• Grow the data storage media business across the four "pillars" of storage offering products under multiple brands. Over the years, we have brought to market recordable media products beyond magnetic tape, including recordable optical media, removable USB flash drives and flash cards, solid state drives, and external and removable hard disk products. We have also acquired additional brands, beyond the Imation brand, and established distribution agreements for other brands, as described above. The strength of our brands has allowed us to gain market share in the world wide optical media markets. In addition, with over half of our revenue coming from outside the United States, we seek to leverage our global marketing and distribution capability in bringing products to market across multiple geographies.

• Extend certain brands selectively across multiple product categories. We sell accessories and certain consumer electronic products, selectively, under multiple brands in various regions of the world. With the acquisition of Memcorp we entered into the consumer electronics market to sell certain products which we did not offer previously. Our product portfolio includes TVs and digital displays, including flat-panel liquid crystal displays (LCD) and digital picture frames, iPod® accessories, clock-radios and MP3 players. The portfolio also includes home theater video, portable and fashion DVD players, karaoke systems and office products such as voice recorders. The XtremeMac acquisition provided a broader product set and greater distribution presence targeting Apple iPod®, iPhone™ and Apple TV® users.

While retaining our tape media business as a cornerstone of the Company, we are transforming the Company into a brand and product management company, with the majority of our products sold to individual consumers, primarily through retail distribution channels.
We have taken several actions which have significantly increased our industry presence and relevance in both commercial and consumer retail channels and markets globally, to broaden the scope of our business and to address the large and growing consumer market for data storage media and audio/video consumer electronics and accessories.
The more important actions driving this change over the past five years include the following:
• We entered into a series of agreements with Moser Baer India Ltd. (MBI) in 2003 that established MBI as a significant, non-exclusive source for our optical media products and created a joint venture sales and distribution company, Global Data Media (GDM). We hold a 51 percent interest in GDM. As the controlling shareholder of the subsidiary, GDM's results are consolidated into our financial statements.

• An agreement with IBM in 2004 established us as the exclusive global distributor for IBM branded tape media products, whether manufactured by Imation or others.

• On April 28, 2006, we acquired substantially all of the assets of Memorex International Inc. (Memorex), including the Memorex brand name and the capital stock of its operating subsidiaries engaged in the business of the design, development, sourcing, marketing, distribution and sale of hardware, media and accessories used for the storage of electronic data under the Memorex brand name. This action strengthened our position in optical products and accessories, especially in the United States retail channel. See Note 3 to the Consolidated Financial Statements for further information.

• On July 9, 2007, we acquired Memcorp. This action established our foundation in the consumer electronic products in the mass merchant channel and enabled us to better manage the Memorex brand name across all retail channels in the United States. See Note 3 to the Consolidated Financial Statements for further information.

• On July 31, 2007, we acquired TDK Recording Media. This action further strengthened our optical market position, especially in the important consumer markets of Europe and Japan. See Note 3 to the Consolidated Financial Statements for further information.

• An agreement with Sun Microsystems, Inc. in 2007 established us as the exclusive global distributor for Sun StorageTek branded tape media products, whether manufactured by Imation or others.

• An agreement with Hewlett-Packard Company (HP) in 2007 established us as the exclusive global distributor for HP branded recordable optical media products.

• Other agreements have given us exclusive and non-exclusive distribution rights for certain brands of recordable media in various regions or product categories. Examples of other distribution agreements include those with ProStor Systems Inc. and Tandberg Data ASA (Tandberg).

• On June 30, 2008 we acquired substantially all of the assets of XtremeMac, a Florida-based product development and design firm focused on consumer electronic products and accessories for the iPod®, iPhone™ and Apple TV® markets. This action expanded our product portfolio, enhanced our distribution reach and strengthened product design capabilities, with particular focus on Apple users.

• An agreement in 2008 with Mtron, a Korean company, established Imation as a global distributor (except in Korea and Japan) for certain solid state drive (SSD) products developed by Mtron for mobile computers and enterprise servers.

Factors Affecting Comparability of our Financial Results Acquisitions
• On July 31, 2007, we acquired the TDK Recording Media business.

• On July 9, 2007, we acquired the Memcorp business.

• On April 28, 2006, we acquired the Memorex business.

Operating results of the TDK Recording Media, Memcorp and Memorex businesses are included in our consolidated results of operations from their respective dates of acquisition. See Note 3 to the Consolidated Financial Statements for further information. In addition, we acquired XtremeMac on June 30, 2008. The effects of the acquisition did not materially impact our 2008 results of operations.
Executive Summary
2008 Consolidated Results of Operations
• Revenue of $2,154.6 million in 2008 was up 4.5 percent compared with revenue of $2,062.0 million in 2007, due primarily to the acquisitions of the TDK Recording Media and Memcorp businesses which closed in the third quarter of 2007.

• Gross margin of 16.2 percent in 2008 was down from 17.3 percent in 2007, due mainly to continued changes in product mix and reduced profitability in our Electronic Products segment.

• Selling, general and administrative expense was 13.5 percent of revenue in 2008, compared with 10.8 percent in 2007 due to incremental TDK Recording Media and Memcorp SG&A expense, brand investments and additional legal expenses related to the Philips and SanDisk litigation.

• Operating loss was $27.8 million in 2008, compared with $33.0 million in 2007. Operating loss in 2008 included a goodwill impairment charge of $34.7 million and restructuring and other charges of $28.9 million. Operating loss in 2007 included a goodwill impairment charge of $94.1 million and restructuring and other charges of $33.3 million.

2008 Cash Flow/Financial Condition
• Cash totaled $96.6 million at year-end.

• Cash flow provided by operating activities was $84.7 million for 2008.

• We repurchased approximately 1.1 million shares of common stock in 2008 for $26.4 million.

• Our Board of Directors declared dividends of $0.16 per share in February, May and August 2008, and $0.08 per share in November 2008, totaling $20.9 million for the year. Effective January 30, 2009 our Board of Directors suspended the Company's quarterly cash dividend.

Results of Operations
Net Revenue

                                Years Ended December 31,                Percent Change
                                                                    2008 vs.     2007 vs.
         (In millions)      2008          2007          2006          2007         2006
         Net revenue     $ 2,154.6     $ 2,062.0     $ 1,584.7          4.5 %        30.1 %

Our worldwide 2008 revenue growth, compared with 2007, was driven by volume increases of 10.1 percent, a foreign currency benefit of 2.6 percent, partially offset by price declines of 8.2 percent. The volume increases for 2008, compared with 2007, were driven by optical and consumer electronics sales, primarily due to the addition of TDK Recording Media and Memcorp incremental revenue which totaled $394.4 million. Excluding acquisitions, revenue for 2008 from our magnetic products was down due to declines in demand for entry level and mature data center tape formats; revenue from our optical products was down due to a decline in DVD and CD sales due to a decrease in the size of DVD and CD market. Revenue from our flash products was down due to our planned rationalization of our exposure in the retail channel.
Our worldwide 2007 revenue growth, compared with 2006, was driven by volume increases of 38.4 percent and foreign currency benefit of 2.4 percent, partially offset by price declines of 10.7 percent. The revenue increase in 2007, compared with 2006, was driven by the acquisitions of the TDK Recording Media and Memcorp businesses, both of which closed in the third quarter of 2007 and incremental revenue from the Memorex acquisition which closed in the second quarter of 2006. Revenue from the TDK Recording Media and Memcorp acquisitions in 2007 was $275.1 million and $118.1 million, respectively. Incremental revenue in 2007 from the Memorex acquisition was $130.1 million.

Gross Profit

                                 Years Ended December 31,            Percent Change
                                                                  2008 vs.     2007 vs.
            (In millions)      2008        2007        2006         2007         2006
            Gross profit     $ 350.0     $ 355.9     $ 344.1         -1.7 %        3.4 %
            Gross margin        16.2 %      17.3 %      21.7 %

Our gross margin decreased in 2008, compared with 2007, driven by continued changes in product mix which can be attributed to softness in data center tape demand and reduced profitability in our Electronic Products segment. Our consumer electronic product margins were impacted by economic factors in the United States, which led to higher than expected levels of price erosion in the industry as supply exceeded demand as well as weaker margins on all products.
Our gross margin decreased in 2007, compared with 2006, driven by changes in our product mix, negative impacts of USB flash products and declining revenue and gross margins of legacy magnetic tape products. The product mix changes were primarily due to the acquisitions of the TDK Recording Media and Memcorp businesses in the third quarter of 2007 and the acquisition of Memorex in the second quarter of 2006. These operations, which are almost entirely focused on consumer channels, have business models which involve selling products with lower gross margin percentages than our base magnetic tape business.

Selling, General and Administrative (SG&A)

                                           Years Ended December 31,             Percent Change
                                                                            2008 vs.     2007 vs.
(In millions)                            2008        2007        2006         2007         2006
Selling, general and administrative    $ 290.6     $ 223.3     $ 174.0         30.1 %        28.3 %
As a percent of revenue                   13.5 %      10.8 %      11.0 %

Our 2008 increase in SG&A expense, compared with 2007, was due to incremental TDK Recording Media and Memcorp SG&A expense, brand investments and legal expenses related to the Philips and SanDisk litigation. We experienced additional intangible asset amortization due to the TDK Recording Media and Memcorp acquisitions of approximately $6 million in 2008.
Our 2007 increase in SG&A expense, compared with 2006, was due to the addition of the TDK Recording Media and Memcorp business SG&A expenses and incremental Memorex SG&A expense. Additional intangible amortization associated with the TDK Recording Media and Memcorp businesses totaled approximately $5 million and incremental Memorex intangible amortization totaled approximately $4 million. The decrease in SG&A as a percentage of revenue in 2007 was due to our overall revenue growth and the benefit of restructuring actions.

Research and Development (R&D)

                                      Years Ended December 31,            Percent Change
                                                                       2008 vs.     2007 vs.
      (In millions)                 2008          2007       2006        2007         2006
      Research and development    $  23.6       $ 38.2     $ 50.0        -38.2 %      -23.6 %
      As a percent of revenue         1.1 %        1.9 %      3.2 %

The decrease in our 2008 and 2007 R&D expense was due to cost saving from restructuring activities initiated in the second quarter of 2007. This is consistent with our strategy of transforming the Company into a brand and product management company, as we focused our activities primarily on development of new magnetic tape formats.

Goodwill Impairment

                                    Years Ended December 31,            Percent Change
                                                                     2008 vs.     2007 vs.
         (In millions)             2008          2007       2006       2007         2006
         Goodwill impairment    $   34.7        $ 94.1     $  -         N/M           N/M

N/M - Not meaningful

In the fourth quarter of 2008, in connection with our annual goodwill impairment test, impairments were identified and recorded in an aggregate amount of $34.7 million related to the Americas-Commercial, Asia Pacific and Electronic Products reporting units. During the fourth quarter, the continuing and accelerating deterioration of general economic conditions including shortfalls against our anticipated fourth quarter operating profitability resulted in lower expectations for growth and profitability in future periods. In addition, we experienced a decline in our stock price reflecting a further reduction in a market participant's view of fair value of our underlying reporting units.
During the fourth quarter of 2007, in conjunction with our annual goodwill impairment test, we recorded a goodwill impairment charge of $94.1 million consisting of a full impairment of the goodwill associated with our Americas-Consumer and Europe reporting units. The goodwill impairments in 2007 resulted from a general decline in the outlook for profitability for the products sold by our Americas-Consumer and Europe reporting units combined with the fact that a market participant's view of our fair value was substantially reduced as reflected by the decline in our stock price.
See Notes 2 and 6 to the Consolidated Financial Statements as well as Critical Accounting Policies and Estimates for further background and information on goodwill impairment.

Restructuring and Other
   The components of our restructuring and other expense included in the
Consolidated Statements of Operations were as follows:

                                                                 Years Ended December 31,
(In millions)                                              2008             2007            2006
Restructuring
Severance and severance related expense                  $    15.7         $  23.6         $   8.6
Lease termination costs                                        4.8             0.6             1.4
Reversal of severance and severance related expense
from prior restructuring programs                                -               -            (0.9 )

Total restructuring                                           20.5            24.2             9.1
Other
Pension settlement/curtailment (Note 10)                       5.7             1.4               -
Asset impairments                                              5.0             8.4             2.8
TDK post-closing purchase price adjustment                    (2.3 )             -               -
Terminated employment agreement                                  -            (0.7 )             -

Total                                                    $    28.9         $  33.3         $  11.9

During 2008, we recorded $4.9 million and $0.5 million of severance and severance related expenses and lease termination costs, respectively, related to our 2008 corporate redesign restructuring program initiated during the fourth quarter of 2008. This program further accelerates the alignment of our cost structure with our strategic direction by reducing selling, general and administrative expenses (SG&A). We plan to reduce costs by rationalizing key accounts and products and through simplifying our corporate structure globally. We anticipate incurring up to $40 million in restructuring and other charges globally, mainly through cash payments for severance and severance related costs. The majority of the program is expected to be completed by the end of 2009. As of December 31, 2008, we estimate 290 positions will be eliminated throughout the world and annualized SG&A costs savings will exceed $40 million once the program is fully implemented.
During 2008, we recorded $5.2 million and $0.2 million of severance and severance related expenses and lease termination costs, respectively, related to our 2008 cost reduction restructuring program. This program began in the third quarter of 2008 when our Board of Directors approved the Camarillo, California restructuring plan as further implementation of our manufacturing strategy. We ended manufacturing at our Camarillo plant and have exited the facility as of December 31, 2008. We will focus our manufacturing efforts on magnetic tape coating operations at our existing plant in Weatherford, Oklahoma. The plant closing resulted in the elimination of approximately 140 positions, 31 of which were included under previously announced programs. We expect exit of the Camarillo plant to result in approximately $15 million to $20 million in annualized cost eliminations intended to partially mitigate projected declines in tape gross profits in future years. As of December 31, 2008, charges related to the Camarillo plan are substantially complete.
The 2008 cost reduction restructuring program also includes our decision to consolidate the Cerritos, California business operations into Oakdale, Minnesota and close the Cerritos office by March 2009. As of December 31, 2008, we expect the elimination of 49 positions in Cerritos, some of which we expect to be replaced in Oakdale, Minnesota. Consolidation of Cerritos activities at a single headquarters location is intended to achieve better focus, gain efficiencies across brands and channels, and reduce cost. Consolidation of the Cerritos operations is expected to result in approximately $1.0 million in annualized sales, general and administrative cost eliminations.
During 2008, we recorded $5.3 million for severance and severance related expenses under our TDK recording media and 2007 cost reduction restructuring programs, respectively, which began in 2007. We also recorded $1.8 million of lease termination costs related to these programs in 2008. The 2007 cost reduction restructuring program is expected to result in $25 million to $30 million in annualized cost savings, which is intended to counteract the impact of declining gross margins on tape products. As of December 31, 2008, charges related to both programs are substantially complete.
During 2008, we recorded $0.3 million and $2.3 million of severance and severance related expenses and lease termination costs, respectively, related to our 2006 Imation and Memorex restructuring program, which began in the second quarter of 2006.

The TDK post-closing purchase price adjustment of $2.3 million recorded in 2008 is associated with the finalization of certain acquisition-related working capital amounts as negotiated with TDK. See Note 3 to the Consolidated Financial Statements for further information.
We recorded pension settlement and curtailment losses of $5.7 and $1.4 million in 2008 and 2007, respectively, within restructuring and other expense in the Consolidated Statements of Operations, mainly as a result of the reorganizations associated with our restructuring activities. See Note 10 to the Consolidated Financial Statements for further information regarding pension settlements and curtailments.
During 2008 and 2007, we incurred net asset impairment charges of $5.0 and $8.4 million, respectively, related to the abandonment of certain manufacturing and R&D assets as a result of the reorganizations associated with our restructuring activities.
During 2007, we recorded severance and severance related expenses of $21.5 million and $2.3 million under our 2007 cost reduction and TDK Recording Media restructuring programs, respectively, within restructuring and other expense in the Consolidated Statements of Operations. During 2007, we recorded $0.4 million and $0.2 million of lease termination costs related to our 2007 cost reduction and 2006 Imation and Memorex restructuring programs, respectively.
During 2006, we recorded net restructuring charges of $9.1 million mainly related to the restructuring program which began in the second quarter of 2006, as well as charges related to employee reductions in our Wahpeton, North Dakota and Camarillo, California production facilities. During 2006, we incurred asset impairment charges of $2.8 million related to the abandonment of certain manufacturing assets and purchased intellectual property.
See Note 8 to the Consolidated Financial Statements for further information regarding our various restructuring programs and other expenses.

Operating (Loss) Income

                                      Years Ended December 31,            Percent Change
                                                                       2008 vs.     2007 vs.
       (In millions)                2008        2007        2006         2007         2006
       Operating (loss) income    $ (27.8 )   $ (33.0 )   $ 108.2        -15.8 %     -130.5 %
       As a percent of revenue       -1.3 %      -1.6 %       6.8 %

Our 2008 and 2007 operating losses were significantly impacted by non-cash goodwill impairment charges of $34.7 million and $94.1 million, respectively and restructuring and other charges of $28.9 million and $33.3 million, respectively, noted above.
Other (Income) and Expense

                                               Years Ended December 31,
              (In millions)                  2008          2007       2006
              Interest expense             $    1.5       $  2.6     $   1.0
              Interest income                  (3.8 )       (7.6 )     (12.6 )
              Other expense, net                9.8          6.6         8.0

              Other (income) and expense   $    7.5       $  1.6     $  (3.6 )
              As a percent of revenue           0.3 %        0.1 %      -0.2 %

Our 2008 decrease in interest income was primarily attributable to declines in cash balances due to the repurchase of common stock of $26.4 million and $108.2 million in 2008 and 2007, respectively, the acquisitions of TDK Recording Media and Memcorp businesses in 2007, the repayment of debt of $31.3 million in . . .