Table of Contents





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|FORM 10-K                                                                                 
|U.S.
 SECURITIES AND EXCHANGE COMMISSION                                                  
|WASHINGTON, DC 20549                                                                      
|                                                                                          
|xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
 SECURITIES EXCHANGE ACT OF 1934    
|FOR THE FISCAL YEAR ENDED DECEMBER
 31, 2008                                              
|OR                                                                                        
|oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
 SECURITIES EXCHANGE ACT OF 1934
|                                                                                          
|COMMISSION FILE NO. 000-20728                                                             

|
|
|

|                                                      
|------------------------------------------------------
|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, Minneapolis, Minnesota         |  | 55439                               
|(Address of principal executive offices)                     |  | (Zip Code)                          
|                                                             |  |                                      | 
|                                                             |  |                                      | 
|Registrants
 telephone number:                              |  | (952) 944 - 8144                    

|                                                             |                                
|------------------------------------------------------------ | -------------------------------
|Securities
 registered pursuant to Section 12(b) of the Act: | Common Stock, $.01 par value   
|                                                             |                                
|                                                             | Preferred Stock Purchase Rights
|                                                             |                                
|Securities
 registered pursuant to Section 12(g) of the Act: | None                           

|
|
|

Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YesoNox

Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YesoNox

Indicate
by checkmark 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. YesxNoo

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

Indicate
by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.

Large
Accelerated Filer o Accelerated Filer x

Non-Accelerated
Filer o Smaller Reporting
Company o

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

YesoNox

The
aggregate market value of common stock held by non-affiliates of the
registrant, computed by reference to the last quoted price at which such stock
was sold on such date as reported by the Nasdaq Stock Market as of the last
business day of the registrants most recently completed second fiscal quarter
was approximately $114,600,000.

As of February 28, 2009,
9,349,435 shares of the registrants common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants
definitive proxy statement for its 2009 Annual Meeting of Shareholders, to be
filed within 120 days after the end of the fiscal year covered by this report,
are incorporated by reference into Part III hereof.

1





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TABLE OF CONTENTS

|           |                                                                                                  |    |     
|---------- | ------------------------------------------------------------------------------------------------ | -- | ----
|           |                                                                                                  |    | Page
|           |                                                                                                  |    |     
|PART I     |                                                                                                  |    | 3   
|           |                                                                                                  |    |     
|Item 1.    | Business                                                                                         |    | 3   
|           |                                                                                                  |    |     
|           | General                                                                                          |    | 3   
|           | Products                                                                                         |    | 3   
|           | Marketing and Distribution                                                                       |    | 4   
|           | Competition                                                                                      |    | 5   
|           | Manufacturing                                                                                    |    | 5   
|           | Research and Development                                                                         |    | 5   
|           | Patents and Government Regulation                                                                |    | 5   
|           | Employees                                                                                        |    | 6   
|           | Cautionary Note Regarding Forward-Looking Statements                                             |    | 6   
|Item 1A.   | Risk Factors                                                                                     |    | 6   
|Item 1B.   | Unresolved Staff Comments                                                                        |    | 12  
|Item 2.    | Properties                                                                                       |    | 12  
|Item 3.    | Legal Proceedings                                                                                |    | 12  
|Item 4.    | Submission of Matters to a Vote of Security Holders                                              |    | 12  
|           |                                                                                                  |    |     
|PART II    |                                                                                                  |    | 13  
|           |                                                                                                  |    |     
|Item 5.    | Market for Common Equity, Related Stockholder Matters and Issuer
 Purchases of Equity Securities |    | 13  
|           | Shareholders                                                                                     |    | 13  
|           | Dividends                                                                                        |    |     
|           | Other Information Regarding Equity Compensation Plans                                            |    | 13  
|           | Performance Graph                                                                                |    | 14  
|           | Issuer Purchases of Equity Securities                                                            |    | 15  
|Item 6.    | Selected Financial Data                                                                          |    | 16  
|Item 7.    | Managements Discussion and Analysis of Financial Condition and
 Results of Operations           |    | 17  
|           | Overview                                                                                         |    | 17  
|           | Results of Operations                                                                            |    | 17  
|           | Liquidity and Capital Resources                                                                  |    | 20  
|           | Critical Accounting Policies                                                                     |    | 21  
|           | New Accounting Pronouncements                                                                    |    | 24  
|           | Available Information                                                                            |    | 24  
|Item 7A.   | Quantitative and Qualitative Disclosures About Market Risk                                       |    | 24  
|Item 8.    | Financial Statements and Supplementary Data                                                      |    | 25  
|Item 9.    | Changes in and Disagreements with Accountants on Accounting and
 Financial Disclosure            |    | 50  
|Item 9A.   | Controls and Procedures                                                                          |    | 51  
|Item 9B.   | Other Information                                                                                |    | 51  
|           |                                                                                                  |    |     
|PART III   |                                                                                                  |    | 51  
|           |                                                                                                  |    |     
|Item 10.   | Directors, Executive Officers and Corporate Governance                                           |    | 51  
|Item 11.   | Executive Compensation                                                                           |    | 51  
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management and
 Related Stockholders Matters |    | 52  
|Item 13.   | Certain Relationships and Related Transactions and Directors
 Independence                       |    | 52  
|Item 14.   | Principal Accountant Fees and Services                                                           |    | 52  
|           |                                                                                                  |    |     
|PART IV    |                                                                                                  |    | 52  
|           |                                                                                                  |    |     
|Item 15.   | Exhibits and Financial Statement Schedules                                                       |    | 52  
|           |                                                                                                  |    |     
|SIGNATURES |                                                                                                  | 53

2

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Table of Contents

General Information

PART I

|        |         
|------- | --------
|ITEM 1. | BUSINESS

General

Rimage Corporation (Rimage or the Company) is a leading provider of
high-performance digital publishing systems that are used by businesses to
produce recordable CD, DVD and blue laser discs with customized digital content
on an on-demand basis. Rimages publishing systems, which include equipment to
handle a full range of low-to-high production volumes, incorporate robotics,
software and custom printing technology for disc labeling. Rimage focuses its
digital publishing solutions on a set of vertical markets with special needs
for customized, on-demand digital information, including digital photography,
medical imaging and business services.

Incorporated as IXI, Inc. in Minnesota in February 1987, Rimage has
focused on digital storage production equipment since its inception. Since
1995, Rimage has focused its business on development and sale of its CD
recordable (CD-R) publishing systems, and since 2000, its DVD recordable
(DVD-R) publishing systems. Blue laser capabilities were integrated into key
products in late 2006 to address the needs of customers desiring the
substantial increase in storage capacity provided by this emerging technology,
which has been popularized by the Blu-ray disc format developed by the Blu-Ray
Disc Association.

Products

Rimages products are designed to enable the automation of data
distribution and archiving processes. In some cases, this results in reductions
of labor, training and inventory costs for users of the products; in other
cases, it enables totally new and innovative applications. Rimage products
provide compelling solutions for distribution and archiving of information on
recordable CD, DVD and blue laser media for just-in-time, on-demand and mass
customization of discs with unique content and labels.

The principal benefits to users of Rimages products include unattended
operation, reduced labor costs and higher throughput and quality than
alternative systems. One of the essential elements of Rimages marketing and development
strategy is to provide users with a path for future product upgrades to obtain
improved products or products with additional capabilities, such as drives that
will accommodate new media types, drives with faster recording speeds and
opportunities to upgrade to improved printing technologies. Rimage has made a
long-term commitment to its customers by providing maintenance service
contracts, replacement parts and repair service for current, as well as past
products.

Sales of Rimages digital publishing systems comprised 39%, 52% and 54%
of its revenue from operations during 2008, 2007 and 2006, respectively.
Rimages other major sources of revenue are recurring in nature and consist of
consumables (ribbons, ink cartridges and Rimage-branded blank recordable CD,
DVD and blue laser media), parts and maintenance contract sales.

Rimages digital publishing systems have been divided into two primary
product lines: the Producer line of equipment for higher volume requirements
for production of recordable CD, DVD or blue laser media, and the Desktop line
of lower-cost products for office and other desktop applications. The Producer
line of hardware products continues to generate a significant portion of
Rimages revenue, comprising 33% of total revenues during 2008 at $30.3
million, 43% during 2007 at $46.8 million and 44% during 2006 at $44.9 million.
The Desktop line of hardware products contributed 6% of total revenues in 2008
at $5.8 million, 9% in 2007 at $9.4 million and 10% in 2006 at $10.6 million. The
balance of revenue in each year was generated through sale of Rimage-branded
blank recordable CD, DVD and blue laser media, ribbons, ink cartridges, parts,
repair services and maintenance contracts. These recurring revenues comprised
61% of total revenues during 2008 at $55.3 million, 48% during 2007 at $52.6
million and 46% during 2006 at $47.7 million. The growth in recurring revenues
has been spurred by the expansion of the Companys worldwide installed base of
digital publishing systems as well as the Companys introduction in 2004 of its
consumable supplies strategy involving media kits. Through this strategy, the
Company assembles Rimage-branded blank recordable CD or DVD discs with
replacement printer ribbons and cartridges into kits to simplify the customers
purchase and use of these consumable products in the production process.

The Producer III
Series.The Producer III Series of digital
publishing systems, introduced in 2006, represents the latest generation of the
high-performance Producer line and consists of a family of products that cover
a broad range of applications for the publishing and duplication of CD, DVD and
blue laser discs with digital content. The Producer line of products also
includes previously available systems from the Producer II Series and DiscLab
Series. The Company

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augmented its Producer product line with the introduction in 2007 of
the Professional Series line of digital publishing systems and the introduction
in 2008 of the Rimage 6100 system, part of the Producer III Series. Each
product in the Producer line incorporates recorders capable of recording on CD,
DVD or blue laser media, customized robotics, a thermal or thermal re-transfer
printer for on-disc color printing, software and computer hardware components.

Rimage offers its Producer line of products in seven basic
configurations to meet the varying needs of its commercial customers. The
Rimage 8100 system, part of the Producer III Series of publishing systems
introduced in 2006, provides industry leading speed and throughput for
on-demand production of CD, DVD or blue laser discs with digital content. The
Rimage 8100 system utilizes up to four simultaneous data streams and four
recorders and provides for a capacity of 300 discs. The Rimage 7100 system,
also part of the Producer III Series, comes standard with two recorders. The
Rimage 6100 system, introduced in 2008 as an expansion of the Producer III
Series, and Amigo II system, introduced in 2001, both come with a single
recorder. The Rimage 8100 and Rimage 7100 systems are available with either a
stand-alone control center or a control center embedded inside the unit, while
the Rimage 6100 is available with an embedded control center or may be
purchased without a control center. The Rimage 8100, Rimage 7100, and the
single-recorder 6100 and Amigo II systems are each available with either
Rimages Everest or Prism printers. The DiscLab systems, consisting of the
DLN5200 and DL5200, and the Professional Series systems, consisting of the
5300N and 5100N, are designed predominantly as network attached publishing
systems and feature an embedded control center, an Everest printer and a small
product size and footprint.

The Everest printer was developed to meet the need of customers for an
on-demand surface printer able to produce color and monochrome labels with
quality similar to offset and silkscreen printing systems. Everest produces
images on recordable CD, DVD and blue laser media that are indelible and cover
the full surface of the media. In 2008, Rimage introduced the Everest 600
printer which enables users to print labels with 600 dpi print resolution for
printing photo quality images and clear, crisp text. Rimages Prism printer
provides high-speed, laser quality monochrome and spot color printing on
standard recordable CD and DVD media for in-house, customized printing. The
Producer line also includes Autoprinters that incorporate either an Everest or
Prism printer.

The markets served by Rimages Producer line of products include the
digital photography, medical imaging and business services industries. List
prices for the Producer line of publishing products range from $10,500 to
$49,400.

The Desktop Series.
Rimages Desktop Series of CD-R/DVD-R products features economical pricing, a
compact desktop design, software, network compatibility and stand-alone,
plug-and-play technology ideal for office environments. The Company introduced
the two-drive recorder Rimage 2000i Desktop publishing system and Rimage 480i
thermal inkjet printer in June 2004. Co-developed by the Company and
Hewlett-Packard, the Rimage 480i inkjet printer features 4800 dpi resolution
for high clarity color printing on CD-R/DVD-R discs. The list price for the
Rimage 2000i Desktop publishing system approximates $4,000.

Marketing and Distribution

Rimage currently utilizes the following principal means of distributing
its products: Direct sales using its own sales force; a two-tier distribution
channel of distributors to value added resellers in Europe, the U.S. and Latin
America; and a distributor or OEM to end-user distribution channel in Asia
Pacific, some areas in Europe and some U.S. market applications. Rimages
channel partners, primarily consisting of distributors, value added resellers
and other strategic partners, currently generate the majority of the Companys
sales.

Rimage has historically focused its sales and marketing efforts on
high-volume CD-R and DVD-R publishing solutions for its Producer product line
in such areas as banking and finance, wholesale photo processing labs, medical imaging,
and retail photography. Rimage plans to continue to expand its position in many
of these markets while also focusing on new applications with high-growth
potential in business services. The Companys sales and marketing organization
is focused on penetrating these targeted markets and strengthening marketing
support for new products.

During 2008, 2007 and 2006, Rimage derived 15%, 14% and 15% of its
respective revenues from one of its distributors, and derived 11%, 9% and 14%
of its revenues from a second distributor during the same respective periods.
Sales to one of the Companys strategic partners represented 10% of revenues
during 2008 and 9% during 2007 and 2006.

Rimage conducts foreign sales through its U.S. operation and its
subsidiaries in Germany and Japan, Rimage Europe GmbH and Rimage Japan Co.,
Ltd., respectively. Foreign sales constituted approximately 42% of Rimages
revenues for the year ended December 31, 2008, 36% for the year ended December
31, 2007 and 34% of revenues for the year ended December 31, 2006.

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Competition

Rimage competes with a number of manufacturers of CD-R/DVD-R production
equipment and related products. Primary competitors of the Company currently
include Primera Technology, Inc., Teac, Microtech Systems, Inc., Seiko Epson
Corporation and LSK Data Systems GmbH. Rimage is able to compete effectively in
the sale of digital publishing systems because of technological leadership in
automated solutions and its early start within the CD-R/DVD-R production
equipment industry. Rimage believes that its quality printing capabilities for
recordable CD, DVD and blue laser media, its transporter mechanisms, its
software and its integration tools differentiate its products from those of
competitors. Rimage also competes with alternative technologies in the storage
media industry such as high capacity hard drives, flash memory, new recordable
media technologies, file servers accessible through computer networks, the
Internet and additional media under development. Rimage believes that within
its targeted markets its technology has advantages over these alternative
technologies in terms of usability, reliability, performance, security and
cost.

Manufacturing

Rimages manufacturing operations consist primarily of the assembly of
products from components purchased from third parties. Some parts are standard
components and others are manufactured to Rimages specifications. Rimages
employees at its facility in Edina, Minnesota conduct assembly and testing
operations. Components include DVD-R drives, blue laser recorders, printers,
circuit boards, electric motors, machined and molded parts, precision sheet
metal assemblies, computer components and other mechanical parts. The Company
depends upon a single-source supplier for its Everest printers.

Although Rimage believes it has identified alternative assembly
contractors for most of its subassemblies and products, an actual change in
such contractors would likely require a period of training and testing.
Accordingly, a sudden interruption in a supply relationship or the production
capacity of one or more of such contractors could result in increased costs,
delivery delays, loss of sales and quality control issues as the Company seeks
to secure alternative sources of supply.

Research and Development

At December 31, 2008, 29 full-time employees were involved in research
and development at Rimage. This staff, with software, electrical, mechanical
and drafting capabilities, engages in research and development of new products
and development of enhancements to existing products.

The industries served by Rimage are subject to rapid technological
changes. Alternate data storage media exist or are under development, including
high capacity hard drives, new recordable media technologies, file servers
accessible through computer networks and the Internet. All these forces may
affect the usage of recordable CD, DVD and blue laser media. Rimage believes
that it must continue to innovate and anticipate advances in the storage media
industry in order to remain competitive.

Rimages expenditures for research and development were $5.3 million,
$5.9 million and $6.7 million in 2008, 2007 and 2006, representing 5.7%, 5.4%
and 6.5% of revenues, respectively. Rimage anticipates its expenditures in
research and development will increase in 2009 relative to 2008 to support an
increased level of new product development initiatives and improve existing
products.

Patents and Government Regulation

Rimage currently maintains 23 U.S. and foreign patents and has a total
of eight U.S. and foreign patents pending. In addition, Rimage protects the
proprietary nature of its software primarily through copyright and license
agreements and through close integration with its hardware offerings. It is
Rimages policy to protect the proprietary nature of its newly developed
products whenever they are likely to become significant sources of revenue. No
assurance can be given that Rimage will be able to obtain patent or other
protection for its products. In addition, Rimage has registered and may in the
future register trademarks and other marks used in its business.

As the number of Rimages products increases and the functionality of
those products expands, Rimage believes that it may become increasingly subject
to attempts by others to duplicate its proprietary technology and to the
possibility of infringement of Rimage patents. In addition,although Rimage does not
believe that any of its products infringe on the rights of others, third
parties have claimed, and may in the future claim, Rimages products infringe
on their rights and these third parties may assert infringement claims against
Rimage in the future. Rimage may litigate to enforce patents issued to it and
to defend against claimed infringement of the rights of others or to determine
the ownership, scope, or validity of Rimages proprietary rights and the rights
of others. Any claim of infringement against Rimage could involve significant
liabilities to third parties, could require Rimage to seek licenses from third
parties, and could prevent Rimage from manufacturing, selling or using its
products.

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The FCC requires some of Rimages equipment to meet radio frequency
emission standards. Rimage takes steps to ensure proper compliance of all
products.

Employees

At December 31, 2008, Rimage had 209 full-time employees, of which 29
were involved in research and development, 101 in production, testing, repair
and customer service, and 79 in sales, marketing, administration and
management. None of Rimages employees are represented by a labor union or
covered by a collective bargaining agreement.

Cautionary Note Regarding Forward-Looking Statements

We
make written and oral statements from time to time regarding our business and
prospects, such as projections of future performance, statements of
managements plans and objectives, forecasts of market trends, and other
matters that are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Statements containing the words or phrases will likely result, are
expected to, will continue, is anticipated, estimates, projects,
believes, expects, anticipates, intends, target, goal,
plans,
objective, should or similar expressions identify forward-looking
statements, which may appear in documents, reports, filings with the Securities
and Exchange Commission, news releases, written or oral presentations made by
our authorized officers or other representatives. For such statements, we claim
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995.

Our
future results, including results related to forward-looking statements,
involve a number of risks and uncertainties. No assurance can be given that the
results reflected in any forward-looking statements will be achieved. Any
forward-looking statement made by or on behalf of us speaks only as of the date
on which such statement is made. We do not undertake any obligation to update
or keep current any forward-looking statement to reflect events or
circumstances arising after the date of such statement.

In
addition to other matters identified or described by us from time to time in
filings with the SEC, there are several important factors that could cause our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or results that are reflected from time to time
in any forward-looking statement that may be made by or on behalf of us. These
important factors are described below under Item 1A. Risk Factors.

|         |             
|-------- | ------------
|ITEM 1A. | RISK FACTORS

If
any of the following risks actually occur, our results of operations, cash
flows and the market price of our common stock could be negatively impacted.
Although we believe that we have identified and discussed below the key risk
factors affecting our business, there may be additional risks and uncertainties
that are not presently known or that are not currently believed to be significant
that may adversely affect our performance or financial condition.

Adverse
economic conditions, particularly those affecting our customers, distributors
and resellers, will harm our business.

Unfavorable changes in economic conditions, including recession,
inflation, lack of access to capital, lack of consumer confidence or other
changes have resulted and may continue to result in lower spending among
customers in the industries we serve. Unfavorable economic conditions have also
resulted and may continue to result in decreased sales to our distributors and
resellers.

Further, we sell our products throughout the United States, as well as
in several foreign countries. Our business may be adversely affected by factors
in the United States and other countries, such as disruptions in financial
markets or downturns in economic activity in specific countries or regions, or
in the various industries in which we operate; social, political or labor
conditions in specific countries or regions; or adverse changes in the
availability and cost of capital, interest rates, tax rates, or regulations.
These factors are beyond our control, but may result in further decreases in
spending among customers and softening demand for our products.

Declining demand for our products will adversely affect our revenue.
Further, challenging economic conditions also may impair the ability of our
customers to pay for products and services they have purchased. As a result,
our cash flow may be negatively impacted and our allowance for doubtful
accounts and write-offs of accounts receivable may increase.

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Technology
in our industry evolves rapidly, potentially causing our products to become
obsolete, and we must continue to enhance existing systems and develop new
systems or we will lose sales.

Rapid
technological advances, rapidly changing customer requirements and fluctuations
in demand characterize the current market for our products. Further, there are
alternative data storage media, and additional media is under development,
including high capacity hard drives, flash memory, new recordable media
technologies, file servers accessible through computer networks and the
Internet. Our existing and development-stage products may become obsolete if
our competitors introduce newer or more appealing technologies. If these
technologies are patented or proprietary to our competitors, we may not be able
to access these technologies. We believe that we must continue to innovate and
anticipate advances in the storage media industry in order to remain competitive.
If we fail to anticipate or respond to technological developments or customer
requirements, or if we are significantly delayed in developing and introducing
products, our business will suffer lost sales.

Our market
is becoming more competitive. Competition may result in price reductions, lower
gross profits and loss of market share.

The
storage media industry is becoming more competitive, and we face the potential
for increased competition in developing and selling our recordable CD, DVD and
blue laser publishing systems in both the U.S. and in foreign markets. Our
competitors may have or could develop or acquire significant marketing,
financial, development and personnel resources. Our current primary competitors
include Primera Technology, Inc., Teac, Seiko Epson Corporation, Microtech
Systems, Inc. and LSK Data Systems GmbH. To remain competitive, we believe that
we must continue to provide:

| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| | § | Technologically advanced
 systems that satisfy the demands of end-users.                     
| |   |                                                                                              
| | § | Continuing advancements in
 our recordable CD, DVD and blue laser digital publishing systems.
| |   |                                                                                              
| | § | A dependable and efficient
 distribution and reseller network.                               
| |   |                                                                                              
| | § | Superior customer service.                                                                   
| |   |                                                                                              
| | § | High levels of quality and
 reliability.                                                     

We
cannot assure you that we will be able to compete successfully against our
current or future competitors. The storage media industry has increased
visibility, which may lead to large, well-known, well-financed companies
entering into this market. Increased competition from manufacturers of systems
or consumable supplies may result in price reductions, lower gross profit
margins, increased discounts to customers and loss of market share and could
require increased spending by us on research and development, sales and
marketing and customer support.

If our
products fail to compete successfully with other existing publishing systems or
newly-developed products for the storage media industry, our business will
suffer.

The
success of our products depends upon our end users choosing our recordable CD,
DVD and blue laser technology for their storage media needs. However,
alternative data storage media exist, such as high capacity hard drives, flash
memory, new media technologies and file servers accessible through computer
networks and the Internet. Further, additional media is under development. If
end users perceive any technology that is competing with ours as more reliable,
higher performing, less expensive or having other advantages over our
technology, the demand for our products could decrease. Additionally, some of
our competitors may make strategic acquisitions or establish cooperative
relationships with suppliers or companies that produce complementary products
such as cameras, computer equipment, software or biometric applications.
Competition from other publishing systems or other storage media is likely to
increase. If our products do not compete successfully with existing or new
competitive products, our business will suffer.

We sell a
significant portion of our products internationally, which exposes us to risks
associated with foreign operations.

We
sell a significant amount of our products to customers outside the United
States, particularly in Europe, Asia and Latin America. International sales
accounted for 42% of our revenues for the year ended December 31, 2008, 36% for
the year ended December 31, 2007 and 34% of our revenues the year ended
December 31, 2006. We expect that shipments to international customers,
including customers in Europe, Asia and Latin America, will continue to account
for a significant portion of our net sales. Sales outside the United States
involve the following risks, among others:

| |   |                                                           
| | - | ----------------------------------------------------------
| | § | Foreign governments may
 impose tariffs, quotas and taxes.

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| |   |                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | § | The demand for our
 products will depend, in part, on local economic health.                                                                                                           
| |   |                                                                                                                                                                                        
| | § | Political and economic
 instability may reduce demand for our products.                                                                                                                
| |   |                                                                                                                                                                                        
| | § | Restrictions on the export
 or import of technology may reduce or eliminate our ability to sell in
 certain markets.                                                                   
| |   |                                                                                                                                                                                        
| | § | Potentially limited
 intellectual property protection in certain countries may limit our recourse
 against infringing products or cause us to refrain from selling in certain
 markets.
| |   |                                                                                                                                                                                        
| | § | We may face difficulties
 in managing our international operations.                                                                                                                    
| |   |                                                                                                                                                                                        
| | § | The burden and cost of
 complying with a variety of foreign laws.                                                                                                                      
| |   |                                                                                                                                                                                        
| | § | We may decide to price our
 products in foreign currency denominations.                                                                                                                
| |   |                                                                                                                                                                                        
| | § | Our contracts with foreign
 distributors and resellers cannot fully protect us against political and
 economic instability.                                                            
| |   |                                                                                                                                                                                        
| | § | We may face difficulties
 in collecting receivables.                                                                                                                                   
| |   |                                                                                                                                                                                        
| | § | We may not be able to
 control our international distributors efforts on our behalf.                                                                                                  

The
financial results of our German and Japanese subsidiaries are translated into
U.S. dollars for consolidation with our overall financial results.
Additionally, we hedge against currency fluctuations associated with foreign
currency denominated transactions (principally the Euro) with Rimage Europe.
Despite our hedging activity, currency translations and fluctuations may
adversely affect the financial performance of our consolidated operations.
Currency fluctuations also may increase the relative price of our product in
foreign markets and thereby could also cause our products to become less
affordable or less price competitive than those of foreign manufacturers. These
risks associated with foreign operations may have a material adverse effect on
our revenue from or costs associated with international sales.

If our
domestic or international intellectual property rights are not adequately
protected, others may offer products similar to ours which could depress our
product selling prices and gross profit or result in loss of market share.

We believe that protecting our proprietary technology is important to
our success and competitive positioning. In addition to common law intellectual
property rights, we rely on patents, trade secrets, trademarks, copyrights,
know-how, license agreements and contractual provisions to establish and
protect our intellectual property rights. However, these legal means afford us
only limited protection and may not adequately protect our rights or remedies
to gain or keep any advantages we may have over our competitors.

We cannot
assure you that others may not independently develop the same or similar
technologies or otherwise obtain access to our technology and trade secrets.

Our competitors, who may have or could
develop or acquire significant resources, may make substantial investments in
competing technologies, or may apply for and obtain patents that will prevent,
limit, or interfere with our ability to manufacture or market our products.
Further, although we do not believe that any of our products infringe the
rights of others, third parties have claimed, and may in the future claim, our
products infringe on their rights, and these third parties may assert
infringement claims against us in the future. We may litigate to enforce patents issued to us and to
defend against claimed infringement of the rights of others or to determine the
ownership, scope, or validity of our proprietary rights and the rights of
others. Any claim of infringement against us could involve significant
liabilities to third parties, could require us to seek licenses from third
parties, and could prevent us from manufacturing, selling or using our
products.

Costly litigation may be necessary to enforce patents issued to us, to
protect trade secrets or know-how we own, to defend us against claimed
infringement of the rights of others or to determine the ownership, scope, or
validity of our proprietary rights and the rights of others. Any claim of
infringement against us may involve significant liabilities to third parties,
could require us to seek licenses from third parties, and could prevent us from
manufacturing, selling, or using our products. The occurrence of this
litigation, or the effect of an adverse determination in any of this type of
litigation, could have a material adverse effect on our business, financial
condition and results of operations. Further, the laws of some of the countries
in which our systems are or may be sold may not protect our systems and
intellectual property to the same extent as the United States or at all. Our
failure to protect or enforce our intellectual property rights could have a
material adverse effect on our business, results of operations and financial
condition.

8

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Our sales
will decline, and our business will be materially harmed if our key channel
partners do not effectively market or sell our products or if there is a
significant reduction, delay or cancellation of orders from such channel
partners or our direct OEM customers.

We
distribute our products to end users through our own sales force, through
distributors and through a two-tier system of distributors and resellers. Our
distributors and resellers are independent businesses that we do not control.
We cannot be certain that our distribution channel will continue to market or
sell our systems effectively. Our agreements with distributors and resellers do
not contain requirements that a certain percentage of such parties sales are
of our products, nor do the agreements restrict their ability to choose
alternative sources for digital publishing systems.

During
2008, sales to two of our distributors and a strategic partner represented 15%,
11% and 10% of our total revenues, respectively. Sales to one of these
distributors represented 14% of our revenues in 2007. Sales to these two
distributors generated 15% and 14%, respectively, of our revenues in 2006. A
significant reduction, delay or cancellation of orders from our key channel
partners or our direct OEM customers, or the loss of any of them, could have a
negative impact upon our operating results. Further, some of our channel
partners are small organizations with limited capital, and our success in
distributing our products to end-users will depend upon the continued viability
and financial stability of these entities. These channel partners may choose to
devote their efforts to other products in different markets or reduce or fail
to devote the necessary resources to provide effective sales and marketing
support of our products. We believe that our future growth and success will
continue to depend in large part upon the success of our channel partners in
operating their businesses and our relationships with our direct OEM customers.

If we do
not maintain adequate inventories of component parts or finished goods, or if
we fail to adequately forecast demand, the likely resulting delays in producing
our publishing systems products would damage our business.

Because
most of our systems are built upon order, we do not maintain a significant
inventory of completed systems. We assemble the Producer Series and Desktop
Series systems as they are ordered, which causes us to forecast production
based on past sales and our estimates of future demand. In the event that we
significantly underestimate our needs or encounter an unexpectedly high level
of demand for our systems or our suppliers are unable to deliver our orders of
components in a timely manner, we may be unable to fill our product orders on
time which could harm our reputation and result in reduced sales.

We rely on
single-source suppliers, which could cause delays, increases in costs or
prevent us from completing customer orders, all of which could materially harm
our business.

We
assemble our Producer Series and Desktop Series products using materials and
components supplied by various subcontractors and suppliers. We purchase
critical components for our systems, including our Everest printers, DVD-R
drives, blue laser drives, circuit boards, electric motors, machined and molded
parts, precision sheet metal assemblies and mechanical parts from third
parties. Some of our subcontractors and suppliers are the sole source of these
components and these third parties may also own technology and manufacturing
know-how required to manufacture critical components. If any of our suppliers
is unable to ship critical components, we would be unable to assemble and ship
products to our end-users, distributors or resellers. If the price of these
components increases for any reason, or if these suppliers are unable or
unwilling to deliver, we may have to find another source, which could result in
interruptions, increased costs, delays, loss of sales and quality control
problems.

The termination or interruption of any of these relationships, or the
failure of these manufacturers or suppliers to supply products or components to
us on a timely basis or in sufficient quantities, likely would cause us to be
unable to meet orders for our products and harm our reputation and our
business. For the majority of our critical components, we have identified
alternative suppliers. However, for certain other components, it is not
possible to identify an alternative supplier because of the proprietary
information and technology held by the current supplier. If we were unable to
secure the technology and proprietary information used by our current
suppliers, identifying an alternative manufacturer to design and manufacture
the components to our specifications could involve significant delays in
production of the products and significant expense. Further, if we obtain a new
supplier for a component or use an alternative component in our product, we may
need to conduct additional testing of our products to ensure the product meets
our quality and performance standards. Any delays in delivery of our product to
end-users, distributors or resellers could be extended, and our costs
associated with the change in product manufacturing could increase.

The failure of our components suppliers to supply us with the
components consistent with our requirements as to quality, quantity and
timeliness could materially harm our business by causing delays, loss of sales,
increases in costs and lower gross profit margins.

9

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Our products must be compatible with products
designed and manufactured by others and, in the event of design changes or the
introduction of new products by them or us, our products must continue to be
compatible with products of others.

Our Producer Series and Desktop Series of digital publishing systems
incorporate computer and related computer equipment, hardware and software
manufactured by others. Our products are designed to provide end users with a
fully-integrated publishing system and therefore, our products must operate
with the computer and related equipment of others to function properly for end
users. Problems with the products of others may adversely affect the
performance and reliability of our publishing system products and damage our
reputation with end users. Further, if there are changes in our products,
changes in the computer or computer related equipment integrated into our
products or if we offer new products, we must maintain compatibility and
interoperability of our products with the products of others. We cannot assure
you that we will be able to adapt our products to be compatible with any newly
designed product of another party. We would likely incur substantial costs to
test and de-bug any newly designed product that we integrate into our
products. Further, our new product development efforts may be hampered by our
need to maintain compatibility with the products of others, and we may incur
additional expense designing for compatibility.

Our publishing systems may have manufacturing
or design defects that we discover after shipment, which could negatively
affect our revenues, increase our costs and harm our reputation.

Our publishing systems are complex and may contain undetected and
unexpected defects, errors or failures. If these product defects are
substantial, the result could be product recalls, an increased amount of
product returns, loss of market acceptance and damage to our reputation, all of
which could increase our costs and cause us to lose sales. We carry general commercial
liability insurance covering our products with policy limits per occurrence and
in the aggregate that we have deemed to be sufficient. We cannot predict,
however, whether this insurance is sufficient, or if not, whether we will be
able to obtain sufficient insurance to cover the risks associated with our
business or whether such insurance will be available at premiums that are
commercially reasonable. In addition, these insurance policies must be renewed
annually. Although we have been able to obtain liability insurance, such
insurance may not be available in the future on acceptable terms, if at all. A
successful claim against us or settlement by us in excess of our insurance
coverage or our inability to maintain insurance in the future could have a
material adverse effect on our business, results of operations, liquidity and
financial condition.

If our systems fail to comply with domestic
and international government regulations, or if these regulations result in a
barrier to our business, we could lose sales.

Our systems must comply with various domestic and international laws,
regulations and standards. In the event that we are unable or unwilling to
comply with any such laws, regulations or standards, we may decide not to
conduct business in certain markets. Particularly in international markets, we
may experience difficulty in securing required licenses or permits on
commercially reasonable terms, or at all. Failure to comply with existing or
evolving laws or regulations, including export and import restrictions and
barriers, or to obtain timely domestic or foreign regulatory approvals or
certificates could result in lost sales.

Fluctuations in our future operating results
may negatively affect the market price of our common stock.

We have experienced fluctuations in our quarterly operating results,
and we expect those fluctuations to continue due to a variety of factors. Some
of the factors that influence our quarterly operating results include:

| |   |                                                                          
| | - | -------------------------------------------------------------------------
| | § | The number
 and mix of products sold in the quarter.                     
| |   |                                                                          
| | § | The timing
 of major projects.                                           
| |   |                                                                          
| | § | The availability and cost of components and
 materials.                  
| |   |                                                                          
| | § | Timing,
 costs and benefits of new product introductions.                
| |   |                                                                          
| | § | Customer
 order size and shipment timing.                                
| |   |                                                                          
| | § | Seasonal
 factors affecting timing of purchase orders.                   
| |   |                                                                          
| | § | Promotions by ourselves or competitors, and
 the timing of the promotion.
| |   |                                                                          
| | § | The impact
 to the marketplace of competitive products and pricing.      
| |   |                                                                          
| | § | The timing
 and level of operating expenses.                             
| |   |                                                                          
| | § | General
 economic and market conditions including market uncertainty.    

10

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Table of Contents

Because of these factors, our quarterly operating results are difficult
to predict and are likely to vary in the future. If our operating results are
below financial analysts or investors expectations, the market price of our
common stock may fall abruptly and significantly.

If we fail to retain and attract highly
skilled managerial and technical personnel, we may fail to remain competitive.

Our future success depends, in significant part, upon the continued
service and performance of our senior management and other key personnel. The
loss of the services of our management team, some of whom have significant
experience in our industry, and other key personnel could impair our ability to
effectively manage our company and to carry out our business plan. We do not
carry key person life insurance on any of our executive officers. In addition,
competition for skilled employees in our industry is intense. Our future
success also depends on our continuing ability to attract, retain and motivate
highly qualified managerial, technical and sales personnel. Our inability to
retain or attract qualified personnel could have a significant negative effect
and thereby materially harm our business and financial condition.

Our stock price may be volatile, and a
shareholders investment could decline in value.

Our stock price has fluctuated in the past and may continue to
fluctuate significantly, making it difficult for an investor to resell shares
or to resell shares at an attractive price. The market prices for securities of
technology companies, like Rimage, have historically been highly volatile.
Future events concerning us or our competitors could cause such volatility,
including:

| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| | § | Actual or anticipated variations in our operating results.                                      
| |   |                                                                                                 
| | § | Investments required in infrastructure and/or personnel to meet
 long-term strategic objectives.
| |   |                                                                                                 
| | § | Technological innovations or new commercial products introduced by us
 or our competitors.      
| |   |                                                                                                 
| | § | Developments concerning proprietary rights.                                                     
| |   |                                                                                                 
| | § | Changes in senior management.                                                                   
| |   |                                                                                                 
| | § | Investor perception of us and our industry.                                                     
| |   |                                                                                                 
| | § | General economic and market conditions including market uncertainty.                            
| |   |                                                                                                 
| | § | National or global political events.                                                            
| |   |                                                                                                 
| | § | Public confidence in the securities markets and regulation by or of
 the securities markets.    

In addition, the stock market is subject to price and volume
fluctuations that affect the market prices for companies in general, and small-capitalization,
high-technology companies in particular, which are often unrelated to the
operating performance of these companies. Any failure by us to meet or exceed
estimates of financial analysts is likely to cause a decline in our common
stock price. Further, recent economic conditions have resulted in significant
fluctuations and significant declines in stock prices for many companies,
including Rimage. We cannot predict when the stock markets and the market for
our common stock may stabilize.

Future sales of shares of our common stock in
the public market may negatively affect our stock price.

Future sales of our common stock, or the perception that these sales
could occur, could have a significant negative effect on the market price of
our common stock. In addition, upon exercise of outstanding options, the number
of shares outstanding of our common stock could increase substantially. This
increase, in turn, could dilute future earnings per share, if any, and could
depress the market value of our common stock. Dilution and potential dilution,
the availability of a large amount of shares for sale, and the possibility of
additional issuances and sales of our common stock may negatively affect both
the trading price of our common stock and the liquidity of our common stock.
These sales also might make it more difficult for us to sell equity securities
or equity-related securities in the future at a time and price that we would
deem appropriate.

Provisions of Minnesota law, our bylaws and
other agreements may deter a change of control of our company and may have a
possible negative effect on our stock price.

Certain
provisions of our Minnesota law, our bylaws and other agreements may make it
more difficult for a third- party to acquire, or discourage a third-party from
attempting to acquire, control of our company, including:

| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | § | The provisions of Minnesota
 law relating to business combinations and control share acquisitions.                                                                                
| |   |                                                                                                                                                                                   
| | § | The provisions of our bylaws
 regarding the business properly brought before shareholders.                                                                                        
| |   |                                                                                                                                                                                   
| | § | The right of our Board of
 Directors to establish more than one class or series of shares and to fix the
 relative rights and preferences of any such different classes or series.

11

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| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | § | Our shareholder rights plan,
 which would cause substantial dilution to any person or group attempting to
 acquire our company on terms not approved in advance by our Board of
 Directors.              
| |   |                                                                                                                                                                                                          
| | § | The provisions of our stock
 option plans allowing for the acceleration of vesting or payments of awards
 granted under the plans in the event of specified events that result in a
 change in control.
| |   |                                                                                                                                                                                                          
| | § | The provisions of our
 agreements provide for severance payments to our executive officers in the
 event of certain terminations following a change in control.                                        

These measures could discourage or prevent a takeover of our company or
changes in our management, even if an acquisition or such changes would be
beneficial to our shareholders. This may have a negative effect on the price of
our common stock.

Compliance with changing regulation of
corporate governance and public disclosure may result in additional expenses.

Keeping abreast of, and in compliance with, changing laws, regulations
and standards relating to corporate governance and public disclosure, including
the Sarbanes-Oxley Act of 2002 and in particular Section 404 of that Act
relating to management certification of internal controls, the regulations of
the Securities and Exchange Commission and the rules of the Nasdaq Stock Market
have required an increased amount of management attention and external
resources. We intend to invest all reasonably necessary resources to comply
with evolving corporate governance and public disclosure standards, and this
investment may result in increased general and administrative expenses and a
diversion of management time and attention from revenue-generating activities
to compliance activities.

|          |                           
|--------- | --------------------------
|ITEM
 1B. | UNRESOLVED STAFF
 COMMENTS

None.

|         |           
|-------- | ----------
|ITEM
 2. | PROPERTIES

Rimage headquarters are located in a facility of 58,500 square feet at
7725 Washington Avenue South, Edina, Minnesota 55439. The Company rented this
facility through September 2008 under a noncancellable 48-month lease initiated
August 1, 2004. Monthly base rent was $33,394 for the first year, with 2%
inflationary increases each subsequent year of the lease. Effective August 11,
2008, a Purchase and Sale Agreement was completed under which the Company
agreed to purchase from the Seller, 7725 Washington Avenue Corp., the real
property and building the Company previously leased. The closing of the
purchase transaction was effective September 30, 2008. The Company financed the
purchase using cash on hand. This facility is used for manufacturing,
engineering, service, sales, marketing and administration.

In July 2006, Rimage entered into a facility lease of approximately
18,200 square feet in Dietzenbach, Germany, used for service, sales and light
assembly. The current term of the lease in Germany expires June 30, 2011, and
monthly base rent is 14,833 (or approximately $21,000 U.S. dollars).
Additionally, in May 2008, the Company entered into a facility lease of
approximately 2,689 square feet in Tokyo, Japan, used for sales and service.
The current term of the lease in Japan expires April 30, 2010, and monthly base
rent is ¥ 1,685,441 (or approximately $19,000 U.S. dollars).

|         |                  
|-------- | -----------------
|ITEM
 3. | LEGAL PROCEEDINGS

The Company is exposed to a number of asserted and unasserted legal
claims encountered in the ordinary course of its business. Although the outcome
of any such legal actions cannot be predicted, management believes that there
are no pending legal proceedings against or involving the Company for which the
outcome is likely to have a material adverse effect upon its financial position
or results of operations.

|         |                                                     
|-------- | ----------------------------------------------------
|ITEM
 4. | SUBMISSION OF
 MATTERS TO A VOTE OF SECURITY HOLDERS

Rimage did not submit any matters to a vote of security holders during
the last quarter of the fiscal year covered by this report.

12

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PART II

|         |                                                                                                 
|-------- | ------------------------------------------------------------------------------------------------
|ITEM
 5. | MARKET FOR COMMON
 EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Rimages common stock is traded on the Nasdaq Global Market under the
symbol RIMG. The following table sets forth, for the periods indicated, the
range of low and high sales prices for Rimages common stock as reported on The
Nasdaq Stock Market.

|            |  |     |       |      |   |       | 
|----------- |  | --- | ----- | ---- | - | ----- | 
|            |  | Low |       | High |  
|           
|Year 2007:  |  |     |       |      |   |       | 
|1st Quarter |  | $   | 23.50 |      | $ | 28.74 | 
|2nd Quarter |  | $   | 25.76 |      | $ | 34.58 | 
|3rd Quarter |  | $   | 21.59 |      | $ | 34.63 | 
|4th Quarter |  | $   | 20.79 |      | $ | 27.39 | 
|Year 2008:  |  |     |       |      |   |       | 
|1st Quarter |  | $   | 21.25 |      | $ | 26.61 | 
|2nd Quarter |  | $   | 12.09 |      | $ | 23.85 | 
|3rd Quarter |  | $   | 12.01 |      | $ | 17.88 | 
|4th Quarter |  | $   | 10.07 |      | $ | 15.89 | 

Shareholders

As of February 19, 2009, there were 54 shareholders of record of
Rimages common stock.

Dividends

To date, Rimage has not paid or declared any cash dividends on its
common stock. The payment by Rimage of dividends, if any, on its common stock
in the future is subject to the discretion of the Board of Directors and will
depend on Rimages continued earnings, financial condition, capital
requirements and other relevant factors.

Other Information Regarding Equity
Compensation Plans

The following
table sets forth information regarding Rimages equity compensation plans in
effect as of December 31, 2008. Each of the Companys equity compensation plans
is an employee benefit plan as defined by Rule 405 of Regulation C of the
Securities Act of 1933.

|                                                         |  |                                                                                                             |           |                                                                          |  |                                                                                                                 |   |       |  |  |  |         |  | 
|-------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------- | - | ----- |  |  |  | ------- |  | 
|                                                         |  | Securities Authorized for Issuance Under Equity
 Compensation Plans                                         |          
|                                                         |  |                                                                                                             |          
|Plan
 category                                           |  | Number of shares of
 common stock to be
 issued upon exercise
 of outstanding options,
 warrants and rights |           | Weighted-averageexercise price ofoutstanding options,warrants and rights |  | Number of shares of
 common stock remaining
 available for future
 issuance under equity
 compensation plans(1) |  
|Equity compensation plans approved by
 shareholders:     |  |                                                                                                             | 1,159,381 |                                                                          |  |                                                                                                                 | $ | 17.88 |  |  |  | 333,570 |  | 
|                                                         |  |                                                                                                             |           |                                                                          |  |                                                                                                                 |   |       |  |  |  |         |  | 
|Equity compensation plans not approved by
 shareholders: |  |                                                                                                             |          |                                                                          |  |                                                                                                                 |   |      |  |  |  |        |  | 
|                                                         |  |                                                                                                             |           |                                                                          |  |                                                                                                                 |   |       |  |  |  |         |  | 
|Total                                                    |  |                                                                                                             | 1,159,381 |                                                                          |  |                                                                                                                 | $ | 17.88 |  |  |  | 333,570 |  | 

| |     |                                                            
| | --- | -----------------------------------------------------------
| | (1) | Excludes
 shares of common stock listed in the first column

13

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Performance Graph

The Companys common stock is quoted on The Nasdaq Global Market. The
graph and table below set forth a comparison of the cumulative total return of
the Companys common stock over the last five fiscal years with a broad market
index and either a nationally-recognized industry standard or an index of peer
companies selected by the Company. Rimage has chosen to use the Nasdaq National
Market Index (U.S.) as its broad market index and the Nasdaq Computer
Manufacturer Stocks Index as its index of peer companies.

The following graph shows changes during the period from December 31,
2004 to December 31, 2008 in the value of $100 invested in: (1) the Nasdaq
National Market Index (U.S.); (2) the Nasdaq Computer Manufacturer Stocks
Index; and (3) Rimages common stock. The values of each investment as of the
dates indicated are based on share prices plus any dividends paid in cash, with
the dividends reinvested on the date they were paid. The calculations exclude
trading commissions and taxes. The table and graph are not necessarily
indicative of future investment performance.

(LINE GRAPH)

|                                          |  |          |        |          |   |          |  |          |        |          |   |        |  |   |       | 
|----------------------------------------- |  | -------- | ------ | -------- | - | -------- |  | -------- | ------ | -------- | - | ------ |  | - | ----- | 
|                                          |  | 12/31/04 |        | 12/30/05 |   | 12/29/06 |  | 12/31/07 |        | 12/31/08 |  
|                                          |  |          |        |          |   |          |  |          |        |          |  
|Nasdaq National Market Index              |  | $        | 100.00 |          | $ | 102.13   |  | $        | 112.20 |          | $ | 121.67 |  | $ | 58.62 | 
|                                          |  |          |        |          |   |          |  |          |        |          |   |        |  |   |       | 
|Nasdaq Computer Manufacturer Stocks Index |  | $        | 100.00 |          | $ | 102.31   |  | $        | 104.49 |          | $ | 152.88 |  | $ | 64.22 | 
|                                          |  |          |        |          |   |          |  |          |        |          |   |        |  |   |       | 
|Rimage Corporation                        |  | $        | 100.00 |          | $ | 180.34   |  | $        | 161.79 |          | $ | 161.48 |  | $ | 83.45 | 

14

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Table of Contents

Issuer Purchases of Equity Securities

The
following table provides certain information regarding purchases made by the
Company of its common stock in the quarter ended December 31, 2008:

|                             |  |                                    |  |                               |   |                                                                                    |  |                                                                                          |  |        |  |  |         |  | 
|---------------------------- |  | ---------------------------------- |  | ----------------------------- | - | ---------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | ------ |  |  | ------- |  | 
|Period                       |  | Total Number
 of Shares
 Purchased |  | Average Price
 Paid Per Share |   | Total Number of
 Shares Purchased
 as Part of Publicly
 Announced Plan or
 Program |  | Maximum
 Number
 of Shares that
 May Yet Be
 Purchased Under
 the Plans or
 Programs (1) | 
|                             |  |                                    |  |                               |   |                                                                                    |  |                                                                                          | 
|October 1  October 31, 2008 |  |                                   |  |                               |   |                                                                                   |  |                                                                                          |  |       |  |  | 449,238 |  | 
|Nov. 1  Nov. 30, 2008       |  | 26,321                             |  |                               | $ | 12.48                                                                              |  |                                                                                          |  | 26,321 |  |  | 422,917 |  | 
|Dec. 1  Dec. 31, 2008       |  |                                   |  |                               |   |                                                                                   |  |                                                                                          |  |       |  |  | 422,917 |  | 
|Total                        |  | 26,321                             |  |                               | $ | 12.48                                                                              |  |                                                                                          |  | 26,321 |  |  | 422,917 |  | 

(1) On October 17, 2007, the Companys Board of Directors authorized
the repurchase of up to 500,000 shares of its common stock. In February 2008,
the Companys Board of Directors increased the share repurchase authorization
by an additional 500,000 shares, bringing total shares authorized for
repurchase to 1,000,000. Shares will be purchased at prevailing market prices
in the open market or in private transactions, subject to market conditions,
share price, trading volume and other factors. The repurchase program may be
discontinued at any time. The Company will finance the purchase of the shares
using cash on hand.

15

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Table of Contents

|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

The selected consolidated financial data below should be read in
conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations in Item 7 below and the Consolidated Financial
Statements and the Notes thereto included in Item 8 below. (In thousands,
except per share data).

Consolidated Statements of Income
Information:

|                                     |  |                         |        |      |   |         |  |      |         |      |   |        |  |   |        | 
|------------------------------------ |  | ----------------------- | ------ | ---- | - | ------- |  | ---- | ------- | ---- | - | ------ |  | - | ------ | 
|                                     |  | Year ended December 31, |       
|                                     |  | 2008                    |        | 2007 |   | 2006    |  | 2005 |         | 2004 |  
|Revenues                             |  | $                       | 91,394 |      | $ | 108,874 |  | $    | 103,252 |      | $ | 95,410 |  | $ | 70,848 | 
|Cost of revenues                     |  | $                       | 51,731 |      | $ | 57,719  |  | $    | 56,014  |      | $ | 51,957 |  | $ | 38,027 | 
|Gross profit                         |  | $                       | 39,663 |      | $ | 51,155  |  | $    | 47,238  |      | $ | 43,453 |  | $ | 32,821 | 
|Operating expenses                   |  | $                       | 27,915 |      | $ | 30,274  |  | $    | 29,464  |      | $ | 26,829 |  | $ | 19,386 | 
|Operating income                     |  | $                       | 11,748 |      | $ | 20,881  |  | $    | 17,774  |      | $ | 16,624 |  | $ | 13,435 | 
|Other income, net                    |  | $                       | 2,711  |      | $ | 3,513   |  | $    | 2,684   |      | $ | 1,419  |  | $ | 608    | 
|Income tax expense                   |  | $                       | 5,028  |      | $ | 8,633   |  | $    | 7,374   |      | $ | 6,675  |  | $ | 4,971  | 
|Net income                           |  | $                       | 9,431  |      | $ | 15,761  |  | $    | 13,084  |      | $ | 11,368 |  | $ | 9,072  | 
|                                     |  |                         |        |      |   |         |  |      |         |      |   |        |  |   |        | 
|Basic net income per share           |  | $                       | 0.99   |      | $ | 1.59    |  | $    | 1.33    |      | $ | 1.19   |  | $ | 0.98   | 
|Diluted net income per share         |  | $                       | 0.97   |      | $ | 1.52    |  | $    | 1.26    |      | $ | 1.10   |  | $ | 0.91   | 
|Weighted average shares outstanding: |  |                         |        |      |   |         |  |      |         |      |   |        |  |   |        | 
|Basic                                |  |                         | 9,556  |      |   | 9,915   |  |      | 9,812   |      |   | 9,530  |  |   | 9,290  | 
|Diluted                              |  |                         | 9,729  |      |   | 10,371  |  |      | 10,356  |      |   | 10,312 |  |   | 9,932  | 

Consolidated
Balance Sheet Information:

|                                    |  |                             |         |      |   |         |  |      |         |      |   |        |  |   |        | 
|----------------------------------- |  | --------------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------ |  | - | ------ | 
|                                    |  | Balances as of December 31, |        
|                                    |  | 2008                        |         | 2007 |   | 2006    |  | 2005 |         | 2004 |  
|Cash and cash equivalents           |  | $                           | 14,885  |      | $ | 7,416   |  | $    | 8,500   |      | $ | 12,693 |  | $ | 12,120 | 
|Marketable securities               |  | $                           | 39,870  |      | $ | 51,605  |  | $    | 30,266  |      | $ | 51,582 |  | $ | 40,375 | 
|Receivables, net                    |  | $                           | 11,099  |      | $ | 14,447  |  | $    | 21,697  |      | $ | 12,885 |  | $ | 10,184 | 
|Inventories                         |  | $                           | 5,625   |      | $ | 8,075   |  | $    | 6,072   |      | $ | 6,621  |  | $ | 7,396  | 
|Current assets                      |  | $                           | 74,151  |      | $ | 84,771  |  | $    | 70,116  |      | $ | 86,444 |  | $ | 71,665 | 
|Property and equipment, net         |  | $                           | 6,183   |      | $ | 3,206   |  | $    | 3,626   |      | $ | 2,525  |  | $ | 2,386  | 
|Marketable securities - non-current |  | $                           | 40,647  |      | $ | 35,201  |  | $    | 38,594  |      | $ |       |  | $ |       | 
|Total assets                        |  | $                           | 123,456 |      | $ | 125,096 |  | $    | 112,359 |      | $ | 89,009 |  | $ | 74,138 | 
|Current liabilities                 |  | $                           | 12,010  |      | $ | 17,882  |  | $    | 16,163  |      | $ | 12,191 |  | $ | 11,277 | 
|Long-term liabilities               |  | $                           | 2,398   |      | $ | 2,153   |  | $    | 720     |      | $ | 289    |  | $ | 139    | 
|Stockholders equity                |  | $                           | 109,048 |      | $ | 105,061 |  | $    | 95,476  |      | $ | 76,529 |  | $ | 62,722 | 

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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The percentage relationships to revenues of certain income and expense
items for the three years ended December 31, 2008 and the percentage changes in
these income and expense items between years are contained in the following
table:

|                                    |  |                            |       |                                                  |  |       |   |               |       |               |  |       |   |  |       |  
|----------------------------------- |  | -------------------------- | ----- | ------------------------------------------------ |  | ----- | - | ------------- | ----- | ------------- |  | ----- | - |  | ----- | -
|                                    |  | Percentage (%) of Revenues |       | Percent (%) Increase (Decrease)
 Between Periods | 
|                                    |  | 2008                       |       | 2007                                             |  | 2006  |   | 2008 vs. 2007 |       | 2007 vs. 2006 | 
|Revenues                            |  |                            | 100.0 |                                                  |  | 100.0 |   |               | 100.0 |               |  | (16.1 | ) |  | 5.4   |  
|Cost of revenues                    |  |                            | (56.6 | )                                                |  | (53.0 | ) |               | (54.2 | )             |  | (10.4 | ) |  | 3.0   |  
|Gross profit                        |  |                            | 43.4  |                                                  |  | 47.0  |   |               | 45.8  |               |  | (22.5 | ) |  | 8.3   |  
|Operating expenses:                 |  |                            |       |                                                  |  |       |   |               |       |               |  |       |   |  |       |  
|Research and development            |  |                            | (5.7  | )                                                |  | (5.4  | ) |               | (6.5  | )             |  | (11.0 | ) |  | (12.4 | )
|Selling, general and administrative |  |                            | (24.8 | )                                                |  | (22.4 | ) |               | (22.0 | )             |  | (7.0  | ) |  | 7.2   |  
|Operating income                    |  |                            | 12.9  |                                                  |  | 19.2  |   |               | 17.2  |               |  | (43.7 | ) |  | 17.5  |  
|Other income, net                   |  |                            | 2.9   |                                                  |  | 3.2   |   |               | 2.6   |               |  | (22.8 | ) |  | 30.9  |  
|Income before income taxes          |  |                            | 15.8  |                                                  |  | 22.4  |   |               | 19.8  |               |  | (40.7 | ) |  | 19.2  |  
|Income tax expense                  |  |                            | (5.5  | )                                                |  | (7.9  | ) |               | (7.1  | )             |  | (41.8 | ) |  | 17.1  |  
|Net income                          |  |                            | 10.3  |                                                  |  | 14.5  |   |               | 12.7  |               |  | (40.2 | ) |  | 20.5  |  

Overview

Rimage develops, manufactures and markets digital publishing systems
that are used by businesses to produce recordable CD, DVD and blue laser discs
with customized digital content on an on-demand basis. Rimage distributes its
publishing 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 Rimage-branded blank
CD-R, DVD-R and blue laser media. These systems allow customers to benefit from
cost savings by eliminating their manual labor efforts in industries such as
digital photography, medical imaging and business services. As Rimages sales
within North America and Europe have averaged 95% of total sales over the past
three years, the strength of the economies in these regions plays an important
role in determining the success of Rimage.

Rimage earns revenues through the sale of equipment, consumables and
parts (included in Product revenues on the accompanying Consolidated Statements
of Income), as well as maintenance contracts, repair and installation services
(included as Service revenues on the Consolidated Statements of Income).
Rimages recurring revenues (consumables, parts, maintenance contracts and
service) comprised approximately 61%, 48% and 46% of its consolidated revenues
in 2008, 2007 and 2006, respectively. Exclusive of a small amount of capital
lease obligations, Rimage has no long-term debt and does not require
significant capital investment as all fabrication of its products is outsourced
to vendors.

Results of Operations

Revenues.
Total revenues were $91.4 million for 2008, reflecting a 16% decline from total
revenues of $108.9 million in 2007, which reflected growth of 5% from total
revenues of $103.3 million in 2006.

The $17.5 million reduction in total revenues from 2007 to 2008
reflects an $18.2 million or 18% decline in product revenues, partially offset
by a $0.7 million or 8% increase in service related revenues. The reduction in
product revenues resulted primarily from a 36% or $20.2 million decrease in the
volume of sales of Producer and Desktop product line equipment. The overall
decline in the volume of equipment sales was primarily due to deliveries
against significant orders from the retail market segment during the prior
years second and third quarters, compared to minimal sales in this market
segment in the current year. Sales in the retail market segment can fluctuate
significantly between periods because the Companys retail customers make
purchases at various times with orders of unequal size at irregularly spaced
intervals. Also contributing to the current year decline in equipment revenues
was a decrease in sales to the Companys U.S. channel partners. The lower
volume and concentration of sales in the retail market segment in 2008 helped
drive an increase in average selling prices on Producer equipment
configurations, partially offsetting the impact on revenue of a decreased
volume of equipment sales. Also partially offsetting the decrease in equipment
sales was growth in recurring revenues of $2.7 million, consisting primarily of
a rise in consumables revenues of $2.1 million and an increase in service
revenues of $0.7 million. The 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. Recurring revenues comprised 61% of total revenues for
the year ended December 31, 2008, compared to 48% in the prior year period.
Sales of Producer product line equipment

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comprised 33% of total revenues in 2008, compared to 43% in the prior
year period. Remaining revenues in each year were generated by sales of Desktop
product line equipment, representing 6% and 9% of revenues, respectively.

The growth in total revenues from 2006 to 2007 of $5.6 million resulted
from a $3.1 million or 3% increase in product revenues and a $2.5 million or
40% increase in service revenues. The recurring revenue component of product
revenues, consisting of consumables and parts, contributed most of the net
growth in product revenues. Combined with service revenues, the volume of such
recurring revenues increased $4.9 million or 10% from 2006. Product revenues
were also favorably impacted by a $2.0 million or 4% increase in sales of
Producer product line equipment, primarily the result of increased sales
volume. The rise in recurring revenues and increased volume of Producer product
line equipment sales were favorably impacted by deliveries against significant
orders from the retail market segment during the second and third quarters of
2007. Partially offsetting the increases in recurring and Producer product line
equipment revenues was a decrease in the volume of Desktop product line
equipment sales, largely driven by reduced sales of the low-end Rimage 360i
product line.

International sales decreased 1% in 2008 from 2007 and comprised 42% of
total sales, compared to 36% in 2007 and 34% in 2006. Without the impact of
currency fluctuations affecting the Companys European and Japanese operations,
international revenues decreased by 7% in 2008 relative to 2007. The European
market continued to generate the majority of international sales. Currency
fluctuations affecting the Companys European and Japanese operations increased
consolidated revenues in 2008 by 2.8% relative to 2007 and 2.6% in 2007
relative to 2006.

Revenue levels in 2009 will be dependent upon many factors, including
the effectiveness of the Companys channel partners, the timing of new product
introductions, the rate of adoption of new applications for the Companys
products in its targeted markets, the impact of changes in economic conditions
and the impact of foreign currency exchange rate fluctuations.

Gross
Profit. Gross profit as a percentage of total revenues
was 43.4% for the year ended December 31, 2008, compared to 47.0% and 45.8% for
the years ended December 31, 2007, and 2006, respectively.

The decline in gross profit as a percentage of total revenues in 2008
relative to 2007 resulted primarily from a reduction in product margins,
stemming from a shift in the distribution of sales to lower margin products.
This shift is driven largely by a reduced volume and concentration of Producer
product line equipment sales, which generally carry higher gross margins than
Desktop product line equipment or recurring revenues. Sales in 2008 also
included an increased volume and concentration of sales of media and media kits,
which generally carry lower margins than other product offerings, comprising
21% of revenues in 2008, compared to 14% in 2007. Also contributing to the
decline in gross profit as a percentage of revenues in 2008 was the impact of
service costs increasing at a faster pace than the associated service revenues,
impacted by investments to strengthen the service support infrastructure of the
Companys subsidiaries and increased fuel costs. Partially offsetting the
unfavorable impact of changes in product mix and increased service costs was an
overall improvement in equipment margins primarily as a result of higher
average selling prices on Producer equipment configurations, influenced by the
lower concentration of sales in the retail market segment. Additionally, gross
margin for the current year period benefited from reductions in compensation
related costs stemming from a workforce reduction in the second quarter 2008 in
the Companys U.S. operations. Gross profit as a percentage of revenues was
also favorably impacted in 2008 by reduced inventory related charges to cost of
revenues of approximately $0.3 million relative to 2007.

The improvement in gross profit as a percentage of total revenues in
2007 relative to 2006 was impacted by reduced product costs for some equipment
configurations and consumables and the impact of higher average selling prices
for lower-end Producer equipment configurations and Desktop equipment.
Additionally, gross margins in 2007 benefited from a reduced concentration of
sales of lower margin products. Sales of Desktop product line equipment, media
and media kits, which generally carry the lowest gross margins of all product
offerings, decreased to 23% of total revenues in 2007 from 25% in 2006. Gross
profit as a percentage of revenue in 2007 also benefited from the impact of
growth in service revenues outpacing the growth in associated service support
costs. This improvement was largely influenced by the attachment of new
maintenance contracts to a significant volume of equipment sales in the U.S.
retail market segment in the second and third quarters of 2007. Partially
offsetting the favorable changes described above were lower average selling
prices on high-end Producer equipment configurations, influenced by the higher
concentration of sales generated from the retail market. Both 2007 and 2006
were unfavorably impacted by charges to cost of revenues for provisions for
excess raw material inventory and impairments in the carrying amount of
manufacturing tooling, both driven by slow sales of the Rimage 360i Desktop
product line. Such charges reduced gross profit by $0.5 million, or 0.5
percentage points, in 2007, and $0.6 million, or 0.6 percentage points, in
2006.

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

Operating
Expenses. Research and development expenses were $5.3
million, $5.9 million and $6.7 million for the years ended December 31, 2008,
2007 and 2006, respectively, representing 5.7%, 5.4% and 6.5% of revenues,
respectively.

The 11% reduction in research and development expenses from 2007 to
2008 was primarily due to the timing of activities associated with new product
development projects and enhancements to existing products. Expenses in 2008
included costs to support the introduction of the Rimage 6100 system, a new
Producer series product, and modifications to the operating system software
used in Rimage publishing systems to facilitate usage of the
Companys products in a customers Macintosh-based environment. Higher levels
of development expenses were required in 2007 to support introduction of the
Professional Series line of Producer products and other products under
development.

The 12% decrease in research and development expenses from 2006 to 2007
was also primarily due to the timing of activities associated with new product
development projects. Development expenses incurred in 2007 included costs to
support the introduction of the Professional Series line of Producer products
and other products under development. A higher level of development expenses
was incurred in 2006 to support the completion of the Companys next generation
Producer product line, the Producer III. Also contributing to the reduction in
research and development expenses in 2007 were lower compensation related
costs, impacted primarily by a 13% reduction in headcount.

Rimage anticipates its expenditures in research and development will
increase in 2009 relative to 2008 to support an increased level of new product
development initiatives and improve existing products.

Selling, general and administrative expenses for the years ended
December 31, 2008, 2007 and 2006 were $22.7 million, $24.4 million and $22.7
million, respectively, representing 24.8%, 22.4% and 22.0% of revenues,
respectively.

The 7% decline in selling, general and administrative expenses in 2008
compared to 2007 was primarily impacted by a reduction in bonus related
expenses approximating $1.1 million, stemming from below plan revenue and
operating income. Also contributing to the decline in expenses were reduced
expenditures for marketing and promotional programs of approximately $0.6
million, lower stock-based compensation costs of $0.5 million and reduced
consulting related expenses of $0.3 million, primarily stemming from the
Companys implementation in the prior years first quarter of a new enterprise
resource planning (ERP) system in its European operation. Additionally, cost
savings from workforce reductions, net of severance related costs, amounted to
approximately $0.15 million in 2008. Partially offsetting the reductions in
expenses described above was the impact of currency fluctuations affecting the
Companys European and Japanese operations, increasing selling, general and
administrative expenses by $0.6 million in 2008 relative to 2007. Also partially
offsetting the decline in 2008 expenses was a 9% increase in average sales and
general and administrative headcount in the Companys U.S. operations,
resulting in higher salaries and travel related expenses relative to 2007.

The 7% increase in selling, general and administrative expenses in 2007
compared to 2006 was primarily the result of the Companys strengthening of its
global sales, marketing and administrative organizations and increased
expenditures for marketing and promotional programs. Contributing to the
increase in expenses was an increase in average selling, general and
administrative headcount of 15% from 2006 to 2007 and increased temporary labor
requirements. Partially offsetting the described increase in expenses was the
impact of $1.2 million of consulting expenses incurred in the prior years
first quarter for the completion of a strategic analysis of the Companys
operations and a $0.9 million reduction in consulting and other expenses
associated with the Companys completion in the first quarter 2007 of the
implementation of a new enterprise resource planning system initiated in 2006.

Other
Income, Net.The Company recognized interest income on
cash and marketable securities of $2.8 million, $3.5 million and $2.8 million
in 2008, 2007 and 2006, respectively. The reduction in interest income in 2008
relative to 2007 was the result of a decline of approximately one percentage
point in the effective yield on the Companys investment portfolio, partially
offset by higher average cash and marketable securities balances of $7.9
million. The increase in interest income in 2007 relative to 2006 was driven
primarily by a $15 million increase in average cash equivalent and marketable
securities balances. See Liquidity and Capital Resources below for a
discussion of changes in cash levels.

Income Taxes.The
provision for income taxes represents federal, state, and foreign income taxes
on income. For the years ended December 31, 2008, 2007 and 2006, income tax
expense amounted to $5.0 million, $8.6 million and $7.4 million, respectively,
representing 34.8%, 35.4% and 36.0% of income before income taxes,
respectively. The reduction in the effective income tax rate in 2008 relative
to 2007 primarily reflects the impact of reduced state income taxes as a result
of reductions in certain state tax apportionment rates, the impact of
tax-exempt interest income comprising a larger

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percentage of pre-tax income and the impact of a lower tax bracket.
Partially offsetting the above reductions was the impact of recording no tax
benefit on increased foreign operating losses in the Companys Japanese
subsidiary and reduced benefits from the manufacturers tax deduction and
federal research credit. The decrease in the effective tax rate in 2007
relative to 2006 was primarily impacted by increased tax-exempt interest income
and an increase in the manufacturers tax deduction and the federal research
credit, partially offset by an increase in state income taxes.

The Company anticipates its effective tax rate will range between 35%
and 37% for the full year 2009.

Net
Income / Net Income Per Share. Net income for the
years ended December 31, 2008, 2007 and 2006 amounted to $9.4 million, $15.8
million and $13.1 million, representing 10.3%, 14.5% and 12.7% of revenues,
respectively. Related net income per diluted share amounts were $0.97 in 2008,
$1.52 in 2007 and $1.26 in 2006.

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. The
credit agreement allows for advances under an unsecured revolving loan up to a
maximum advance of $10 million. At December 31, 2008, no amounts were
outstanding under the credit agreement.

At December 31, 2008, the Company had working capital of approximately
$62 million, a decrease of $5 million from working capital reported at December
31, 2007. The decrease was primarily the result of the Companys use of $9.6
million in 2008 to repurchase shares of its common stock and $3.9 million in
September 2008 to purchase its U.S. corporate headquarters and manufacturing
facility, previously leased by the Company. Also contributing to the decrease
in working capital was the impact of a $5.4 million net change in
classification of marketable securities. Net income adjusted for non-cash items
of $11.9 million and proceeds from employee stock plans of $1.6 million
partially offset the uses of cash described above. The net change in marketable
securities resulted from a $37 million net use of cash to purchase non-current
marketable securities, partially offset by a non-cash change in the
classification of $31.6 million of marketable securities from non-current as of
December 31, 2007 to current as of December 31, 2008. The change in the
classification of marketable securities occurred as the remaining term to
maturity for these securities is twelve months or less as of December 31, 2008.

On October 17, 2007, the Companys Board of Directors authorized the
repurchase of up to 500,000 shares of its common stock. In February 2008, the
Companys Board of Directors increased the share repurchase authorization by an
additional 500,000 shares, bringing total shares authorized for repurchase to
1,000,000. Shares will be purchased at prevailing market prices in the open
market or in private transactions, subject to market conditions, share price,
trading volume and other factors. The repurchase program may be discontinued at
any time. The Company will finance the purchase of the shares using cash on
hand. During 2008, the Company repurchased 577,083 shares of its common stock
at an average purchase price of $16.66 per share under the authorizations. The
Company also intends on utilizing its assets primarily for its continued
organic growth. Additionally, the Company may use its available cash for
potential future strategic initiatives or alliances.

Net cash provided by operating activities totaled $12.2 million, $26.1
million and $12.0 million for the years ended December 31, 2008, 2007 and 2006,
respectively. The $13.9 million decrease in cash provided by operating
activities in 2008 relative to 2007 resulted from changes in operating assets
and liabilities producing a $9.3 million smaller increase in cash, coupled with
a $4.6 million decrease in net income adjusted for non-cash items. Primarily
contributing to the change in operating assets and liabilities was a $0.9
million smaller increase in net income taxes payable and unfavorable variations
of $3.9 million in receivables, $3.7 million in deferred income and $5.0
million in the aggregate amount of trade accounts payable, accrued compensation
and other accrued expenses. These changes were partially offset by a favorable
variation of $4.5 million in inventories. The unfavorable change in receivables
resulted from a $3.9 million smaller reduction in related balances in 2008
relative to 2007, primarily impacted by a $2.6 million decline in sales from
December 2007 to December 2008, compared to a $5.7 million decline in sales
between December 2006 and December 2007. The unfavorable change in deferred
income resulted from a larger volume of new multi-year maintenance contracts
initiated in 2007 compared to 2008, impacted primarily by significant sales in
the retail market segment in 2007. The changes in trade accounts payable,
accrued compensation and accrued expenses were primarily due to reduced
inventory purchases, in the case of accounts payable, and reduced bonus accruals
in the case of accrued compensation, both impacted by a reduced level of sales.
The favorable change in inventories resulted from a $2.5 million reduction in
inventories during 2008, compared to a $2.0 million increase in 2007. The
decrease in inventories in 2008 resulted primarily from a reduced level of
sales and maintenance of lower levels of buffer stock.

Investing activities provided a net increase in cash of $2.7 million
for the year ended December 31, 2008, compared to a net use of cash of $18.7
million and $19.8 million for the years ended December 31, 2007 and 2006,
respectively. Cash

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provided by or used in investing activities for each year primarily
reflects purchases of marketable securities, net of maturities and sales of
marketable securities. Maturities and sales of marketable securities, net of
related purchases, generated a net increase in cash and cash equivalents of
$7.0 million in 2008, compared to purchases of marketable securities, net of
related maturities, generating a net use of cash and cash equivalents of $17.6
million in 2007 and $17.2 million in 2006. Investing activities also included
purchases of property and equipment of $4.4 million in 2008, $1.3 million in
2007 and $2.7 million in 2006. Purchases in 2008 consisted primarily of the
purchase of the Companys U.S. corporate headquarters and manufacturing
facility ($3.9 million), previously leased by the Company, and purchases of
manufacturing tooling and office equipment. Expenditures in 2007 consisted
primarily of costs capitalized as part of the implementation of an enterprise
resource planning system and purchases of manufacturing tooling. In 2009, the
Company expects capital expenditure related investments to primarily support
the Companys production and product development processes. Capital
expenditures in 2009 are expected to increase relative to non-facility related
purchases in 2008.

Financing activities used net cash of $7.4 million in 2008 and $8.7
million in 2007, and provided net cash of $3.4 million in 2006. The significant
net use of cash in financing activities in 2008 and 2007 was primarily
attributable to the Companys repurchase of shares of its common stock,
requiring $9.6 million of cash to purchase 577,083 shares in 2008 and $12.6
million to repurchase 500,000 shares in 2007. Financing activities in each year
included proceeds from employee stock plans of $1.6 million, $2.8 million and
$2.3 million, respectively. Additionally, financing activities in each year
include excess tax benefits recognized as an addition to the Additional Paid-in
Capital (APIC) pool of $0.7 million in 2008 and $1.2 million in 2007 and
2006. Such amounts are required to be reported as an addition to financing
activities and a reduction in operating activities in the Statements of Cash
Flows under the provisions of Statement of Financial Accounting Standards
(SFAS) 123R, Share-Based Payment.

A summary of Rimages
contractual obligations for minimum lease payments under non-cancelable
operating or capital leases and income tax liabilities under FIN 48 at December
31, 2008 is as follows (in thousands):

|                                         |  |                        |       |      |   |      |  |      |     |      |   |      |  |   |   |  |   |   | 
|---------------------------------------- |  | ---------------------- | ----- | ---- | - | ---- |  | ---- | --- | ---- | - | ---- |  | - | - |  | - | - | 
|                                         |  | Payments due by period |      
|Contractual
 Obligations                 |  | Total                  |       | 2009 |   | 2010 |  | 2011 |     | 2012 |   | 2013 | 
|Operating leases                         |  | $                      | 1,230 |      | $ | 701  |  | $    | 387 |      | $ | 142  |  | $ |  |  | $ |  | 
|Capital leases (1)                       |  |                        | 64    |      |   | 28   |  |      | 27  |      |   | 9    |  |   |  |  |   |  | 
|Income tax liabilities
 under FIN 48 (2) |  |                        |      |      |   |     |  |      |    |      |   |     |  |   |  |  |   |  | 
|Total contractual cash obligations       |  | $                      | 1,294 |      | $ | 729  |  | $    | 414 |      | $ | 151  |  | $ |  |  | $ |  | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Amounts
 include principal and interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (2) | The Company
 does not currently expect any income tax liabilities accrued under FIN 48 as
 of December 31, 2008 to be paid to the applicable tax authorities in 2009.
 The full balance of unrecognized tax benefits under FIN 48 of $361,000 at
 December 31, 2008 has been excluded from the above table as the period of
 payment or reversal can not be reasonably estimated. This amount is before
 reduction for deferred federal benefits of uncertain tax positions and also
 excludes potential interest and penalties.

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. Management made no changes to the Companys critical
accounting policies during the year ended December 31, 2008.

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
year ended December 31, 2008.

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 SEC Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition, 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.

21

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| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

The Company records an allowance for sales returns from its customers.
The amount of the allowance 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 distributors inventory to ensure compliance with the
return policy.

Revenue for maintenance agreements is recognized primarily on a
straight-line basis over the life of the contracts, in accordance with
Financial Accounting Standards Board (FASB) Technical Bulletin No. 90-1,
Accounting for Separately Priced Extended Warranty and Product Maintenance
Contracts.

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 an allowance for doubtful accounts for potentially
uncollectible receivables. The allowance 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 an allowance for sales returns from its customers. The amount of the
allowance is based upon historical trends, timing of new product introductions
and other factors.

Inventory Provisions.
The Company records provisions for inventory shrinkage and for potential
excess, obsolete and slow moving inventory. The amounts of these provisions are
based upon usage, 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.

Income Taxes.
The Company is required to estimate income taxes in each of the jurisdictions
in which it operates. This process involves estimating actual current tax
expense and assessing temporary differences resulting from differing treatment
of items for book and tax purposes. These temporary differences result in
deferred tax assets and liabilities, which are included in the consolidated
balance sheets. Management records a valuation allowance to reduce its deferred
tax assets to the amount that is more likely than not to be realized. Increases
in the valuation allowance result in the recognition of additional income tax
expense. 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. As of December 31, 2008, the Company
carried a valuation allowance of $0.9 million to reduce the full tax benefit of
a loss carryforward for a subsidiary in Japan established in May 2005.

On January 1, 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income
Taxes,
an Interpretation of FASB Statement No. 109. Under the guidance of
FIN 48, management recognizes a tax accrual for estimated exposures associated
with uncertain tax positions and adjusts this accrual in light of changing
facts and circumstances. However, due to the complexity of some of these uncertainties,
the ultimate settlement may result in payments that are significantly different
from managements current estimate of tax liabilities, resulting in the
recognition of additional charges or benefits to income tax expense. For the
year ended December 31, 2008, the Company recognized tax liabilities of
$217,000 and $29,000, before reduction for the federal benefit for state income
tax related amounts, for new

22

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uncertainties related to prior and current year income tax positions,
respectively. For the year ended December 31, 2008, the Company reversed gross
tax liabilities, exclusive of interest and penalties, amounting to $72,000
associated with income tax settlements. The increase in tax liabilities in 2008
for prior year income tax positions of $217,000 resulted from a balance sheet
reclassification of a deferred tax asset that had previously been offset in
unrecognized tax benefits as of December 31, 2007.

Warranty Accruals. 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
estimated future warranty claims during the warranty period. 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.

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 on a straight-line basis over the vesting period 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 recognized stock-based compensation costs of approximately $1.1
million, $1.6 million and $1.7 million for the years ended December 31, 2008,
2007 and 2006, respectively.

During the year
ended December 31, 2006, the Company granted 16,967 performance shares to
certain managerial and executive employees under the 1992 Plan, with
performance criteria established based on revenue and operating income goals
for calendar year 2008. Performance share awards are valued based on the market
value of the Companys shares on the date of grant, which is equal to the intrinsic
value of the shares on that date. Compensation cost for awards with a
performance condition is recognized pro-ratably over the performance period,
once achievement of performance criteria is deemed probable. The Company
assessed the probability of the achievement of performance criteria associated
with the performance shares as probable during 2006 and the first half of 2007.
As such, the total fair value of the performance shares of approximately
$372,000 was being recognized as compensation expense over the performance
period ending December 31, 2008. During the third quarter of 2007, the Company
changed its assessment of achieving the performance criteria from probable to
improbable. Accordingly, the Company reversed all compensation expense recorded
in prior periods for the 2006 performance shares during the third quarter of
2007, amounting to approximately $111,000, of which $41,000 related to expense
recorded in 2006. As the revenue and operating income goals for
calendar year 2008 were not achieved, all performance shares were cancelled and
employees will receive no common stock for the cancelled performance shares.

The Company
utilizes a Black-Scholes option pricing model to estimate the fair value of
each stock option 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 assumptions change for future stock-based awards, 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 Consolidated Financial Statements in this Form 10-K for additional
information on stock-based compensation.

Impairment of Long-lived Assets. Long-lived assets at
December 31, 2008 consisted of property and equipment. In accordance with SFAS
No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, the
Company reviews the carrying amount of its long-lived assets when events or
changes in circumstances such as market value, asset utilization, physical
change, legal factors or other matters indicate that the carrying amount of the
assets may not be recoverable. When this review indicates the carrying amount
of an asset or asset group exceeds the sum of the future undiscounted cash
flows expected to be generated by the assets, the Company recognizes an asset
impairment charge against operations for the amount by which the carrying
amount of the impaired asset exceeds its fair value.

23

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Considerable judgment is required in the evaluation of whether certain
events or circumstances lead to an indication of impairment, and in the
assumptions used in determining the amount and period over which future
revenues are expected to be earned, related costs, terminal values and discount
rates. No impairment charges were recognized by the Company during the year
ended December 31, 2008.

New Accounting
Pronouncements

In December 2007,
the FASB issued SFAS No. 141R (revised 2007), Business Combinations. SFAS No.
141R establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired in the business combination. SFAS No. 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. The provisions of SFAS No. 141R are
effective for the Company beginning January 1, 2009, and early adoption is
prohibited. The Company will be required to apply the guidance of SFAS No. 141R
to any business combinations completed on or after January 1, 2009.

In December 2007,
the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of Accounting Research Bulletin No. 51. SFAS
No. 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parents ownership interest and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated.
SFAS No. 160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. The provisions of SFAS No. 160 are effective for the
Company beginning January 1, 2009. The Company currently does not have any
subsidiaries in which it holds a non-controlling interest, and therefore, does
not expect that this pronouncement will have an impact on its consolidated
financial statements and related disclosures.

Available Information

Rimage maintains a website at www.rimage.com. Its annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, are available on its website, as soon as reasonably practicable after
these documents are filed with the SEC. To obtain copies of these reports, go
to www.rimage.com and click on Investor Relations, then click on EDGAR
Filings. A copy of any report filed by the Company with the SEC will also be
furnished without charge to any shareholder who requests it in writing to:
Secretary, Rimage Corporation 7725 Washington Avenue South, Minneapolis,
Minnesota 55439.

|         |                                                           
|-------- | ----------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

Foreign Currency Translation. 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 GmbH and Rimage Japan Co.,
Ltd., respectively, are translated into U.S. dollars for consolidation.
Resulting translation adjustments are recorded as a separate component of
stockholders equity.

Derivative Financial Instruments. 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.

Exchange
Rate Sensitivity.The table below summarizes
information on foreign currency forward exchange agreements that are sensitive
to foreign currency exchange rates. For these foreign currency forward exchange
agreements, the table presents the notional amounts and weighted average
exchange rates by expected (contractual) maturity dates. These notional amounts
generally are used to calculate the contractual payments to be exchanged under
the contract.

24

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|                                                    |  |                                       |        |      |  |      |  |      |   |               |  |       |  |             |   |  |   |        |  |    |     |  
|--------------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- |  | ---- | - | ------------- |  | ----- |  | ----------- | - |  | - | ------ |  | -- | --- | -
|                                                    |  | Expected Maturity or Transaction Date |        |      |  |     
|                                                    |  | 2009                                  |        | 2010 |  | 2011 |  | 2012 |   | There-
 after |  | Total |  | Fair
 Value |  
|                                                    |  | (US$
Equivalent in Thousands)         |       
|Anticipated
 Transactions and 
 Related Derivatives |  |                                       |       
|                                                    |  |                                       |        |      |  |      |  |      |   |               |  |       |  |             |   |  |   |        |  |    |     |  
|Forward Exchange Agreements (Receive
 $US/Pay )    |  |                                       |        |      |  |      |  |      |   |               |  |       |  |             |   |  |   |        |  |    |     |  
|Contract Amount                                     |  | $                                     | 2,601  |      |  |     |  |      |  |               |  |      |  |             |  |  | $ | 2,601  |  | ($ | 238 | )
|Average Contractual 
 Exchange Rate                 |  |                                       | 1.2713 |      |  |     |  |      |  |               |  |      |  |             |  |  |   | 1.2713 |  |    |     |  

|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements

|                                                                                                                                |  |                                                                        |  | 
|------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------- |  | 
|                                                                                                                                |  | Page in Annual
 Report on Form 10-K
 For Year Ended
 December 31, 2008 | 
|                                                                                                                                |  |                                                                        |  | 
|Managements Report on Internal Control over Financial Reporting                                                                |  | 26                                                                     |  | 
|                                                                                                                                |  |                                                                        |  | 
|Reports of Independent Registered Public Accounting Firm                                                                        |  | 27-28                                                                  |  | 
|                                                                                                                                |  |                                                                        |  | 
|Consolidated Balance Sheets as of December 31, 2008 and 2007                                                                    |  | 29                                                                     |  | 
|                                                                                                                                |  |                                                                        |  | 
|Consolidated Statements of Income for the years ended December 31,
 2008, 2007 and 2006                                         |  | 30                                                                     |  | 
|                                                                                                                                |  |                                                                        |  | 
|Consolidated Statements of Stockholders
 Equity and Comprehensive Income for the years ended December 31, 2008, 2007
 and 2006 |  | 31                                                                     |  | 
|                                                                                                                                |  |                                                                        |  | 
|Consolidated Statements of Cash Flows for
 the years ended December 31, 2008, 2007 and 2006                                     |  | 32                                                                     |  | 
|                                                                                                                                |  |                                                                        |  | 
|Notes to Consolidated Financial Statements                                                                                      |  | 33-50                                                                  |  | 

25

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Managements Report on Internal Control over
Financial Reporting

The Board of
Directors and Stockholders Rimage Corporation:

Management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a15-(f) and
15d-15(f) under the Securities Exchange Act of 1934. The Companys internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that:

| |       |                                                                                                                                                                                                                                                                                                                                                
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)   | pertain to the maintenance of records that, in reasonable detail,
 accurately and fairly reflect the transactions and dispositions of the assets
 of the Company;                                                                                                                                                                              
| |       |                                                                                                                                                                                                                                                                                                                                                
| | (ii)  | provide reasonable assurance that transactions are recorded as
 necessary to permit preparation of financial statements in accordance with
 generally accepted accounting principles, and that receipts and expenditures
 of the Company are being made only in accordance with authorizations of
 management and directors of the Company; and
| |       |                                                                                                                                                                                                                                                                                                                                                
| | (iii) | provide reasonable assurance regarding prevention or timely detection
 of unauthorized acquisition, use or disposition of the Companys assets that
 could have a material effect on the financial statements.                                                                                                                                 

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. Under the
supervision of our chief executive officer and our chief financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal
Control  Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our assessment and
those criteria, management believes that the Company maintained effective
internal control over financial reporting as of December 31, 2008. Our
independent registered public accounting firm, KPMG LLP, has issued an audit
report on the effectiveness of our internal control over financial reporting,
which report is included in this Form 10-K.

26

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Report of Independent Registered Public
Accounting Firm

The Board of
Directors and Stockholders 
Rimage Corporation:

We have audited the accompanying consolidated balance sheets of Rimage
Corporation and subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of income, stockholders equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2008. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule for each of
the years in the three-year period ended December 31, 2008, listed in schedule
II of this Form 10-K. These consolidated financial statements and financial
statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rimage
Corporation and subsidiaries as of December 31, 2008 and 2007, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), Rimage Corporations
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 16, 2009 expressed an unqualified opinion on the
effectiveness of the Companys internal control over financial reporting.

| |             
| | ------------
| | /s/ KPMG LLP

Minneapolis,
Minnesota 
March 16, 2009

27

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Report of Independent Registered Public
Accounting Firm

The Board of
Directors and Stockholders 
Rimage Corporation:

We have audited Rimage Corporation and subsidiaries (the Company)
internal control over financial reporting as of December 31, 2008, based on
criteria established inInternal Control 
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Managements Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial
statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal
Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Rimage Corporation as of December 31, 2008 and 2007, and the related
consolidated statements of income, stockholders equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2008, and our report dated March 16, 2009 expressed an unqualified
opinion on those consolidated financial statements.

| |             
| | ------------
| | /s/ KPMG LLP

Minneapolis,
Minnesota 
March 16, 2009

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RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets 
December 31, 2008 and 2007(In thousands, except share data)

|                                                                                                                           |  |                    |         |                    |   |         | 
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ------------------ | - | ------- | 
|Assets                                                                                                                     |  | December 31,
 2008 |         | December 31,
 2007 |  
|                                                                                                                           |  |                    |         |                    |   |         | 
|Current assets:                                                                                                            |  |                    |         |                    |   |         | 
|Cash and cash equivalents                                                                                                  |  | $                  | 14,885  |                    | $ | 7,416   | 
|Marketable securities                                                                                                      |  |                    | 39,870  |                    |   | 51,605  | 
|Receivables, net of allowance for doubtful
 accounts and sales returns of $489 and $583, respectively                      |  |                    | 11,099  |                    |   | 14,447  | 
|Inventories                                                                                                                |  |                    | 5,625   |                    |   | 8,075   | 
|Prepaid income taxes                                                                                                       |  |                    | 314     |                    |   |        | 
|Prepaid expenses and other current assets                                                                                  |  |                    | 2,014   |                    |   | 1,591   | 
|Deferred income taxes - current                                                                                            |  |                    | 344     |                    |   | 1,637   | 
|Total current assets                                                                                                       |  |                    | 74,151  |                    |   | 84,771  | 
|                                                                                                                          
|Marketable securities - non-current                                                                                        |  |                    | 40,647  |                    |   | 35,201  | 
|Property and equipment, net                                                                                                |  |                    | 6,183   |                    |   | 3,206   | 
|Deferred income taxes - non-current                                                                                        |  |                    | 2,281   |                    |   | 1,918   | 
|Other assets - non-current                                                                                                 |  |                    | 194     |                    |   |        | 
|Total assets                                                                                                               |  | $                  | 123,456 |                    | $ | 125,096 | 
|                                                                                                                          
|Liabilities
 and Stockholders Equity                                                                                      |  |                    |         |                    |   |         | 
|Current liabilities:                                                                                                       |  |                    |         |                    |   |         | 
|Trade accounts payable                                                                                                     |  | $                  | 4,534   |                    | $ | 7,564   | 
|Accrued compensation                                                                                                       |  |                    | 1,879   |                    |   | 3,138   | 
|Other accrued expenses                                                                                                     |  |                    | 827     |                    |   | 1,157   | 
|Income taxes payable                                                                                                       |  |                    |        |                    |   | 685     | 
|Deferred income and customer deposits                                                                                      |  |                    | 4,507   |                    |   | 5,281   | 
|Other current liabilities                                                                                                  |  |                    | 263     |                    |   | 57      | 
|Total current liabilities                                                                                                  |  |                    | 12,010  |                    |   | 17,882  | 
|                                                                                                                          
|Long-term liabilities:                                                                                                     |  |                    |         |                    |   |         | 
|Deferred income and customer deposits -
 non-current                                                                       |  |                    | 1,942   |                    |   | 1,930   | 
|Income taxes payable - non-current                                                                                         |  |                    | 421     |                    |   | 164     | 
|Other non-current liabilities                                                                                              |  |                    | 35      |                    |   | 59      | 
|Total long-term liabilities                                                                                                |  |                    | 2,398   |                    |   | 2,153   | 
|Total liabilities                                                                                                          |  |                    | 14,408  |                    |   | 20,035  | 
|                                                                                                                          
|Commitments and contingencies (Notes 11 and
 15)                                                                           |  |                    |        |                    |   |        | 
|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 9,334,435 and 9,705,947,
 respectively |  |                    | 93      |                    |   | 97      | 
|Additional paid-in capital                                                                                                 |  |                    | 37,484  |                    |   | 33,827  | 
|Retained earnings                                                                                                          |  |                    | 70,287  |                    |   | 70,462  | 
|Accumulated other comprehensive income                                                                                     |  |                    | 1,184   |                    |   | 675     | 
|Total stockholders equity                                                                                                 |  |                    | 109,048 |                    |   | 105,061 | 
|                                                                                                                           |  |                    |         |                    |   |         | 
|Total liabilities and stockholders
equity                                                                                 |  | $                  | 123,456 |                    | $ | 125,096 | 

See accompanying
notes to consolidated financial statements.

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RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income 
Years Ended December 31, 2008, 2007 and 2006(In
thousands, except per share data)

|                                            |  |      |        |      |   |         |   |   |         |  
|------------------------------------------- |  | ---- | ------ | ---- | - | ------- | - | - | ------- | -
|                                            |  | 2008 |        | 2007 |   | 2006    |  
|                                           
|Revenues:                                   |  |      |        |      |   |         |   |   |         |  
|Product                                     |  | $    | 81,848 |      | $ | 100,071 |   | $ | 96,956  |  
|Service                                     |  |      | 9,546  |      |   | 8,803   |   |   | 6,297   |  
|Total revenues                              |  |      | 91,394 |      |   | 108,874 |   |   | 103,252 |  
|Cost of revenues:                           |  |      |        |      |   |         |   |   |         |  
|Product                                     |  |      | 42,382 |      |   | 49,435  |   |   | 49,245  |  
|Service                                     |  |      | 9,350  |      |   | 8,285   |   |   | 6,769   |  
|Total cost of revenues                      |  |      | 51,731 |      |   | 57,719  |   |   | 56,014  |  
|Gross profit                                |  |      | 39,663 |      |   | 51,155  |   |   | 47,238  |  
|                                           
|Operating expenses:                         |  |      |        |      |   |         |   |   |         |  
|Research and development                    |  |      | 5,251  |      |   | 5,903   |   |   | 6,738   |  
|Selling, general and administrative         |  |      | 22,664 |      |   | 24,371  |   |   | 22,726  |  
|Total operating expenses                    |  |      | 27,915 |      |   | 30,274  |   |   | 29,464  |  
|                                            |  |      |        |      |   |         |   |   |         |  
|Operating income                            |  |      | 11,748 |      |   | 20,881  |   |   | 17,774  |  
|                                           
|Other income (expense):                     |  |      |        |      |   |         |   |   |         |  
|Interest, net                               |  |      | 2,819  |      |   | 3,451   |   |   | 2,770   |  
|Gain (loss) on currency exchange            |  |      | (105   | )    |   | 80      |   |   | (86     | )
|Other, net                                  |  |      | (3     | )    |   | (18     | ) |   |        |  
|Total other income, net                     |  |      | 2,711  |      |   | 3,513   |   |   | 2,684   |  
|                                           
|Income before income taxes                  |  |      | 14,459 |      |   | 24,394  |   |   | 20,458  |  
|Income tax expense                          |  |      | 5,028  |      |   | 8,633   |   |   | 7,374   |  
|Net income                                  |  | $    | 9,431  |      | $ | 15,761  |   | $ | 13,084  |  
|                                            |  |      |        |      |   |         |   |   |         |  
|Net income per basic share                  |  | $    | 0.99   |      | $ | 1.59    |   | $ | 1.33    |  
|                                            |  |      |        |      |   |         |   |   |         |  
|Net income per diluted share                |  | $    | 0.97   |      | $ | 1.52    |   | $ | 1.26    |  
|                                            |  |      |        |      |   |         |   |   |         |  
|Basic weighted average shares outstanding   |  |      | 9,556  |      |   | 9,915   |   |   | 9,812   |  
|                                            |  |      |        |      |   |         |   |   |         |  
|Diluted weighted average shares outstanding |  |      | 9,729  |      |   | 10,371  |   |   | 10,356  |  

See accompanying notes to
consolidated financial statements.

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RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity and
Comprehensive Income
Years Ended December 31, 2008, 2007 and 2006
(In thousands)

|                                                                          |  |              |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |       |   |   |         |  
|------------------------------------------------------------------------- |  | ------------ | ----- | ------ | - | ---------------------------- | - | ------------------ | ------ | ------------------------------------------------ | - | ------- | - | - | ----- | - | - | ------- | -
|                                                                          |  |              |       |        |   |                              |   |                    |        | Accumulated
 other
 comprehensive
 income (loss) |   |         |  
|                                                                          |  |              |       |        |   | Additional
 paid-in
 capital |   | Retained
 earnings |        |                                                  |   |        
|                                                                          |  | Common stock |       |        |   |                              |   |                   
|                                                                          |  | Shares       |       | Amount |   |                              |   |                    | Total  |                                                 
|                                                                         
|Balance at December 31, 2005                                              |  |              | 9,630 |        | $ | 96                           |   | $                  | 22,389 |                                                  | $ | 54,240  |   | $ | (196  | ) | $ | 76,529  |  
|                                                                          |  |              |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |       |   |   |         |  
|Stock issued for employee stock plans                                     |  |              | 295   |        |   | 3                            |   |                    | 2,260  |                                                  |   |        |   |   |      |   |   | 2,263   |  
|Income tax reductions relating to exercise
 of stock options              |  |              |      |        |   |                             |   |                    | 1,583  |                                                  |   |        |   |   |      |   |   | 1,583   |  
|Stock-based compensation                                                  |  |              |      |        |   |                             |   |                    | 1,682  |                                                  |   |        |   |   |      |   |   | 1,682   |  
|Comprehensive income:                                                     |  |              |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |       |   |   |         |  
|Net income                                                                |  |              |      |        |   |                             |   |                    |       |                                                  |   | 13,084  |   |   |      |   |   | 13,084  |  
|Translation adjustment                                                    |  |              |      |        |   |                             |   |                    |       |                                                  |   |        |   |   | 305   |   |   | 305     |  
|Unrealized gain from available-for-sale
 securities                       |  |              |      |        |   |                             |   |                    |       |                                                  |   |        |   |   | 30    |   |   | 30      |  
|Total comprehensive income                                                |  |              |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |       |   |   | 13,419  |  
|                                                                         
|Balance at December 31, 2006                                              |  |              | 9,925 |        | $ | 99                           |   | $                  | 27,914 |                                                  | $ | 67,324  |   | $ | 139   |   | $ | 95,476  |  
|                                                                          |  |              |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |       |   |   |         |  
|Stock issued for employee stock plans                                     |  |              | 276   |        |   | 3                            |   |                    | 2,751  |                                                  |   |        |   |   |      |   |   | 2,754   |  
|Issuance of restricted stock                                              |  |              | 5     |        |   |                             |   |                    |       |                                                  |   |         |   |   |       |   |   |         |  
|Income tax reductions relating to exercise
 of stock options              |  |              |      |        |   |                             |   |                    | 1,545  |                                                  |   |        |   |   |      |   |   | 1,545   |  
|Stock-based compensation                                                  |  |              |      |        |   |                             |   |                    | 1,617  |                                                  |   |        |   |   |      |   |   | 1,617   |  
|Repurchase of common stock                                                |  |              | (500  | )      |   | (5                           | ) |                    |       |                                                  |   | (12,623 | ) |   |       |   |   | (12,628 | )
|Comprehensive income:                                                     |  |              |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |       |   |   |         |  
|Net income                                                                |  |              |      |        |   |                             |   |                    |       |                                                  |   | 15,761  |   |   |      |   |   | 15,761  |  
|Translation adjustment                                                    |  |              |      |        |   |                             |   |                    |       |                                                  |   |        |   |   | 339   |   |   | 339     |  
|Unrealized gain from available-for-sale
 securities, net of taxes of $125 |  |              |      |        |   |                             |   |                    |       |                                                  |   |        |   |   | 197   |   |   | 197     |  
|Total comprehensive income                                                |  |              |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |       |   |   | 16,297  |  
|                                                                         
|Balance at December 31, 2007                                              |  |              | 9,706 |        | $ | 97                           |   | $                  | 33,827 |                                                  | $ | 70,462  |   | $ | 675   |   | $ | 105,061 |  
|                                                                          |  |              |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |       |   |   |         |  
|Stock issued for employee stock plans                                     |  |              | 201   |        |   | 2                            |   |                    | 1,548  |                                                  |   |        |   |   |      |   |   | 1,550   |  
|Issuance of restricted stock                                              |  |              | 5     |        |   |                             |   |                    |       |                                                  |   |        |   |   |      |   |   |         |  
|Income tax reductions relating to exercise
 of stock options              |  |              |      |        |   |                             |   |                    | 982    |                                                  |   |        |   |   |      |   |   | 982     |  
|Stock-based compensation                                                  |  |              |      |        |   |                             |   |                    | 1,127  |                                                  |   |        |   |   |      |   |   | 1,127   |  
|Repurchase of common stock                                                |  |              | (577  | )      |   | (6                           | ) |                    |       |                                                  |   | (9,606  | ) |   |      |   |   | (9,612  | )
|Comprehensive income:                                                     |  |              |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |       |   |   |         |  
|Net income                                                                |  |              |      |        |   |                             |   |                    |       |                                                  |   | 9,431   |   |   |      |   |   | 9,431   |  
|Translation adjustment                                                    |  |              |      |        |   |                             |   |                    |       |                                                  |   |        |   |   | 90    |   |   | 90      |  
|Unrealized gain from available-for-sale
 securities, net of taxes of $258 |  |              |      |        |   |                             |   |                    |       |                                                  |   |        |   |   | 419   |   |   | 419     |  
|Total comprehensive income                                                |  |              |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |       |   |   | 9,940   |  
|Balance at
 December 31, 2008                                             |  |              | 9,335 |        | $ | 93                           |   | $                  | 37,484 |                                                  | $ | 70,287  |   | $ | 1,184 |   | $ | 109,048 |  

See
accompanying notes to consolidated financial statements.

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RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2008, 2007 and 2006(In
thousands)

|                                                                                   |  |      |         |      |   |         |   |   |          |  
|---------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | -------- | -
|                                                                                   |  | 2008 |         | 2007 |   | 2006    |  
|Cash flows from operating
 activities:                                             |  |      |         |      |   |         |   |   |          |  
|Net income                                                                         |  | $    | 9,431   |      | $ | 15,761  |   | $ | 13,084   |  
|Adjustments to reconcile net income to net cash
provided by operating
 activities: |  |      |         |      |   |         |   |   |          |  
|Depreciation and amortization                                                      |  |      | 1,372   |      |   | 1,525   |   |   | 1,519    |  
|Deferred income tax charge (benefit)                                               |  |      | 672     |      |   | (1,227  | ) |   | (1,056   | )
|Impairment of long-lived assets                                                    |  |      |        |      |   | 60      |   |   | 312      |  
|Loss on sale of property and equipment                                             |  |      | 7       |      |   | 67      |   |   | 41       |  
|Stock-based compensation                                                           |  |      | 1,128   |      |   | 1,617   |   |   | 1,681    |  
|Excess tax benefits from stock-based
compensation                                  |  |      | (673    | )    |   | (1,217  | ) |   | (1,202   | )
|Changes in operating assets and
liabilities:                                       |  |      |         |      |   |         |   |   |          |  
|Receivables                                                                        |  |      | 3,349   |      |   | 7,250   |   |   | (8,812   | )
|Inventories                                                                        |  |      | 2,450   |      |   | (2,003  | ) |   | 549      |  
|Prepaid
 expenses and other current assets                                         |  |      | (617    | )    |   | (440    | ) |   | 133      |  
|Trade
 accounts payable                                                            |  |      | (3,019  | )    |   | 553     |   |   | 1,577    |  
|Prepaid
 income taxes/income taxes payable                                         |  |      | 238     |      |   | 1,187   |   |   | 2,507    |  
|Accrued
 compensation                                                              |  |      | (1,258  | )    |   | 256     |   |   | (14      | )
|Other
 accrued expenses and other current liabilities                              |  |      | (125    | )    |   | (238    | ) |   | 3        |  
|Deferred
 income and customer deposits                                             |  |      | (762    | )    |   | 2,987   |   |   | 1,693    |  
|                                                                                   |  |      |         |      |   |         |   |   |          |  
|Net cash provided by operating activities                                          |  |      | 12,193  |      |   | 26,138  |   |   | 12,015   |  
|                                                                                   |  |      |         |      |   |         |   |   |          |  
|Cash flows from investing activities:                                              |  |      |         |      |   |         |   |   |          |  
|Purchases of marketable securities                                                 |  |      | (77,714 | )    |   | (82,128 | ) |   | (120,026 | )
|Maturities of marketable securities                                                |  |      | 80,016  |      |   | 64,505  |   |   | 102,778  |  
|Sales of marketable securities                                                     |  |      | 4,663   |      |   |        |   |   |         |  
|Purchases of property and equipment                                                |  |      | (4,366  | )    |   | (1,285  | ) |   | (2,712   | )
|Proceeds from the sale of property and
equipment                                   |  |      |        |      |   | 13      |   |   | 4        |  
|Other non-current items                                                            |  |      | 108     |      |   | 169     |   |   | 137      |  
|                                                                                   |  |      |         |      |   |         |   |   |          |  
|Net cash provided by (used in) investing
activities                                |  |      | 2,707   |      |   | (18,726 | ) |   | (19,819  | )
|                                                                                   |  |      |         |      |   |         |   |   |          |  
|Cash flows from financing
 activities:                                             |  |      |         |      |   |         |   |   |          |  
|Principal payments on capital lease
obligations                                    |  |      | (24     | )    |   | (9      | ) |   | (22      | )
|Repurchase of common stock                                                         |  |      | (9,612  | )    |   | (12,628 | ) |   |         |  
|Excess tax benefits from stock-based
compensation                                  |  |      | 673     |      |   | 1,217   |   |   | 1,202    |  
|Proceeds from employee stock plans                                                 |  |      | 1,550   |      |   | 2,754   |   |   | 2,263    |  
|Net cash provided by (used in) financing
activities                                |  |      | (7,413  | )    |   | (8,666  | ) |   | 3,443    |  
|                                                                                   |  |      |         |      |   |         |   |   |          |  
|Effect of exchange rate
 changes on cash                                           |  |      | (18     | )    |   | 170     |   |   | 168      |  
|                                                                                   |  |      |         |      |   |         |   |   |          |  
|Net increase (decrease) in
 cash and cash equivalents                              |  |      | 7,469   |      |   | (1,084  | ) |   | (4,193   | )
|                                                                                   |  |      |         |      |   |         |   |   |          |  
|Cash and cash equivalents,
 beginning of year                                      |  |      | 7,416   |      |   | 8,500   |   |   | 12,693   |  
|                                                                                   |  |      |         |      |   |         |   |   |          |  
|Cash and cash equivalents,
 end of year                                            |  | $    | 14,885  |      | $ | 7,416   |   | $ | 8,500    |  
|Supplemental disclosures of
 net cash paid during the period for:                  |  |      |         |      |   |         |   |   |          |  
|Income taxes                                                                       |  | $    | 4,872   |      | $ | 8,699   |   | $ | 5,944    |  
|Non-cash investing and
 financing activties:                                       |  |      |         |      |   |         |   |   |          |  
|Income tax reductions relating to exercise of stock
options                        |  | $    | 309     |      | $ | 328     |   | $ | 381      |  
|Unrealized net gains from available-for-sale
securities                            |  | $    | 677     |      | $ | 322     |   | $ | 30       |  
|Capital lease obligations                                                          |  | $    |        |      | $ | 86      |   | $ | 30       |  
|Asset retirement obligation                                                        |  | $    |        |      | $ |        |   | $ | 66       |  

See accompanying notes to consolidated
financial statements.

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RIMAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

1)          Nature of Business and Summary of Significant Accounting Policies

Basis of Presentation and Nature of Business

The consolidated financial statements include the accounts of Rimage
Corporation and its subsidiaries, collectively hereinafter referred to as
Rimage or the Company. All intercompany accounts and transactions have been
eliminated upon consolidation.

Rimage develops, manufactures and markets digital publishing systems
that are used by businesses to produce recordable CD, DVD and blue laser discs
with customized digital content on an on-demand basis.

Revenue Recognition

Revenue for product sales, which do not include any requirement for
installation or training, is recognized on shipment, at which point the
following criteria of Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition, 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.                                                                                                                                      
|
| |  | 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.

Revenue for maintenance agreements is recognized primarily on a
straight-line basis over the life of the contracts in accordance with Financial
Accounting Standards Board (FASB) Technical Bulletin No. 90-1, Accounting
for Separately Priced Extended Warranty and Product Maintenance Contracts.

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.

Sales Returns

An allowance for sales returns is recorded by the Company 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.

Receivables and Allowance for
Doubtful Accounts

The Company
records accounts receivable at face amount less an allowance for doubtful
accounts for potentially uncollectible receivables. The allowance 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. The
uncollectible portion

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of receivables is charged against the allowance for doubtful accounts
when collection efforts have ceased. Recoveries of receivables previously
charged-off are recorded when received.

Cash Equivalents

All short-term investments with original maturities of three months or
less at date of purchase are considered cash equivalents, except for variable
rate demand notes, which are classified as marketable securities.

Marketable Securities

Marketable securities generally consist of municipal securities, U.S.
government agency and money market 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, except
for variable rate demand notes, have maturities ranging from three to 36
months. Variable rate demand notes may be liquidated in less than three months
from the date of purchase, but have legal maturities of greater than three
months and are required to be classified as marketable securities. Marketable
securities 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. The Companys investment portfolio at December 31, 2008 did not
include any auction-rate securities, high-yield sub-prime backed paper or
other affected securities which are subject to significant market value
declines or liquidity issues.

Sources of Supply

Many of the purchased components used to assemble the Companys
products are standard parts and are readily available. Other components and
subassemblies are manufactured to the Companys specifications. For the
majority of the Companys critical components, the Company has identified
alternative suppliers. However, for certain other components, it is not
possible to identify an alternative supplier because of the proprietary
information and technology held by the current supplier. If the Company were
unable to secure the technology and proprietary information used by its current
suppliers, identifying an alternative manufacturer to design and manufacture the
components to its specifications could involve significant delays in production
of the products and significant expense. Further, if the Company obtains a new
supplier for a component or uses an alternative component in its product, the
Company may need to conduct additional testing of its products to ensure the
product meets its quality and performance standards. Any delays in delivery of
its product to end-users, distributors or resellers could be extended, and
costs associated with the change in product manufacturing could increase.

Inventories

Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out (FIFO) basis. The Company records
provisions for potential excess, obsolete and slow moving inventory based upon
usage, historical loss trends, expected product lives and forecasted sales
demand.

Property and Equipment

Property and equipment are stated at cost and depreciated on a
straight-line basis over estimated useful lives ranging from two to seven years
for most assets, and fifteen years for the Companys headquarters facility
purchased in September 2008. Leasehold improvements are amortized using the
straight-line method over the shorter of the propertys useful life or term of
the underlying lease. Repairs and maintenance costs are charged to operations
as incurred.

Impairment of Long-lived Assets

Long-lived assets at December 31, 2008 and 2007 consisted of property
and equipment. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for Impairment or Disposal of Long-Lived Assets,
the Company reviews the carrying amount of its long-lived assets when events or
changes in circumstances such as market value, asset utilization, physical
change, legal factors or other matters indicate that the carrying amount of the
assets may not be recoverable. When this review indicates the carrying amount
of an asset or asset group exceeds the sum of the future undiscounted cash
flows expected to be generated by the assets, the Company recognizes an asset
impairment charge against operations for the amount by which the carrying
amount of the impaired asset exceeds its fair value. The Company recorded asset
impairment charges approximating $60,000 and $312,000 in 2007 and 2006,
respectively, for certain manufacturing tooling. See Note 6 for further
discussion of these charges.

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Product Warranty

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 12 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. Warranty expense is accrued during the
warranty period based on an analysis of historical claims experience, which
includes labor, freight and parts costs, with consideration of the proportion
of parts that can be re-used.

The warranty accrual rollforward, including provisions and claims, is
as follows for the years ended December 31, 2008, 2007 and 2006 (in thousands):

|                   |  |   |                  |  |                    |     |                |   |                        |   |               |    |   |   |     |  | 
|------------------ |  | - | ---------------- |  | ------------------ | --- | -------------- | - | ---------------------- | - | ------------- | -- | - | - | --- |  | 
|Years ended:       |  |   | BeginningBalance |  | WarrantyProvisions |     | WarrantyClaims |   | ForeignExchange Impact |   | EndingBalance |   
|                   |  |   |                  |  |                    |     |                |   |                        |   |               |    |   |   |     | 
|December 31,
 2008 |  | $ | 420              |  | $                  | 314 |                | $ | (468                   | ) | $             | (3 | ) | $ | 263 | 
|                   |  |   |                  |  |                    |     |                |   |                        |   |               |    |   |   |     | 
|December 31,
 2007 |  | $ | 394              |  | $                  | 851 |                | $ | (838                   | ) | $             | 13 |   | $ | 420 | 
|                   |  |   |                  |  |                    |     |                |   |                        |   |               |    |   |   |     | 
|December 31,
 2006 |  | $ | 317              |  | $                  | 874 |                | $ | (809                   | ) | $             | 12 |   | $ | 394 | 

Stock-Based Compensation

In December 2004, the FASB issued 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 an 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 on a straight-line
basis over the period during which an employee is required to provide services
in exchange for the entire 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.

The Company implemented the provisions of SFAS 123R effective January
1, 2006 using the modified prospective method. Under this method, the Company
recognizes compensation expense on a straight-line basis over the vesting period
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. Compensation cost is recognized for all
awards over the vesting period to the extent the employees or directors meet
the requisite service requirements, whether or not the award is ultimately
exercised. Conversely, when an employee or director does not meet the requisite
service requirements and forfeits the award prior to vesting, any compensation
expense previously recognized for the award is reversed. See Note 2 to the
Consolidated Financial Statements for additional information on stock-based
compensation.

Research and Development Costs

Research and development costs relate to hardware and software
development and enhancements to existing products. All such costs are expensed
as incurred.

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date. A valuation allowance is provided to offset deferred tax
assets if, based on the available evidence, it is more likely than not that
some or all of the deferred tax asset will not be realized.

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Net Income Per Share

Basic net income per share is calculated as income available to common
stockholders divided by the weighted average number of common shares
outstanding for the period. Diluted net income per share includes the
potentially dilutive effect of common shares issued in connection with
outstanding stock options using the treasury stock method.

Foreign Currency Translation / Transactions

The functional currency for each of the Companys foreign subsidiaries
is the respective local currency. The assets and liabilities of the Companys
foreign subsidiaries are translated into U.S. dollars using period-end exchange
rates, while revenues and expenses are translated at average exchange rates
prevailing during the year. The resulting translation adjustments are recorded
as a separate component of stockholders equity in accumulated other
comprehensive income (loss). The Company recorded net gains on foreign currency
translation in comprehensive income of $0.1 million for the year ended December
31, 2008, and $0.3 million for each of the years ended December 31, 2007 and
2006.

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.

Comprehensive Income

Comprehensive income consists of the Companys net income, foreign
currency translation adjustments, and unrealized holding gains and losses from
available-for-sale marketable securities and is presented in the Consolidated
Statements of Stockholders Equity and Comprehensive Income.

Operating Leases

The Company leases certain of its facilities and some of its equipment
under non-cancelable operating lease arrangements. The rental payments under
these leases are charged to expense as incurred.

Taxes Collected From Customers

Sales taxes charged to and collected from customers as part of the
Companys sales transactions are excluded from revenues and recorded as a
liability to the applicable governmental taxing authority.

Use of Estimates

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 and disclosure of contingent 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
estimates on items such as allowance for doubtful accounts and sales returns,
inventory provisions, asset impairment charges, deferred tax asset valuation
allowances, accruals for uncertain tax positions and warranty accruals. These
estimates and assumptions are based on managements best judgment. Management
evaluates estimates and assumptions on an ongoing basis using its technical
knowledge, historical experience and other factors, including consideration of
the impact of the current economic environment. Management believes its
assumptions are reasonable in light of the current economic environment.
Management adjusts such estimates and assumptions when facts and circumstances
change. Illiquid credit markets, volatile equity, foreign currency and energy
markets, and declines in business and consumer spending have combined to
increase the uncertainty inherent in such estimates and assumptions. As future
events and their effects cannot be determined with precision, actual results could
differ significantly from these estimates. Changes in those estimates resulting
from continuing changes in the economic environment will be reflected in the
financial statements in future periods.

New Accounting Pronouncements

In December 2007,
the FASB issued SFAS No. 141R (revised 2007), Business Combinations. SFAS No.
141R establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired in the business combination. SFAS No. 141R also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. The provisions of SFAS No.

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141R are effective for the Company beginning January 1, 2009. The Company will be
required to apply the guidance of SFAS No. 141R to any business combinations
completed on or after January 1, 2009.

In December 2007,
the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of Accounting Research Bulletin No. 51. SFAS
No. 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parents ownership interest and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated.
SFAS No. 160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. The provisions of SFAS No. 160 are effective for the
Company beginning January 1, 2009. The Company currently does not have any
subsidiaries in which it holds a non-controlling interest, and therefore, does
not expect that this pronouncement will have an impact on its consolidated
financial statements and related disclosures.

2)          Stock-Based Compensation and Common Stock
Repurchases

In May 2007, the Companys shareholders approved the 2007 Stock
Incentive Plan (the 2007 Plan). The 2007 Plan provides for the grant of stock
incentive awards in the form of incentive and non-qualified stock options,
stock appreciation rights, restricted stock, restricted stock units,
performance stock, performance units and other awards in stock and/or cash to
certain key employees, non-employee directors and service providers. The 2007
Plan permits the issuance of up to 730,320 shares of the Companys common
stock. At December 31, 2008, a total of 333,570 shares were available for
future grant under the 2007 Plan. Effective with the approval of the 2007 Plan
in May 2007, the Company may not issue any new awards or options under its 1992
Plan. The exercise price of stock options granted under the 2007 Plan is equal
to the market value on the date of grant. Options issued to employees through
March 31, 2006 under the 1992 Plan 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 under both the 1992 Plan and the 2007 Plan
generally become exercisable over a four-year period. Options issued to
employees through May 13, 2008 under the 1992 Plan and the 2007 Plan terminate
ten years from the date of grant, while options issued effective May 14, 2008
under the 2007 Plan terminate seven 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. Restricted shares issued to
non-employee directors under the 2007 Plan are subject to the risk of
forfeiture and transfer restrictions that lapse one year from the date of
grant.

Amounts recognized in the financial statements for the years ended
December 31, 2008, 2007 and 2006 with respect to the Companys share-based
payment arrangements are as follows:

|                                                                               |  |                         |       |      |   |       |   |   |       |  
|------------------------------------------------------------------------------ |  | ----------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                                               |  | Year Ended December 31, |      
|                                                                               |  | 2008                    |       | 2007 |   | 2006  |  
|                                                                               |  |                         |       |      |   |       |   |   |       |  
|Total stock-based compensation cost                                            |  | $                       | 1,127 |      | $ | 1,617 |   | $ | 1,682 |  
|Amounts capitalized in inventory                                               |  |                         |      |      |   | (1    | ) |   | (1    | )
|Amounts recognized in income for amounts
 previously capitalized in inventory  |  |                         | 1     |      |   | 1     |   |   |      |  
|Amounts charged against income, before
 income tax benefit                     |  | $                       | 1,128 |      | $ | 1,617 |   | $ | 1,681 |  
|Income tax benefit related to stock-based
 compensation included in net income |  | $                       | (397  | )    | $ | (611  | ) | $ | (480  | )

Total stock-based compensation cost reflected in the preceding table of
$1,127,000 for 2008 consisted of $1,071,000 for the issuance of stock options
and $56,000 associated with the grant of restricted stock to external Board
members. Total stock-based compensation cost of $1,617,000 for 2007 consisted
of $1,523,000 for the issuance of stock options, $135,000 associated with the
grant of restricted stock to external Board members and a reduction in expense
of $41,000 for the reversal of performance share expense. Total stock-based compensation
cost of $1,682,000 for 2006 consisted of $1,619,000 for the issuance of stock
options, $22,000 for shares issued under the Employee Stock Purchase Plan and
the recognition of $41,000 of expense associated with performance shares.

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Stock Options

The fair value of each option award is estimated at the date of grant
using the Black-Scholes option pricing model. This model estimates the fair
value of each option award based on the grant date exercise price and
assumptions regarding expected life of the award, expected stock price
volatility, expected interest rates and the expected dividend yield. The
assumptions used to determine the fair value of stock option awards granted
during the years ended December 31, 2008, 2007 and 2006 were as follows:

|                                   |  |                         |  |              |  |              
|---------------------------------- |  | ----------------------- |  | ------------ |  | -------------
|                                   |  | Year Ended December 31,
|                                   |  | 2008                    |  | 2007         |  | 2006         
|                                   |  |                         |  |              |  |              
|Expected life of options in
 years |  | 4.75
 - 6.00            |  | 6.00         |  | 5.00
 - 6.00 
|                                   |  |                         |  |              |  |              
|Risk-free interest rate            |  | 3.1%                    |  | 4.0
 - 4.8%  |  | 4.3
 - 5.0%  
|                                   |  |                         |  |              |  |              
|Expected volatility                |  | 39.1
 - 40.0%           |  | 38.0-
 40.0% |  | 37.8
 - 50.4%
|                                   |  |                         |  |              |  |              
|Expected dividend yield            |  | 0.0%                    |  | 0.0%         |  | 0.0%         

In accordance with SFAS 123R, the Company reviews these assumptions at
the time of each new option award and adjusts them as necessary to ensure
proper option valuation. The expected life represents the period that the stock
option awards are expected to be outstanding. For all stock options granted in
2006 and 2007, and all stock options granted to non-employee directors in 2008,
the expected life was determined based on an analysis of historical exercise
behavior and anticipated future exercise patterns, giving consideration to the
contractual terms of unexercised stock option awards. Effective April 2008, the
Companys Board of Directors approved a change in the contractual term of stock
options granted to employees from ten to seven years. Given the reduction in
the contractual term of its employee stock option awards, the Company
determined it was unable to rely on its historical exercise data as a basis for
estimating the expected life of stock options granted to employees in 2008. As
such, the Company used the simplified method for determining the expected
life of stock options granted to employees in 2008, as specified by Staff
Accounting Bulletin (SAB) No. 107, Valuation of Share-Based Payment
Arrangements for Public Companies, which bases the expected life calculation
on the average of the vesting term and the contractual term of the awards. 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. The expected dividend yield is
zero, as the Company has not paid or declared any cash dividends on its common
stock, and does not currently have plans to pay dividends.

A summary of share option activity under the 2007 and 1992 Plans as of
and for the year ended December 31, 2008 is presented in the table below (in
thousands, except per share data):

|                                                  |  |        |       |       |   |                                                           |  |                               |      |  |   |       | 
|------------------------------------------------- |  | ------ | ----- | ----- | - | --------------------------------------------------------- |  | ----------------------------- | ---- |  | - | ----- | 
|                                                  |  | Shares |       | WAEP* |   | Weighted Average
 Remaining
 Contractual Term
 (in years) |  | Aggregate
 Intrinsic
 Value** |     
|                                                  |  |        |       |       |   |                                                           |  |                               |      |  |   |       | 
|Options outstanding at
 December 31, 2007         |  |        | 1,240 |       | $ | 16.57                                                     |  |                               |      |  |   |       | 
|Granted                                           |  |        | 184   |       |   | 17.74                                                     |  |                               |      |  |   |       | 
|Exercised                                         |  |        | (201  | )     |   | 7.73                                                      |  |                               |      |  |   |       | 
|Canceled                                          |  |        | (64   | )     |   | 23.84                                                     |  |                               |      |  |   |       | 
|                                                  |  |        |       |       |   |                                                           |  |                               |      |  |   |       | 
|Options outstanding at
 December 31, 2008         |  |        | 1,159 |       | $ | 17.88                                                     |  |                               | 5.73 |  | $ | 1,143 | 
|                                                  |  |        |       |       |   |                                                           |  |                               |      |  |   |       | 
|Options subject to exercise
 at December 31, 2008 |  |        | 853   |       | $ | 16.51                                                     |  |                               | 5.19 |  | $ | 1,143 | 

*Weighted Average Exercise Price

**Aggregate intrinsic value includes only those options with
intrinsic value (options where the exercise price is below the market value).

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A summary of the status of the Companys nonvested option shares as of
December 31, 2008 and changes during the year ended December 31, 2008 is
presented in the table below (in thousands, except per share data):

|                                |  |                  |      |                                         |   |       | 
|------------------------------- |  | ---------------- | ---- | --------------------------------------- | - | ----- | 
|                                |  | Number of Shares |      | Weighted Average
 Grant-Date Fair Value |  
|Nonvested at December 31,
 2007 |  |                  | 278  |                                         | $ | 12.06 | 
|                                |  |                  |      |                                         |   |       | 
|Granted                         |  |                  | 184  |                                         | $ | 6.98  | 
|                                |  |                  |      |                                         |   |       | 
|Vested                          |  |                  | (112 | )                                       | $ | 10.28 | 
|                                |  |                  |      |                                         |   |       | 
|Canceled                        |  |                  | (44  | )                                       | $ | 11.84 | 
|                                |  |                  |      |                                         |   |       | 
|Nonvested at December 31,
 2008 |  |                  | 306  |                                         | $ | 9.61  | 

As of December 31, 2008, there was $2,984,000 of total stock option
compensation expense (gross of the impact of potential forfeitures) not yet
recognized related to non-vested option awards, which is expected to be
recognized over a weighted average period of 2.66 years.

Other
information pertaining to options is as follows:

|                                                          |  |                                       |       |      |   |       |  |   |       | 
|--------------------------------------------------------- |  | ------------------------------------- | ----- | ---- | - | ----- |  | - | ----- | 
|                                                          |  | Year Ended December 31,               |      
|                                                          |  | 2008                                  |       | 2007 |   | 2006  | 
|                                                          |  | (in thousands, except per share data) |      
|                                                          |  |                                       |       |      |   |       |  |   |       | 
|Number of options granted                                 |  |                                       | 184   |      |   | 248   |  |   | 265   | 
|Fair value of options
 granted                            |  | $                                     | 1,282 |      | $ | 3,036 |  | $ | 3,132 | 
|Per share weighted average
 fair value of options granted |  | $                                     | 6.98  |      | $ | 12.24 |  | $ | 11.82 | 
|Total fair value of stock
 options vested                 |  | $                                     | 1,144 |      | $ | 1,649 |  | $ | 1,538 | 
|Total intrinsic value of
 stock options exercised         |  | $                                     | 2,641 |      | $ | 4,613 |  | $ | 4,551 | 

Cash received from the exercise of stock options was $1,550,000,
$2,754,000 and $1,934,000 for the years ended December 31, 2008, 2007 and 2006,
respectively. The income tax benefit realized from the exercise of stock options
and recorded as an increase to additional paid-in capital was $982,000,
$1,545,000 and $1,583,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.

Employee Stock Purchase Plan

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 165,126 shares. Such shares are no longer reserved for issuance
under the Employee Stock Purchase Plan.

Performance Shares

During the year ended December 31, 2006, the Company granted 16,967
performance shares to certain managerial and executive employees under the 1992
Plan, with performance criteria established based on revenue and operating
income goals for calendar year 2008. If the performance goals are not achieved
during the performance period, all performance shares are to be canceled and
the employees will receive no common stock for the canceled performance shares.
An employee must also remain employed by the Company as of the end of the
performance period to be eligible to receive common stock for the performance
shares. Performance share awards were valued based on the market value of the
Companys shares on the date of grant, which was equal to the intrinsic value
of the shares on that date. Compensation cost for awards with a performance
condition is recognized ratably over the performance period, once achievement
of performance criteria is deemed probable. The Company assessed the
probability of the achievement of performance criteria associated with the
performance shares as probable during 2006 and the first half of 2007. As such,
the total fair value of the performance shares of approximately $372,000, based
on a common stock price on the date of grant of $21.92, was being recognized as
compensation expense over

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the performance period ending December 31, 2008. During the third
quarter of 2007, the Company changed its assessment of achieving the
performance criteria from probable to improbable. Accordingly, the Company
reversed all compensation expense recorded in prior periods and ceased
recording additional expense for the 2006 performance shares during the third
quarter 2007. The expense reversal recorded in the third quarter of 2007
amounted to approximately $111,000, of which $41,000 related to expense
recorded in 2006. As the revenue and operating income goals for calendar year
2008 were not achieved, all performance shares were cancelled and employees
will receive no common stock for the cancelled performance shares.

Restricted Stock

On May 14, 2008, the Company issued 1,000 shares of restricted stock to
each of the five external members of its Board of Directors. The restricted
stock was valued based on the market value of the Companys shares on the date
of grant of $88,700, which was equal to the intrinsic value of the shares on
that date. Such restricted stock vests and the restrictions lapse one year
after the date of grant. As such, the Company is recognizing expense for the
intrinsic value of the restricted stock ratably over the one year vesting
period, resulting in $56,000 of expense for the year ended December 31, 2008.

Common Stock Repurchases

On October 17, 2007, the Companys Board of Directors authorized the
repurchase of up to 500,000 shares of its common stock. In February 2008, the
Companys Board of Directors increased the share repurchase authorization by an
additional 500,000 shares, bringing total shares authorized for repurchase to
1,000,000. Shares will be purchased at prevailing market prices in the open
market or in private transactions, subject to market conditions, share price,
trading volume and other factors. The repurchase program may be discontinued at
any time. During the year ended December 31, 2008, the Company repurchased
577,083 shares of its common stock at an average purchase price of $16.66 per
share under the authorization. The repurchase program was funded from cash on
hand. As of December 31, 2008, there were 422,917 shares available for
repurchase under the authorizations.

3)          Marketable Securities

The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value of available-for-sale marketable securities by
major security type and class of security at December 31, 2008 and 2007 are
reflected in the following table (in thousands). Unrealized holding gains and
losses are included in accumulated other comprehensive income (loss) until
realized.

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|                                             |  |                 |        |                                  |   |                                   |  |            |    |   |   |        | 
|-------------------------------------------- |  | --------------- | ------ | -------------------------------- | - | --------------------------------- |  | ---------- | -- | - | - | ------ | 
|                                             |  | Amortized
 cost |        | Gross
 unrealized
 holding gains |   | Gross
 unrealized
 holding losses |  | Fair value |   
|At
 December 31, 2008                        |  |                 |        |                                  |   |                                   |  |            |    |   |   |        | 
|                                             |  |                 |        |                                  |   |                                   |  |            |    |   |   |        | 
|Short term:                                  |  |                 |        |                                  |   |                                   |  |            |    |   |   |        | 
|Government securities                        |  | $               | 2,009  |                                  | $ | 56                                |  | $          |   |   | $ | 2,065  | 
|Corporate securities                         |  |                 | 1,985  |                                  |   | 22                                |  |            |   |   |   | 2,007  | 
|Municipal securities                         |  |                 | 35,440 |                                  |   | 358                               |  |            |   |   |   | 35,798 | 
|                                             |  |                 |        |                                  |   |                                   |  |            |    |   |   |        | 
|Total                                        |  | $               | 39,434 |                                  | $ | 436                               |  | $          |   |   | $ | 39,870 | 
|Long term:                                   |  |                 |        |                                  |   |                                   |  |            |    |   |   |        | 
|Government guaranteed - corporate
securities |  | $               | 10,023 |                                  | $ | 166                               |  | $          |   |   | $ | 10,189 | 
|Municipal securities                         |  |                 | 30,062 |                                  |   | 396                               |  |            |   |   |   | 30,458 | 
|                                             |  |                 |        |                                  |   |                                   |  |            |    |   |   |        | 
|Total                                        |  | $               | 40,085 |                                  | $ | 562                               |  | $          |   |   | $ | 40,647 | 
|                                             |  |                 |        |                                  |   |                                   |  |            |    |   |   |        | 
|At December
 31, 2007                        |  |                 |        |                                  |   |                                   |  |            |    |   |   |        | 
|                                             |  |                 |        |                                  |   |                                   |  |            |    |   |   |        | 
|Short term:                                  |  |                 |        |                                  |   |                                   |  |            |    |   |   |        | 
|Government securities                        |  | $               | 3,779  |                                  | $ | 2                                 |  | $          |   |   | $ | 3,781  | 
|Corporate securities                         |  |                 | 6,031  |                                  |   | 1                                 |  |            | (5 | ) |   | 6,027  | 
|Municipal securities                         |  |                 | 6,720  |                                  |   | 8                                 |  |            |   |   |   | 6,728  | 
|Money market securities                      |  |                 | 35,000 |                                  |   | 69                                |  |            |   |   |   | 35,069 | 
|                                             |  |                 |        |                                  |   |                                   |  |            |    |   |   |        | 
|Total                                        |  | $               | 51,530 |                                  | $ | 80                                |  | $          | (5 | ) | $ | 51,605 | 
|Long term:                                   |  |                 |        |                                  |   |                                   |  |            |    |   |   |        | 
|Government securities                        |  | $               | 2,021  |                                  |   | 26                                |  | $          |   |   | $ | 2,047  | 
|Corporate securities                         |  |                 | 4,192  |                                  |   | 42                                |  |            |   |   |   | 4,234  | 
|Municipal securities                         |  |                 | 28,742 |                                  |   | 180                               |  |            | (2 | ) |   | 28,920 | 
|                                             |  |                 |        |                                  |   |                                   |  |            |    |   |   |        | 
|Total                                        |  | $               | 34,955 |                                  | $ | 248                               |  | $          | (2 | ) | $ | 35,201 | 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4) | Fair Value Measurements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company adopted SFAS No. 157, Fair Value Measurements, for financial
 assets and liabilities on January 1, 2008. SFAS No. 157 defines fair value
 and establishes a framework for measuring fair value. This statement applies
 only to fair value measurements that are already required or permitted by
 other accounting standards, except for measurements of share-based payments
 and measurements that are similar to, but not intended to be, fair value. In
 February 2008, FASB Staff Position No. 157-2 was issued which delayed the
 effective date of FASB Statement No. 157 to fiscal years beginning after
 November 15, 2008 for nonfinancial assets and liabilities, except for items
 that are recognized or disclosed at fair value in the financial statements on
 a recurring basis (at least annually). Although the adoption of SFAS No. 157
 for financial assets and liabilities did not impact the Companys financial
 statements, additional disclosures about fair value measurements are
 required.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | SFAS No. 157 establishes a framework for measuring fair value by
 creating a hierarchy of fair value measurements that distinguishes market
 data between observable independent market inputs and unobservable market
 assumptions by the reporting entity, as highlighted in the table below. The
 Companys assets and liabilities measured at fair value on a recurring basis
 subject to the disclosure requirements of SFAS No. 157 were as follows at
 December 31, 2008:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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|                                            |  |                                             |        |                                             |   |                                                  |  |                                              |        |  |   |   | 
|------------------------------------------- |  | ------------------------------------------- | ------ | ------------------------------------------- | - | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                            |  |                                             |        | Fair Value Measurements Using               |  
|(in thousands)                              |  | Total Carrying
 Value at
 December 31, 2008 |        | Quoted Prices in
 Active Markets
 (Level 1) |   | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|Assets:                                     |  |                                             |        |                                             |   |                                                  |  |                                              |        |  |   |   | 
|Available-for-sale securities               |  | $                                           | 90,218 |                                             | $ |                                                 |  | $                                            | 90,218 |  | $ |  | 
|Liabilities:                                |  |                                             |        |                                             |   |                                                  |  |                                              |        |  |   |   | 
|Foreign currency forward exchange
contracts |  | $                                           | 238    |                                             | $ |                                                 |  | $                                            | 238    |  | $ |  | 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | Available-for-sale securities in the table above consist of
 investments of $80.5 million classified as marketable securities (further
 described in note 3) and $9.7 million of money market funds classified as
 cash and cash equivalents in the accompanying Consolidated Balance Sheets.
 Available-for-sale securities are carried at fair value based on significant
 observable inputs other than quoted market prices. Such inputs may include
 benchmark yields, reported trades, broker/dealer quotes, issuer spreads,
 two-sided markets, benchmark securities, bids, offers and other reference
 data. Foreign currency forward exchange contracts are also carried at fair
 value based on significant other observable market inputs, in this case,
 quoted foreign currency exchange rates. Such valuation represents the amount
 the Company would receive or pay to terminate the forward exchange contracts
 at the reporting date.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The carrying amount of cash and cash equivalents not included in the
 above table as well as the carrying amount of trade accounts receivable and
 accounts payable approximate fair value because of the short maturity of
 these instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The Company adopted SFAS No. 159, The Fair Value Option for
 Financial Assets and Financial Liabilities-Including an Amendment of FASB
 Statement No. 115, on January 1, 2008. This standard permits entities to
 choose to measure many financial instruments and certain other items at fair
 value. This statement also establishes presentation and disclosure
 requirements designed to facilitate comparisons between entities that choose
 different measurement attributes for similar types of assets and liabilities.
 Unrealized gains and losses on items for which the fair value option is elected
 would be reported in earnings. The Company has not elected the fair value
 measurement option for any of its financial assets or liabilities as of
 December 31, 2008, and the Company has not determined whether or not it will
 elect this option for financial instruments it may acquire in the future.                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|5) | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Inventories
consisted of the following as of December 31, (in thousands):

|                                            |  |      |       |      |   |       | 
|------------------------------------------- |  | ---- | ----- | ---- | - | ----- | 
|                                            |  | 2008 |       | 2007 |  
|                                            |  |      |       |      |   |       | 
|Finished goods and
 demonstration equipment |  | $    | 1,717 |      | $ | 1,879 | 
|Purchased parts and
 subassemblies          |  |      | 3,908 |      |   | 6,196 | 
|                                            |  | $    | 5,625 |      | $ | 8,075 | 

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6)        Property and Equipment

Property and
equipment consisted of the following as of December 31, (in thousands):

|                                                |  |      |        |      |   |        |  
|----------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                |  | 2008 |        | 2007 |  
|                                               
|Land and land improvements                      |  | $    | 1,096  |      | $ |       |  
|Building and building
 improvements             |  |      | 2,806  |      |   |       |  
|Manufacturing equipment                         |  |      | 3,071  |      |   | 2,933  |  
|Development fixtures and
 equipment             |  |      | 760    |      |   | 750    |  
|Data equipment and
 furniture                   |  |      | 4,814  |      |   | 4,667  |  
|Leasehold improvements                          |  |      | 1,089  |      |   | 1,073  |  
|                                                |  |      | 13,636 |      |   | 9,423  |  
|Less accumulated
 depreciation and amortization |  |      | (7,453 | )    |   | (6,217 | )
|                                                |  | $    | 6,183  |      | $ | 3,206  |  

Depreciation and amortization expense was $1,372,000, $1,525,000 and
$1,519,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

On August 11, 2008, a Purchase and Sale Agreement dated July 31, 2008
between the Company and 7725 Washington Avenue Corp. (the Seller) became
effective. Under the Purchase and Sale Agreement, the Company agreed to
purchase from the Seller the real property and building the Company previously leased
as its corporate headquarters in Edina, Minnesota. The closing of the purchase
transaction was effective September 30, 2008. The aggregate cost of the
property totaled $3.9 million, consisting of the base purchase price of $3.8
million and other direct costs of $0.1 million. The Company financed the
purchase using cash on hand. The $3.9 million purchase price of the property
was allocated to the building and land based on relative market values, with
72% of the value allocated to the building ($2.8 million) and 28% allocated to
the land ($1.1 million). The Company is depreciating the building cost over a
period of 15 years.

In 2007 and 2006, the Company recorded charges to cost of revenues of
approximately $60,000 and $312,000, respectively, for impairments in the
carrying amount of manufacturing tooling associated with the assembly of the
Rimage 360i Desktop product line. The impairment charges were triggered by slow
sales of the Rimage 360i product and a resulting reduction in the estimated
cash flows attributable to future use of the manufacturing tooling.

7)        Credit Agreement

On March 29, 2004, the Company entered into a term note agreement (the
Credit Agreement) with a bank. The Credit Agreement, as amended effective June
7, 2007, is effective until July 1, 2009, and allows for advances under an
unsecured revolving loan up to a maximum advance of $10 million to be used for
general Company operating expenses. The outstanding principal balance of the
note bears interest at a fluctuating rate per annum equal to the Prime Rate in
effect from time to time, or at a fixed rate per annum at one and one-half
percent (1.50%) above LIBOR in effect on the first day of the applicable fixed
rate term. No amounts were outstanding under the Credit Agreement at December
31, 2008 and 2007.

The Credit Agreement contains various covenants pertaining to minimum
tangible net worth, minimum EBITDA and minimum unencumbered liquid assets. The
Company was in compliance with all covenants as of December 31, 2008.

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8)        Income Taxes

The components
of income before income taxes consist of the following (in thousands):

|                             |  |                         |        |      |   |        |  |   |        | 
|---------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                             |  | Year Ended December 31, |       
|                             |  | 2008                    |        | 2007 |   | 2006   | 
|                             |  |                         |        |      |   |        |  |   |        | 
|Income
 before income taxes: |  |                         |        |      |   |        |  |   |        | 
|Domestic                     |  | $                       | 14,427 |      | $ | 23,907 |  | $ | 20,053 | 
|Foreign                      |  |                         | 32     |      |   | 487    |  |   | 405    | 
|                             |  | $                       | 14,459 |      | $ | 24,394 |  | $ | 20,458 | 
|                             |  |                         |        |      |   |        |  |   |        | 

The provision
for income tax expense (benefit) consists of the following (in thousands):

|               |  |                         |       |      |   |        |   |   |        |  
|-------------- |  | ----------------------- | ----- | ---- | - | ------ | - | - | ------ | -
|               |  | Year Ended December 31, |      
|               |  | 2008                    |       | 2007 |   | 2006   |  
|               |  |                         |       |      |   |        |   |   |        |  
|Current:       |  |                         |       |      |   |        |   |   |        |  
|U.S. Federal   |  | $                       | 4,007 |      | $ | 7,718  |   | $ | 6,813  |  
|State          |  |                         | 641   |      |   | 1,637  |   |   | 1,239  |  
|Foreign        |  |                         | 319   |      |   | 396    |   |   | 378    |  
|Total current  |  |                         | 4,967 |      |   | 9,751  |   |   | 8,430  |  
|               |  |                         |       |      |   |        |   |   |        |  
|Deferred:      |  |                         |       |      |   |        |   |   |        |  
|U.S. Federal   |  |                         | (37   | )    |   | (897   | ) |   | (899   | )
|State          |  |                         | 98    |      |   | (221   | ) |   | (157   | )
|Total deferred |  |                         | 61    |      |   | (1,118 | ) |   | (1,056 | )
|               |  |                         |       |      |   |        |   |   |        |  
|               |  | $                       | 5,028 |      | $ | 8,633  |   | $ | 7,374  |  

Total tax expense differs from the expected tax expense, computed by
applying the federal statutory rate of 35% to earnings before income taxes as
follows (in thousands):

|                                               |  |                         |       |      |   |       |   |   |       |  
|---------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                               |  | Year Ended December 31, |      
|                                               |  | 2008                    |       | 2007 |   | 2006  |  
|                                               |  |                         |       |      |   |       |   |   |       |  
|Expected income tax
 expense                   |  | $                       | 5,061 |      | $ | 8,540 |   | $ | 7,160 |  
|State income taxes, net of
 federal tax effect |  |                         | 480   |      |   | 920   |   |   | 703   |  
|Extraterritorial income
 exclusion             |  |                         |      |      |   |      |   |   | (83   | )
|Manufacturers deduction                       |  |                         | (80   | )    |   | (234  | ) |   | (95   | )
|Federal R&D credit                             |  |                         | (34   | )    |   | (130  | ) |   | (79   | )
|Tax-exempt interest income                     |  |                         | (663  | )    |   | (751  | ) |   | (446  | )
|Change in valuation
 allowance                 |  |                         | 437   |      |   | 250   |   |   | 186   |  
|Taxes on foreign income in
 excess of 35%      |  |                         |      |      |   |      |   |   | 47    |  
|Benefit of lower federal
 tax bracket          |  |                         | (100  | )    |   |      |   |   |      |  
|Other, net                                     |  |                         | (73   | )    |   | 38    |   |   | (19   | )
|                                               |  |                         |       |      |   |       |   |   |       |  
|                                               |  | $                       | 5,028 |      | $ | 8,633 |   | $ | 7,374 |  

The American Jobs Creation Act, signed into law in October 2004 and
effective for the Company beginning in 2005, replaced the extraterritorial
income exclusion over time with a manufacturers tax deduction for domestic
manufacturing and production activities. The manufacturers tax deduction is
expected to have an impact of approximately one percentage point on the
Companys effective tax rate after the full phase-in of the deduction in 2010.

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The tax effects of temporary differences that give rise to significant
portions of deferred tax assets (liabilities) as of December 31, are presented
below (in thousands):

|                                                           |  |      |       |      |   |       |  
|---------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|                                                           |  | 2008 |       | 2007 |  
|Deferred tax assets:                                       |  |      |       |      |   |       |  
|Inventory provisions and
 uniform capitalization           |  | $    | 374   |      | $ | 578   |  
|Accounts receivable
 allowances                            |  |      | 167   |      |   | 191   |  
|Gross margin recognition on
 sales to foreign subsidiaries |  |      |      |      |   | 580   |  
|Non-qualified stock option
 and restricted stock expense   |  |      | 1,327 |      |   | 1,027 |  
|Deferred maintenance
 revenue                              |  |      | 610   |      |   | 756   |  
|Unrecognized tax benefits                                  |  |      | 253   |      |   | 109   |  
|Loss carryforward of
 foreign subsidiary                   |  |      | 928   |      |   | 491   |  
|Other accruals and reserves                                |  |      | 185   |      |   | 315   |  
|Other                                                      |  |      | 93    |      |   | 124   |  
|Total deferred tax assets before valuation
allowance       |  |      | 3,937 |      |   | 4,171 |  
|Less valuation allowance                                   |  |      | (928  | )    |   | (491  | )
|Total deferred tax assets                                  |  | $    | 3,009 |      | $ | 3,680 |  
|                                                           |  |      |       |      |   |       |  
|Deferred tax liabilities:                                  |  |      |       |      |   |       |  
|Unrealized gain on
 marketable securities                  |  | $    | (384  | )    | $ | (125  | )
|Total deferred tax liabilities                             |  | $    | (384  | )    | $ | (125  | )
|Total net deferred tax assets                              |  | $    | 2,625 |      | $ | 3,555 |  

The Company generally believes that it is more likely than not that the
future results of its operations will generate sufficient taxable income to
realize the tax benefits related to the Companys net deferred tax assets.
However, the Company established a full valuation allowance on the tax benefit
of a loss carryforward for a subsidiary in Japan established in May 2005. The
cumulative pre-tax loss amounts generated by the Japanese subsidiary from 2005
through 2008 approximated $2.4 million. The valuation allowances were
calculated in accordance with the provisions of SFAS No. 109, Accounting for
Income Taxes, which requires that a valuation allowance be established or
maintained when it is more likely than not that all or a portion of deferred
tax assets will not be realized. As of December 31, 2008, the Company
appropriately reclassified the gross margin recognition on sales to foreign
subsidiaries to a deferred charge, recorded in other current assets.

According to Accounting Principles Bulletin (APB) 23, Accounting for
Income Taxes  Special Areas, U.S. income taxes are not provided on undistributed
earnings of international subsidiaries that are permanently reinvested. As
such, the Company has not provided deferred taxes on unremitted earnings
attributable to its international subsidiary in Germany that are considered to
be reinvested indefinitely. These earnings relate to ongoing operations and
were approximately $4.4 million as of December 31, 2008. Because of the
availability of U.S. foreign tax credits, it is not practicable to determine
the income tax liability that would be payable if such earnings were not
indefinitely reinvested.

The Company adopted FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxesan interpretation of FASB Statement No. 109,
effective January 1, 2007. 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 criteria 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.

The impact on the Companys financial statements of adopting FIN 48 was
insignificant; as a result, a cumulative effect adjustment to the January 1,
2007 balance of retained earnings was not recorded.

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A reconciliation of the beginning and ending amounts of gross
unrecognized tax benefits for the years ended December 31, 2008 and 2007 is
presented in the table below (in thousands):

|                                                      |  |      |     |      |   |      |  
|----------------------------------------------------- |  | ---- | --- | ---- | - | ---- | -
|                                                      |  | 2008 |     | 2007 |  
|Gross
 unrecognized tax benefits at beginning of year |  | $    | 187 |      | $ | 251  |  
|Increases related to:                                 |  |      |     |      |   |      |  
|Prior year income tax positions                       |  |      |    |      |   | 69   |  
|Current year income tax positions                     |  |      | 29  |      |   | 57   |  
|Reclassification                                      |  |      | 217 |      |   |     |  
|Decreases related to:                                 |  |      |     |      |   |      |  
|Prior year income tax positions                       |  |      |    |      |   | (155 | )
|Settlements                                           |  |      | (72 | )    |   | (15  | )
|Expiration of statute of limitations                  |  |      |    |      |   | (20  | )
|Gross
 unrecognized tax benefits at end of year       |  | $    | 361 |      | $ | 187  |  

The reclassification impacting gross unrecognized tax benefits in 2008
of $217,000 resulted from a balance sheet reclassification of a deferred tax
asset that had previously been offset in unrecognized tax benefits as of
December 31, 2007.

Included in the balance of unrecognized tax benefits at December 31,
2008 are potential benefits of $126,000 that if recognized, would affect the
effective tax rate. The difference between this amount and the corresponding
amount of gross unrecognized tax benefits relates primarily to deferred federal
benefits of uncertain tax positions.

The Company does not anticipate that the total amount of unrecognized tax
benefits as of December 31, 2008 will change significantly by December 31,
2009.

The Company recognizes accrued interest and penalties related to
unrecognized tax benefits as a component of income tax expense. Total accrued
interest and penalties amounted to $59,000 and $49,000 on a gross basis at
December 31, 2008 and 2007, respectively, and are excluded from the
reconciliation of unrecognized tax benefits presented above. Interest and
penalties recognized in the Consolidated Statements of Income related to
uncertain tax positions amounted to $19,000 of expense in 2008 and a $49,000
benefit in 2007.

The Company files income tax returns in the U.S. federal jurisdiction
and various state and foreign jurisdictions. As of December 31, 2008, the
Company was no longer subject to income tax examinations for taxable years
before 2006 and 2005 in the case of U.S. federal and German taxing authorities,
respectively, and taxable years generally before 2004 in the case of state
taxing authorities, consisting primarily of Minnesota, California and Maryland.

9)        Stockholders Equity

Preferred Stock Purchase Rights

On September 16, 2003, the Companys Board of Directors adopted a
shareholder rights plan and declared a dividend of one preferred share purchase
right (a Right) for each share of common stock of the Company outstanding on
October 6, 2003 and with respect to each share of common stock issued
thereafter. The rights become exercisable only after any person or group (the
Acquiring Person) becomes or would become the beneficial owner of 15% or more
of the Companys outstanding common stock.

Each Right entitles the registered holder to purchase from the Company
1/100 of a Series A Junior Participating Preferred Share at a price of $100.00
per 1/100 of a Preferred Share, subject to adjustment. In the event that any
person or group becomes an Acquiring Person, each holder of a Right, other than
Rights that are or were beneficially owned by the Acquiring Person (which will
thereafter be void), will thereafter have the right to receive, upon exercise
thereof at the then current exercise price of the Right, that number of Common
Shares having a market value of two times the exercise price of the Right,
subject to certain possible adjustments. If the Company is acquired in certain
mergers or other business combination transactions, or 50% or more of the
assets or earning power of the Company and its subsidiaries (taken as a whole)
are sold, each holder of a Right (other than Rights that have become void under
the terms of the Rights Agreement) will thereafter have the right to receive,
upon exercise of the Right at the then current exercise price of the Right, the
number of common shares of the acquiring company (or, in certain cases, on of
its affiliates) having a market value of two times the exercise price of the
Right. At any time prior to the time that a person or group has become an
Acquiring Person, the Companys Board of Directors may redeem the Rights in
whole, but not in part, at a price of $.001 per Right, subject to adjustment,
payable in cash.

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The Rights will expire at the close of business on September 16, 2013,
unless extended or earlier redeemed by the Company. No preferred shares have
been issued or are outstanding under the shareholder rights plan as of December
31, 2008.

10)        Net Income Per Share

Basic net income per common share is determined by dividing net income
by the basic 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 and the dilutive impact of restricted stock. Stock
options to acquire 739,000, 321,000 and 185,000 weighted average common shares for
the years ended December 31, 2008, 2007 and 2006 have been excluded from the
computation of diluted weighted average shares outstanding for each respective
period as their effect is anti-dilutive. The following table identifies the
components of net income per basic and diluted share (in thousands, except for
per share data):

|                                                      |  |              |       |      |   |        |  |   |        | 
|----------------------------------------------------- |  | ------------ | ----- | ---- | - | ------ |  | - | ------ | 
|                                                      |  | December 31, |      
|                                                      |  | 2008         |       | 2007 |   | 2006   | 
|                                                      |  |              |       |      |   |        |  |   |        | 
|Shares outstanding at end
 of period                  |  |              | 9,335 |      |   | 9,706  |  |   | 9,925  | 
|                                                      |  |              |       |      |   |        |  |   |        | 
|Basic weighted average shares outstanding             |  |              | 9,556 |      |   | 9,915  |  |   | 9,812  | 
|                                                      |  |              |       |      |   |        |  |   |        | 
|Dilutive effect of stock options and restricted
stock |  |              | 173   |      |   | 456    |  |   | 544    | 
|Total diluted weighted average shares
outstanding     |  |              | 9,729 |      |   | 10,371 |  |   | 10,356 | 
|                                                      |  |              |       |      |   |        |  |   |        | 
|Net income                                            |  | $            | 9,431 |      | $ | 15,761 |  | $ | 13,084 | 
|                                                      |  |              |       |      |   |        |  |   |        | 
|Basic net income per common
 share                    |  | $            | 0.99  |      | $ | 1.59   |  | $ | 1.33   | 
|                                                      |  |              |       |      |   |        |  |   |        | 
|Diluted net income per
 common share                  |  | $            | 0.97  |      | $ | 1.52   |  | $ | 1.26   | 

11)       Lease Commitments

The Company leases certain of its facilities and some of its equipment
under non-cancelable operating lease arrangements. The rental payments under
these leases are charged to expense as incurred. The following is a schedule of
future minimum lease payments, excluding property taxes and other operating
expenses, required under all non-cancelable operating leases (in thousands):

|                          |  |                          |       | 
|------------------------- |  | ------------------------ | ----- | 
|Year ending
 December 31, |  | Total
 operating
 leases |      
|                         
|2009                      |  | $                        | 701   | 
|2010                      |  |                          | 387   | 
|2011                      |  |                          | 142   | 
|                          |  |                          |       | 
|Minimum lease payments    |  | $                        | 1,230 | 

Rent expense under operating leases amounted to approximately
$1,259,000, $1,161,000 and $1,116,000 for the years ended December 31, 2008,
2007 and 2006, respectively.

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12)        Profit Sharing and Savings Plan

Rimage has a profit sharing and savings plan under Section 401(k) of
the Internal Revenue Code. The plan allows employees to contribute up to 100%
of pretax compensation. The Company matches a percentage of employees contributions.
Matching contributions totaled $302,000, $313,000 and $314,000 in 2008, 2007
and 2006, respectively.

13)        Business Segment Information / Major
Customers

The Company has identified one operating segment consisting of
high-performance digital publishing systems that are used by businesses to
produce recordable CD, DVD and blue laser discs with customized digital content
on an on-demand basis. The Companys hardware products consist of two primary
product lines: The Producer line, which accommodates higher volume requirements
for production of recordable CD, DVD or blue laser media, and the Desktop line
of lower-cost products for office and other desktop applications. The Company
also sells related consumables (media kits, ribbons, ink cartridges and
Rimage-branded blank CD-R, DVD-R and blue laser media) and services (primarily
maintenance contracts and repairs) for use with its digital publishing systems.
The Company conducts operations from its U.S. corporate headquarters and from
subsidiaries in Europe and Japan.

The Companys two primary product lines (Producer and Desktop) and
three primary geographic locations have similar economic characteristics. Both
product lines are digital publishing systems as described above. The production
processes are also similar; both product lines are assembled from components
purchased from third party suppliers, consisting of recordable DVD or blue
laser drives, printers, circuit boards, electric motors, machined and molded
parts, precision sheet metal assemblies and other mechanical parts. Both
product lines are sold from each of the Companys geographic locations to
similar classes of commercial customers in similar vertical markets, including
digital photography, medical imaging and business services. Both product lines
utilize Rimage consumables and services and generate recurring revenues from
each. Rimage uses similar methods to distribute its products from each
geographic location. These consist of direct sales using its own sales force; a
two-tier distribution channel of distributors to value added resellers in
Europe, the U.S. and Latin America; and a distributor or OEM to end-user
distribution channel in Asia Pacific, some areas in Europe and some U.S. market
applications. Furthermore, the types of information and internal reports used
by management to monitor performance, evaluate results of operations, allocate
resources and otherwise manage the business support a single reportable
segment. Accordingly, based on these similarities, the Company has concluded
that its operations, consisting of two primary product lines sold from three
primary geographic locations, comprise one operating segment for purposes of
reporting under this disclosure.

The following represents sales amounts and related accounts receivable
balances generated by the Companys unaffiliated customers that provided more
than 10% of consolidated revenues (in thousands):

|           |  |                         |        |      |   |        |  |   |        | 
|---------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|           |  | Year ended December 31, |       
|           |  | 2008                    |        | 2007 |   | 2006   | 
|           |  | Revenues                |       
|          
|Customer A |  | $                       | 13,883 |      | $ | 14,921 |  | $ | 15,612 | 
|Customer B |  | $                       | 9,686  |      |   | *      |  | $ | 14,322 | 
|Customer C |  | $                       | 9,497  |      |   | *      |  |   | *      | 
|           |  |                         |        |      |   |        |  |   |        | 
|           |  | December 31,            |       
|           |  | 2008                    |        | 2007 |   | 2006   | 
|           |  | Accounts Receivable     |       
|          
|Customer A |  | $                       | 1,042  |      | $ | 1,982  |  | $ | 2,916  | 
|Customer B |  | $                       | 1,198  |      |   | *      |  | $ | 2,960  | 
|Customer C |  | $                       | 773    |      |   | *      |  |   | *      | 

|  |                                                                             
|- | ----------------------------------------------------------------------------
|* | Sales to
 customer did not represent more than 10% of consolidated revenues.

48

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Table of Contents

The Companys revenues from each of its principal geographic regions
are presented based on customer location as follows (in thousands):

|               |  |                         |        |      |   |         |  |   |         | 
|-------------- |  | ----------------------- | ------ | ---- | - | ------- |  | - | ------- | 
|               |  | Year Ended December 31, |       
|               |  | 2008                    |        | 2007 |   | 2006    | 
|North
 America |  | $                       | 52,992 |      | $ | 70,046  |  | $ | 68,641  | 
|Europe         |  |                         | 31,610 |      |   | 31,885  |  |   | 28,908  | 
|Other          |  |                         | 6,792  |      |   | 6,943   |  |   | 5,703   | 
|               |  |                         |        |      |   |         |  |   |         | 
|Total          |  | $                       | 91,394 |      | $ | 108,874 |  | $ | 103,252 | 

Long-lived
assets of the Company were located as follows (in thousands):

|              |  |                   |       |                   |   |       | 
|------------- |  | ----------------- | ----- | ----------------- | - | ----- | 
|              |  | December 31, 2008 |       | December 31, 2007 |  
|North America |  | $                 | 5,511 |                   | $ | 2,485 | 
|Germany       |  |                   | 630   |                   |   | 712   | 
|Japan         |  |                   | 42    |                   |   | 9     | 
|Total         |  | $                 | 6,183 |                   | $ | 3,206 | 

The Companys
revenues from each of its principal products and services were as follows (in
thousands):

|                      |  |                         |        |      |   |         |  |   |         | 
|--------------------- |  | ----------------------- | ------ | ---- | - | ------- |  | - | ------- | 
|                      |  | Year Ended December 31, |       
|                      |  | 2008                    |        | 2007 |   | 2006    | 
|Equipment:            |  |                         |        |      |   |         |  |   |         | 
|Producer              |  | $                       | 30,297 |      | $ | 46,829  |  | $ | 44,874  | 
|Desktop               |  |                         | 5,783  |      |   | 9,435   |  |   | 10,640  | 
|Total                 |  |                         | 36,080 |      |   | 56,264  |  |   | 55,514  | 
|                      |  |                         |        |      |   |         |  |   |         | 
|Consumables and parts |  |                         | 45,768 |      |   | 43,807  |  |   | 41,441  | 
|                      |  |                         |        |      |   |         |  |   |         | 
|Service               |  |                         | 9,546  |      |   | 8,803   |  |   | 6,297   | 
|                      |  |                         |        |      |   |         |  |   |         | 
|Total                 |  | $                       | 91,394 |      | $ | 108,874 |  | $ | 103,252 | 

14)        Related Party Transactions

One of the Companys non-employee directors was a member of the board
of directors through August 2007 of one of the Companys vendors, a supplier of
printed circuit boards used in the assembly of the Companys digital publishing
systems. The Company purchased component parts from this supplier approximating
$1.0 million, $1.9 million and $1.6 million for the years ended December 31,
2008, 2007 and 2006, respectively. Outstanding accounts payable with this
supplier totaled approximately $42,000, $70,000 and $199,000 at December 31,
2008, 2007 and 2006, respectively, payable under standard 30-day payment terms.
Effective September 2007, this related party relationship no longer exists.

15)        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.

49

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Table of Contents

16)        Supplemental Quarterly Data  Unaudited
(dollars in thousands, except per share data)

|                                    |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        | 
|----------------------------------- |  | ------ | ------ | ----- | - | ------ | - | ----- | ------ | ------ | - | ------ | - | ------ | ------ | ----- | - | ------ | - | - | ------ | - | - | ------ | 
|                                    |  | 2008   |        | 2007  |  
|                                    |  | Fourth |        | Third |   | Second |   | First |        | Fourth |   | Third  |   | Second |        | First |  
|                                   
|Revenues                            |  | $      | 20,749 |       | $ | 25,210 |   | $     | 22,686 |        | $ | 22,749 |   | $      | 28,212 |       | $ | 33,650 |   | $ | 25,486 |   | $ | 21,526 | 
|Cost of revenues                    |  |        | 12,654 |       |   | 13,233 |   |       | 12,772 |        |   | 13,072 |   |        | 14,615 |       |   | 17,238 |   |   | 14,088 |   |   | 11,778 | 
|Gross profit                        |  |        | 8,095  |       |   | 11,977 |   |       | 9,914  |        |   | 9,677  |   |        | 13,597 |       |   | 16,412 |   |   | 11,398 |   |   | 9,748  | 
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        | 
|Operating expenses:                 |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        | 
|Research and
development            |  |        | 1,160  |       |   | 1,227  |   |       | 1,513  |        |   | 1,351  |   |        | 1,280  |       |   | 1,592  |   |   | 1,441  |   |   | 1,590  | 
|Selling, general and
administrative |  |        | 5,129  |       |   | 5,225  |   |       | 5,672  |        |   | 6,638  |   |        | 6,079  |       |   | 6,180  |   |   | 6,284  |   |   | 5,828  | 
|Total operating expenses            |  |        | 6,289  |       |   | 6,452  |   |       | 7,185  |        |   | 7,989  |   |        | 7,359  |       |   | 7,772  |   |   | 7,725  |   |   | 7,418  | 
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        | 
|Operating income                    |  |        | 1,806  |       |   | 5,525  |   |       | 2,729  |        |   | 1,688  |   |        | 6,238  |       |   | 8,640  |   |   | 3,673  |   |   | 2,330  | 
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        | 
|Other income (expense):             |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        | 
|Interest, net                       |  |        | 616    |       |   | 691    |   |       | 676    |        |   | 836    |   |        | 898    |       |   | 889    |   |   | 861    |   |   | 803    | 
|Gain (loss) on currency
exchange    |  |        | 18     |       |   | 40     |   |       | (410   | )      |   | 247    |   |        | 6      |       |   | 163    |   |   | (95    | ) |   | 6      | 
|Other, net                          |  |        | (3     | )     |   | (20    | ) |       | 21     |        |   | (1     | ) |        |       |       |   | (31    | ) |   | (7     | ) |   | 20     | 
|Total other income, net             |  |        | 631    |       |   | 711    |   |       | 287    |        |   | 1,082  |   |        | 904    |       |   | 1,021  |   |   | 759    |   |   | 829    | 
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        | 
|Income before income taxes          |  |        | 2,437  |       |   | 6,236  |   |       | 3,016  |        |   | 2,770  |   |        | 7,142  |       |   | 9,661  |   |   | 4,432  |   |   | 3,159  | 
|Income tax expense                  |  |        | 725    |       |   | 2,230  |   |       | 1,089  |        |   | 984    |   |        | 2,627  |       |   | 3,458  |   |   | 1,511  |   |   | 1,037  | 
|Net income                          |  | $      | 1,712  |       | $ | 4,006  |   | $     | 1,927  |        | $ | 1,786  |   | $      | 4,515  |       | $ | 6,203  |   | $ | 2,921  |   | $ | 2,122  | 
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        | 
|Net income per basic share          |  | $      | 0.19   |       | $ | 0.42   |   | $     | 0.20   |        | $ | 0.18   |   | $      | 0.46   |       | $ | 0.63   |   | $ | 0.29   |   | $ | 0.21   | 
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        | 
|Net income per diluted share        |  | $      | 0.18   |       | $ | 0.42   |   | $     | 0.19   |        | $ | 0.18   |   | $      | 0.45   |       | $ | 0.59   |   | $ | 0.28   |   | $ | 0.20   | 

The Company recorded pre-tax charges to cost of revenues of $0.5
million in the second quarter of 2007 to establish a provision primarily for
excess raw material inventory and to write down fixed assets for an impairment
in the carrying amount of manufacturing tooling. Such charges resulted from
slow sales of the Rimage 360i Desktop product line.

During the second quarter of 2008 the Company determined that translation
gains associated with an intercompany loan that was deemed to be permanently
invested in the first quarter of 2008 were recorded in other income/(expense) as
transaction gains during the first quarter of 2008, but should have been
recorded as other comprehensive income at that time.  The Company recorded
a pre-tax out-of-period adjustment of approximately $244,000 during the second
quarter of 2008 to reduce the transaction gains and to increase other
comprehensive income to properly state accumulated other comprehensive income as
of June 30, 2008.

|         |                                                                                      
|-------- | -------------------------------------------------------------------------------------
|ITEM
 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
 ACCOUNTING AND FINANCIAL DISCLOSURE
|         |                                                                                      
|None.    |                                                                                      

50

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|          |                        
|--------- | -----------------------
|ITEM
 9A. | CONTROLS AND 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 reasonable likely to materially affect, the
Companys internal control over financial reporting.

See Item 8. Financial Statements and Supplementary Data of this Form
10-K for managements report on internal control over financial reporting and
the report on internal control over financial reporting of the Companys
Independent Registered Accounting Firm.

|          |                                                       
|--------- | ------------------------------------------------------
|ITEM
 9B. | OTHER INFORMATION                                     
|          |                                                       
|None.     |                                                       
|          |                                                       
|PART III 
|          |                                                       
|ITEM
 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated herein by
reference to the following sections of the Companys Proxy Statement for its
2009 Annual Meeting of Shareholders, which will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A within 120 days after the
close of the fiscal year for which this report is filed (the Proxy
Statement):

| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | Ownership of
 Voting Securities by Principal Holders and Management;
| |   |                                                                     
| |  | Proposal
 1Election of Directors;                                  
| |   |                                                                     
| |  | Nominees for
 Election of Directors;                                
| |   |                                                                     
| |  | Executive
 Officers of the Company;                                 
| |   |                                                                     
| |  | Executive
 Compensation;                                            
| |   |                                                                     
| |  | Section
 16(a) Beneficial Ownership Reporting Compliance;           
| |   |                                                                     
| |  | Corporate
 Governance; and                                          
| |   |                                                                     
| |  | Code of
 Ethics.                                                    

|          |                       
|--------- | ----------------------
|ITEM
 11. | EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by
reference to the section of the Companys Proxy Statement entitled Executive
Compensation.

51

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Table of Contents

|          |                                                                                                
|--------- | -----------------------------------------------------------------------------------------------
|ITEM
 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
 MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated herein by
reference to the section of the Companys Proxy Statement entitled Ownership
of Voting Securities by Principal Holders and Management, and is incorporated
herein by reference to Part II, Item 5 entitled Market for Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities of this
Annual Report on Form 10-K.

|          |                                                                          
|--------- | -------------------------------------------------------------------------
|ITEM
 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
 DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to
the sections of the Companys Proxy Statement entitled Certain Relationships
and Related Person Transactions and Corporate Governance.

|          |                                        
|--------- | ---------------------------------------
|ITEM
 14. | PRINCIPAL
 ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by
reference to the section of the Companys Proxy Statement entitled
Relationship with Independent Registered Public Accounting Firm.

PART IV

|          |                                            
|--------- | -------------------------------------------
|ITEM
 15. | EXHIBITS AND
 FINANCIAL STATEMENT SCHEDULES

|    |                                                                
|--- | ---------------------------------------------------------------
|(a) | (1) Financial Statements. See Part II, Item 8
 of this report. 
|    |                                                                
|    | (2) Financial Statement Schedules. See page
 56 of this report.
|    |                                                                
|    | (3) Exhibits. See Index to Exhibits on page
 54 of this report.
|    |                                                                
|(b) | See Index to Exhibits on page 54 of this report.               

52

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SIGNATURES

Pursuant to
the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.

|                       |                    |     |                         
|---------------------- | ------------------ | --- | ------------------------
|Dated: March
 16, 2009 | RIMAGE CORPORATION
|                       |                    |     |                         
|                       |                    | By: | /s/ Bernard
 P. Aldrich 
|                       |                    |     | Bernard P.
 Aldrich     
|                       |                    |     | Chief
 Executive Officer
|                       |                    |     |                         
|                       |                    | By: | /s/ Robert
 M. Wolf     
|                       |                    |     | Robert M.
 Wolf         
|                       |                    |     | Chief
 Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Each person whose
signature appears below constitutes and appoints Bernard P. Aldrich and Robert
M. Wolf as his true and lawful attorneys-in-fact and agents, each acting alone,
with full power of substitution and re-substitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the U.S. Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.

|                            |  |                                                                                |  |                
|--------------------------- |  | ------------------------------------------------------------------------------ |  | ---------------
|Signature                   |  | Title                                                                          |  | Date           
|                            |  |                                                                                |  |                
|/s/ Bernard
 P. Aldrich     |  | Chief
 Executive Officer and President(Principal
 Executive Officer), Director |  | March 16,
 2009
|Bernard P. Aldrich          |  |                                                                                | 
|                            |  |                                                                                |  |                
|/s/ Robert
 M. Wolf         |  | Chief
 Financial Officer (PrincipalFinancial
 and Accounting Officer)          |  | March 16,
 2009
|Robert M. Wolf              |  |                                                                                | 
|                            |  |                                                                                |  |                
|/s/ James L.
 Reissner      |  | Director                                                                       |  | March 16,
 2009
|James L. Reissner           |  |                                                                                |  |                
|                            |  |                                                                                |  |                
|/s/ Thomas
 F. Madison      |  | Director                                                                       |  | March 16,
 2009
|Thomas F. Madison           |  |                                                                                |  |                
|                            |  |                                                                                |  |                
|/s/ Steven
 M. Quist        |  | Director                                                                       |  | March 16,
 2009
|Steven M. Quist             |  |                                                                                |  |                
|                            |  |                                                                                |  |                
|/s/ Lawrence
 M. Benveniste |  | Director                                                                       |  | March 16,
 2009
|Lawrence M. Benveniste      |  |                                                                                |  |                
|                            |  |                                                                                |  |                
|/s/ Philip
 D. Hotchkiss    |  | Director                                                                       |  | March 16,
 2009
|Philip D. Hotchkiss         |  |                                                                                |  |                

53

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INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                            
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                            
|No.     |  | Description                                                                                                                                                                                                                                                                                
|3.1     |  | 1992 Restated Articles of Incorporation of Rimage Corporation
 (Incorporated herein by reference to Exhibit 3.1 to the Companys
 Registration Statement on Form SB-2 (File No. 33-22558)).                                                                                                
|        |  |                                                                                                                                                                                                                                                                                            
|3.2     |  | Articles of Amendment to 1992 Restated Articles of Incorporation of
 Rimage Corporation (Incorporated by reference to Exhibit 4.2 to the Companys
 Registration Statement on Form S-8 (File No. 333-69550)).                                                                              
|        |  |                                                                                                                                                                                                                                                                                            
|3.3     |  | Amended and Restated Bylaws of Rimage Corporation, as amended
 (Incorporated by reference to Exhibit 3.2 to the Companys Current Report on
 Form 8-K dated March 7, 2007).                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                            
|3.4     |  | Rights Agreement dated as of September 17, 2003 between Rimage Corporation
 and Wells Fargo Bank, as Rights Agent (Incorporated by reference to Exhibit 1
 to the Companys Registration Statement on Form 8-A (File No. 000- 20728)).                                                     
|        |  |                                                                                                                                                                                                                                                                                            
|10.1    |  | Rimage Corporation Amended and Restated 1992 Stock Option Plan (as
 amended through May 17, 2005) * (Incorporated by reference to Exhibit 4.1 to
 the Companys Registration Statement on Form S-8 (File No. 333- 127244)).                                                                
|        |  |                                                                                                                                                                                                                                                                                            
|10.2    |  | Rimage Corporation 2001 Stock Option Plan for Non-Employee Directors
 * (Incorporated by reference to Exhibit 10.2 to the Companys Annual Report
 on Form 10-K for the year ended December 31, 2001).                                                                                     
|        |  |                                                                                                                                                                                                                                                                                            
|10.3    |  | Rimage Corporation 2001 Employee Stock Purchase Plan * (Incorporated
 by reference to Exhibit 10.3 to the Companys Annual Report on Form 10-K for
 the year ended December 31, 2001).                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                            
|10.4    |  | Rimage Corporation 2007 Stock Incentive Plan (as amended through May
 15, 2007) * (Incorporated by reference to Exhibit 4.1 to the Companys
 Registration Statement on Form S-8 (File No. 333-147344)).                                                                                   
|        |  |                                                                                                                                                                                                                                                                                            
|10.5    |  | Amended and Restated Form of Severance/Change in Control Letter
 Agreement dated December 22, 2008, between the Company and certain executive
 officers * (Incorporated by reference to Exhibit 10.1 of the Companys
 Current Report on Form 8-K dated December 22, 2008).                
|        |  |                                                                                                                                                                                                                                                                                            
|10.6    |  | Letter Agreement dated December 21, 2007 between Rimage Corporation
 and David J. Suden * (Incorporated by reference to Exhibit 10.1 of the
 Companys Current Report on Form 8-K dated December 31, 2007).                                                                                
|        |  |                                                                                                                                                                                                                                                                                            
|10.7    |  | Credit Agreement, dated March 29, 2004, by and between the Company
 and Wells Fargo Bank, National Association (Incorporated by reference to
 Exhibit 10.6 to the Companys Annual Report on Form 10-K for the year ended
 December 31, 2004).                                             
|        |  |                                                                                                                                                                                                                                                                                            
|10.8    |  | First Amendment to Credit Agreement, dated June 30, 2005, by and
 between the Company and Wells Fargo Bank, National Association (Incorporated
 by reference to Exhibit 10.7 to the Companys Annual Report on Form 10-K for
 the year ended December 31, 2005).                           
|        |  |                                                                                                                                                                                                                                                                                            
|10.9    |  | Second Amendment to Credit Agreement, dated August 6, 2006, by and
 between the Company and Wells Fargo Bank, National Association (Incorporated
 by reference to Exhibit 10.9 of the Companys Annual Report on Form 10-K for
 the year ended December 31, 2006).                         
|        |  |                                                                                                                                                                                                                                                                                            
|10.10   |  | Third Amendment to Credit Agreement, dated June 7, 2007, by and
 between the Company and Wells Fargo Bank, National Association (Incorporated
 by reference to Exhibit 10.13 of the Companys Annual Report on Form 10-K for
 the year ended December 31, 2007).                           
|        |  |                                                                                                                                                                                                                                                                                            
|10.11   |  | Revolving Line of Credit Note, dated June 7, 2007, in the principal
 amount of $10,000,000 issued to the Company by Wells Fargo Bank, National
 Association (Incorporated by reference to Exhibit 10.14 of the Companys
 Annual Report on Form 10-K for the year ended December 31, 2007).
|        |  |                                                                                                                                                                                                                                                                                            
|10.12   |  | Purchase and Sale Agreement dated as of July 31, 2008, between Rimage
 Corporation and 7725 Washington Avenue Corporation (Incorporated by reference
 to Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q for the
 quarter ended September 30, 2008).                           
|        |  |                                                                                                                                                                                                                                                                                            
|10.13   |  | Letter from Rimage Corporation to Sherman Black regarding offer of
 employment, accepted on January 29, 2009 * (Incorporated by reference to
 Exhibit 10.1 of the Companys Current Report on Form 8-K, dated January 29,
 2009).                                                          
|        |  |                                                                                                                                                                                                                                                                                            
|10.14   |  | Form of Restricted Stock Agreement by and between Sherman Black and
 the Company to be entered into as of the first day of Mr. Blacks employment
 with the Company * (Incorporated by reference to Exhibit 10.2 of the
 Companys Current Report on Form 8-K, dated January 29, 2009).    

54

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|      |  |                                                                                                                                                                                                                                                                                    
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.15 |  | Form of Stock Option Agreement by and between Sherman Black and the
 Company to be entered into as of the first day of Mr. Blacks employment with
 the Company * (Incorporated by reference to Exhibit 10.3 of the Companys
 Current Report on Form 8-K, dated January 29, 2009).
|      |  |                                                                                                                                                                                                                                                                                    
|21.1  |  | Subsidiaries of Rimage Corporation.                                                                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                    
|23.1  |  | Consent of KPMG LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                    
|31.1  |  | Certificate of Chief Executive Officer pursuant to Rules 13a-14(a)
 and 15d-14(a) of the Exchange Act.                                                                                                                                                                             
|      |  |                                                                                                                                                                                                                                                                                    
|31.2  |  | Certificate of Chief Financial Officer pursuant to Rules 13a-14(a)
 and 15d-14(a) of the Exchange Act.                                                                                                                                                                             
|      |  |                                                                                                                                                                                                                                                                                    
|32    |  | Certification pursuant to 18 U.S.C. §1350.                                                                                                                                                                                                                                         

* Indicates a
management contract or compensatory plan or arrangement

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Table of Contents

Schedule II

RIMAGE CORPORATION
Valuation and Qualifying Accounts
(in thousands)

Allowance for
Doubtful Accounts Receivable:

|                                        |  |                           |     |      |   |      |   |   |     |  
|--------------------------------------- |  | ------------------------- | --- | ---- | - | ---- | - | - | --- | -
|                                        |  | Years
 ended December 31, |    
|                                        |  | 2008                      |     | 2007 |   | 2006 |  
|                                        |  |                           |     |      |   |      |   |   |     |  
|Balance at beginning of year            |  | $                         | 244 |      | $ | 309  |   | $ | 246 |  
|                                        |  |                           |     |      |   |      |   |   |     |  
|Write-offs and other adjustments        |  |                           | (52 | )    |   | (89  | ) |   | (51 | )
|Recoveries                              |  |                           | (6  | )    |   | (57  | ) |   | (16 | )
|Additions charged to costs and expenses |  |                           | 10  |      |   | 81   |   |   | 130 |  
|                                        |  |                           |     |      |   |      |   |   |     |  
|Balance at end of year                  |  | $                         | 196 |      | $ | 244  |   | $ | 309 |  

See
accompanying report of Independent Registered Public Accounting Firm.

56

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