Prepared by MerrillDirect

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, 2001 OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _____________ .

Commission file number: 1-14310

IMATION CORP.
(Exact name of registrant as specified in its charter)

Delaware	41-1838504
(State or other jurisdiction of	(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 o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 34,855,933 shares of Common Stock, par value $0.01 per share, were outstanding at July 30, 2001.

IMATION CORP.
INDEX


PART I.		FINANCIAL INFORMATION

	ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS

		Consolidated Statements of Operations for the three and six months ended June 30, 2001 and 2000

		Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000

		Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2001 and 2000

		Notes to Consolidated Financial Statements

		Report of Independent Accountants

	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


PART II.		OTHER INFORMATION

SIGNATURE

EXHIBIT INDEX

PART I. FINANCIAL INFORMATION

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

				Three months ended June 30,						Six months ended June 30,

				2001			2000			2001			2000

Net revenues				$	283.4		$	307.1		$	583.3		$	635.7
Cost of goods sold				197.1			212.7			409.8			439.2

	Gross profit			86.3			94.4			173.5			196.5
Operating expenses:
	Selling, general andadministrative (1)			57.0			64.4			121.6			131.6
	Research and development			16.4			16.7			32.9			33.7

		Total		73.4			81.1			154.5			165.3

Operating income				12.9			13.3			19.0			31.2

Other (income) and expense:
	Interest income			(3.9		)	(3.2		)	(7.6		)	(6.5		)
	Interest expense			0.3			0.5			0.6			0.9
	Other, net			2.0			(1.3		)	4.3			(6.3		)

		Total		(1.6		)	(4.0		)	(2.7		)	(11.9		)

Income before taxes				14.5			17.3			21.7			43.1

Income tax provision				4.6			3.8			6.9			9.5

Income before cumulative effect of accounting change				9.9			13.5			14.8			33.6

Cumulative effect of accounting change, net of tax				-			-			-			(3.4		)

Net income				$	9.9		$	13.5		$	14.8		$	30.2


Earnings per basic common share:
		Income before cumulative effect of accounting change		$	0.28		$	0.39		$	0.43		$	0.95
		Net income		$	0.28		$	0.39		$	0.43		$	0.85

Earnings per diluted common share:
		Income before cumulative effect of accounting change		$	0.28		$	0.38		$	0.42		$	0.93
		Net income		$	0.28		$	0.38		$	0.42		$	0.84

Weighted average basic shares outstanding				34.8			35.0			34.7			35.4


Weighted average diluted shares outstanding				35.0			35.6			34.9			36.1



(1)			Selling, general and administrative expenses for the six month period ended June 30, 2001 include $5.7 million of amortization from first quarter related to abandoned computer software.

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

IMATION CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)

			June 30, 2001 (Unaudited)		December 31, 2000

ASSETS
Current assets
	Cash and equivalents		$	322.4	$	269.7
	Accounts receivable – net		163.4		171.4
	Inventories		160.9		141.2
	Other current assets		88.9		103.9

		Total current assets	735.6		686.2
Property, plant and equipment – net			195.0		200.7
Other assets			101.9		101.0

		Total assets	$	1,032.5	$	987.9


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
	Accounts payable		$	105.9	$	82.9
	Accrued payroll		24.3		17.1
	Short-term debt		14.3		23.7
	Other current liabilities		180.0		167.4

		Total current liabilities	324.5		291.1
Other liabilities			38.0		34.3

Shareholders’ equity			670.0		662.5

		Total liabilities and shareholders’ equity	$	1,032.5	$	987.9

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

IMATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

		Six months ended June 30,

		2001			2000

Cash Flows from Operating Activities:
Net income		$	14.8		$	30.2
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization	30.1			34.8
	Deferred income taxes	(4.2		)	9.3
	Inventory, accounts receivable and payable changes	4.1			30.8
	Other working capital changes	40.2			(11.8		)
	Other	4.2			(2.7		)

Net cash provided by operating activities		89.2			90.6

Cash Flows from Investing Activities:
	Capital expenditures	(20.7		)	(28.7		)
	Other	(2.6		)	(0.5		)

Net cash used in investing activities		(23.3		)	(29.2		)

Cash Flows from Financing Activities:
	Net change in short-term debt	(8.8		)	(3.1		)
	Other repayments of debt	-			(1.1		)
	Purchases of treasury stock	-			(51.4		)
	Decrease in unearned ESOP shares	3.3			4.4
	Exercise of stock options and other	0.4			8.1

Net cash used in financing activities		(5.1		)	(43.1		)

Effect of exchange rate changes on cash		(8.1		)	(1.6		)


Net change in cash and equivalents		52.7			16.7
Cash and equivalents - beginning of period		269.7			194.6

Cash and equivalents - end of period		$	322.4		$	211.3

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

.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. This Form 10-Q should be read in conjunction with the Company's consolidated financial statements and notes included in its 2000 Annual Report on Form 10-K.

2. 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 released and allocated. 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 June 30,				Six Months Ended June 30,
(In millions)	2001		2000		2001		2000


Weighted average shares outstanding	35.2		35.7		35.2		36.2

Weighted average ESOP shares not released and allocated	(0.4	)	(0.7	)	(0.5	)	(0.8	)


Weighted average basic shares outstanding	34.8		35.0		34.7		35.4

Dilutive effect of employee stock options	0.2		0.6		0.2		0.7


Weighted average diluted shares outstanding	35.0		35.6		34.9		36.1

Options to purchase 1.8 million and 0.4 million shares of the Company’s common stock were outstanding as of June 30, 2001 and 2000, respectively, that were not included in the computation of potential common shares because the effect of the options would be antidilutive.

3. SUPPLEMENTAL BALANCE SHEET INFORMATION

(In millions)			June 30, 2001 (Unaudited)			December 31, 2000


Inventories
	Finished goods		$	105.7		$	95.7
	Work in process		23.1			17.5
	Raw materials and supplies		32.1			28.0

		Total inventories	$	160.9		$	141.2

Property, Plant and Equipment
	Property, plant and equipment		$	893.0		$	938.3
	Less accumulated depreciation		(698.0		)	(737.6		)

		Property, plant and equipment – net	$	195.0		$	200.7

4. 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.

5. RESTRUCTURING CHARGES AND OTHER SPECIAL CHARGES

In the third quarter of 2000, the Company recorded a restructuring charge of $24.6 million to rationalize its manufacturing operations, streamline its organizational structure, and write-down impaired assets. The charges included $15.9 million for employee separation programs related to headcount reductions of approximately 430 employees. As a result of the program, the Company has reduced its headcount by approximately 300 to date.

In 1997 and 1998, the Company recorded charges of $146.8 million for the restructuring of its worldwide operations. As a result of the 1997 and 1998 restructuring plan, the Company has reduced its headcount relating to continuing operations by approximately 1,900.

During the six months ended June 30, 2001, the Company made cash payments of $9.1 million related to these programs, compared to $10.0 million in the same period in 2000. In addition, during the three months ended June 30, 2001, the Company recorded severance charges of $2.0 million as part of the continuing headcount reduction efforts. This charge was offset during the quarter by the reversal of a $2.1 million reserve due to a favorable settlement of certain obligations associated with the rationalization of its manufacturing operations. The remaining accrual balance for these programs at June 30, 2001 of $6.9 million is comprised of $5.8 million for severance and $1.1 million for other liabilities. Most of the remaining payments associated with these restructuring programs are expected to be completed in 2001.

6. SALE OF THE MEDICAL IMAGING AND PHOTO COLOR SYSTEMS SEGMENT

On November 30, 1998, the Company sold its worldwide Medical Imaging Systems business (the Medical Imaging Sale) to Eastman Kodak Company (Kodak). Excluded from the Medical Imaging Sale was the Company’s medical imaging/photo color manufacturing facility in Ferrania, Italy (the Ferrania Facility), at which the Company agreed to manufacture wet laser and x-ray film and hardware pursuant to an exclusive supply agreement (the Ferrania Supply Agreement) with Kodak. In exchange for retaining the Ferrania Facility and pursuant to certain conditions, Kodak agreed to pay the Company up to $25.0 million at such time as it was sold.

On August 2, 1999, the Company closed on the sale of its worldwide Photo Color Systems business, together with the Ferrania Facility, the Ferrania Supply Agreement and certain other associated businesses, to Schroder Ventures, through Schroder Ventures’ wholly owned affiliate, Ferrania Lux, S.A.R.L.

Kodak has challenged the Company’s claim for the full $25.0 million as well as claims for other amounts which the Company believes are due from Kodak in connection with the Ferrania Facility and Medical Imaging sales. The Company has retained cash, as reflected in its financial statements, which it collected on behalf of Kodak in an amount approximately equal to the disputed items. While the Company cannot predict with certainty the ultimate outcome of these disputed items, it believes its positions are supported by the applicable contractual terms.

7. COMPREHENSIVE (LOSS) INCOME

The components of total comprehensive (loss) income are shown below. As of June 30, 2001, the net loss of $0.2 million, consisting of the unrealized loss on available-for-sale securities offset by the gain on cash flow hedging, is recorded net of $0.1 million of deferred income tax benefits.

Accumulated other comprehensive (loss) income consists of the following:

	Foreign Currency Translation Adjustment			Cash Flow Hedging			Unrealized Loss on Available-for-Sale Securities			Accumulated Other Comprehensive (Loss) Income

Balance, December 31, 2000	$	(89.7	)	$	(0.9	)	$	(0.5	)	$	(91.1	)
First quarter 2001 change	(8.0		)	0.6			0.1			(7.3		)

Balance, March 31, 2001	(97.7		)	(0.3		)	(0.4		)	(98.4		)
Second quarter 2001 change	(4.6		)	0.3			0.2			(4.1		)

Balance, June 30, 2001	$	(102.3	)	$	–		$	(0.2	)	$	(102.5	)

Other comprehensive (loss) income for the three and six months ended June 30, 2001 and 2000 consists of the following:

	Three Months Ended June 30,						Six Months Ended June 30,

(In millions)	2001			2000			2001			2000

Net income	$	9.9		$	13.5		$	14.8		$	30.2
Changes in cumulative translation adjustments	(4.6		)	(1.5		)	(12.6		)	(2.0		)
Cash flow hedging – net	0.3			(0.1		)	0.9			(0.2		)
Unrealized loss on available-for-sale securities	0.2			(1.9		)	0.3			(1.9		)

Comprehensive income	$	5.8		$	10.0		$	3.4		$	26.1

8. BUSINESS SEGMENT INFORMATION

The Company’s businesses are organized, managed and internally reported as three segments differentiated primarily by their products and services, and the markets they serve. These segments, whose results are shown below, are Data Storage and Information Management, providing removable data storage products for use in the mobile and desktop, network and enterprise data center markets; Color Technologies, whose principle products include printing and color proofing systems, printing films and plates for the graphic arts marketplace, and carbonless paper, such as multi-part business forms; and Digital Solutions and Services, which provides 24-hour technical service and support for equipment sold by the Company as well as by other third party equipment vendors, and document imaging products for large format engineering documentation.

Business Segment Information (In millions)		Second Quarter	Data Storage and Information Management		Color Technologies		Digital Solutions and Services			(1)Corporate, Other and Unallocated			Total Company

Net revenues		2001	$	206.3	$	55.9	$	21.0		$	0.2		$	283.4
		2000	211.4		74.0		23.7			(2.0		)	307.1

Operating		2001	$	12.0	$	4.1	$	(3.0	)	$	(0.2	)	$	12.9
	Income(loss)	2000	6.7		8.0		(0.6		)	(0.8		)	13.3



Business Segment Information (In millions)		Six Months To Date	Data Storage and Information Management		Color Technologies		Digital Solutions and Services			(1)Corporate, Other and Unallocated			Total Company

Net revenues		2001	$	425.9	$	111.6	$	43.8		$	2.0		$	583.3
		2000	444.6		144.4		48.7			(2.0		)	635.7

Operating		2001	$	21.6	$	7.9	$	(4.5	)	$	(6.0	)	$	19.0
	income(loss)	2000	19.2		13.2		(1.3		)	0.1			31.2

(1) The Corporate, Other and Unallocated amounts for net revenues and operating income (loss) primarily include certain amounts not included in the Company’s disclosable business segments. Operating income for the six months ended June 30, 2000 includes a one-time benefit of approximately $2 million related to the conclusion of a development project, net of a manufacturing capacity adjustment. The Corporate, Other, and Unallocated operating loss for the six months ended June 30, 2001 includes $5.7 million of accelerated software amortization discussed in Note 10.

Intersegment revenues are not material. The proportion of total assets by segment has not changed materially from December 31, 2000.

9. DERIVATIVE FINANCIAL INSTRUMENTS

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” effective January 1, 2000. The Company also adopted SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133,” effective July 1, 2000. SFAS No. 133 requires that all derivatives, including foreign currency exchange contracts, be recognized on the balance sheet at fair value. Derivatives that are not hedges must be recorded at fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of underlying assets or liabilities through income or recognized in other comprehensive income in stockholders’ equity until the underlying hedged item is recognized in income. Loss amounts reclassified into income for the six months ended June 30, 2001 totaled $0.9 million. The ineffective portion of a derivative’s change in fair value is to be immediately recognized in income. The amount of accumulated net deferred gains on foreign currency cash flow hedges included in other comprehensive income (loss) in shareholders’ equity as of June 30, 2001 was not significant.

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. These contracts are entered into to fix the U.S. dollar amount of the eventual cash flows resulting from such transactions. The Company formally documents 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 derivatives to booked or 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 gains and losses that were accumulated in other comprehensive income (loss) recognized in current period operations. The Company does not hold or issue derivative financial instruments for trading purposes and is not a party to leveraged derivatives.

The Company enters into foreign currency forward-exchange contracts to hedge foreign currency exposure of its firm commitments to purchase and sell goods that qualify as fair-value hedges. These forward-exchange contracts mature in twelve months or less.

Substantially all of the Company’s intercompany sales to Europe are denominated in Euros. The Company purchased options as hedges of a portion of these anticipated 2001 sales that qualify as cash-flow hedges. These option contracts range in duration from one to six months.

Upon adoption of SFAS No. 133, the Company recorded a cumulative-effect-type loss adjustment in accumulated other comprehensive income (loss) to recognize the fair value of foreign currency contracts designated as cash-flow hedging instruments. The adjustment did not have a significant impact on the Company’s financial position or results of operations at adoption.

As of June 30, 2001 the fair market value of the Company’s foreign currency forward and option contracts outstanding was a negative $5.1 million. The estimated fair market values were determined using available market information or other appropriate valuation methodologies.

10. CAPITALIZED SOFTWARE AMORTIZATION

During the last half of 2000, the Company determined that it would abandon certain components of its computer software system. Accordingly, the Company shortened the estimated useful life of a large portion of capitalized software such that this portion of the software would be fully amortized by the end of the first quarter of 2001. The Company recorded the remaining $5.7 million of non-cash, pre-tax charges in first quarter 2001 for amortization related to software being abandoned.

11. NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, “Business Combinations,” which addresses accounting and financial reporting for business combinations. This statement is effective in its entirety for the Company on January 1, 2002. Also in June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which addresses accounting and financial reporting for intangible assets acquired individually or with a group of other assets, except for those acquired in a business combination. This statement is effective in its entirety for the Company on January 1, 2002. The Company does not believe that adoption of these statements will have a material impact on its results of operations or financial position.

****

PricewaterhouseCoopers LLP, the Company's independent accountants, 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.

REPORT OF INDEPENDENT ACCOUNTANTS

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

We have reviewed the accompanying condensed consolidated balance sheet of Imation Corp. (the “Company”) as of June 30, 2001 and the related consolidated statements of operations for each of the three-month and six-month periods ended June 30, 2001 and 2000 and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, 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 reviews, 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 auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2000, 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 25, 2001, 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, 2000, 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 24, 2001

IMATION CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Comparison of Three Months Ended June 30, 2001 and 2000

Net revenues of $283.4 million declined 7.7 percent from last year’s revenues of $307.1 million. This decline was partially a result of difficult economic conditions and the on-going strength of the U.S. dollar versus most foreign currencies. During the second quarter of 2001, the Company experienced negative effects of changes in currency exchange rates of approximately 3 percent and price declines of almost 7 percent. Increases in newer product revenues of 13 percent over the prior year, were offset partially by declines in mature product revenues, for total volume increases of approximately 2 percent.

Data Storage and Information Management revenues declined $5.1 million, or 2.4 percent, to $206.3 million from $211.4 million a year ago. The most significant factor causing this decline was reduced sales of SuperDisk. Excluding SuperDisk hardware and media, Data Storage revenues would have increased 4.8 percent over second quarter 2000. Pricing pressures persisted throughout the period but were less than recent quarters.

Color Technologies revenues were $55.9 million as compared with $74.0 million a year ago. The $18.1 million decline from second quarter 2000 was primarily due to lower sales of analog proofing systems, and plates and film products.

Digital Solutions and Services second quarter 2001 revenues were $21.0 million as compared with $23.7 million a year ago. The $2.7 million decline from second quarter 2000 resulted primarily from the ongoing transition in the large format document imaging business from analog to digital, as well as declines in the Document Imaging business.

Gross profit in second quarter 2001 was $86.3 million or 30.5 percent of revenues, compared to $94.4 million, or 30.8 percent of revenues in the year earlier quarter. The gross margin percentage decrease resulted primarily from continued negative impacts from changes in foreign currency exchange rates, partially offset by productivity improvements and lower price erosion.

Selling, general and administrative (SG&A) expenses in second quarter 2001 were $57.0 million, compared to $64.4 million in the year earlier quarter. This $7.4 million decline was primarily a result of lower selling expenses and lower software amortization.

Research and development (R&D) costs were $16.4 million, or 5.9 percent of revenues.

Operating income in the second quarter of 2001 was $12.9 million, compared with $13.3 million for the same period last year. This decline is due to the factors discussed above.

Other income for the second quarter of 2001 was $1.6 million, comprised primarily of interest earned on cash balances. This compares with $4.0 million a year ago. The decline was due to investment and currency-related activities.

The tax rate for the second quarter was 32 percent. This is the rate projected for the full year 2001. This compares with a 22 percent tax rate for the second quarter 2000 and a full year 2000 rate of 5 percent. The lower 2000 rates resulted from changes in the Company’s European structure resulting from the sale of the Medical Imaging and Photo Color Systems businesses, and the Italian manufacturing facility.

Net income in the second quarter of 2001 was $9.9 million, or $0.28 per basic and diluted share, compared with net income of $13.5 million, or $0.39 per basic and $0.38 per diluted share in the second quarter 2000. The decline of $0.10 per diluted share resulted from foreign currency impacts, tax rate changes, and lower non-operating income. Adjusted for the impact of these items, net income per diluted share would have increased by $0.07 over the same period in 2000.

Comparison of Six Months Ended June 30, 2001 and 2000

In the first quarter of 2001, the Company recorded special charges related to accelerated amortization associated with the abandonment of certain capitalized software (see Note 10 to Consolidated Financial Statements). The $5.7 million charge for this amortization is recorded in selling, general, and administrative expenses.

On a year to date basis, net revenues of $583.3 million declined 8.2 percent from last year’s $635.7 million. As a result of difficult economic conditions, the Company experienced lower demand for its mature products, which comprised most of the decline as compared to the prior year. During the first six months of 2001, the Company experienced negative effects of changes in currency exchange rates of approximately 2 percent and price declines of almost 9 percent. Increases in newer product revenues of 17 percent over the prior year, were offset partially by declines in mature product revenues, for total volume increases of approximately 3 percent. The Company’s current outlook is for full-year 2001 revenues to be down slightly compared to 2000.

Data Storage and Information Management revenues decreased 4.2 percent to $425.9 million from $444.6 million a year ago. The revenue decline was primarily due to increased pricing pressures, reductions in sales of SuperDisk, and negative impacts of currency translation. Volume growth of 13 percent partially offset the decline, led by increased demand for optical media, and the Company’s enterprise tape cartridges.

Color Technologies revenues were $111.6 million, as compared to $144.4 million a year ago. The $32.8 million decline was primarily due to lower sales of analog proofing products, graphic arts film products, and plates. Strong digital proofing product sales partially offset the overall decline. The Color Technologies segment was particularly impacted by the difficult economic conditions.

Digital Solutions and Services revenues declined $4.9 million to $43.8 million. The decrease primarily resulted from the ongoing transition in the large format document imaging business from analog to digital, as well as declines in the Document Imaging business. The Digital Solutions and Services segment was also impacted by the difficult economic conditions.

Gross profit was $173.5 million, or 29.7 percent of sales, for the first six months of 2001. This compared with $196.5 million, or 30.9 percent of sales, a year ago. The gross margin percentage decrease resulted primarily from continued negative impacts from changes in foreign currency exchange rates, partially offset by productivity improvements and lower price erosion.

Selling, general and administrative (SG&A) expenses for the first six months of 2001 were $121.6 million. Excluding special charges, SG&A declined $15.7 million to $115.9 million in 2001 from $131.6 million last year. This decline was primarily a result of lower selling expenses and lower software amortization. The Company continues to expect SG&A spending to be in the range of 20 percent of revenue for the full year 2001.

Research and development (R&D) costs for the first six months of 2001 were $32.9 million. The Company expects full year R&D spending to be the range of 5-6 percent of revenues.

Operating income for the first six months of 2001 was $19.0 million. Excluding special charges, operating income for the first six months of 2001 was $24.7 million as compared to $31.2 million for the same period last year. This decline is due to the factors discussed above. Operating income for the third quarter of 2001 is expected to be higher than the prior year quarter, and for the full year, excluding special charges, to grow 5-10 percent over 2000 results to $48 to $51 million.

Other income for the first six months of 2001 was $2.7 million, as compared with $11.9 million for the same period last year. The decline was mostly attributable to $7.6 million of venture capital distributions received during the first six months of 2000, increased currency translation losses in 2001, and lower interest earned on cash balances. Due to recent declines in short term interest rates, the Company currently estimates full-year 2001 non-operating income to be below previous guidance of about $8-10 million.

The tax rate for the first six months and expected for the full-year 2001 is 32 percent. This compares with a 22 percent tax rate for the first six months of 2000 and a full year 2000 rate of 5 percent, resulting from changes in the Company’s European structure resulting from the sale of the Medical Imaging and Photo Color Systems businesses, and the Italian manufacturing facility.

Income for the first six months of 2001 was $14.8 million, or $0.43 per basic share and $0.42 per diluted share. Excluding special charges, income for the first six months of 2001 was $18.7 million, or $0.54 per basic share and $0.53 per diluted share. This compares with income, before cumulative effect of accounting change, of $33.6 million, or $0.95 per basic share and $0.93 per diluted share, for the same period in 2000. The decline resulted from tax rate changes, lower non-operating income, and foreign currency impacts. Adjusting for these items, excluding special charges, diluted earnings per share would have increased by $0.02 compared to the year-ago period. Due primarily to the increase in the full year tax rate from 5 percent in 2000 to a projected 32 percent in 2001, the full year 2001 earnings per share, excluding special charges, is expected to be below the full year 2000 earnings per share, despite anticipated improvements in operating income.

Financial Position

Accounts receivable days sales outstanding of 48 days was unchanged from December 31, 2000. Inventory days of supply of 74 days was up from 63 days as of December 31, 2000, but down 5 days from the same quarter in 2000. The increase since December 31, 2000 is due primarily to higher optical media inventory in the Data Storage and Information Management segment, as well as a planned build-up of tape products at one manufacturing plant in anticipation of the relocation of some of the work to another facility.

The Company did not repurchase any shares of common stock during the first six months of 2001. Authorization to repurchase approximately 3.2 million shares remains under the terms of the existing stock repurchase program.

Liquidity

Cash provided by operating activities was $89.2 million during the six months ended June 30, 2001 compared with $90.6 million during the same period in 2000. Depreciation and amortization was $30.1 million in the first six months of 2001 compared with $34.8 million in 2000. Amortization in 2001 includes $5.7 million of special charges related to the accelerated amortization discussed above. Depreciation and amortization, excluding the special charge, is expected to be in the range of $50 million for the full year 2001. Changes in working capital provided $44.3 million during the first six months of 2001, as compared with $19.0 million in the comparable period of 2000. This increase includes two one-time benefits, including a $15.1 million income tax refund and the reclassification of $11.0 million of restricted cash from other current assets to cash and equivalents, which was previously used as collateral for local borrowings of debt in an international subsidiary. For the six months ended June 30, 2001, the Company made total cash payments of $9.1 million associated with its restructuring programs, as compared to $10.0 million in the first six months of 2000.

Cash used by investing activities was $23.3 million for the six months ended June 30, 2001, primarily consisting of capital expenditures of $20.7 million. This compares to $29.2 million used for investing activities during the same period last year, primarily consisting of capital expenditures of $28.7 million. Capital expenditures are expected to be in the range of $45 million for the full year 2001.

Net financing activities during the first six months of 2001 used cash of $5.1 million compared with a $43.1 million use of cash in the comparable 2000 period. Financing activities in the first six months of 2000 consisted primarily of the purchase of treasury stock under an existing repurchase program. There were no shares purchased in the first six months of 2001.

The Company has a Loan and Security Agreement (the Loan Agreement) with a group of banks. The Loan Agreement provides for revolving credit, including letters of credit, with borrowing availability based on eligible accounts receivable, inventory and manufacturing machinery and equipment not to exceed $175.0 million. Borrowing availability at June 30, 2001 was $71.0 million. No borrowings were outstanding under the Loan Agreement as of June 30, 2001. The Loan Agreement expires December 31, 2001.

In addition, the Company has arranged for local borrowings of debt for certain subsidiaries. As of June 30, 2001, $14.3 million of short-term borrowings were outstanding under such arrangements, as compared to $23.7 million as of December 31, 2000.

As of June 30, 2001 the Company’s ratio of debt to total capital was 2.1 percent, down from 3.5 percent at December 31, 2000, primarily due to the decline in outstanding short-term debt. The Company expects that cash and equivalents, together with cash flow from operations and availability of borrowings under its current and future sources of financing, will provide liquidity sufficient to operate the Company for the foreseeable future.

Derivative Financial Instruments

In conjunction with the adoption of SFAS No. 133 (see Note 9 to Consolidated Financial Statements), the Company revised its foreign currency hedging policy to allow for the hedging of anticipated transactions (“cash flow hedging”) in addition to booked transactions (“transaction hedging”). The Company has begun to use cash flow hedging to reduce foreign currency exchange risks for 2001, and may further expand its use of cash flow hedging in the future. The objective of the currency hedging is to reduce the fluctuations in earnings and cash flows caused by volatility in exchange rates; however, no assurance can be given that these risk management activities will offset more than a portion of the adverse financial impact.

Euro Conversion Status

On January 1, 1999, 11 of the 15 member countries of the European Union adopted the Euro as their new common currency. The Euro is trading on currency exchanges and can be used for non-cash transactions. Local currencies will remain legal tender until December 31, 2001. By no later than December 31, 2001, participating countries will issue new Euro-denominated bills for use in cash transactions. By no later than July 1, 2002, participating countries will begin using the Euro as the legal tender and will withdraw all legacy currencies.

The Euro conversion may lead to increased competition between countries and potential erosion of margins as prices in different countries are more transparent. The Company is reviewing its marketing strategies to address possible increased competition and is also reviewing and testing its software compatibility with the Euro conversion. The Company does not expect that the Euro conversion will have a material impact on the Company’s results of operations or financial position.

New Accounting Pronouncements

Forward-Looking Statements

Certain information contained in this report which does not relate to historical financial information may be deemed to constitute forward-looking statements. The words or phrases “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 readers not to place undue reliance on any such forward looking statements, which speak only as of the date made. Among the factors that could cause the Company’s actual results in the future to differ materially from any opinions or statements expressed with respect to future periods are continuing uncertainty in global economic conditions that make it particularly difficult to predict product demand, the Company's ability to meet its cost reduction and revenue growth targets, and its ability to implement its restructuring program on a timely basis and to achieve the projected benefits, its ability to introduce new offerings in a timely manner, the competitive pricing environment, foreign currency fluctuations, the outcome of litigation, the resolution of disputes associated with the sale of the Medical Imaging Systems business, the ready availability and price of energy, the ability of Imation to secure adequate supply of certain high demand products, the market acceptance of newly introduced product and service offerings, the rate of decline for certain existing products, pricing transparencies resulting from the Euro conversion, as well as various factors set forth in the Company's filings with the Securities and Exchange Commission, including its 2000 Annual Report on Form 10-K.

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 fiscal year ended December 31, 2000.

The Company is also 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, 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 could materially affect operating results of any one quarter when resolved in future periods, it is management’s opinion that after final disposition, any monetary liability or financial impact to the Company beyond that provided in the Condensed Consolidated Balance Sheet as of June 30, 2001 would not be material to the Company’s financial position or annual results of operations or cash flows.

Items 2-5. Not Applicable

Item 6(a). Exhibits

The following documents are filed as exhibits to this Report.

	10.1	Separation Agreement between Steven D. Ladwig and the Company

	15.1	An awareness letter from the Company’s independent accountants regarding unaudited interim financial statements.

(b) No reports on Form 8-K were filed during the quarter ended June 30, 2001.

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:	July 31, 2001	By:	/s/ Robert L. Edwards

			Robert L. Edwards
			Senior Vice President, Chief Financial Officer and Chief Administrative Officer

EXHIBIT INDEX

Exhibit Number	Description


10.1	Separation Agreement between Steven D. Ladwig and the Company
15.1	An awareness letter from the Company’s independent accountants regarding unaudited interim financial statements.

1.	Employee will remain employed by Imation, and Imation agrees to employ Employee, until August 3, 2001 and Employee shall continue to be entitled to all pay, benefits and perquisites accrued and vested through that date. Employee’s resignation effective August 3, 2001, will be deemed a voluntarily resignation by Employee for other than “Good Reason,” as defined in the Severance Agreement. Employee will not be entitled to any pay, benefits or any other consideration under the Severance Agreement.

2.	As a result of Employee’s agreement to remain employed by Imation until August 3, 2001, the restrictions on 25,000 shares of restricted common stock will lapse on August 1, 2001, and the 20,000 unvested stock options will vest on August 1, 2001, after which time Employee will be permitted to dispose of such stock as he sees fit, subject to applicable withholding taxes as more fully described below and so long as he complies with all securities trading laws and regulations. Employee will have 30 days after August 3, 2001, to exercise all fully vested stock options. In the event that Employee elects to dispose of any Imation stock, he shall dispose of no more than 20,000 shares per day. Imation agrees to take all necessary steps immediately after August 1, 2001 to issue such unrestricted shares to Employee (less 9,113 shares which will be withheld to cover payment of applicable withholding taxes) and to promptly issue any shares upon exercise of such vested options in accordance with the terms of such agreements.

3.	Until August 3, 2001, in addition to his regular duties, Employee will assist Imation with the transition of responsibility for key third party relationships designated by Imation’s CEO (including, but not limited to, IBM, Dell, Sun Microsystems, Hewlett Packard, University of Minnesota and industry analysts). Such cooperation and assistance will include, but not be limited to, assisting Imation’s CEO in the establishment of relationships with key third parties, including attending joint calls on such third parties.

4.	For a reasonable time after August 3, 2001, Employee agrees that he will continue to assist Imation with the transition of responsibility for key third party relationships designated by Imation’s CEO (including, but not limited to, IBM, Dell, Sun Microsystems, HP, University of Minnesota and industry analysts). Such cooperation and assistance will include, but not be limited to, assisting Imation’s CEO in the establishment of relationships with key third parties, including attending joint calls on such third parties, provided that Imation provide adequate advance notice of any such requested assistance, and such assistance shall not materially or unreasonably interfere with Employee’s performance of his duties at Retek, Inc.

5.	Employee will inform Imation’s CEO of requests that he receives for information concerning Imation and its businesses within three business days of such requests.

6.	Employee 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, subject to any reimbursement for business expenses incurred by Employee in accordance with Imation policy.

7.	Following termination of his employment with Imation on August 3, 2001, Employee will execute a General Release of All Claims against Imation and its affiliates, directors, officers and employees, in the form attached as Exhibit A.

8.	Employee will not make disparaging remarks of any kind about Imation, or its officers, directors, employees, products or business opportunities, and will not interfere with any of Imation’s business relationships, including relationships with its customers, vendors, distributors, or employees, provided, however, that nothing herein shall limit Employee’s ability to perform his duties to Retek, Inc.

9.	For a period of one (1) year following the date of this Agreement, Employee will not solicit any Imation employee to work for Employee or any third party, unless Employee first obtains permission to do so from Imation’s CEO, who will have complete discretion to provide such permission.

10.	Employee will never use any Confidential Information or disclose any Confidential Information to anyone. On or shortly after August 3, 2001, Employee must return all Imation property currently in Employee’s possession. Employee acknowledges that this obligation is continuing and agrees to promptly return to Imation any subsequently discovered property as described above. For the purposes of this Paragraph the term “Confidential Information” means:

		Information not generally known and proprietary to Imation, including all (1) trade secret information about Imation’s processes and products, (2) information relating to research, development, manufacture, purchasing, accounting, engineering, marketing, merchandising, selling, leasing, servicing finance and business systems and techniques, or similar information of a third party (including 3M) who has entrusted such information to Imation, and (3) all information disclosed to Employee, or to which Employee obtains access, whether originated by Employee or by others, during the period of Employee’s employment, which Employee has a reasonable basis to believe is Confidential Information.

11.	Imation hereby waives and releases Employee from any claim or liability it may have in connection with Employee’s employment with Retek, Inc. under the non-competition provisions of Imation’s employee agreement.

12.	Employee understands that the term Imation, as used in this Agreement, includes: (1) its past, present, and future divisions, subsidiaries, affiliates successors and assigns, and their officers, directors, employees, agents, insurers and legal counsel; (2) any ERISA employee benefit plan sponsored by Imation, acting as plan administrator, fiduciary or party in interest with respect to such plan. Employee agrees that this Agreement binds Employee and also binds Employee's heirs, executors, administrators, assigns, agents, partners and successors in interest.

13.	This Agreement is not an admission by Imation of any violation of Employee's rights or of any statutory or other legal obligation.

14.	This Agreement contains the entire understanding between Employee and Imation and supersedes all prior agreements and understandings relating to the subject matter of this Agreement.

15.	Any dispute arising between Employee 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 Employee and Imation.

16.	The agreement will be governed by and construed and interpreted according to the laws of the State of Minnesota.

ACCEPTED AND AGREED:		IMATION CORP.


/s/ Steven D. Ladwig		By: /s/ William T. Monahan



Date: June 27, 2001		Date: June 26, 2001