Earnings

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First Quarter 1997
W. T. Monahan, Chief Executive Officer
(As prepared for delivery)

Good morning. I am pleased to have the opportunity to share with you our First Quarter results.

Six quarters ago, at the end of 1995, the businesses that were combined to make up Imation were operating on a break- even basis. In Q1 we achieved earnings of 30 cents a share and a 19% O.I. improvement over Q1, 1996 despite a significant currency impact.

After 3 quarters of independent operation, we have succeeded in establishing stability and improved earnings, improving structure and factory costs, and we have begun inventing a new Imation Corp. designed to take advantage of the digital revolution. We are starting the change from a material science, product-focused business, to a customer-driven solutions company, delivering added value to all customers, resulting in growth and earnings for Imation.

Our challenge going forward is profitable growth. We are addressing this challenge in a variety of ways I will share with you today.

We will continue to implement necessary changes while maintaining good business controls and implementing portfolio management, and value-add workflow solutions to help lead our customers into the digital environment.

Currency exchange rates and weakness in the business environment in Europe will make the achievement of growth difficult for the full year, but will not impede the development of a solid business base that we believe will lead us to our growth goals for 1998 and beyond.

We are very pleased with our financial progress in Q-1.

Gross margins improved to 36.3 percent, the highest in 8 quarters, with good unit cost results across our business units, raw material price declines, and the exiting of some unprofitable product sales. Our Rochester, New York, film plant closure is ahead of schedule and will be completed in early Q-2.

Our operating margins improved to 5.1%, the highest since 1994.

Earnings Per Share were 30 cents, the third quarter in a row of consistent performance and the highest EPS of any quarter for these businesses in recent history.

We generated $7.5 million in economic profit improvement over Q-1, 1996, for a cumulative EP improvement of $72 million as we progress to our goal of $150 million in EP improvement by the end of 1998.

Worldwide revenues were 548 million dollars, down 4.9 % in Q- 1 due to currency exchange rates and weakness in European sales vs. a strong 1996 Q-1. About half this decline was due to our selectively exiting some low-margin, non-strategic business in the non-brand duplicator diskette market, graphic arts supplies, and photo film.

We are encouraged by strong growth in both Asia and Latin America on a local currency basis and continued acceptance of DryViewTM Imagers, and high-capacity tape storage cartridges.

Our expanded growth portfolio - including a small contribution from Luminous - reached 16% of sales, up from 11% in all of fiscal 1996.

GROWTH

Now let me talk about what we are doing about building growth. We are working to develop a growth company by implementing the following strategies:

1) Creating independent focus on core businesses and on solution-oriented, new growth opportunities.
2) Developing new products and network solutions for the digital workflows of our customers to drive our growth.
3) Redesigning our operational infrastructure from I.T. systems to a new efficient worldwide supply chain.
4) Increasingly tying compensation of key leaders to growth as well as Economic Profit results, and
5) Expanding resources in new markets worldwide such as Russia, other parts of Eastern Europe, India, and China.

To maximize our existing core businesses and ensure the right focus and resources on our new solution-oriented opportunities, we are structuring and leading them independently. For example, our standard diskette business and our LS-120 growth platform are now managed separately, as is our Data network solutions and our digital workflow solutions in Printing and Publishing. This will allow us to take our present resource and spending level and focus more of it on our strategic growth initiatives.

Let me also briefly touch on the growth portfolio we now have in the marketplace and then outline several efforts we believe will be growth drivers in 1998 and beyond.

In 1997

In Data Storage, our TRAVAN Data Cartridges are moving to the fast-growing network and server market segments with the introduction of our 8 gigabyte TR-4 cartridge late last year and the launch of our 10 gigabyte TR-5 later this year.

We have also started to penetrate the server market in Q-1 with our new family of automated tape library systems announced in March at CEBIT.

LS-120 continues to gain market visibility and interest as the next evolution of the 3.5 inch floppy diskettes.

Drive production is up to half million per month.

Slim-line versions have been announced by Mitsubishi and ORT.

OEM support is expanding with the addition of Samsung in Asia and Fujitsu/ICL and Vobis AG in Europe.

Exabyte has expanded its Eagle Nest family with the LS- 120 drive.

Channel support is strengthening with the addition of staples, Office Depo, Best Buy, Merisel, PC Connection and Micro Warehouses.

In enterprise higher-capacity tape, we are taking orders for a new 26 gigabyte data cartridge developed with Tandberg Data.

We also announced a new client/server software product, Media Performance Manager, allowing Data Centers to manage media and drive performance as part of a complete storage solution.

In Medical Imaging, our DryViewTM Laser System continues to grow well with over 2000 systems shipped, and our new desktop system is getting good reception, particularly in the digital environments.

In Printing and Publishing, we continue to integrate Luminous software with our Rainbow proofing systems, and expanding the Luminous portfolio with three new products.

At Seybold last week we demonstrated our new MatchprintTM Laser System technology in partnership with other vendors. It is expected to be introduced in the second half of 1997.

We are introducing a new, large format RainbowTM 4700 Proofing System this May.

We also have introduced near photo quality paper for Color Ink Jet printers.

These new products will start to impact our sales in the second half of 1997.

We have also developed several programs alone, and with partners that we expect to be growth drivers in future years.

In March we announced with TeraStor (a California start-up), an agreement to develop a new class of rewriteable mass storage devices and media, called near-field recording technology, combining hard disk and optical technologies to deliver tape-like capacity with hard drive-like speed and performance. We expect to begin shipping products based on this new platform in the first half of 1998.

In March we also announced that we are partnering with StorageTek to develop a new tape drive/cartridge solution across a variety of operating environments, hardware platforms, and end-user applications. We expect to begin shipping products based on this new platform in the first half of 1998.

These network solutions being developed with TeraStor and STK present us with an excellent opportunity to leverage our end-user position in medical imaging and printing and publishing with greater effect than we ever could in the past.

We are leveraging our dry film technology from medical into printing and publishing, where we're introducing a new processless plate, differentiating our conventional or film- based products from our competitors.

As we look at our business process redesign for growth, in 1997 we began implementing a world-class IT system and supply chain. We are doing this with Hewlett-Packard, Oracle, and Ernst & Young û to improve the efficiency of our entire business process û from purchasing raw materials, to manufacturing, to warehousing and distribution, to sales and cash flow. This is an important effort, as we believe it represents a significant competitive advantage. We have the opportunity to design and implement our processes specifically for the imaging and information industries, important for delivering efficiency and asset management improvements. This effort is also an extremely important part of our strategy to improve our customer service capabilities as an enabler of our future growth.

IN SUMMARY

We are making substantial progress in building a stable earnings base and improving the quality of those earnings through cost reductions, reengineering our business processes, and rationalizing our portfolio.

We are building the foundation for future growth and profitability by expanding our "growth portfolio" through a variety of efforts including greater solutions focus, joint development efforts, business process reengineering and other activities, focused by increasingly tying compensation of our key business managers to growth and stock performance as well as EP.

We remain focused on meeting our three-year economic profit goal, on achieving modest revenue growth in the second half of 1997 and improved growth in 1998 and beyond, supported by the continued improvements we are showing in operating income, gross margin, and cost management. We have illustrated our confidence with the announcement today of an expanded stock purchase authorization for Imation stock.

Now to provide more financial details, I'd like to introduce Imation's Chief Financial Officer, Jill Burchill.

Certain portions of these comments which do not relate to historical financial information may be deemed to constitute forward looking statements which are subject to various factors that could cause actual results in the future to differ materially from these statements. Among these factors are the Company's ability to meet its cost reduction, revenue growth and profitability targets, its ability to establish itself as an independent public company, competitive industry conditions including historical price erosion in certain product categories, foreign currency fluctuations, and the market acceptance of newly introduced products as well as various factors set forth in the Company's filings with the Securities and Exchange Commission, including its 1996 Annual Report on Form 10-K.