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, 2009                                              
|OR                                                                                        
|oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
 SECURITIES EXCHANGE ACT OF 1934
|                                                                                          
|COMMISSION FILE NO. 000-20728                                                             



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|                                                      
|------------------------------------------------------
|RIMAGE CORPORATION                                    
|(Exact name of registrant as specified in its charter)

|                                                             |  |                                      | 
|------------------------------------------------------------ |  | ------------------------------------ | 
|Minnesota                                                    |  | 41-1577970                          
|State or other jurisdiction of incorporation or organization |  | (I.R.S. Employer Identification No.)
|                                                             |  |                                     
|7725 Washington Avenue South, 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                           



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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 check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files). Yes o No o

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 $155,700,000.

As of February 28, 2009,
9,471,885 shares of the registrants common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants
definitive proxy statement for its 2010 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                                                                                      |    | 4   
|           | 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                                                                        |    | 11  
|Item 2.    | Properties                                                                                       |    | 11  
|Item 3.    | Legal Proceedings                                                                                |    | 12  
|Item 4.    | [Reserved]                                                                                       |    | 12  
|           |                                                                                                  |    |     
|PART II    |                                                                                                  |    | 12  
|           |                                                                                                  |    |     
|Item 5.    | Market for Common Equity, Related Stockholder Matters and Issuer
 Purchases of Equity Securities |    | 12  
|           | Shareholders                                                                                     |    | 12  
|           | Dividends                                                                                        |    | 12  
|           | Other Information Regarding Equity Compensation Plans                                            |    | 13  
|           | Performance Graph                                                                                |    | 14  
|Item 6.    | Selected Financial Data                                                                          |    | 15  
|Item 7.    | Managements Discussion and Analysis of Financial Condition and
 Results of Operations           |    | 16  
|           | Overview                                                                                         |    | 16  
|           | Results of Operations                                                                            |    | 16  
|           | Liquidity and Capital Resources                                                                  |    | 19  
|           | Critical Accounting Policies                                                                     |    | 20  
|           | New Accounting Pronouncements                                                                    |    | 22  
|           | Available Information                                                                            |    | 22  
|Item 7A.   | Quantitative and Qualitative Disclosures About Market Risk                                       |    | 22  
|Item 8.    | Financial Statements and Supplementary Data                                                      |    | 23  
|Item 9.    | Changes in and Disagreements with Accountants on Accounting and
 Financial Disclosure            |    | 49  
|Item 9A.   | Controls and Procedures                                                                          |    | 49  
|Item 9B.   | Other Information                                                                                |    | 50  
|           |                                                                                                  |    |     
|PART III   |                                                                                                  |    | 50  
|           |                                                                                                  |    |     
|Item 10.   | Directors, Executive Officers and Corporate Governance                                           |    | 50  
|Item 11.   | Executive Compensation                                                                           |    | 50  
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management and
 Related Stockholders Matters |    | 50  
|Item 13.   | Certain Relationships and Related Transactions and Directors
 Independence                       |    | 51  
|Item 14.   | Principal Accountant Fees and Services                                                           |    | 51  
|           |                                                                                                  |    |     
|PART IV    |                                                                                                  |    | 51  
|           |                                                                                                  |    |     
|Item 15.   | Exhibits and Financial Statement Schedules                                                       |    | 51  
|           |                                                                                                  |    |     
|SIGNATURES |                                                                                                  | 52

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 Blu-ray 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, business services, law enforcement and video workflows.

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. Blu-ray 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 technology.

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 Blu-ray 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 40%, 39%, and 52% of its
revenue from operations during 2009, 2008 and 2007, 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 Blu-ray 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 Blu-ray 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 34% of total revenues during 2009 at $27.9 million, 33% during 2008
at $30.3 million and 43% during 2007 at $46.8 million. The Desktop line of
hardware products contributed 6% of total revenues in 2009 at $5.1 million, 6%
in 2008 at $5.8 million and 9% in 2007 at $9.4 million. The balance of revenue
in each year was generated through sale of Rimage-branded blank recordable CD,
DVD and Blu-ray media, ribbons, ink cartridges, parts, repair services and
maintenance contracts. These recurring revenues comprised 60% of total revenues
during 2009 at $50.3 million, 61% during 2008 at $55.3 million and 48% during
2007 at $52.6 million. The decrease in recurring revenues has been driven by
the economic downturn compressing demand for many products including the CD,
DVD, and Blu-ray media products created by Rimage customers.

The Producer III Series. The Producer III Series of digital publishing
systems, introduced in 2006, represent 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
Blu-ray discs with digital content. The Company augmented its Producer product
line with the introduction in 2007 of the Professional Series line of digital
publishing systems. Each product in the Producer line incorporates recorders
capable of recording on CD, DVD or Blu-ray 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 Blu-ray 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, has two recorders. The Rimage 6100
system, introduced in 2008 as an expansion of the Producer III Series, has a

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single
recorder. The Rimage 8100 and Rimage 7100 systems have 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,
7100, and the single-recorder 6100 systems are each available with either
Rimages Everest or Prism printers. The Professional Series systems include the
5300N and 5100N, designed as network-attached publishing systems that feature
an embedded control center, an Everest printer and a small product size and
footprint. Rimage introduced two new digital publishing systems to its
Professional Series line of products effective March 1, 2010. The Rimage
Professional Series 5400N and Rimage Professional Series 3400 offer an entry
point for on-demand disc publishing and are compact, all-in one solutions
designed specifically for retail applications and disc publishing in front
office settings. Both systems utilize two recorders, three input bins and an
Everest printer. The Rimage Professional Series 5400N has a control center
embedded inside the unit, while the Rimage Professional Series 3400 does not
contain a control center. The Professional Series 5400N and 3400 line of systems
will replace the 5300N and 5100N as product offerings over the course of 2010.

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 Blu-ray 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 and applications for Rimages Producer line of products include digital
photography, medical imaging, business services, law enforcement and video
workflows. List prices for the Producer line of publishing products available
during 2009 currently range from $10,500 to $37,950. List prices for the
recently introduced Professional Series 5400N and 3400 range from $6,950 to
$12,950.

The Desktop Series. Rimages Desktop Series of CD-R/DVD-R
products feature 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 current list price for the Rimage 2000i Desktop publishing system is
$3,450.

Marketing and Distribution

During
2009 and through March 31, 2010, Rimage has and will utilize the following
principal means of distributing its products: A two-tier distribution channel
of distributors to value added resellers in Europe, the U.S. and Latin America;
a distributor or OEM to end-user distribution channel in Asia Pacific, some
areas in Europe and some U.S. market applications; and direct sales to select
accounts using its own sales force. Rimages channel partners, primarily
consisting of distributors, value added resellers and other strategic partners,
currently generate the majority of the Companys sales.

Effective
April 1, 2010, Rimage is terminating its distributor relationships with
distributors in the United States, Germany, and the United Kingdom. The
termination of these distributors is part of the Companys plan to improve the
efficiency of its sales channels. Following termination of the distributors,
the Company will sell product in these regions to end-user customers primarily
through value-added resellers or other strategic partners and also directly to
select accounts through its own sales force.

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 some of
these markets while also focusing on new applications with high-growth
potential in business services, law enforcement and video workflows. The
Companys sales and marketing organization is focused on penetrating these
targeted markets and strengthening marketing support for new products.

During
2009, 2008 and 2007, Rimage derived 18%, 15% and 14% of its respective revenues
from one of its distributors, and derived 10%, 11% and 9% of its revenues from
a second distributor during the same respective periods. Sales to one of the
Companys strategic partners represented 11%, 10% and 9% of revenues during
2009, 2008 and 2007, respectively. The agreement governing these sales is the
Companys standard distributor agreement (in the case of the distributors) or
standard form of purchase order in the case of the strategic partner.

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 41% of Rimages revenues for the year
ended December 31, 2009, 42% for the year ended December 31, 2008 and 36% of
revenues for the year ended December 31, 2007.

Competition

Rimage
competes with a number of manufacturers of CD-R/DVD-R/Blu-ray production
equipment and related products. Primary competitors of the Company currently
include Primera Technology, Inc., Teac, Microtech Systems, Inc., and Seiko
Epson Corporation. Rimage is able to compete effectively in the sale of digital
publishing systems because of technological leadership in

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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 Blu-ray media, its transporter mechanisms, its software, its
serviceability, and its integration tools differentiate its products from those
of competitors. Rimage also competes with online distribution and alternative
technologies in the storage media industry such as high capacity hard drives,
tape drives and flash memory. 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, Blu-ray 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 and, beginning in March 2010,
its Rimage Professional Series 5400N and Rimage Professional Series 3400
systems. The Company currently purchases these products pursuant to its
standard form of purchase order, submitted to the supplier from time to time as
the products are needed.

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, 2009, 27 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. In addition, Rimage partners
with third-parties to utilize their competencies in creating products to
enhance its product offering.

The
industries served by Rimage are subject to rapid technological changes. Other
technologies, including online distribution and alternative data storage media
exist or are under development, including high capacity hard drives, tape
drives and flash memory. All these forces may affect the usage of recordable
CD, DVD and Blu-ray 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 $7.1 million, $5.3 million and
$5.9 million in 2009, 2008 and 2007, representing 8.6%, 5.7% and 5.4% of
revenues, respectively. Rimage anticipates its expenditures in research and
development in 2010 will remain similar to the levels experienced during 2009
to support a sustained level of new product development initiatives and improve
existing products.

Patents and Government
Regulation

Rimage
currently maintains 27 U.S. and
foreign patents and has a total of four 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.

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

Blu-ray
Disc is a trademark of the Blu-ray Disc Association.

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Employees

At
December 31, 2009, Rimage had 186 full-time employees, of which 27 were
involved in research and development, 79 in production, testing, repair and
customer service, and 80 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 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. Forward-looking statements may
appear in documents, reports, filings with the Securities and Exchange
Commission (SEC), 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 expressed in or implied by forward-looking
statements, involve a number of risks and uncertainties. Forward-looking
statements are not guarantees of future actions, results or performance. 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 many important factors that could cause our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or the results expressed in or implied by any
forward-looking statements. 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 would 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.

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, online
distribution and alternative data storage media is available, including high
capacity hard drives, tape drives and flash memory. 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.

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Our market is competitive and such 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
Blu-ray 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 America, Inc., Seiko Epson Corporation
and Microtech Systems, Inc. To remain competitive, we believe that we must
continue to provide:

| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | Technologically advanced
 systems that anticipate and satisfy the demands of end-users;   
| |   |                                                                                           
| |  | Continuing advancements in
 our recordable CD, DVD and Blu-ray digital publishing systems;
| |   |                                                                                           
| |  | A responsive and effective
 sales force;                                                  
| |   |                                                                                           
| |  | A dependable and efficient
 distribution and reseller network;                            
| |   |                                                                                           
| |  | Superior customer service;
 and                                                           
| |   |                                                                                           
| |  | 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, and 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
or content distribution industries, our business will suffer.

The
success of our products depends upon our end users choosing our recordable CD,
DVD and Blu-ray technology for their storage media needs. However, online
distribution and alternative data storage media exist, such as high capacity
hard drives, tape drives and flash memory. 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. Competition from other publishing systems, online
distribution 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 41% of our revenues for the year ended December 31, 2009, 42% of
our revenues for the year ended December 31, 2008, and 36% for the year ended
December 31, 2007. 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;                                                                                                                             
| |   |                                                                                                                                                                                        
| |  | 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; and                                                                                                                               
| |   |                                                                                                                                                                                        
| |  | 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

7

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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.

Our sales will decline, and our business will be materially
harmed, if our sales and marketing efforts are not effective.

Historically,
we have distributed our products to end users through a two-tier system of
distributors and resellers and through our own sales force to select accounts.

Effective
April 1, 2010, we will terminate several distributor relationships as part of
our plan to improve the efficiency of our sales channels. Following termination
of the distributors, we will sell product to end-user customers primarily
through value-added resellers, other strategic partners, a web-based ordering
tool and also directly to select accounts through our own sales force. Although
we have communicated with our customers regarding these changes, we may
encounter difficulties in transitioning customer relationships from terminated
distributors. Because we will be performing much of the sales and marketing to
this larger customer group, we may also encounter difficulties in managing a
more complex sales and marketing function that meets the needs of our
customers, and may also experience challenges in maintaining an appropriate
number of trained personnel. If we are not able to effectively market our
products to customers or service these customers through our new distribution
channels, our sales may decline and our business may be harmed.

For
sales that are made to customers through value-added resellers or other
strategic partners, we depend on these businesses to provide effective sales
and marketing support to our products. Our distributors and resellers are
independent businesses that we do not control. Our agreements with distributors
and resellers do not contain requirements that a certain percentage of such
parties sales are of our products. 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, any of which could harm our business by reducing sales to customers.

We
believe that our future growth and success will depend upon the success of our
sales and marketing efforts as well as those of our value-added resellers or
other strategic partners.

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.

8

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We
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, Blu-ray 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 resellers or end-user customers. 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. We purchase these components pursuant to our standard form of
purchase order, submitted to the supplier from time to time as the components
are needed.

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.
The Company depends upon a single-source supplier for its Everest printers and,
beginning in March 2010, its Rimage Professional Series 5400N and Rimage
Professional Series 3400 systems. For these products, it is more difficult to
identify an alternative supplier because of the proprietary information and
technology held by the current supplier. If we were unable to effectively
transition the technology and proprietary information used by our current
suppliers to alternative suppliers, the design and manufacture of components
and products to our specifications may be significantly delayed, resulting in
potential production delays and significant expense. Further, if we obtain a
new supplier for a component or product 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.

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.

9

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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; and  
| |   |                                                                          
| |  | The timing and level of
 operating expenses;                             
| |   |                                                                          
| |  | General economic and market
 conditions including market uncertainty.    

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 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;                                                                  
| |   |                                                                                                 
| |  | Potential acquisition or
 strategic alliance activities;                                        
| |   |                                                                                                 
| |  | Investor perception of us
 and our industry;                                                    
| |   |                                                                                                 
| |  | General economic and market
 conditions including market uncertainty;                           
| |   |                                                                                                 
| |  | National or global
 political events; and                                                       
| |   |                                                                                                 
| |  | 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.

10

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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;                          
| |   |                                                                                                                                                                                                             
| |  | 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; and
| |   |                                                                                                                                                                                                             
| |  | 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 company disclosure
requirements, 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. 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 $22,000 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 $18,000 U.S. dollars).

11

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|        |                  
|------- | -----------------
|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. | [RESERVED]

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 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 | 
|Year 2009:  |  |     |       |      |   |       | 
|1st Quarter |  | $   | 11.14 |      | $ | 15.11 | 
|2nd Quarter |  | $   | 12.58 |      | $ | 18.00 | 
|3rd Quarter |  | $   | 14.97 |      | $ | 17.86 | 
|4th Quarter |  | $   | 15.47 |      | $ | 19.38 | 

Shareholders

As of February
17, 2010, there were 46 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.

12

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Table of Contents

Other Information Regarding
Equity Compensation Plans

The following table sets forth information regarding Rimages equity
compensation plans in effect as of December 31, 2009. 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-average
 exercise price of
 outstanding 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:      |  |                                                                                                             |  | 1,069,626                                                                      |  |                                                                                                                 |  | $ | 17.85 |  |  |  |  | 675,420 |  | 
|                                                         |  |                                                                                                             |  |                                                                                |  |                                                                                                                 |  |   |       |  |  |  |  |         |  | 
|Equity
 compensation plans not approved by shareholders: |  |                                                                                                             |  | 200,000                                                                        |  |                                                                                                                 |  | $ | 14.10 |  |  |  |  |        |  | 
|Total                                                    |  |                                                                                                             |  | 1,269,626                                                                      |  |                                                                                                                 |  | $ | 17.26 |  |  |  |  | 675,420 |  | 

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

Equity compensation plans not approved by shareholders consists of a
non-qualified stock option grant to Sherman L. Black on April 1, 2009, the
first day of his employment with Rimage. The stock option was granted outside
of the Companys current equity incentive plan, the 2007 Stock Incentive Plan,
as an inducement award pursuant to Nasdaq Marketplace Rule 4350(i)(1)(A)(iv).
The option has an exercise price equal to the closing price of the Companys
common stock as reported by the Nasdaq Stock Market on April 1, 2009, vests in
four equal installments on each of the first four anniversaries of the date of
grant, and has a term of seven years. In other respects, the option was
structured to mirror the terms of options granted under the Companys 2007
Stock Incentive Plan and is subject to a stock option plan and agreement
entered into by and between the Company and Mr. Black dated April 1, 2009.

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,
2005 to December 31, 2009 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)

|                                           |  |          |        |          |   |          |  |          |        |          |   |       |  |   |        | 
|------------------------------------------ |  | -------- | ------ | -------- | - | -------- |  | -------- | ------ | -------- | - | ----- |  | - | ------ | 
|                                           |  | 12/30/05 |        | 12/29/06 |   | 12/31/07 |  | 12/31/08 |        | 12/31/09 |  
|                                           |  |          |        |          |   |          |  |          |        |          |   |       |  |   |        | 
|Nasdaq
 National Market Index              |  | $        | 100.00 |          | $ | 109.84   |  | $        | 119.14 |          | $ | 57.41 |  | $ | 82.52  | 
|                                           |  |          |        |          |   |          |  |          |        |          |   |       |  |   |        | 
|Nasdaq
 Computer Manufacturer Stocks Index |  | $        | 100.00 |          | $ | 102.13   |  | $        | 149.41 |          | $ | 62.76 |  | $ | 137.84 | 
|                                           |  |          |        |          |   |          |  |          |        |          |   |       |  |   |        | 
|Rimage
 Corporation                        |  | $        | 100.00 |          | $ | 89.72    |  | $        | 89.54  |          | $ | 46.27 |  | $ | 59.83  | 

14

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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,     |        
|                                         |  | 2009                        |         | 2008 |   | 2007    |  | 2006 |         | 2005 |  
|Revenues                                 |  | $                           | 83,227  |      | $ | 91,394  |  | $    | 108,874 |      | $ | 103,252 |  | $ | 95,410 | 
|Cost of revenues                         |  | $                           | 42,894  |      | $ | 51,731  |  | $    | 57,719  |      | $ | 56,014  |  | $ | 51,957 | 
|Gross profit                             |  | $                           | 40,333  |      | $ | 39,663  |  | $    | 51,155  |      | $ | 47,238  |  | $ | 43,453 | 
|Operating expenses                       |  | $                           | 29,087  |      | $ | 27,915  |  | $    | 30,274  |      | $ | 29,464  |  | $ | 26,829 | 
|Operating income                         |  | $                           | 11,246  |      | $ | 11,748  |  | $    | 20,881  |      | $ | 17,774  |  | $ | 16,624 | 
|Other income, net                        |  | $                           | 1,866   |      | $ | 2,711   |  | $    | 3,513   |      | $ | 2,684   |  | $ | 1,419  | 
|Income tax expense                       |  | $                           | 4,617   |      | $ | 5,028   |  | $    | 8,633   |      | $ | 7,374   |  | $ | 6,675  | 
|Net income                               |  | $                           | 8,495   |      | $ | 9,431   |  | $    | 15,761  |      | $ | 13,084  |  | $ | 11,368 | 
|                                         |  |                             |         |      |   |         |  |      |         |      |   |         |  |   |        | 
|Basic net income per share               |  | $                           | 0.91    |      | $ | 0.99    |  | $    | 1.59    |      | $ | 1.33    |  | $ | 1.19   | 
|Diluted net income per
 share            |  | $                           | 0.89    |      | $ | 0.97    |  | $    | 1.52    |      | $ | 1.26    |  | $ | 1.10   | 
|Weighted average shares
 outstanding:    |  |                             |         |      |   |         |  |      |         |      |   |         |  |   |        | 
|Basic                                    |  |                             | 9,374   |      |   | 9,559   |  |      | 9,915   |      |   | 9,812   |  |   | 9,530  | 
|Diluted                                  |  |                             | 9,507   |      |   | 9,729   |  |      | 10,371  |      |   | 10,356  |  |   | 10,312 | 
|                                         |  |                             |         |      |   |         |  |      |         |      |   |         |  |   |        | 
|                                         |  |                             |         |      |   |         |  |      |         |      |   |         |  |   |        | 
|Consolidated
 Balance Sheet Information: |  |                             |         |      |   |         |  |      |         |      |   |         |  |   |        | 
|                                         |  |                             |         |      |   |         |  |      |         |      |   |         |  |   |        | 
|                                         |  | Balances as of December 31, |        
|                                         |  | 2009                        |         | 2008 |   | 2007    |  | 2006 |         | 2005 |  
|Cash and cash equivalents                |  | $                           | 72,507  |      | $ | 14,885  |  | $    | 7,416   |      | $ | 8,500   |  | $ | 12,693 | 
|Marketable securities                    |  | $                           | 28,581  |      | $ | 39,870  |  | $    | 51,605  |      | $ | 30,266  |  | $ | 51,582 | 
|Receivables, net                         |  | $                           | 13,732  |      | $ | 11,099  |  | $    | 14,447  |      | $ | 21,697  |  | $ | 12,885 | 
|Inventories                              |  | $                           | 4,123   |      | $ | 5,625   |  | $    | 8,075   |      | $ | 6,072   |  | $ | 6,621  | 
|Current assets                           |  | $                           | 120,760 |      | $ | 74,151  |  | $    | 84,771  |      | $ | 70,116  |  | $ | 86,444 | 
|Property and equipment, net              |  | $                           | 7,855   |      | $ | 6,183   |  | $    | 3,206   |      | $ | 3,626   |  | $ | 2,525  | 
|Marketable securities -
 non-current     |  | $                           | 9,037   |      | $ | 40,647  |  | $    | 35,201  |      | $ | 38,594  |  | $ |       | 
|Total assets                             |  | $                           | 140,282 |      | $ | 123,456 |  | $    | 125,096 |      | $ | 112,359 |  | $ | 89,009 | 
|Current liabilities                      |  | $                           | 17,589  |      | $ | 12,010  |  | $    | 17,882  |      | $ | 16,163  |  | $ | 12,191 | 
|Long-term liabilities                    |  | $                           | 2,744   |      | $ | 2,398   |  | $    | 2,153   |      | $ | 720     |  | $ | 289    | 
|Stockholders equity                     |  | $                           | 119,949 |      | $ | 109,048 |  | $    | 105,061 |      | $ | 95,476  |  | $ | 76,529 | 

15

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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, 2009 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 | 
|                                    |  | 2009                       |       | 2008                                            |  | 2007  |   | 2009 vs. 2008 |       | 2008 vs. 2007 | 
|Revenues                            |  |                            | 100.0 |                                                 |  | 100.0 |   |               | 100.0 |               |  | (8.9  | ) |  | (16.1 | )
|Cost
 of revenues                   |  |                            | (51.5 | )                                               |  | (56.6 | ) |               | (53.0 | )             |  | (17.1 | ) |  | (10.4 | )
|Gross
 profit                       |  |                            | 48.5  |                                                 |  | 43.4  |   |               | 47.0  |               |  | 1.7   |   |  | (22.5 | )
|Operating
 expenses:                |  |                            |       |                                                 |  |       |   |               |       |               |  |       |   |  |       |  
|Research and development            |  |                            | (8.6  | )                                               |  | (5.7  | ) |               | (5.4  | )             |  | 36.0  |   |  | (11.0 | )
|Selling, general and administrative |  |                            | (26.4 | )                                               |  | (24.8 | ) |               | (22.4 | )             |  | (3.2  | ) |  | (7.0  | )
|Operating
 income                   |  |                            | 13.5  |                                                 |  | 12.9  |   |               | 19.2  |               |  | (4.3  | ) |  | (43.7 | )
|Other
 income, net                  |  |                            | 2.2   |                                                 |  | 2.9   |   |               | 3.2   |               |  | (31.2 | ) |  | (22.8 | )
|Income
 before income taxes         |  |                            | 15.7  |                                                 |  | 15.8  |   |               | 22.4  |               |  | (9.3  | ) |  | (40.7 | )
|Income
 tax expense                 |  |                            | (5.5  | )                                               |  | (5.5  | ) |               | (7.9  | )             |  | (8.2  | ) |  | (41.8 | )
|Net
 income                         |  |                            | 10.2  |                                                 |  | 10.3  |   |               | 14.5  |               |  | (9.9  | ) |  | (40.2 | )

Overview

Rimage
develops, manufactures and markets digital publishing systems that are used by
businesses to produce recordable CD, DVD and Blu-ray 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 Blu-ray media. These systems allow customers to benefit from
cost savings by eliminating their manual labor efforts in markets and
applications such as digital photography, medical imaging, business services,
law enforcement and video workflows. As Rimages sales within North America and
Europe have averaged 92% 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 60%, 61% and 48% of its consolidated revenues in 2009, 2008 and
2007, 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 $83.2 million for 2009, reflecting a 9% decline
from total revenues of $91.4 million in 2008, which reflected a decline of 16%
from total revenues of $108.9 million in 2007.

The
$8.2 million reduction in total revenues from 2008 to 2009 reflects a $9.6
million or 12% decrease in product revenues, partially offset by an increase in
service revenues of $1.4 million or 17%. The decrease in product revenues
resulted from a $6.5 million reduction in sales of consumable products and a
$3.1 million reduction in sales of equipment. The decrease in consumable
product sales consisted of a $3.7 million decline in the volume of ribbon and
ink cartridge sales and a $2.8 million reduction in media and media kit sales.
The current year decline in sales of consumable products was primarily
attributable to a reduction in sales in the retail market segment of $4.0
million, impacted by the economy-related reductions in consumer demand. Also
contributing to the current year decrease in sales of consumable products was a
$1.1 million reduction in sales to the Companys U.S. channel partners. The
overall decline in equipment sales in the current year period was primarily
impacted by a reduced volume of sales in the Companys European market of $3.6
million, spurred by lower sales of Producer product line equipment and the
impact of fluctuations in the Euro relative to the U.S. dollar. The reduction
in equipment sales in the current period was also impacted by a shift in the
distribution of sales to lower-end Producer products, which have lower average
selling prices than higher-end Producer product line equipment. The partially
offsetting growth in service revenues of $1.4 million was impacted by increased
coverage of the Companys installed base of systems with maintenance contracts,
driven primarily by new and renewed maintenance contract in the retail market
segment. Recurring revenues comprised 60% of total revenues for the year ended
December 31, 2009, compared to 61% in the prior year period. Sales of Producer
product line equipment comprised 34% of total revenues in 2009, compared to 33%
in the prior-year period.

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Remaining
revenues in each year were generated by sales of Desktop product line
equipment, representing 6% of revenues in 2009 and 2008.

The
reduction in total revenues from 2007 to 2008 of $17.5 million resulted from an
$18.2 million or 18% decline in product revenues, partially offset by a $0.7
million or 8% increase in service 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, largely driven by a decline in
equipment sales in the Companys retail market segment. 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 decline
in equipment sales from 2007 to 2008 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 product line equipment, 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 installed base of
publishing systems and the Companys increased emphasis on promoting this
portion of its business.

International
sales decreased 11% in 2009 from 2008 and comprised 41% of total sales,
compared to 42% in 2008 and 36% in 2007. The decline in international sales in
the current year was driven by a 16% reduction in sales in the Companys
European market, partially offset by sales growth in the Companys Asian
markets of 20%. Without the impact of currency fluctuations affecting the
Companys European and Japanese operations, international revenues decreased by
8% in 2009 relative to 2008. The European market continued to generate the
majority of international sales. Currency fluctuations affecting the Companys
European and Japanese operations decreased consolidated revenues in 2009 by
1.4% relative to 2008 and increased consolidated revenues by 2.8% in 2008
relative to 2007.

Revenue
levels in 2010 will be dependent upon many factors, including the effectiveness
of changes that will occur effective April 1, 2010 to improve the efficiency of
the Companys sales channels. As part of this change, Rimage will be
terminating its distributor relationships with distributors in the United
States, Germany, and the United Kingdom and will sell products in these regions
to end-user customers primarily through value-added resellers or other
strategic partners and also directly to select accounts through its own sales
force. Other factors that will influence revenue levels in 2010 include the
performance 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 48.5% for the year
ended December 31, 2009, compared to 43.4% and 47.0% for the years ended
December 31, 2008, and 2007, respectively.

The
increase in gross profit as a percentage of total revenues in 2009 relative to
2008 resulted primarily from an improvement in service margins, impacted by
growth in maintenance contract revenues largely within the retail market
segment. Additionally, service costs decreased as a result of lower
compensation costs stemming from a reduced workforce in 2009 and a reduction in
support costs for service parts and freight as a result of corporate
initiatives which reduced the number of maintenance exchanges. Also
contributing to the increase in gross profit as a percentage of revenues in
2009 was a reduction in sales rebates from sales incentive and other programs.
Partially offsetting the favorable impact in 2009 of the changes described
above was a reduced volume and concentration of higher margin product sales,
including higher-end systems in the Producer product line and ribbons and ink
cartridges.

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 was
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, the
gross margin in 2008 benefited from reductions in compensation related costs
resulting 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.

Future
gross profit margins will continue to be affected by many factors, including
the impact of planned changes in the Companys sales distribution model
described above, 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.

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Operating Expenses. Research and development expenses were $7.1 million, $5.3 million and
$5.9 million for the years ended December 31, 2009, 2008 and 2007,
respectively, representing 8.6%, 5.7% and 5.4% of revenues, respectively.

The
36% increase in research and development expense from 2008 to 2009 was
primarily due to $2.3 million in expenses incurred in 2009 as part of a
development arrangement with a third party supplier to develop a new product
scheduled to launch during the first quarter of 2010. Partially offsetting this
increase was the impact in 2009 of a 7% reduction in average headcount. A lower
level of development expenses was incurred in 2008 to support activities
associated with the projects described below.

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.

Rimage
anticipates its expenditures in research and development in 2010 will remain
similar to the levels experienced during 2009 to support a sustained level of
new product development initiatives and improve existing products.

Selling,
general and administrative expenses for the years ended December 31, 2009, 2008
and 2007 were $21.9 million, $22.7 million and $24.4 million, respectively,
representing 26.4%, 24.8% and 22.4% of revenues, respectively.

The
3.2% decline in selling, general and administrative expenses in 2009 compared
to 2008 was primarily impacted by cost reduction measures implemented during
2008 and early 2009, including reduced employee compensation related costs of
approximately $1.8 million stemming from workforce reductions and reduced
expenditures for travel and marketing and promotional programs approximating
$0.9 million. Also contributing to the decline in expenses was the net impact
of currency fluctuations primarily affecting the Companys European operations,
reducing selling, general and administrative expenses by $0.2 million.
Partially offsetting the reductions in expenses described above were higher
expenses associated with incentive bonus compensation of approximately $1.2
million resulting from above plan operating performance in 2009, compensation
related expenses associated with the retirement of the outgoing Chief Executive
Officer of $0.6 million, and compensation expenses associated with the hire in
2009 of two new executive officers.

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.

Other Income, Net. The Company recognized interest income on cash and marketable
securities of $1.5 million, $2.8 million and $3.5 million in 2009, 2008 and
2007, respectively. The reduction in interest income in 2009 relative to 2008
was the result of a decline of approximately one and a half percentage points
in the effective yield on the Companys investment portfolio, partially offset
by higher average cash and marketable securities balances of $9.4 million. The
reduction in interest income in 2008 relative to 2007 was the result of an
approximate decline of 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. 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, 2009, 2008 and 2007,
income tax expense amounted to $4.6 million, $5.0 million and $8.6 million,
respectively, representing 35.2%, 34.8% and 35.4% of income before income
taxes, respectively. The rise in the effective tax rate in 2009 relative to
2008 primarily reflects the impact of tax-exempt interest income comprising a
smaller percentage of pre-tax income and higher state income taxes affected
primarily by changes in certain state tax apportionment factors. Partially
offsetting the unfavorable effect of the above was the impact in 2009 of the
implementation of recommendations of a transfer price study which reduced U.S.
pre-tax income as a result of a re-allocation to the U.S. parent company of
expenses incurred in the Companys Japanese subsidiary to properly reflect
expenses for each legal entity. 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 percentage of pre-tax
income and the impact of a lower tax bracket. Partially offsetting the above

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reductions
in 2008 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.

Net Income / Net Income Per Share. Net income for the years ended December 31,
2009, 2008 and 2007 amounted to $8.5 million, $9.4 million and $15.8 million,
representing 10.2%, 10.3% and 14.5% of revenues, respectively. Related net
income per diluted share amounts were $0.89 in 2009, $0.97 in 2008 and $1.52 in
2007.

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, 2009, no amounts were outstanding under
the credit agreement.

At
December 31, 2009, the Company had working capital of $103.2 million, an
increase of $41.0 million from working capital reported at December 31, 2008.
The increase was primarily the result of the impact of a non-cash change in the
classification of $26.4 million of marketable securities from non-current as of
December 31, 2008 to current as of December 31, 2009, the sale of $6.8 million
of non-current marketable securities and corresponding purchase of current
marketable securities and net income of $8.5 million. 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, 2009.

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 may 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
2009, the Company did not repurchase any shares of its common stock. The
Company also intends on utilizing its assets for its continued organic growth
and potential future strategic initiatives or alliances.

Net
cash provided by operating activities totaled $14.2 million, $12.2 million and
$26.1 million for the years ended December 31, 2009, 2008 and 2007,
respectively. The $2.0 million increase in cash provided by operating
activities in 2009 relative to 2008 resulted from changes in operating assets
and liabilities producing a $3.5 million larger increase in cash, partially
offset by a $1.5 million reduction in net income adjusted for non-cash and
non-operating items. Primarily contributing to the change in operating assets
and liabilities was a $6.0 million favorable change in the aggregate amount of
trade accounts payable, accrued compensation and other accrued expenses and a
$2.5 million favorable change in deferred income, partially offset by a $5.9
million unfavorable change in receivables. The changes in trade accounts
payable, accrued compensation and accrued expenses reflect a $1.6 million
aggregate increase in the amount of these balances in the current year,
compared to a $4.4 million aggregate decrease in 2008. These changes were
primarily due to increased accruals in 2009 for costs related to a development
project and reduced inventory purchases, in the case of accounts payable, and
increased bonus accruals, in the case of accrued compensation. The favorable
change in deferred income resulted from a larger volume of new maintenance
contracts or renewals in 2009 compared to 2008, impacted primarily by
significant renewals in the retail market segment in 2009. The unfavorable
change in receivables resulted from a $2.6 million increase in related balances
in 2009 compared to a $3.3 million decrease in 2008, primarily impacted by a
$3.4 million increase in sales from December 2008 to December 2009, compared to
a $2.6 million decline in sales between December 2007 and December 2008.

Investing
activities provided a net increase in cash of $42.2 million for the year ended
December 31, 2009, compared to a net increase in cash of $2.7 million and a net
use of cash of $18.7 million for the years ended December 31, 2008 and 2007,
respectively. Cash provided by or used in investing activities for each year
primarily reflects maturities and sales of marketable securities, net of
purchases of marketable securities. Maturities and sales of marketable
securities, net of related purchases, generated a net increase in cash and cash
equivalents of $42.6 million and $7.0 million in 2009 and 2008, respectively,
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.
Investing activities also included purchases of property and equipment of $0.4
million in 2009, $4.4 million in 2008 and $1.3 million in 2007. Capital expenditures
in 2009 included purchases of office equipment, manufacturing tooling and
information technology related infrastructure. 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
2010, the Company expects capital expenditure related investments to primarily
support the Companys production and information technology infrastructure
related requirements. Capital expenditures in 2010 are expected to range from
$3.5 million to $4.0 million, including $2.4 million for production tooling
capitalized by the Company in late 2009 associated with a new product scheduled
to launch during the first quarter of 2010.

Financing
activities generated net cash of $1.3 million in 2009 and used net cash of $7.4
million in 2008 and $8.7 million in 2007. The significant net use of cash in
financing activities in 2008 and 2007 was primarily attributable to the
Companys repurchase of shares of

19

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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 $1.2 million, $1.6
million and $2.8 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 $0.1 million in 2009, $0.7 million
in 2008 and $1.2 million in 2007. 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.

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, 2009 is as follows (in thousands):

|                                         |  |                        |     |      |   |      |  |      |     |      |   |      |  |   |    |  |   |    | 
|---------------------------------------- |  | ---------------------- | --- | ---- | - | ---- |  | ---- | --- | ---- | - | ---- |  | - | -- |  | - | -- | 
|                                         |  | Payments due by period |    
|Contractual
 Obligations                 |  | Total                  |     | 2010 |   | 2011 |  | 2012 |     | 2013 |   | 2014 | 
|Operating leases                         |  | $                      | 662 |      | $ | 439  |  | $    | 202 |      | $ | 20   |  | $ | 1  |  | $ |   | 
|Capital leases (1)                       |  |                        | 111 |      |   | 23   |  |      | 23  |      |   | 23   |  |   | 23 |  |   | 19 | 
|Income tax liabilities
 under FIN 48 (2) |  |                        |    |      |   |     |  |      |    |      |   |     |  |   |   |  |   |   | 
|Total contractual cash obligations       |  | $                      | 773 |      | $ | 462  |  | $    | 225 |      | $ | 43   |  | $ | 24 |  | $ | 19 | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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, 2009 to be paid to the applicable tax authorities
 in 2010. The full balance of unrecognized tax benefits under FIN 48 of
 $364,000 at December 31, 2009 has been excluded from the above table as the
 period of payment or reversal cannot 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. 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, 2009.

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 have been satisfied:

| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Persuasive
 evidence of an arrangement exists. Orders are received for all sales and
 sales invoices are mailed on shipment.                                                                                                                            
| |   |                                                                                                                                                                                                                                                         
| |  | Delivery
 has occurred. Product has been transferred to the customer or the customers
 designated delivery agent, at which time title and risk of loss transfers.                                                                                      
| |   |                                                                                                                                                                                                                                                         
| |  | The
 vendors price is fixed or determinable. All sales prices are fixed at the
 time of the sale (shipment).                                                                                                                                           
| |   |                                                                                                                                                                                                                                                         
| |  | Collectability
 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 certain of
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.

As
part of its product offering, the Company sells separately priced maintenance
agreements that are valued based on the amount invoiced for the service.
Revenue associated with all other elements in a multiple element arrangement is
allocated among the separate accounting units based on the residual method.
Under the residual method, the arrangement revenue is allocated to undelivered
elements based on the fair value of such undelivered elements and the residual
amount of revenue is allocated to the delivered elements.

20

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Allowance for Doubtful Accounts. 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.

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, 2009, 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.

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. As of
December 31, 2009, the Company recognized tax liabilities of $259,000 and
$30,000, before reduction for the federal benefit for state income tax related
amounts and a valuation allowance on a foreign loss carryforward, for new
uncertainties related to prior and current year income tax positions,
respectively. As of December 31, 2009, the Company reversed gross tax
liabilities, exclusive of interest and penalties, amounting to $62,000
associated with income tax settlements and $224,000 for prior year tax
positions. The decrease of $224,000 is primarily offset by a deferred tax asset
of $217,000.

Stock-Based
Compensation.The Company accounts for stock-based awards 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 $1.5 million, $1.1 million and
$1.6 million for the years ended December 31, 2009, 2008 and 2007,
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 received 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 historical 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 may differ significantly from the expense
recorded in the current period.

21

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See Note 3 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, 2009 consisted of property and equipment. 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. 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, 2009.

New Accounting
Pronouncements

In September 2009, the FASB
ratified its guidance on two revenue recognition standards that will become
effective for the Company beginning January 1, 2011, with earlier adoption
permitted. Under the new guidance on revenue arrangements with multiple
deliverables, when vendor specific objective evidence or third party evidence
for deliverables in an arrangement cannot be determined, a best estimate of the
selling price is required to separate deliverables and allocate arrangement
consideration using the relative selling price method. Under the new guidance
on arrangements that include software elements, tangible products that have
software components that are essential to the functionality of the tangible
product will no longer be within the scope of the software revenue recognition
guidance, and software-enabled products will now be subject to the new guidance
for multiple deliverable arrangements discussed above. In the initial year of
application, companies are required to make qualitative and quantitative
disclosures about the impact of the changes under both standards. The Company
is currently evaluating the impact that this guidance will have 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.

22

---

Table of Contents

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.

|                                                   |  |                                       |        |      |  |      |  |      |   |               |  |       |  |             |   |  |   |        |  |   |    | 
|-------------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- |  | ---- | - | ------------- |  | ----- |  | ----------- | - |  | - | ------ |  | - | -- | 
|                                                   |  | Expected Maturity or Transaction Date |        |      | 
|                                                   |  | 2010                                  |        | 2011 |  | 2012 |  | 2013 |   | There-
 after |  | Total |  | Fair
 Value |  
|                                                   |  | (US$ Equivalent in Thousands)         |        |     
|Anticipated Transactions and 
 Related Derivatives |  |                                       |        |      |  |      |  |      |   |               | 
|                                                   |  |                                       |        |      |  |      |  |      |   |               |  |       |  |             |   |  |   |        |  |   |    | 
|Forward Exchange Agreements (Receive $US/Pay )    |  |                                       |        |      |  |      |  |      |   |               |  |       |  |             |   |  |   |        |  |   |    | 
|Contract Amount                                    |  | $                                     | 550    |      |  |     |  |      |  |               |  |      |  |             |  |  | $ | 550    |  | $ | 17 | 
|Average Contractual 
 Exchange Rate                |  |                                       | 1.4779 |      |  |     |  |      |  |               |  |      |  |             |  |  |   | 1.4779 |  |   |    | 

A hypothetical 10% appreciation or depreciation in the value of the
U.S. dollar relative to the Euro as of December 31, 2009, assuming all other
variables are held constant, would result in a larger gain or loss in fair
value of approximately $53,000, respectively, than that reflected above as of
December 31, 2009.

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

Financial Statements

|                                                                                                                               |  |                                                                        | 
|------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------- | 
|                                                                                                                               |  | Page in Annual
 Report on Form 10-K
 For Year Ended
 December 31, 2009
|                                                                                                                               |  |                                                                        | 
|Managements Report on Internal Control over
 Financial Reporting                                                              |  | 24                                                                     | 
|                                                                                                                               |  |                                                                        | 
|Reports of Independent Registered Public Accounting
 Firm                                                                      |  | 25
 - 26                                                               | 
|                                                                                                                               |  |                                                                        | 
|Consolidated Balance Sheets as of December 31, 2009
 and 2008                                                                  |  | 27                                                                     | 
|                                                                                                                               |  |                                                                        | 
|Consolidated Statements of Income for the years ended
 December 31, 2009, 2008 and 2007                                        |  | 28                                                                     | 
|                                                                                                                               |  |                                                                        | 
|Consolidated Statements of Stockholders Equity and
 Comprehensive Income for the years ended December 31, 2009, 2008 and 2007 |  | 29                                                                     | 
|                                                                                                                               |  |                                                                        | 
|Consolidated Statements of Cash Flows for the years
 ended December 31, 2009, 2008 and 2007                                    |  | 30                                                                     | 
|                                                                                                                               |  |                                                                        | 
|Notes to Consolidated Financial Statements                                                                                     |  | 31
 - 49                                                               | 

23

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Table of Contents

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, 2009. 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.

24

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Table of Contents

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, 2009 and 2008 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, 2009. 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,
2009, 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, 2009 and 2008, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, 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, 2009, 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 12, 2010, expressed an unqualified opinion on the
effectiveness of the Companys internal control over financial reporting.

|                        | 
|----------------------- | 
|KPMG LLP               
|                        | 
|Minneapolis,
 Minnesota | 
|March 12,
 2010         | 

25

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Table of Contents

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, 2009, 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, 2009,
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, 2009 and 2008, 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, 2009, and our report dated March 12, 2010 expressed an unqualified
opinion on those consolidated financial statements.

|         | 
|-------- | 
|KPMG LLP

Minneapolis,
Minnesota 
March 12, 2010

26

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RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2009 and 2008(In
thousands, except share data)

|                                                                                                                          |  |                    |         |                    |   |         | 
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ------------------ | - | ------- | 
|Assets                                                                                                                    |  | December 31,
 2009 |         | December 31,
 2008 |  
|                                                                                                                          |  |                    |         |                    |   |         | 
|Current assets:                                                                                                           |  |                    |         |                    |   |         | 
|Cash and cash equivalents                                                                                                 |  | $                  | 72,507  |                    | $ | 14,885  | 
|Marketable securities                                                                                                     |  |                    | 28,581  |                    |   | 39,870  | 
|Receivables, net of allowance for doubtful accounts and sales returns
 of $327 and $489, respectively                     |  |                    | 13,732  |                    |   | 11,099  | 
|Inventories                                                                                                               |  |                    | 4,123   |                    |   | 5,625   | 
|Prepaid income taxes                                                                                                      |  |                    |        |                    |   | 314     | 
|Prepaid expenses and other current assets                                                                                 |  |                    | 1,271   |                    |   | 2,014   | 
|Deferred income taxes - current                                                                                           |  |                    | 546     |                    |   | 344     | 
|Total current assets                                                                                                      |  |                    | 120,760 |                    |   | 74,151  | 
|                                                                                                                          |  |                    |         |                    |   |         | 
|Marketable securities - non-current                                                                                       |  |                    | 9,037   |                    |   | 40,647  | 
|Property and equipment, net                                                                                               |  |                    | 7,855   |                    |   | 6,183   | 
|Deferred income taxes - non-current                                                                                       |  |                    | 2,630   |                    |   | 2,281   | 
|Other assets - non-current                                                                                                |  |                    |        |                    |   | 194     | 
|Total assets                                                                                                              |  | $                  | 140,282 |                    | $ | 123,456 | 
|                                                                                                                          |  |                    |         |                    |   |         | 
|Liabilities and
 Stockholders Equity                                                                                     |  |                    |         |                    |   |         | 
|Current liabilities:                                                                                                      |  |                    |         |                    |   |         | 
|Trade accounts payable                                                                                                    |  | $                  | 6,898   |                    | $ | 4,534   | 
|Accrued compensation                                                                                                      |  |                    | 3,834   |                    |   | 1,879   | 
|Other accrued expenses                                                                                                    |  |                    | 911     |                    |   | 827     | 
|Income taxes payable                                                                                                      |  |                    | 222     |                    |   |        | 
|Deferred income and customer deposits                                                                                     |  |                    | 5,706   |                    |   | 4,507   | 
|Other current liabilities                                                                                                 |  |                    | 18      |                    |   | 263     | 
|Total current liabilities                                                                                                 |  |                    | 17,589  |                    |   | 12,010  | 
|                                                                                                                          |  |                    |         |                    |   |         | 
|Long-term liabilities:                                                                                                    |  |                    |         |                    |   |         | 
|Deferred income and customer deposits - non-current                                                                       |  |                    | 2,452   |                    |   | 1,942   | 
|Income taxes payable - non-current                                                                                        |  |                    | 213     |                    |   | 421     | 
|Other non-current liabilities                                                                                             |  |                    | 79      |                    |   | 35      | 
|Total long-term liabilities                                                                                               |  |                    | 2,744   |                    |   | 2,398   | 
|Total liabilities                                                                                                         |  |                    | 20,333  |                    |   | 14,408  | 
|                                                                                                                          |  |                    |         |                    |   |         | 
|Commitments and contingencies (Notes 13 and 17)                                                                           |  |                    |        |                    |   |        | 
|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 9,471,885 and 9,334,435, respectively |  |                    | 94      |                    |   | 93      | 
|Additional paid-in capital                                                                                                |  |                    | 40,296  |                    |   | 37,484  | 
|Retained earnings                                                                                                         |  |                    | 78,782  |                    |   | 70,287  | 
|Accumulated other comprehensive income                                                                                    |  |                    | 777     |                    |   | 1,184   | 
|Total stockholders equity                                                                                                |  |                    | 119,949 |                    |   | 109,048 | 
|                                                                                                                          |  |                    |         |                    |   |         | 
|Total
 liabilities and stockholders equity                                                                               |  | $                  | 140,282 |                    | $ | 123,456 | 

See accompanying notes to
consolidated financial statements.

27

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RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 2009, 2008 and 2007(In
thousands, except per share data)

|                                               |  |      |        |      |   |        |   |   |         |  
|---------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------- | -
|                                               |  | 2009 |        | 2008 |   | 2007   |  
|Revenues:                                      |  |      |        |      |   |        |   |   |         |  
|Product                                        |  | $    | 72,285 |      | $ | 81,848 |   | $ | 100,071 |  
|Service                                        |  |      | 10,942 |      |   | 9,546  |   |   | 8,803   |  
|Total revenues                                 |  |      | 83,227 |      |   | 91,394 |   |   | 108,874 |  
|Cost of revenues:                              |  |      |        |      |   |        |   |   |         |  
|Product                                        |  |      | 35,491 |      |   | 42,382 |   |   | 49,435  |  
|Service                                        |  |      | 7,403  |      |   | 9,350  |   |   | 8,285   |  
|Total cost of revenues                         |  |      | 42,894 |      |   | 51,731 |   |   | 57,719  |  
|Gross profit                                   |  |      | 40,333 |      |   | 39,663 |   |   | 51,155  |  
|                                               |  |      |        |      |   |        |   |   |         |  
|Operating expenses:                            |  |      |        |      |   |        |   |   |         |  
|Research and development                       |  |      | 7,143  |      |   | 5,251  |   |   | 5,903   |  
|Selling, general and administrative            |  |      | 21,944 |      |   | 22,664 |   |   | 24,371  |  
|Total operating expenses                       |  |      | 29,087 |      |   | 27,915 |   |   | 30,274  |  
|                                               |  |      |        |      |   |        |   |   |         |  
|Operating income                               |  |      | 11,246 |      |   | 11,748 |   |   | 20,881  |  
|                                               |  |      |        |      |   |        |   |   |         |  
|Other income (expense):                        |  |      |        |      |   |        |   |   |         |  
|Interest, net                                  |  |      | 1,542  |      |   | 2,819  |   |   | 3,451   |  
|Realized gain on sale of marketable securities |  |      | 278    |      |   |       |   |   |        |  
|Gain (loss) on currency exchange               |  |      | 48     |      |   | (105   | ) |   | 80      |  
|Other, net                                     |  |      | (2     | )    |   | (3     | ) |   | (18     | )
|Total other income, net                        |  |      | 1,866  |      |   | 2,711  |   |   | 3,513   |  
|                                               |  |      |        |      |   |        |   |   |         |  
|Income before income taxes                     |  |      | 13,112 |      |   | 14,459 |   |   | 24,394  |  
|Income tax expense                             |  |      | 4,617  |      |   | 5,028  |   |   | 8,633   |  
|Net income                                     |  | $    | 8,495  |      | $ | 9,431  |   | $ | 15,761  |  
|                                               |  |      |        |      |   |        |   |   |         |  
|Net income per basic share                     |  | $    | 0.91   |      | $ | 0.99   |   | $ | 1.59    |  
|                                               |  |      |        |      |   |        |   |   |         |  
|Net income per diluted share                   |  | $    | 0.89   |      | $ | 0.97   |   | $ | 1.52    |  
|                                               |  |      |        |      |   |        |   |   |         |  
|Basic weighted average
 shares outstanding     |  |      | 9,374  |      |   | 9,559  |   |   | 9,915   |  
|                                               |  |      |        |      |   |        |   |   |         |  
|Diluted weighted average
 shares outstanding   |  |      | 9,507  |      |   | 9,729  |   |   | 10,371  |  

See accompanying notes to
consolidated financial statements

28

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|                                                                         
|-------------------------------------------------------------------------
|RIMAGE CORPORATION AND SUBSIDIARIES                                      
|Consolidated Statements of
 Stockholders Equity and Comprehensive Income
|Years Ended December 31, 2009, 2008, and
 2007                           
|(In thousands)                                                           

|                                                                                    |  |              |       |                              |   |                    |   |   |        |  |   |         |   |                                                  |       |   |   |         |  
|----------------------------------------------------------------------------------- |  | ------------ | ----- | ---------------------------- | - | ------------------ | - | - | ------ |  | - | ------- | - | ------------------------------------------------ | ----- | - | - | ------- | -
|                                                                                    |  |              |       |                              |   |                    |   |   |        |  |   |         |   | Accumulated
 other
 comprehensive
 income (loss) |       |   |   |        
|                                                                                    |  | Common stock |       | Additional
 paid-in
 capital |   | Retained
 earnings |   |   |        | 
|                                                                                    |  | Shares       |       | Amount                       |   |                    |   |   | Total  | 
|                                                                                    |  |              |       |                              |   |                    |   |   |        |  |   |         |   |                                                  |       |   |   |         |  
|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     |  
|Change in 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      |  
|Change in 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 |  
|                                                                                    |  |              |       |                              |   |                    |   |   |        |  |   |         |   |                                                  |       |   |   |         |  
|Stock issued for employee stock plans                                               |  |              | 117   |                              |   | 1                  |   |   | 1,224  |  |   |        |   |                                                  |      |   |   | 1,225   |  
|Issuance of restricted stock                                                        |  |              | 20    |                              |   |                   |   |   |       |  |   |        |   |                                                  |      |   |   |        |  
|Income tax reductions relating to exercise
 of stock options                        |  |              |      |                              |   |                   |   |   | 46     |  |   |        |   |                                                  |      |   |   | 46      |  
|Stock-based compensation                                                            |  |              |      |                              |   |                   |   |   | 1,542  |  |   |        |   |                                                  |      |   |   | 1,542   |  
|Repurchase of common stock                                                          |  |              |      |                              |   |                   |   |   |       |  |   |        |   |                                                  |      |   |   |        |  
|Comprehensive income:                                                               |  |              |       |                              |   |                    |   |   |        |  |   |         |   |                                                  |       |   |   |         |  
|Net income                                                                          |  |              |      |                              |   |                   |   |   |       |  |   | 8,495   |   |                                                  |      |   |   | 8,495   |  
|Translation adjustment                                                              |  |              |      |                              |   |                   |   |   |       |  |   |        |   |                                                  | (42   | ) |   | (42     | )
|Change in unrealized gain from
 available-for-sale securities, net of taxes of $225 |  |              |      |                              |   |                   |   |   |       |  |   |        |   |                                                  | (365  | ) |   | (365    | )
|Total comprehensive income                                                          |  |              |       |                              |   |                    |   |   |        |  |   |         |   |                                                  |       |   |   | 8,088   |  
|                                                                                   
|Balance at
 December 31, 2009                                                       |  |              | 9,472 |                              | $ | 94                 |   | $ | 40,296 |  | $ | 78,782  |   | $                                                | 777   |   | $ | 119,949 |  

See accompanying notes to
consolidated financial statements.

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|                                            
|--------------------------------------------
|RIMAGE CORPORATION AND SUBSIDIARIES         
|Consolidated Statements of Cash Flows       
|Years ended December 31, 2009, 2008 and 2007
|(In thousands)                              

|                                                                                   |  |      |         |      |   |         |   |   |         |  
|---------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                   |  | 2009 |         | 2008 |   | 2007    |  
|Cash flows from operating activities:                                              |  |      |         |      |   |         |   |   |         |  
|Net income                                                                         |  | $    | 8,495   |      | $ | 9,431   |   | $ | 15,761  |  
|Adjustments to reconcile net income to net cash provided by operating
 activities: |  |      |         |      |   |         |   |   |         |  
|Depreciation and amortization                                                      |  |      | 1,250   |      |   | 1,372   |   |   | 1,525   |  
|Deferred income tax charge (benefit)                                               |  |      | (573    | )    |   | 672     |   |   | (1,227  | )
|Impairment of long-lived assets                                                    |  |      |        |      |   |        |   |   | 60      |  
|Gain on sale of marketable securities                                              |  |      | (278    | )    |   |        |   |   |        |  
|Loss on sale of property and equipment                                             |  |      | 40      |      |   | 7       |   |   | 67      |  
|Stock-based compensation                                                           |  |      | 1,542   |      |   | 1,128   |   |   | 1,617   |  
|Excess tax benefits from stock-based compensation                                  |  |      | (64     | )    |   | (673    | ) |   | (1,217  | )
|Changes in operating assets and liabilities:                                       |  |      |         |      |   |         |   |   |         |  
|Receivables                                                                        |  |      | (2,572  | )    |   | 3,349   |   |   | 7,250   |  
|Inventories                                                                        |  |      | 1,486   |      |   | 2,450   |   |   | (2,003  | )
|Prepaid
 expenses and other current assets                                         |  |      | 930     |      |   | (617    | ) |   | (440    | )
|Trade
 accounts payable                                                            |  |      | (194    | )    |   | (3,019  | ) |   | 553     |  
|Prepaid
 income taxes/income taxes payable                                         |  |      | 623     |      |   | 238     |   |   | 1,187   |  
|Accrued
 compensation                                                              |  |      | 1,948   |      |   | (1,258  | ) |   | 256     |  
|Other
 accrued expenses and other current liabilities                              |  |      | (178    | )    |   | (125    | ) |   | (238    | )
|Deferred
 income and customer deposits                                             |  |      | 1,707   |      |   | (762    | ) |   | 2,987   |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Net cash provided by operating activities                                          |  |      | 14,162  |      |   | 12,193  |   |   | 26,138  |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Cash flows from investing activities:                                              |  |      |         |      |   |         |   |   |         |  
|Purchases of marketable securities                                                 |  |      | (70,479 | )    |   | (77,714 | ) |   | (82,128 | )
|Maturities of marketable securities                                                |  |      | 106,231 |      |   | 80,016  |   |   | 64,505  |  
|Sales of marketable securities                                                     |  |      | 6,835   |      |   | 4,663   |   |   |        |  
|Purchases of property and equipment                                                |  |      | (424    | )    |   | (4,366  | ) |   | (1,285  | )
|Proceeds from the sale of property and equipment                                   |  |      |        |      |   |        |   |   | 13      |  
|Other non-current items                                                            |  |      |        |      |   | 108     |   |   | 169     |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Net cash provided by (used in) investing activities                                |  |      | 42,163  |      |   | 2,707   |   |   | (18,726 | )
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Cash flows from financing activities:                                              |  |      |         |      |   |         |   |   |         |  
|Principal payments on capital lease obligations                                    |  |      | (35     | )    |   | (24     | ) |   | (9      | )
|Repurchase of common stock                                                         |  |      |        |      |   | (9,612  | ) |   | (12,628 | )
|Excess tax benefits from stock-based compensation                                  |  |      | 64      |      |   | 673     |   |   | 1,217   |  
|Proceeds from employee stock plans                                                 |  |      | 1,225   |      |   | 1,550   |   |   | 2,754   |  
|Net cash provided by (used in) financing activities                                |  |      | 1,254   |      |   | (7,413  | ) |   | (8,666  | )
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Effect of exchange rate changes on cash                                            |  |      | 43      |      |   | (18     | ) |   | 170     |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Net increase (decrease) in cash and cash equivalents                               |  |      | 57,622  |      |   | 7,469   |   |   | (1,084  | )
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Cash and cash equivalents, beginning of year                                       |  |      | 14,885  |      |   | 7,416   |   |   | 8,500   |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Cash and cash equivalents,
 end of year                                            |  | $    | 72,507  |      | $ | 14,885  |   | $ | 7,416   |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Supplemental disclosures of net cash paid during the period for:                   |  |      |         |      |   |         |   |   |         |  
|Income taxes                                                                       |  | $    | 4,031   |      | $ | 4,872   |   | $ | 8,699   |  
|Non-cash investing and financing activties:                                        |  |      |         |      |   |         |   |   |         |  
|Income tax reductions relating to exercise of stock options                        |  | $    |        |      | $ | 309     |   | $ | 328     |  
|Change in unrealized net gains from available-for-sale securities                  |  | $    | (590    | )    | $ | 677     |   | $ | 322     |  
|Capital lease obligations                                                          |  | $    | 98      |      | $ |        |   | $ | 86      |  

See accompanying notes to
consolidated financial statements.

RIMAGE

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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 in
consolidation.

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

In
July 2009, the FASB launched its Accounting Standards Codification (the
Codification). The Codification became the exclusive authoritative source of
nongovernmental U.S. generally accepted accounting principles (GAAP) for
interim and annual accounting periods ending after September 15, 2009, except
for rules and interpretive releases of the SEC, which are sources of
authoritative GAAP for SEC registrants. The Codification did not change GAAP
but reorganized the literature.

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 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).                                                                                                                                           
| |   |                                                                                                                                                                                                                                                         
| |  | Collectability
 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.

As
part of its product offering, the Company sells separately priced maintenance
agreements that are valued based on the amount invoiced for the service.
Revenue associated with all other elements in a multiple element arrangement is
allocated among the separate accounting units based on the residual method.
Under the residual method, the arrangement revenue is allocated to undelivered
elements based on the fair value of such undelivered elements and the residual
amount of revenue is allocated to the delivered elements.

Shipping
and handling fees billed to customers are reported within revenue in the
consolidated statements of income, and the related costs are included in cost
of revenues in the consolidated statements of income.

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 certain of the Companys distributors to restrict the volume
of returned products.

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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 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 U.S. treasury bills, municipal securities,
corporate securities, money market securities and U.S. government agency
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
accompanying consolidated balance sheet based on their effective maturity date.
All marketable securities, except for variable rate demand notes included in
the Companys portfolio at December 31, 2008, 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. See Note 5, Fair Value Measurements, for a discussion
of inputs used to measure the fair value of the Companys available-for-sale
securities. The Companys investment portfolio at
December 31, 2009 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.
The Company depends upon a single-source supplier for its Everest printers and,
beginning in March 2010, its Rimage Professional Series 5400N and Rimage
Professional Series 3400 systems. For these products, it is more difficult to
identify an alternative supplier because of the proprietary information and
technology held by the current supplier. If the Company were unable to
effectively transition the technology and proprietary information used by its
current suppliers to alternative suppliers, the design and manufacture of
components and products to the Companys specifications may be significantly
delayed, resulting in potential production delays and significant expense
Further, if the Company obtains a new supplier for a component or product 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 15
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 the 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, 2009 and 2008 consisted of property and equipment. 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.

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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, 2009,
2008 and 2007 (in thousands):

|                  |  |                    |     |                      |   |                  |  |                          |      |                 |   |    |   |   |     | 
|----------------- |  | ------------------ | --- | -------------------- | - | ---------------- |  | ------------------------ | ---- | --------------- | - | -- | - | - | --- | 
|Years ended:      |  | Beginning
 Balance |     | Warranty
 Provisions |   | Warranty
 Claims |  | Foreign
 Exchange Impact |      | Ending
 Balance |  
|                  |  |                    |     |                      |   |                  |  |                          |      |                 |   |    |   |   |     | 
|December 31, 2009 |  | $                  | 263 |                      | $ | 376              |  | $                        | (419 | )               | $ | 1  |   | $ | 221 | 
|                  |  |                    |     |                      |   |                  |  |                          |      |                 |   |    |   |   |     | 
|December 31, 2008 |  | $                  | 420 |                      | $ | 314              |  | $                        | (468 | )               | $ | (3 | ) | $ | 263 | 
|                  |  |                    |     |                      |   |                  |  |                          |      |                 |   |    |   |   |     | 
|December 31, 2007 |  | $                  | 394 |                      | $ | 851              |  | $                        | (838 | )               | $ | 13 |   | $ | 420 | 

Stock-Based Compensation

The
Company measures 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 recognized on a straight-line basis over the period during
which an employee is required to provide services in exchange for the entire
award. The benefits of tax deductions in excess of recognized compensation
expense is reported as a financing cash flow.

The
Company accounts for stock options 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 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 3 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.

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 (losses) on foreign currency
translation in comprehensive income of ($42,000), $90,000 and $339,000 for the
years ended December 31, 2009, 2008 and 2007, respectively.

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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 September 2006, the Financial Accounting Standards Board (FASB)
issued authoritative guidance on fair value measurements and disclosures. This
guidance defines fair value, establishes a framework for measuring fair value
and requires enhanced disclosures about fair value measurements. The Company
adopted this guidance effective January 1, 2008. In February 2008, the FASB
delayed the effective date of this guidance to fiscal years beginning after
November 15, 2008 for nonfinancial assets and liabilities, except for items
that are recognized and disclosed at fair value in the financial statements on
a recurring basis (at least annually). Effective January 1, 2009, the company
adopted the guidance applicable to nonfinancial assets and liabilities that was
previously deferred. The adoption did not impact the Companys consolidated
financial statements and related disclosures for the year ended December 31,
2009.

In March 2008, the FASB issued authoritative guidance on disclosures
about derivative instruments and hedging activities. The required disclosures
include information about an entitys objectives and strategies for using
derivatives, the existence and nature of credit-risk-related contingent
features in derivative instruments, counterparty credit risk, the relative
volume of derivative activity, the fair value of derivative instruments and
related amounts of gains and losses. The Companys adoption of the disclosure
provisions of this guidance effective January 1, 2009 did not have a material
impact on the Companys consolidated financial statements and related
disclosures.

In June 2008, the FASB issued authoritative guidance on the treatment
of participating securities in the calculation of earnings per share (EPS).
This guidance requires all outstanding unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) to be considered participating securities and shall be included
in the computation of basic and diluted earnings per share using the two-class
method. All prior-period earnings per share data presented shall be adjusted
retrospectively. The Company adopted this guidance effective January 1, 2009.
As discussed under Note 12, while applicable to the Company, the adoption did
not have a material impact on the Companys consolidated financial statements.

In November 2007, the FASB issued authoritative guidance on the
accounting for collaborative arrangements. This guidance applies to
participants in a collaborative arrangement, defined as a contractual
arrangement that involves a joint operating activity involving two (or more)
parties who are both (a) active participants in the activity and (b) exposed to
significant risks and rewards dependent on

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the commercial success of the activity. Revenues and costs incurred
with third parties in connection with a collaborative arrangement should be
presented gross or net by the collaborators based on criteria outlined in other
applicable accounting literature. Payments to or from collaborators should be
presented in the income statement based on the nature of the arrangement, the
nature of the Companys business and whether the payments are within the scope
of other accounting literature. This guidance is effective for the Company as
of January 1, 2009, and should be applied to collaborative arrangements in
existence at the date of adoption using the modified retrospective method that
requires reclassification in all periods presented for those arrangements still
in effect at the transition date, unless that application is impracticable. The
adoption of this guidance did not have an impact on the Companys consolidated
financial statements and related disclosures for the year ended December 31,
2009.

In April 2009, the FASB issued authoritative guidance for estimating
fair value of assets and liabilities when market activity has decreased and on
identifying transactions that are not orderly. Additionally, entities are
required to disclose in interim and annual periods the inputs and valuation
techniques used to measure fair value. This guidance was effective for the
Company for its quarter ended June 30, 2009. The adoption of this guidance did
not have an impact on the Companys consolidated financial statements and
related disclosures.

2)          Development and Manufacturing Arrangement

In late 2008, the Company entered into a shared development arrangement
with a supplier of printers and consumables used in its digital publishing
systems. Rimage engaged the supplier to assist in the design, development and
manufacture of a new digital publishing system based on specifications
developed by Rimage. The new system will be assembled by the supplier and sold
exclusively by Rimage with product launch scheduled for the first quarter of
2010.

Under the development arrangement, Rimage shall become obligated to pay
the supplier development fees and purchase production tooling developed by the
supplier based on the achievement of certain project milestones agreed to by
the parties. In late December 2009, Rimage completed the approval of the
project milestones and authorized the project be released to production.
Aggregate fees due to the supplier consist of development fees approximating
$2.5 million, including agency testing fees of approximately $0.1 million
expected to be incurred in the first quarter of 2010, and production tooling
costs of $2.4 million.

Rimage assumed ownership of the production tooling upon the release to
production approval and capitalized $2.4 million of costs in property and
equipment in the accompanying consolidated balance sheets as of December 31,
2009. Development fees incurred with the supplier were charged to research and
development expense in the accompanying consolidated statements of income as
project milestones were achieved and totaled $2.3 million and $0.1 million for
the years ended December 31, 2009 and 2008, respectively. To the extent Rimage
issues the first purchase order for the new system within six months after the
release to production approval, approximately $1.5 million in development fees
will be paid to the supplier as Rimage orders, takes delivery and purchases the
first 10,000 units from the supplier, or approximately $150 per unit. In the
event Rimage does not order a total of 10,000 units within three years from
first delivery, Rimage shall pay the then remaining balance of $1.5 million
within 60 days after the end of the three-year period. In the event Rimage does
not issue the first purchase order for the new system within six months of the
release to production approval, Rimage shall pay the $1.5 million within 60
days after the end of the six-month period. Rimage paid the supplier
development fees of approximately $0.3 million during 2009. The remaining
development fees of approximately $0.7 million and the production tooling costs
of $2.4 million are payable by Rimage to the supplier in 2010. Amounts payable
to the supplier for development and tooling costs incurred as of December 31,
2009 total $4.5 million and are included in trade accounts payable on the
consolidated balance sheets.

3)          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. In May
2009, the Companys shareholders approved amendments to the 2007 Plan, including
an increase in the number of shares authorized for issuance by 500,000 shares
to a total of 1,230,320 shares. At December 31, 2009, a total of 675,420 shares
were available for future grant under the 2007 Plan, as amended. Effective with
the approval of the 2007 Plan in May 2007, the Company may not issue any new
awards or options under its Amended and Restated 1992 Stock Option Plan (the
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 stock and restricted
stock units issued to employees and to non-employee directors under the 2007
Plan are subject to the risk of forfeiture and transfer restrictions that
generally lapse one year from the date of grant.

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In addition to awards granted under the 2007 Plan and 1992 Plan, the
Company granted a non-qualified option to purchase 200,000 shares of its common
stock to a newly hired executive officer on April 1, 2009. The option was
granted outside of any shareholder-approved plan as an inducement to accept
employment with the Company. The option has an exercise price equal to the
closing price of the Companys common stock as reporting by the Nasdaq Stock
Market on the first day of employment of April 1, 2009, vests in four equal
installments on each of the first four anniversaries of the date of grant and
has a term of seven years. In other respects, the option was structured to
mirror the terms of the options granted under the 2007 Plan and is subject to a
stock option plan and agreement between the Company and the executive officer.

Amounts recognized in the financial statements for the years ended
December 31, 2009, 2008 and 2007 with respect to the Companys share-based
payment arrangements are as follows (in thousands):

|                                                                                 |  |                         |       |      |   |       |   |   |       |  
|-------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                                                 |  | Year Ended December 31, |      
|                                                                                 |  | 2009                    |       | 2008 |   | 2007  |  
|                                                                                 |  |                         |       |      |   |       |   |   |       |  
|Stock-based compensation cost charged against income, before income
 tax benefit |  | $                       | 1,542 |      | $ | 1,128 |   | $ | 1,617 |  
|Income tax benefit related to stock-based compensation included in net
 income   |  | $                       | (539  | )    | $ | (397  | ) | $ | (611  | )

Total stock-based compensation cost reflected in the preceding table of
$1,542,000 for 2009 consisted of $1,174,000 for the issuance of stock options
and $368,000 associated with the grant of restricted stock and restricted stock
units to independent Board members and certain employees. Total stock-based
compensation cost reflected of $1,128,000 for 2008 consisted of $1,072,000 for
the issuance of stock options and $56,000 associated with the grant of
restricted stock to independent 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 independent
Board members and a reduction in expense of $41,000 for the reversal of performance
share expense.

Stock Options

The fair value of each option award is estimated at the date of grant
using the Black-Scholes option pricing model. The assumptions used to determine
the fair value of stock option awards granted during the years ended December
31, 2009, 2008 and 2007 were as follows:

|                                   |  |                         |  |               |  |             
|---------------------------------- |  | ----------------------- |  | ------------- |  | ------------
|                                   |  | Year Ended December 31,
|                                   |  | 2009                    |  | 2008          |  | 2007        
|                                   |  |                         |  |               |  |             
|Expected life of options in
 years |  | 4.75                    |  | 4.75
 - 6.00  |  | 6.00        
|                                   |  |                         |  |               |  |             
|Risk-free interest rate            |  | 1.58%
 - 2.30%          |  | 3.1%          |  | 4.0
 - 4.8% 
|                                   |  |                         |  |               |  |             
|Expected volatility                |  | 48.5
 - 49.9%           |  | 39.1
 - 40.0% |  | 38.0-
 40.0%
|                                   |  |                         |  |               |  |             
|Expected dividend yield            |  | 0.0%                    |  | 0.0%          |  | 0.0%        

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 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 10
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 and 2009. As such, the Company used the
simplified method for determining the expected life of stock options granted
to employees in 2008 and 2009, 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.

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A summary of share option activity under the 2007 and 1992 Plans as of
and for the year ended December 31, 2009 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, 2008          |  |        | 1,159 |       | $ | 17.88                                                     |  |                               |      |  |   |       | 
|Granted                                           |  |        | 449   |       |   | 14.77                                                     |  |                               |      |  |   |       | 
|Exercised                                         |  |        | (117  | )     |   | 10.43                                                     |  |                               |      |  |   |       | 
|Canceled                                          |  |        | (221  | )     |   | 19.09                                                     |  |                               |      |  |   |       | 
|                                                  |  |        |       |       |   |                                                           |  |                               |      |  |   |       | 
|Options outstanding at
 December 31, 2009         |  |        | 1,270 |       | $ | 17.26                                                     |  |                               | 6.11 |  | $ | 2,763 | 
|                                                  |  |        |       |       |   |                                                           |  |                               |      |  |   |       | 
|Options subject to exercise
 at December 31, 2009 |  |        | 724   |       | $ | 17.88                                                     |  |                               | 5.05 |  | $ | 1,707 | 

*Weighted Average Exercise Price

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

A summary of the status of the Companys nonvested option shares as of
December 31, 2009 and changes during the year ended December 31, 2009 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, 2008 |  |                  | 306  |                                         |  | 9.61  | 
|                                |  |                  |      |                                         |  |       | 
|Granted                         |  |                  | 449  |                                         |  | 6.36  | 
|                                |  |                  |      |                                         |  |       | 
|Vested                          |  |                  | (94  | )                                       |  | 10.13 | 
|                                |  |                  |      |                                         |  |       | 
|Canceled                        |  |                  | (115 | )                                       |  | 8.42  | 
|                                |  |                  |      |                                         |  |       | 
|Nonvested at
 December 31, 2009 |  |                  | 546  |                                         |  | 7.09  | 

As of December 31, 2009, there was $3,184,000 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 2.94 years.

Other
information pertaining to options is as follows:

|                                                         |  |                                        |       |      |   |       |  |   |       | 
|-------------------------------------------------------- |  | -------------------------------------- | ----- | ---- | - | ----- |  | - | ----- | 
|                                                         |  | Year
 Ended December 31,               |      
|                                                         |  | 2009                                   |       | 2008 |   | 2007  | 
|                                                         |  | (in
 thousands, except per share data) |      
|                                                         |  |                                        |      
|Number of options granted                                |  |                                        | 449   |      |   | 184   |  |   | 248   | 
|Fair value of options granted                            |  | $                                      | 2,850 |      | $ | 1,282 |  | $ | 3,036 | 
|Per share weighted average fair value of options granted |  | $                                      | 6.36  |      | $ | 6.98  |  | $ | 12.24 | 
|Total fair value of stock options vested                 |  | $                                      | 958   |      | $ | 1,144 |  | $ | 1,649 | 
|Total intrinsic value of stock options exercised         |  | $                                      | 718   |      | $ | 2,641 |  | $ | 4,613 | 

Cash received from the exercise of stock options was $1,225,000,
$1,550,000 and $2,754,000 for the years ended December 31, 2009, 2008 and 2007,
respectively. The income tax benefit realized from the exercise of stock
options and recorded as an increase to

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additional paid-in capital was $46,000, $982,000 and $1,545,000 for the
years ended December 31, 2009, 2008 and 2007, respectively.

Performance Shares

The Company granted no performance share awards during the years ended
December 31, 2009, 2008 and 2007. 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
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 received no common stock for the cancelled
performance shares.

Restricted Stock

On May 13, 2009, the Company issued 3,500 shares of restricted stock
units to each of the five independent members of its Board of Directors. The
restricted stock units were valued based on the market value of the Companys
shares on the date of grant of $258,000, which was equal to the intrinsic value
of the shares on that date. Such restricted stock units vest and the
restriction lapse one year after the date of grant. As such, the Company is
recognizing expense for the intrinsic value of the restricted stock units
ratably over the one-year vesting period, resulting in $164,000 of expense for
the year ended December 31, 2009.

During 2009, the Company issued 20,000 shares of restricted stock to
certain management employees and on May 14, 2008, the Company issued 1,000
shares of restricted stock to each of the five independent 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 which was equal to the intrinsic value of
the shares on that date. Restricted stock of 10,000 shares awarded to a newly
hired executive officer effective April 1, 2009 vest and the restrictions lapse
nine months from the date of grant. The remaining issued shares of restricted
stock vest and the restrictions lapse one year after the date of grant. The
Company recognizes expense for the intrinsic value of the restricted stock
ratably over the vesting period, resulting in $203,000 and $56,000 of expense
for the years ended December 31, 2009 and 2008, respectively.

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 may 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. The Company did not repurchase any shares of its common stock during the
year ended December 31, 2009. As of December 31, 2009, there were 422,917
shares available for repurchase under the authorizations.

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4)          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, 2009 and 2008 are
reflected in the following table (in thousands). Unrealized holding gains and
losses are included in accumulated other comprehensive income (loss) until
realized.

|                                             |  |                 |        |                                  |   |            |  |   |        | 
|-------------------------------------------- |  | --------------- | ------ | -------------------------------- | - | ---------- |  | - | ------ | 
|                                             |  | Amortized
 cost |        | Gross
 unrealized
 holding gains |   | Fair value | 
|At December
 31, 2009:                       |  |                 |        |                                  |   |            |  |   |        | 
|                                            
|Short term:                                  |  |                 |        |                                  |   |            |  |   |        | 
|Government guaranteed - corporate securities |  | $               | 6,017  |                                  | $ | 59         |  | $ | 6,076  | 
|U.S. Treasury bills                          |  |                 | 5,999  |                                  |   | 1          |  |   | 6,000  | 
|Municipal securities                         |  |                 | 16,401 |                                  |   | 104        |  |   | 16,505 | 
|                                            
|Total                                        |  | $               | 28,417 |                                  | $ | 164        |  | $ | 28,581 | 
|Long term:                                   |  |                 |        |                                  |   |            |  |   |        | 
|Government guaranteed - corporate securities |  | $               | 3,992  |                                  | $ | 136        |  | $ | 4,128  | 
|Municipal securities                         |  |                 | 4,801  |                                  |   | 108        |  |   | 4,909  | 
|                                            
|Total                                        |  | $               | 8,793  |                                  | $ | 244        |  | $ | 9,037  | 
|                                            
|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 | 

5)          Fair
Value Measurements

A hierarchy for inputs used in measuring fair value is in place that
distinguishes market data between observable independent market inputs and
unobservable market assumptions by the reporting entity. The hierarchy is
intended to maximize the use of observable inputs and minimize the use of
unobservable inputs by requiring that the most observable inputs be used when
available. Three levels within the hierarchy may be used to measure fair value:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Level 1: Inputs are unadjusted quoted prices in active markets for
 identical assets and liabilities.                                                                                                                                                                                                                                                                                            
|
| |  | Level 2: Inputs include data points that are observable such as
 quoted prices for similar assets or liabilities in active markets, quoted
 prices for identical or similar assets or liabilities in markets that are not
 active, and inputs (other than quoted prices) such as interest rates and
 yield curves that are observable for the asset or liability, either directly
 or indirectly.
|
| |  | Level 3: Inputs are generated from model-based techniques that use
 significant assumptions not observable in the market. These unobservable
 assumptions reflect an entitys own estimates of assumptions that market
 participants would use in pricing the asset or liability.                                                                                                                

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The Companys assets and liabilities measured at fair value on a
recurring basis and the fair value hierarchy utilized to determine such fair
values is as follows at December 31, 2009:

|                                            |  |                                             |        |                                             |                               |                                                  |  |                                              |        |  |   |   | 
|------------------------------------------- |  | ------------------------------------------- | ------ | ------------------------------------------- | ----------------------------- | ------------------------------------------------ |  | -------------------------------------------- | ------ |  | - | - | 
|                                            |  |                                             |        |                                             | Fair Value Measurements Using |                                                 
|(in thousands)                              |  | Total Carrying
 Value at
 December 31, 2009 |        | Quoted Prices in
 Active Markets
 (Level 1) |                               | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |       
|Assets:                                     |  |                                             |        |                                             |                               |                                                  |  |                                              |        |  |   |   | 
|Available-for-sale securities               |  | $                                           | 37,618 |                                             | $                             |                                                 |  | $                                            | 37,618 |  | $ |  | 
|Foreign currency forward exchange contracts |  | $                                           | 17     |                                             | $                             |                                                 |  | $                                            | 17     |  | $ |  | 

Available-for-sale securities in the preceding table are classified as
either current or non-current marketable securities 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.

6)          Derivatives

The Company enters into forward foreign exchange contracts principally
to hedge intercompany receivables denominated in Euros arising from sales to
its subsidiary in Germany. The Companys foreign exchange contracts do not
qualify for hedge accounting. As a result, gains or losses related to
mark-to-market adjustments on forward foreign exchange contracts are recognized
as other income or expense in the consolidated income statement during the
period in which the instruments are outstanding. The fair value of forward
foreign exchange contracts represents the amount the Company would receive or
pay to terminate the forward exchange contracts at the reporting date and is
recorded 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.

As of December 31, 2009, the Company had three outstanding foreign
exchange contracts with a notional amount totaling approximately $550,000.
These contracts mature during 2010 and bear exchange rates ranging from 1.4554
and 1.4913 U.S. Dollars per Euro. As of December 31, 2009, the fair value of
foreign exchange contracts resulted in a net gain position of $17,000, which is
recorded in other current assets.

As of December 31, 2008, the Company had 15 outstanding foreign
exchange contracts with a notional amount totaling $2,601,000, all maturing
during the first half of 2009 at exchange rates ranging from 1.2431 to 1.3540
U.S. Dollars per Euro. As of December 31, 2008, the fair value of foreign
exchange contracts resulted in a net loss position of approximately $238,000,
which is recorded in other current liabilities.

Realized and unrealized gains or losses on derivative instruments
related to foreign currency exchange contracts and their location on the
Companys consolidated statements of income are as follows (in thousands):

|                           |  |                                   |  |                          |     |      |   |      |  
|-------------------------- |  | --------------------------------- |  | ------------------------ | --- | ---- | - | ---- | -
|                           |  |                                   |  | Year Ended
 December 31, |    
|Derivative
 Instrument     |  | Location                          |  | 2009                     |     | 2008 |  
|                          
|Foreign Exchange Contracts |  | Gain
 (loss) on currency exchange |  | $                        | 266 |      | $ | (323 | )

The net gains or losses from foreign exchange contracts reflected above
were largely offset by the underlying transaction net losses or gains,
respectively, arising from the foreign currency exposures for which these
contracts relate.

The gross fair market value of derivative instruments related to
foreign currency exchange contracts and their location on the Companys
consolidated balance sheets is as follows as of December 31, 2009 (in
thousands):

40

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|                           |  |                          |  |                       |    |          |                              |                    |   |   | 
|-------------------------- |  | ------------------------ |  | --------------------- | -- | -------- | ---------------------------- | ------------------ | - | - | 
|                           |  | Asset Derivatives        |  | Liability Derivatives |   
|Derivative
 Instrument     |  | Location                 |  | December 31,
 2009    |    | Location |                              | December 31,
 2009 |  
|                           |  |                          |  |                       |    |          |                              |                    |   |   | 
|Foreign Exchange Contracts |  | Other current assets (1) |  | $                     | 17 |          | Other current
liabilities(1) |                    | $ |  | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As the Companys foreign exchange agreement is subject to a master
netting arrangement, the Companys policy is to record the fair value of
outstanding foreign exchange contracts as other current assets or other current
liabilities, based on whether outstanding contracts are in a net gain or loss
position, respectively. See Note 5, Fair Value Measurements, for additional
information regarding the fair value measurements of derivative instruments
related to foreign currency exchange contracts.

The Company enters into its foreign exchange contracts with a single
counterparty, a financial institution. The Company manages its concentration of
counterparty risk associated with foreign exchange contracts by periodically
assessing relevant information such as the counterpartys current financial
statements, credit agency reports and/or credit references. To further mitigate
credit risk, the Companys Foreign Exchange Agreement with its counterparty
includes a master netting arrangement, which allows netting of asset and
liability positions of outstanding foreign exchange contracts if settlement
were required.

7)          Inventories

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

|                                            |  |   |       |  |   |       | 
|------------------------------------------- |  | - | ----- |  | - | ----- | 
|                                            |  |   | 2009  |  |   | 2008  | 
|                                           
|Finished goods and
 demonstration equipment |  | $ | 1,425 |  | $ | 1,717 | 
|Purchased parts and
 subassemblies          |  |   | 2,698 |  |   | 3,908 | 
|                                            |  | $ | 4,123 |  | $ | 5,625 | 

8)          Property
and Equipment

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

|                                                |  |      |        |      |   |        |  
|----------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                |  | 2009 |        | 2008 |  
|Land and land improvements                      |  | $    | 1,096  |      | $ | 1,096  |  
|Building and building
 improvements             |  |      | 2,808  |      |   | 2,806  |  
|Manufacturing equipment                         |  |      | 5,543  |      |   | 3,071  |  
|Development fixtures and
 equipment             |  |      | 760    |      |   | 760    |  
|Data equipment and
 furniture                   |  |      | 5,116  |      |   | 4,814  |  
|Leasehold improvements                          |  |      | 1,106  |      |   | 1,089  |  
|                                                |  |      | 16,430 |      |   | 13,636 |  
|Less accumulated
 depreciation and amortization |  |      | (8,575 | )    |   | (7,453 | )
|                                                |  | $    | 7,855  |      | $ | 6,183  |  

Depreciation and amortization expense was $1,250,000, $1,372,000 and
$1,525,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

Included in manufacturing equipment as of December 31, 2009 is $2.4
million of production tooling capitalized by the Company in late 2009 in
conjunction with a development and manufacturing arrangement further described
in Note 2. The Company will depreciate the production tooling over a three-year
period upon commencement of production scheduled for the first quarter of 2010.
The capitalized amount of $2.4 million is included in trade accounts payable as
of December 31, 2009 and is expected to be paid in 2010.

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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.

|   |                 
|-- | ----------------
|9) | 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 July
1, 2009, is effective until July 1, 2010, 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 either 1) at a fluctuating rate per annum equal to a Base
Rate in effect from time to time, or 2) at a fixed rate per annum determined by
the Companys bank to be two and one quarter percent (2.25%) above LIBOR in
effect on the first day of the applicable fixed rate term. The Base Rate is a
fluctuating rate equal to the highest of 1) the Prime Rate in effect on such
day, 2) a rate determined by the Companys bank to be one and one-half percent
(1.50%) above the daily one month LIBOR in effect on such day, and 3) the
Federal Funds Rate plus one and one-half percent (1.50%). No amounts were
outstanding under the Credit Agreement at December 31, 2009 and 2008.

The Credit Agreement contains various covenants pertaining to minimum
tangible net worth, restrictions on the amount of net losses for each fiscal
quarter and minimum unencumbered liquid assets. The Company was in compliance
with all covenants as of December 31, 2009.

|    |             
|--- | ------------
|10) | Income Taxes

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

|                            |  |                         |        |      |   |        |  |   |        | 
|--------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                            |  | Year Ended December 31, |       
|                            |  | 2009                    |        | 2008 |   | 2007   | 
|                            |  |                         |        |      |   |        |  |   |        | 
|Income before income taxes: |  |                         |        |      |   |        |  |   |        | 
|Domestic                    |  | $                       | 12,065 |      | $ | 14,427 |  | $ | 23,907 | 
|Foreign                     |  |                         | 1,047  |      |   | 32     |  |   | 487    | 
|                            |  | $                       | 13,112 |      | $ | 14,459 |  | $ | 24,394 | 

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

|               |  |                         |       |      |   |       |   |   |        |  
|-------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | ------ | -
|               |  | Year Ended December 31, |      
|               |  | 2009                    |       | 2008 |   | 2007  |  
|               |  |                         |       |      |   |       |   |   |        |  
|Current:       |  |                         |       |      |   |       |   |   |        |  
|U.S. Federal   |  | $                       | 3,671 |      | $ | 4,007 |   | $ | 7,718  |  
|State          |  |                         | 827   |      |   | 641   |   |   | 1,637  |  
|Foreign        |  |                         | 348   |      |   | 319   |   |   | 396    |  
|Total current  |  |                         | 4,846 |      |   | 4,967 |   |   | 9,751  |  
|               |  |                         |       |      |   |       |   |   |        |  
|Deferred:      |  |                         |       |      |   |       |   |   |        |  
|U.S. Federal   |  |                         | (143  | )    |   | (37   | ) |   | (897   | )
|State          |  |                         | (86   | )    |   | 98    |   |   | (221   | )
|Total deferred |  |                         | (229  | )    |   | 61    |   |   | (1,118 | )
|               |  |                         |       |      |   |       |   |   |        |  
|               |  | $                       | 4,617 |      | $ | 5,028 |   | $ | 8,633  |  

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

|                                               |  |                         |       |      |   |       |   |   |       |  
|---------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                               |  | Year Ended December 31, |      
|                                               |  | 2009                    |       | 2008 |   | 2007  |  
|                                               |  |                         |       |      |   |       |   |   |       |  
|Expected income tax
 expense                   |  | $                       | 4,589 |      | $ | 5,061 |   | $ | 8,540 |  
|State income taxes, net of
 federal tax effect |  |                         | 481   |      |   | 480   |   |   | 920   |  
|Manufacturers deduction                       |  |                         | (120  | )    |   | (80   | ) |   | (234  | )
|Federal R&D credit                             |  |                         | (38   | )    |   | (34   | ) |   | (130  | )
|Tax-exempt interest income                     |  |                         | (367  | )    |   | (663  | ) |   | (751  | )
|Change in valuation
 allowance                 |  |                         | (22   | )    |   | 437   |   |   | 250   |  
|Benefit of lower federal
 tax bracket          |  |                         | (100  | )    |   | (100  | ) |   |      |  
|Other, net                                     |  |                         | 194   |      |   | (73   | ) |   | 38    |  
|                                               |  |                         |       |      |   |       |   |   |       |  
|                                               |  | $                       | 4,617 |      | $ | 5,028 |   | $ | 8,633 |  

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):

|                                                         |  |      |       |      |   |       |  
|-------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|                                                         |  | 2009 |       | 2008 |  
|Deferred tax assets:                                     |  |      |       |      |   |       |  
|Inventory provisions and
 uniform capitalization         |  | $    | 302   |      | $ | 374   |  
|Accounts receivable
 allowances                          |  |      | 109   |      |   | 167   |  
|Non-qualified stock option
 and restricted stock expense |  |      | 1,629 |      |   | 1,327 |  
|Deferred maintenance
 revenue                            |  |      | 855   |      |   | 610   |  
|Unrecognized tax benefits                                |  |      | 32    |      |   | 253   |  
|Loss carryforward of
 foreign subsidiary                 |  |      | 906   |      |   | 928   |  
|Other accruals and reserves                              |  |      | 253   |      |   | 185   |  
|Other                                                    |  |      | 154   |      |   | 93    |  
|Total deferred tax assets before valuation allowance     |  |      | 4,240 |      |   | 3,937 |  
|Less valuation allowance                                 |  |      | (906  | )    |   | (928  | )
|Total deferred tax assets                                |  | $    | 3,334 |      | $ | 3,009 |  
|                                                         |  |      |       |      |   |       |  
|Deferred tax liabilities:                                |  |      |       |      |   |       |  
|Unrealized gain on
 marketable securities                |  | $    | (158  | )    | $ | (384  | )
|Total deferred tax liabilities                           |  | $    | (158  | )    | $ | (384  | )
|Total net deferred tax assets                            |  | $    | 3,176 |      | $ | 2,625 |  

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 2009 approximated $2.5 million. The 2009 amounts for the deferred tax
asset associated with the loss carryforward of the foreign subsidiary and
related valuation allowance reflect reductions for an unrecognized tax benefit
of $187,000. The valuation allowances were calculated in accordance with the
requirement 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. The available loss carryforward at December 31, 2009 of the Companys
Japanese subsidiary is scheduled to expire between tax years 2012 and 2016.

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 $5.2 million as of December 31, 2009.

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A recognition threshold and measurement criteria are in place for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. Guidance is also provided on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.

The impact on the Companys financial statements of adopting the
recognition threshold and measurement criteria was insignificant; as a result,
a cumulative effect adjustment to the January 1, 2007 balance of retained
earnings was not recorded. A reconciliation of the beginning and ending amounts
of gross unrecognized tax benefits for the years ended December 31, 2009 and
2008 is presented in the table below (in thousands):

|                                                      |  |      |      |      |   |     |  
|----------------------------------------------------- |  | ---- | ---- | ---- | - | --- | -
|                                                      |  | 2009 |      | 2008 |  
|Gross
 unrecognized tax benefits at beginning of year |  | $    | 361  |      | $ | 187 |  
|Increases related to:                                 |  |      |      |      |   |     |  
|Prior year income tax positions                       |  |      | 259  |      |   |    |  
|Current year income tax positions                     |  |      | 30   |      |   | 29  |  
|Reclassification                                      |  |      |     |      |   | 217 |  
|Decreases related to:                                 |  |      |      |      |   |     |  
|Prior year income tax positions                       |  |      | (224 | )    |   |    |  
|Settlements                                           |  |      | (62  | )    |   | (72 | )
|Gross
 unrecognized tax benefits at end of year       |  | $    | 364  |      | $ | 361 |  

The increase in gross unrecognized tax benefits in 2009 related to
prior year tax positions includes $187,000 of unrecognized tax benefits that
are offset against a deferred tax asset associated with a cumulative net
operating loss for the Companys subsidiary in Japan.

The decrease in gross unrecognized tax benefits in 2009 for prior year
income tax positions of $224,000 is offset by a deferred tax asset of $217,000.
The reclassification 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,
2009 are potential benefits of $343,000 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, 2009 will change significantly by December 31,
2010.

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 $36,000 and $59,000 on a gross basis at
December 31, 2009 and 2008, 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 a net $23,000 benefit in 2009 and $19,000
of expense in 2008.

The Company files income tax returns in the U.S. federal jurisdiction
and various state and foreign jurisdictions. As of December 31, 2009, 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 2005 in the case of state
taxing authorities, consisting primarily of Minnesota, California and Maryland.

|    |                     
|--- | --------------------
|11) | 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

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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, one 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. 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, 2009.

|    |                     
|--- | --------------------
|12) | 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 units. Stock
options to acquire 735,000, 739,000 and 321,000 weighted average common shares
for the years ended December 31, 2009, 2008 and 2007 have been excluded from
the computation of diluted weighted average shares outstanding for each
respective period as their effect is anti-dilutive.

Effective January 1, 2009, the Company adopted guidance which requires
all outstanding unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) to be
considered participating securities and shall be included in the computation of
basic and diluted earnings per share using the two-class method. As required by
this guidance, the Company increased the amount of basic weighted average
shares outstanding previously reported for the year ended December 31, 2008 by
approximately 3,000 shares. These amounts pertain to outstanding unvested
restricted stock deemed to be participating securities. The adjustment had no
impact on previously reported earnings per share amounts. The following table
identifies the components of net income per basic and diluted share (in
thousands, except for per share data):

|                                                      |  |              |       |      |   |       |  |   |        | 
|----------------------------------------------------- |  | ------------ | ----- | ---- | - | ----- |  | - | ------ | 
|                                                      |  | December 31, |      
|                                                      |  | 2009         |       | 2008 |   | 2007  | 
|                                                      |  |              |       |      |   |       |  |   |        | 
|Shares outstanding at end
 of period                  |  |              | 9,472 |      |   | 9,335 |  |   | 9,706  | 
|                                                      |  |              |       |      |   |       |  |   |        | 
|Basic weighted average shares outstanding             |  |              | 9,374 |      |   | 9,559 |  |   | 9,915  | 
|                                                      |  |              |       |      |   |       |  |   |        | 
|Dilutive effect of stock options and restricted stock |  |              | 133   |      |   | 170   |  |   | 456    | 
|Total diluted weighted average shares outstanding     |  |              | 9,507 |      |   | 9,729 |  |   | 10,371 | 
|                                                      |  |              |       |      |   |       |  |   |        | 
|Net income                                            |  | $            | 8,495 |      | $ | 9,431 |  | $ | 15,761 | 
|                                                      |  |              |       |      |   |       |  |   |        | 
|Basic net income per common
 share                    |  | $            | 0.91  |      | $ | 0.99  |  | $ | 1.59   | 
|                                                      |  |              |       |      |   |       |  |   |        | 
|Diluted net income per
 common share                  |  | $            | 0.89  |      | $ | 0.97  |  | $ | 1.52   | 

45

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13)       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 |    
|                          |  |                          |     | 
|2010                      |  | $                        | 439 | 
|2011                      |  |                          | 202 | 
|2012                      |  |                          | 20  | 
|2013                      |  |                          | 1   | 
|                          |  |                          |     | 
|Minimum lease payments    |  | $                        | 662 | 

Rent expense under operating leases amounted to approximately $903,000,
$1,259,000 and $1,161,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.

14)       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 $260,000, $302,000 and $313,000 in 2009, 2008
and 2007, respectively.

15)       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 Blu-ray 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 Blu-ray 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 Blu-ray 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 Blu-ray
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, business services, law enforcement and video
workflows. Both product lines utilize Rimage consumables and services and
generate recurring revenues from each. Rimage used similar methods to
distribute its products from each geographic location during 2009. These
consisted of a two-tier distribution channel of distributors to value added
resellers in Europe, the U.S. and Latin America; a distributor or OEM to
end-user distribution channel in Asia Pacific, some areas in Europe and some
U.S. market applications; and direct sales to select accounts using its own
sales force. 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.

46

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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, |       
|           |  | 2009                    |        | 2008 |   | 2007   | 
|           |  | Revenues                |       
|Customer A |  | $                       | 14,972 |      | $ | 13,883 |  | $ | 14,921 | 
|Customer B |  | $                       | 9,425  |      | $ | 9,497  |  |   | *      | 
|Customer C |  | $                       | 8,673  |      | $ | 9,686  |  |   | *      | 

|           |  |                     |       |      |   |       |  |   |       | 
|---------- |  | ------------------- | ----- | ---- | - | ----- |  | - | ----- | 
|           |  | December 31,        |      
|           |  | 2009                |       | 2008 |   | 2007  | 
|           |  | Accounts Receivable |      
|Customer A |  | $                   | 2,047 |      | $ | 1,042 |  | $ | 1,982 | 
|Customer B |  | $                   | 438   |      | $ | 773   |  |   | *     | 
|Customer C |  | $                   | 1,486 |      | $ | 1,198 |  |   | *     | 

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

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, |       
|              |  | 2009                    |        | 2008 |   | 2007   | 
|North America |  | $                       | 48,956 |      | $ | 52,992 |  | $ | 70,046  | 
|Europe        |  |                         | 26,509 |      |   | 31,610 |  |   | 31,885  | 
|Other         |  |                         | 7,762  |      |   | 6,792  |  |   | 6,943   | 
|              |  |                         |        |      |   |        |  |   |         | 
|Total         |  | $                       | 83,227 |      | $ | 91,394 |  | $ | 108,874 | 

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

|              |  |                   |       |                   |   |       | 
|------------- |  | ----------------- | ----- | ----------------- | - | ----- | 
|              |  | December 31, 2009 |       | December 31, 2008 |  
|North America |  | $                 | 7,275 |                   | $ | 5,511 | 
|Germany       |  |                   | 536   |                   |   | 630   | 
|Japan         |  |                   | 44    |                   |   | 42    | 
|              |  | $                 | 7,855 |                   | $ | 6,183 | 

47

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

|                      |  |                         |        |      |   |        |  |   |         | 
|--------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------- | 
|                      |  | Year Ended December 31, |       
|                      |  | 2009                    |        | 2008 |   | 2007   | 
|Equipment:            |  |                         |        |      |   |        |  |   |         | 
|Producer              |  | $                       | 27,868 |      | $ | 30,297 |  | $ | 46,829  | 
|Desktop               |  |                         | 5,089  |      |   | 5,783  |  |   | 9,435   | 
|Total                 |  |                         | 32,957 |      |   | 36,080 |  |   | 56,264  | 
|                      |  |                         |        |      |   |        |  |   |         | 
|Consumables and parts |  |                         | 39,328 |      |   | 45,768 |  |   | 43,807  | 
|                      |  |                         |        |      |   |        |  |   |         | 
|Service               |  |                         | 10,942 |      |   | 9,546  |  |   | 8,803   | 
|                      |  |                         |        |      |   |        |  |   |         | 
|Total                 |  | $                       | 83,227 |      | $ | 91,394 |  | $ | 108,874 | 

16)       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. Effective September 2007, this related party relationship no longer
exists. The Company purchased component parts from this supplier approximating
$1.9 million for the year ended December 31, 2007. Outstanding accounts payable
with this supplier totaled approximately $70,000 at December 31, 2007, payable
under standard 30-day payment terms.

17)       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.

18)       Subsequent
Event

Over the past several years, Rimage has utilized the following
principal means of distributing its products: A two-tier distribution channel
of distributors to value added resellers in Europe, the U.S. and Latin America;
a distributor or OEM to end-user distribution channel in Asia Pacific, some
areas in Europe and some U.S. market applications; and direct sales to select
accounts using its own sales force.

On January 25, 2010, the Company notified distributors of its products
in the United States that the Company is terminating these distributor
relationships effective April 1, 2010. The Company also terminated distribution
relationships in Germany and the United Kingdom effective April 1, 2010. The
termination of these distributors is part of the Companys plan to improve the
efficiency of its sales channels. Following termination of the distributors,
the Company will sell product in these regions to end-user customers primarily
through value-added resellers or other strategic partners and also directly to
select accounts through its own sales force. The Company is currently
evaluating the expected future impact of this change, if any, on its
consolidated financial statements.

48

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

|                                               |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        |  
|---------------------------------------------- |  | ------ | ------ | ----- | - | ------ | - | ----- | ------ | ------ | - | ------ | - | ------ | ------ | ----- | - | ------ | - | - | ------ | - | - | ------ | -
|                                               |  | 2009   |        | 2008  |  
|                                               |  | Fourth |        | Third |   | Second |   | First |        | Fourth |   | Third  |   | Second |        | First |  
|                                               |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        |  
|Revenues                                       |  | $      | 22,686 |       | $ | 22,365 |   | $     | 19,818 |        | $ | 18,358 |   | $      | 20,749 |       | $ | 25,210 |   | $ | 22,686 |   | $ | 22,749 |  
|Cost of revenues                               |  |        | 11,203 |       |   | 11,268 |   |       | 10,630 |        |   | 9,793  |   |        | 12,654 |       |   | 13,233 |   |   | 12,772 |   |   | 13,072 |  
|Gross profit                                   |  |        | 11,483 |       |   | 11,097 |   |       | 9,188  |        |   | 8,565  |   |        | 8,095  |       |   | 11,977 |   |   | 9,914  |   |   | 9,677  |  
|                                               |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        |  
|Operating expenses:                            |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        |  
|Research and development                       |  |        | 2,153  |       |   | 1,514  |   |       | 1,501  |        |   | 1,975  |   |        | 1,160  |       |   | 1,227  |   |   | 1,513  |   |   | 1,351  |  
|Selling, general and administrative            |  |        | 6,445  |       |   | 5,009  |   |       | 5,148  |        |   | 5,342  |   |        | 5,129  |       |   | 5,225  |   |   | 5,672  |   |   | 6,638  |  
|Total operating expenses                       |  |        | 8,598  |       |   | 6,523  |   |       | 6,649  |        |   | 7,317  |   |        | 6,289  |       |   | 6,452  |   |   | 7,185  |   |   | 7,989  |  
|                                               |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        |  
|Operating income                               |  |        | 2,885  |       |   | 4,574  |   |       | 2,539  |        |   | 1,248  |   |        | 1,806  |       |   | 5,525  |   |   | 2,729  |   |   | 1,688  |  
|                                               |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        |  
|Other income (expense):                        |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        |  
|Interest, net                                  |  |        | 219    |       |   | 309    |   |       | 458    |        |   | 556    |   |        | 616    |       |   | 691    |   |   | 676    |   |   | 836    |  
|Realized gain on sale of marketable securities |  |        |       |       |   |       |   |       | 278    |        |   |       |   |        |       |       |   |       |   |   |       |   |   |       |  
|Gain (loss) on currency exchange               |  |        | 1      |       |   | 5      |   |       | 87     |        |   | (45    | ) |        | 18     |       |   | 40     |   |   | (410   | ) |   | 247    |  
|Other, net                                     |  |        | 3      |       |   | (4     | ) |       |       |        |   | (1     | ) |        | (3     | )     |   | (20    | ) |   | 21     |   |   | (1     | )
|Total other income, net                        |  |        | 223    |       |   | 310    |   |       | 823    |        |   | 510    |   |        | 631    |       |   | 711    |   |   | 287    |   |   | 1,082  |  
|                                               |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        |  
|Income before income taxes                     |  |        | 3,108  |       |   | 4,884  |   |       | 3,362  |        |   | 1,758  |   |        | 2,437  |       |   | 6,236  |   |   | 3,016  |   |   | 2,770  |  
|Income tax expense                             |  |        | 880    |       |   | 1,775  |   |       | 1,389  |        |   | 573    |   |        | 725    |       |   | 2,230  |   |   | 1,089  |   |   | 984    |  
|Net income                                     |  | $      | 2,228  |       | $ | 3,109  |   | $     | 1,973  |        | $ | 1,185  |   | $      | 1,712  |       | $ | 4,006  |   | $ | 1,927  |   | $ | 1,786  |  
|                                               |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        |  
|Net income per basic share                     |  | $      | 0.24   |       | $ | 0.33   |   | $     | 0.21   |        | $ | 0.13   |   | $      | 0.19   |       | $ | 0.42   |   | $ | 0.20   |   | $ | 0.18   |  
|                                               |  |        |        |       |   |        |   |       |        |        |   |        |   |        |        |       |   |        |   |   |        |   |   |        |  
|Net income per diluted share                   |  | $      | 0.23   |       | $ | 0.33   |   | $     | 0.20   |        | $ | 0.13   |   | $      | 0.18   |       | $ | 0.42   |   | $ | 0.19   |   | $ | 0.18   |  

During the second quarter of 2008 the Company determined that
translation gains associated with an intercompany loan that was deemed to be
indefinitely 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.

|         |                         
|-------- | ------------------------
|ITEM 9A. | CONTROLS AND
 PROCEDURES

|   |                                                  
|-- | -------------------------------------------------
|a) | Evaluation
 of Disclosure Controls and Procedures

The Companys Chief Executive Officer, Sherman L. Black, and the
Companys Chief Financial Officer, Robert M. Wolf, have evaluated the Companys
disclosure controls and procedures as of December 31, 2009. Based upon such
evaluation, they have concluded that these disclosure controls and procedures
are effective. The Companys Chief

49

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Executive Officer and Chief Financial Officer used the definition of
disclosure controls and procedures as set forth in Rule 13a-15(e) under the
Exchange Act in making their conclusion as to the effectiveness of such
controls and procedures.

|    |                                                      
|--- | -----------------------------------------------------
|(b) | Changes in
 Internal Control Over Financial Reporting

There have been no changes in internal controls over financial
reporting that occurred during the fourth quarter ended December 31, 2009 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 2010 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.

|         |                                                                                                
|-------- | -----------------------------------------------------------------------------------------------
|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.

50

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|                                                                                                                                                                                                                    |                                                                           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | 
|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
 55 of this report.          
|                                                                                                                                                                                                                    |                                                                          
|                                                                                                                                                                                                                    | (3) Exhibits. See Index to Exhibits on page
 53 of this report.          
|                                                                                                                                                                                                                    |                                                                          
|(b)                                                                                                                                                                                                                 | See Index to Exhibits on page 53 of this report.                         

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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 12, 2010 | RIMAGE
 CORPORATION
|                      |                     |     |                        
|                      |                     | By: | /s/ Sherman L. Black   
|                      |                     |     | Sherman L. Black       
|                      |                     |     | 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 Sherman L. Black 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/ Sherman L. Black       |  | Chief Executive Officer and
 President(Principal Executive
 Officer), Director |  | March 12, 2010
|Sherman L. Black           |  |                                                                                | 
|                           |  |                                                                                |  |               
|/s/ Robert M. Wolf         |  | Chief Financial Officer
 (PrincipalFinancial and Accounting
 Officer)          |  | March 12, 2010
|Robert M. Wolf             |  |                                                                                | 
|                           |  |                                                                                |  |               
|/s/ James L. Reissner      |  | Director                                                                       |  | March 12, 2010
|James L. Reissner          |  |                                                                                |  |               
|                           |  |                                                                                |  |               
|/s/ Thomas F. Madison      |  | Director                                                                       |  | March 12, 2010
|Thomas F. Madison          |  |                                                                                |  |               
|                           |  |                                                                                |  |               
|/s/ Steven M. Quist        |  | Director                                                                       |  | March 12, 2010
|Steven M. Quist            |  |                                                                                |  |               
|                           |  |                                                                                |  |               
|/s/ Lawrence M. Benveniste |  | Director                                                                       |  | March 12, 2010
|Lawrence M. Benveniste     |  |                                                                                |  |               
|                           |  |                                                                                |  |               
|/s/ Philip D. Hotchkiss    |  | Director                                                                       |  | March 12, 2010
|Philip D. Hotchkiss        |  |                                                                                |  |               

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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 Amended
 and Restated 2007 Stock Incentive Plan * (Incorporated by reference to
 Appendix A to the Companys Proxy Statement for the 2009 Annual Meeting of
 Shareholders held on May 13, 2009).                                                                          
|        |  |                                                                                                                                                                                                                                                                                              
|10.4    |  | 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).                 
|        |  |                                                                                                                                                                                                                                                                                              
|10.5    |  | 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).                                               
|        |  |                                                                                                                                                                                                                                                                                              
|10.6    |  | 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).                             
|        |  |                                                                                                                                                                                                                                                                                              
|10.7    |  | 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).                           
|        |  |                                                                                                                                                                                                                                                                                              
|10.8    |  | 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. 9   |  | Letter from Rimage
 Corporation to Sherman L. 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).                                                          
|        |  |                                                                                                                                                                                                                                                                                              
|10.10   |  | Restricted Stock Agreement
 dated April 1, 2009 by and between Sherman L. Black and the Company *
 (Incorporated by reference to Exhibit 10.2 of the Companys Current Report on
 Form 8-K dated January 29, 2009).                                                                          
|        |  |                                                                                                                                                                                                                                                                                              
|10.11   |  | Stock Option Agreement
 dated April 1, 2009 by and between Sherman L. Black and the Company *
 (Incorporated by reference to Exhibit 10.1 of the Companys Quarterly Report
 on Form 10-Q for the quarter ended June 30, 2009).                                                              
|        |  |                                                                                                                                                                                                                                                                                              
|10.12   |  | Fourth Amendment to Credit
 Agreement, dated July 1, 2009, by and between the Company and Wells Fargo
 Bank, National Association (Incorporated by reference to Exhibit 10.2 of the
 Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2009).                           
|        |  |                                                                                                                                                                                                                                                                                              
|10.13   |  | Revolving Line of Credit
 Note, dated July 1, 2009, in the principal amount of $10,000,000 issued to
 the Company by Wells Fargo Bank, National Association (Incorporated by
 reference to Exhibit 10.3 of the Companys Quarterly Report on Form 10-Q for
 the quarter ended June 30, 2009).
|        |  |                                                                                                                                                                                                                                                                                              
|10.14   |  | Letter from Rimage
 Corporation to Samir Mittal regarding offer of employment, accepted on August
 20, 2009 * (Incorporated by reference to Exhibit 10.1 of the Companys
 Current Report on Form 8-K dated April 20, 2009).                                                                 

53

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Table of Contents

|      |  |                                                                                                                                                                                                                                      
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.15 |  | Letter Agreement dated
 November 4, 2009 by and between Rimage Corporation and Sherman L. Black *
 (Incorporated by reference to Exhibit 10.1 of the Companys Current Report on
 Form 8-K dated November 4, 2009).                  
|      |  |                                                                                                                                                                                                                                      
|10.16 |  | Separation and Release
 Agreement dated November 4, 2009 by and between Rimage Corporation and
 Bernard P. Aldrich * (Incorporated by reference to Exhibit 10.2 of the
 Companys Current Report on Form 8-K dated November 4, 2009).
|      |  |                                                                                                                                                                                                                                      
|10.17 |  | Consulting Agreement dated
 November 4, 2009 by and between Rimage Corporation and Bernard P. Aldrich *
 (Incorporated by reference to Exhibit 10.3 of the Companys Current Report on
 Form 8-K dated November 4, 2009).            
|      |  |                                                                                                                                                                                                                                      
|10.18 |  | Form of Non-Employee
 Director Restricted Stock Unit Agreement with Deferral Election *.                                                                                                                                             
|      |  |                                                                                                                                                                                                                                      
|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

54

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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, |     
|                                             |  | 2009                     |      | 2008 |   | 2007 |  
|                                             |  |                          |      |      |   |      |   |   |     |  
|Balance at beginning of year                 |  | $                        | 196  |      | $ | 244  |   | $ | 309 |  
|                                             |  |                          |      |      |   |      |   |   |     |  
|Write-offs and other adjustments             |  |                          | (132 | )    |   | (52  | ) |   | (89 | )
|Recoveries                                   |  |                          | 6    |      |   | (6   | ) |   | (57 | )
|Additions charged to costs and expenses      |  |                          | 136  |      |   | 10   |   |   | 81  |  
|                                             |  |                          |      |      |   |      |   |   |     |  
|Balance at end of year                       |  | $                        | 206  |      | $ | 196  |   | $ | 244 |  

See accompanying report of
Independent Registered Public Accounting Firm.

55

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