9 million. Hedge costs, representing the premiums paid on expired options net of hedge gains and losses, of $1.4 and $0.4 million were reclassified into operations during the quarters ended June 30, 2004 and 2003, respectively. The amount of net deferred losses on foreign currency cash flow hedges included in other comprehensive (loss) income in shareholders’ equity as of June 30, 2004 was $3.2 million, pre-tax, which depending on market factors is expected to reverse or be reclassified into operations in 2004 or 2005.

Other Hedges- The Company enters into foreign currency forward contracts, generally with durations of less than two months, to manage foreign currency exposure of its monetary assets and liabilities denominated in foreign currencies. The Company records the estimated fair value of these forwards within other current assets or other current liabilities in the Condensed Consolidated Balance Sheets, and changes in their fair value are immediately recognized in earnings. As of June 30, 2004, the Company had a notional amount of forward contracts of $53.7 million to hedge the Company’s recorded balance sheet exposures.

Fair Value Disclosure- As of June 30, 2004, the fair value of the Company’s foreign currency forward and option contracts outstanding was negative $1.8 million. The estimated fair market values were determined using available market information or other appropriate valuation methodologies.

11. AGREEMENT WITH EMTEC MAGNETICS GMBH

The Company entered into an agreement on June 30, 2003 to purchase certain assets and intellectual property relating to the removable data storage tape media operations from EMTEC Magnetics GmbH, a German-based manufacturing subsidiary of EMTEC International Holding GmbH. This agreement required the Company to escrow approximately $15 million in the third quarter of 2003 with final payment pending the satisfaction of certain terms of the agreement. In April 2004, the transaction was closed and as of June 30, 2004 all amounts have been released from escrow and all payments have been made. The total purchase price was cash of $16.7 million, of which $9.6 million was allocated to goodwill, $6.0 million to intangible assets and $1.1 million to fixed assets. The intangible assets are being amortized over a weighted-average life of five years.

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12. DISCONTINUED OPERATIONS

In the second quarter of 2004, the Company recorded expenses of $0.5 million (net of a tax benefit of $0.3 million), related to the litigation costs associated with discontinued operations. Such expenses recorded in the first quarter of 2004 were $0.3 million (net of a tax benefit of $0.2 million). In the second quarter of 2003, the Company recoded a net gain of $0.5 million (net of a tax expense of $0.3 million), resulting from a favorable outcome of the dispute with Eastman Kodak Company (Kodak) related to the 1998 sale of the Medical Imaging Systems business, partially offset by expenses related to the litigation costs associated with discontinued operations. The litigation costs associated with discontinued operations related to the Company’s defense of its ongoing legal dispute with Jazz Photo Corp. See Part II. Item 1, Legal Proceedings in this Form 10-Q for additional details.

13. REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, has performed a review of the unaudited interim consolidated financial statements included herein and their report thereon accompanies this filing. This report is not a “report” within the meaning of Sections 7 and 11 of the 1933 Act and the independent accountants liability under Section 11 does not extend to it.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the accompanying condensed consolidated balance sheet of Imation Corp. and its subsidiaries as of June 30, 2004, and the related consolidated statements of operations for each of the three-month and six-month periods ended June 30, 2004 and 2003 and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2004 and 2003. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

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

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2003, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and of cash flows for the year then ended (not presented herein), and in our report dated January 27, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/    PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP

Minneapolis, Minnesota
July 21, 2004

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

General Overview

Imation is a global technology development, manufacturing and distribution company that derives revenue and profits primarily from the sale of removable data storage media products to both consumers and businesses. These products range from floppy diskettes, recordable CDs and DVDs, and tape cartridges used in small and medium businesses to high capacity tape cartridges used in large automated tape silos in a data center environment. These products are sold in over 100 countries outside the U.S., and approximately 58 percent of the Company’s revenues for the first six months of 2004 came from outside the U.S. The Company also has a specialty papers business, representing approximately four percent of revenues for the three and six month periods ended June 30, 2004, which manufactures and distributes carbonless paper for use in the creation of multi-part business forms.

The core data storage market presents attractive growth opportunities as well as challenges. The market is highly competitive, characterized by continuing changes in technology, pricing pressure on media products, diverse distribution channels, and a large variety of formats for both tape and optical products. During the second quarter of 2004, price competition for recordable optical products was unusually strong. This resulted from increased supply as significant additional manufacturing capacity in Asia came on line, coupled with softer than expected demand for the Company’s products principally in the U.S.

The Company delivers a broad portfolio of products across diverse distribution channels and geographies. Success in this market is dependent on being early to market with new formats, having efficient sourcing, manufacturing and supply chain operations, maintaining competitive total delivered cost, working closely with leading OEM’s (Original Equipment Manufacturers) to develop enhancements to existing and new formats, carrying a broad assortment of products across multiple competing tape drive platforms, and having a broad geographic and market coverage across a variety of distribution channels. As a result, the Company’s business is a combination of a manufacturer and a brand distributor.

While the overall removable data storage media industry is a growth industry, the highest revenue growth opportunities over the next three to five years lie outside the Company’s historical core magnetic tape and diskette media businesses. These higher growth markets include newer tape formats in semi-proprietary or open system environments, recordable optical discs, which currently are more consumer oriented products, and removable flash memory. These higher revenue growth opportunities provide revenue streams that are, as a rule, at lower gross profit margins than the Company’s historical gross margins on the core magnetic media business.

The Company’s strategy has been to position itself to profitably take advantage of these growth opportunities by establishing strategic sourcing, brand distribution and licensing arrangements which require relatively low capital investments and by implementing a relatively flat and efficient operating structure, which can support higher revenue without the need to add substantial infrastructure or overhead costs, thus delivering increased gross margin dollars and operating profit growth on increased revenues. For example, while the Company has intellectual property, patents and know-how in optical media, it sources these products from third party manufacturers.

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The growth opportunities in the removable data storage media market are also generally higher in emerging markets such as Asia and Latin America than in more established markets in the U.S. and Western Europe. As a result, as the Company pursues growth opportunities in emerging markets, revenues are expected over time to increasingly be derived from sales outside the U.S.

Results of Operations

Comparison of Three Months Ended June 30, 2004 and 2003

Net revenues of $284.1 million increased 6.0 percent from last year’s second quarter revenues of $268.0 million, driven by revenue growth in the Company’s Data Storage and Information Management segment (DS&IM). For the quarter, U.S. revenues totaled $119.6 million, or 42 percent of worldwide revenues, compared with $125.7 million, or 47 percent, from a year ago. Non-U.S. revenues totaled $164.5 million, or 58 percent of worldwide revenues, compared with $142.3 million, or 53 percent, from a year ago. The relative shift in revenues from the U.S. to international was driven by revenue growth in Asia and Latin America as well as the launch in 2003 of Global Data Media (GDM), the Company’s joint venture with Moser Baer India. Both optical and tape products contributed to the Company’s growth during the quarter. Favorable currency rates also benefited international revenues, as discussed under “Impact of Changes in Foreign Currency Rates” below.

DS&IM second quarter revenues increased $17.6 million, or 6.9 percent, to $272.3 million from $254.7 million a year ago. DS&IM accounted for approximately 96 percent of the Company’s revenues during the quarter. The revenue increase in the second quarter 2004 was driven by volume increases of approximately 18 percent and the effect of a positive currency exchange rate translation of approximately two percent. The volume and currency translation benefits were partially offset by price declines of approximately 13 percent. The price decline was higher than recent quarters as price competition for recordable optical products was unusually strong during the second quarter of 2004. This resulted from increased supply as significant additional manufacturing capacity in Asia came on line coupled with softer than expected demand. As discussed under “Impact of Changes in Foreign Currency Rates” below, pricing changes can be impacted by changes in foreign currency exchange rates. Optical media products accounted for approximately one-third and tape products accounted for approximately two-thirds of total DS&IM revenues during the second quarter of 2004.

Specialty Papers had a slight revenue decline, with $11.8 million in second quarter 2004 as compared with $13.3 million in second quarter 2003. The decrease was driven by declines in Imation branded xerographic and offset paper sales, partially offset by a sales increase associated with the introduction of digital carbonless paper.

Gross profit in second quarter 2004 was $70.2 million or 24.7 percent of revenues, compared to $81.5 million, or 30.4 percent of revenues in the second quarter of 2003. The decrease was due principally to $9 million of inventory related charges associated with optical media. The inventory related charges were driven by competitive market pricing which caused inventory valuation write-downs of $6 million and price protection payments of $3 million to be made in order to retain and expand certain retail business. The inventory write-down was recorded in cost of goods sold and the price protection payment was recorded as a reduction of revenues. The remaining decline in gross profit percentage was due primarily to product mix driven by growth in optical products which generally carry lower gross profits as a percentage of sales as compared to magnetic tape products.

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Selling, general and administrative (SG&A) expenses in second quarter of 2004 were $42.2 million, or 14.9 percent of revenues, compared to $42.2 million, or 15.7 percent of revenues, in the second quarter of 2003. The quarter over quarter 0.8 percentage point decrease in SG&A as a percent of revenues was primarily the result of the revenue growth initiatives within DS&IM which increased revenues without a corresponding increase in the level of SG&A expenses. This is in line with the Company’s strategy, as discussed in “General Overview” above.

Research and development costs were $14.6 million, or 5.1 percent of revenues in the second quarter of 2004, as compared to $12.5 million, or 4.7 percent of revenues in the second quarter of 2003. The increased spending in dollar terms was related to investments in new storage platforms.

During the second quarter of 2004, the Company recorded restructuring charges of $3.1 million for employee reductions. The charges related to a plan to close the Company’s production facility in Tucson, Arizona and international administrative and sales employee reductions. The restructuring will impact approximately 280 positions. It is anticipated that the Tucson facility will be closed by December 31, 2005. Production from this facility will be shifted to other facilities as the shutdown occurs. The restructuring charge consists of estimated severance payments and related benefits. In addition to these costs, the Company will also be incurring costs related to the Tucson facility closing such as scale-up costs at other facilities, equipment moves and relocation. These costs will be generally expensed as incurred, and are expected to total approximately $6 million, of which approximately $1.3 million are expected to be incurred in the last half of 2004. These actions are expected to result in ongoing earnings and cash flow benefits commencing in 2006. During the transition period, through the end of 2005, the benefits will be largely offset by the implementation costs.

Based on the above factors, operating income in the second quarter of 2004 was $10.3 million, or 3.6 percent of revenues, compared with operating income of $26.8 million, or 10.0 percent of revenues, for the same period last year.

The tax rate for the second quarter of 2004 was approximately 27 percent compared to 32 percent for the same period last year and 33 percent for the year ended December 31, 2003. The decrease in the current year rate was due to lower pre-tax income and one time tax benefits associated with the better than expected results related to the taxation of certain foreign income on the U.S. Federal tax return. The Company would see a lower tax rate in 2004 if certain tax benefits are realized, but is unable to project with certainty those tax benefits at this time.

Income from continuing operations in the second quarter of 2004 was $7.3 million, or $0.21 per basic share and $0.20 per diluted share, compared with income from continuing operations of $18.9 million, or $0.54 per basic share and $0.52 per diluted share, in the second quarter of 2003.

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Net income in the second quarter of 2004 was $6.8 million, or $0.20 per basic share and $0.19 per diluted share, compared with net income of $19.4 million, or $0.55 per basic share and $0.53 per diluted share, in the second quarter of 2003. Net income in the second quarter of 2004 included a loss of $0.5 million, net of taxes, related to the litigation costs associated with discontinued operations. Net income in the second quarter of 2003 included a net gain of $0.5 million, net of taxes, resulting from a favorable outcome of the dispute with Kodak related to the 1998 sale of the Medical Imaging Systems business partially offset by expenses related to the litigation costs associated with discontinued operations.

Comparison of Six Months Ended June 30, 2004 and 2003

On a year to date basis, net revenues of $623.4 million increased 15.2 percent from last year’s revenues of $541.3 million, driven by revenue growth in DS&IM. For the year to date period, U.S. revenues totaled $260.7 million, or 42 percent of worldwide revenues, compared with $252.5 million, or 47 percent, from a year ago. Non-U.S. revenues totaled $362.7 million, or 58 percent of worldwide revenues, compared with $288.8 million, or 53 percent, from a year ago. The relative shift in revenues from the U.S. to international was driven by strong growth in Asia and Latin America as well as the launch in 2003 of GDM, the Company’s joint venture with Moser Baer India. Both optical and tape products contributed to the Company’s growth during the period. Favorable currency rates also benefited international revenues, as discussed under “Impact of Changes in Foreign Currency Rates” below.

DS&IM revenues for the first six months of 2004 increased $83.9 million, or 16.3 percent, to $598.6 million from $514.7 million a year ago. DS&IM accounted for approximately 96 percent of the Company’s revenues during the period. The revenue increase during the period was driven by volume increases of approximately 24 percent and the effect of a positive currency exchange rate translation of approximately three percent. The volume and currency translation benefits were partially offset by price declines of approximately 11 percent. The price decline was higher than recent periods as price competition for recordable optical products was unusually strong during the second quarter of 2004. This resulted from increased supply as significant additional manufacturing capacity in Asia came on line, coupled with softer than expected demand. As discussed under “Impact of Changes in Foreign Currency Rates” below, pricing changes can be impacted by changes in foreign currency exchange rates. Optical media products accounted for approximately one-third and tape products accounted for approximately two-thirds of total DS&IM revenues during the first six months of 2004.

Specialty Papers revenues for the first six months of 2004 were $24.8 as compared to $26.6 million a year ago. The decrease was driven by declines in Imation branded xerographic and offset paper sales, partially offset by a sales increase associated with the introduction of digital carbonless paper.

Gross profit was $163.7 million, or 26.3 percent of revenues, for the first six months of 2004 compared with $168.6 million, or 31.1 percent of revenues, a year ago. The decrease was driven by $9 million of inventory related charges associated with optical media discussed above. The remaining decline in gross profit percentage was due primarily to product mix driven by growth in optical products which generally carry lower gross profits as a percentage of sales as compared to magnetic tape products.

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SG&A expenses for the first six months of 2004 were $87.0 million, or 14.0 percent of revenues, compared to $83.6 million, or 15.4 percent of revenues, for the same period a year ago. The period over period 1.4 percentage point decrease in SG&A as a percent of revenues was primarily the result of the revenue growth initiatives within DS&IM which increased revenues without a corresponding increase in the level of SG&A expenses. This is in line with the Company’s strategy, as discussed in “General Overview” above.

Research and development costs for the first six months of 2004 were $29.8 million, or 4.8 percent of revenues, as compared to $25.4 million, or 4.7 percent of revenues, for the same period a year ago. The increased spending in dollar terms was related to investments in new storage platforms.

Restructuring charges of $3.1 million, as described above, were recorded in the first six months of 2004.

Based on the above factors, operating income for the first six months of 2004 was $43.8 million, or 7.0 percent of revenues, as compared to $59.6 million, or 11.0 percent of revenues, for the same period last year.

The tax rate for the first six months of 2004 was approximately 33 percent compared to 34 percent for the same period last year and 33 percent for the year ended December 31, 2003. The Company would see a lower tax rate in 2004 if certain tax benefits are realized, but is unable to project with certainty those tax benefits at this time.

Income from continuing operations for the first six months of 2004 was $29.0 million, or $0.82 per basic share and $0.80 per diluted share, compared with income from continuing operations of $40.4 million, or $1.14 per basic share and $1.11 per diluted share for the first six months of 2003.

Net income in the first half of 2004 was $28.2 million or $0.80 per basic share and $0.78 per diluted share compared with net income of $40.9 million or $1.15 per basic share and $1.12 per diluted share for the first six months of 2003. Net income for the first six months of 2004 included a loss of $0.8 million, net of taxes, related to the litigation costs associated with discontinued operations. Net income for the first six months of 2003 included a net gain of $0.5 million, net of taxes, resulting from a favorable outcome of the dispute with Kodak related to the 1998 sale of the Medical Imaging Systems business, partially offset by expense related to the litigation costs associated with discontinued operations.

Impact of Changes in Foreign Currency Rates

The Company has a market presence in more than 100 countries and sells products on a local currency basis through a variety of distribution channels. While the Company sources some finished goods, primarily optical products, from outside the U.S., the majority of the Company’s revenues are from products produced in its own manufacturing facilities, all of which are located in the U.S. Comparisons of revenues and income from outside the U.S. are subject to fluctuations due to the impact of translating results at differing exchange rates in different periods.

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Changes in foreign currency exchange rates in the first six months of 2004 positively impacted worldwide revenues by approximately three percent due to favorable translation. The impact on profits is more difficult to determine due to the influence of other factors that we believe are also impacted by currency rate changes, including the translation impact on local offsetting expenses and pricing declines that over time work to offset translation benefits. For example, the Company has generally experienced increased price erosion internationally as the dollar weakened. In addition, the weak dollar negatively impacts some regional business activity. The Company’s objective is to hedge a portion of the Euro operating income exposure through the purchase of a combination of currency forwards and options, which protects a portion of operating income against downside risk but enables the Company to capture upside benefits from favorable translation (see “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this Form 10-Q).

Financial Position

As of June 30, 2004, the Company’s cash and equivalents balance was $392.0 million, a decrease of $19.4 million from $411.4 million as of December 31, 2003. This decrease relates primarily to the net purchases of investments of $20.1 million during the first six months of 2004. These investments, which total $33.0 million as of June 30, 2004 related to investment grade interest bearing securities with original maturities greater than one year and are classified as other current assets or other assets depending on the time remaining to maturity.

Accounts receivable days sales outstanding was 47 days as of June 30, 2004, up one day from December 31, 2003. Days sales outstanding is calculated using the count-back method, which calculates the number of days of most recent revenues that are reflected in the net accounts receivable. The increase was driven by international accounts receivable partially offset by an improvement in U.S. accounts receivable. The accounts receivable balance was $163.2 million as of June 30, 2004 and $196.8 million as of December 31, 2003. Days of inventory supply was 80 days as of June 30, 2004 compared to 71 days as of December 31, 2003. 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. The increase in days of inventory supply was primarily related to tape products to support the increased service and sales levels of the Company as we implemented planned manufacturing transitions as well as increases in optical inventories. These increases were partially offset by the inventory valuation write-downs of $6 million discussed previously. This resulted in an increase in the inventory balance of $33.3 million to $192.7 million as of June 30, 2004 from $159.4 million as of December 31, 2003.

The decrease of $26.0 million in other current assets from December 31, 2003 was driven by the closing of the EMTEC transaction and the release of funds from escrow to pay for the acquisition (see Note 11 to the Consolidated Financial Statements) which generated a similar increase in other assets. The decline in other current assets was also the result of $4.4 million received from the collection of a receivable related to the settlement reached in January 2004 for outstanding transition services payments for the color proofing and color software business sold in 2001.

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The increase of $18.7 million in other assets from December 31, 2003 was primarily caused by the closing of the EMTEC transaction and the purchase of cash investments as described above, partially offset by a reduction of deferred tax assets of $7.0 million.

The decrease in accounts payable of $30.8 million from December 31, 2003 was driven by several factors, including reduced inventory purchases toward the end of the six months ended June 30, 2004 and payments during the first quarter of 2004 for capital expenditures of $5 million reported as accounts payable as of December 31, 2003.

The decrease in other current liabilities of $20.4 million from December 31, 2003 was driven by a reduction of income taxes payable of $12.8 million due to higher income tax payments and a reduction of pre-tax income in the second quarter of 2004, as well as a reduction in the rebate accrual of $4.4 million which reflects the seasonal nature of payments made for the Company’s rebate programs.

Liquidity and Capital Resources

Cash provided by operating activities was $30.1 million in the first six months of 2004. The major driver was net income as adjusted for non-cash items of $60.8 million, offset by working capital usages of $34.4 million. Net income as adjusted for significant non-cash items includes net income of $28.2 million, adjusted for depreciation and amortization of $25.2 million, deferred income taxes of $4.3 million and the restructuring charge of $3.1 million. The working capital usages in 2004 were caused by several factors including a $35.1 million increase in inventory and a $25.1 million decrease in accounts payable. The working capital usage was partially offset by a reduction in accounts receivable of $31.4 million.

For the first six months of 2003, cash provided by operating activities was $42.1 million. The major driver was net income as adjusted for non-cash items of $71.3 million, offset by working capital usages of $29.7 million. Net income as adjusted for significant non-cash items includes net income of $40.9 million, adjusted for depreciation and amortization of $18.8 million and deferred income taxes of $11.6 million. The working capital usages in 2003 were primarily for payments for broad-based employee incentive compensation plans related to full year 2002 performance of $13.5 million, the Company’s settlement with Kodak resulting in a net $9.0 million usage of working capital as well as payments related to restructuring programs of $3.4 million.

Cash used by investing activities was $41.2 million in the first six months of 2004 and $35.0 million in the first six months of 2003. Investing activities primarily relate to capital spending for both periods and for net purchases of investments of $20.1 million in the first six months of 2004. These investments related to investment grade interest bearing securities with maturities greater than one year and are classified as other current assets or other assets, depending on the time remaining to maturity.

Cash used in financing activities was $7.5 million in the first six months of 2004 and $4.3 million in the first six months of 2003. Cash usages in 2004 were driven by share repurchases of $14.0 million and dividend payments of $6.4 million, offset partially by cash inflows of $12.9 million related to the exercise of stock options. Cash usages for the same period in 2003 were driven by share repurchases of $4.9 million and dividend payments of $2.8 million, offset by cash inflows of $4.9 million related to the exercise of stock options.

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As of June 30, 2004, the Company does not have any debt. In December 2003, the Company entered into a new Credit Agreement with a group of banks that expires December 16, 2006. The Credit Agreement provides for revolving credit, including letters of credit, with borrowing availability of $100 million. The Credit Agreement provides for, at the option of the Company, borrowings at either a floating interest rate based on a defined prime rate or a fixed rate related to the Eurodollar rate, plus a margin based on the Company’s consolidated leverage ratio. The margins over a defined prime rate and Eurodollar rate range from zero to 0.4 percent and 1.1 to 1.6 percent, respectively. Letter of credit fees are equal to the Eurodollar margins. A facility fee ranging from 0.2 to 0.4 percent per annum and a utilization fee ranging from zero to 0.25 percent per annum, both based on the Company’s consolidated leverage ratio, are payable on the total credit line. In conjunction with the Credit Agreement, the Company has pledged 65 percent of the stock of certain of the Company’s foreign subsidiaries. Covenants include maintenance of a minimum consolidated tangible net worth, a required EBITDA, and a maximum leverage ratio. The Company does not expect these covenants to restrict materially its ability to borrow funds in the future. No borrowings were outstanding under the Credit Agreement as of June 30, 2004 and the Company was in compliance with all covenants under the Credit Agreement.

In addition, certain international subsidiaries have arranged borrowings locally outside of the Credit Agreement discussed above. As of June 30, 2004, there were no borrowings outstanding under such arrangements.

In 1997, the Company’s Board of Directors authorized the repurchase of up to 6 million shares of the Company’s common stock and in 1999 increased that authorization up to a total of 10 million shares available for repurchase as of that date. The Company repurchased 375,000 shares during the first six months of 2004. As of June 30, 2004, the Company had repurchased 8.2 million shares under this authorization and held, in total, 7.2 million shares of treasury stock acquired at an average price of $22.28 per share. On August 4, 2004, the Company’s Board of Directors increased the authorization for repurchase of common stock, expanding the outstanding share authorization of 1.8 million shares as of June 30, 2004, to a total of six million shares.

The Company paid a cash dividend of $0.08 per share, or $2.8 million, during the first quarter of 2004 and paid a cash dividend of $0.10 per share, or $3.6 million, during the second quarter of 2004. On August 4, 2004, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.10 per share, payable September 30, 2004, to shareholders of record at the close of business on September 15, 2004. Any future dividends are at the discretion of and subject to the approval of Imation’s Board of Directors.

During the six months ended June 30, 2004, $7 million of contributions have been made to the Company’s pension plans. The Company presently anticipates contributing an additional $5 million to $10 million to fund its pension plans during the last six months of 2004.

The Company’s remaining liquidity needs for 2004 include: capital expenditures of $20 to $25 million; pension funding of approximately $5 million to $10 million; lease payments of approximately $5 million; and any amounts associated with dividend payments and the repurchase of common stock. The Company expects that cash and equivalents plus cash investments, together with cash flow from operations and availability of borrowings under its current and future sources of financing, will provide liquidity sufficient to meet these needs and operate the Company.

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Other than operating lease commitments, the Company is not using off-balance sheet arrangements, including special purpose entities. The Company does not have any contractual obligations or commercial commitments with terms greater than one year that would significantly impact its liquidity.

Contractual Obligations

A table of the Company’s contractual obligations was provided in Item 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. There were no significant changes to the Company’s contractual obligations during the first six months of 2004.

Critical Accounting Policies and Estimates

For further discussion, see the “Critical Accounting Policies and Estimates” section in Item 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. There were no significant changes to these accounting policies during the first six months of 2004.

Recent Board Actions

On August 4, 2004, the Company’s Board of Directors approved the following actions.

• Increased the authorization for repurchase of common stock, expanding the outstanding share authorization of 1.8 million shares as of June 30, 2004, to a total of six million shares.

• Appointed Paul Zeller, formerly the Company’s Vice President, Corporate Controller, to the position of Vice President, Chief Financial Officer.

• Declared a quarterly cash dividend of $0.10 per share, payable September 30, 2004, to shareholders of record at the close of business on September 15, 2004.

Forward-Looking Statements and Risk Factors

The following section contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the Company’s current outlook for fiscal year 2004, and are subject to the risks and uncertainties described below.

During the second quarter of 2004, the Company announced a restructuring program, with $3.1 million in charges in the quarter, as well as, lower than expected revenue and earnings for the quarter, including $9 million in inventory related charges associated with optical media. Aggressive industry pricing in optical media resulted in lower than expected results for the quarter. The Company’s magnetic tape media business met the Company’s expectations for the quarter. The Company’s outlook for the last half of 2004 is for solid data storage and information management segment operating income growth compared with the second half last year on modest second half revenue growth. The following summarizes the Company’s current outlook for fiscal year 2004.

• Total company revenue for the full year 2004 is targeted to grow approximately five to ten percent to $1.22 billion to $1.28 billion. Previously, the Company had targeted growth of 15 percent.

• Full year 2004 operating income is targeted to range between $95 million and $103 million, including $3.1 million in restructuring charges. Previously, the Company had targeted operating income to range between $123 million and $127 million.

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• The tax rate for the full year is currently targeted to be 33 percent. The Company would see a lower tax rate in 2004 if certain tax benefits are realized, but is unable to project with certainty those benefits at this time.

• Diluted earnings per share on continuing operations (including $3.1 million in restructuring charges) is projected to be in the range of $1.75 to $1.90 based on shares currently outstanding and a 33 percent tax rate.

• Capital spending is targeted to be approximately $40 to $45 million.

• Depreciation and amortization is targeted to be approximately $50 million.

Certain information contained in this report which does not relate to historical financial information, including the 2004 targeted projections, may be deemed to constitute forward-looking statements. The words or phrases “is targeting,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe” or similar expressions identify “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from historical results, and those presently anticipated or projected.

The Company wishes to caution investors not to place undue reliance on any such forward looking statements. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update such statement to reflect events or circumstances arising after such date. Among the factors that could cause the Company’s actual results in the future to differ materially from any opinion or statements expressed with respect to future periods are continuing uncertainty in global economic conditions that make it particularly difficult to predict product demand or the impact of changes in market conditions, the Company’s ability to meet its cost reduction and revenue growth targets, its ability to introduce new offerings in a timely manner either independently or in association with OEMs or other third parties, its ability to achieve the expected benefits in a timely manner from the Moser Baer relationships including the GDM joint venture, the competitive pricing environment, foreign currency fluctuations, the outcome of litigation, its ability to secure adequate supply of certain high demand products, the ready availability and price of energy, the market acceptance of newly introduced product and service offerings, the rate of decline for certain existing products, as well as various factors set forth under the caption “Risk Factors” in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, and in the Company’s other filings with the Securities and Exchange Commission.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Except for the paragraph noted below, there has been no material change since the Company’s Annual Report Form 10-K for the year ended December 31, 2003. For further information, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Also, see information on derivatives and hedging activities in Note 10 to the Consolidated Financial Statements of this Form 10-Q.

As of June 30, 2004, the Company had $120.6 million notional amount of foreign currency forward and option contracts of which $53.7 million hedged recorded balance sheet exposures. This compares to $182.6 million notional amount of foreign currency forward and option contracts as of December 31, 2003, of which $51.4 million hedged recorded balance sheet exposures. A hypothetical adverse change of 10 percent in quarter-end foreign currency exchange rates would reduce the fair value of foreign currency contracts outstanding as of June 30, 2004 by $11 million.

Item 4. Controls and Procedures

Based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2004, the end of the period covered by this report, the Chairman of the Board and Chief Executive Officer, Bruce A. Henderson, and the Vice President, Chief Financial Officer, Paul R. Zeller, have concluded that the disclosure controls and procedures were effective.

During the quarter ended June 30, 2004, there was no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Reference is made to Item 3 “Legal Proceedings” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and to Part II, Item 1 “Legal Proceedings” included in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.

The Company is the subject of various pending or threatened legal actions in the ordinary course of its business. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. Consequently, as of June 30, 2004, the Company is unable to ascertain the ultimate aggregate amount of any monetary liability or financial impact that may be incurred by the Company with respect to these matters. While these matters, certain of which are described below, could materially affect operating results when resolved in future periods, it is management’s opinion that after final disposition, any monetary liability to the Company beyond that provided in the Consolidated Balance Sheet as of June 30, 2004 would not be material to the Company’s financial position.

On May 10, 1999, Jazz Photo Corp. (Jazz Photo) served the Company and its affiliate, Imation S.p.A., with a civil complaint filed in New Jersey Superior Court. The complaint charges breach of contract, breach of warranty, fraud, and racketeering activity in connection with the Company’s sale of allegedly defective film to Jazz Photo by its Photo Color Systems business which was sold in 1999. In the complaint, Jazz Photo seeks unspecified compensatory damages, treble damages, punitive damages, and equitable relief for both initial purchases and subsequent additional purchases of film.

The Company is vigorously defending the action. In 2002, the parties continued to litigate the scope of document production and discovery, and depositions began in the third quarter of 2002. Depositions were taken in the fourth quarter of 2002 through the first quarter of 2004. Factual discovery is now complete.

On February 24, 2003, the Company was served with the reports of Jazz Photo’s testifying expert witnesses in the case (the Jazz Photo Reports). In the opinion of Jazz Photo’s experts as set forth in the Jazz Photo Reports, the alleged damages to Jazz Photo were caused by a combination of heat, moisture, and fumes from packaging materials supplied by Jazz Photo. The Jazz Photo Reports do not contain any opinions that the alleged damages to Jazz Photo were caused by any error by the Company in the manufacture of the film or by damage to the film during shipment to Jazz Photo. The primary opinion set forth in the Jazz Photo Reports is that the film was not fit for Jazz Photo’s particular use or purpose (use in reloaded single use cameras) because the film design made it more vulnerable to a combination of heat, moisture, and chemical fumes than other film products. The Jazz Photo Reports further conclude that the Company should have known that use in reloaded cameras would expose the film to the damaging combination of heat, moisture, and chemical fumes. The Company vigorously disputes this theory of liability and believes that it has meritorious defenses. The Jazz Photo Reports claim alleged out-of-pocket damages of approximately $13 million, lost profits through 2002 of approximately $41 million, and lost future profits of approximately $32 million. The Company vigorously disputes the amount of the out-of-pocket damages claim and vigorously disputes that Jazz Photo has suffered any lost profits as a result of any action by the Company. Any claim for treble damages by Jazz Photo would have to be based on a violation of the New Jersey Racketeer Influenced and Corrupt Organizations Act or the New Jersey Consumer Fraud Act. Even though Jazz Photo has asserted claims under these acts, the Jazz Photo Reports contain no allegation of damages related to additional purchases of film by Jazz Photo in 1999.

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On May 6, 2003, the Company served reports of testifying expert witnesses, who conclude that the Company’s film was appropriately designed and manufactured and was fit for use in single use cameras, including reloaded single use cameras. The Company’s experts agree that the damage to the film was caused by a combination of chemical fumes, excess moisture, and excess heat occurring after the film was delivered to Jazz Photo. They conclude that Jazz Photo was responsible for the damage because it failed to put in place a quality control system consistent with industry norms and failed to comply with manufacturer instructions and industry standards concerning protecting film from heat, humidity, and chemical fumes. Also on May 6, 2003, the Company served the report of a financial expert who concludes that the plaintiff’s financial analysis is fundamentally flawed. Both sides filed rebuttal expert reports and have taken expert depositions.

On May 20, 2003, Jazz Photo filed a Voluntary Petition for Relief under Chapter 11 of the United States Bankruptcy Code. The Jazz Photo litigation with the Company will proceed despite the bankruptcy. The largest bankruptcy creditor Jazz Photo listed was Fuji Photo Film Co., Ltd. (Fuji). Fuji obtained a judgment against Jazz Photo in the amount of approximately $30 million after a patent infringement trial in the United States District Court for the District of New Jersey. Mr. Benun, Jazz Photo’s principal shareholder, filed bankruptcy in July 2003. On April 6, 2004, an Administrative Law Judge issued an “Enforcement Initial Decision” recommending that the U.S. International Trade Commission rule that Jazz Photo has been continuing to infringe on Fuji’s patents and impose a $13 million civil penalty on Jazz Photo and Mr. Benun. That recommendation is still pending before the Commission.

On October 2, 2003, the Company filed a motion for summary judgment dismissal of the entire case against it. On the same date, Jazz Photo filed a motion for partial summary judgment in its favor on its New Jersey racketeering and consumer fraud claims. The final pre-trial conference was held on October 30, 2003. A settlement conference and hearing on the parties’ summary judgment motions took place on January 22, 2004. An unsuccessful mediation was held before retired Federal District Court Judge Nicholas Politan on April 1, 2004. Imation has requested that mediation efforts continue and that representatives of Jazz Photo’s creditors participate in mediation.

On May 20, 2004, the Federal District Judge in New Jersey issued his ruling on the summary judgment motions brought by the Company and Jazz Photo. The Judge denied Jazz Photo’s motion in its entirety. Regarding the Company’s motion, the Judge granted several parts and denied certain parts. The Judge granted the Company’s motion to dismiss Jazz Photo’s statute-based consumer fraud claims. He also granted the Company’s motion to dismiss the implied warranty claims and rejected Jazz Photo’s attempt to add a new state product liability claim. Finally, the Judge granted summary judgment to the Company on its claim against Jazz Photo for $1,134,000 due on film purchased in 1999. The Judge denied the Company’s motion to dismiss certain fraud and racketeering claims. The Judge granted the Company’s motion to dismiss Jazz Photo’s fraud and racketeering claims relating to film purchased in 1999, but he left those claims relating to film purchased in 1997 and 1998. As a result of the Judge’s ruling, Jazz Photo is left only with its pre-1999 fraud and racketeering claims. Jazz Photo can still seek all the damages under these fraud claims that it could have sought under the dismissed claims, including treble damages and punitive damages.

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The Company and Jazz Photo have each filed motions to reconsider portions of the summary judgment ruling. These motions are pending before the Judge. The Company and Jazz Photo have each filed numerous motions to limit evidence and claims, in part based on this ruling. The Company seeks by such motions to limit significantly Jazz Photo’s damages claims.

The Judge has set trial for September 20, 2004. Barring some change in Jazz Photo’s position caused by a change in its bankruptcy status, further dismissal of claims or limitation of damages or otherwise, or unless the case is disposed of by the ruling on reconsideration of summary judgment, the Company expects to try this case.

The St. Paul Fire and Marine Insurance Co. (St. Paul) insured the Company under a primary commercial general liability policy. St. Paul has, under a reservation of rights, reimbursed the Company for its defense costs in the Jazz Photo litigation up to the limit of $2 million under one insuring agreement of the policy issued by St. Paul. In 2003 and the first six months of 2004, the Company recorded $1.3 million and $0.8 million, respectively of after-tax expenses in discontinued operations, primarily related to incurred litigation costs associated with the Company’s defense of its ongoing legal dispute with Jazz Photo that have not been reimbursed. The Company has asserted that it is entitled to higher limits for defense and indemnity contained in other insuring agreements of the St. Paul policy. The Company also believes it has coverage for defense and/or indemnity under policies issued by another primary carrier (Cigna) and by its excess carrier (AIG). The disputes regarding coverage under both the primary and excess policies have been stayed pending resolution of the Jazz Photo litigation.

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Item 2. Changes in Securities and Use of Proceeds

(a) - (d)

Not applicable

(e) Registrant Purchases of Equity Securities

							(d)Maximum Number
					(c)Total Number of		(or Approximate
					Shares (or Units)		Dollar Value) of
	(a)Total				Purchased as Part		shares (or Units)
	Number of		(b)Average Price		of Publicly		that May Yet Be
	Shares (or Units)		Paid per Share		Announced Plans or		Purchased Under the
Period	Purchased		(or Unit)		Programs		Plans or Programs
April 1, 2004 - April 30, 2004		—		—		—		1,937,700
May 1, 2004 - May 31, 2004		60,000	$	40.63		60,000		1,877,700
June 1, 2004 - June 30, 2004		64,500	$	41.19		64,500		1,813,200
Total		124,500	$	40.92		124,500		1,813,200

In 1997, the Company’s Board of Directors authorized the repurchase of up to 6 million shares of the Company’s common stock and in 1999 increased the authorization up to a total of 10 million shares available for repurchase as of that date. This authorization has no expiration date. This program was announced on February 4, 1997 and the increased authorization was announced on January 26, 1999. On August 4, 2004, the Company’s Board of Directors increased the authorization for repurchase of common stock expanding the share authorization of 1,813,200 shares as of June 30, 2004 to a total of six million shares.

Item 3. Defaults Upon Senior Securities

Not Applicable

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Item 4. Submission of Matters to a Vote of Security Holders

At the Company’s 2004 Annual Meeting of Shareholders held on May 5, 2004, the shareholders approved the following:

     (a) A proposal to elect two Class II directors of the Company to serve for three-year terms ending in 2007, as follows:

Directors	Votes For		Votes Withheld
Glen A. Taylor		31,159,001		306,065
Daryl J. White		30,331,711		1,133,355

There were no broker non-votes. In addition, the terms of the following directors continued after the meeting: Class III director for a term ending in 2005- Linda W. Hart; and Class I directors for a term ending in 2006- Michael S. Fields, L. White Matthews, III and Ronald T. LeMay. Effective May 5, 2004, Marvin L. Mann retired from the Board of Directors and effective June 1, 2004, William T. Monahan resigned from the Board of Directors in connection with his retirement from the Company. Effective July 5, 2004, Charles Reich was elected to the Board as a Class III director.

      (b) A proposal to ratify the appointment of PricewaterhouseCoopers LLP to serve as independent accountants of the Company for the year ending December 31, 2004. The proposal received 30,921,330 votes for, and 500,932 against, ratification. There were 42,804 abstentions and no broker non-votes.

Item 5. Other Information

Not Applicable

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Item 6. Exhibits and Reports on Form 8-K

      (a) Exhibits

      The following documents are filed as exhibits to this Report.

3.1	Amended and Restated Bylaws of the Company
10.1	Employment Agreement dated May 13, 2004 between the Company and Bruce A. Henderson
10.2	Separation Agreement and General Release dated May 25, 2004 between the Company and William T. Monahan
15.1	Awareness Letter from the Company’s Independent Registered Public Accounting Firm regarding Unaudited Interim Financial Statements
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     (b) Reports on Form 8-K.

Form 8-K Current Reports dated April 14 and 21, 2004 were furnished relating to the Company’s first quarter 2004 earnings release.

Form 8-K Current Report dated Mary 13, 2004 was furnished relating to the naming of Bruce A. Henderson as Imation Chief Executive Officer.

Form 8-K Current Report dated June 1, 2004 was furnished relating to the appointment of Bruce A. Henderson as Imation Class III board member and Chairman of the Board.

Form 8-K Current Report dated July 7 was furnished relating to the election of Dr. Charles Reich to the Imation board of directors.

Form 8-K Current Reports dated July 14 and 21, 2004 were furnished relating to the Company’s second quarter 2004 earnings release.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	Imation Corp. (REGISTRANT)
Date: August 5, 2004	By:	/s/ Paul R. Zeller
		Paul R. Zeller
		Vice President, Chief Financial Officer

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EXHIBIT INDEX

Exhibit
Number	Description
3.1	Amended and Restated Bylaws of the Company
10.1	Employment Agreement dated May 13, 2004 between the Company and Bruce A. Henderson
10.2	Separation Agreement and General Release dated May 25, 2004 between the Company and William T. Monahan
15.1	Awareness Letter from the Company’s Independent Registered Public Accounting Firm regarding Unaudited Interim Financial Statements
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act 2002
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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EX-3.1

Exhibit 3.1

IMATION CORP.

BYLAWS

As Amended May 28, 2004

ARTICLE I
SEAL

     Section 1. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization, and shall be in such form as may be approved from time to time by the Board of Directors. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced.

ARTICLE II
MEETINGS OF STOCKHOLDERS

     Section 1. All meetings of the stockholders shall be held at such date, time, and place either within or without the State of Delaware as may be designated by the Board of Directors from time to time in the notice of the meeting. An annual meeting shall be held for the election of directors, and any other proper business may be transacted thereat.

     Section 2. The holders of a majority of each class of stock issued and outstanding, and entitled to vote thereat, present in person, or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by law, by the Restated Certificate of Incorporation, or by these Bylaws. For purposes of the foregoing, two or more classes or series of stock shall be considered a single class if the holders thereof are entitled to vote together as a single class at the meeting. In the absence of a quorum the stockholders so present may, by majority vote, adjourn the meeting from time to time in the manner provided by Section 3 of Article II of these Bylaws until a quorum shall attend.

     Section 3. Any meeting of stockholders, annual or special, may adjourn from time to time and reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

     Section 4. At any meeting of the stockholders every stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three (3) years prior to said meeting, unless said instrument provides for a longer period. Unless otherwise provided in the Restated Certificate of Incorporation or as otherwise determined by the Board of Directors pursuant to the powers conferred by the Restated Certificate of Incorporation, each stockholder shall have one vote for each share of stock having voting power registered in his or her name on the books of the Corporation.

     Section 5. Written notice of the annual meeting which shall state the place, date, and hour of the meeting shall be mailed to each stockholder entitled to vote thereat at such address as appears on the stock book of the Corporation, at least ten (10) days prior to the meeting and not more than sixty (60) days prior to the meeting.

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     Section 6. No business may be transacted at an annual meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section.

     In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation.

     To be timely, a stockholder’s notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within ten (10) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received before the later of the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or the day on which public disclosure of the date of the annual meeting was made, whichever first occurs and the close of business on the day which is sixty (60) days prior to the date of the annual meeting.

     To be in proper written form, a stockholder’s notice to the Secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting.

     No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with the procedures set forth in this Section, provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section shall be deemed to preclude discussion by any stockholder of any such business. If the Chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted.

     Section 7. A complete list of the stockholders entitled to vote at each meeting of stockholders, arranged in alphabetical order, with the record address of each, and the number of voting shares held by each, shall be prepared by the Secretary and made available for examination by any stockholder either (i) on a reasonably accessible electronic network, provided that information required to gain access is provided with the notice of the meeting or (ii) during ordinary business hours at the Corporation’s principal place of business, at least ten (10) days before every meeting, and shall at all times during said meeting continue to be open to the examination of any stockholder.

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     Section 8. Special meetings of the stockholders may be called for any purpose or purposes by the Chairman of the Board, and shall be called by the Secretary at the request in writing of the Chairman of the Board or of a majority of the Board of Directors. Business transacted at all special meetings shall be confined to the objects stated in the notice of the meeting.

     Section 9. Written notice of a special meeting of stockholders, stating the time and place and object thereof, shall be mailed postage prepaid, at least ten (10) days before such meeting, to each stockholder entitled to vote thereat at such address as appears on the books of the Corporation.

     Section 10. The Board of Directors shall appoint two persons as inspectors of election, to serve for one year or until their successors are chosen. The inspectors shall act at meetings of stockholders on elections of Directors and on all other matters voted upon by ballot.

     If at the time of any meeting inspectors have not been appointed or if none, or only one, of the inspectors is present and willing to act, the Chairman of the Board shall appoint the required number of inspectors so that two inspectors shall be present and acting.

ARTICLE III
DIRECTORS

     Section 1. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, except as may be otherwise provided by law or in the Restated Certificate of Incorporation.

     Section 2. Except as otherwise fixed by or pursuant to the provisions of Article FOURTH of the Restated Certificate of Incorporation (as it may be duly amended from time to time) relating to the rights of the holders of any class or series of stock having a preference over the common stock as to dividends or upon liquidation to elect, by separate class vote, additional directors, the number of directors of the Corporation shall be the number fixed from time to time by the affirmative vote of a majority of the total number of directors which the Corporation would have, prior to any increase or decrease, if there were no vacancies. The persons receiving the votes of a plurality in amount of holders of the shares of capital stock of the Corporation, considered as a single class, entitled to vote generally in the election of directors present at the meeting in person or by proxy shall be directors for the term prescribed by Article TENTH of the Restated Certificate of Incorporation or until their successors shall be elected and qualified.

     Section 3. Newly created directorships resulting from an increase in the number of directors of the Corporation and vacancies occurring in the Board of Directors resulting from death, resignation, retirement, removal, or any other reason shall be filled by the affirmative vote of a majority of the directors, although less than a quorum, then remaining in office and elected by the holders of the capital stock of the Corporation entitled to vote generally in the election of directors or, in the event that there is only one such director, by such sole remaining director. Any director elected in accordance with the preceding sentence shall hold office for the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director’s successor shall have been elected and qualified.

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     Section 4. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation, except as may be otherwise provided in the Restated Certificate of Incorporation of the Corporation with respect to the right of holders of preferred stock of the Corporation to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Section.

     In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation.

     To be timely, a stockholder’s notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within ten (10) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received before the later of the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or the day on which public disclosure of the date of the annual meeting was made, whichever first occurs and the close of business on the day which is sixty (60) days prior to the date of the annual meeting.

     To be in proper written form, a stockholder’s notice to the Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice (i) the name and record address of such stockholder, (ii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to nominate the persons named in its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected.

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     No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section. If the Chairman of the annual meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded.

     Section 5. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Restated Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders.

ARTICLE IV
COMMITTEES OF DIRECTORS

     Section 1. The Board of Directors may by resolution or resolutions passed by a majority of the whole Board, designate an Executive Committee and one or more committees, each committee to consist of one (1) or more Directors of the Corporation, which, to the extent provided in said resolution or resolutions or in these Bylaws, or unless otherwise prescribed by statute, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may have power to authorize the seal of the Corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be stated in these Bylaws or as may be determined from time to time by resolution adopted by the Board.

     Section 2. The committees of the Board of Directors shall keep regular minutes of their proceedings and report the same to the Board when required. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in place of any absent or disqualified member.

ARTICLE V
COMPENSATION OF DIRECTORS

     Section 1. The compensation of the Directors of the Corporation shall be fixed by resolution of the Board of Directors.

ARTICLE VI
MEETINGS OF THE BOARD

     Section 1. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board may from time to time determine, and if so determined notice thereof need not be given.

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     Section 2. Special meetings of the Board may be held at any time or place within or without the State of Delaware whenever called by the Chairman of the Board, if any, or by any two directors. Reasonable notice thereof shall be given by the persons or persons calling the meeting.

     Section 3. Unless otherwise restricted by the Restated Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board, may participate in a meeting of the Board or of such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting.

     Section 4. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, if any, or in the absence of the Chairman of the Board, by a chairman chosen at the meeting. The Secretary, or in the absence of the Secretary an Assistant Secretary, shall act as secretary of the meeting, but in the absence of the Secretary and any Assistant Secretary, the chairman of the meeting may appoint any person to act as secretary of the meeting.

     Section 5. Unless otherwise restricted by the Restated Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

     Section 6. At all meetings of the Board of Directors, a majority of the Directors shall constitute a quorum for the transaction of business, and the vote of a majority of the Directors present at any meeting at which there is a quorum, shall be the act of the Board, except as may be otherwise specifically provided by statute or by the Restated Certificate of Incorporation or by these Bylaws. In case at any meeting of the Board a quorum shall not be present, the members of the Board present may adjourn the meeting from time to time until a quorum shall attend.

ARTICLE VII
OFFICERS

     Section 1. The officers of the Corporation shall be elected by the Board of Directors at its annual meeting, or if the case requires, at any other regular or special meeting with such titles and duties as the Board shall deem desirable. The same person may hold any number of offices at the same time.

     Section 2. The Board of Directors may appoint such other officers and agents as it shall deem desirable with such further designations and titles as it considers desirable, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board.

     Section 3. The compensation of the officers of the Corporation shall be fixed by or under the direction of the Board of Directors.

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     Section 4. Except as otherwise provided in the resolution of the Board of Directors electing any officer, each officer shall hold office until the first meeting of the Board after the annual meeting of stockholders next succeeding his or her election, and until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any officer may resign at any time upon written notice to the Board or to the Chairman or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein, no acceptance of such resignation shall be necessary to make it effective. The Board may remove any officer with or without cause at any time. Any such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation, but the election of an officer shall not of itself create contractual rights. Any vacancy occurring in any office of the Corporation by death, resignation, removal, or otherwise may be filled for the unexpired portion of the term by the Board at any regular or special meeting.

     Section 5. The officers of the Corporation shall have such powers and duties in the management of the Corporation as shall be stated in these Bylaws or in a resolution of the Board of Directors which is not inconsistent with these Bylaws, and, to the extent so stated, as generally pertain to their respective offices, subject to the control of the Board. The Board may require any officer, agent, or employee to give security for the faithful performance of his or her duties.

ARTICLE VIII
CERTIFICATES OF STOCK

     Section 1. The certificates of stock of the Corporation shall be numbered and shall be entered in the books of the Corporation as they are issued. They shall exhibit the holder’s name and number of shares and shall be signed by the Chairman of the Board, or a vice president, and the Treasurer or an assistant treasurer, or the Secretary or an assistant secretary. The Board of Directors may adopt the facsimile signature of any such officer as his or her signature and give to such facsimile the same force and effect as though it were written on the certificates of stock by such officer, and upon appointment of a Transfer Agent and Registrar any certificate bearing such facsimile signature when certified and registered by such Transfer Agent and Registrar shall be deemed duly signed, and unless and until changed by the Board, certificates in the form so adopted may be issued and delivered whether the said officer so signing and to be taken as so signing the same continue to be such officers or whether because of death, resignation, or otherwise they, or either of them, cease to be such officers.

ARTICLE IX
LOST, STOLEN, OR DESTROYED STOCK CERTIFICATE

     Section 1. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen, or destroyed, and the Corporation may require the owner of the lost, stolen, or destroyed certificate, or such owner’s legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft, or destruction of any such certificate or the issuance of such new certificate.

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ARTICLE X
FISCAL YEAR

     Section 1. The fiscal year shall begin on the first day of January in each year.

ARTICLE XI
NOTICES

     Section 1. Whenever under the provisions of these Bylaws notice is required to be given to any Director, officer, or stockholder, it shall not be construed to mean personal notice, but such notice may be given by any means or instrumentality reasonably designed for such purpose and permitted by law.

     Section 2. Whenever notice is required to be given by law or under any provision of the Restated Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice unless so required by the Restated Certificate of Incorporation or these Bylaws.

ARTICLE XII
INDEMNIFICATION OF DIRECTORS AND OFFICERS

     Section 1. The Corporation shall indemnify, to the full extent authorized or permitted by law, any person made or threatened to be made a party, witness or participant in or to any action, suit, or proceeding, whether criminal, civil, administrative, or investigative, by reason of the fact that such person or such person’s testator or intestate is or was a Director, officer, or employee of the Corporation or serves or served at the request of the Corporation any other enterprise as a director, officer, or employee.

     Expenses incurred by any such person in defending any such action, suit, or proceeding or as a witness or participant shall be paid or reimbursed by the Corporation promptly upon receipt by it of an undertaking of such person to repay such expenses if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation. The rights provided to any person by this Section shall be enforceable against the Corporation by such person who shall be presumed to have relied upon it in serving or continuing to serve as a Director, officer, or employee. No amendment of this Section shall impair the rights of any person arising at any time with respect to events occurring prior to such amendment.

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     For purposes of this Section, the term “Corporation” shall include any predecessor of the Corporation and any constituent corporation (including any constituent of a constituent) absorbed by the Corporation in a consolidation or merger; the term “other enterprise” shall include any corporation, partnership, joint venture, trust, or employee benefit plan; service “at the request of the Corporation” shall include service as a Director, officer, or employee of the Corporation which imposes duties on, or involves services by, such Director, officer, or employee with respect to an employee benefit plan, its participant or beneficiaries; any excise taxes assessed on a person with respect to an employee benefit plan shall be deemed to be indemnifiable expenses; and action by a person with respect to an employee benefit plan which such person reasonably believes to be in the interest of the participants and beneficiaries of such plan shall be deemed to be action not opposed to the best interest of the Corporation.

     Section 2. The indemnification provided by these Bylaws shall not be deemed exclusive of any other rights to which those indemnified may be entitled by any Bylaw, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, officer, or employee and shall inure to the benefit of the heirs, executors, and administrators of such a person.

     Section 3. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of these Bylaws.

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ARTICLE XIII
INTERESTED DIRECTORS

     Section 1. No contract or transaction between the Corporation and one or more of its Directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its Directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the Director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or her or their votes are counted for such purpose, if: (i) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested Directors, even though the disinterested Directors be less than a quorum; or (ii) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved, or ratified by the Board, a committee thereof, or the stockholders. Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction.

ARTICLE XIV
FORM OF RECORDS

     Section 1. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs, or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same.

ARTICLE XV
AMENDMENTS

     Section 1. Subject to any limitations imposed by the Restated Certificate of Incorporation, the Board of Directors shall have power to adopt, amend, or repeal these Bylaws. Any Bylaws made by the directors under the powers conferred by the Restated Certificate of Incorporation may be amended or repealed by the directors or by the stockholders. Notwithstanding the foregoing and any other provisions of the Restated Certificate of Incorporation or these Bylaws (and notwithstanding that a lesser percentage may be specified by law), no provisions of these Bylaws shall be adopted, amended or repealed by the stockholders without an affirmative vote of the holders of not less than eighty percent (80%) of the voting power of all of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, considered for the purposes of this Section as a single class.

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EX-10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

     This Employment Agreement (this “Agreement”) is entered into as of this 13th day of May 2004, by and between Imation Corp., a Delaware corporation (the “Company”), and Bruce A. Henderson (the “Executive”).

RECITALS

     WHEREAS, the Company is engaged in the business of developing, manufacturing, sourcing and marketing removable data storage media for organizations and individuals that must store, retain and protect vital digital information (the “Business”);

     WHEREAS, the Company believes that it would benefit from the Executive’s skill, experience and background, and wishes to employ the Executive as its Chief Executive Officer; and

     WHEREAS, the parties desire by this Agreement to set forth the terms and conditions of the employment relationship between the Company and the Executive.

     NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein set forth, and for other good and valuable consideration, the Company and the Executive hereby agree as follows:

     1. Employment and Duties. The Company hereby employs the Executive as its Chief Executive Officer, and the Executive accepts such employment, on the terms and subject to the conditions provided in this Agreement. The Executive shall report to the Company’s Board of Directors (the “Board”) and shall devote substantially all of his professional time, efforts, attention, energy and skill to performing the duties of Chief Executive Officer of the Company. As part of these duties, the Executive may serve on the Board of Directors of subsidiaries of the Company as may be requested by the Company from time to time. Provided that such activities do not violate any term or condition of this Agreement, or materially interfere with the performance of his duties hereunder, nothing herein shall prohibit the Executive from (a) participating in other business activities approved in advance in writing by the Board in accordance with any terms and conditions of such approval, (b) engaging in charitable, civic, fraternal or trade group activities, (c) investing his personal assets in other entities or business ventures, subject to any policies of the Company applicable to all executive personnel of the Company, or (d) serving on the Board of Directors of another entity, provided such service is approved in advance in writing by the Board.

     2. Employment Term. Subject to the terms and conditions of this Agreement, the Executive’s term of employment under this Agreement (the “Employment Term”) shall commence on May 13, 2004 (the “Effective Date”) and shall continue in effect until the first anniversary of the Effective Date, and shall thereafter be automatically renewed on each annual anniversary of the Effective Date for successive one-year terms unless (a) not later than 120 days prior to any renewal for a successive one-year term, the Company delivers to the Executive, or the Executive delivers to the Company, written notice that the automatic extension provision of this Section 2 shall be inoperative (in which case this Agreement shall terminate on such anniversary of the Effective Date), (b) a notice of termination has been delivered and not withdrawn under Section 4 or (c) the Executive dies.

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     3. Compensation. As compensation for performing the services required by this Agreement, and during the term of this Agreement, the Executive shall be compensated as follows:

          (a) Base Compensation. The Company shall pay to the Executive as base compensation an annual salary (“Base Compensation”) of Six Hundred Fifty Thousand Dollars ($650,000). The Base Compensation shall be payable in accordance with the general policies and procedures for payment of salaries to senior executive personnel of the Company as implemented by the Board, in substantially equal installments, subject to withholding for applicable federal, state, local and foreign taxes. Increases in Base Compensation, if any, shall be determined by the Compensation Committee of the Board (the “Compensation Committee”) based on an annual review of the Executive’s performance to be conducted each year during the Employment Term. Upon the completion of each such review, but no later than May of the following year, the Company shall provide the Executive with a written notice (each, a “Base Compensation Notice”) that sets forth the amount of Base Compensation to be paid to the Executive during the twelve-month period that begins in May of such year (the “Next Compensation Period”); provided, however, that if no Base Compensation Notice is delivered in May of such year, then the Executive’s Base Compensation shall be deemed to remain at the then-existing level until a Base Compensation Notice is delivered.

          (b) Cash Incentive Compensation. The Executive shall be eligible to receive an annual cash bonus as incentive compensation in addition to his Base Compensation (“Cash Incentive Compensation”). Cash Incentive Compensation for each fiscal year will be payable in accordance with the general policies and procedures for payment of incentive compensation to senior executive personnel of the Company. Receipt of Cash Incentive Compensation will be conditioned on the attainment of certain quantitative objectives (the “Objectives”) established by the Compensation Committee in its sole and absolute discretion. The Compensation Committee also will determine from time to time a target amount for the Cash Incentive Compensation, which shall not be less than 80% of the Executive’s Base Compensation (the “Target Amount”). In no case shall the amount of the Executive’s Cash Incentive Compensation for any one year exceed 150% of the Target Amount.

          (c) Equity-Based Incentive Compensation. On the date hereof, the Executive is being granted options under the Company’s 2000 Stock Incentive Plan, as amended February 6, 2003, to purchase up to 175,000 shares of the Company’s common stock, par value $.01 per share (the “Common Stock”). The vesting provisions and other terms and conditions relating to such option grant are set forth in the stock option agreement attached hereto as Exhibit A. In addition, during 2004 and pursuant to the Company’s 2000 Stock Incentive Plan, the Company will grant to the Executive an option to purchase at least 40,000 shares of Common Stock, or such greater amount as the Compensation Committee shall determine in its sole discretion (the “2004 Option Grant”). The 2004 Option Grant will be made at the time the Company grants options for the 2004 fiscal year to other senior executives and at the exercise price applicable to such senior executives’ 2004 options; provided, however, that if such 2004 option grants to other senior executives are made as of a date prior to the Effective Date of this Agreement, then the Executive’s 2004 Options Grant will be made as of the Effective Date of this Agreement and the exercise price for the 2004 Option Grant will be end of day market price on such Effective Date. The 2004 Option Grant shall be evidenced by and subject to the vesting provisions and other terms and conditions of a stock option award agreement in form and substance approved by the Compensation Committee.

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          (d) Employee Benefits: Fringe Benefits. During the Employment Term, the Executive and his eligible dependents (where applicable) shall have the right to participate in each retirement, pension, insurance, health and other benefit plan or program that has been or is hereafter adopted by the Company (or in which the Company participates) according to the terms of such plan or program with all the benefits, rights and privileges as are generally enjoyed by senior executive personnel of the Company. The Executive also shall be entitled to all fringe benefits, if any, that generally are enjoyed by senior executive personnel of the Company.

           (e) Vacation; Sick Leave; Holidays; Leaves of Absence. The Executive shall be entitled to four weeks of paid vacation leave each year, to be utilized in accordance with the policies and procedures of the Company. The Executive also shall be entitled to the same paid holidays provided to the other employees of the Company. In addition, the Executive may be granted leaves of absence with or without pay for such valid and legitimate reasons as the Board in its sole and absolute discretion may determine.

           (f) Expenses. The Executive shall be entitled to receive reimbursement for all reasonable and necessary expenses incurred by him in connection with the performance of Business-related duties under this Agreement, subject to the Executive’s compliance with the Company’s policies for recording such expenses and for submitting them for reimbursement.

           (g) Relocation Expenses. The Company shall pay to the Executive $75,000 (the “Relocation Payment”) to cover expenses incurred by the Executive in connection with his relocation to Minnesota. In the event the Relocation Payment is deemed to increase the Executive’s taxable income, the Company will pay to the Executive an additional sum of money (the “Relocation Adjustment”). For purposes hereof, the Relocation Adjustment shall equal the difference between (i) the quotient of (A) the non-deductible portion of the Relocation Payment divided by (B) the excess of one (1), minus the Executive’s combined effective tax rate, and (ii) the Relocation Payment; provided, however, in no event shall the aggregate amounts paid to the Executive as a Relocation Payment and Relocation Adjustment exceed twice the amount of the Relocation Payment. The Executive shall use reasonable efforts to minimize the amount of any Relocation Adjustment and shall consult with the Company in determining whether any portion of the Relocation Payment is taxable to the Executive. If the Executive requests that the Company pay a Relocation Adjustment, then the Executive shall make available to the Company and its accountants documents (including without limitation, receipts and the Executive’s tax returns) reasonably requested by the Company to permit the Company to determine the proper amount of any Relocation Adjustment.

           (h) Taxes. Except as provided in Section 3(g) above, the Executive shall be responsible for payment of all Federal, state, and local income and employment taxes, any applicable excise taxes, and any other government assessments owing by the Executive for all benefits received pursuant to this Agreement. All payments required to be made by the Company hereunder and all other benefits provided to the Executive hereunder shall be subject to the withholding of such amounts relating to taxes and other government assessments as the Company may reasonably determine it should withhold pursuant to any applicable law, rule or regulation.

     4. Termination and Termination Benefits.

           (a) Termination by the Company.

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          (i) For Cause. The Company may terminate the Executive’s employment under this Agreement for Cause (defined below) by written notice to the Executive. The Executive’s employment hereunder shall terminate immediately upon his receipt of such notice unless the Company specifies a later effective date of termination therein. In the event of such a termination, the Executive shall be paid his Base Compensation earned but not paid to the Executive prior to the effective date of termination, and the Company shall have no further obligation or liability to the Executive under this Agreement (other than pursuant to Section 3(f) and then only up to the effective date of termination).

     For purposes of this Agreement, “Cause” means: (1) the Executive’s gross incompetence or substantial failure to perform his duties under this Agreement, (2) misconduct by the Executive that causes or is likely to cause harm to the Company or that causes or is likely to cause harm to the Company’s reputation, as determined by the Board in its sole and absolute discretion (such misconduct may include, without limitation, insobriety at the workplace during working hours or the use of illegal drugs), (3) failure to follow directions of the Board that are consistent with the Executive’s duties under this Agreement, (4) the Executive’s conviction of, or entry of a pleading of guilty or nolo contendere to, any crime involving moral turpitude, or the entry of an order duly issued by any federal or state regulatory agency having jurisdiction in the matter permanently prohibiting the Executive from participating in the conduct of the affairs of the Company or (5) any other breach of this Agreement by the Executive that is not remedied within 30 days after receipt of written notice from the Company specifying such breach in reasonable detail.

          (ii) Without Cause. The Company may terminate the Executive’s employment under this Agreement without Cause by written notice to the Executive. The Executive’s employment hereunder shall terminate immediately upon the receipt of such notice unless the Company specifies a later effective date of termination therein. If the Company terminates the Executive’s employment without Cause:

     (1) The Company shall pay the Executive the following amounts:

     (A) his Base Compensation earned but not paid to the Executive prior to the effective date of termination, plus

     (B) prorated Cash Incentive Compensation (if any) earned but not paid, which amount will be determined after the end of the fiscal year during which the Executive’s employment is terminated (such fiscal year, the “Termination Fiscal Year”), based on the Company’s actual performance during the Termination Fiscal Year as compared to the Objectives, prorated by multiplying the total Cash Incentive Compensation that would have been payable to the Executive for the full Termination Fiscal Year by a ratio of (x) the number of full months elapsed during the Termination Fiscal Year prior to the Executive’s date of termination, divided by (y) twelve, plus

     (C) a base severance equal to

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     (I) an amount equal to one year of the Executive’s total annual Base Compensation as in effect on the date of such termination, plus

     (II) an amount equal to the Executive’s Cash Incentive Compensation Target Amount for the Termination Fiscal Year.

     All such amounts shall be paid to the Executive periodically over the twelve-month period following the date of termination in accordance with the general policies and procedures of the Company, in substantially equal installments, subject to withholding for applicable federal, state, local and foreign taxes; provided, however, that the prorated Cash Incentive Payment described in Section 4(a)(ii)(1)(B) above shall be allocated in substantially equal amounts over the remaining portion of such twelve-month period after such amount is determined in the ordinary course of determining the amounts payable to other senior executives of the Company under the Company’s cash incentive programs.

     (2) The Company shall continue to provide for twelve (12) months, the same level of health insurance benefits for the Executive and the Executive’s eligible dependants in the same manner as the Company provided for them at the time of termination of the Executive’s employment.

     (3) Notwithstanding anything contained herein to the contrary, if the Executive violates the provisions of Sections 6 or 7 of this Agreement (the “Restrictive Covenants”) at any time while the Company is obligated to make severance payments or provide severance benefits under this Section 4(a)(ii), the Company may send the Executive written notice of such fact that specifies in reasonable detail the circumstances surrounding the violation. If the Executive does not cease the activities that are violating the Restrictive Covenants within five (5) days of the date of the Company’s written notice to the Executive, then, in addition to any and all other rights that the Company may have at law or in equity, the Company may permanently cancel and terminate such severance payments and benefits.

          (iii) Non-Renewal and Expiration of Contract. If the Company notifies the Executive that the Company elects to terminate the automatic annual renewal of the Agreement as described in Section 2 of this Agreement, then the Company and the Executive each shall use reasonable efforts to negotiate the terms of a new employment agreement as a replacement of this Agreement. If the Company and the Executive do not execute and deliver a new employment agreement on or before the next anniversary of the Effective Date after the Company’s delivery of a notice of non-renewal (or if the Company and the Executive agree to continue their negotiations for an additional period at the end of which they have not agreed to a new employment agreement), then on such anniversary of the Effective Date (or at the end of such additional period if there is not then a new employment agreement in place), the Executive’s employment shall be deemed to have been terminated without Cause and the Executive shall be entitled to the benefits described under Section 4(a)(ii) above. This Agreement shall continue in effect during the period beginning on the date on which the Company notifies the Executive that the Company elects to terminate the automatic annual renewal of this Agreement, through the date on which a new employment agreement is executed and delivered by the parties hereto or the date on which the Executive’s employment hereunder is terminated pursuant to the immediately-preceding sentence of this Section 4(a)(iii), as applicable.

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          (iv) Disability. If due to illness, physical or mental disability, or other incapacity which cannot be reasonably accommodated, the Executive shall fail, for a total of any six (6) months or more within any period of twelve (12) consecutive months, to perform the duties required by this Agreement, the Board may terminate the Executive’s employment under this Agreement upon thirty (30) days’ written notice to the Executive. In such event, the Executive shall be paid his Base Compensation up to the effective date of such termination. The Executive shall not be entitled to any other compensation or payments from the Company, other than (1) pursuant to Section 3(f), but only up to the effective date of such termination, and (2) to the extent permitted by the terms of the Company’s health insurance benefits and disability insurance benefits, the Company shall continue to provide for ninety (90) days, at the Company’s expense, the same level of health insurance benefits for the Executive and his eligible dependents in the same manner as the Company provided for them at the time of the Executive’s disability.

     (b) Termination by the Executive.

          (i) Resignation Without Company Breach. The Executive may voluntarily terminate his employment hereunder upon ninety (90) days’ prior written notice to the Company. Such a termination shall be effective ninety (90) days after the delivery of such written notice unless the Company agrees in writing to another effective date. In the event of such a termination, the Company shall pay to the Executive (1) his Base Compensation earned but not paid to the Executive prior to the effective date of such termination and (2) a prorated Cash Incentive Compensation (if any) earned but not paid, which amount will be determined after the end of the Termination Fiscal Year, based on the Company’s actual performance during the Termination Fiscal Year as compared to the Objectives, prorated by multiplying the total Cash Incentive Compensation that would have been payable to the Executive for the full Termination Fiscal Year by a ratio of (x) the number of full months elapsed during the Termination Fiscal Year prior to the executive’s date of termination, divided by (y) twelve. The Company shall have no further obligation or liability to the Executive under this Agreement (other than pursuant to Section 3(f) and then only up to the effective date of termination). All such amounts shall be paid to the Executive periodically over the twelve-month period following the date of termination in accordance with the general policies and procedures of the Company, in substantially equal installments, subject to withholding for applicable federal, state, local and foreign taxes; provided, however, that the prorated Cash Incentive Payment described in this Section 4(b) shall be allocated in substantially equal amounts over the remaining portion of such twelve-month period after such amount is determined in the ordinary course of determining the amounts payable to other senior executives of the Company under the Company’s cash incentive programs.

          (ii) Resignation Upon Company Breach. Upon the occurrence of a Company Breach (defined below), the Executive may provide the Company with a written notice that specifies in reasonable detail the circumstances surrounding the alleged Company Breach. If such Company Breach is not cured within thirty (30) days of the Company’s receipt of such notice, then the Executive may terminate his employment hereunder by written notice to the Company. The Executive’s employment hereunder shall terminate immediately upon the delivery of such termination notice unless the Executive specifies a later effective date of termination therein. Upon such termination, the Executive shall be entitled to receive the payments and benefits specified in Section 4(a)(ii)(1) and (2) hereof, and shall be subject to the forfeiture provisions set forth in Section 4(a)(ii)(3) hereof.

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     For the purposes of this Agreement, “Company Breach” means: (1) a change in the Executive’s duties or responsibilities with the Company (A) that represents a substantial reduction of the duties or responsibilities as in effect immediately prior thereto and (B) that is reasonably likely to subject the Executive to professional embarrassment or ridicule; (2) a change by the Board in the duties or responsibilities of other senior executive officers of the Company that has the effect of precluding the Executive from effectively performing his duties and responsibilities; (3) a material reduction in the Executive’s Base Compensation that is not substantially proportionate to any reduction in the base compensation of other senior executives of the Company; or (4) any material breach by the Company of any provision of this Agreement that is not remedied within 30 days after receipt of written notice from the Executive specifying such breach in reasonable detail.

          (iii) Non-Renewal and Expiration of Contract. If the Executive notifies the Company that the Executive elects to terminate the automatic annual renewal of the Agreement as described in Section 2 of this Agreement, then the Company and the Executive each shall use reasonable efforts to negotiate the terms of a new employment agreement as a replacement of this Agreement. If the Company and the Executive do not execute and deliver a new employment agreement on or before the next anniversary of the Effective Date after the Executive’s delivery of a notice of non-renewal (or if the Company and the Executive agree to continue their negotiations for an additional period at the end of which they have not agreed to a new employment agreement), then on such anniversary of the Effective Date (or at the end of such additional period if there is not then a new employment agreement in place), the Executive’s employment shall be deemed to have been terminated by the Executive without Company Breach and the Executive shall be entitled to the benefits described under Section 4(b)(i) above. This Agreement shall continue in effect during the period beginning on the date on which the Executive notifies the Executive that the Company elects to terminate the automatic annual renewal of this Agreement, through the date on which a new employment agreement is executed and delivered by the parties hereto or the date on which the Executive’s employment hereunder is terminated pursuant to the immediately-preceding sentence of this Section 4(b)(iii), as applicable.

     (c) Additional Effects of Termination. The Executive’s obligations and liabilities to the Company under this Agreement shall cease as of the effective date of any termination pursuant to Sections 4(a) or 4(b), except his obligations under the Restrictive Covenants shall survive and continue any such termination.

     (d) Death. Notwithstanding any other provision of this Agreement, this Agreement shall terminate on the date of the Executive’s death. In such event, the Executive’s estate shall be paid the Executive’s Base Compensation earned but not paid prior to the date of his death, plus a prorated amount of earned but not paid Cash Incentive Compensation (if any), determined by multiplying, the Executive’s Target Amount for such fiscal year by a ratio of (i) the number of months through the Executive’s date of death (for purposes of this Section 4(d) only, inclusive of the full month during which the date of death occurred), divided by (ii) twelve. In addition, upon the death of the Executive, the Company shall continue to provide for ninety (90) days, at the Company’s expense, the same level of health insurance benefits for the Executive’s eligible dependents in the same manner as the Company provided for them at the time of the Executive’s death.

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     5. Change of Control.

          (a) Definitions. For the purposes of this Agreement:

          “Affiliate” shall have the meaning given in Rule 405 promulgated under the Securities Act of 1933, as amended.

          “Change of Control” shall mean any of the following events:

               (i) The acquisition by any person, entity or “group,” within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other than the Company or a subsidiary of the Company, or any employee benefit plan of the Company or a subsidiary of the Company, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either the then outstanding Common Stock or the combined voting power of the Company’s then outstanding voting securities in a transaction or series of transactions not approved in advance by a vote of a majority of the Continuing Directors (as hereinafter defined); or

               (ii) Individuals who, as of the Effective Date, constitute the Board (generally the “Directors” and as of the Effective Date the “Continuing Directors”) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the Effective Date whose nomination for election was approved in advance by a vote of a majority of the Continuing Directors (other than a nomination of an individual whose initial assumption of office is in connection with an actual or threatened solicitation with respect to the election or removal of the Directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act) shall be deemed to be a Continuing Director; or

               (iii) The approval by the shareholders of the Company of a reorganization, merger, consolidation, liquidation or dissolution of the Company or of the sale (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company other than a reorganization, merger, consolidation, liquidation, dissolution or sale approved in advance by a vote of a majority of the Continuing Directors; or

               (iv) The first purchase under any tender offer or exchange offer (other than an offer by the Company or a subsidiary of the Company) pursuant to which Common Stock is purchased.

          “Change of Control Amount” shall mean an amount equal to the sum of (i) two times the total annual Base Compensation of the Executive that is in effect immediately prior to a Change of Control plus (ii) two times the average of the Executive’s Cash Incentive Compensation payment (if any) for the two years prior to a Change of Control, or, if the Executive has been employed by the Company for less than two years, two times the amount of the Executive’s last Cash Incentive Compensation payment (if any) by the Company, or, if the Executive has been employed by the Company for less than one year, two times his Target Amount as determined by the Compensation Committee.

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          (b) Change of Control Benefit. If (i) a Change of Control has occurred and (ii) within one year thereafter, the Executive’s employment with the Company terminates for any reason other than (1) termination by the Company for Cause or (2) termination by the Executive for other than Company Breach, then the Company shall pay to the Executive within thirty (30) days of such termination a lump sum equal to the Change of Control Amount. The receipt of such Change of Control Amount shall be in lieu of any right of payment that the Executive may have in connection with such termination of employment, whether pursuant to this Agreement or otherwise. If any payment made to the Executive pursuant to this Section 5(b) with respect to a Change of Control that occurs prior to the one-year anniversary of the Effective Date, either alone or together with other payments or benefits, either cash or non-cash, that the Executive has the right to receive from the Company, including without limitation accelerated vesting or payment of any deferred compensation, options, stock appreciation rights or any benefits payable to (or for the benefit of) the Executive under any plan for the benefit of employees, would constitute an “excess parachute payment” (as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”)), then such payment or other benefit shall be reduced so that the aggregate present value of all payments and benefits, either cash or non-cash, to (or for the benefit of) the Executive which are contingent on the Change of Control (as defined in Code Section 280G(b)(2)(A)) is One Dollar ($1.00) less than the amount which the Executive could receive without being considered to have received any parachute payment (the amount of this reduction is referred to herein as the “Excess Amount”). The determination of the amount of any reduction required by this Section 5(b) shall be made by an accountant selected by the Company, and such determination shall be conclusive and binding on the parties hereto. Notwithstanding the foregoing provisions, if it is established, pursuant to a final determination of a court or an Internal Revenue Service proceeding which has been finally and conclusively resolved, that an Excess Amount was received by the Executive from the Company, then the Executive shall repay the Excess Amount to the Company promptly after written demand from the Company is received by the Executive.

          (c) Adjustment of Change of Control Payment. Notwithstanding the foregoing, after the third anniversary of the Effective Date, the Compensation Committee shall have the sole and exclusive right to re-determine and adjust the Change of Control Amount to which the Executive may be entitled upon a Change of Control; provided, that any adjustment to the Change of Control Amount that is made within a period of ninety (90) days prior to the execution of a definitive agreement for a Change of Control transaction shall be null and void. Any adjustment to the Change of Control Amount shall be communicated to the Executive in writing within ten (10) days of the effective date of such adjustment.

          (d) Additional Payments by the Company.

               (i) Gross-Up Payment. In the event it shall be determined that any payment or distribution of any type by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise with respect to any Change of Control that occurs on or after the one-year anniversary of the Effective Date, would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (an “Adjustment Payment”) in an amount such that after payment by the Executive of all taxes (including additional excise taxes under said Section 4999 and any interest, and penalties imposed with respect to any taxes) imposed upon the Adjustment Payment, the Executive retains an amount of the Adjustment Payment equal to the Excise Tax imposed upon the Change of Control Amount; provided, however, the Adjustment Payment shall not exceed an amount equal to the Change of Control Amount, and no Adjustment Payment shall be made in respect of any payment other than the Change of Control Amount, including without limitation any value attributable to any options or other equity compensation subject to the Excise Tax. The Company shall pay the Adjustment Payment to the Executive within twenty (20) business days after the Date of Termination.

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               (ii) Determination By Accountant. All determinations required to be made under this Section 5(d), including whether an Adjustment Payment is required and the amount of such Adjustment Payment, shall be made by the independent accounting firm retained by the Company on the date of Change of Control (the “Accounting Firm”), which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the Date of Termination, if applicable, or such earlier time as is requested by the Company. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with an opinion that he has substantial authority not to report any Excise Tax on his federal income tax return. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that an Adjustment Payment which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 5(d)(iii) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive; provided, however, that the sum of the Underpayment plus any Adjustment Payment previously paid shall not exceed two times the Change of Control Amount.

               (iii) Notification Required. The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Adjustment Payment. Such notification shall be given as soon as practicable but no later than thirty (30) business days after the Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30)-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

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               (A) give the Company any information reasonably requested by the Company relating to such claim,

               (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

               (C) cooperate with the Company in good faith in order to effectively contest such claim,

               (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 5(d)(iii), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority with respect to such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund, or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which an Adjustment Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

               (iv) Repayment. If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(d)(iii), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Section 5(d)(iii)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(d)(iii), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of any Adjustment Payment required to be paid.

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     6. Confidential Information.

          (a) Acknowledgment. The Executive recognizes and acknowledges that he will have access to, and the Company shall provide the Executive with, confidential proprietary information of the Company, including information regarding costs, profits, markets, sales, products, key personnel, pricing policies, operational methods, other business methods, plans for future developments, and other information not readily available to the public, the disclosure of which to third parties would in each case have a material adverse effect on the Company’s Business operations (“Confidential Information”).

          (b) Agreement Regarding Confidentiality. The Executive will keep secret, during and after the termination of his employment, all Confidential Information and will not use or disclose Confidential Information to anyone outside of the Company other than in the course of performance of his duties under this Agreement, except that (i) the Executive shall have no such obligation to the extent Confidential Information is or becomes publicly known other than as a result of the Executive’s breach of his obligations hereunder, and (ii) the Executive may disclose such matters to the extent required by applicable laws, or governmental regulations or judicial or regulatory processes.

          (c) Return of Records. The Executive will deliver promptly to the Company on termination of his employment by the Company, or at any other time the Board may so request, all memoranda, notes, records, reports and other documents (and all copies thereof) relating to the Company’s Business that he obtained while employed by, or otherwise serving or acting on behalf of, the Company and that he may then possess or have under his control. In the event the Executive fails to comply with his obligations under this Section 6(c), the Company shall be entitled to injunctive relief enforcing such obligations to the extent reasonably necessary to protect the Company’s legitimate interests.

     7. Noncompetition.

          (a) In exchange for the Company’s delivery of Confidential Information to the Executive, during the Executive’s employment under this Agreement, if applicable, and for a period (the “Restriction Period”) equal to the greater of (i) the period during which the Company provides any severance payments or benefits to the Executive pursuant to Section 4(a) hereof or (ii) two years after the Executive’s termination:

          (1) The Executive will inform any new employer, prior to accepting employment, of the existence of this provision of the Agreement and provide such employer with a copy thereof; and

          (2) The Executive agrees not to directly or indirectly, render services to any Conflicting Organization in the United States or in any country in which the Company has a plant for manufacturing a product, except that the Executive may accept employment with a large Conflicting Organization whose business is diversified (and which has separate and distinct divisions), and which as to the part of its business in which the Executive is to be employed is not a Conflicting Organization, provided the Company, prior to the Executive accepting such employment, shall receive separate written assurances satisfactory to the Company from such Conflicting Organization and from the Executive that the Executive will not render services directly or indirectly in connection with the development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any Conflicting Product; and

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“Conflicting Product” means any product, process, system or service that is the same as or similar to, or competes with, a product, process, system or service that was in development by the Company, was sold or leased by the Company or was utilized by the Company in delivering services to the Company’s customers, in each case on or prior to the termination of the Executive’s employment by the Company.

“Conflicting Organization” means any person or organization that develops, sells or leases Conflicting Products (or utilizes Conflicting Products in delivering services to such person’s or organization’s customers), whether before or after the Executive begins rendering services to such person or organization.

          (3) After the Executive’s termination of employment with the Company, the Executive agrees not to directly or indirectly, (A) participate in any solicitation or offer to purchase the stock or assets of the Company or other business combination or similar transaction involving the Company, (B) take any action to encourage (including by way of furnishing information or access to information regarding the Company) the making of any offer to purchase the stock or assets of the Company or other business combination or similar transaction involving the Company, or (C) participate in any discussions or negotiations regarding the purchase of the stock or assets of the Company or other business combination or similar transaction involving the Company; and

          (4) Without the prior approval of the Board, the Executive agrees not to purchase or otherwise acquire (other than pursuant to a stock split or stock dividend) any additional shares of Common Stock for the purpose of influencing or participating in the acquisition of a majority of the voting stock of the Company or the assets of the Company or other business combination or similar transaction involving the Company; provided, however, the terms of this Agreement shall not be construed to prohibit the Executive from voting or tendering any shares of Common Stock held by the Executive, solely in his capacity as a stockholder; and

          (5) The Executive further agrees that he will not solicit the Company’s employees, either on behalf of the Executive or any third party, to resign or otherwise leave their employment with the Company to work for the Executive or any third party; and

          (6) The Executive further agrees that he will not solicit business from, attempt to do business with, or do business with any customer of the Company with whom the Company did business within the two years preceding the date of his termination of employment with the Company; and

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          (7) The Executive further agrees that he will not make remarks disparaging the conduct or character of the Company or its officers or directors, and will not interfere with the Company’s business relationships with its customers, vendors and distributors.

          (b) Specific Performance. If the Executive breaches or threatens to commit a breach of the provisions of Sections 6 or 7 hereof, the Company shall have the right to have such Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy for such injury. Accordingly, the Company shall be entitled to injunctive relief to enforce the terms of the Restrictive Covenants and to restrain the Executive or any of its Affiliates from any violation thereof, without the need to post any type of bond or other form of security in connection with such relief and enforcement. The rights and remedies set forth in this Section 7(b) shall be independent of all other others rights and remedies available to the Company for a breach of the Restrictive Covenants, and shall be severally enforceable from, in addition to, and not in lieu of, any other rights and remedies available at law or in equity.

     8. Additional Service as Chairman of the Board of Directors and as a Director. As soon as is practicable after the execution and delivery of this Agreement, the Company intends to nominate the Executive for election as a Director of the Company, either by vote of the Company’s stockholders or by vote of the Board. Upon the Executive’s election as a Director, the Board intends to elect the Executive to be Chairman of the Board. The Executive acknowledges that (a) the Executive will serve as Chairman of the Board at the discretion of the Board, which may elect another person to serve as Chairman of the Board in the Executive’s place, and (b) the Executive will serve as a Director at the discretion of the Company’s stockholders. The Executive further acknowledges that this Agreement will not be affected if at any time the Board or the Company’s stockholders make any change in the Executive’s status as Chairman of the Board or as a Director, and that any such change in status, in and of itself, will not constitute either a termination of the Executive’s employment as Chief Executive Officer hereunder or a Company Breach hereunder. Notwithstanding anything to the contrary in any other provision of this Agreement, if the Executive elects to continue serving as a Director after termination of his employment, then (a) the Company shall not make any payment of any amount payable under Section 4(a)(ii)(1)(B) or Section 4(b)(ii) until after the date of the Executive’s resignation as a Director (the “Resignation Date”), and (b) the Restriction Period shall be extended by the period of time from the date of the Executive’s termination of employment to the Resignation Date.

     9. Miscellaneous.

          (a) Integration; Amendment. This Agreement constitutes the entire agreement among the parties hereto with respect to the matters set forth herein and supersedes and renders of no force and effect all prior understandings and agreements among the parties with respect to the matters set forth herein. No amendments or additions to this Agreement shall be binding unless in writing and signed by the Executive and the Company.

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          (b) Assignment. The Company may assign this Agreement to any successor by operation of law or to any purchaser of all or substantially all of the assets of the Company. The Executive may not assign this Agreement or any right or interest therein, whether by operation of law or otherwise, without the prior written consent of the Company.

          (c) Severability. If any part of this Agreement is contrary to, prohibited by, or deemed invalid under applicable law or regulations, such provision shall be inapplicable and deemed omitted to the extent so contrary, prohibited, or invalid, but the remainder of this Agreement shall not be invalid and shall be given full force and effect so far as possible.

          (d) Waivers. The failure or delay of any party at any time to require performance by any other party of any provision of this Agreement, even if known, shall not affect the right of such party to require performance of that provision or to exercise any right, power, or remedy hereunder, and any waiver by any party of any breach of any provision of this Agreement shall not be construed as a waiver of any continuing or succeeding breach of such provision, a wavier of the provision itself, or a waiver of any right, power, or remedy under this Agreement. No notice to or demand on any party in any case shall, of itself, entitle such party to any other or further notice or demand in similar or other circumstances.

          (e) Power and Authority. The Company represents and warrants to the Executive that it has the requisite corporate power to enter into this Agreement and perform the terms hereof; and that the execution, delivery and performance of this Agreement by it has been duly authorized by all appropriate corporate action.

          (f) Burden and Benefit. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, personal and legal representatives, successors and, subject to Section 9(b) above, assigns. Any provision of this Agreement which by its terms requires performance beyond the term of this Agreement shall survive the term of this Agreement in accordance with the terms of such provision.

          (g) Time is of the Essence. Time is of the essence for all purposes of this Agreement.

          (h) Arbitration. Any dispute or controversy arising out of or relating to this Agreement shall be settled finally and exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Such arbitration shall be conducted in the State of Minnesota by a sole arbitrator appointed by the American Arbitration Association in accordance with its rules and any finding by such arbitrator shall be final and binding upon the parties. Judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction thereof, and the parties consent to the jurisdiction of the courts of the State of Minnesota for this purpose. Nothing contained in this Section 9(h) shall be construed to preclude the Company from obtaining injunctive or other equitable relief to secure specific performance or to otherwise prevent a breach or contemplated breach of this Agreement. Each party shall bear its own expenses for attorneys, experts, travel and other similar matters. Each party shall pay one-half of the arbitrator’s fees and expenses.

          (i) Governing Law; Headings. This Agreement and its construction, performance, and enforceability shall be governed by, and construed in accordance with, the laws of the State of Minnesota. Headings and titles herein are included solely for convenience and shall not affect the interpretation of this Agreement.

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          (j) Notices. All notices called for under this Agreement shall be in writing and shall be deemed given upon receipt if delivered personally or by facsimile transmission and followed promptly by mail, or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective only upon receipt thereof):

If to the Executive:

Bruce A. Henderson
Imation Corp.
One Imation Place
Oakdale, Minnesota 55128
Facsimile: (651) 704-4412

If to the Company:

Imation Corp.
One Imation Place
Oakdale, Minnesota 55128
Attn: General Counsel
Facsimile: (651) 704-4412

          Any notice delivered to the party hereto to whom it is addressed shall be deemed to have been given and received on the day it was received; provided, however, that if such day is not a business day then the notice shall be deemed to have been given and received on the business day next following such day. Any notice sent by facsimile transmission shall be deemed to have been given and received on the next business day following the day of transmission.

          (k) Counterparts. This Agreement may be executed in one or more counterparts, each of which counterparts shall be deemed to be an original, and all such counterparts shall constitute one and the same agreement.

          (l) No Strict Construction. The parties hereto confirm that they have each participated in the negotiation and preparation of this Agreement and that this Agreement represents the joint agreement and understanding of the parties. The language used in this Agreement has been mutually chosen by the parties hereto, and no rule of strict construction construing ambiguities against any party hereto shall be applied.

***************

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     IN WITNESS WHEREOF, the parties have duly executed this Agreement, or caused this Agreement to be duly executed on their behalf, as of the date first above written.

IMATION CORP.
By:	/s/ John L. Sullivan
	Name:	John L. Sullivan
	Title:	Senior Vice President, General Counsel and Assistant Secretary

/s/ Bruce A. Henderson  

Bruce A. Henderson 

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EXHIBIT A

2000 Stock Incentive Plan
of Imation Corp.

Stock Option Agreement

     This STOCK OPTION AGREEMENT (the “Agreement”) effective as of May 13, 2004, is entered into between Imation Corp., a Delaware corporation (the “Company”) and Bruce A. Henderson an employee of the Company or a Subsidiary (the “Participant”), pursuant to and subject to the terms and conditions of the 2000 Stock Incentive Plan of the Company (the “Plan”). The purpose of this Agreement is to evidence the terms and conditions of a nonqualified stock option granted to the Participant under the Plan.

     Accordingly, for good and valuable consideration, the parties agree as follows:

     1. Grant of Non-qualified Option. Effective May 13, 2004 (the “Effective Date”), the Company granted to the Participant a non-qualified option to purchase all or any part of an aggregate of one hundred seventy-five thousand (175,000) shares of the Company’s Common Stock on the terms and conditions herein set forth (the “Option”).

     2. Purchase Price. The purchase price of the shares of Common Stock subject to the Option shall be [insert end of day market price on May 13, 2004] per share.

     3. Term of the Option. The term of the Option (the “Option Period”) shall be for a period of seven (7) years from the Effective Date, subject to earlier termination as provided in Section 7 hereof.

     4. Vesting of the Option. Subject to Section 7 hereof, the Option may be exercised at any time or from time to time, as to any part or all of the shares covered thereby in accordance with the following vesting schedule:

     (a) 100,000 shares of the Option may be exercised at any time on or after May 13, 2008, and prior to the end of the Option Period set forth in Section 3 hereof, if the Company achieves a ten percent (10%) or greater compounded average annual growth in operating income for the period beginning on January 1, 2004 and ending on December 31, 2007, as compared to the December 31, 2003 full fiscal year operating income; provided, however, if it is determined after December 31, 2007 that the Company did not achieve this objective, the Option to purchase 100,000 shares shall be deemed to have expired on December 31, 2007; and

     (b) 75,000 shares of the Option may be exercised at any time on or after February 14, 2011, and prior to the end of the Option Period set forth in Section 3 hereof, if the Company achieves a fifteen percent (15%) or greater compounded average annual growth in operating income for the period beginning on January 1, 2008 and ending on December 31, 2010, as compared to the December 31, 2007 full fiscal year operating income; provided, however, if it is determined after December 31, 2010 that the Company did not achieve this objective, the Option to purchase 75,000 shares shall be deemed to have expired on December 31, 2010.

The Committee shall make the determination whether the objective described in Section 4(a) or Section 4(b) was achieved. Such determination shall be made as promptly as practicable after the applicable December 31, shall be based on the Company’s audited financial statements for the applicable periods, and shall be final and conclusive with respect to the achievement of the objectives. For purposes of determining whether the operating income objective has been achieved under this Agreement, the Committee shall exclude the effect of expensing options.

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All Options that are exercisable pursuant to the terms set forth in this Section 4 shall expire on May 13, 2011, if not exercised prior to that date.

     5. Limited Acceleration upon Certain Events.

          (a) In the event (i) the Company terminates the Participant’s employment with the Company and all its subsidiaries without Cause (defined below) during the Option Period, (ii) the Company terminates the Participant’s employment with the Company and all its subsidiaries during the Option Period and within one year after a Change of Control (defined below) for any reason other than for Cause, the Participant’s death or disability (as described in the Participant’s employment agreement with the Company dated May 13, 2004 (the “Employment Agreement”)), or (iii) the Participant terminates his employment with the Company and all its subsidiaries during the Option Period for Company Breach (defined below) (any of the termination events described in these Sections 5(a)(i), (ii) and (iii) being referred to herein as an “Acceleration Termination Event”), then a portion of the Option described in Section 4(a) or Section 4(b) (as applicable, determined based on the date of such Acceleration Termination Event) shall immediately vest and become exercisable (subject to the time periods for exercise set forth in other provisions of this Agreement), if (and only if) the Company had achieved the required level of growth in operating income for the applicable period ending on the December 31 immediately prior to the date of such Acceleration Termination Event, in accordance with Section 4(a) or Section 4(b), as applicable. Such Option shall accelerate (if at all) only in an amount equal to the number of shares of Common Stock determined by multiplying the maximum number of shares subject to such Option (either 100,000 shares or 75,000 shares, as applicable, determined based on the date of such Acceleration Termination Event) by the ratio of (i) the portion of the applicable measurement period set forth in Section 4(a) or 4(b) (expressed in full fiscal years) through the December 31 immediately prior to the date of such Acceleration Termination Event, divided by (ii) the total number of full fiscal years in the applicable measurement period set forth in Section 4(a) or 4(b).

          (b) If an Acceleration Termination Event occurs on or before December 31, 2007, then the Option described in Section 4(b) above shall immediately be forfeited, whether or not any portion of the Option described in Section 4(a) is accelerated under Section 5(a).

          (c) If an Acceleration Termination Event occurs on or after January 1, 2008 and on or before December 31, 2010, then no portion of any forfeited Option described in Section 4(a) above that did not vest in accordance with Section 4(a) in accordance with its terms shall be reinstated or accelerated, whether or not any portion of the Option described in Section 4(b) is accelerated under Section 5(a).

          (d) Except as specifically provided in Section 5(a) hereof, there shall not be any acceleration of vesting of the Option or any portion thereof. Without limiting the foregoing, a voluntary resignation or retirement by the Participant shall not be an Acceleration Termination Event.

     For the avoidance of doubt, the following are two examples of the limited acceleration described in this Section 5.

A. If an Acceleration Termination Event occurred during July 2006, then the Option described in Section 4(a) would accelerate as to 50,000 shares, if (but only if) the Company had achieved a ten percent (10%) or greater compounded average annual growth in operating income for the two year period ended December 31, 2005, as compared to the December 31, 2003 full fiscal year operating income. (Note that this growth might be achieved even if the Company’s operating income grew at a rate less than ten percent (10%) in either such year, so long as the combined compounded growth in operating income for such two year period was at least ten percent (10%). The 50,000 shares that would accelerate under this example would be determined by multiplying 100,000 shares by the ratio of 2 (the number of full fiscal years elapsed under the applicable vesting provision (Section 4(a))), divided by 4 (the total number of full fiscal years in the period under the applicable vesting provision (Section 4(a))). The remaining 50,000 shares of the Option (100,000 shares minus 50,000 shares) would be forfeited upon the Participant’s termination. The Option provided for in Section 4(b) would be forfeited in full upon such termination. Exercise of such vested 50,000 share Option would be subject to the exercise provisions of this Agreement.

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B. As another example, if an Acceleration Termination Event occurred during May 2009, then the Option described in Section 4(b) would accelerate as to 25,000 shares, if (but only if) the Company had achieved a fifteen percent (15%) or greater compounded annual growth in operating income for the year ended December 31, 2008, as compared to the Company’s December 31, 2007 full fiscal year operating income. The 25,000 shares that would accelerate would be determined by multiplying 75,000 shares by the ratio of 1 (the number of full fiscal years elapsed under the applicable vesting provision (Section 4(b))), divided by 3 (the total number of full fiscal years in the period under the applicable vesting provision (Section 4(b))). The remaining 50,000 shares of the Option (75,000 shares minus 25,000 shares) would be forfeited upon the Participant’s termination. Acceleration of the 25,000 shares would not affect any portion of the Option that had been forfeited under Section 4(a) or any portion of the Option that had vested under Section 4(a), in either case as provided in Section 4(a). Exercise of such 25,000 share Option would be subject to the exercise provisions of this Agreement.

     6. Transferability. The Option may not be assigned, transferred (other than by will or the laws of descent and distribution), pledged or hypothecated (whether by operation of law or otherwise), and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition of the Option contrary to the provisions of the Plan or this Agreement, or the levy of any execution, attachment or similar process upon the Option shall constitute an immediate cancellation of the Option.

     7. Effect of Termination of Employment

          (a) In the event the Participant shall cease to be employed by the Company or a Subsidiary for any reason other than termination for Cause or death, or elects to accept Pre-Retirement Leave (“PRL”) in conjunction with a Company sponsored severance plan, the Participant may exercise the Option to the extent of (but only to the extent of) the number of vested shares the Participant was entitled to purchase under the Option on the date of such termination or commencement of PRL, and such exercise may be effected at any time within 90 days after such termination of employment or commencement of PRL (or within six months after such termination of employment or commencement of PRL if such termination or PRL is for any reason following a Change of Control) but not thereafter; provided, however, that the Option may not be exercised after the Option Period.

          (b) In the event the Participant shall cease to be employed by the Company or a Subsidiary upon termination for Cause, the Option shall be terminated as of the date of such termination. Termination for “Cause” shall mean termination of Participant’s employment with the Company or a Subsidiary for the following acts: (i) the Participant’s gross incompetence or substantial failure to perform his duties under the Employment Agreement, (ii) misconduct by the Participant that causes or is likely to cause harm to the Company or that causes or is likely to cause harm to the Company’s reputation, as determined by the Company’s Board of Directors in its sole and absolute discretion (such misconduct may include, without limitation, insobriety at the workplace during working hours or the use of illegal drugs), (iii) failure to follow directions of the Company’s Board of Directors that are consistent with the Participant’s duties under the Employment Agreement, (iv) the Participant’s conviction of, or entry of a pleading of guilty or nolo contendere to, any crime involving moral turpitude, or the entry of an order duly issued by any federal or state regulatory agency having jurisdiction in the matter permanently prohibiting the Participant from participating in the conduct of the affairs of the Company or (v) any breach of the Employment Agreement by the Participant that is not remedied within 30 days after receipt of written notice from the Company specifying such breach in reasonable detail.

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          (c) Notwithstanding the provisions of paragraph 7(a), and except as otherwise provided in paragraphs 7(b) and (d), if the participant retires pursuant to a pension plan maintained or funded by the Company, the Option, to the extent not previously exercised or forfeited, shall be exercisable to the extent of (but only to the extent of) the number of vested shares the Participant was entitled to purchase under the Option on the date of such retirement, and such exercise may be effected for three years after the date of such retirement, but not thereafter; provided, however, that the Option may not be exercised after the Option Period. If a Participant who has thus retired, dies prior to expiration of the term of the Option, the Option, to the extent not previously exercised or forfeited, may be exercised (but only to the extent exercisable in accordance with the vesting provisions hereof as of the date of the Participant’s retirement and only to the extent not exercised or forfeited as of the date of the Participant’s death) within two (2) years after the date of his or her death (but not more than seven (7) years from the Effective Date) by the Participant’s estate or by a person who acquired the right to exercise such Option by bequest or inheritance.

          (d) If the Participant dies or is deemed to suffer a disability (as described in the Employment Agreement) while employed by the Company or a Subsidiary, the Option, to the extent not previously exercised or forfeited, shall be exercisable to the extent of (but only to the extent of) the number of vested shares the Participant was entitled to purchase under the Option on the date of the Participant’s death or disability (as described in the Employment Agreement). In the event of death, such exercise may be effected by the Participant’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance within two (2) years after the date of the Participant’s death, but before the Option Period expires. In the event of disability (as described in the Employment Agreement), such exercise may be effected by the Participant within two (2) years after the date of the Participant’s disability (as described in the Employment Agreement), but before the Option Period expires.

     8. Stock Dividends, Stock Splits, Recapitalization, Merger or Consolidation. If all or any portion of the Option shall be exercised subsequent to any stock dividend, stock split, recapitalization, merger or consolidation involving the Company or its Common Stock, the Committee shall make appropriate adjustment to the Option to give effect thereto on an equitable basis.

     9. Exercise of the Option. Subject to the terms and conditions of this Agreement, the Option may be exercised by contacting the Company’s Stock Plan Administrator. Such notice shall state the election to exercise the Option and the number of shares in respect of which it is being exercised and shall be signed by the Participant or such other person entitled to exercise the Option. Such notice shall be accompanied by payment of the full purchase price of such shares and applicable federal, state and local withholding taxes, if any. Payment of such purchase price and applicable withholding taxes, if any, may be made in whole or in part in shares of Common Stock. The value of any share of Common Stock delivered in payment of all or part of the purchase price upon the exercise of the Option shall be the last sale price of a share of Common Stock on the New York Stock Exchange on the date the Option shall be exercised. A Participant shall obtain no rights as a stockholder or any interest in shares of Common Stock subject to the Option until certificates for such shares are issued and delivered to the Participant and the Participant becomes the holder of record. In the event that the Option shall be exercised pursuant to paragraph 7(c) or 7(d) hereof by any person or persons other than the Participant, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise the Option.

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     10. Issuance of Shares. Upon exercise of all or any portion of the Option, the Company will cause to be delivered to the Participant a certificate representing the shares of Common Stock purchased. Notwithstanding anything to the contrary in this Agreement, the Company’s obligation to issue shares of Common Stock or to deliver certificates therefore shall be subject to (i) all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required, including, without limitation, the effectiveness of a registration statement under the Securities Act of 1933, as amended, and (ii) the condition that such shares shall have been duly listed on the New York Stock Exchange.

     11. Definitions. Terms not defined in this Agreement shall have the meanings given to them in the Plan, and the following terms shall have the following meanings when used in this Agreement:

          (a) “Change of Control” means any of the following events:

          (i) The acquisition by any person, entity or “group,” within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other than the Company or a subsidiary of the Company, or any employee benefit plan of the Company or a subsidiary of the Company, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either the then outstanding Common Stock or the combined voting power of the Company’s then outstanding voting securities in a transaction or series of transactions not approved in advance by a vote of a majority of the Continuing Directors (as hereinafter defined); or

          (ii) Individuals who, as of the date of this Agreement, constitute the Board of Directors of the Company (generally the “Directors” and as of the Effective Date the “Continuing Directors”) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the Effective Date whose nomination for election was approved in advance by a vote of a majority of the Continuing Directors (other than a nomination of an individual whose initial assumption of office is in connection with an actual or threatened solicitation with respect to the election or removal of the Directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act) shall be deemed to be a Continuing Director; or

          (iii) The approval by the shareholders of the Company of a reorganization, merger, consolidation, liquidation or dissolution of the Company or of the sale (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company other than a reorganization, merger, consolidation, liquidation, dissolution or sale approved in advance by a vote of a majority of the Continuing Directors; or

          (iv) The first purchase under any tender offer or exchange offer (other than an offer by the Company or a subsidiary of the Company) pursuant to which Common Stock is purchased.

     (b) “Committee” means the Compensation Committee of the Board of Directors of the Company or such other committee of directors designated by the Board of Directors to administer the Plan.

     (c) “Common Stock” means the common stock of the Company, par value $.01 per share.

     (d) “Company Breach” means: (i) a change in the Participant’s duties or responsibilities with the Company (A) that represents a substantial reduction of the duties or responsibilities as in effect immediately prior thereto and (B) that is reasonably likely to subject the Participant to professional embarrassment or ridicule; (2) a change by the Board of Directors of the Company in the duties or responsibilities of other senior executive officers of the Company that has the effect of precluding the Participant from effectively performing his duties and responsibilities; (3) a material reduction in the Participant’s base compensation that is not substantially proportionate to any reduction in the base compensation of other senior executives of the Company; or (4) any material breach by the Company of any provision of the Employment Agreement that is not remedied within 30 days after receipt of written notice from the Participant specifying such breach in reasonable detail.

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     (e) “Subsidiary” means a corporation more than 50% of the voting stock of which shall at the time be owned directly or indirectly by the Company.

     12. Governing Law. This Agreement has been entered into pursuant to and shall be governed by the laws of the State of Delaware.

     The Agreement is made under and subject to the provisions of the Plan, and all of the provisions of the Plan are also provisions of the Agreement. If there is a difference or conflict between the provisions of the Agreement and the provisions of the Plan, the provisions of the Plan will govern. By signing the Agreement, the Participant confirms that the Participant has received a copy of the Plan.

     The Company and the Participant have caused this Agreement to be signed and delivered as of the date set forth above.

IMATION CORP.
	By:
	Name:
	Title:

PARTICIPANT:
  Bruce A. Henderson
 

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EX-10.2

Exhibit 10.2

SEPARATION AGREEMENT AND GENERAL RELEASE

     This Separation Agreement and General Release (the “Agreement”) is made and entered into between William T. Monahan, an individual residing at 11930 Isleton Avenue North, Stillwater, Minnesota 55082 (“Mr. Monahan”) and Imation Corp., a Delaware corporation, with its principal offices at One Imation Place, Oakdale, Minnesota 55128 (“Imation”).

     MR. MONAHAN UNDERSTANDS THAT HE MAY CONSIDER THIS AGREEMENT FOR AT LEAST TWENTY-ONE (21) DAYS AFTER HE HAS RECEIVED THIS AGREEMENT, WHICH WAS ON May 20, 2004, UNLESS HE CHOOSES TO WAIVE THAT RIGHT BY EXECUTING THE AGREEMENT WITHIN THE TWENTY-ONE (21) DAY PERIOD.

1. What Imation Agrees To Do

     In return for (i) this Agreement, (ii) Mr. Monahan’s consulting services as set forth in Section 2.A of this Agreement, (iii) Mr. Monahan’s voluntary resignation from all positions Mr. Monahan holds with Imation as set forth in Section 2.B of this Agreement, and in full and final settlement, compromise, and release of all of Mr. Monahan’s employment-related claims (as described in Section 2 below), Imation agrees to pay Mr. Monahan the following:

A.	Mr. Monahan’s base salary for the fiscal year 2004 through September 30, 2004, and such amount from June 4, 2004 (the “Separation Date”) to September 30, 2004 is $227,774 (the “Remaining Salary Payment”). The Remaining Salary Payment shall be paid in equal installments at regular payroll intervals beginning on June 18, 2004.
B.	If the target financial objectives under Imation’s 2004 Bonus Plan (as previously established by Imation’s Board of Directors) are satisfied, Imation shall pay Mr. Monahan a bonus by January 31, 2005 equal to seventy-five percent (75%) of the product of (i) the applicable percentage (from a minimum of 0% to a maximum of 150%) under Imation’s 2004 Bonus Plan, multiplied by (ii) $634,500 . Such payment shall be made by check payable to the order of Mr. Monahan.
2.	What Mr. Monahan Agrees To Do

     As a condition to receiving the payments set forth in Section 1 of this Agreement, Mr. Monahan agrees as follows:

A. Until September 30, 2004, Mr. Monahan agrees to provide consulting and advisory services to Imation as may from time to time be reasonably requested by Imation concerning any and all matters relating to Imation. Mr. Monahan agrees that he will provide services under this Agreement using the degree of care, skill and diligence applied by Mr. Monahan to Imation matters prior to the Separation Date.

B. Mr. Monahan hereby voluntarily resigns as a member and Chairman of Imation’s Board of Directors and as President and Chief Executive Officer of Imation, and from any other offices Mr. Monahan may hold with Imation, effective as of June 1, 2004.

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C.

Mr. Monahan agrees to return all Imation property currently in Mr. Monahan’s possession, including, but not limited to, all notes, memoranda, correspondence, files, notebooks, technical charts or diagrams, customer lists or information, sales and marketing information, computer recorded information, software, equipment, materials, keys and credit cards. Mr. Monahan acknowledges that this obligation is continuing and agrees to promptly return to Imation any subsequently discovered property as described above.

D.

Mr. Monahan also agrees to repay to Imation the amount of any permanent or temporary advances or other monies due and owing Imation, and to pay off the remaining balance on his corporate credit cards. If Mr. Monahan fails to make such payments as of the date he signs this Agreement, Mr. Monahan agrees that Imation may deduct any monies owed from the payment under this Agreement, if no other written arrangements are made for repayment by the date this Agreement is signed.

E. Mr. Monahan hereby irrevocably and unconditionally releases and forever discharges Imation from any and all federal, state or local charges, claims, controversies, causes of action, damages, costs, attorneys’ fees, or liabilities of any nature, both past and present, known and unknown, including but not limited to claims arising under federal, state, local, and common laws and under any regulations of any jurisdiction that in any way relate to employment and termination of employment existing at any time up to and including the date of this Agreement, that Mr. Monahan now may have or ever have had. This Agreement specifically includes, but is not limited to, ANY CLAIMS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT of 1967, THE OLDER WORKERS BENEFIT PROTECTION ACT OF 1990, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, any state or local human rights act, claims for wrongful termination, breach of contract, and tort claims (for example, defamation, emotional distress or any tort or negligence-based claim). Mr. Monahan expressly acknowledges that this Agreement also is intended to include in its scope, without limitation, all claims that Mr. Monahan does not know of or expect to exist in Mr. Monahan’s favor at the time Mr. Monahan signs this Agreement and that this Agreement contemplates the extinguishment of any such claim or claims except as expressly provided in this Section. MR. MONAHAN IS NOT WAIVING ANY RIGHTS FOR EVENTS ARISING AFTER THE DATE OF THIS AGREEMENT.

F. Mr. Monahan agrees that in order to protect Imation’s business interests, goodwill, confidential business information, trade secrets and customer relationships, for a period of two years following the Separation Date:

i.

Mr. Monahan will inform any new employer, prior to accepting employment, of the existence of this provision of the Agreement and provide such employer with a copy thereof.

ii.

Mr. Monahan agrees not to directly or indirectly, render services to any Conflicting Organization in any country in which Imation conducts business, except that Mr. Monahan may accept employment with a large Conflicting Organization whose business is diversified (and which has separate and distinct divisions), and which as to the part of its business in which Mr. Monahan is to be employed is not a Conflicting Organization, provided Imation, prior to Mr. Monahan accepting such employment, shall receive separate written assurances satisfactory to Imation from such Conflicting Organization and from Mr. Monahan that Mr. Monahan will not render services directly or indirectly in connection with the development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any Conflicting Product.

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“Conflicting Product” means any product, process, system or service that is the same as or similar to, or competes with, a product, process, system or service that was in development by Imation, was sold or leased by Imation or was utilized by Imation in delivering services to Imation’s customers, in each case on or prior to the termination of Mr. Monahan’s employment with Imation.

“Conflicting Organization” means any person or organization that develops, sells or leases Conflicting Products (or utilizes Conflicting Products in delivering services to such person’s or organization’s customers), whether before or after Mr. Monahan begins rendering services to such person or organization.

iii.	Mr. Monahan agrees not to directly or indirectly, (a) participate in any solicitation or offer to purchase the stock or assets of Imation or other business combination or similar transaction involving Imation, (b) take any action to encourage (including by way of furnishing information or access to information regarding Imation) the making of any offer to purchase the stock or assets of Imation or other business combination or similar transaction involving Imation, or (c) participate in any discussions or negotiations regarding the purchase of the stock or assets of Imation or other business combination or similar transaction involving Imation.
iv.	Without the prior approval of Imation’s Board of Directors, Mr. Monahan agrees not to purchase or otherwise acquire (other than pursuant to a stock split or stock dividend) any additional shares of common stock of Imation for the purpose of influencing or participating in the acquisition of a majority of the voting stock of Imation or the assets of Imation or other business combination or similar transaction involving Imation; provided, however, the terms of this Agreement shall not be construed to prohibit Mr. Monahan from voting or tendering any shares of common stock of Imation held by Mr. Monahan, solely in his capacity as a stockholder.
v.	Mr. Monahan further agrees that Mr. Monahan will not solicit Imation employees, either on behalf of Mr. Monahan or any third party, to resign or otherwise leave their employment with Imation to work for Mr. Monahan or any third party.
vi.	Mr. Monahan further agrees that Mr. Monahan will not solicit business from, attempt to do business with, or do business with any customer of Imation with whom Imation did business within the two years preceding the Separation Date. This restriction applies only to business which is in the scope of a competing business as defined by Paragraph F.ii of this Agreement.

G. Mr. Monahan also agrees that following the Separation Date, Mr. Monahan will not make remarks disparaging the conduct or character of Imation and will not interfere with Imation’s business relationships with its customers, vendors, or distributors.

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H.

As further consideration for this Agreement, Mr. Monahan agrees that if requested by Imation, Mr. Monahan will make himself available at reasonable times to assist and cooperate with Imation in the litigation of any lawsuits or claims, and agrees to be available to Imation to testify honestly with regard to such lawsuits or claims if Mr. Monahan is determined by Imation to be a material witness. Similarly, Mr. Monahan agrees that he will decline to voluntarily aid, assist, or cooperate with any parties who are involved in claims or lawsuits by or against Imation, or with their attorneys or agents; and will notify Imation when and if the Mr. Monahan is contacted by other parties or their attorneys or agents involving claims or lawsuits by or against Imation. It is understood and intended that nothing in this paragraph shall prevent Mr. Monahan from honestly testifying at a legal proceeding in response to a lawful and properly served subpoena in a proceeding involving Imation.

I.

Mr. Monahan agrees that Imation shall be entitled to injunctive and other equitable relief to prevent a breach or threatened breach of the provisions of this Agreement, without the necessity of proving actual damages. Such injunctive relief shall be in addition to any other damages that may be available at law. Mr. Monahan also acknowledges that if Imation is required to bring an action to enforce its rights under this Agreement, it shall be entitled to recover its attorney’s fees and costs associated with such an action, if Imation prevails.

3. Other Understandings, Agreements, and Representations

A.	Mr. Monahan understands and agrees that Mr. Monahan will not be eligible for and will not receive consideration, severance pay or benefits under the Severance Agreement by and between Mr. Monahan and Imation, dated August 7, 2002, and any other group Income Assistance Pay Plan for which Mr. Monahan might otherwise have been eligible.
B.	Mr. Monahan understands that the term “Imation”, as used in this Agreement, includes: (i) past, present, and future divisions, subsidiaries, affiliates, successors and assigns of Imation Corp., and the respective officers, directors, employees, agents, insurers and legal counsel of Imation Corp. and of such past, present and future divisions, subsidiaries, affiliates, successors and assigns of Imation Corp.; (ii) any ERISA employee benefit plan sponsored by Imation, acting as plan administrator, fiduciary or party in interest with respect to such plan. Mr. Monahan agrees that this Agreement binds Mr. Monahan and also binds Mr. Monahan’s heirs, executors, administrators, assigns, agents, partners and successors in interest.
C.	Mr. Monahan agrees that this Agreement and the payment of money to Mr. Monahan by Imation is not an admission by Imation of any violation of Mr. Monahan’s rights or of any statutory or other legal obligation.
D.	Mr. Monahan represents that no right, claim, or cause of action covered by this Agreement has been assigned or given to someone else.
E.	Mr. Monahan represents that Mr. Monahan will not apply for or accept employment with Imation in any capacity, except as approved in writing in advance by Imation’s Board of Directors.
F.	Nothing in this Agreement shall be deemed to terminate or reduce in any way any right Mr. Monahan may have to indemnification from Imation under the provisions of the Delaware General Corporation Law and the Company’s Restated Certificate of Incorporation and Bylaws, each as in effect on the Separation Date, for acts, omissions or events that occurred or are alleged to have occurred prior to the Separation Date.

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G.	This Agreement contains the entire understanding between Mr. Monahan and Imation and supersedes all prior agreements and understandings relating to the subject matter of this Agreement. This Agreement shall not be modified, amended, or terminated except as provided in section 3.J of this Agreement unless such modification, amendment, or termination is executed in writing by Mr. Monahan and Imation.
H.	Mr. Monahan agrees that Imation may use this Agreement to secure withdrawal of any federal, state, or local charge Mr. Monahan might have filed or will file, that Mr. Monahan will sign any document necessary to obtain the withdrawal of any such charge, and that Mr. Monahan waives the right to receive monetary damages or other legal or equitable relief awarded by any governmental agency related to any such charge.
I.	Mr. Monahan represents and certifies that Mr. Monahan has twenty-one (2l) days to consider whether to accept this Agreement and enter into this Agreement; review it before being asked to sign it; has read this Agreement carefully; has been given a fair opportunity to discuss and negotiate the terms of this Agreement; understands its provisions; has been advised to consult an attorney; has determined that it is in Mr. Monahan’s best interest to enter into this Agreement; has not been influenced to sign this Agreement by any statement or representation by Imation not contained in this Agreement; and enters into this Agreement knowingly and voluntarily. If Mr. Monahan chooses to sign this Agreement before twenty-one (21) days have passed, Mr. Monahan understands that it is his decision to execute this Agreement early and that Imation has made the full twenty-one (21) day period available for Mr. Monahan to consider this Agreement.
J.	Mr. Monahan understands that pursuant to the provisions of Minnesota Statutes §363.031, subdivision 2, Mr. Monahan may rescind this Agreement by notifying Imation of Mr. Monahan’s desire to do so in a writing delivered to Imation personally or by certified mail, return receipt requested, within fifteen (15) calendar days of Mr. Monahan’s execution of this Agreement. To be effective, such notice of rescission, if mailed, must be postmarked within the fifteen (15) day period and addressed as follows:

Patty Meagher
Imation Corp. Legal Affairs
One Imation Place
Pioneer Building 1S-14
Oakdale, MN 55128

K. In case any part of this Agreement is held invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions will not be affected in any way, it being intended that the provisions of this Agreement are severable, EXCEPT THAT, if paragraph 2 of this Agreement is held invalid, illegal, or unenforceable, this Agreement is voidable, and, if Mr. Monahan seeks to void this Agreement, Mr. Monahan understands and agrees that Mr. Monahan will repay the total amount of consideration paid to Mr. Monahan under this Agreement.

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L. Any dispute arising between Mr. Monahan and Imation under this Agreement will be submitted to final and binding arbitration in accordance with the rules of the American Arbitration Association before an arbitrator mutually selected by the parties. In the event that the parties cannot agree on an arbitrator, the parties agree to submit the dispute before an arbitrator selected by the Chief Judge of Ramsey County Court. The Arbitration shall be conducted in St. Paul, Minnesota and shall be final and binding on both parties. The expenses of the neutral arbitrator(s) and any court reporter shall be equally divided between Mr. Monahan and Imation.

M. The parties hereby acknowledge and covenant that for the purposes of this Agreement, Mr. Monahan is an independent contractor and will act exclusively as an independent contractor and not as an employee of Imation in performing the duties assigned hereunder.

N. This Agreement will be governed by and construed and interpreted according to the laws of the State of Minnesota.

* * * *  

ACCEPTED AND AGREED:
WILLIAM T. MONAHAN
By:	/s/ William T. Monahan
	Date: 5-25-04

IMATION CORP.
By:	/s/ Bruce A. Henderson
	Name:	Bruce A. Henderson
	Title:	CEO
	Date: 5/26/04

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WAIVER OF CONSIDERATION PERIOD

I understand that under the law I have 21 days to consider this Agreement. I knowingly and voluntarily waive this consideration period. The 15 day rescission period to revoke the acceptance of this Agreement remains in effect.

Print Name:  W.T. Monahan
Signature: /s/ W.T. Monahan
Date:  05-25-04                     

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EX-15.1

Exhibit 15.1

(PricewaterhouseCoopers LLP Letterhead)
(Minneapolis, MN)

August 5, 2004

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Commissioners:

We are aware that our report dated July 21, 2004, on our reviews of the interim consolidated financial statements of Imation Corp. (the Company) for the three and six months ended June 30, 2004 and 2003, and included in the Company’s Form 10-Q for the quarter ended June 30, 2004, is incorporated by reference in the Company’s Registration Statements on Form S-8 (Registration Nos. 333-15273, 333-15275, 333-15277, 333-35591, 333-38196, and 333-66030).

Yours very truly,

/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP

EX-31.1

Exhibit 31.1

Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002

I, Bruce A. Henderson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Imation Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2004

By: /s/ Bruce A. Henderson
Bruce A. Henderson
Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002

I, Paul R. Zeller, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Imation Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2004

By: /s/ Paul R. Zeller
Paul R. Zeller
Vice President,
Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Imation Corp. (the “Company”) on Form 10-Q for the period ending June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bruce A. Henderson, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Bruce A. Henderson

Bruce A. Henderson
Chairman and
Chief Executive Officer

August 5, 2004

EX-32.2

Exhibit 32.2

Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Imation Corp. (the “Company”) on Form 10-Q for the period ending June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul R. Zeller, Vice President, Corporate Controller* of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Paul R. Zeller

Paul R. Zeller
Vice President,
Chief Financial Officer

August 5, 2004