Certain portions of this document 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 or revenue growth targets, the competitive pricing environment, foreign currency fluctuations, and the market acceptance of newly introduced products as well as various factors set forth in the Company's Information Statement included in the Form 10 Registration Statement, filed with the Securities and Exchange Commission on June 21, 1996, in the section titled "SPECIAL FACTORS."

Paul Antico, Fidelity:

Good morning and congratulations. Two questions for Jill Burchill. Regarding operating expenses you said Q3 didn't include charges that were in the first half. Can you review the charges in the first half and also is this a base line we should work with going forward into Q4 and 1997?

Jill Burchill: First, the charges that were incurred in the first half totaled approximately $76 million, $53.9 million of that were recorded on a special line called restructuring, $14.6 million was recorded in SG&A, and $7.9 million in COGS. Those charges were related to the separation of employees and also the write off of various assets. At this point in time we are very comfortable with the goals we set out last June. Let me repeat what those goals are: R&D in the range of 7-8 % of sales; SG&A in the range of 20-22% of sales. We expect to achieve those ranges by 1998. While we have one quarter of operations under our belt we are comfortable with those ranges and continue to evolve toward that. We'll be evolving the Operating Expenses ratios as time goes on.

Why did the R&D come down so much in Q3? Is this an anomaly or should this continue at about $40 milllion a quarter?

Jill Burchill: We have consolidated our labs from 14 to 7 and that is one of the main reasons why the R&D costs were lower in Q3. We continue as a company to maintain a strong technology focus. We'll continue to build technology building blocks. I'm more comfortable with a range of 7-8% to sales, and the third quarter is a little bit lower than that.

Bill Monahan: Just to add to that, we have a strong priority to invest in new technologies and building new technology platforms to the ones we have out now in the market place and were working on new platforms that we can't discuss at this time, but that will ensure we continue a strong technology investment.

On the tax rate, do you have any guidance to use at this point?

Jill Burchill: At this point we expect this rate to decline over time. We have the good story that we are earning more profit around the world. It just so happens that it is in high tax rate countries. We have a plan set out to reduce that rate to closer to 40%. I would suggest it might go down a percent or two in 1997. But we're going to make sure that we do it in the way that's appropriate to our business operations and also that's appropriate for the countries that we operate in.

Jeffrey Priest, Bear Stearns:

Polaroid announced this morning that they have joined with Sterling Diagnostic Imaging to produce dry lasers for the medical industry. Have they been a competitor all along and was this announcement a surprise or was it expected?

Bill Monahan: It was an expected announcement. Helios™ is the technology that Polaroid uses for the dry laser systems and they've been in the market for a few years and we're having good success in the market against any competition. We have now shipped over 1500 DryView™ systems and we feel we have a very strong competitive edge.

In terms of penetration you're early on but in terms of market share of buyers who are interested where do you estimate that you are sitting?

Bill Monahan: Our sales of DryView™ Systems in 1996 is up over 50% of both wet and dry laser imagers shipped in the U.S. Our share is dramatically up this year.

Kim Retrievi, First Boston:

Could you describe what stage you're at in terms of facility consolidation and reducing R&D labs from 14 to 7, about how far through you are in that? And also in SG&A reduction some of the things that have been accomplished and obviously are showing through in the numbers and the things that are going to be accomplished in the next few quarters?

Bill Monahan: We're right in the middle of some of the key consolidations and changes. We also are just starting the implementation of our process reengineering and I.T. and supply chain which will go on through 1997 into 1998. From a laboratory standpoint through the voluntary separation plan and consolidation programs, we've accomplished pulling the laboratory into the kind of design we wanted, and now we're focusing those laboratories on specific growth opportunities in our customer base, so that progress has gone extremely well throughout all of the business units. In addition, in the sales area, we have our sales structure in place worldwide and established our sales teams around the world, they're already in place and moving to penetrate Latin America and Asia, specifically, more aggressively than we have in the past.

Jill Burchill: We continue as part of our approach to examine the structure that we have established or are establishing in all parts of the company, Manufacturing, R&D and SG&A, and we're continuing to examine where in some cases we can further reduce that structure and in others cases we may need to fill in a few pieces. It's an evolutionary process and we're pleased with where we are but we're certainly not at our SG&A goal.

Bill Monahan: One added comment, we will be exited from our Rochester facility by the middle of next year, that's a process that's on going.

James Pan, Tyndall Partners:

What is your net working capital needs as a percent of sales in 1998? How many LS-120™ drives will be out in 12 to 16 months from today and what does that mean to your sales?

Bill Monahan: Let me talk about the LS-120™ first. We've been anxiously waiting for the ramp up of drive manufacturing by MKE and that's starting to happen. Their automated lines are starting in November and we have Mitsubishi as part of the partnership coming on line in Q1 1997. And that's going to dramatically increase drive availability which is what numerous OEM's are telling us they're waiting for which is the issue. We are constantly taking the pulse of the potential users of LS-120™ out in the market place and there continues to be an extremely strong interest in the LS-120™ format because of the migration capability to a higher capacities. Its backward read and write capability is really critical because there's 8 billion 2MB diskettes out there that have to be used and the ease to build it in as an A drive. You only have to use one slot in the computer in order to use LS-120™. We see interest remaining very high as we go forward with LS-120™. We have a lot of announcements that we believe are going to happen as the drive availability starts to grow. In the 2MB drive area 75 million drives are shipped every year. We believe the market opportunity is enormous and it's really still ahead of us.

Are you saying that if the drives were available today and supply was no problem, that the top 10 PC manufacturers would immediately sign on?

Bill Monahan: I believe that as drive volume is available quite a few of the OEM manufacturers are going to have very strong interest in signing on with LS-120™. That's what the end users are telling us in the market place and we're keeping very close touch with that.

When would you say the bottle neck of supply might not only be over but will be going downhill as opposed to uphill? When will there be no backorders?

Bill Monahan: I think in the first quarter of 1997 when Mitsubishi comes on line we're going to have much freer flow of drives to where it will be able to handle an ever increasing demand for the LS-120™ in the market place.

Net working capital as a percentage of sales for 1998, what's your target?

Jill Burchill: Today we have net working capital of over $500 million and today it's running just short of 30% to sales. Certainly with our improvement and our modest revenue growth goals of 3 - 5%, we expect that that will decrease toward 20%. I don't have the exact figure with me but I certainly could provide you with a sense of that.

Peter Enderlin, Smith Barney:

For the nine months the difference between what you reported and what you want to report excluding restructuring charges and start up expenses is $48.6 million. Please walk through how that is derived in terms of charges and other start up expenses in pre-tax basis and the tax effect that gets you to the $48.6 million.

Jill Burchill: The pre-tax basis of the $48.6 million is $76.4 million. That is made up of three main areas: $53.9 million restructuring charge entirely related to the separation costs that were offered to employees in Imation, $14.6 million related to SG&A write-off and $7.9 million related write-offs that hit the COGS line.

So, those three items the $53.9 million, the $14.6 million, and the $7.9 million total $76.4 million. The tax provision applied against that $76.4 million is $27.8 million which is 36% to sales and so the net charge that was taken was $48.6 million.

Brad Allen: Regarding the numbers Jill Burchill just went through, you should have received in the fax this morning a reconciliation of nine months year to date that has all of that laid out for you. So, if you look in the fax you received today, you should have all the details.

Who was the third partner in the direct to plate area?

Bill Monahan: Ultre, but that's not in the direct to plate, that's in dry proofing.

What are you doing in the direct to plate area?

Bill Monahan: We're working with a number of people in the industry on the direct to plate as well as other types of plates that we feel will be prevalent in the printing industry in the future.

John Schneller, DLJ:

You mentioned last quarter that you shipped 1000 DryView™ units and this quarter you mentioned you shipped 1500 total, is that a fair internal run rate for that particular product? If so, how does that compare to what you believe will be the competitive run rates, specifically Polaroid with the Helios™?

Bill Monahan: 1500 is an excellent start and we're keeping sales up with our scale up of DryView™ (systems). The response has been excellent and is well in excess of anyone in the marketplace with any type of imager.

Next to Polaroid, who would you consider your major competitor in that product line?

Bill Monahan: Right now, with DryView™ (systems) we believe we don't have any competitors. We don't have any one who has the features that DryView™ (systems) has or the kind of response in the market place by the users that we're getting.

Paul O'Neill, Buetel Goodman:

What are the breakdowns of the divisions in terms of how they've done, specifically Data, Printing, Photo and Medical on a year over year basis?

Bill Monahan: We don't provide specific breakdown by business for both competitive reasons and because in the future, as our businesses begin to develop synergies between them, the lines will blur. But we can state that were seeing improvement in all the business units in Imation as part of the results we're getting in the third quarter and the portfolio moves that we've made in all of the business units shedding a few programs that were not producing economic profit for us is paying off and showing results.

Is it fair to say the four major divisions are growing at the top line?

Bill Monahan: Both top and bottom line.

What is the cost that the LS-120™ needs to get to, and can it get there, in order to replace the 2MB drives?

Bill Monahan: Because of the capacity and features of the LS-120™ and the demand that we've seen for the capacity due to the Internet and LANs, we believe the LS-120™ is going to be very competitive and very attractive to the end user - that's what the end users are telling us. We believe the drive has to come down well under $100 and we believe it has the potential to do that in OEM price. The reason being in the future, optics are moving toward more standard CD ROM type optics and the magnetic heads to more typical media heads which is going to give us leverage to driving the cost down on the drives.

Isn't that the problem that there is the optic head in it, and is it possible to develop the same type of drive without the optic head in it and isn't that the competitive threat?

Bill Monahan: There's a real competitive advantage to having the optic head to the features of the LS-120™. But because it's moving toward the CD ROM type head we see the cost advantages there also.

Do you expect Compaq to be shipping PC's in the first quarter of 1997 with the LS-120™ standard?

Bill Monahan: Compaq is shipping six systems today with the LS-120™ built in, and in some cases as a standard. It's not a retail option but a high end product in their tower system.

And you expect it to remain there until the drives can hit the say $50 price range, is that fair?

Bill Monahan: No, I think the volume will increase dramatically with the LS-120™ even if it's around the $100 mark, because of the interest we're seeing from the users of the features.

Michael Ellmann, Schroder Wertheim:

Please explain why the volumes in the U. S. are not as strong as they are internationally. And also why the pricing pressure seems to be less in the U. S. than internationally.

Bill Monahan: On pricing in the U. S. vs. International, the mix in the new products platforms internationally isn't as strong yet as in the U. S. The drives are being shipped overseas worldwide but the drive penetration in all our new platforms is stronger in the U. S., so that's a benefit on the pricing area from a mix standpoint.

Does that imply that US new product sales is approaching 20%?

Bill Monahan: Not 20% but a higher percentage than the total (13%).

Why is the international volume stronger then?

Bill Monahan: One of the things that we outlined when we first spun-off was the opportunity that we have because the added focus of being an independent company. In the past these were 4 or 5 of 50 units within the 3M family that were prioritized on a local basis and because of the heavy competition and it being in a high tech business I think they didn't get the priority that they get today as independent units. So, with very focused sales teams in the international countries we're starting to see the benefits of our independence in those countries.

About SG&A costs, I think you indicated that you had recurring and non-recurring company launch and company image building costs that in this quarter were $19 million and that in the preceding quarter they were $13 million. What were they in the First quarter?

Jill Burchill: They were nothing in the first quarter.

If they were nothing in the first quarter that implies that without these charges SG&A was $130.7 million, the reported figure in the first quarter. In the second quarter without these charges, SG& A would have been $131.6 million, and without these charges there's really a quite dramatic drop down to $114.5. Now, is that $114.5 million a kind of the new threshold that we should be at? That's pretty exciting for 1997 and going forward.

Jill Burchill: Let me say, that our goal by 1998 is to have SG&A in the 20-22% to sales range. As we're only one quarter old, we're continually examining the structure we've established and in some cases including some activities related to improving some of our business processes we are going to need to invest in some SG&A in the future. We believe our goal is still achievable, but I believe we need to review that goal and we need to continue to evaluate where the structure can be further reduced and even where the structure needs to be enhanced. So you've got the numbers correct , you can draw your conclusion, but we're real comfortable with the cost goals we've set out at in our SG&A targets.

I begin to understand why. With respect to these recurring costs, your suggestion was these costs would be reduced over time and would essentially be done by the end of 1997?

Jill Burchill: We believe that they will be declining in 1997, there may be some that fade in 1998 but the costs are made up of two main areas: The first area is the cost we are investing into identify the redefined business processes for the company both in the supply chain and I.T., and many of those costs will disappear as those systems and processes are implemented. We intend to implement those through 1997 and 1998. The second area is in the brand and identity, as a new company we need to spend money initially here of a special nature to help people understand what Imation's all about and who we are, and we expect that to continue at a declining rate into 1997 and 1998.

Bob Gottesman, First Manhattan:

I wanted to ask a follow up question on the U. S. volumes. I believe in the third quarter there was a decline in unit volume growth from 8% in the second quarter to 4.8% in the third quarter. And what was the reason for that?

Jill Burchill: We're very pleased with the U. S. volume growth of 4.8%, it is less of a volume growth than in the previous quarter because it has a very difficult comparison. The third quarter of 1995 was the largest sales quarter that I have on my records here for the U. S. operation. So we're competing against a very high third quarter of last year, and the second quarter of last year was significantly lower. So, we're not discouraged at all by the sales growth being 4.8% in the US where it was 8% in the second quarter. In fact we're very encouraged that we beat that very high quarter in US sales.

Bill Monahan: In addition, the mix is better because we've cleaned our portfolio and we're driving the products that are going to add economic profit to the company.

Also, you announced the completion of the Luminous transaction, can you give us the amount you paid and I believe that there was some amount that was paid in stock?

Jill Burchill: We're not going to share with you what we paid for that company. But we have shared with that we did pay a partial stock-partial cash transaction we are recognizing a special after-tax write-off in the fourth quarter of $12 million that represents a portion of the purchase price that can be associated with in-process R&D. We were required to deduct that immediately. We're very pleased with that acquisition, we will start to see synergys developing with that company in the fourth quarter.

Could you just spend one or two minutes about the opportunities to integrate these two companies especially with your international scope?

Bill Monahan: There's actually a number of major areas for integration. The first one - the main reason we acquired Luminous - is that their workflow software fits perfectly into our rainbow™ proofing solution and it gives us the fourth leg of the stool, so to speak, in delivering a complete solution to our customers along with our data storage components and our Color lock™ software and rainbow™ components and some transmissions capability that we do in partnership in an alliance with Netco. So it really helps us deliver a complete solution to the customer and dramatically improves our offering. So the synergy was excellent there. In addition to that, the opportunity is to spread the penetration of the Luminous product on a world wide basis. Luminous being a smaller company did not have the distribution and sales coverage that we have world wide, and that's going to help dramatically in the future.

What are the revenues for Luminous this year, roughly?

Jill Burchill: I don't think we've announced that. It's not significant to the company, it certainly isn't significant to our fourth quarter or our 1997 sales revenue. Let me just remind everyone that in-process R&D write-off is a non-tax deductible $12 million that will hit the fourth quarter stand alone results.

Bill Monahan: Let me just add to that, it might clear it up a little, as we've outlined our plan since the roadshow, our plans are to build solutions for the customers and we're not acquiring companies for market share but for technology. Technology that we can leverage within the platforms that we have and solutions we're offering the customers. And Luminous is a perfect fit for that strategy

What is the capital spending for the quarter and what it will be in Q4 and in 1997?

Jill Burchill: We've said in our business plan all along that we've set capital spending and depreciation to be relatively balanced to the tune of about $160 million per year. In the third quarter our capital spending was about $37 million which was slightly lower than our depreciation expense for the third quarter. We expect to continue tracking closely, it looks like we're going to be a little below the $160 million, but I think the $160 million for the total year 1996 is appropriate. In 1997 we believe that our operating capital expenditures will be around $160 million. We are now in the process of examining some future expenditures that we may choose to make for business processes and to further separate us from 3M. For example, we currently still have over 1,000 people housed in 3M facilities and we're in the process of studying that issue and determining if housing them and spending capital in a way to house them outside of 3M may be more cost effective for Imation. We're examining these issues but we consider them to be outside of the normal approximately $160 million a year in capital spending.

Michael Mullarkey, Markston Investment Management:

On the unearned ESOP shares, normally in an ESOP situation there's a contribution that comes out of COGS. Could you expand on whether there was a contribution out of COGS and what percentage of employee cost it would be and give us any kind of elaboration on the ESOP that you can?

Brad Allen: Mike, at this time those ESOP shares were purchased to fund essentially future company matches because we're a new company so there's very little that's hitting the P&L now, it's really a balance sheet purchase to fund future contributions.

Can you give us an idea of what an ESOP contribution might be as a percentage of employee cost going forward?

Jill Burchill: I don't have that information available.

Brad Allen: It's for the 401(K) match.

So it's not an enormous number?

Jill Burchill: No.

John McPeake, Prudential Securities:

How much of the sequential decline in SG&A costs was related to the real overhead vs. the overhead you were carrying from 3M?

Jill Burchill: Well, at this point we've determined that we think that the overhead reduction that we have made, a combination of both of those items, is somewhere in the neighborhood of $14 million a quarter. Some of that is just separating from 3M and not absorbing costs that were not related to the businesses. There is a portion that relates to decisions that this management team has made from a cost structure perspective. We decided to change the culture, the way we operate the business and the structure that is absorbed in that. We're very pleased that of that $14 million a good portion relates to the decisions this team has made to structure the company. We are continuing to look at that and are only keeping that structure that is appropriate for our company and appropriate for our industry that we operate in.

Bill Monahan: As we go forward, we see that we're going to have a continuing and on going lower cost structure and we're attacking some other areas that we hadn't had a chance to address in the past that should continue what's on our plan as we outlined it for you.

The R&D range was below the 7-8% guidance, I've talked to you and you have given me sometimes an absolute dollar guidance, and this can swing the estimates a fair amount with the margin range you are operating in. Should we expect closer to 7%?

Bill Monahan: I think we're still holding to between 7-8%. As I mentioned earlier, we are developing additional new product platform technologies for our business. We see some excellent opportunities out there. We see some short term reduction in terms of the headcount and we're going to be changing some of the skill sets. We're going to be adding other skill sets that fit our software needs as we go forward in technology. So, I think that at this time after one quarter under our belt we hold to between the 7-8% that we've outlined in our three year plan.

In the x-ray film, microfilm, 35mm film market what kind of pricing are you seeing?

Bill Monahan: In the conventional x-ray film, the pricing has been very aggressive. There has been strong price erosion in that market probably over the last 18 months. In the 35mm film, that has been more stable. In microfilm, that's a declining market and so it's pretty stable.

Sterling Medical drove the prices of x-ray down and now they're partnering with Polaroid in this dry imaging area. Do you see this an issue?

Bill Monahan: Our DryView™ imager has been out in the market place for over a year. It is by far the most popular system. We've shipped 1500 units, we've been up against Helios™ the entire time and we have some very strong competitive advantages that the users are recognizing and are choosing the DryView™. So, we feel we're positioned very well.

Do you have an ending share count for the quarter?

Jill Burchill: From the press release, it is 41.9 million.

Mark Heilweil, Spectrum Advisory:

It's appropriate that this is an ending question. For those of us who have been 3M shareholders and aren't technology analysts, could you clarify what your core businesses are? I hear film, software, what are the core businesses that Imation will be based on?

Bill Monahan: Imation is in the core businesses of information and imaging and if you look at our portfolio, we have all methods of removable media data storage, imaging for the medical industry with x-ray film for imaging in radiology area being a major factor. Photographic film is a business unit and a key factor in our business is our whole color proofing line around the printing and publishing industry. We also are in optical storage and document imaging. We also have a strong service component that has business supporting our shipments of hardware in the marketplace.

Are you primarily selling to consumers or to industrial customers?

Bill Monahan: We sell primarily to industrial customers. I would call it business to business and we sell both through distribution and on a direct basis.

How much of your business is software, where you're developing software that later gets sold or incorporated into your products?

Bill Monahan: An increasing percentage of our business is tied to software, particularly enabling software. We have software components in our Color lock™ color management program for rainbow™ proofing, we have substantial software in our DryView™ imaging system. So our whole imaging area and also our back up technology has software components to it. Our business is driving and benefiting from the trend to digital. And that entails a stronger software component as we go forward.

Copyright 1996 Imation. All rights reserved.