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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number: 1-14310

(651) 704-4000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b of the Act).     Yes þ          No o

      Aggregate market value of voting stock of the Registrant held by non-affiliates of the Registrant, based on the closing price of $29.76 as reported on the New York Stock Exchange on June 28, 2002: $1,044.6 million.

      The number of shares outstanding of the Registrant’s common stock on February 28, 2003 was 35,442,208.

DOCUMENTS INCORPORATED BY REFERENCE

      Selected portions of Registrant’s Proxy Statement for Registrant’s 2003 Annual Meeting are incorporated by reference into Part III.

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PART I

General

      Imation Corp. (Imation or the Company), a Delaware corporation formed in 1996, develops, manufactures, and markets magnetic and optical removable data storage products for users of digital information technology in more than 60 countries around the world. The Company’s primary business is the development, manufacture and distribution of removable data storage products, categorized under the Standard Industrial Classification (SIC) code as “3695; Magnetic and Optical Recording Media” or the North American Industry Classification System (NAICS) code as “334613; Magnetic and Optical Recording Media Manufacturing.”

      The Company was formed in a spin-off of the businesses which comprised substantially all of the data storage and imaging systems groups of 3M Company. Since the spin-off, the Company has divested most of the non-data storage businesses, consolidated warehouses and physical infrastructure it inherited with the spin-off, invested in information systems, and adjusted the basic operational infrastructure to support the Company more effectively. Divestitures within the last three years include: 1) the color proofing and color software business that comprised most of the Color Technologies segment sold on December 31, 2001 to Kodak Polychrome Graphics LLC and Kodak Polychrome Graphics Company LTD (collectively referred to as KPG), and 2) the Digital Solutions and Services (DSS) business that provided field service on Imation and other Original Equipment Manufacturers’ (OEMs) hardware devices, manufactured microfilm aperture cards and sold document imaging consumables and hardware systems. The North America DSS business was sold effective August 30, 2002 to DecisionOne Corporation while the remaining DSS businesses outside North America were closed or sold by September 30, 2002 (see Note 3 to the Consolidated Financial Statements).

      Following its divestitures, the Company is now almost singularly focused on the removable data storage media industry (see Figure #1) and has a long history in this industry dating from 1947, when this business was started by 3M Company, resulting in the first commercialized data storage tape introduced in 1953. The Company’s vision is to be the recognized worldwide leader in removable data storage, to be the most trusted source for digital data storage by consumers and businesses alike, and to be recognized as an independent expert in digital information back-up, archive, and protection. Key elements of the Company’s strategy are as follows:

	•	Strengthen and grow the core data storage removable media business by offering a comprehensive portfolio of products to the sectors of the market where it competes;
	•	Expand into business areas that are closely adjacent to the core;
	•	Further develop and enhance manufacturing and sourcing capabilities to deliver optimum cost structure and product quality;
	•	Leverage the Company’s broad and successful relationships with leading OEMs, customers, and distribution channels;
	•	Further penetrate markets outside the United States; and
	•	Maintain and extend technology capabilities in key areas, including cartridge design and manufacturing, tape coating, servo-writing, and advanced optical storage technologies.

      Historical results are reported by the Company for four business segments: Data Storage and Information Management (DS&IM), Specialty Paper, Color Technologies, and Digital Solutions and Services (DSS) outside of North America. As noted in Note 3 to the Consolidated Financial Statements, the North America DSS business was sold on August 30, 2002 and was reclassified as discontinued operations for all periods presented. In addition, the DSS businesses outside of North America, which were sold or closed by September 30, 2002, remained in the presentation of continuing operations as did

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      Approximately 49 percent of the Company’s revenues are derived from international sales in over 60 countries outside the U.S. Financial information by segment and geographic region can also be found in Note 11 to the Consolidated Financial Statements.

Figure #1

      The Company competes within the global information technology (IT) industry. Specifically, the Company develops, manufactures and markets removable data storage media, where digital information that is important to organizations and individuals can be recorded and stored. The need to capture, manipulate, store and protect ever larger amounts of this digital information is driving demand for a variety of data storage media formats that are differentiated by total storage capacity, reliability, data transfer rates, cost, portability, and media size. According to various industry analysts and Company estimates, the total global data storage market, including hardware and services, is estimated to be in excess of $70 billion. The removable storage media segment, where the Company directly competes, is estimated to exceed $7 billion.

      The demand for removable data storage media is driven by the rapid growth of digital information, a trend that has accelerated with the emergence of the digital economy where more and diverse types of information are created and managed digitally. As data storage hardware, software, and transmission networks continue to deliver improved cost/performance, new and expanded applications have emerged which require the creation of larger, more complex sets of data and larger databases to more efficiently support critical business processes. With business data reaching across multiple locations, data security, archiving and reliable backup have become critical business processes. In addition, there has been increased awareness of the risks of catastrophic data loss and increased requirements for record retention, causing an increase in data backup and retention practices at many organizations. As use of the Internet

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      There are many diverse ways to store digital information, depending on the application and the amount of information to be stored. In a commercial environment, decisions about the kind of data storage platform to use depend on a multitude of factors including storage capacity, access speed, performance, scalability, portability, compatibility with other components, and total cost. For example, “live” data that is directly accessed and manipulated typically will be treated differently than data which is copied for purposes of back-up or archiving. As a result, storage implementations in a commercial environment typically may include more than one platform and media format.

      There are multiple sales channels available to users of data storage products, including direct from factory, sales and distribution through OEMs, value added resellers, distributors, catalog and retail.

      In the case of removable storage, there are many formats, in both magnetic and optical technologies, ranging from tape cartridges and diskettes to CDs and DVDs. Removable data storage products such as those offered by the Company provide the benefits of easily expanded capacity, data transportability, data management, and data security at a significantly lower relative cost than fixed disk storage. The Company develops, manufactures, and markets removable data storage media products in nearly every capacity range a user may require — from data that could occupy one book up to data occupying thousands of libraries. Data storage media products are used across all major application areas — enterprise data centers, the network server environment at both the high-end and low-end, and personal storage applications for both consumer electronics devices and desktop or laptop computers.

      The digital economy, as discussed above, is at a different level of development and penetration in different geographies. As a result, growth rates will typically vary in different application areas and product categories in different parts of the world.

      Enterprise Data Center — Imation is the leading supplier of magnetic tape cartridges to large data centers worldwide. In the data center, Imation’s products are typically used in mainframe and open systems environments, in large data libraries for back-up, business and operational continuance planning, near-line data storage and retrieval, cost-effective mass storage, and archival storage. Imation’s tape cartridges are often used in an automated tape library that can either be direct-attached storage or part of networked storage infrastructure such as a Storage Area Network (SAN). Large data centers are found in multiple industries, including financial services, geophysical exploration, transportation, government, telecommunications, and support the IT infrastructure of most large organizations globally. Enterprise level tape storage cartridges are used to store large amounts of data — up to 200 gigabytes (GB) of data on some cartridges and data transfer rates as high as 40 megabytes (Mb) per second. Imation cartridges used in enterprise-class applications include BlackWatch™ 9840 and 9940 cartridges developed for use with StorageTek drives, and BlackWatch 3480, 3490, 3590, and 3590E cartridges, developed for use with IBM drives. The Company is the exclusive manufacturer of 9840 and 9940 tape cartridges.

      Network Server Environment — Imation manufactures and distributes data tape cartridges for the wide variety of tape drives that are used in the network server environment, providing back-up, archive, and near-line storage in open systems environments for small to mid-sized businesses and corporate data centers. Imation cartridges work with tape drive systems that support the major operating environments including Unix, Linux, and Microsoft Windows® NT. Imation cartridges for entry-level server applications include Travan™ tape cartridges for use with Seagate Travan drives, and SLR tape cartridges for use with drives sold by Tandberg Data. For mid-range to high-end servers, where higher capacity cartridges are required, Imation’s BlackWatch DLTtape IV and BlackWatch SuperDLTtape cartridges are used in DLT and SDLT tape drives sold by several drive manufacturers. BlackWatch Ultrium™ cartridges are used in Linear Tape Open drives manufactured by IBM, Seagate, and Hewlett Packard.

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      Personal Storage Applications — In the personal storage media sector, businesses and consumers use Imation’s broad range of digital storage media, storage devices, and accessories to store business information, spreadsheets, presentations, digital photos, data, music, video and more. Imation products provide storage media capacities ranging from 1.44MB diskettes to 650 MB CD-R and CD-RW optical disks to 9.4GB DVD optical disks.

      The application areas described above are overlapping with no definitive boundaries. The Company’s products are frequently used in more than one environment, depending on the specific customer need for functionality or capacity. In addition, the way these application areas are defined frequently changes as storage capacities and functionality needs increase. The following chart shows the Company’s data storage media offerings on a continuum of capacities and typical applications:

      As described above, the Company’s products are used by business customers in a variety of industries and by individual consumers. The Company’s removable data storage products and accessories are produced in multiple formats, including both magnetic and optical, across a wide spectrum of data storage drives, many with multiple manufacturers. The products are also often used in more than one storage environment, depending on the needed capacity.

      While the Company has a broad range of users for the spectrum of the Company’s products, one customer, StorageTek, represented approximately 11% of the Company’s net revenues in 2002. StorageTek has been successful in the enterprise market for tape automation systems with its 9840 and 9940 tape drives. The Company is the sole source of supply for 9840 and 9940 tape cartridges, which it sells to StorageTek as well as other customers. The divestiture of the Company’s non-data storage businesses reduced total Company revenues in 2002, which also increased StorageTek’s percent of total net revenues versus prior years.

      In addition to StorageTek, who is both a customer and OEM partner, the Company also considers its relationship with IBM, who also is both a customer and OEM partner, to be significant to its operations. The development of future formats with key OEMs, such as StorageTek and IBM, is critical to the Company’s future success and the loss of such a relationship could have a material effect on the Company’s business.

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      The global markets for the Company’s products are intensely competitive and subject to continuous pricing pressure, frequent product performance improvement, and rapid technological change. The Company directly competes against other manufacturers of removable data storage products and, to some extent, against manufacturers of other forms of data storage, including hard disk storage for network and enterprise storage, and solid state (semi-conductor based) in the personal storage environment. Hard disk storage typically has been used for on-line applications whereas removable storage has been used for near-line and off-line applications such as back-up and archive, and in various consumer applications. Competition is based on a multitude of factors, including cost, breadth of product line, capacity, access speed and performance, durability, reliability, distribution capability, geographic availability, scalability, and compatibility. At the personal storage level, multiple formats of removable storage compete based on many different factors, with particular emphasis on pricing, emerging applications, convenience, compatibility and technology. Broad competition has resulted in continuous price pressure in the past and the Company expects this trend to continue.

      The Company’s primary competitors in the removable data storage market include Fuji Photo Film Co., Ltd., Hitachi Maxell, Ltd., Memorex, Inc., Verbatim Corporation, TDK Corp., Emtec, Inc., and Sony Corp. In addition, the Company has various agreements with manufacturers such that it is possible to be, at various times, a competitor, supplier, or customer with those manufacturers. While these companies compete in the removable media market, they do not generally report financial results for these businesses on a stand alone basis. Therefore it is difficult for the Company to estimate its relative market share. However, the Company uses a variety of industry sources to estimate market size and share and estimates that in 2001, the latest period for which data is available, it held approximately 15 to 17 percent of the total market sectors in which it chooses to compete for removable media, one to two percentage points greater than its nearest competitor.

      Imation’s data storage products are sold through a combination of distributors and value-added resellers, retailers, and OEMs. In the United States, approximately 60 percent of revenues come from distributors, 22 percent from OEMs and 18 percent from the retail channel. The Company maintains a sales force of approximately 50 representatives to service this distribution network.

      Approximately 50 percent of the Company’s data storage revenues come from sales outside the United States, primarily through subsidiaries and local sales teams in 35 different locations throughout Europe, Asia, Latin America, and Canada.

      The Company manufactures data storage products at its facilities located in the United States at plants in Camarillo, California; Tucson, Arizona; Wahpeton, North Dakota; and Weatherford, Oklahoma. All of these manufacturing facilities are certified to ISO 9001:2000 quality standards. The Company manufactures most of the components for its magnetic data storage products, including magnetic tape and plastic components, but sources some material from outside suppliers. The Company does not manufacture the vast majority of the optical media products it sells but rather sources these products from manufacturers outside the U.S. In August 2002, the Board of Directors approved a capital expenditure of $49 million to design and build a new, state-of-the-art tape coating capability at its Oklahoma plant. The new coating facility is expected to begin operation by the end of the first quarter of 2004.

      The manufacture of high quality, competitive removable data storage media requires exacting manufacturing process steps with precise physical, electrical, and chemical tolerances as well as significant technical expertise in several areas including coating process technology, servo-writing, component design, fine particle plastic injection molding, automated high volume assembly, and magnetic and optical physical and material science. To manufacture magnetic media, a thin plastic film material is coated precisely and uniformly with a magnetic dispersion solution. Significant experience is required to successfully coat tapes

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      Servo-writing technology in linear tape and tape drives provides precise positioning of read/write heads to achieve higher data densities on tape and is a critical technology to achieve increased storage capacities. Tape handling through the cartridge is an increasingly critical element of system robustness for the cartridge and the drive as tape transport speeds in the drives increase and the distance between the read/write head and the tape media decreases. Cartridge design and manufacturing includes the manufacture and assembly of plastic moldings and components, metal part stamping and modeling of the tape path and tape handling through the cartridge. The Company believes its servo-writing and cartridge design and manufacturing capabilities in particular give it a competitive advantage for certain products.

      The principal raw materials the Company uses for data storage products include plastic resins, polyester films, magnetic pigments, specialty chemicals, and solvents. The Company makes significant purchases of these and other materials and components used in the manufacturing operations from many domestic and foreign sources. There are two sources of supply for the base film and two for the MP (metal particulate) pigments on which the industry relies. If supply were disrupted for any of these key materials, the business of the Company and its competitors could be negatively impacted. The Company does rely on certain partners as sole suppliers for components used in its manufacturing processes. The loss of these certain suppliers could have a material impact on the business. Except for the instances cited above, the Company is not overly dependent on any single supplier of raw materials. The Company also makes significant purchases of other finished and semi-finished products, including optical media and certain finished tape and tape cartridges, primarily from Asian suppliers.

      The Company’s Specialty Paper unit is the remaining part of the Color Technologies segment retained by the Company. This business manufactures a wide variety of carbonless paper products that are used to make multi-part business forms at its specialty coating and converting production facility located in Nekoosa, Wisconsin. The Specialty Paper business represented approximately five percent of the Company’s total revenues in 2002.

      The Specialty Paper unit has been an innovative leader in the carbonless paper industry for over 40 years, specializing in cut sheet products. These products are used by most industry segments and are distributed through distribution channels including traditional fine paper merchants. The primary competitors to this business include Appleton Papers Inc. and MeadWestvaco Corporation. The Specialty Paper business also manufacturers private label carbonless paper products and provides contract manufacturing for various third party organizations.

      The Company’s videodisc replication business, which was closed in the first quarter of 2002, was also part of the Specialty Paper segment.

      The Company sold its North America DSS business in August 2002 (see Note 3 to the Consolidated Financial Statements). These operations are presented in the Company’s Consolidated Statements of Operations as discontinued operations.

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      The Company also completed its planned exit of the DSS business outside of North America in the third quarter of 2002. As of the end of the third quarter, all DSS operations outside of North America had been closed or sold. The operations outside of North America are still included in continuing operations (see Note 11 to the Consolidated Financial Statements).

      The Company’s DSS business was a service organization with a focus on two areas — Field Service and Document Imaging products. Through relationships with OEMs, the Field Service group offered call center, help desk support, spare parts logistics, and field service to end-user customers, with a focus on providing services for the wide format color and imaging equipment markets. In the Document Imaging products area, the Company acted as a system integration coordinator to help its customer base transition from analog to digital systems, with an emphasis on providing integrated solutions in the wide format engineering document imaging systems market by combining hardware, software, supplies and services for its customers. The business also manufactured microfilm aperture cards.

      Through 2001 the Company was an active participant in the graphic arts industry as a manufacturer and marketer of products and services for the capture, enhancement, management, and transmission of color images. On December 31, 2001, the Company consummated the sale of its worldwide color proofing and color software business to KPG. KPG acquired substantially all the assets and assumed substantially all the liabilities associated with this business and paid the Company $50 million in cash. Approximately 500 Imation employees worldwide transferred to KPG in connection with the transaction, along with the portion of the Company’s Weatherford, Oklahoma plant associated with color proofing (see Notes 3 and 11 to the Consolidated Financial Statements).

Research and Development

      New product development is critical to the Company’s future success and Imation maintains research laboratories and invests substantial resources in developing new products, improving existing products and researching potential new technologies for storage media. The Company’s research and development expenses were $50.6 million, $62.1 million, and $64.1 million, for 2002, 2001, and 2000, respectively, averaging approximately five percent of revenues. The decline in spending in each year was due to the divestitures of the color proofing and software business and the DSS business outside of North America. Most of this spending was focused on the development of existing and future formats of removable magnetic and optical storage media such as the next generation of high density metal particulate tape which requires newer and more advanced metal particulate pigments (referred to as MP3 and MP4 technology), as well as extensions of existing tape products. The Company is also engaged in certain programs both on its own and in collaboration with other organizations which are more research in nature and which do not yet have a specific product or product set in the market or soon to be introduced. Examples of these efforts include:

	•	a joint development agreement with InPhase Technologies, to develop proprietary, holographic data storage technology for the enterprise storage market;
	•	a four-year, $11.9 million grant jointly awarded to Imation and several other organizations from the National Institute of Standards and Technology — Advanced Technology Program (NIST-ATP) for development of technologies needed to increase data density of current magnetic tape data systems, and lay the foundation for even greater densities in future tape systems;
	•	investment by Imation of up to $5 million for up to a 12% equity stake in OMass, a subsidiary of drive manufacturer Tandberg Data Systems, Inc., focused on developing the world’s fastest performing, highest capacity tape drive based on a combination of magnetic and optical technologies.

      Imation’s competitive capabilities are dependent upon development and protection of intellectual property. The Company’s proprietary rights are protected through a combination of patents, copyrights,

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International Operations

      Imation’s products are sold in over 60 countries outside the United States, primarily through subsidiaries, sales offices, and relationships with OEMs. Approximately 49 percent of the Company’s total revenues come from outside the United States. The Company does not manufacture outside the United States but maintains sales offices in 21 countries. Note 11 to the Consolidated Financial Statements shows financial information by geographic region.

Employees

      As of December 31, 2002, Imation employed approximately 2,800 people worldwide.

Environmental Matters

      The Company’s operations are subject to a wide range of federal, state, and local environmental protection laws. The Company has remedial activities underway at one of its facilities. Environmental remediation costs are accrued when a probable liability has been determined and the amount of such liability has been reasonably estimated. These accruals are reviewed periodically as remediation and investigatory activities proceed, and are adjusted accordingly. Compliance with environmental regulations has not had a material adverse effect on the financial results of the Company. The Company believes that its accruals are adequate, though there can be no assurance that the amount of expenses relating to remedial actions and compliance with applicable environmental laws will not exceed the amounts reflected in the Company’s accruals.

      In 2002, the Company spent approximately $0.1 million on environmental related matters. As of December 31, 2002, the Company had environmental related accruals totaling approximately $0.7 million.

Executive Officers of the Company

      The executive officers of the Company on February 27, 2003, together with their ages and business experiences, are set forth below.

      William T. Monahan, age 55, is Chairman of the Board, President and Chief Executive Officer, positions he has held since the Company was spun-off from 3M on July 1, 1996. From June 1993 to March 1996, he was Group Vice President responsible for 3M’s Electro and Communications Group, and from May 1992 to May 1993, he was Senior Managing Director of 3M Italy. From September 1989 to May 1992, he was Vice President of 3M’s Data Storage Products Division.

      Bradley D. Allen, age 52, is Vice President, Corporate Communications and Investor Relations. He has led the Company’s investor relations function since spin-off. From October of 1994 to May of 1996, he held the senior investor relations position at Cray Research, which was acquired by Silicon Graphics. Prior to Cray Research, he headed the investor relations function at Digital Equipment Corporation.

      Jacqueline A. Chase, age 49, is Vice President, Human Resources. She has been with the Company since spin-off. From 1991 to 1996, she held the position of Senior Counsel in 3M’s legal department. Prior to joining 3M, she was an associate attorney at the law firm of Oppenheimer, Wolff and Donnelly.

      Robert L. Edwards, age 47, is Senior Vice President, Chief Financial Officer and Chief Administrative Officer. He joined the Company in April 1998 after 20 years of experience in the transportation and energy industries with Santa Fe Industries affiliated or predecessor companies. From 1991 to 1995, he was Senior Vice President, Treasurer and Chief Financial Officer, and from 1995 to 1998, he was Senior Vice President, Business Development of Santa Fe Pacific Pipelines, Inc.

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      Frank P. Russomanno, age 55, is President of DS&IM, a position he has held since August 2002. He has been with the Company since spin-off. Prior to assuming his current responsibilities he had various managerial positions within the Company, including Vice President and General Manager of Data Storage and Media Services, DS&IM and General Manager of Advanced Imaging Technologies. Prior to joining the Company, he held several management positions with 3M, including European Business Director.

      John L. Sullivan, age 48, is Senior Vice President, General Counsel and Corporate Secretary. He joined the Company in August 1998 from Silicon Graphics, where he most recently was Vice President-General Counsel. Prior to joining Silicon Graphics, he held several positions with Cray Research from 1989 to 1997, including the positions of General Counsel and Corporate Secretary from 1995 to 1997. Cray Research became part of Silicon Graphics in 1996.

      David H. Wenck, age 59, is Vice President, International, a position he has held since March 1998, and was President, DSS, until the business was discontinued/sold in 2002, a position he held since June 2000. Prior to assuming his current responsibilities, he was Vice President, Asia, Latin America and Canada, assuming that role at spin-off. From May 1995 to July 1996, he was General Manager of 3M’s Data Storage Optical Technology Division. From December 1994 to April 1995, he was Department Manager of 3M’s Software Media and CD-ROM Services Department, and from July 1986 to September 1994, he was Project Manager of 3M’s Optical Recording Project. Mr. Wenck is retiring from the Company as of February 28, 2003.

      Colleen R. Willhite, age 46, is Vice President, DS&IM, Manufacturing and Supply Chain, a position she has held since February 2002. She has been with the Company since spin-off. Prior to assuming her current responsibilities she had various managerial positions within the Company, including Corporate Supply Chain Director, Global Application Migration Project Leader, and Operations General Manager, Color Technologies. Prior to joining the Company, she held several management positions with 3M.

      Paul R. Zeller, age 42, is Vice President, Corporate Controller. He was elected to his position as Vice President in February 2000, and has held the Corporate Controller position since May 1998. He joined the Company at spin-off and held accounting manager and division controller positions with the Company prior to assuming his current responsibilities. Prior to joining the Company, he held several accounting management positions with 3M.

Availability of SEC Reports

      The Company’s web site address is www.imation.com. The Company makes available free of charge on or through its internet website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with or furnishes it to the SEC.

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      The Company’s headquarters are located in Oakdale, Minnesota. The Company’s major facilities, and the products manufactured at such facilities, are listed below. The Company’s facilities are in good operating condition suitable for their respective uses and adequate for the Company’s current needs.

      * The portion of the Weatherford, Oklahoma facility engaged in conventional proofing was sold to KPG on December 31, 2001. The Company exited its Menomonie, Wisconsin leased facility in connection with its exit of the videodisc replication business in first quarter 2002 and transferred its Pine City, Minnesota facility to DecisionOne Corporation in connection with the sale of the Company’s North America DSS business in August 2002. See Note 3 to Consolidated Financial Statements.

      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 December 31, 2002, 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 depending upon the final resolution 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 December 31, 2002 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 (see Note 3 to the Consolidated Financial Statements). In the complaint, Jazz Photo seeks unspecified compensatory damages, treble damages, punitive damages, and equitable relief. In 2002, the parties

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      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. The Jazz Photo Reports contain no allegation of damages related to additional purchases of film by Jazz Photo in 1999 on which Jazz Photo’s claims under these Acts are based.

      The Company is vigorously defending the action. It is expected that fact discovery will conclude and expert depositions will occur in the spring of 2003. The Company expects to serve its expert reports at the end of April 2003. A pre-trial conference has been scheduled in September 2003.

      The St. Paul Fire and Marine Insurance Co. (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. 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 Cigna and AIG. The dispute regarding coverage under the St. Paul and Cigna policies has been stayed pending resolution of the Jazz Photo litigation.

      On October 1, 2001, the Company filed a lawsuit in the Federal District Court in St. Paul, Minnesota, charging Quantum Corporation (Quantum) with violations of Sections 1 and 2 of the Sherman Antitrust Act, including price fixing and conspiracy to monopolize the production and sale of data storage tape compatible with Quantum’s digital linear tape (DLT) tape drives. The Company amended the complaint to include Hitachi Maxell, Ltd. (Maxell) as an additional defendant and to add Quantum’s attempt to monopolize the production and sale of data storage tape compatible with Quantum’s S-DLT tape drives. The lawsuit specifically charged that Quantum had fixed prices on DLT-compatible tape, invited Imation to join an illegal tape cartel, inappropriately extended patents on licensed DLT tape drives to tape media as a way to enforce its monopoly hold on the tape market, and misrepresented DLT-compatible tape as an open standard with competitive pricing. The complaint sought an injunction barring Quantum from further violations of antitrust law in this market and recovery of damages of at least $150 million.

      On October 3, 2001, Quantum Corporation filed a lawsuit in the Superior State Court in California in Santa Clara County seeking to prohibit Imation from selling its digital linear tape for use on Quantum DLT tape drives. The lawsuit accused Imation of misappropriation of trade secrets, deceptive and misleading advertising, and unfair business practices. Quantum also filed a motion for a preliminary injunction to block Imation from selling Black Watch™ Digital Linear Tape IV cartridges. The court issued a preliminary injunction that allowed the Company to sell its Black Watch Digital Linear Tape IV

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      On May 29, 2002, the Company, Quantum, and Maxell settled all legal claims between the companies over the qualification, production, and sale of DLT tape media products. Quantum and the Company also committed to completing the qualification process of the Company as a manufacturer of DLT tape media, which was completed in August 2002. The antitrust lawsuit and all counterclaims have been withdrawn.

      The Company is a defendant in a lawsuit filed in Court of First Instance Num. 5 in Madrid by a Spanish collecting society demanding copyright levies for recording artists to be paid on all CDR-Data discs that have been sold during 1998 and 1999. Presently, there is an agreed upon levy that is assessed on all CDR-Audio discs sold but no agreement has been reached regarding CDR-Data discs. The Spanish collecting society has sued the Company and at least three other companies alleging that consumers are using CDR-Data discs to make copies of music for private use and, therefore, the same levy that applies to CDR-Audio disc sales should also apply to CDR-Data disc sales. A judgement was rendered by a Court of First Instance in Madrid on November 28, 2002 which requires the Company’s affiliate, Imation Iberia S.A., to provide an accounting of CDR-Data discs that were sold in 1998 and 1999 which may be subject to CDR levies. The Company has appealed this judgement and continues to defend the action vigorously.

      Not applicable.

PART II

      As of February 28, 2003, there were 35,442,208 shares of the Company’s common stock, $0.01 par value (Common Stock), outstanding held by approximately 35,800 shareholders of record. The Company’s Common Stock is listed on the New York and Chicago Stock Exchanges under the symbol of IMN. The Company did not pay any dividends during 2002. Any decision to pay future dividends will be made by the Company’s Board of Directors.

      The following table sets forth, for the periods indicated, the high and low sales prices of Common Stock as reported on the New York Stock Exchange Composite Transactions.

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Selected Consolidated Financial Data*

*	See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General Overview” for a description of the basis of presentation of the financial information presented in this table.

n/m = not meaningful

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(1)	Income (loss) from continuing operations before cumulative effect of accounting change, excluding restructuring and other special items, in 2002, 2001, 2000, and 1998 was $66.5 million, $35.6 million, $55.2 million, and $(24.3) million, respectively (see Notes 5, 15, and 17 to the Consolidated Financial Statements).
(2)	1998 excludes the impact of the medical imaging business, which was sold on November 30, 1998. 1999 excludes the impact of the Photo Color business, which was sold on August 2, 1999. 2001 excludes the impact of the color proofing and color software business, which was sold on December 31, 2001. 2002 excludes the impact of the North American digital solutions and services business, which was sold on August 30, 2002.
(3)	Return percentages are calculated using income (loss) from continuing operations before cumulative effect of accounting change, excluding restructuring and other special items noted in (1) above for all years presented. Average assets are calculated using continuing operations.
(4)	Capital expenditures in 1998 include $67.5 million for the purchase of the Company’s research and development facility previously under a synthetic lease.
(5)	Years prior to 2002 include employees of subsequently discontinued operations.

General Overview

      On August 30, 2002, the Company consummated the sale of its North America DSS business to DecisionOne Corporation (DecisionOne). These operations are presented in the Company’s Consolidated Statements of Operations as discontinued operations. On December 31, 2001, the Company closed on the sale of its worldwide color proofing and color software business. Since this business did not constitute a complete segment, the operations related to this business are presented in the Company’s Consolidated Statements of Operations as continuing operations. Unless otherwise noted, the following discussion of results of operations refers to continuing operations only.

      Results displayed and discussed below have been presented on both a reported and an adjusted basis excluding special items to aid understanding of the impact of the various special items on results in 2002, 2001 and 2000. Special items include the impacts of restructuring and special charges (see Note 5 to the Consolidated Financial Statements), litigation (see Note 17 to the Consolidated Financial Statements), gain on sale of the color proofing and color software business (see Note 3 to the Consolidated Financial Statements), amortization related to abandoned computer software (see Note 15 to the Consolidated Financial Statements), and the cumulative effect of an accounting change (see Note 16 to the Consolidated Financial Statements).

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Results of Operations

      The following table displays the Company’s results of operations for 2002, 2001, and 2000.

(1)	In 2002, the Company recorded a net litigation benefit due primarily to the May 29, 2002, legal settlement with Quantum and Maxell, net of certain associated legal expenses. The Company also recorded adjustments of reserves of $5.8 million from the Company’s previous restructuring programs as the result of lower than expected costs offset by new charges of $1.8 million.
(2)	In 2001, the Company recorded special charges of $0.6 million in cost of goods sold and restructuring and other charges of $48.0 million. Selling, general and administrative expenses (SG&A) includes $5.7 million of amortization related to software that was abandoned. Restructuring and other also includes a $1.9 million pre-tax gain on the sale of the Company’s color proofing and color software business.
(3)	In 2000, the Company recorded special charges of $7.5 million in cost of goods sold, $2.3 million in SG&A, and $21.8 million of restructuring and other charges to rationalize the Company’s manufacturing operations, streamline its organizational structure, and write-down impaired assets. SG&A includes $60.8 million of amortization related to software that was abandoned. These charges in 2000 include a $2.6 million reversal of certain restructuring reserves remaining from charges recorded in 1997 and 1998.

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      The following tables set forth the percentage relationship to revenue of certain items in the Company’s Consolidated Statements of Operations for the years indicated. The first table is on a reported basis while the second table is on an adjusted basis, as described in the footnotes to the previous table.

	n/m: not meaningful

	n/m: not meaningful

      Net revenues in 2002, 2001, and 2000 were $1,066.7 million, $1,119.3 million, and $1,171.3 million, respectively. Net revenues decreased 4.7 percent in 2002 compared to a 4.4 percent decline in 2001. The revenue decline in 2002 was due to the sale of the color proofing and color software business and the closing or selling of all the DSS businesses, offset by a 14.6 percent revenue increase in DS&IM. DS&IM was approximately 95 percent of net revenues for continuing operations in 2002 (see discussion of DS&IM results in the Performance by Segments section). Approximately 49 percent, 48 percent, and 47 percent of the Company’s net revenues in 2002, 2001, and 2000, respectively, were from sales outside the U.S.

      Gross profit for 2002, 2001, and 2000 was $327.8 million or 30.7 percent of revenues, $335.4 million or 30.0 percent of revenues, and $339.0 million or 28.9 percent of revenues, respectively. The 0.7 percentage point increase in gross profit margin in 2002 was driven by strong volume growth, especially in the business-to-business tape products, which helped lower unit costs, and more than offset the negative

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      In 2002, 2001, and 2000, SG&A expenses were $176.9 million, $232.0 million, and $312.7 million, respectively. Excluding special charges in 2001 and 2000 primarily related to the accelerated amortization of certain capitalized software (see Note 15 to the Consolidated Financial Statements), SG&A expenses would have been $226.3 million and $249.1 million, respectively. Excluding special charges, SG&A expenses for 2002, 2001, and 2000 were 16.6 percent, 20.2 percent, and 21.3 percent of revenues, respectively. The decrease in SG&A as a percent of revenues in 2002, excluding special charges, was driven primarily by a 2.2 percentage point impact from the divestiture of the relatively higher SG&A color proofing and color software business, benefits from the previously announced restructuring program, and from continued focus on reducing selling and administrative expenses. Increased DS&IM revenue in the year also benefited SG&A as a percent of revenues. SG&A in 2002 included $8.4 million received for transition services associated with divested businesses which offset certain costs previously allocated to the divested businesses. Transition services have substantially ended in January of 2003. The decrease in SG&A as a percent of revenues in 2001, excluding special charges, resulted from lower selling costs and lower software amortization.

      Research and development expenses in 2002, 2001, and 2000 were $50.6 million, $62.1 million, and $64.1 million, respectively. The $11.5 million decline in 2002 is due primarily to the divestiture of the color proofing and color software business.

      In 2002, the Company recorded a $6.4 million net litigation benefit. This consisted of a $7.4 million litigation benefit from Quantum and Maxell legal settlements, net of associated legal expenses, and a $1.0 million charge for an unrelated litigation matter related to optical disc royalties in Spain (see Note 17 to the Consolidated Financial Statements).

      In 2002, the Company recorded a $4.0 million net benefit in restructuring. Adjustments to previously recorded restructuring reserves of $5.8 million were offset by a new charge of $1.8 million. The adjustments, in accordance with applicable accounting standards, were made as part of the Company’s regular practice of reviewing its recorded restructuring reserves quarterly and making adjustments as necessary to reflect management’s best estimate of costs remaining for each restructuring program. Part of the adjustment was related to the Company’s DSS businesses in Europe and was primarily due to lower than estimated employee separation costs as well as recognition of pension-related amounts that can only be recorded under the applicable accounting standards when the employees are separated. The new charge relates to the realignment of the Storage Professional Services organization within the Company’s DS&IM business segment. The charges include asset impairments, exit costs and $0.4 million for employee separation programs related to headcount reduction of approximately 15 employees.

      In 2001, the Company recorded $48.0 million of restructuring and other charges to reduce its administrative structure, improve the profitability of the remaining, non-data storage businesses and rationalize its data storage manufacturing. The charges included $25.0 million for employee separation programs related to a headcount reduction of approximately 430 employees relating to continuing operations, of which approximately 45 percent related to administrative structure, 50 percent related to the

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      In 2000, the Company recorded $21.8 million of restructuring and other charges to rationalize the Company’s manufacturing operations, streamline its organizational structure, and write-down impaired assets. These charges in 2000 include a $2.6 million reversal of certain restructuring reserves remaining from charges recorded in 1997 and 1998. The activities related to the 2000 restructuring program were completed in 2002.

      During 2002, the Company made cash payments of $22.3 million related to all of its restructuring programs and reduced headcount by approximately 260 employees. The Company expects to make payments of $8.5 million, with substantially all being made in 2003, to complete its restructuring programs (see Note 5 to the Consolidated Financial Statements).

      Operating income (loss) for 2002, 2001, and 2000 was $110.7 million, $(4.8) million, and $(59.6) million, respectively. Excluding restructuring and special items, operating income for 2002, 2001, and 2000 would have been $100.3 million, $47.6 million, and $32.8 million, respectively. As a percent of revenues, operating income, excluding restructuring and special items, for 2002, 2001, and 2000 was 9.4 percent, 4.3 percent, and 2.8 percent, respectively.

      Non-operating income was $1.9 million in 2002, as compared with expense of $0.6 million and income of $20.8 million in 2001 and 2000, respectively. Despite higher cash balances in 2002, interest income was $8.4 million in 2002, down from $12.4 million in 2001 and $14.5 million in 2000, due to lower short-term interest rates. Other non-operating expenses in 2002 included a $3.0 million write-off of an equity investment and in 2001 included $5.4 million of write-offs related to certain venture capital investments. Other non-operating income in 2000 included $10.6 million of venture capital investment gains. The Company utilizes certain financial instruments to manage risks associated with interest rate and foreign currency risks (see Item 7A and Note 8 to the Consolidated Financial Statements).

      The Company’s effective tax rate was 35 percent, 85 percent, and 78 percent for 2002, 2001, and 2000 respectively, as discussed in Note 6 to the Consolidated Financial Statements. The rates in 2001 and 2000 were significantly impacted by restructuring and special items. Excluding restructuring and other special items, the Company’s effective tax rate was 24 percent and negative 3 percent for 2001 and 2000, respectively. The tax rate in both 2001 and 2000 benefited by certain tax planning strategies, with the significantly lower 2000 tax rate resulting from tax benefits associated with changes to the Company’s European structure resulting from the sale of the Medical Imaging and Photo Color Systems businesses, and the Italian manufacturing facility. The Company has performed an analysis of the recoverability of deferred tax assets and has recorded valuation allowances for certain amounts not considered recoverable. As of December 31, 2002 and 2001, the Company had net deferred tax assets of $92.7 million and $123.9 million, respectively. The future recoverability of the Company’s net deferred tax assets is dependent upon the generation of future taxable income, primarily in the U.S. The Company believes that it will generate sufficient future taxable income to recover the Company’s recorded net deferred tax assets.

      Income (Loss) from Continuing Operations before Cumulative Effect of Accounting Change

      Income from continuing operations in 2002 was $73.2 million, or $2.05 per diluted share. This compares to a loss from continuing operations in 2001 of $0.8 million, or $0.02 per diluted share, and to a loss from continuing operations before cumulative effect of accounting change in 2000 of $8.7 million, or

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Performance By Geographic Area

      Approximately 49 percent, 48 percent, and 47 percent of the Company’s net revenues in 2002, 2001, and 2000, respectively, were from sales outside the U.S. U.S. revenues totaled $546.7 million, $587.4 million, and $619.3 million in 2002, 2001, and 2000, respectively. International revenues were $520.0 million, $531.9 million, and $552.0 million in 2002, 2001, and 2000, respectively. See Performance by Segments below for additional information.

Performance by Segments

      The Company’s businesses are organized, managed and internally reported as segments differentiated primarily by their products and services and the markets they serve. These segments, whose results are discussed below, are Data Storage and Information Management, Specialty Paper, Digital Solutions and Services, and Color Technologies. In 2001 and 2000, Specialty Paper and Color Technologies were combined and presented as a single segment. Beginning in 2002, they have been separated and the prior period results have been restated to conform to the new presentation as a result of the sale of the color proofing and color software business to KPG.

      DS&IM net revenues were $1,003.9 million, $875.9 million, and $866.6 million in 2002, 2001, and 2000, respectively. The 14.6 percent increase in 2002 was driven by a volume increase of approximately 24 percent, offset by price declines of approximately 10 percent, and foreign currency benefits of less than one percent. Significant volume increases occurred in all major product categories and across all geographic areas, while pricing pressures were less than in 2001. For the year, growth was especially strong in Ultrium tape cartridges, optical products, and 9840 and 9940 cartridges. The revenue increase also was driven by the Company’s distribution program with IBM in which IBM branded media products are sold through the Company’s distribution channels. The IBM branded business, which spans across multiple product lines, began in the third quarter of 2001. The increase in 2001 was a result of stronger sales of optical storage products and enterprise tape products for both StorageTek and IBM platforms, offset partially by reductions of SuperDisk™ drive and media sales and lower revenues from mature network products.

      Operating income was $99.2 million, $52.5 million, and $24.4 million in 2002, 2001, and 2000, respectively. The operating income increase in 2002 was driven by the strong demand of business to business tape products as noted above, gross margin improvements, lower SG&A costs, and currency exchange rate benefits. The operating income increase in 2001 was driven by the stronger demand in enterprise and optical products noted above, lower levels of price erosion especially associated with optical products, and the reduction of losses associated with the SuperDisk product line.

      Specialty Paper net revenues were $53.1 million, $51.0 million, and $60.0 million in 2002, 2001, and 2000, respectively. The increase in 2002 was driven by an increase in private label sales and contract

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      Operating income was $7.2 million, $2.0 million, and $5.5 million in 2002, 2001, and 2000, respectively. The increase in 2002 operating income was due primarily to increased revenues and the benefits from restructuring in 2001. The decrease in operating income in 2001 was driven by the revenue reduction noted above.

      The videodisc replication division of the Specialty Paper segment was closed at the end of the first quarter of 2002.

      Due to the presentation of the North America DSS business as discontinued operations, the results of this segment relate only to the DSS businesses outside of North America. DSS net revenues were $9.5 million, $29.6 million, and $30.7 million in 2002, 2001, and 2000, respectively. The decline in 2002 was due to the planned discontinuation of DSS businesses in regions outside North America, all of which had been closed or sold by the end of the third quarter of 2002, as part of the Company’s 2001 restructuring program. The decline in 2001 was driven primarily by the ongoing transition in the large format document imaging business from analog to digital.

      The 2002 operating loss of $4.0 million compares to operating losses of $7.5 million and $5.5 million in 2001 and 2000, respectively. The loss in 2002 was lower than in previous years due to exiting the operations partway through the year. The higher operating loss in 2001 was the result of ongoing declines in revenue.

      As previously discussed in Item 1 “Business,” on December 31, 2001, the Company consummated the sale of its worldwide color proofing and color software business to KPG.

      Color Technologies net revenues declined to $160.8 million in 2001, from $213.1 million in 2000. The decline in 2001 was driven primarily by lower demand for analog proofing products and plates and film products in the color proofing business. Operating income of $7.9 million in 2001 was down from $14.4 million in 2000. The declines in operating income in 2001 resulted primarily from lower revenues of more profitable analog proofing products.

Financial Position

      In 2002 the Company increased its cash balance by $84.9 million compared to December 31, 2001. The accounts receivable days sales outstanding was a record low 43 days as of December 31, 2002, compared to 48 days as of December 31, 2001. This reduction was driven by operational improvements in the U.S. and Europe. The Company had 70 days of inventory supply on hand as of December 31, 2002 compared to 67 days as of December 31, 2001. The increase was primarily made to support growth of the Company’s newer products. Other assets were $96.2 million as of December 31, 2002 compared to $125.6 million as of December 31, 2001. The $29.4 million decrease in other assets is primarily due to a $26.5 million decrease in deferred income taxes. Other current liabilities decreased to $181.3 million during the year, mostly due to decreases in restructuring reserves, the elimination of deferred revenues related to the DSS business, and a decrease in income tax liabilities. Other liabilities increased by $20.6 million during 2002, primarily due to $23.0 million of minimum pension liability adjustments (see Liquidity and Capital Resources discussion in this section).

Critical Accounting Policies and Estimates

      The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these

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      The Company believes the following critical accounting policies are affected by significant judgements and estimates used in the preparation of its consolidated financial statements:

      Income Tax Accruals and Valuation Allowances — Significant management judgement is required in determining the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets. Due to uncertainties related to the Company’s ability to utilize some portion of the deferred tax assets as well as uncertainties associated with normal and customary audits of the Company’s tax returns in certain jurisdictions, a valuation allowance of $16.2 million has been recorded as of December 31, 2002. The future recoverability of the Company’s net deferred tax assets of $92.7 million as of December 31, 2002 is dependent upon the generation of future taxable income, primarily in the U.S. The Company believes that it will generate future taxable income to recover the recorded net deferred tax assets. In the event that actual results differ from these estimates, the Company may need to adjust, upwards or downwards, the valuation allowance.

      Significant management judgement is also required to estimate the probable outcomes associated with normal and customary audits of the Company’s tax returns in the various jurisdictions in which it operates.

      Accruals Related to Divested Businesses — On November 30, 1998, the Company sold substantially all of its worldwide Medical Imaging Systems business to Eastman Kodak Company (Kodak). Excluded from this sale was the Ferrania Facility, at which certain x-ray and wet laser medical imaging products and photographic film were manufactured. On August 2, 1999, the Company closed on the sale of its worldwide Photo Color Systems business, including the Ferrania Facility, to Ferrania Lux. The Kodak Asset Purchase Agreement obligated Kodak to pay to the Company up to $25 million under certain conditions upon the sale of the Ferrania Facility. Kodak has challenged the Company’s claim for the full $25 million as well as claims for other amounts which the Company believes are due from Kodak in connection with the sale of the Medical Imaging Systems business. The Company has retained cash, which it collected on behalf of Kodak in an amount approximately equal to these disputes. While the Company cannot predict with certainty the outcome of these disputes, it believes its positions are supported by the applicable contractual terms.

      The Company has also established certain accruals for future costs associated with the sale of its color proofing and color software business to KPG as well as the sale of its North America DSS business to DecisionOne. The Company believes these accruals closely approximate the amount of these future costs.

      Significant management assumptions and estimates have been required in assessing the most likely outcome from these divestitures and there can be no assurance that actual results will not differ from these estimates used in recording these transactions. If actual results differ significantly from these estimates, the Company may need to make an adjustment, upward or downward, in its statement of operations. In 2002, the Company recorded a charge of $2.7 million, net of income taxes of $1.6 million, resulting from the adjustment of estimated costs associated with discontinued operations

      Revenue Recognition — In 2000, the Company changed its revenue recognition policy for product revenues, such that revenue is recognized when the risks and rewards of ownership pass, which is primarily upon delivery of goods to customers (see Note 16 to the Consolidated Financial Statements). Revenue from services is recognized upon performance. Revenue from service contracts is deferred and recognized over the life of the contracts as service is performed.

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      Restructuring Accruals — In establishing the accrual for the restructuring costs discussed in Note 5 to Consolidated Financial Statements, the Company made certain assumptions to estimate future severance costs, pension and post employment benefits, and other exit costs. In addition, while performing impairment tests for certain long-term assets, assumptions were made as to the future cash flows associated with these assets. While management feels the assumptions were appropriate, there can be no assurance that actual costs will not differ from estimates used to establish the restructuring accrual. If actual results differ from the estimates, the Company may need to adjust, upward or downward, its restructuring accrual in the future. The Company made adjustments to its restructuring programs in 2002 and 2000 (see Note 5 to the Consolidated Financial Statements).

      Litigation — Management’s current estimated range of liability related to pending litigation is based on claims for which the Company can estimate the amount and range of loss. Based upon information presently available, management believes that accruals for these claims are adequate. Due to uncertainties related to both the amount and range of loss on the remaining pending litigation, the Company is unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, potential liability related to pending litigation will be assessed and estimates may be revised.

      Inventory Obsolescence Accruals — The Company writes down its inventory for estimated obsolescence or unmarketable inventory to the estimated net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

      Rebates — The Company maintains an accrual for customer rebates which totaled $35.8 million as of December 31, 2002. This accrual requires estimation of various customer program outcomes based on a variety of factors including customer unit volumes and end user redemption rates. In the event that actual volumes and redemption rates differ from the estimates used in the accrual calculation, adjustments to the accrual, upward or downward, may be necessary.

      Other Accrued Liabilities — The Company also maintains other accrued liabilities, including uninsured claims and pensions. These accruals are based on a variety of factors including past experience and various actuarial assumptions and, in many cases, require estimates of events not yet reported to the Company. If future experience differs from these estimates, operating results in future periods would be impacted.

Liquidity and Capital Resources

      Cash provided by operating activities was $120.8 million in 2002. The major driver was net income as adjusted for non-cash items of $141.6 million, offset by other working capital usages of $26.0 million. Net income as adjusted for significant non-cash items includes net income of $75.1 million adjusted for depreciation and amortization of $38.7 million and deferred income taxes of $38.2 million, less restructuring, litigation, and other special items of $10.4 million (see Notes 5 and 17 to the Consolidated Financial Statements). The cash used in 2002 related to other working capital increases was due largely to payments for restructuring programs of $23.3 million relating to both continuing and discontinued operations, cash paid for income taxes of $11.7 million, deferred revenue decrease of $11.7 million (due primarily to the sale or closing of all DSS businesses) and payments related to employee incentive compensation of $13.8 million, offset by a cash inflow of $20.5 million due to a decrease in accounts receivable and a cash inflow of $12.0 million due to an increase in accounts payable.

      Cash provided by operating activities was $128.2 million in 2001. The major drivers were net income as adjusted for non-cash items of $75.5 million and other working capital decreases of $38.1 million. Net income as adjusted for significant non-cash items includes net loss of $1.7 million adjusted for depreciation and amortization of $54.1 million and restructuring and other special items of $56.5 million (see Note 5 to the Consolidated Financial Statements), offset by deferred income taxes of $33.4 million. The amortization amount in 2001 includes $5.7 million of accelerated amortization (see Note 15 to the Consolidated Financial Statements). Cash provided in 2001 related to total working capital decreases was $38.1 million.

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      Cash provided by operating activities was $192.0 million in 2000. The major drivers were net income as adjusted for non-cash items of $140.1 million and other working capital decreases of $53.8 million. Net income as adjusted for significant non-cash items includes net loss of $4.4 million adjusted for depreciation and amortization of $122.3 million and restructuring and other special items of $32.2 million (see Note 5 to the Consolidated Financial Statements), offset by deferred income taxes of $10.0 million. The amortization amount in 2000 includes $60.8 million of accelerated amortization (see Note 15 to the Consolidated Financial Statements). Cash provided in 2000 related to total working capital decreases was $53.8 million. Cash flows were positively impacted by significant reductions in accounts receivable and inventory balances, offset by a cash outflow due to the decrease in accrued payroll and other current liabilities.

      Cash used by investing activities was $43.5 million in 2002, as compared to $0.2 million in 2001 and $58.3 million in 2000. Proceeds from the sale of the North America DSS business provided $5.0 million in 2002. Proceeds from the sale of the color proofing and color software business provided $50.0 million in 2001. Capital spending totaled $42.6 million, $47.0 million, and $50.5 million in 2002, 2001, and 2000, respectively. Capital expenditures by business segment are shown in Note 11 to the Consolidated Financial Statements. The Company is targeting capital spending in 2003 to be up to $80 million. In 2003, the Company will be making a significant addition to its manufacturing capabilities with the installation of a new coating facility at its existing Weatherford, Oklahoma, plant site. The total estimated cost of the project is $49 million, most of which will be spent in 2003. The new coating facility is expected to be in operation by the end of the first quarter of 2004.

      The Company has a Loan and Security Agreement (the Loan Agreement) with a group of banks that expires December 31, 2003. 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 $100.0 million. The Loan 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 London Interbank Offering Rate (LIBOR), plus a margin based on the Company’s interest expense coverage. The margins over a defined prime rate and LIBOR range from zero to 0.5 percent and 1.25 to two percent, respectively. Letter of credit fees are equal to the LIBOR margins and a commitment fee of 0.375 percent per annum is payable on the unused line. The Loan Agreement is collateralized by substantially all the domestic assets of the Company, excluding the corporate campus land and buildings, and a pledge of 65 percent of the stock of certain of the Company’s foreign subsidiaries. Covenants include maintenance of a minimum tangible net worth of $450 million and borrowing base availability of $20 million, with certain restrictions on the incurrence of additional indebtedness, sale of assets, mergers and consolidation, transactions with affiliates, creation of liens, and certain other matters. Borrowing availability as of December 31, 2002 was $69.8 million. No borrowings were outstanding under the Loan Agreement and the Company was in compliance with the covenants under the Loan Agreement as of December 31, 2002.

      In addition, certain international subsidiaries have arranged borrowings locally outside of the agreement discussed above. As of December 31, 2002, $4.5 million of short-term borrowings were outstanding under such arrangements. As of December 31, 2002, the Company’s ratio of debt to total capital was 0.6 percent as compared with 1.9 percent as of December 31, 2001.

      The Company’s Board of Directors has authorized the repurchase of up to 10 million shares of the Company’s common stock. During 2002, the Company repurchased 0.4 million shares. A minimal number of shares was repurchased during 2001. During 2000, the Company repurchased approximately 2.4 million shares. As of December 31, 2002, the Company had repurchased 7.2 million shares under this authorization and held, in total, 7.4 million shares of treasury stock acquired at an average price of $22.36 per share.

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      The Company contributed $20.8 million to its defined benefit pension plans during 2002. Due to the impacts of financial market performance on plan assets as well as lower interest rates in 2002, the Company ended 2002 with an aggregate unfunded status of these plans of $47.6 million, representing an excess of projected benefit obligations over plan assets. Based on the relationship of the unfunded accumulated benefit obligations to amounts accrued in the financial statements, the applicable accounting rules required the recording of a minimum pension liability adjustment. As a result, the Company increased its minimum pension liability adjustment, which reduced shareholder’s equity by $13 million net of tax. This minimum liability adjustment did not impact cash or net income. Although not specifically required by statute, it is likely that the Company will voluntarily fund its pension plans in 2003 at a higher level than in 2002, currently estimated at $34 million, depending on asset performance and interest rates. The Company estimates that its pension contribution required by statute for 2003 to be approximately $8.2 million.

      The Company’s liquidity needs over the next year include: capital expenditures targeted to be up to $80 million; cash payments related to restructuring of approximately $8 million; pension funding of approximately $34 million; tax payments of approximately $31 million; short-term debt repayment of $4.5 million; lease payments of approximately $12.5 million (see Note 9 to the Consolidated Financial Statements); investment in its new joint venture, Global Data Media, of approximately $5 million (see Note 18 to the Consolidated Financial Statements); and any amounts associated with the repurchase of common stock under the authorization discussed above. 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 meet these needs and operate the Company. Other than the lease commitments discussed in Note 9 to the Consolidated Financial Statements, the Company is not using off-balance sheet arrangements, including special purpose entities, nor does it have any contractual obligations or commercial commitments with terms greater than one year, that would significantly impact its liquidity.

Recently Issued Accounting Standards

      In 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses the financial accounting and reporting for costs associated with exit or disposal activities and applies only to those activities initiated on or after the date of adoption. The Company will adopt this statement in 2003 and is in the process of determining the extent to which this statement will impact its results of operations or financial position.

      Also in 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation elaborates on the disclosures required in financial statements concerning obligations under certain guarantees. It also clarifies the requirements related to the recognition of liabilities by a guarantor at the inception of certain guarantees. As of December 31, 2002, the Company does not have any required disclosures under this interpretation. The recognition provisions of the interpretation are applicable only to guarantees issued or modified after December 31, 2002.

      Also in 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation, as outlined in SFAS No. 123, Accounting for Stock-Based Compensation. This statement also amends the financial statement disclosure requirements relating to stock-based compensation. The Company adopted the disclosure requirements of this statement on December 31, 2002. The Company currently has no plans to adopt the fair value method of accounting for stock-based compensation.

Subsequent Event

      On February 25, 2003, the Company entered into a series of agreements with Moser Baer India Ltd. (Moser Baer), including the formation of a global joint venture company, Global Data Media, intended to

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      Under the terms of the agreement, the Company will hold a 51 percent interest and Moser Baer will hold a 49 percent interest in the new entity. As the controlling shareholder, the Company will consolidate the results of the joint venture, which is expected to launch in the first half of 2003. The Company expects the benefits of this joint venture to increase revenue and earnings beginning primarily in the second half of fiscal 2003.

Forward-Looking Statements

      The Company and its representatives may from time to time make written or oral forward-looking statements with respect to future goals of the Company, including statements contained in this report, the Company’s other filings with the Securities and Exchange Commission and in the Company’s reports to shareholders.

      Based on estimates from industry analysts and the Company, the removable media industry is expected to grow between five and ten percent over the next several years. In any given period the rate of growth may fall outside that range based on industry or economic factors. The following statements are based on the Company’s current outlook for fiscal year 2003, subject to the risks and uncertainties described below in “Risk Factors”:

	•	Data Storage revenue growth in 2003 is estimated to range between five to ten percent with growth towards the lower end of that range in the first half and higher growth rates in the second half of the year;
	•	Gross margin is estimated to be in the range of 30 to 32 percent;
	•	Research and Development spending is targeted to be in the range of five percent of revenues;
	•	Selling, General and Administrative (SG&A) spending, is targeted to be in the range of 16 to 17 percent of revenues;
	•	Operating income and earnings per share from continuing operations excluding special items are estimated to grow eight to ten percent over 2002 (or from a base of $100.3 million and $1.86 respectively). In the first quarter of 2003, operating income is estimated to grow as much as 15 percent over the comparable period;
	•	Tax rate is estimated to be 35 percent;
	•	Capital spending is targeted to be up to $80 million;
	•	Depreciation and amortization is estimated to be approximately $45 million.

      Certain information contained in this report which does not relate to historical financial information, including the 2003 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, which speak only as of the date made. Among the factors that could cause the Company’s

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Risk Factors

      Due to significant risks and uncertainties which exist even in the most stable economic environment, the Company cannot predict, with certainty, the operating results for future periods. Certain risks and uncertainties faced by the Company are outlined below.

      Competitive Industry Conditions — The Company operates in a highly competitive environment. The Company’s competitors are both larger and smaller than the Company in terms of resources and market share. The marketplaces in which the Company operates are generally characterized by rapid technological change, frequent new product introductions, a variety of distribution channels, relatively large and aggressive marketing efforts, and aggressive pricing practices which result in consistent price erosion.

      Driving demand in the data storage industry is an expanding need to access, manage, and store information more rapidly and at lower cost, with greater accuracy and reliability. In particular, the data storage industry is undergoing rapid technology and market changes, and the variety of data storage media formats available for customers is increasing. The data storage market is characterized by short product development cycles that are driven by rapidly changing technology and consumer preferences as well as declining product prices.

      In these highly competitive markets, the Company’s success will depend to a significant extent on its ability to continue to develop and introduce differentiated and innovative products, services and customer solutions cost effectively and on a timely basis. The success of the Company’s offerings is dependent on several factors including its ability to develop relationships with distributors and OEMs, competitive technology capabilities, differentiation from competitive offerings, the timing of new product introductions, effectiveness of marketing programs, and low manufacturing costs. Although the Company believes that it can take the necessary steps to meet the competitive challenges of these marketplaces, no assurance can be given with regard to the Company’s ability to take these steps, the actions of competitors, some of which will have greater resources than the Company, or the pace of technological changes.

      New Products and Services — The Company’s competitive position and operating results are dependent upon its ability to successfully develop, manufacture, and market innovative new products and services. There can be no assurance that the Company will be able to continue to introduce new products or maintain competitive technology competencies, that the markets will be receptive to its new products, that the Company’s marketing programs will be successful, or that the Company’s competitors will not introduce more advanced products ahead of the Company. The Company is also dependent in some cases upon various third parties, such as certain drive manufacturers, for new product introductions, the timing of which is out of the Company’s control. In addition, there can be no assurance that the Company will maintain existing or create new OEM relationships, the lack of which could cause a material adverse impact on its business and financial results. Also, while the Company currently has access to significant proprietary technologies through internal development and licensing arrangements with third parties, there can be no assurance that it will continue to have access to new competitive technologies that may be required to introduce new products. In addition, new technological innovations generally require a substantial investment before any assurance is available as to their commercial viability. Therefore, the Company must make strategic decisions from time-to-time as to the technologies in which the Company desires to invest. If the Company is not successful in executing any of the above described risks, the Company may incur a material adverse impact on its business and financial results.

      Manufacturing and Product Quality — The Company’s success depends upon the ability to manufacture and deliver products to our customers at acceptable volume and cost levels. The manufacture of the Company’s products involves complex and precise processes requiring production in highly controlled and clean environments. If not managed effectively, changes in the Company’s manufacturing processes could significantly hurt the Company’s ability to meet our customers’ product volume and quality needs. Even within a cleanroom environment, minor equipment malfunctions in any one of the many

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      Availability of Raw Materials, Energy, and Purchased Products — The Company makes significant purchases of raw materials, energy, and certain purchased products from many domestic and foreign sources for use in its manufacturing operations and for resale to customers. While the Company is presently able to obtain sufficient raw materials, energy, and purchased products to meet its needs, no assurances can be given that such availability at acceptable pricing levels will continue. If the Company is unable to continue to obtain critical raw materials, energy, and purchased products, the Company may incur a material adverse impact on its business and financial results.

      International Operations and Foreign Currency — The Company does business in more than 60 countries outside the United States. International operations, which comprised approximately 49 percent of the Company’s revenues in 2002, may be subject to various risks which are not present in domestic operations, including political instability, the possibility of expropriation, restrictions on royalties, dividends and currency remittances, local government involvement required for operational changes within the Company, requirements for governmental approvals for new ventures, and local participation in operations such as local equity ownership and workers’ councils. In addition, the Company’s business and financial results are affected by fluctuations in world financial markets, including foreign currency exchange rates. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk for additional information on foreign currency.

      Intellectual Property Rights — The Company’s success depends in part on its ability to obtain and protect its intellectual property rights and to defend itself against intellectual property infringement claims of others. If the Company is not successful in defending itself against claims that may arise from time-to-time alleging infringement of the intellectual property rights of others, the Company could incur substantial costs in implementing remediation actions, such as redesigning its products or processes or acquiring license rights. Such costs or the disruption to the Company’s operations occasioned by the need to take such actions could have a material adverse effect on the Company. In addition, the Company utilizes valuable non-patented technical know-how and trade secrets in its product development and manufacturing operations. Although the Company utilizes confidentiality agreements and other measures to protect such proprietary information, there can be no assurance that these agreements will not be breached or that competitors of the Company will not acquire the information as a result of such breaches or through independent development. The Company has pursued a policy of enforcing its intellectual property rights against others who may infringe those rights. In connection with such enforcement actions, the Company may incur significant costs for which the Company may or may not be reimbursed by the alleged infringer.

      Restructuring Programs — While the Company’s restructuring plans are designed to reduce the Company’s cost structure and improve its profitability, there can be no assurance that the Company will be successful in achieving its financial improvement goals in the future and in implementing its restructuring program on a timely basis to achieve the projected benefits and at the projected costs. In addition, if it becomes necessary for the Company to shut down or restructure additional businesses and operations in the future, it could incur substantial additional charges in the process. The recording of these charges could have a material adverse impact on the Company’s financial condition.

      Retention of Key Talent and Employees — The Company operates in a highly competitive market for key talent and employees. While the Company is presently able to retain key talent and employees, no assurances can be given that this situation will continue. If the Company is unable to retain its key talent and employees, the Company may incur a material adverse impact on its business and financial results.

      Fluctuations in the Company’s Stock Price — The Company’s stock price may be subject to significant volatility. If revenue or earnings in any quarter fail to meet the investment community’s

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      Sale of Medical Imaging Systems Business — As discussed in Note 3 to the Consolidated Financial Statements, on November 30, 1998, the Company sold substantially all of its worldwide Medical Imaging Systems business to Kodak. Excluded from this sale was the Ferrania Facility, at which certain x-ray and wet laser medical imaging products and photographic film were manufactured. As also discussed in Note 3 to the Consolidated Financial Statements, on August 2, 1999, the Company closed on the sale of its worldwide Photo Color Systems business, including the Ferrania Facility, to Ferrania Lux. The Kodak Asset Purchase Agreement obligated Kodak to pay to the Company up to $25 million under certain conditions upon the sale of the Ferrania Facility. Kodak has challenged the Company’s claim for the full $25 million as well as claims for other amounts which the Company believes are due from Kodak in connection with the sale of the Medical Imaging Systems business. While the Company believes that the applicable contractual terms support its position, it cannot predict with certainty the outcome of these disputes.

      Litigation — 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 December 31, 2002, 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 depending on the final resolution 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 December 31, 2002 would not be material to the Company’s financial position.

      The Company does business in more than 60 countries outside the United States. International operations, which comprised approximately 49 percent of the Company’s revenues in 2002, may be subject to various risks which are not present in domestic operations, including political instability, the possibility of expropriation, restrictions on royalties, dividends and currency remittances, local government involvement required for operational changes within the Company, requirements for governmental approvals for new ventures and local participation in operations such as local equity ownership and workers’ councils. In addition, the Company’s business and financial results are affected by fluctuations in world financial markets, including foreign currency exchange rates.

      The Company’s foreign currency hedging policy attempts to manage some of these risks over near term periods; however, these risk management activities cannot assure that these programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in foreign exchange rates or that medium and longer term effects of exchange rates will not be significant. The Company is exposed to various market risks, including volatility in foreign currency exchange rates and interest rates. These exposures primarily relate to the sale of products to foreign customers, purchases from foreign suppliers, acquisition of raw materials from both domestic and foreign suppliers, and changes in interest rates. The Company may, from time to time, utilize derivative financial instruments, including forward exchange contracts, options and swap agreements to manage certain of these exposures when it is considered practical to do so in accordance with established policies and procedures. There can be no assurances that such an approach will be successful, especially in the event of a significant and sudden decline in the value of local currencies. Factors that could impact the effectiveness of the Company’s hedging include accuracy of revenue forecasts, volatility of the currency markets, and availability of hedging instruments. Although the Company attempts to utilize transaction hedging to manage the impact of changes in currency exchange rates, when the U.S. dollar sustains a strengthening position against currencies in which the Company sells products or a weakening exchange rate against currencies in which the Company incurs costs, the Company’s revenues or costs may be adversely impacted. The Company does not hold or issue derivative financial instruments for speculative purposes and is not a party to leveraged derivative transactions.

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      As of December 31, 2002, the Company had $190.1 million notional amount of foreign currency forward and option contracts of which $79.2 million hedged recorded balance sheet exposures. This compares to $146.8 million notional amount of foreign currency forward and option contracts as of December 31, 2001, of which $80.6 million hedged recorded balance sheet exposures. A hypothetical adverse change of 10 percent in year-end foreign currency exchange rates would reduce the fair value of foreign currency contracts outstanding as of December 31, 2002 by $11.4 million.

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REPORT OF INDEPENDENT ACCOUNTANTS

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

      In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders’ equity and comprehensive income and cash flows present fairly, in all material respects, the financial position of Imation Corp. and its subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

	/s/ PRICEWATERHOUSECOOPERS LLP
	PricewaterhouseCoopers LLP

Minneapolis, Minnesota

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IMATION CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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IMATION CORP.

CONSOLIDATED BALANCE SHEETS

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

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IMATION CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME