Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

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FORM 10-Q

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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED
June 30, 2006; OR
|- | ---------------------------------------------------------------------------------------------------------------------------------------



|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM __________TO __________.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------





Commission File Number:0-20728

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RIMAGE CORPORATION

(Exact name of Registrant as specified in its charter)



|Minnesota                                                      | 41-1577970                          
|-------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of
incorporation or organization) | (I.R.S. Employer Identification No.)





7725 Washington Avenue South, Edina, MN  55439

(Address of principal executive offices)



952-944-8144

(Registrants telephone number, including area code)



NA

(Former name, former address, and former fiscal year, if changed since last report.)



Common Stock outstanding at July 31, 2006  9,839,180 shares

of $.01 par value Common Stock.

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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

|Large Accelerated Filer o | Accelerated Filer x | Non-Accelerated Filer o
|------------------------- | ------------------- | -----------------------

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o Nox





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RIMAGE CORPORATION

FORM 10-Q

TABLE OF CONTENTS

FOR THE QUARTER ENDED JUNE 30, 2006





|           |    | Description                                                                                               | Page 
|---------- | -- | --------------------------------------------------------------------------------------------------------- | -----
|           |    |                                                                                                           |      
|           |    |                                                                                                           |      
|PART I     |    | FINANCIAL INFORMATION                                                                                     |      
|           |    |                                                                                                           |      
|Item 1.    |    | Financial Statements (unaudited)                                                                          |      
|           |    |                                                                                                           |      
|           |    | Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005                           | 3    
|           |    |                                                                                                           |      
|           |    | Condensed Consolidated Statements of Income for the three and six months ended June 30, 2006 and 2005     | 4    
|           |    |                                                                                                           |      
|           |    | Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2006 and 2005 | 5    
|           |    |                                                                                                           |      
|           |    | Notes to Condensed Consolidated Financial Statements                                                      | 6-14 
|           |    |                                                                                                           |      
|Item 2.    |    | Managements Discussion and Analysis of Financial Condition and Results of Operations                     | 15-23
|           |    |                                                                                                           |      
|Item 3.    |    | Quantitative and Qualitative Disclosures about Market Risk                                                | 23   
|           |    |                                                                                                           |      
|Item 4.    |    | Controls and Procedures                                                                                   | 23   
|           |    |                                                                                                           |      
|           |    |                                                                                                           |      
|           |    |                                                                                                           |      
|PART II    |    | OTHER INFORMATION                                                                                         | 24-25
|           |    |                                                                                                           |      
|Items 1-3. |    | None                                                                                                      |      
|           |    |                                                                                                           |      
|Item 4.    |    | Submission of Matters to a Vote of Security Holders                                                       |      
|           |    |                                                                                                           |      
|Item 5.    |    | None                                                                                                      |      
|           |    |                                                                                                           |      
|Item 6.    |    | Exhibits                                                                                                  |      
|           |    |                                                                                                           |      
|SIGNATURES | 26

2

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Table of Contents

# RIMAGECORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2006 and December 31, 2005
(unaudited  in thousands, except share data)

|Assets                                                            |  |  | June 30,2006 |        | December 31,2005
|----------------------------------------------------------------- |  |  | ------------ | ------ | ----------------
|                                                                 
|Current assets:                                                   |  |  |              |        |                 
|Cash and cash equivalents                                         |  |  | $            | 31,703 |                 
|Marketable securities                                             |  |  |              | 21,606 |                 
|Trade accounts receivable, net of allowance for doubtful accounts |  | 
|and sales returns of $603,000 and $854,000, respectively          |  |  |              | 13,171 |                 
|Inventories                                                       |  |  |              | 6,921  |                 
|Prepaid income taxes                                              |  |  |              | 1,237  |                 
|Prepaid expenses and other current assets                         |  |  |              | 968    |                 
|Deferred income taxes - current                                   |  |  |              | 1,379  |                 
|                                                                 
|Total current assets                                              |  |  |              | 76,985 |                 
|                                                                 
|                                                                 
|Property and equipment, net                                       |  |  |              | 3,053  |                 
|Marketable securities  non-current                               |  |  |              | 16,322 |                 
|Deferred income taxes  non-current                               |  |  |              | 134    |                 
|Other non-current assets                                          |  |  |              |       |                 
|                                                                 
|                                                                 
|Total assets                                                      |  |  | $            | 96,494 |                 
|                                                                 
|                                                                 
|Liabilities and Stockholders Equity                              |  | 
|                                                                 
|Current liabilities:                                              |  | 
|Trade accounts payable                                            |  |  | $            | 5,533  |                 
|Accrued compensation                                              |  |  |              | 2,057  |                 
|Other accrued expenses                                            |  |  |              | 1,379  |                 
|Income taxes payable                                              |  |  |              |       |                 
|Deferred income and customer deposits                             |  |  |              | 3,270  |                 
|Other current liabilities                                         |  |  |              | 87     |                 
|                                                                 
|Total current liabilities                                         |  |  |              | 12,326 |                 
|                                                                 
|Long-term liabilities:                                            |  | 
|Other non-current liabilities                                     |  |  |              | 19     |                 
|                                                                 
|Total long-term liabilities                                       |  |  |              | 19     |                 
|                                                                 
|Total liabilities                                                 |  |  |              | 12,345 |                 
|                                                                 
|Commitments and contingencies (note 10)                           |  | 
|                                                                 
|Stockholders equity:                                            
|Preferred stock, $.01 par value, authorized 250,000 shares,       |  | 
|no shares issued and outstanding                                  |  |  |              |       |                 
|Common stock, $.01 par value, authorized 29,750,000 shares,      
|issued and outstanding 9,810,917 and 9,630,324, respectively      |  |  |              | 98     |                 
|Additional paid-in capital                                        |  |  |              | 24,868 |                 
|Retained earnings                                                 |  |  |              | 59,258 |                 
|Accumulated other comprehensive loss                              |  |  |              | (75    | )               
|                                                                 
|Total stockholders equity                                        |  |  |              | 84,149 |                 
|                                                                 
|                                                                 
|Total liabilities and stockholders equity                        |  |  | $            | 96,494 |                 
|                                                                 

See accompanying notes to condensed consolidated financial statements

3

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Table of Contents

# RIMAGECORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(unaudited  in thousands, except per share data)

|                                            | Three Months EndedJune 30, |  | Six Months EndedJune 30,
|------------------------------------------- | -------------------------- |  | ------------------------
|
|                                            |                            | 
|Revenues                                    |                            |  | $                       
|Cost of revenues                            |                            |  |                         
|                                            |                            | 
|Gross profit                                |                            |  |                         
|                                            |                            | 
|                                           
|Operating expenses:                         |                            | 
|Research and development                    |                            |  |                         
|Selling, general and administrative         |                            |  |                         
|                                            |                            | 
|Total operating expenses                    |                            |  |                         
|                                            |                            | 
|Operating income                            |                            |  |                         
|                                            |                            | 
|                                           
|Other income (expense):                    
|Interest, net                               |                            |  |                         
|Loss on currency exchange                   |                            |  |                         
|Other, net                                  |                            |  |                         
|                                            |                            | 
|Total other income, net                     |                            |  |                         
|                                            |                            | 
|                                           
|Income before income taxes                  |                            |  |                         
|Income tax expense                          |                            |  |                         
|                                            |                            | 
|Net income                                  |                            |  | $                       
|                                            |                            | 
|                                           
|Net income per basic share                  |                            |  | $                       
|                                            |                            | 
|                                           
|Net income per diluted share                |                            |  | $                       
|                                            |                            | 
|                                           
|Basic weighted average shares outstanding   |                            |  |                         
|                                            |                            | 
|                                           
|Diluted weighted average shares outstanding |                            |  |                         
|                                            |                            | 

See accompanying notes to condensed consolidated financial statements

4

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Table of Contents

RIMAGECORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited  in thousands)

|                                                                 | Six months endedJune 30,
|---------------------------------------------------------------- | ------------------------
|
|                                                                
|Cash flows from operating activities:                            |                         
|Net income                                                       |                         
|Adjustments to reconcile net income to net cash                 
|provided by operating activities:                               
|Depreciation and amortization                                    |                         
|Deferred income tax benefit                                      |                         
|Loss on sale of property and equipment                           |                         
|Stock-based compensation                                         |                         
|Excess tax benefits from stock-based compensation                |                         
|Changes in operating assets and liabilities:                    
|Trade accounts receivable                                        |                         
|Inventories                                                      |                         
|Prepaid income taxes / income taxes payable                      |                         
|Prepaid expenses and other current assets                        |                         
|Trade accounts payable                                           |                         
|Accrued compensation                                             |                         
|Other accrued expenses and other current liabilities             |                         
|Deferred income and customer deposits                            |                         
|                                                                
|                                                                
|Net cash provided by operating activities                        |                         
|                                                                
|                                                                
|Cash flows from investing activities:                           
|Purchases of marketable securities                               |                         
|Maturities of marketable securities                              |                         
|Purchases of property and equipment                              |                         
|Proceeds from sale of property and equipment                     |                         
|Other non-current items                                          |                         
|                                                                
|                                                                
|Net cash provided by investing activities                        |                         
|                                                                
|                                                                
|Cash flows from financing activities:                            |                         
|Principal payments on capital lease obligations                  |                         
|Excess tax benefits from stock-based compensation                |                         
|Proceeds from stock option exercises                             |                         
|                                                                
|                                                                
|Net cash provided by financing activities                        |                         
|                                                                
|                                                                
|Effect of exchange rate changes on cash                          |                         
|                                                                
|                                                                
|Net increase in cash and cash equivalents                        |                         
|                                                                
|Cash and cash equivalents, beginning of period                   |                         
|                                                                
|                                                                
|Cash and cash equivalents, end of period                         |                         
|                                                                
|                                                                
|Supplemental disclosures of net cash paid during the period for:
|Income taxes                                                     |                         
|                                                                
|Non-cash investing and financing activities:                    
|Income tax reductions relating to exercise of stock options      |                         
|Unrealized net gains (losses) from available-for-sale securities |                         
|Capital lease obligations                                        |                         

See accompanying notes to condensed consolidated financial statements

5

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Table of Contents

RIMAGECORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



|(1) | Basis of Presentation and Nature of Business
|--- | --------------------------------------------

Rimage Corporation (the Company) develops, manufactures and distributes high performance CD-Recordable (CD-R) and DVD-Recordable (DVD-R) publishing and duplication systems from its operations in the United States, Germany and Japan. The Company also distributes related consumables for use with its systems, consisting of media kits, ribbons, ink cartridges and blank CD-R and DVD-R media.



The accompanying condensed consolidated financial statements of Rimage Corporation are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the financial statements have been condensed or omitted. However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations and cash flows of the interim periods presented. Certain previously reported amounts have been reclassified to conform with the current presentation. Operating results
for these interim periods are not necessarily indicative of results to be expected for the entire year, due to seasonal, operating and other factors. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



|(2) | Stock-Based Compensation
|--- | ------------------------

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123R, Share-Based Payment.  SFAS 123R is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS 95, Statement of Cash Flows, and its related implementation guidance. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. SFAS 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost is to be recognized over the
period during which an employee is required to provide services in exchange for the award. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under the prior accounting rules. This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption. Total cash flow remains unchanged from what would have been reported under prior accounting rules.

6

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Table of Contents

RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



The Company implemented the provisions of SFAS 123R effective January 1, 2006 using the modified prospective method, and therefore has not restated prior periods results. Under this method, the Company recognizes compensation expense for all stock-based awards granted on or after January 1, 2006, and for previously granted awards not yet vested as of January 1, 2006. Under the provisions of SFAS 123R, the Company recognizes stock-based compensation net of an estimated forfeiture rate, resulting in the recognition of compensation cost for only those shares expected to vest. Prior to the adoption of SFAS 123R, the Company followed the intrinsic value method in accordance with APB 25 to account for the issuance of stock incentives to employees and directors. Accordingly, no compensation expense was recognized for share purchase rights granted in connection with the Companys
Amended and Restated 1992 Stock Option Plan (the Stock Option Plan) or the Companys Employee Stock Purchase Plan (the Employee Stock Purchase Plan).



The Stock Option Plan, initially approved by shareholders in September 1992, and with the latest amendments approved by shareholders in May 2005, provides for the grant of incentive stock options, non-qualified stock options, restricted stock awards, deferred stock awards, stock appreciation rights and performance stock to certain key administrative, managerial and executive employees and the automatic periodic grants of stock options to non-employee directors. At June 30, 2006, a total of 227,921 shares were available for future grant under the plan. The exercise price of stock options granted under the Stock Option Plan is equal to the market value on the date of grant. Options issued to employees through March 31, 2006 generally become exercisable over a two-year period and terminate ten years from the date of grant. Options issued to employees after March 31, 2006 generally become
exercisable over a four-year period and terminate ten years from the date of grant. Stock options granted to non-employee directors vest six months from the date of grant and terminate ten years from the date of grant.



The Employee Stock Purchase Plan was approved by shareholders in May 2001. Under this plan, employees were entitled to purchase the Companys common stock at 85% of the lower of the market price of such shares on the first or last business day of each one-year period. The Employee Stock Purchase Plan was terminated effective July 1, 2006, and no additional shares will be issued under that plan. Shares originally authorized and reserved for issuance under the Employee Stock Purchase Plan and remaining unissued after its termination amounted to 165,124 shares. Such shares are no longer reserved for issuance under the Employee Stock Purchase Plan.

7

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Table of Contents

RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



Amounts recognized in the
financial statements with respect to the Companys share-based payment arrangements are as follows:

Three Months EndedJune 30, 2006
     Six Months EndedJune 30, 2006(in thousands)Total stock-based compensation cost
     
     
     $357
        
     $560Amounts capitalized in inventory
     (1
        )
     (1
        )Amounts recognized in income for amounts previously capitalized in inventory
     1
        
     Amounts charged against income, before income tax benefit
     357
        
     559Income tax benefit related to stock-based compensation included in net income
     (104
        )
     (116
        )Net compensation expense included in net income
     $253
        
     $443Impact on net income per share:Basic
     $0.03
        
     $0.05Diluted
     $0.02
        
     $0.04


Total stock-based compensation cost of $560,000
for the six months ended June 30, 2006 reflected in the preceding table consists of $538,000 of expense associated with stock
options issued under the Stock Option Plan, including $241,000 related to options granted prior to January 1, 2006, and $22,000 of
expense associated with the Employee Stock Purchase Plan.



The fair value of each option
award is estimated at the date of grant using the Black-Scholes option pricing model. The following key assumptions were utilized
in valuing option awards issued during the six months ended June 30, 2006:



Six Months EndedJune 30, 2006Expected life of options in years
     
     
     5.0 - 6.0Risk-free interest rate
     4.3 - 5.0%Volatility
     37.8 - 50.4%Dividend yield
     0.0%




In accordance with SFAS 123R,
the Company reviews these assumptions on a periodic basis and adjusts them as necessary to ensure proper option valuation. The
expected life of each award was determined based on an analysis of historical exercise behavior. The risk-free interest rate is
based on the yield of constant maturity U.S. treasury bonds with a remaining term equal to the expected life of the awards. The
Company estimated the stock price volatility using historical weekly price observations over the expected life of the
awards.

8

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Table of Contents

RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)





A summary of share option activity under the Stock Option Plan as of and for the six months ended June 30, 2006 is presented in the table below (in thousands, except per share data):

Shares
     WAEP*
     Weighted AverageRemainingContractual Term(in years)
     AggregateIntrinsicValue**Options outstanding at December 31, 2005
     
     
     1,340
        
     $10.67Granted
     265
        
     22.02Exercised
     (180
        )
     5.47Canceled
     (4
        )
     23.66Options outstanding at June 30, 2006
     1,421
        
     $13.41
        
     6.47
        
     $10,503Options subject to exercise at June 30, 2006
     1,063
        
     $10.84
        
     5.44
        
     $10,255 *Weighted Average Exercise Price
**Aggregate intrinsic value includes only those options with intrinsic value (options where the exercise price is below the market value).


A summary of the status of the
Companys nonvested shares as of June 30, 2006 and changes during the six months ended June 30, 2006 is presented in the
table below (in thousands, except per share data):



Number of Shares
     Grant-Date FairValueNonvested at December 31, 2005
     
     
     206
        
     $5.88Granted
     265
        
     11.82Vested
     (108
        )
     5.39Cancelled
     (4
        )
     10.76Nonvested at June 30, 2006
     359
        
     $10.35




As of June 30, 2006, there was $2,691,287 of total stock option compensation expense not yet recognized related to non-vested awards, which is expected to be recognized over a weighted average period of 1.47 years.

9

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Table of Contents

RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



Other information pertaining to options is as follows:

Three Months Ended
     Six Months EndedJune 30, 2006
     June 30, 2005
     June 30, 2006
     June 30, 2005(in thousands, except per share data)Number of options granted
     
     
     260
        
     103
        
     265
        
     296Fair value of options granted
     $3,065
        
     $683
        
     $3,132
        
     $1,754Per share weighted average fair value of options granted
     $11.79
        
     $6.66
        
     $11.82
        
     $5.94Total fair value of stock options vested
     $67
        
     $71
        
     $574
        
     $729Total intrinsic value of stock options exercised
     $48
        
     $363
        
     $3,188
        
     $1,917




Cash received from the exercise
of stock options was $988,000 and $551,000 for the six months ended June 30, 2006 and 2005, respectively. The income tax benefit
realized from the exercise of stock options was $932,000 and $199,000 for the six months ended June 30, 2006 and 2005,
respectively.



Results of operations for
periods prior to 2006 have not been restated to reflect recognition of stock-based compensation expense. Had compensation costs
for the Companys stock-based compensation been determined based on the fair value of the awards on the date of grant,
consistent with the provisions of SFAS No. 123, the Companys net income and basic and diluted earnings per share for the
three and six months ended June 30, 2005 would have been adjusted to the proforma amounts stated in the following table (in
thousands, except for per share data):

10

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Table of Contents

RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



Three MonthsEnded June 30,2005
     Six MonthsEnded June 30,2005Net income:As reported
     $2,288
        
     $4,979Stock-based employee compensation, net of tax
     (372
        )
     (561
        )Proforma
     $1,916
        
     $4,418Basic net income per share:As reported
     $0.24
        
     $0.53Stock-based employee compensation, net of tax
     (0.04
        )
     (0.06
        )Proforma
     $0.20
        
     $0.47Diluted net income per share:As reported
     $0.22
        
     $0.49Stock-based employee compensation, net of tax
     (0.03
        )
     (0.05
        )Proforma
     $0.19
        
     $0.44




|(3) | Marketable Securities
|--- | ---------------------

Marketable securities primarily consist of U.S. Treasury and money market securities, municipal securities and corporate securities with long-term credit ratings of AAA and short-term credit ratings of A-1. Marketable securities are classified as short-term or long-term in the balance sheet based on their effective maturity date. All marketable securities have maturities ranging from three to 36 months and are classified as available-for-sale. Available-for-sale securities are recorded at fair value and any unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of accumulated other comprehensive income (loss) until realized.



|(4) | Inventories
|--- | -----------

Inventories consisted of the following (in thousands):

June 30,2006
     December 31,2005Finished goods and demonstration equipment
     
     
     $1,400
        
     $1,562Work-in-process
     45
        
     290Purchased parts and subassemblies
     5,476
        
     4,769$6,921
        
     $6,621


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RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



|(5) | Comprehensive Income
|--- | --------------------

Comprehensive income consists of the Companys net income, foreign currency translation adjustments and unrealized holding gains (losses) from available for sale investments. The components of and changes in other comprehensive income (loss) are as follows (in thousands):

Three Months EndedJune 30,
     Six Months EndedJune 30,2006
     2005
     2006
     2005Net income
     
     
     $3,384
        
     $2,288
        
     $5,018
        
     $4,979Other comprehensive income (loss):Foreign currency translation adjustment
     99
        
     (148
        )
     146
        
     (260
        )Net unrealized gains (losses) on securities
     (21
        )
     32
        
     (25
        )
     13Total other comprehensive income
     $3,462
        
     $2,172
        
     $5,139
        
     $4,732


|(6) | Foreign Currency Contracts
|--- | --------------------------

The Company enters into forward
foreign exchange contracts to hedge intercompany receivables denominated in Euros arising from sales to its subsidiary in Germany.
Gains or losses on forward foreign exchange contracts are calculated at each period end and are recognized in net income in the
period in which they arose. The fair value of forward foreign exchange contracts is recorded in other current assets or other
current liabilities depending on whether the net amount is a gain or a loss.



As of June 30, 2006, the Company
had thirteen outstanding foreign currency contracts totaling $3,017,000. These contracts mature in 2006 and bear rates ranging
from 1.1961 to 1.2920 U.S. Dollars per Euro. As of June 30, 2006, the fair value of foreign currency contracts is a net loss
position of $60,000, recorded in other current liabilities.



As of December 31, 2005, the
Company had twenty three outstanding foreign currency contracts totaling $4,578,000, all maturing during 2006 at rates ranging
from 1.1724 to 1.2155 U.S. Dollars per Euro. As of December 31, 2005, the fair value of foreign currency contracts was a net gain
position of $25,000, recorded in other current assets.



|(7) | Recently Issued Accounting Standards
|--- | ------------------------------------

In June 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109.
This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation prescribes a
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. This Interpretation is effective for the Company beginning in fiscal
year 2007. The Company is currently evaluating the impact of adopting this pronouncement on its consolidated financial statements
and related disclosures.

12

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Table of Contents

RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



|(8) | Warranty Reserve
|--- | ----------------

The warranty reserve rollforward, including provisions and claims, is as follows:

Six Months Ended:
     BeginningBalance
     WarrantyProvisions
     WarrantyClaims
     ForeignExchange Impact
     EndingBalanceJune 30, 2006
     
     
     $317
        
     349
        
     (338
        )
     7
        
     $335June 30, 2005
     $187
        
     336
        
     (313
        )
     (6
        )
     $204


|(9) | Computation of Net Income Per Share of Common Stock
|--- | ---------------------------------------------------

Basic net income per common
share is determined by dividing net income by the weighted average number of shares of common stock outstanding. Diluted net
income per common share includes the potentially dilutive effect of common shares issued in connection with outstanding stock
options using the treasury stock method. Options to acquire 163,000 and 92,000 weighted average common shares have been excluded
from the computation of weighted average assumed conversion shares outstanding for the three and six months ended June 30, 2006,
respectively, as their effect is anti-dilutive. Similar amounts excluded from the computation of weighted average assumed
conversion shares for the three and six months ended June 30, 2005 amounted to 4,000 and 30,000 weighted average common shares,
respectively. The following is a summary of the weighted average common shares outstanding and assumed conversion shares (in
thousands, except for per share data):

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Table of Contents

RIMAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



Three Months EndedJune 30,
     Six Months EndedJune 30,2006
     2005
     2006
     2005Shares outstanding at end of period
     
     
     9,811
        
     9,502
        
     9,811
        
     9,502Weighted average shares of common stock outstanding
     9,808
        
     9,491
        
     9,747
        
     9,457Weighted average assumed conversion shares
     490
        
     723
        
     570
        
     696Weighted average shares of common stock andassumed conversion shares
     10,298
        
     10,214
        
     10,317
        
     10,153Net income
     $3,384
        
     $2,288
        
     $5,018
        
     $4,979Basic net income per common share
     $0.35
        
     $0.24
        
     $0.51
        
     $0.53Diluted net income per common share
     $0.33
        
     $0.22
        
     $0.49
        
     $0.49


|(10) | Commitments and Contingencies
|---- | -----------------------------

The Company is exposed to a
number of asserted and unasserted claims encountered in the normal course of business. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the Companys financial position or results of
operations.

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Table of Contents

Item 2.ManagementsDiscussion and Analysis of Financial Condition and Results of Operations



The following table sets forth,
for the periods indicated, selected items from the Companys consolidated statements of income.



Percentage (%)of RevenuesThree Months EndedJune 30,
     Percentage (%)IncreaseBetweenPeriods
     Percentage (%)of RevenuesSix Months EndedJune 30,
     Percentage (%)Increase/(Decrease)BetweenPeriods2006
     2005
     2006 vs. 2005
     2006
     2005
     2006 vs. 2005Revenues
     
     
     100
        
     100
        
     14
        
     100
        
     100
        
     11Cost of revenues
     (54
        )
     (57
        )
     8
        
     (56
        )
     (55
        )
     11Gross profit
     46
        
     43
        
     21
        
     44
        
     45
        
     11Operating expenses:Research and development
     (7
        )
     (7
        )
     16
        
     (7
        )
     (6
        )
     20Selling, general and admin
     (20
        )
     (21
        )
     4
        
     (23
        )
     (21
        )
     21Operating income
     19
        
     15
        
     47
        
     14
        
     17
        
     (6
        )Other income, net
     3
        
     1
        
     91
        
     3
        
     1
        
     135Income before income taxes
     22
        
     17
        
     51
        
     17
        
     18
        
     4Income tax expense
     (9
        )
     (6
        )
     56
        
     (7
        )
     (7
        )
     9Net income
     13
        
     10
        
     48
        
     10
        
     12
        
     1


Overview

Rimage develops, manufactures
and distributes CD-Recordable (CD-R) and DVD-Recordable (DVD-R) publishing and duplication systems from its operations in the
United States, Germany and Japan. These systems allow customers to benefit from cost savings by reducing their manual labor
efforts in industries such as photography, medical, banking and government. Rimage anticipates increased sales and marketing
expenditures as a result of increased resources focused on developing these markets. As Rimages sales within North America
and Europe have averaged 94% of total sales over the past three years, the strength of the economies in each of these regions
plays an important role in determining the success of Rimage.



Rimage earns revenues through
the sale of equipment, consumables (ribbons, ink cartridges, media kits and Rimage-branded blank CD-R and DVD-R media),
maintenance contracts, parts and repair services. Rimages recurring revenues (consumables, maintenance contracts, parts and
service) comprised approximately 46% and 39% of consolidated revenues during the six months ended June 30, 2006 and 2005,
respectively. Exclusive of a small amount of capital lease obligations, Rimage has no long-term debt and does not require
significant capital investments as all fabrication of its products is outsourced to vendors.



Stock-Based
Compensation

The Company implemented the
provisions of Statement of Financial Accounting Standard (SFAS) No. 123R, Share-Based Payment effective
January 1, 2006, using the modified prospective method, and therefore has not restated prior periods results. Prior to the
adoption of SFAS 123R, the Company followed the intrinsic value method in accordance with Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees to account for the issuance of stock
incentives to employees and directors. Accordingly, no compensation expense was recognized for equity compensation awards granted
with no intrinsic value and the proforma disclosures required by SFAS 123 were presented in the notes to the Companys
consolidated financial statements.

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Table of Contents

Managements Discussion
and Analysis of Financial Condition and Results of Operations (Continued)



As a result of the adoption of
SFAS 123R, the Companys income before taxes as reported in the Consolidated Statements of Income for the three and six
months ended June 30, 2006, was $0.4 million and $0.6 million lower, respectively, than under the previous accounting method for
stock-based compensation. In addition, basic net income per share for the three and six months ended June 30, 2006 was $.03 and
$.05 lower, respectively, and diluted net income per share was $.02 and $.04 lower, respectively, than under the previous
accounting method. SFAS 123R also requires that the benefits of tax deductions in excess of recognized compensation expense be
reported as a component of cash flows from financing activities in the Consolidated Statements of Cash Flows. This change
increased cash flows provided by financing activities by $0.8 million and reduced cash flows provided by operating activities by
the same amount. Compensation cost not yet recognized as of June 30, 2006 related to nonvested awards totaled $2.7 million, which
is expected to be recognized over a weighted average period of 1.47 years.



Results of
Operations



Revenues.Revenues
increased 14% to $25.3 million and 11% to $48.0 million for the three and six months ended June 30, 2006, respectively, from $22.3
million and $43.2 million for the respective prior-year periods. The growth in revenues for both the quarterly and year-to-date
periods was impacted by a $1.9 million and a $5.4 million respective increase in the volume of recurring revenues, consisting of
sales of media kits, blank CD-R and DVD-R media, printer ribbons, ink cartridges, parts and maintenance contracts. The strong
growth in recurring revenues was primarily due to the continued expansion of the Companys worldwide installed base of CD-R
and DVD-R publishing systems, and the Companys increased emphasis on promoting this portion of its business. Additionally,
revenues for the three months ended June 30, 2006 reflect a $2.2 million increase in the volume of producer product line equipment
sales, primarily driven by increased sales into retail applications. Sales of desktop product line equipment decreased $1.1
million in the second quarter 2006, due to strong sales in the same prior year quarter of the Rimage 360i desktop product,
released in April 2005.



International sales rose 11% for
both the three and six months ended June 30, 2006 over the same prior year periods and comprised 34% and 36% of total sales,
respectively, consistent with the same periods in the prior year. The European market continued to generate the majority of
international sales, and contributed most of the increase in both current year periods. Sales in Asian markets also increased,
reflecting increased sales efforts in this region with the establishment of a subsidiary operation in Japan in 2005. Currency
fluctuations affecting the Companys European and Japanese operations had a minimal impact on reported revenues for the three
months ended June 30, 2006, and decreased reported revenues for the six months ended June 30, 2006 by approximately $0.8 million,
or less than 2% of consolidated revenues.



As of and for the six months
ended June 30, 2006, foreign revenues from unaffiliated customers generated by the Companys German and Japanese operations
and the operating income and net identifiable assets of such operations were $14.7 million, $0.2 million and $7.4 million,
respectively. These amounts related primarily to the Companys German operations, as the establishment of subsidiary
operations in Japan occurred in June 2005. Comparable amounts for the Companys German and Japanese operations as of and for
the six months ended June 30, 2005 were revenues of $12.9 million, operating income of $0.5 million and net identifiable assets of
$6.6 million. The growth is due to increasing penetration in foreign markets of sales of CD-R and DVD-R products.

16

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Table of Contents

Managements Discussion
and Analysis of Financial Condition and Results of Operations (Continued)



The Company is estimating that third quarter 2006 consolidated revenues will range between $23 million and $25 million.



Gross profit.Gross profit as a percentage of revenues was 46% and 44% for the three and six months ended June 30, 2006, respectively, compared to 43% and 45% for the respective prior year periods. The increase in gross profit as a percentage of revenues for the second quarter 2006 primarily reflects an increase in both the volume and concentration of producer product line equipment sales, which generally carry higher margins than desktop product line equipment or recurring revenues. Producer product line equipment sales comprised 46% of sales in the second quarter 2006, compared to 43% in the same quarter in the prior year. Also favorably impacting the second quarter gross profit was a decline in lower margin desktop product line equipment sales. The small decline in gross profit as a percentage of revenues for the year-to-date period in 2006 was impacted by an
increase in both the volume and concentration of recurring revenues, which generally carry lower margins than equipment sales. Recurring revenues comprised 46% of total revenues for the six months ended June 30, 2006, compared to 39% in the same prior year period. The decline in gross profit as a percentage of revenues for the year-to-date period was also impacted by increased manufacturing and service labor and overhead costs stemming from increased investments in these areas to support an expected continued growth in total sales. Stock-based compensation expense included in cost of revenue for the three and six months ended June 30, 2006 had a minimal impact on gross profit as a percentage of revenues, and amounted to $16,000 and $32,000, respectively.



Future gross profit margins will
continue to be affected by many factors, including product mix, the timing of new product introductions, manufacturing volume, the
rate of growth of service related revenues relative to associated service support costs, foreign currency exchange rate
fluctuations and levels of sales returns.



Operating expenses.Research and development expenses totaled $1.7 million and $3.3 million for the three and six months ended
June 30, 2006, respectively, representing approximately 7% of revenues for both periods. Expenses for the same prior year periods
totaled $1.5 million and $2.8 million, representing 7% and 6% of revenues, respectively. The 16% and 20% respective increases in
expenses for the three and six months ended June 30, 2006 were primarily due to an 18% increase in average headcount to support
continued development of new products and enhancements to existing products. Research and development expenses for the three and
six months ended June 30, 2006 were minimally impacted by stock-based compensation expense of $37,000 and $81,000,
respectively.



Rimage anticipates continued
expenditures in research and development in 2006 to support new product development initiatives and to improve existing
products.

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Table of Contents

Managements Discussion
and Analysis of Financial Condition and Results of Operations (Continued)



Selling, general and
administrative expenses for the three and six months ended June 30, 2006 were 20% and 23% of revenues at $5.0 million and $11.1
million, respectively, compared to expenses in the same prior year periods at 21% of revenues, or $4.8 million and $9.1 million,
respectively.



The net dollar growth in
selling, general and administrative expenses for the three and six months ended June 30, 2006 reflects a decrease in sales and
marketing expenses of $0.5 million and $0.2 million, respectively, and an increase in general and administrative expenses of $0.7
million and $2.1 million, respectively. The decline in sales and marketing expenses is primarily the result of reduced costs for
advertising and promotional activities due to implementation of programs in the prior years second quarter to support the
launch of the Rimage 360i desktop product, and a reduction in cooperative marketing program costs resulting from the
Companys transition to an alternative program format with its distributors. The increase in general and administrative
expenses for both the quarterly and the year-to-date periods was impacted by $0.5 million of expenses incurred to support the
implementation of a new enterprise resource planning system. Also significantly impacting expenses for the six months ended June
30, 2006 were $1.2 million of consulting expenses incurred in the first quarter for the completion of a strategic analysis of the
Companys operations and new applications for its products. Stock-based compensation expenses increased aggregate selling,
general and administrative expenses by $0.3 million and $0.45 million for the three and six months ended June 30, 2006,
respectively.



Other income, net.The Company recognized net interest income on cash investments of $0.7 million and $1.3 million for the
three and six months ended June 30, 2006, compared to $0.3 million and $0.6 million for the same prior year periods. The increase
in the quarterly and year-to-date periods was due to a $14 million and $13 million respective increase in average cash equivalent
and marketable securities balances and an increase in effective yields. Other income in each period was negatively impacted by net
losses on foreign currency transactions, amounting to $39,000 and $27,000 for the three and six months ended June 30, 2006,
respectively, compared to $6,000 and $73,000 for the respective prior year periods.



Income taxes.The provision for income taxes represents federal, state and foreign income taxes on income. Income tax
expense for the three and six months ended June 30, 2006 amounted to $2.2 million and $3.2 million, or 39.3% and 38.6% of income
before taxes, respectively. Income tax expense for the three and six months ended June 30, 2005 was $1.4 million and $2.9 million,
or 38.1% and 36.7% of income before taxes, respectively. The increase in the effective tax rate in the current year periods
primarily reflects the impact of a valuation allowance on the projected pre-tax loss for Rimage Japan, the impact of non tax
deductible equity compensation expense associated with incentive stock options and a reduced benefit for the research tax credit,
impacted by the delay in the U.S. governments expected reinstatement of the federal research credit for 2006.



Net income / net income per
share.Resulting net income for the three and six months ended June 30, 2006 was $3.4 million, or 13.3% of
revenues, and $5.0 million, or 10.5% of revenues, respectively. Comparable amounts for the three and six months ended June 30,
2005 were net income of $2.3 million, or 10.3% of revenues, and $5.0 million, or 11.5% of revenues, respectively. Related net
income per diluted share amounts for the three and six months ended June 30, 2006 were $0.33 and $0.49, respectively, compared to
$0.22 and $0.49 per diluted share for the respective prior year periods. The Company expects third quarter 2006 net income to
range between $0.24 to $0.28 per diluted share.

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Table of Contents

Managements Discussion
and Analysis of Financial Condition and Results of Operations (Continued)



Liquidity and Capital Resources



The Company expects it will be
able to maintain current operations, including anticipated capital expenditure requirements, through its internally generated
funds and, if required, from Rimages existing credit agreement. This credit agreement allows for advances under an unsecured
revolving loan up to a maximum advance of $10 million. At June 30, 2006, no amounts were outstanding under the credit
agreement.



At June 30, 2006, the Company
had working capital of $64.7 million, a decrease of $9.3 million from working capital reported at December 31, 2005. The decline
was primarily impacted by the purchase of $16.3 million of non-current marketable securities and capital expenditures of $1.1
million, partially offset by year-to-date net income of $5.0 million and proceeds from stock option exercises of $1.0 million. The
Company intends on utilizing its current assets primarily for its continued organic growth. To help strengthen the Companys
ability to manage anticipated future growth, the Company expects to invest approximately $4 million in 2006 for the implementation
of an enterprise resource planning system. Additionally, the Company may use its available cash for potential future strategic
initiatives or alliances.



Net cash provided by operating
activities totaled $4.4 million for the six months ended June 30, 2006, compared to $4.2 million in the same prior year period.
The $0.2 million increase in cash generated from operations was primarily impacted by a $0.6 million increase in net income
adjusted for non-cash items and a $0.4 million smaller use of cash from changes in operating assets and liabilities, partially
offset by the impact of an $0.8 million non-cash reduction in operating cash flows associated with excess tax benefits recognized
as an addition to the APIC (additional paid-in capital) pool under SFAS 123R. SFAS 123R requires such amounts to be reported as an
addition to financing activities and a reduction in operating activities in the Statements of Cash Flows. Primarily contributing
to the change in operating assets and liabilities compared to the prior years year-to-date period was a $1.0 million
variation in the change in prepaid expenses, a $0.5 million smaller increase in accounts receivable and a $0.45 million larger
increase in deferred income, partially offset by reductions or smaller increases in accounts payable and accrued expenses. The
change in prepaid expenses was primarily due to the impact on the prior years six month period of an $0.8 million prepayment
in the first quarter for the renewal of a paid-up software license agreement, compared to a decline in prepaid expenses for the
first six months of 2006. The increase in deferred income occurred due to the sale of maintenance contracts on a growing base of
installed CD-R and DVD-R publishing systems. The net reduction in accounts payable and accrued expenses during the six months
ended June 30, 2006 was impacted by the payment of $1.8 million of consulting fees accrued at December 31, 2005.



Net cash provided by investing
activities was $7.0 million for the six months ended June 30, 2006, compared to $4.7 million during the same period in 2005. The
increase in cash provided by investing activities was the result of a $2.2 million increase in maturities of marketable
securities, net of related purchases of marketable securities, partially offset by a $0.2 million increase in capital
expenditures. Capital expenditures for the six months ended June 30, 2006 totaled $1.1 million, and consisted primarily of the
purchase of enterprise resource planning system software and related hardware.

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Table of Contents

Managements Discussion
and Analysis of Financial Condition and Results of Operations (Continued)



Net cash provided by financing
activities totaled $1.7 million and $0.5 million for the six months ended June 30, 2006 and 2005, respectively. Financing
activities in each period included proceeds from stock option exercises of $1.0 million and $0.6 million, respectively.
Additionally, the current year period includes $0.8 million associated with excess tax benefits recognized as an addition to the
APIC pool, which as discussed above, are required to be reported as an addition to financing activities in the Statements of Cash
Flows under the provisions of SFAS 123R.



Critical Accounting
Policies.



Management utilizes its
technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the
Companys accounting policies. The accounting policies described below are considered by management to be the most critical
to the presentation of the consolidated financial statements because they require the most difficult, subjective and complex
judgments. With the implementation effective January 1, 2006 of SFAS 123R, Share-Based Payment, the Company has added
as a new critical accounting policy its accounting for stock-based compensation, discussed below.



In applying the critical
accounting policies described below, management reassesses its estimates each reporting period based on available information.
Changes in such estimates did not have a significant impact on earnings for the three and six months ended June 30, 2006.



Revenue
Recognition. Revenue for product sales (including hardware and consumables), which do not include any
requirement for installation or training, is recognized on shipment, at which point the following criteria of SAB Topic 13(A)(1)
have been satisfied:

Persuasive evidence of an arrangement exists. Orders are received for all
sales and sales invoices are mailed on shipment.Delivery has occurred. Product has been transferred to the customer or the
customers designated delivery agent, at which time title and risk of loss transfers.The vendors price is fixed or determinable. All sales prices are fixed
at the time of the sale (shipment).Collectibility is probable. All sales are made on the basis that collection
is expected in line with the Companys standard payment terms, which are consistent with industry practice in the geographies
in which the Company markets its products.


A standard product sale by the
Company does not require a commitment on the Companys part to provide installation, set-up or training. When such services
are requested, value-added resellers generally arrange and perform the service directly with the customer, with no financial
interest or obligation on the part of the Company. In the limited situations in which the Company does provide installation or
training services for customers, the Company charges separately for the service based upon its published list prices, and
recognizes the associated service revenue upon the successful completion of the service.

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Table of Contents

Managements Discussion
and Analysis of Financial Condition and Results of Operations (Continued)



The Company records a reserve
for sales returns from its customers. The amount of the reserve is based upon historical trends, timing of new product
introductions and other factors. A return policy is in place with the Companys distributors to restrict the volume of
returned products, and the Company reviews the distributors inventory to insure compliance with the return
policy.



Revenue for maintenance
agreements is recognized on a straight-line basis over the life of the contracts (commencing once the period covered by standard
warranty expires).



Emerging Issues Task Force
(EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables provides revenue recognition
guidance for arrangements with multiple deliverables, and the criteria to determine if items in a multiple deliverable agreement
should be accounted for separately. The elements of the Companys sales transactions are clearly and separately stated and
sufficient evidence of their fair value exists to separately account for the elements.



Allowance For Doubtful
Accounts And Sales Returns. The Company records a reserve for accounts receivable that are potentially
uncollectible. The reserve is established based on a specific assessment of accounts with known collection exposure, based upon a
review of the age of the receivable, the customers payment history, the customers financial condition and industry and
general economic conditions, as well as a general assessment of collection exposure in the remaining receivable population based
upon bad debt history. Actual bad debt exposure could differ significantly from managements estimates if economic conditions
worsened for the Companys customers. As described above under Revenue Recognition, the Company also records a
reserve for sales returns from its customers. The amount of the reserve is based upon historical trends, timing of new product
introductions and other factors.



Inventory
Reserves. The Company records reserves for inventory shrinkage and for potentially excess, obsolete
and slow moving inventory. The amounts of these reserves are based upon historical loss trends, inventory levels, expected product
lives and forecasted sales demand. Results could be materially different if demand for the Companys products decreased
because of economic or competitive conditions, or if products became obsolete because of technical advancements in the industry or
by the Company.



Deferred Tax
Assets. The Company recognizes deferred tax assets for the expected future tax impact of temporary
differences between book and taxable income. A valuation allowance and income tax charge are recorded when, in managements
judgment, realization of a specific deferred tax asset is uncertain. Income tax expense could be materially different from actual
results because of changes in managements expectations regarding future taxable income, the relationship between book and
taxable income and tax planning strategies employed by the Company.



Warranty
Reserves.The Companys non-consumable products are warranted to the end-user
to ensure end-user confidence in design, workmanship and overall quality. Warranty lengths vary by product type, ranging from
periods of six to twelve months. Warranty covers parts, labor and other associated expenses. The Company performs the majority of
warranty work, while authorized distributors and dealers also perform some warranty work. The Company records a liability for
warranty claims at the time of sale. The amount of the liability is based on an analysis of historical claims experience, which
includes labor, parts and freight costs and consideration of the proportion of parts that can be re-used. Also considered are the
anticipated impact of product improvements, releases of new products and other factors. Claims experience could be materially
different from actual results because of the introduction of new, more complex products; a change in the Companys warranty
policy in response to industry trends, competition or other external forces; or manufacturing changes that could impact product
quality.

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Table of Contents

Managements Discussion
and Analysis of Financial Condition and Results of Operations (Continued)



Stock-Based Compensation.The Company implemented the fair value recognition provisions of SFAS No. 123R effective January 1,
2006 using the modified prospective method. Under this method, the Company recognizes compensation expense for all stock-based
awards granted on or after January 1, 2006, and for previously granted awards not yet vested as of January 1, 2006.



The Company utilizes a
Black-Scholes option pricing model to estimate the fair value of each award on the date of grant. The Black-Scholes model requires
the input of certain assumptions that involve management judgment. Key assumptions that affect the calculation of fair value
include the expected life of stock-based awards and the Companys stock price volatility. Additionally, the Company is
required to estimate the expected forfeiture rate of unvested awards and recognize expense for only those shares expected to vest.
The assumptions used in calculating the fair value of stock-based awards and the forfeiture rate of such awards reflect
managements best estimates. However, circumstances may change and additional data may become available over time, which
could result in changes to these assumptions that materially impact the fair value determination of future awards or their
estimated rate of forfeiture. If factors change and the Company uses different assumptions in the application of SFAS 123R in
future periods, the compensation expense recorded under SFAS 123R may differ significantly from the expense recorded in the
current period. See Note 2 under the Notes to Condensed Consolidated Financial Statements in this Form 10Q for additional
information on stock-based compensation.



Recently
Issued Accounting Standards



In June 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109.
This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation prescribes a
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. This Interpretation is effective for the Company beginning in fiscal
year 2007. The Company is currently evaluating the impact of adopting this pronouncement on its consolidated financial statements
and related disclosures.



Cautionary Note Regarding
Forward-Looking Statements



This report contains
forward-looking statements that involve risks and uncertainties. For this purpose, any statements contained in this report that
are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such
as may, will, expect, believe, anticipate, estimate or
continue or comparable terminology are intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties. The Companys actual results could differ significantly from those
discussed in the forward-looking statements.

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Table of Contents

Managements Discussion
and Analysis of Financial Condition and Results of Operations (Continued)



Factors that could cause or
contribute to such differences include, but are not limited to, the following, as well as other factors not now identified: the
Companys ability to keep pace with changes in technology in the computer and storage media industries as well as technology
changes in the retail, medical, banking, government and office markets; increasing competition and the ability of the
Companys products to successfully compete with products of competitors and newly developed media storage products; the
ability of the Companys newly developed products to gain acceptance and compete against products in their markets, the
significance of the Companys international operations and the risks associated with international operations including
currency fluctuations, local economic health and management of these operations over long distances; the Companys ability to
protect its intellectual property and to defend claims of others relating to its intellectual property; the Companys
dependence upon the selling efforts of the Companys key channel partners; the Companys ability to maintain adequate
inventory of products; the Companys reliance on single source suppliers; the ability of the Companys products to
operate effectively with the computer products developed and to be developed by other manufacturers; the negative effect upon the
Companys business from manufacturing or design defects; the effect of U.S. and international regulation, including the costs
of implementing and complying with new regulations enacted in various countries requiring the reduction of hazardous substances in
electrical and electronic equipment, including the European Union Waste Electrical and Electronic Equipment Directive and
Restriction of Hazardous Substances Directive; fluctuations in the Companys operating results; the Companys dependence
upon its key personnel; the volatility of the price of the Companys common stock; provisions governing the Company relating
to a change of control, compliance with corporate governance and securities disclosures rules and other risks, including those set
forth in the Companys reports filed with the Securities and Exchange Commission, including Item 1A of Part I of the
Companys Annual Report on Form 10-K for the year ended December 31, 2005. These forward-looking statements are made as of
the date of this report and the Company assumes no obligation to update such forward-looking statements, or to update the reasons
why actual results could differ materially from those anticipated in such forward-looking statements.



Item 3.Quantitativeand Qualitative Disclosures about Market Risk



The Company is exposed to market
risk from foreign exchange rate fluctuations of the European Euro and Japanese Yen to the U.S. dollar as the financial position
and operating results of the Companys German and Japanese subsidiaries, Rimage Europe and Rimage Japan, respectively, are
translated into U.S. dollars for consolidation. Resulting translation adjustments are recorded as a separate component of
stockholders equity.

The Company enters into forward
exchange contracts principally to hedge inter-company receivables denominated in Euros arising from sales to its subsidiary in
Germany. Gains or losses on forward exchange contracts are calculated at each period end and are recognized in net income in the
period in which they arose. The Company records the fair value of its open forward foreign exchange contracts in other current
assets or other current liabilities depending on whether the net amount is a gain or a loss. The Company does not utilize
financial instruments for trading or other speculative purposes.

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Table of Contents

Item 4.Controlsand Procedures



(a)  Evaluation of Disclosure Controls and Procedures



The Companys Chief
Executive Officer, Bernard P. Aldrich, and the Companys Chief Financial Officer, Robert M. Wolf, have evaluated the
Companys disclosure controls and procedures as of the end of the period covered by this report. Based upon such evaluation,
they have concluded that these disclosure controls and procedures are effective.



(b)  Changes in Internal Control Over Financial Reporting



There have been no changes in
internal controls over financial reporting that occurred during the fiscal quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the Companys internal control over financial
reporting.



PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------



| | Not Applicable.
| | ---------------



|Item 1A. | Risk Factors
|-------- | ------------



| | Not Applicable.
| | ---------------



|Item 2. | Changes in Securities and Use of
Proceeds
|------- | -----------------------------------------



| | Not Applicable.
| | ---------------



|Item 3. | Defaults Upon Senior
Securities
|------- | -------------------------------



| | Not Applicable.
| | ---------------



|Item 4. | Submissionof Matters to a Vote
of Security Holders
|------- | --------------------------------------------------



The Companys Annual
Meeting of Shareholders was held on May 16, 2006. Of the 9,806,317 shares outstanding and entitled to vote at the meeting,
9,118,697 shares were present, either in person or by proxy. The following describes the matters considered by the Companys
shareholders at the Annual Meeting, as well as the results of the votes cast at the meeting:

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| | A. | To elect seven (7)
directors of the Company to serve until the next Annual Meeting of Shareholders or until their respective successors have been
elected and qualified.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Nominee             | In Favor  | Withheld
|------------------- | --------- | --------
|                    |           |         
|Bernard Aldrich     | 8,902,757 | 215,940 
|Lawrence Benveniste | 8,775,963 | 342,734 
|Philip Hotchkiss    | 8,902,445 | 216,252 
|Thomas Madison      | 8,894,139 | 224,558 
|Steven Quist        | 8,776,398 | 342,299 
|James Reissner      | 8,765,513 | 353,184 
|David Suden         | 8,902,457 | 216,240 





| | B. | To ratify and approve the appointment of KPMG LLP as independent auditors for the Company for the fiscal year ending December 31, 2006.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------



|FOR       | AGAINST | ABSTAIN | BROKER NON-VOTE
|--------- | ------- | ------- | ---------------
|          |         |         |                
|9,030,567 | 79,547  | 8,583   | 0              



|Item 5. | Other Information
|------- | -----------------



| | Not Applicable.
| | ---------------



|Item 6. | Exhibits
|------- | --------





| | (a) | The following exhibits are included herein:
| | --- | -------------------------------------------



| | 31.1 | Certificate of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 of the Exchange Act.
| | ---- | -----------------------------------------------------------------------------------------------

| | 31.2 | Certificate of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 of the Exchange Act.
| | ---- | -----------------------------------------------------------------------------------------------

| | 32 | Certifications pursuant to 18 U.S.C. §1350.
| | -- | -------------------------------------------

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SIGNATURES



In accordance with the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.





|      |                |  | RIMAGE CORPORATION Registrant
|----- | -------------- |  | -----------------------------
|Date: | August 9, 2006 |  | By:                          
|      |                |  |                              



|Date: | August 9, 2006 |  | By: | /s/   Robert M. Wolf                                                                                
|----- | -------------- |  | --- | ----------------------------------------------------------------------------------------------------
|      |                |  |     | Robert M. Wolf  Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer)

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