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FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,DC 20549

xANNUAL REPORT PURSUANT TOSECTION
13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDEDDECEMBER31, 2007

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NO. 000-20728

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

|                                                              |  |                                      
|------------------------------------------------------------- |  | -------------------------------------
|Minnesota                                                     |  | 41-1577970                           
|State
 or other jurisdiction of incorporation or organization |  | (I.R.S.
 Employer Identification No.)
|                                                              |  |                                      
|7725
 Washington Avenue South, Minneapolis, Minnesota         |  | 55439                                
|(Address
 of principal executive offices)                     |  | (Zip
 Code)                          
|                                                              |  |                                      
|Registrants
 telephone number:                               |  | (952) 944 - 8144                     

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

Indicate by checkmark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No x

Indicate by checkmark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes o No x

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. Yes x 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):

Yes o No x

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 $303,900,000.

As of February 29, 2008,
9,788,947 shares of the registrants common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants
definitive proxy statement for its 2008 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.

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TABLE OF CONTENTS

|           |  |                                                                                                   |     
|---------- |  | ------------------------------------------------------------------------------------------------- | ----
|           |  |                                                                                                   | Page
|           |  |                                                                                                   |     
|           |  |                                                                                                   |     
|PART I     |  |                                                                                                   | 3   
|           |  |                                                                                                   |     
|Item 1.    |  | Business                                                                                          | 3   
|           |  |                                                                                                   |     
|           |  | General                                                                                           | 3   
|           |  | Products                                                                                          | 3   
|           |  | Marketing and Distribution                                                                        | 4   
|           |  | Competition                                                                                       | 5   
|           |  | Manufacturing                                                                                     | 5   
|           |  | Research and Development                                                                          | 5   
|           |  | Patents and Government Regulation                                                                 | 5   
|           |  | Employees                                                                                         | 6   
|           |  | Cautionary
 Note Regarding Forward-Looking Statements                                             | 6   
|Item 1A.   |  | Risk Factors                                                                                      | 6   
|Item 1B.   |  | Unresolved
 Staff Comments                                                                        | 12  
|Item 2.    |  | Properties                                                                                        | 12  
|Item 3.    |  | Legal
 Proceedings                                                                                | 12  
|Item 4.    |  | Submission
 of Matters to a Vote of Security Holders                                              | 12  
|           |  |                                                                                                   |     
|PART II    |  |                                                                                                   | 13  
|           |  |                                                                                                   |     
|Item 5.    |  | Market for
 Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
 Securities | 13  
|           |  | Shareholders                                                                                      | 13  
|           |  | Dividends                                                                                         | 13  
|           |  | 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                                                                    | 23  
|           |  | Available
 Information                                                                            | 24  
|Item 7A.   |  | Quantitative
 and Qualitative Disclosures About Market Risk                                       | 24  
|Item 8.    |  | Financial
 Statements and Supplementary Data                                                      | 25  
|Item 9.    |  | Changes in
 and Disagreements with Accountants on Accounting and Financial Disclosure             | 50  
|Item 9A.   |  | Controls and Procedures                                                                           | 51  
|Item 9B.   |  | Other Information                                                                                 | 51  
|           |  |                                                                                                   |     
|PART III   |  |                                                                                                   | 51  
|           |  |                                                                                                   |     
|Item 10.   |  | Directors, Executive Officers and Corporate
Governance                                            | 51  
|Item 11.   |  | Executive Compensation                                                                            | 51  
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters    | 52  
|Item 13.   |  | Certain
 Relationships and Related Transactions, and Director Independence                        | 52  
|Item 14.   |  | Principal
 Accountant Fees and Services                                                           | 52  
|           |  |                                                                                                   |     
|PART IV    |  |                                                                                                   | 52  
|           |  |                                                                                                   |     
|Item 15.   |  | Exhibits
 and Financial Statement Schedules                                                       | 52  
|           |  |                                                                                                   |     
|SIGNATURES |  | 53                                                                                               

2

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General
Information

PART I

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

General

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

Incorporated as IXI, Inc. in Minnesota in February 1987, Rimage has focused on digital storage
production equipment since its inception. From 1987 until the introduction of its first CD recordable (CD-R)
production equipment in 1995, most of Rimages products consisted of diskette and tape duplication equipment. Rimage also
generated a significant portion of its revenue from CD-ROM and diskette duplication and production services from 1993 until 1999.
From 1994 to 1997, Rimage also engaged in other lines of business, including development of browser and archiving software and
distribution of CD-ROM stamping presses.

Since 1995, Rimage has
focused its business on development and sale of its CD-R publishing systems,
and since 2000, its DVD recordable (DVD-R) publishing systems. Blue laser
capabilities were integrated into key products in late 2006 to address the
needs of customers desiring the substantial increase in storage capacity
provided by this emerging technology. In 1997, Rimage ceased distribution
activities for CD-ROM stamping presses and terminated browser and archiving
software development. During the third quarter of 1998, Rimage ceased operations
of its Minnesota services business and sold the equipment and inventory
associated with that business. On June 30, 1999, Rimage ceased operations of
its Colorado services business and sold all the assets associated with that
business. The resources previously applied to these businesses were instead
applied to development and sales of the Companys digital publishing systems
for commercial applications.

Products

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

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

Sales of Rimages digital
publishing systems comprised 52%, 54% and 62% of its revenue from operations
during 2007, 2006 and 2005, respectively. Rimages other major sources of revenue
are recurring in nature and consist of consumables (ribbons, ink cartridges and
Rimage-branded blank recordable CD, DVD and blue laser media), parts and
maintenance contract sales.

Rimages digital publishing
systems have been divided into two primary product lines: the Producer line of
equipment for higher volume requirements for production of recordable CD, DVD
or blue laser media, and the Desktop line of lower-cost products for office and
other desktop applications. The Producer line of hardware

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products continues to
generate a significant portion of Rimages revenue, comprising 43% of total
revenues during 2007 at $46,829,000, 44% during 2006 at $44,874,000 and 51% in
2005 at $48,428,000. The Desktop line of hardware products contributed 9% of
total revenues in 2007 at $9,435,000, 10% in 2006 at $10,640,000 and 11% in
2005 at $10,692,000. The balance of revenue in each year was generated through
sale of Rimage-branded blank recordable CD, DVD and blue laser media, ribbons,
ink cartridges, parts, repair services and maintenance contracts. These
recurring revenues comprised 48% of total revenues during 2007 at $52,610,000,
46% during 2006 at $47,738,000 and 38% in 2005 at $36,290,000. The growth in
recurring revenues has been spurred by the expansion of the Companys worldwide
installed base of digital publishing systems as well as the Companys
introduction in 2004 of its consumable supplies strategy involving media kits.
Through this strategy, the Company assembles Rimage-branded blank recordable CD
or DVD discs with replacement printer ribbons and cartridges into kits to
simplify the customers purchase and use of these consumable products in the
production process.

The Producer III Series.The Producer III Series of digital publishing
systems, introduced in 2006, represents the latest generation of the
high-performance Producer line and consists of a family of products that cover
a broad range of applications for the publishing and duplication of CD, DVD and
blue laser discs with digital content. The Producer line of products also
includes previously available systems from the Producer II Series and DiscLab
Series. In 2007, the Company augmented its Producer product line with the
introduction of the Professional Series line of digital publishing systems.
Each product in the Producer line incorporates recorders capable of recording
on CD, DVD or blue laser media, customized robotics, a thermal or thermal
re-transfer printer for on-disc color printing, software and computer hardware
components.

Rimage offers its Producer
line of products in five basic configurations to meet the varying needs of its
commercial customers. The Rimage 8100 system, part of the Producer III Series
of publishing systems introduced in 2006, provides industry leading speed and
throughput for on-demand production of CD, DVD or blue laser discs with digital
content. The Rimage 8100 system utilizes up to four simultaneous data streams
and four recorders and provides for a capacity of 300 discs. The Rimage 7100
system, also part of the Producer III series, comes standard with two
recorders. The Amigo II system, introduced in 2001, comes with a single
recorder. The Rimage 8100 and Rimage 7100 systems are available with either a
stand-alone control center or a control center embedded inside the unit. These
two systems and the single-recorder Amigo II system are each available with
either Rimages Everest or Prism printers. The DiscLab systems, consisting of
the DLN5200 and DL5200, and the Professional Series systems, consisting of the
5300N and 5100N, are designed predominantly as network attached publishing
systems and feature an embedded control center, an Everest printer and a small
product size and footprint.

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

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

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

Marketing and Distribution

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

Rimage has historically
focused its sales and marketing efforts on high-volume CD-R and DVD-R
publishing solutions for its Producer product line in such areas as banking and
finance, wholesale photo processing labs,

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medical imaging, and more
recently, retail photography. Rimage plans to continue to expand its position
in many of these markets while also focusing on new applications with
high-growth potential in business services. Such expanded sales and marketing
efforts have led to growth in the Companys sales and marketing organization to
help penetrate these targeted markets and strengthen marketing support for new
products.

During 2007, 2006 and 2005,
Rimage derived 14%, 15% and 12% of its respective revenues from one of its
distributors, and derived 9%, 14% and 8% of its revenues from a second
distributor during the same respective periods. Sales to one of the Companys
strategic partners represented 9% of revenues during 2007 and 2006 and 11%
during 2005.

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 36% of Rimages revenues for the year ended December
31, 2007 and 34% of revenues for both of the years ended December 31, 2006 and
2005.

Competition

Rimage competes with a
number of manufacturers of CD-R/DVD-R production equipment and related
products. Primary competitors of the Company currently include Primera
Technology, Inc., Teac, Microtech Systems, Inc. and LSK Data Systems GmbH.
Rimage is able to compete effectively in the sale of digital publishing systems
because of technological leadership in automated solutions and its early start
within the CD-R/DVD-R production equipment industry. Rimage believes that its
quality printing capabilities for recordable CD, DVD and blue laser media, its
transporter mechanisms, its software and its integration tools differentiate
its products from those of competitors. Rimage also competes with alternative
technologies in the storage media industry such as high capacity hard drives,
flash memory, new recordable media technologies, file servers accessible
through computer networks, the Internet and additional media under development.
Rimage believes that within its targeted markets its technology has advantages
over these alternative technologies in terms of usability, reliability,
performance, privacy 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, circuit boards, electric motors, machined and molded parts, precision
sheet metal assemblies, computer components and other mechanical parts. The
Company depends upon a single-source supplier for its Everest printers.

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

Research and Development

At December 31, 2007, 28
full-time employees were involved in research and development at Rimage. This
staff, with advanced development, software, electrical, mechanical and drafting
capabilities, engages in research and development of new products and
development of enhancements to existing products.

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

Rimages expenditures for
research and development were $5,903,000, $6,738,000 and $5,512,000 in 2007,
2006 and 2005, representing 5.4%, 6.5% and 5.8% of revenues, respectively.
Rimage anticipates its expenditures in research and development will
approximate 6% to 7% of revenues during 2008.

Patents and Government Regulation

Rimage currently maintains
21 U.S. and foreign patents and
has a total of 13 U.S. and foreign patents pending. In addition, Rimage
protects the proprietary nature of its software primarily through copyright and
license agreements

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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.

As the number of Rimages
products increase 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 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.

Employees

At December 31, 2007, Rimage
had 212 full-time employees, of which 28 were involved in research and
development, 100 in production, testing, repair and customer service, and 84 in
sales, marketing, administration and management. None of Rimages employees are
represented by a labor union or covered by a collective bargaining agreement.

Cautionary Note Regarding Forward-Looking
Statements

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

We sell a significant amount
of our products to customers outside the United States, particularly in Europe,
Asia and Latin America. International sales accounted for 36% of our revenues
for the year ended December 31, 2007 and 34% of our revenues for each of the
years ended December 31, 2006 and 2005. 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.

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| |   |                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | § | Potentially limited
 intellectual property protection in certain countries may limit our recourse
 against infringing products or cause us to refrain from selling in certain
 markets.
| |   |                                                                                                                                                                                        
| | § | We may face difficulties
 in managing our international operations.                                                                                                                    
| |   |                                                                                                                                                                                        
| | § | The burden and cost of
 complying with a variety of foreign laws.                                                                                                                      
| |   |                                                                                                                                                                                        
| | § | We may decide to price our
 products in foreign currency denominations.                                                                                                                
| |   |                                                                                                                                                                                        
| | § | Our contracts with foreign
 distributors and resellers cannot fully protect us against political and
 economic instability.                                                            
| |   |                                                                                                                                                                                        
| | § | We may face difficulties
 in collecting receivables.                                                                                                                                   
| |   |                                                                                                                                                                                        
| | § | We may not be able to
 control our international distributors efforts on our behalf.                                                                                                  

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

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

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

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

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

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

8

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

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

During 2007,
sales to one of our distributors represented 14% of our revenues. Sales to this
distributor and a second distributor generated 15% and 14%, respectively, of
our revenues in 2006. During 2005, we derived 12% of our revenues from one of
these distributors and approximately 11% of revenues from a strategic partner.
A significant reduction, delay or cancellation of orders from our key channel
partners or our direct OEM customers, or the loss of any of them, could have a
negative impact upon our operating results. Further, some of our channel
partners are small organizations with limited capital, and our success in
distributing our products to end-users will depend upon the continued viability
and financial stability of these entities. These channel partners may choose to
devote their efforts to other products in different markets or reduce or fail
to devote the necessary resources to provide effective sales and marketing
support of our products. We believe that our future growth and success will
continue to depend in large part upon the success of our channel partners in
operating their businesses and our relationships with our direct OEM customers.

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

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

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

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

The
termination or interruption of any of these relationships, or the failure of
these manufacturers or suppliers to supply products or components to us on a
timely basis or in sufficient quantities, likely would cause us to be unable to
meet orders for our products and harm our reputation and our business.
Identifying and qualifying alternative suppliers of components would take time,
involve significant additional costs and may delay the production of our
products. Further, if we obtain a new supplier for a component or assemble our
product using an alternative component, 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 third-party manufacturers to manufacture the products for us, and the
failure of our components suppliers to supply us with the components consistent
with our requirements as to quality, quantity and timeliness could materially
harm our business by causing delays, loss of sales, increases in costs and
lower gross profit margins.

9

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

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

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

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

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

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

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

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

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

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.

10

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

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

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

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

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

In addition,
the stock market is subject to price and volume fluctuations that affect the
market prices for companies in general, and small-capitalization,
high-technology companies in particular, which are often unrelated to the
operating performance of these companies. Any failure by us to meet or exceed
estimates of financial analysts is likely to cause a decline in our common
stock price.

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.

11

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| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | § | The
 provisions of our agreements provide for severance payments to our executive
 officers in the event of certain terminations following a change in
 control.

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

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

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

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

None.

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

Rimage headquarters are located
in a leased facility of 58,500 square feet at 7725 Washington Avenue South,
Edina, Minnesota 55439. The Company rents this facility under a noncancellable
48-month lease initiated August 1, 2004. Monthly base rent was $33,394 for the
first year, with 2% inflationary increases each subsequent year of the lease.
This facility is used for manufacturing, engineering, service, sales, marketing
and administration. The lease on this facility expires on July 31, 2008 and the
Company is currently evaluating options to meet its future space requirements.
In July 2006, Rimage entered into a new 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, the Company leases a facility of approximately 1,109 square feet
in Tokyo, Japan, used for sales and service. The monthly base rent is ¥ 379,040
(or approximately $3,200 U.S. dollars). The term of the lease in Japan, as
revised, expires on May 31, 2008, and the Company is actively evaluating options
for a new leased facility that accommodates growth in its Japanese subsidiary
operations.

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

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

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

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

12

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Table of Contents

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 prices for Rimages
common stock as reported on The Nasdaq Stock Market.

|            |  |     |       |      |   |       | 
|----------- |  | --- | ----- | ---- | - | ----- | 
|            |  | Low |       | High |  
|            |  |     |       |      |  
|Year 2006:  |  |     |       |      |   |       | 
|1st Quarter |  | $   | 20.25 |      | $ | 33.95 | 
|2nd Quarter |  | $   | 17.52 |      | $ | 23.24 | 
|3rd Quarter |  | $   | 18.08 |      | $ | 26.76 | 
|4th Quarter |  | $   | 20.50 |      | $ | 27.04 | 
|Year 2007:  |  |     |       |      |   |       | 
|1st Quarter |  | $   | 23.50 |      | $ | 28.74 | 
|2nd Quarter |  | $   | 25.76 |      | $ | 34.58 | 
|3rd Quarter |  | $   | 21.59 |      | $ | 34.63 | 
|4th Quarter |  | $   | 20.79 |      | $ | 27.39 | 

Shareholders

As of February
25, 2008, there were 52 shareholders of record of Rimages common stock.

Dividends

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

Other Information Regarding Equity Compensation Plans

The following table sets forth
information regarding Rimages equity compensation plans in effect as of December
31, 2007. 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:     |  |                                                                                                             | 1,240,091 |                                                                                |  |                                                                                                                 | $ | 16.57 |  |  |  | 507,320 |  | 
|                                                         |  |                                                                                                             |           |                                                                                |  |                                                                                                                 |   |       |  |  |  |         |  | 
|Equity
 compensation plans not approved by shareholders: |  |                                                                                                             |          |                                                                                |  |                                                                                                                 |   |      |  |  |  |        |  | 
|                                                         |  |                                                                                                             |           |                                                                                |  |                                                                                                                 |   |       |  |  |  |         |  | 
|Total                                                    |  |                                                                                                             | 1,240,091 |                                                                                |  |                                                                                                                 | $ | 16.57 |  |  |  | 507,320 |  | 
|                                                         |  |                                                                                                             |           |                                                                                |  |                                                                                                                 |   |       |  |  |  |         |  | 

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

13

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Table of Contents

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, 2003 to December 31,
2007 in the value of $100 invested in: (1) the Nasdaq National Market Index
(U.S.); (2) the Nasdaq Computer Manufacturer Stocks Index; and (3) Rimages
common stock. The values of each investment as of the dates indicated are based
on share prices plus any dividends paid in cash, with the dividends reinvested
on the date they were paid. The calculations exclude trading commissions and
taxes. The table and graph are not necessarily indicative of future investment
performance.

(LINE GRAPH)

|                                           |  |          |        |          |   |          |  |          |        |          |   |        |  |   |        | 
|------------------------------------------ |  | -------- | ------ | -------- | - | -------- |  | -------- | ------ | -------- | - | ------ |  | - | ------ | 
|                                           |  | 12/31/03 |        | 12/31/04 |   | 12/30/05 |  | 12/29/06 |        | 12/31/07 |  
|                                           |  |          |        |          |   |          |  |          |        |          |  
|                                           |  |          |        |          |   |          |  |          |        |          |  
|Nasdaq
 National Market Index              |  | $        | 100.00 |          | $ | 108.83   |  | $        | 111.14 |          | $ | 122.11 |  | $ | 132.41 | 
|                                           |  |          |        |          |   |          |  |          |        |          |   |        |  |   |        | 
|Nasdaq
 Computer Manufacturer Stocks Index |  | $        | 100.00 |          | $ | 130.29   |  | $        | 133.30 |          | $ | 136.14 |  | $ | 199.19 | 
|                                           |  |          |        |          |   |          |  |          |        |          |   |        |  |   |        | 
|Rimage
 Corporation                        |  | $        | 100.00 |          | $ | 101.45   |  | $        | 182.95 |          | $ | 164.14 |  | $ | 163.83 | 

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,     |   |         | 
|                                         |  |      |        
|                                         |  | 2007 |         | 2006                        |   | 2005    |  | 2004 |        | 2003 |  
|                                         |  |      |         |                             |   |         |  |      |        |      |  
|Revenues                                 |  | $    | 108,874 |                             | $ | 103,252 |  | $    | 95,410 |      | $ | 70,848 |  | $ | 53,797 | 
|Cost of revenues                         |  | $    | 57,719  |                             | $ | 56,014  |  | $    | 51,957 |      | $ | 38,027 |  | $ | 27,399 | 
|Gross profit                             |  | $    | 51,155  |                             | $ | 47,238  |  | $    | 43,453 |      | $ | 32,821 |  | $ | 26,398 | 
|Operating expenses                       |  | $    | 30,274  |                             | $ | 29,464  |  | $    | 26,829 |      | $ | 19,386 |  | $ | 14,841 | 
|Operating income                         |  | $    | 20,881  |                             | $ | 17,774  |  | $    | 16,624 |      | $ | 13,435 |  | $ | 11,557 | 
|Other income, net                        |  | $    | 3,513   |                             | $ | 2,684   |  | $    | 1,419  |      | $ | 608    |  | $ | 515    | 
|Income tax expense                       |  | $    | 8,633   |                             | $ | 7,374   |  | $    | 6,675  |      | $ | 4,971  |  | $ | 4,406  | 
|Net income                               |  | $    | 15,761  |                             | $ | 13,084  |  | $    | 11,368 |      | $ | 9,072  |  | $ | 7,666  | 
|                                         |  |      |         |                             |   |         |  |      |        |      |   |        |  |   |        | 
|Basic net income per share               |  | $    | 1.59    |                             | $ | 1.33    |  | $    | 1.19   |      | $ | 0.98   |  | $ | 0.86   | 
|Diluted net income per
 share            |  | $    | 1.52    |                             | $ | 1.26    |  | $    | 1.10   |      | $ | 0.91   |  | $ | 0.79   | 
|Weighted average shares
 outstanding:    |  |      |         |                             |   |         |  |      |        |      |   |        |  |   |        | 
|Basic                                    |  |      | 9,915   |                             |   | 9,812   |  |      | 9,530  |      |   | 9,290  |  |   | 8,931  | 
|Diluted                                  |  |      | 10,371  |                             |   | 10,356  |  |      | 10,312 |      |   | 9,932  |  |   | 9,743  | 
|                                         |  |      |         |                             |   |         |  |      |        |      |   |        |  |   |        | 
|Consolidated
 Balance Sheet Information: |  |      |         |                             |   |         |  |      |        |      |   |        |  |   |        | 
|                                         |  |      |         |                             |   |         |  |      |        |      |   |        |  |   |        | 
|                                         |  |      |         | Balances as of December 31, |   |         | 
|                                         |  |      |        
|                                         |  | 2007 |         | 2006                        |   | 2005    |  | 2004 |        | 2003 |  
|                                         |  |      |         |                             |   |         |  |      |        |      |  
|Cash and cash equivalents                |  | $    | 7,416   |                             | $ | 8,500   |  | $    | 12,693 |      | $ | 12,120 |  | $ | 26,742 | 
|Marketable securities                    |  | $    | 51,605  |                             | $ | 30,266  |  | $    | 51,582 |      | $ | 40,375 |  | $ | 21,855 | 
|Receivables, net                         |  | $    | 14,447  |                             | $ | 21,697  |  | $    | 12,885 |      | $ | 10,184 |  | $ | 6,243  | 
|Inventories                              |  | $    | 8,075   |                             | $ | 6,072   |  | $    | 6,621  |      | $ | 7,396  |  | $ | 3,334  | 
|Current assets                           |  | $    | 84,771  |                             | $ | 70,116  |  | $    | 86,444 |      | $ | 71,665 |  | $ | 59,849 | 
|Property and equipment, net              |  | $    | 3,206   |                             | $ | 3,626   |  | $    | 2,525  |      | $ | 2,386  |  | $ | 1,137  | 
|Marketable securities -
 non-current     |  | $    | 35,201  |                             | $ | 38,594  |  | $    |       |      | $ |       |  | $ |       | 
|Total assets                             |  | $    | 125,096 |                             | $ | 112,359 |  | $    | 89,009 |      | $ | 74,138 |  | $ | 61,024 | 
|Current liabilities                      |  | $    | 17,882  |                             | $ | 16,163  |  | $    | 12,191 |      | $ | 11,277 |  | $ | 9,013  | 
|Long-term liabilities                    |  | $    | 2,153   |                             | $ | 720     |  | $    | 289    |      | $ | 139    |  | $ |       | 
|Stockholders equity                     |  | $    | 105,061 |                             | $ | 95,476  |  | $    | 76,529 |      | $ | 62,722 |  | $ | 52,011 | 

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Table of Contents

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, 2007 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 | 
|                                    |  |                             |       |                                                   | 
|                                    |  | 2007                        |       | 2006                                              |  | 2005  |   | 2007 vs.
 2006 |       | 2006 vs.
 2005 | 
|                                    |  |                             |       |                                                   |  |       |   |                |       |                | 
|Revenues                            |  |                             | 100.0 |                                                   |  | 100.0 |   |                | 100.0 |                |  | 5.4   |   |  | 8.2  | 
|Cost of revenues                    |  |                             | (53.0 | )                                                 |  | (54.2 | ) |                | (54.5 | )              |  | 3.0   |   |  | 7.8  | 
|                                    |  |                             |       |                                                   |  |       |   |                |       |                |  |       |   |  |      | 
|Gross profit                        |  |                             | 47.0  |                                                   |  | 45.8  |   |                | 45.5  |                |  | 8.3   |   |  | 8.7  | 
|Operating expenses:                 |  |                             |       |                                                   |  |       |   |                |       |                |  |       |   |  |      | 
|Research and development            |  |                             | (5.4  | )                                                 |  | (6.5  | ) |                | (5.8  | )              |  | (12.4 | ) |  | 22.2 | 
|Selling, general and administrative |  |                             | (22.4 | )                                                 |  | (22.0 | ) |                | (22.3 | )              |  | 7.2   |   |  | 6.6  | 
|                                    |  |                             |       |                                                   |  |       |   |                |       |                |  |       |   |  |      | 
|Operating income                    |  |                             | 19.2  |                                                   |  | 17.2  |   |                | 17.4  |                |  | 17.5  |   |  | 6.9  | 
|Other income, net                   |  |                             | 3.2   |                                                   |  | 2.6   |   |                | 1.5   |                |  | 30.9  |   |  | 89.1 | 
|                                    |  |                             |       |                                                   |  |       |   |                |       |                |  |       |   |  |      | 
|Income before income taxes          |  |                             | 22.4  |                                                   |  | 19.8  |   |                | 18.9  |                |  | 19.2  |   |  | 13.4 | 
|Income tax expense                  |  |                             | (7.9  | )                                                 |  | (7.1  | ) |                | (7.0  | )              |  | 17.1  |   |  | 10.5 | 
|                                    |  |                             |       |                                                   |  |       |   |                |       |                |  |       |   |  |      | 
|Net income                          |  |                             | 14.5  |                                                   |  | 12.7  |   |                | 11.9  |                |  | 20.5  |   |  | 15.1 | 
|                                    |  |                             |       |                                                   |  |       |   |                |       |                |  |       |   |  |      | 

Overview

Rimage develops, manufactures and markets digital publishing systems that are used by businesses
to produce recordable CD, DVD and blue laser discs with customized digital content on an on-demand basis. Rimage distributes its
publishing systems from its operations in the United States, Germany and Japan. These systems allow customers to benefit from cost
savings by eliminating their manual labor efforts in industries such as digital photography, medical imaging and business
services. Rimage anticipates increased sales and marketing expenditures in 2008 as a result of increased resources focused on
developing these markets. As Rimages sales within North America and Europe have averaged 94% of total sales over the past
three years, the strength of the economies in these regions plays an important role in determining the success of Rimage.

Rimage earns revenues through the sale of equipment, consumables (ribbons, ink cartridges and
Rimage-branded blank CD-R and DVD-R media), maintenance contracts, parts and repair services. Rimages recurring revenues
(consumables, maintenance contracts, parts and service) comprised approximately 48%, 46%, and 38% of its consolidated revenues in
2007, 2006 and 2005, respectively. Exclusive of a small amount of capital lease obligations, Rimage has no long-term debt and does
not require significant capital investment as all fabrication of its products is outsourced to vendors.

Results of Operations

Revenues. Revenues were $108.9 million, $103.3 million and $95.4 million for
2007, 2006 and 2005, respectively, reflecting increases of approximately 5%, 8%
and 35%, respectively, over the prior years.

The
growth in revenues from 2006 to 2007 was primarily impacted by a $4.9 million
or 10% increase in the volume of recurring revenues, consisting of sales of
printer ribbons, ink cartridges, media kits, blank CD-R and DVD-R media, parts
and maintenance contracts. The growth in recurring revenues was primarily due
to the continued expansion of the Companys worldwide installed base of CD-R
and DVD-R publishing systems and the Companys increased emphasis on promoting
this portion of its business. Revenue growth was also favorably impacted by a
$2.0 million or 4.4% increase in sales of Producer product line equipment, primarily
the result of increased sales volume. Sales of Producer product line equipment
benefited from deliveries against significant orders received in the second
quarter from the retail market. Partially offsetting the increases in recurring
and Producer product line equipment revenues was a decrease in the volume of
Desktop product line equipment sales, largely driven by reduced sales of the
low-end Rimage 360i product line. Sales of Producer product line equipment
comprised 43% of total revenues for the year ended December 31, 2007, compared
to 43.5% in the prior year period. Recurring revenues comprised 48% and 46% of
total revenues for the years ended December 31, 2007 and 2006, respectively.
Remaining revenues in each year were generated by sales of Desktop product line
equipment, representing 9% and 10% of revenues, respectively.

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The
growth in revenues from 2005 to 2006 was primarily driven by an increase of
31%, or $11.4 million, in the volume of recurring revenues, the content of
which is described above. Partially offsetting the growth in recurring revenues
was a decrease in the volume of sales of Producer product line equipment of
$3.5 million, resulting primarily from reduced sales volume in the retail
market. The reduction in 2006 retail sales was impacted by the Companys
product rollout into the U.S. retail market in 2005, which generated equipment
sales of approximately $9.0 million. Sales of Desktop product line equipment
were relatively flat from 2005 to 2006.

International
sales rose 12% in 2007 and comprised 36% of total sales, compared to 34% in
both 2006 and 2005. The European market continued to generate the majority of
international sales, with sales increasing 10% from 2006 to 2007 and 8% from
2005 to 2006. Most of the revenue growth in 2007 in the European market stemmed
from currency fluctuations. Sales in Asian markets also grew, rising 31% in
2007 and 35% in 2006 from the same prior year periods, reflecting increased
sales efforts in this region by a Rimage subsidiary operation established in
Japan in 2005. Currency fluctuations affecting the Companys European and
Japanese operations increased 2007 consolidated revenues by 2.6% relative to
2006 and less than 1% for 2006 relative to 2005.

The
Company expects to achieve continued revenue growth in 2008, the rate at which
will be dependent upon many factors, including the effectiveness of the
Companys channel partners, the timing of new product introductions, the rate
of adoption of new applications for the Companys products in its targeted
markets and the impact of foreign currency exchange rate fluctuations.

Gross Profit. Gross profit as a percentage of revenues was 47.0% for the year ended
December 31, 2007, compared to 45.8% and 45.5% for the years ended December 31,
2006, and 2005, respectively.

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

Gross
profit as a percentage of revenues increased slightly in 2006 relative to 2005
in spite of a lower volume and concentration of Producer product line equipment
sales, which generally carry higher margins than Desktop product line equipment
or recurring revenues, and the inclusion in 2006 cost of sales of charges of
$0.6 million as discussed above. Producer product line equipment sales
comprised 44% of total revenues in 2006, compared to 51% in 2005. The volume
and concentration of recurring revenues, which generally carry lower margins
than equipment sales, increased to 46% of total revenues, compared to 38% in
2005. Offsetting the unfavorable impact on gross margin of the described
changes in product mix and charges to cost of sales was an improvement in
service related margins, stemming from a higher rate of growth of service
related revenues relative to associated support costs. Additionally, equipment
revenues in 2006 were more concentrated in higher margin transactions, impacted
by higher average selling prices for some Producer equipment configurations.

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

Operating Expenses. Research and development expenses were $5.9 million, $6.7 million and
$5.5 million for the years ended December 31, 2007, 2006 and 2005,
respectively, representing 5.4%, 6.5% and 5.8% of revenues, respectively.

The
12% decrease in research and development expenses from 2006 to 2007 was
primarily due to the timing of activities associated with new product
development projects. Development expenses incurred in 2007 included costs to
support the introduction of the Professional Series line of Producer products
and other products under development. A higher level of development expenses
were incurred in 2006 to support the completion of the

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Companys
next generation Producer product line, the Producer III. Also contributing to
the reduction in research and development expenses in 2007 were lower
compensation related costs, impacted primarily by a 13% reduction in headcount
and a reduction in stock-based compensation expense of $45,000.

The
22% increase in research and development expenses from 2005 to 2006 reflect
development costs to support the introduction in 2006 of the Companys next
generation Producer product line, continued development of new products and
enhancements to existing products. Stock-based compensation expenses increased
research and development expenses by $163,000 in 2006.

Rimage
anticipates its expenditures in research and development will approximate 6% to
7% of revenues during 2008 to support new product development initiatives and
improve existing products.

Selling,
general and administrative expenses for the years ended December 31, 2007, 2006
and 2005 were $24.4 million, $22.7 million and $21.3 million, respectively,
representing 22.4%, 22.0% and 22.3% of revenues, respectively.

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

The
7% growth in selling, general and administrative expenses in 2006 relative to
2005 was primarily driven by $1.4 million of expenses incurred during the year
to support the implementation of a new enterprise resource planning system,
increased costs associated with a 23% increase in headcount and stock-based
compensation expenses of $1.4 million. Partially offsetting the described
expense increases was a $1.1 million reduction in consulting expenses
associated with a strategic analysis of the Companys operations initiated in
the last half of 2005 and completed during the first quarter of 2006.
Additionally, sales and marketing expenses decreased in 2006 primarily as a
result of reduced costs for advertising and promotional activities due to
implementation of programs in the prior years second quarter to support the
launch of the Rimage 360i Desktop product, and a reduction in cooperative
marketing program costs resulting from the Companys transition to an
alternative program format with its distributors.

Selling,
general and administrative expenses in 2008 are expected to comprise a similar
proportion of total revenues relative to 2007 to support initiatives to further
expand and strengthen the Companys global sales and marketing organization.

Other Income, Net. The Company recognized interest income on cash and marketable
securities of $3.5 million, $2.8 million and $1.5 million in 2007, 2006 and
2005, respectively. The year-over-year increases in interest income were driven
primarily by a $15 million and a $13 million respective increase in average
cash equivalent and marketable securities balances. See Liquidity and Capital
Resources below for a discussion of changes in cash levels.

Income Taxes. The provision for income taxes represents federal, state, and foreign
income taxes on income. For the years ended December 31, 2007, 2006 and 2005,
income tax expense amounted to $8.6 million, $7.4 million and $6.7 million,
respectively, representing 35.4%, 36.0% and 37.0% of income before income
taxes, respectively. The year-over-year decreases in the effective tax rate
were primarily impacted by increased tax-exempt interest income in each year. The
2007 effective tax rate was also favorably impacted by an increase in the
manufacturers tax deduction and the federal research credit. Partially
offsetting these favorable changes was an increase in state income taxes in
2007 relative to 2006.

The
Company implemented the provisions of FASB Interpretation No. 48, Accounting
for Uncertainly in Income Taxesan interpretation of FASB Statement No. 109
(FIN 48), effective January 1, 2007. The impact on the Companys financial
statements of adopting FIN 48 was insignificant; as a result, the Company did
not record a cumulative effect adjustment to the January 1, 2007 balance of
retained earnings.

The
Company anticipates its effective tax rate will range between 35% and 37% for
the full year 2008.

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Net Income / Net Income Per Share. Net income for the years ended December 31,
2007, 2006 and 2005 amounted to $15.8 million, $13.1 million and $11.4 million,
representing 14.5%, 12.7% and 11.9% of revenues, respectively. Related net
income per diluted share amounts were $1.52 in 2007, $1.26 in 2006 and $1.10 in
2005.

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, 2007, no amounts were outstanding under
the credit agreement.

At
December 31, 2007, the Company had working capital of approximately $67
million, an increase of $13 million from working capital reported at December
31, 2006. Contributing to the increase in working capital was year-to-date net
income of $15.8 million, proceeds from employee stock plans of $2.8 million and
the impact of a $3.4 million net transfer of funds from non-current to current
marketable securities. Partially offsetting these increases in working capital
were the Companys use of $12.6 million of cash in the third quarter of 2007 to
repurchase 500,000 shares of its common stock and purchases of property and
equipment of $1.3 million. The net transfer of funds described above resulted
from a non-cash change in the classification of $31.8 million of marketable
securities from non-current as of December 31, 2006 to current as of December
31, 2007, partially offset by a $28.4 million use of cash to purchase
non-current marketable securities. 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, 2007.

On July 25, 2007, the Companys Board of Directors authorized the repurchase of up to 500,000
shares of its common stock. The program adopted by the Companys Board of Directors in July 2007 replaced the repurchase
program adopted in May 1999. During the year ended December 31, 2007, the Company repurchased 500,000 shares of its common stock
at an average purchase price of $25.26 per share under the authorization. On October 17, 2007, the Companys Board of
Directors adopted a new stock repurchase program authorizing the repurchase of up to 500,000 shares of the Companys common
stock. This new program replaces the completed share repurchase program that was adopted in July 2007. Shares will be purchased at
prevailing market prices in the open market or in private transactions, subject to market conditions, share price, trading volume
and other factors, and the repurchase program may be discontinued at any time. The Company will finance the purchase of the shares
using cash on hand. As of December 31, 2007, no shares had been repurchased under this authorization. In February 2008, the
Companys Board of Directors increased the share repurchase authorization by an additional 500,000 shares, bringing total
shares available for repurchase to 1,000,000. The Company also intends on utilizing its assets primarily for its continued organic
growth. Additionally, the Company may use its available cash for potential future strategic initiatives or alliances.

Net
cash provided by operating activities totaled $26.1 million, $12.0 million and
$11.5 million for the years ended December 31, 2007, 2006 and 2005,
respectively. The $14.1 million increase in cash provided by operating
activities in 2007 relative to 2006 was due to a $2.2 million increase in net
income adjusted for non-cash items and an $11.9 million larger increase in cash
from changes in operating assets and liabilities. Primarily contributing to the
change in operating assets and liabilities was a $7.3 million decrease in
accounts receivable in 2007 compared to an $8.8 million increase in 2006, and a
$1.3 million larger increase in deferred income year over year. Partially
offsetting the favorable impact of the above was a $2.6 million larger net
increase in inventories and a $2.3 million smaller net increase in the primary
operating liability accounts; consisting of trade accounts payable, income
taxes payable and accrued expenses. The large decrease in accounts receivable
in 2007 relative to the increase in 2006 was driven largely by a $5.7 million
decrease in sales in December 2007 relative to December 2006. The larger
increase in deferred income resulted from the sale of maintenance contracts on
a growing base of installed CD-R and DVD-R publishing systems. The unfavorable
change in inventories was due to a build-up of raw material and sub-assembly
inventories associated with new product introductions and to support expected
future demand. The smaller net increase in operating liability accounts was
primarily affected by the timing of payments.

Net
cash used in investing activities amounted to $18.7 million, $19.8 million and
$12.5 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Cash used in investing activities for each year primarily reflects purchases of
marketable securities, net of maturities of marketable securities. Investing
activities also include purchases of property and equipment of $1.3 million in
2007, $2.7 million in 2006 and $1.3 million in 2005. Purchases in 2007
consisted primarily of costs capitalized as part of the implementation of an
enterprise resource planning system and purchases of manufacturing tooling.
Costs capitalized in 2007 for the enterprise resource planning system amounted
to $0.3 million and consisted primarily of software development costs incurred
in the first quarter. In 2008, the Company expects total capital expenditures
to range between $1.5 million and $2.0

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million,
primarily reflecting investments to support the Companys information
technology requirements and the production and product development processes.

Net
cash used in financing activities totaled $8.7 million in 2007, compared to net
cash provided by financing activities of $3.4 million in 2006 and $1.8 million
in 2005. The significant net use of cash in financing activities in 2007 was
due to the Companys repurchase of 500,000 shares of its common stock in the
third quarter of 2007 for $12.6 million. Financing activities in each year
included proceeds from employee stock plans of $2.8 million, $2.3 million and
$1.8 million, respectively. Additionally, financing activities in both 2007 and
2006 include $1.2 million associated with excess tax benefits recognized as an
addition to the Additional Paid-in Capital (APIC) pool, which are required to
be reported as an addition to financing activities and a reduction in operating
activities in the Statements of Cash Flows under the provisions of Statement of
Financial Accounting Standards (SFAS) 123R, Share-Based Payment.

A
summary of Rimages contractual obligations for minimum lease payments under
non-cancelable operating or capital leases and income tax liabilities under FIN
48 at December 31, 2007 is as follows (in thousands):

|                                         |  |                        |       |      |   |      |  |      |     |      |   |      |  |   |     |  |   |   | 
|---------------------------------------- |  | ---------------------- | ----- | ---- | - | ---- |  | ---- | --- | ---- | - | ---- |  | - | --- |  | - | - | 
|                                         |  | Payments due by period |      
|                                         |  |                        |      
|Contractual Obligations                  |  | Total                  |       | 2008 |   | 2009 |  | 2010 |     | 2011 |   | 2012 | 
|                                         |  |                        |       |      |   |      |  |      |     |      |   |      | 
|Operating leases                         |  | $                      | 1,680 |      | $ | 805  |  | $    | 450 |      | $ | 292  |  | $ | 132 |  | $ | 1 | 
|                                         |  |                        |       |      |   |      |  |      |     |      |   |      |  |   |     |  |   |   | 
|Capital leases (1)                       |  |                        | 96    |      |   | 33   |  |      | 27  |      |   | 27   |  |   | 9   |  |   |  | 
|                                         |  |                        |       |      |   |      |  |      |     |      |   |      |  |   |     |  |   |   | 
|Income tax liabilities
 under FIN 48 (2) |  |                        | 72    |      |   | 72   |  |      |    |      |   |     |  |   |    |  |   |  | 
|                                         |  |                        |       |      |   |      |  |      |     |      |   |      |  |   |     |  |   |   | 
|Total contractual cash obligations       |  | $                      | 1,848 |      | $ | 910  |  | $    | 477 |      | $ | 319  |  | $ | 141 |  | $ | 1 | 
|                                         |  |                        |       |      |   |      |  |      |     |      |   |      |  |   |     |  |   |   | 

(1)
Amounts
 include principal and interest.(2)
Represents
 estimated income tax liabilities accrued under FIN 48 as of December 31, 2007
 that are expected to be paid to the applicable tax authorities in 2008. The remaining
 balance of unrecognized tax benefits under FIN 48 of $115,000 at December 31,
 2007 has been excluded from the above table as the period of payment or
 reversal can not be reasonably estimated. Amounts noted are stated before
 reduction for the federal benefit for state income tax related amounts and
 also exclude 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. Given the implementation effective January 1, 2007 of FIN 48, the
Company added a discussion regarding recognition of tax accruals for estimated
exposures associated with uncertain tax positions to its critical accounting
policy on accounting for income taxes, included below. Management made no other
changes to the Companys critical accounting policies during the year ended
December 31, 2007.

In
applying the critical accounting policies described below, management
reassesses its estimates each reporting period based on available information.
Changes in such estimates in 2007 primarily involved the Companys assessment
of required inventory provisions and its analysis of potential asset
impairment. The impact of these changes on earnings for the year ended December
31, 2007 is discussed below.

Revenue Recognition.Revenue for product sales (including hardware and consumables), which
do not include any requirement for installation or training, is recognized on
shipment, at which point the following criteria of SEC Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition, Topic 13(A)(1) have been
satisfied:

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

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| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Collectibility
 is probable. All sales are made on the basis that collection is expected in
 line with the Companys standard payment terms, which are consistent with
 industry practice in the geographies in which the Company markets its
 products.

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

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

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

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

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

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

In
the second quarter of 2007, the Company recorded additional provisions of $0.4
million for the estimated value of excess raw material inventory and to adjust
the carrying amount of finished goods inventory to net realizable value, both
related to the Rimage 360i Desktop product line. The second quarter increase to
the inventory provision was driven by slow sales of the 360i product line.

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

On January 1, 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income Taxes,
an Interpretation of FASB Statement No. 109. Prior to adoption, the Companys policy was to establish an accrual that
reflected the probable outcome of known tax contingencies. The effects of final resolution, if any, were recognized as changes to
the effective income tax rate in the period of resolution. FIN 48 requires application of a more-likely-than-not
threshold to the recognition and derecognition of uncertain tax positions. Under FIN 48, once the-more-likely-than-not threshold
is met, the amount of benefit to be recognized is the largest amount of tax benefit that is greater than 50 percent likely of
being ultimately realized upon settlement. It further requires that a change in judgment related to

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the expected ultimate resolution of uncertain tax positions be recognized in earnings in the
period of such a change. 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. The impact on the
Companys financial statements of adopting FIN 48 was insignificant; as a result, the Company did not record a cumulative
effect adjustment to the January 1, 2007 balance of retained earnings. In 2007, the Company recognized tax liabilities of
$126,000, before reduction for the federal benefit for state income tax related amounts, for new uncertainties related to prior
and current year income tax positions. The Company reversed during 2007 gross tax liabilities, exclusive of interest and
penalties, amounting to $190,000 associated with prior year income tax positions, income tax settlements and the lapse of
applicable statute of limitations.

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

Stock-Based Compensation. The Company implemented the fair value recognition
provisions of SFAS No. 123R effective January 1, 2006 using the modified prospective method. Under this method, the Company
recognizes compensation expense on a straight-line basis over the vesting period for all stock-based awards granted on or after
January 1, 2006, and for previously granted awards not yet vested as of January 1, 2006. The Company recognized stock-based
compensation costs of approximately $1.6 million and $1.7 million for the years ended December 31, 2007 and 2006, respectively.

During the year ended December 31, 2006, the Company granted 16,967 performance shares to certain
managerial and executive employees under the 1992 Plan, with performance criteria established based on revenue and operating
income goals for calendar year 2008. Performance share awards are valued based on the market value of the Companys shares on
the date of grant, which is equal to the intrinsic value of the shares on that date. Compensation cost for awards with a
performance condition is recognized pro-ratably over the performance period, once achievement of performance criteria is deemed
probable. The Company assessed the probability of the achievement of performance criteria associated with the performance shares
as probable during 2006 and the first half of 2007. As such, the total fair value of the performance shares of approximately
$372,000 was being recognized as compensation expense over the performance period ending December 31, 2008. During the third
quarter of 2007, the Company changed its assessment of achieving the performance criteria from probable to improbable.
Accordingly, the Company reversed all compensation expense recorded in prior periods for the 2006 performance shares during the
third quarter of 2007, amounting to approximately $111,000, of which $41,000 related to expense recorded in 2006.

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

See
Note 2 under the Notes to Consolidated Financial Statements in this Form 10K
for additional information on stock-based compensation.

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Impairment of Long-lived Assets. Long-lived assets at December 31, 2007
consisted of property and equipment. In accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets, the Company
reviews the carrying amount of its long-lived assets when events or changes in
circumstances such as market value, asset utilization, physical change, legal
factors or other matters indicate that the carrying amount of the assets may
not be recoverable. When this review indicates the carrying amount of an asset
or asset group exceeds the sum of the future undiscounted cash flows expected
to be generated by the assets, the Company recognizes an asset impairment
charge against operations for the amount by which the carrying amount of the
impaired asset exceeds its fair value. 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.

In
the second quarter of 2007, the Company recorded a charge to cost of revenues
of approximately $60,000 for an impairment in the carrying amount of
manufacturing tooling associated with the assembly of the Rimage 360i Desktop
product line. The impairment charge was triggered by slow sales of the Rimage
360i product and represented the remaining net book value of the tooling.

New Accounting Pronouncements

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a single authoritative definition of fair value, sets out a
framework for measuring fair value and requires additional disclosures about
fair value measurements. This Statement applies only to fair value measurements
that are already required or permitted by other accounting standards, except
for measurements of share-based payments and measurements that are similar to,
but not intended to be, fair value. This Statement is expected to increase the
consistency of fair value measurements, but imposes no requirements for
additional fair value measures in financial statements. The provisions under SFAS
No. 157 are effective for the Company beginning January 1, 2008 and are
expected to be applied prospectively. The Company does not expect the adoption
of this pronouncement to have a material impact on its consolidated financial
statements and related disclosures.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial LiabilitiesIncluding an amendment of FASB
Statement No. 115. SFAS No. 159 permits entities to choose to measure many
financial instruments and certain warranty and insurance contracts at fair
value on a contract-by-contract basis. A business entity is required to report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. SFAS No. 159 includes
financial statement presentation and disclosure requirements for assets and
liabilities reported at fair value as a consequence of the election. The
objective of this Statement is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. The provisions of SFAS No. 159
are effective for the Company beginning January 1, 2008. The Company does not
expect the adoption of this pronouncement to have a material impact on its
consolidated financial statements and related disclosures.

In
December 2007, the FASB issued SFAS No. 141R (revised 2007), Business
Combinations. SFAS No. 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired in the business combination. SFAS No. 141R
also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. The provisions of SFAS No.
141R are effective for the Company beginning January 1, 2009. The Company is
currently evaluating the impact of adopting this pronouncement on its
consolidated financial statements and related disclosures.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of Accounting Research Bulletin No. 51. SFAS
No. 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parents ownership interest and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated.
SFAS No. 160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. The provisions of SFAS No. 160 are effective for the
Company beginning January 1, 2009. The Company is currently evaluating the
impact of adopting this pronouncement on its consolidated financial statements
and related disclosures.

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Available Information

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

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

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

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

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

|                                                  |  |                                       |        |      |  |      |  |      |   |               |  |       |  |             |   |  |   |        |  |    |    |  
|------------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- |  | ---- | - | ------------- |  | ----- |  | ----------- | - |  | - | ------ |  | -- | -- | -
|                                                  |  | Expected Maturity or Transaction Date |        |      |  |     
|                                                  |  |                                       |        |      |  |     
|                                                  |  | 2008                                  |        | 2009 |  | 2010 |  | 2011 |   | There-
 after |  | Total |  | Fair
 Value |  
|                                                  |  |                                       |        |      |  |      |  |      |   |               |  |       |  |             |  
|Anticipated
 Transactions and Related Derivatives |  | (US$ Equivalent in Thousands)         |       
|                                                 
|Forward Exchange Agreements                       |  |                                       |        |      |  |      |  |      |   |               |  |       |  |             |   |  |   |        |  |    |    |  
|(Receive
 $US/Pay )
 Contract Amount             |  | $                                     | 3,981  |      |  |     |  |      |  |               |  |      |  |             |  |  | $ | 3,981  |  | ($ | 34 | )
|Average
 Contractual
 Exchange Rate               |  |                                       | 1.4443 |      |  |     |  |      |  |               |  |      |  |             |  |  |   | 1.4443 |  |    |    |  

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

Financial
Statements

|                                                                                                                               |  |                                                                        | 
|------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------- | 
|                                                                                                                               |  | Page in Annual
 Report on Form 10-K
 For Year Ended
 December 31, 2007
|                                                                                                                               |  |                                                                       
|                                                                                                                              
|Managements
 Report on Internal Control over Financial Reporting                                                              |  | 26                                                                     | 
|                                                                                                                               |  |                                                                        | 
|Reports of
 Independent Registered Public Accounting Firm                                                                      |  | 27-28                                                                  | 
|                                                                                                                               |  |                                                                        | 
|Consolidated
 Balance Sheets as of December 31, 2007 and 2006                                                                  |  | 29                                                                     | 
|                                                                                                                               |  |                                                                        | 
|Consolidated
 Statements of Income for the years ended December 31, 2007, 2006 and 2005                                        |  | 30                                                                     | 
|                                                                                                                               |  |                                                                        | 
|Consolidated Statements of Stockholders Equity
and
 Comprehensive Income for the years ended December 31, 2007, 2006 and 2005 |  | 31                                                                     | 
|                                                                                                                               |  |                                                                        | 
|Consolidated
 Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005                                    |  | 32                                                                     | 
|                                                                                                                               |  |                                                                        | 
|Notes to
 Consolidated Financial Statements                                                                                    |  | 33-50                                                                  | 

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Managements Report on Internal Control over
Financial Reporting

The Board of
Directors and Stockholders 
Rimage Corporation:

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

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

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



Under the supervision of our chief
executive officer and our chief financial officer, we conducted an evaluation
of the effectiveness of our internal control over financial reporting based on
the framework in Internal Control 
Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our assessment and
those criteria, management believes that the Company maintained effective
internal control over financial reporting as of December 31, 2007. Our
independent registered public accounting firm, KPMG LLP, has issued an audit
report on the effectiveness of our internal control over financial reporting,
which report is included in this Form 10-K.

26

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Report of Independent Registered Public
Accounting Firm

The Board of
Directors and Stockholders 
Rimage Corporation:

We have
audited the accompanying consolidated balance sheets of Rimage Corporation and
subsidiaries as of December 31, 2007 and 2006, 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, 2007.
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, 2007, 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, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007, 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.

As discussed
in Note 1 to the consolidated financial statements, the Company adopted
Statement of Financial Accounting Standards No. 123R, Share-Based Payment, on January 1, 2006.

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, 2007, 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 14, 2008 expressed an unqualified opinion on
the effectiveness of the Companys internal control over financial reporting.

/s/ KPMG LLP

Minneapolis,
Minnesota 
March 14, 2008

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Report of Independent Registered Public
Accounting Firm

The Board of
Directors and Stockholders 
Rimage Corporation:

We have
audited Rimage Corporation and subsidiaries (the Company) internal control
over financial reporting as of December 31, 2007, based on the criteria
established in Internal 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, 2007, based on the 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, 2007 and 2006, 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, 2007, and our
report dated March 14, 2008 expressed an unqualified opinion on those
consolidated financial statements. Our report stated the Company adopted
Statement of Financial Accounting Standards No. 123R, Share-Based Payment,on January 1, 2006.

/s/ KPMG LLP

Minneapolis,
Minnesota 
March 14, 2008

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RIMAGE
CORPORATION AND SUBSIDIARIESConsolidated Balance Sheets 
December 31, 2007 and 2006
(In thousands, except share data)

|                                                                                                                           |  |                     |         |                     |   |         | 
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------- | ------------------- | - | ------- | 
|Assets                                                                                                                     |  | December
 31,
 2007 |         | December
 31,
 2006 |  
|                                                                                                                           |  |                     |         |                     |  
|                                                                                                                           |  |                     |         |                     |  
|Current assets:                                                                                                            |  |                     |         |                     |   |         | 
|Cash and cash
 equivalents                                                                                                 |  | $                   | 7,416   |                     | $ | 8,500   | 
|Marketable
 securities                                                                                                     |  |                     | 51,605  |                     |   | 30,266  | 
|Receivables, net
 of allowance for doubtful accounts and sales returns of $583 and $878,
 respectively                     |  |                     | 14,447  |                     |   | 21,697  | 
|Inventories                                                                                                                |  |                     | 8,075   |                     |   | 6,072   | 
|Prepaid expenses
 and other current assets                                                                                 |  |                     | 1,591   |                     |   | 1,151   | 
|Deferred income
 taxes - current                                                                                           |  |                     | 1,637   |                     |   | 2,430   | 
|                                                                                                                           |  |                     |         |                     |   |         | 
|Total current
 assets                                                                                                      |  |                     | 84,771  |                     |   | 70,116  | 
|                                                                                                                           |  |                     |         |                     |   |         | 
|                                                                                                                           | 
|Marketable
 securities - non-current                                                                                       |  |                     | 35,201  |                     |   | 38,594  | 
|Property and
 equipment, net                                                                                               |  |                     | 3,206   |                     |   | 3,626   | 
|Deferred income taxes
 - non-current                                                                                       |  |                     | 1,918   |                     |   | 23      | 
|                                                                                                                           |  |                     |         |                     |   |         | 
|Total assets                                                                                                               |  | $                   | 125,096 |                     | $ | 112,359 | 
|                                                                                                                           |  |                     |         |                     |   |         | 
|                                                                                                                           |  |                     |         |                     |   |         | 
|Liabilities and Stockholders Equity                                                                                       |  |                     |         |                     |   |         | 
|                                                                                                                           |  |                     |         |                     |   |         | 
|Current
 liabilities:                                                                                                      |  |                     |         |                     |   |         | 
|Trade accounts
 payable                                                                                                    |  | $                   | 7,564   |                     | $ | 7,136   | 
|Accrued
 compensation                                                                                                      |  |                     | 3,138   |                     |   | 2,882   | 
|Other accrued
 expenses                                                                                                    |  |                     | 1,157   |                     |   | 1,237   | 
|Income taxes
 payable                                                                                                      |  |                     | 685     |                     |   | 1,207   | 
|Deferred income
 and customer deposits                                                                                     |  |                     | 5,281   |                     |   | 3,509   | 
|Other current
 liabilities                                                                                                 |  |                     | 57      |                     |   | 192     | 
|                                                                                                                           |  |                     |         |                     |   |         | 
|Total current
 liabilities                                                                                                 |  |                     | 17,882  |                     |   | 16,163  | 
|                                                                                                                           | 
|Long-term
 liabilities:                                                                                                    |  |                     |         |                     |   |         | 
|Deferred income
 and customer deposits - non-current                                                                       |  |                     | 1,930   |                     |   | 715     | 
|Income taxes
 payable - non-current                                                                                        |  |                     | 164     |                     |   |        | 
|Other
 non-current liabilities                                                                                             |  |                     | 59      |                     |   | 5       | 
|                                                                                                                           |  |                     |         |                     |   |         | 
|Total long-term
 liabilities                                                                                               |  |                     | 2,153   |                     |   | 720     | 
|                                                                                                                           |  |                     |         |                     |   |         | 
|Total
 liabilities                                                                                                         |  |                     | 20,035  |                     |   | 16,883  | 
|                                                                                                                           |  |                     |         |                     |   |         | 
|Commitments and
 contingencies (Notes 10 and 14)                                                                           |  |                     |        |                     |   |        | 
|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
 9,705,947 and 9,925,430, respectively |  |                     | 97      |                     |   | 99      | 
|Additional
 paid-in capital                                                                                                |  |                     | 33,827  |                     |   | 27,914  | 
|Retained
 earnings                                                                                                         |  |                     | 70,462  |                     |   | 67,324  | 
|Accumulated
 other comprehensive income                                                                                    |  |                     | 675     |                     |   | 139     | 
|                                                                                                                           |  |                     |         |                     |   |         | 
|Total
 stockholders equity                                                                                                |  |                     | 105,061 |                     |   | 95,476  | 
|                                                                                                                           |  |                     |         |                     |   |         | 
|                                                                                                                           |  |                     |         |                     |   |         | 
|Total
 liabilities and stockholders equity                                                                                |  | $                   | 125,096 |                     | $ | 112,359 | 
|                                                                                                                           |  |                     |         |                     |   |         | 

See accompanying notes to consolidated financial
statements.

29

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RIMAGE
CORPORATION AND SUBSIDIARIESConsolidated Statements of Income 
Years Ended December 31, 2007, 2006 and 2005
(In thousands, except per share data)

|                                             |  |   |         |   |   |         |   |   |        |  
|-------------------------------------------- |  | - | ------- | - | - | ------- | - | - | ------ | -
|                                             |  |   | 2007    |   |   | 2006    |   |   | 2005   |  
|                                             |  |   |         |   |   |         |   |   |        |  
|                                             | 
|Revenues                                     |  | $ | 108,874 |   | $ | 103,252 |   | $ | 95,410 |  
|Cost of revenues                             |  |   | 57,719  |   |   | 56,014  |   |   | 51,957 |  
|                                             |  |   |         |   |   |         |   |   |        |  
|Gross profit                                 |  |   | 51,155  |   |   | 47,238  |   |   | 43,453 |  
|                                             |  |   |         |   |   |         |   |   |        |  
|                                             | 
|Operating
 expenses:                         |  |   |         |   |   |         |   |   |        |  
|Research and
 development                    |  |   | 5,903   |   |   | 6,738   |   |   | 5,512  |  
|Selling, general
 and administrative         |  |   | 24,371  |   |   | 22,726  |   |   | 21,317 |  
|                                             |  |   |         |   |   |         |   |   |        |  
|Total operating
 expenses                    |  |   | 30,274  |   |   | 29,464  |   |   | 26,829 |  
|                                             |  |   |         |   |   |         |   |   |        |  
|                                             | 
|Operating income                             |  |   | 20,881  |   |   | 17,774  |   |   | 16,624 |  
|                                             |  |   |         |   |   |         |   |   |        |  
|                                             | 
|Other income
 (expense):                     |  |   |         |   |   |         |   |   |        |  
|Interest, net                                |  |   | 3,451   |   |   | 2,770   |   |   | 1,544  |  
|Gain (loss) on
 currency exchange            |  |   | 80      |   |   | (86     | ) |   | (134   | )
|Other, net                                   |  |   | (18     | ) |   |        |   |   | 9      |  
|                                             |  |   |         |   |   |         |   |   |        |  
|Total other
 income, net                     |  |   | 3,513   |   |   | 2,684   |   |   | 1,419  |  
|                                             |  |   |         |   |   |         |   |   |        |  
|                                             | 
|Income before
 income taxes                  |  |   | 24,394  |   |   | 20,458  |   |   | 18,043 |  
|Income tax
 expense                          |  |   | 8,633   |   |   | 7,374   |   |   | 6,675  |  
|                                             |  |   |         |   |   |         |   |   |        |  
|Net income                                   |  | $ | 15,761  |   | $ | 13,084  |   | $ | 11,368 |  
|                                             |  |   |         |   |   |         |   |   |        |  
|                                             |  |   |         |   |   |         |   |   |        |  
|                                             |  |   |         |   |   |         |   |   |        |  
|Net income per
 basic share                  |  | $ | 1.59    |   | $ | 1.33    |   | $ | 1.19   |  
|                                             |  |   |         |   |   |         |   |   |        |  
|                                             |  |   |         |   |   |         |   |   |        |  
|                                             |  |   |         |   |   |         |   |   |        |  
|Net income per
 diluted share                |  | $ | 1.52    |   | $ | 1.26    |   | $ | 1.10   |  
|                                             |  |   |         |   |   |         |   |   |        |  
|                                             |  |   |         |   |   |         |   |   |        |  
|Basic weighted
 average shares outstanding   |  |   | 9,915   |   |   | 9,812   |   |   | 9,530  |  
|                                             |  |   |         |   |   |         |   |   |        |  
|                                             |  |   |         |   |   |         |   |   |        |  
|Diluted weighted
 average shares outstanding |  |   | 10,371  |   |   | 10,356  |   |   | 10,312 |  
|                                             |  |   |         |   |   |         |   |   |        |  

See accompanying notes to consolidated financial
statements.

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RIMAGE
CORPORATION AND SUBSIDIARIESConsolidated Statements of Stockholders Equity and
Comprehensive Income 
Years Ended December 31, 2007, 2006 and 2005 
(In thousands)

|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|------------------------------------------------------------------------- |  | ------------- | ----- | ------ | - | ---------------------------- | - | ------------------ | ------ | ------------------------------------------------ | - | ------- | - | - | ---- | - | - | ------- | -
|                                                                          |  |               |       |        |   | Additional
 paid-in
 capital |   | Retained
 earnings |        | Accumulated
 other
 comprehensive
 income (loss) |   | Total   |  
|                                                                          |  | Common
 stock |       |        |   |                              |  
|                                                                          |  |               |       |        |   |                              |  
|                                                                          |  | Shares        |       | Amount |   |                              |   |                    |       
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |  
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |  
|Balance at
 December 31, 2004                                             |  |               | 9,365 |        | $ | 94                           |   | $                  | 19,678 |                                                  | $ | 42,872  |   | $ | 78   |   | $ | 62,722  |  
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|Stock issued for
 employee stock plans                                    |  |               | 265   |        |   | 2                            |   |                    | 1,843  |                                                  |   |        |   |   |     |   |   | 1,845   |  
|Income tax
 reductions relating to exercise of stock options              |  |               |      |        |   |                             |   |                    | 868    |                                                  |   |        |   |   |     |   |   | 868     |  
|Comprehensive
 income:                                                    |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|Net income                                                                |  |               |      |        |   |                             |   |                    |       |                                                  |   | 11,368  |   |   |     |   |   | 11,368  |  
|Translation
 adjustment                                                   |  |               |      |        |   |                             |   |                    |       |                                                  |   |        |   |   | (314 | ) |   | (314    | )
|Unrealized gain
 from available-for-sale securities                       |  |               |      |        |   |                             |   |                    |       |                                                  |   |        |   |   | 40   |   |   | 40      |  
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|Total
 comprehensive income                                               |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   | 11,094  |  
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|Balance at
 December 31, 2005                                             |  |               | 9,630 |        | $ | 96                           |   | $                  | 22,389 |                                                  | $ | 54,240  |   | $ | (196 | ) | $ | 76,529  |  
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|Stock issued for
 employee stock plans                                    |  |               | 295   |        |   | 3                            |   |                    | 2,260  |                                                  |   |        |   |   |     |   |   | 2,263   |  
|Income tax
 reductions relating to exercise of stock options              |  |               |      |        |   |                             |   |                    | 1,583  |                                                  |   |        |   |   |     |   |   | 1,583   |  
|Stock-based
 compensation                                                 |  |               |      |        |   |                             |   |                    | 1,682  |                                                  |   |        |   |   |     |   |   | 1,682   |  
|Comprehensive
 income:                                                    |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|Net income                                                                |  |               |      |        |   |                             |   |                    |       |                                                  |   | 13,084  |   |   |     |   |   | 13,084  |  
|Translation
 adjustment                                                   |  |               |      |        |   |                             |   |                    |       |                                                  |   |        |   |   | 305  |   |   | 305     |  
|Unrealized gain
 from available-for-sale securities                       |  |               |      |        |   |                             |   |                    |       |                                                  |   |        |   |   | 30   |   |   | 30      |  
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|Total
 comprehensive income                                               |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   | 13,419  |  
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|Balance at
 December 31, 2006                                             |  |               | 9,925 |        | $ | 99                           |   | $                  | 27,914 |                                                  | $ | 67,324  |   | $ | 139  |   | $ | 95,476  |  
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|Stock issued for
 employee stock plans                                    |  |               | 276   |        |   | 3                            |   |                    | 2,751  |                                                  |   |        |   |   |     |   |   | 2,754   |  
|Issuance of
 restricted stock                                             |  |               | 5     |        |   |                             |   |                    |       |                                                  |   |        |   |   |     |   |   |        |  
|Income tax
 reductions relating to exercise of stock options              |  |               |      |        |   |                             |   |                    | 1,545  |                                                  |   |        |   |   |     |   |   | 1,545   |  
|Stock-based
 compensation                                                 |  |               |      |        |   |                             |   |                    | 1,617  |                                                  |   |        |   |   |     |   |   | 1,617   |  
|Repurchase of
 common stock                                               |  |               | (500  | )      |   | (5                           | ) |                    |       |                                                  |   | (12,623 | ) |   |     |   |   | (12,628 | )
|Comprehensive
 income:                                                    |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|Net income                                                                |  |               |      |        |   |                             |   |                    |       |                                                  |   | 15,761  |   |   |     |   |   | 15,761  |  
|Translation
 adjustment                                                   |  |               |      |        |   |                             |   |                    |       |                                                  |   |        |   |   | 339  |   |   | 339     |  
|Unrealized gain
 from available-for-sale securities, net of taxes of $125 |  |               |      |        |   |                             |   |                    |       |                                                  |   |        |   |   | 197  |   |   | 197     |  
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|Total
 comprehensive income                                               |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   | 16,297  |  
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  
|Balance at
 December 31, 2007                                             |  |               | 9,706 |        | $ | 97                           |   | $                  | 33,827 |                                                  | $ | 70,462  |   | $ | 675  |   | $ | 105,061 |  
|                                                                          |  |               |       |        |   |                              |   |                    |        |                                                  |   |         |   |   |      |   |   |         |  

See accompanying notes to consolidated financial statements.

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RIMAGE
CORPORATION AND SUBSIDIARIESConsolidated Statements of Cash Flows 
Years ended December 31, 2007, 2006 and 2005
(In thousands)

|                                                                                   |  |   |         |   |   |          |   |   |         |  
|---------------------------------------------------------------------------------- |  | - | ------- | - | - | -------- | - | - | ------- | -
|                                                                                   |  |   | 2007    |   |   | 2006     |   |   | 2005    |  
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|Cash flows from
 operating activities:                                             |  |   |         |   |   |          |   |   |         |  
|Net income                                                                         |  | $ | 15,761  |   | $ | 13,084   |   | $ | 11,368  |  
|Adjustments to
 reconcile net income to net cash provided by operating activities: |  |   |         |   |   |          |   |   |         |  
|Depreciation and
 amortization                                                     |  |   | 1,525   |   |   | 1,519    |   |   | 1,228   |  
|Deferred income
 tax benefit                                                       |  |   | (1,227  | ) |   | (1,056   | ) |   | (392    | )
|Impairment of
 long-lived assets                                                   |  |   | 60      |   |   | 312      |   |   |        |  
|Loss on sale of
 property and equipment                                            |  |   | 67      |   |   | 41       |   |   | 33      |  
|Stock-based
 compensation                                                          |  |   | 1,617   |   |   | 1,681    |   |   |        |  
|Excess tax
 benefits from stock-based compensation                                 |  |   | (1,217  | ) |   | (1,202   | ) |   |        |  
|Changes in
 operating assets and liabilities:                                      |  |   |         |   |   |          |   |   |         |  
|Receivables                                                                        |  |   | 7,250   |   |   | (8,812   | ) |   | (2,702  | )
|Inventories                                                                        |  |   | (2,003  | ) |   | 549      |   |   | 775     |  
|Prepaid expenses
 and other current assets                                         |  |   | (440    | ) |   | 133      |   |   | (822    | )
|Trade accounts
 payable                                                            |  |   | 553     |   |   | 1,577    |   |   | 696     |  
|Income taxes
 payable                                                              |  |   | 1,187   |   |   | 2,507    |   |   | 51      |  
|Accrued
 compensation                                                              |  |   | 256     |   |   | (14      | ) |   | 596     |  
|Other accrued
 expenses and other current liabilities                              |  |   | (238    | ) |   | 3        |   |   | 1       |  
|Deferred income
 and customer deposits                                             |  |   | 2,987   |   |   | 1,693    |   |   | 710     |  
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|Net cash provided by
 operating activities                                         |  |   | 26,138  |   |   | 12,015   |   |   | 11,542  |  
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|Cash flows from
 investing activities:                                             |  |   |         |   |   |          |   |   |         |  
|Purchases of
 marketable securities                                                |  |   | (82,128 | ) |   | (120,026 | ) |   | (72,553 | )
|Maturities of
 marketable securities                                               |  |   | 64,505  |   |   | 102,778  |   |   | 61,386  |  
|Purchases of
 property and equipment                                               |  |   | (1,285  | ) |   | (2,712   | ) |   | (1,328  | )
|Proceeds from
 the sale of property and equipment                                  |  |   | 13      |   |   | 4        |   |   | 5       |  
|Other
 non-current items                                                           |  |   | 169     |   |   | 137      |   |   | (53     | )
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|Net cash used in
 investing activities                                             |  |   | (18,726 | ) |   | (19,819  | ) |   | (12,543 | )
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|Cash flows from
 financing activities:                                             |  |   |         |   |   |          |   |   |         |  
|Principal
 payments on capital lease obligations                                   |  |   | (9      | ) |   | (22      | ) |   | (11     | )
|Repurchase of
 common stock                                                        |  |   | (12,628 | ) |   |         |   |   |        |  
|Excess tax
 benefits from stock-based compensation                                 |  |   | 1,217   |   |   | 1,202    |   |   |        |  
|Proceeds from
 employee stock plans                                                |  |   | 2,754   |   |   | 2,263    |   |   | 1,845   |  
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|Net cash provided by
 (used in) financing activities                               |  |   | (8,666  | ) |   | 3,443    |   |   | 1,834   |  
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|Effect of
 exchange rate changes on cash                                           |  |   | 170     |   |   | 168      |   |   | (260    | )
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|Net increase
 (decrease) in cash and cash equivalents                              |  |   | (1,084  | ) |   | (4,193   | ) |   | 573     |  
|                                                                                   | 
|Cash and cash
 equivalents, beginning of year                                      |  |   | 8,500   |   |   | 12,693   |   |   | 12,120  |  
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|Cash and cash
 equivalents, end of year                                            |  | $ | 7,416   |   | $ | 8,500    |   | $ | 12,693  |  
|                                                                                   |  |   |         |   |   |          |   |   |         |  
|Supplemental
 disclosures of net cash paid during the period for:                  |  |   |         |   |   |          |   |   |         |  
|Income taxes                                                                       |  | $ | 8,699   |   | $ | 5,944    |   | $ | 7,000   |  
|Non-cash
 investing and financing activties:                                       |  |   |         |   |   |          |   |   |         |  
|Income tax
 reductions relating to exercise of stock options                       |  | $ | 328     |   | $ | 381      |   | $ | 868     |  
|Unrealized net
 gains from available-for-sale securities                           |  | $ | 322     |   | $ | 30       |   | $ | 40      |  
|Capital lease
 obligations                                                         |  | $ | 86      |   | $ | 30       |   | $ | 12      |  
|Asset retirement
 obligation                                                       |  | $ |        |   | $ | 66       |   | $ |        |  

See accompanying notes to consolidated financial statements.

32

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Table of Contents

RIMAGE CORPORATION AND SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

|   |                                                                  
|-- | -----------------------------------------------------------------
|1) | Nature of Business and Summary of Significant Accounting Policies

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

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

Revenue RecognitionRevenue for product sales, which do not include any
requirement for installation or training, is recognized on shipment, at which
point the following criteria of Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition, Topic 13(A)(1) have been satisfied:

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

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

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

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

Sales ReturnsAn allowance for sales returns is recorded by the
Company based upon historical trends, timing of new product introductions and
other factors. A return policy is in
place with the Companys distributors to restrict the volume of returned
products.

33

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Table of Contents

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. The activity within the allowance for doubtful accounts for the
three years ended December 31, 2007 was not significant.

Cash EquivalentsAll 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 SecuritiesMarketable securities generally consist of municipal
securities, U.S. government agency and money market securities and corporate
securities with long-term credit ratings of AAA and short-term credit ratings
of A-1. Marketable securities are classified as short-term or long-term in the
balance sheet based on their effective maturity date. All marketable
securities, except for variable rate demand notes, have maturities ranging from
three to 36 months. Variable rate
demand notes may be liquidated in less than three months from the date of
purchase, but have legal maturities of greater than three months and are
required to be classified as marketable securities. Marketable securities are classified as available-for-sale.
Available-for-sale securities are recorded at fair value and any unrealized
holding gains and losses, net of the related tax effect, are excluded from
earnings and are reported as a separate component of accumulated other
comprehensive income (loss) until realized.
The Companys investment portfolio at December 31, 2007 did not include
any high-yield sub-prime backed paper or other affected securities which are
subject to significant market value declines.

Sources of SupplyMany 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.
Although the Company believes it has identified alternative assembly
contractors for most of its subassemblies, a 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 the
Companys inability to deliver one or more products for a period of several
months.

InventoriesInventories 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 EquipmentProperty and equipment are stated at cost and
depreciated on a straight-line basis over estimated useful lives ranging from
two to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the propertys useful life or term of
the underlying lease. Repairs and maintenance costs are charged to operations
as incurred.

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

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Product WarrantyThe 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, 2007, 2006 and 2005 (in thousands):

|                  |  |                  |     |                    |   |                |  |                        |      |               |   |    |   |   |     | 
|----------------- |  | ---------------- | --- | ------------------ | - | -------------- |  | ---------------------- | ---- | ------------- | - | -- | - | - | --- | 
|Years
 ended:     |  | BeginningBalance |     | WarrantyProvisions |   | WarrantyClaims |  | ForeignExchange Impact |      | EndingBalance |  
|                  |  |                  |     |                    |   |                |  |                        |      |               |  
|                  |  |                  |     |                    |   |                |  |                        |      |               |   |    |   |   |     | 
|December 31, 2007 |  | $                | 394 |                    | $ | 851            |  | $                      | (838 | )             | $ | 13 |   | $ | 420 | 
|                  |  |                  |     |                    |   |                |  |                        |      |               |   |    |   |   |     | 
|December 31, 2006 |  | $                | 317 |                    | $ | 874            |  | $                      | (809 | )             | $ | 12 |   | $ | 394 | 
|                  |  |                  |     |                    |   |                |  |                        |      |               |   |    |   |   |     | 
|December 31, 2005 |  | $                | 187 |                    | $ | 905            |  | $                      | (767 | )             | $ | (8 | ) | $ | 317 | 

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

The Company
implemented the provisions of SFAS 123R effective January 1, 2006 using the
modified prospective method, and as a result, has not restated prior periods
results. Under this method, the Company recognizes compensation expense on a
straight-line basis over the vesting period for all stock-based awards granted
on or after January 1, 2006, and for previously granted awards not yet vested
as of January 1, 2006. Under the
provisions of SFAS 123R, the Company recognizes stock-based compensation net of
an estimated forfeiture rate, resulting in the recognition of compensation cost
for only those shares expected to vest. Prior to the adoption of SFAS 123R, the
Company followed the intrinsic value method in accordance with APB 25 to
account for the issuance of stock incentives to employees and directors.
Accordingly, no compensation expense was recognized for periods prior to 2006
for share purchase rights granted in connection with the Companys Amended and
Restated 1992 Stock Option Plan (the 1992 Plan) or the Companys Employee
Stock Purchase Plan (the Employee Stock Purchase Plan). See Note 2 to the Consolidated Financial
Statements for additional information on stock-based compensation.

Results of
operations for periods prior to 2006 have not been restated to reflect
recognition of stock-based compensation expense. Had compensation costs for the
Companys stock-based compensation been determined based on the fair value of
the awards on the date of grant for stock options and the fair value of the
discount related to the Employee Stock Purchase Plan under the provisions of
SFAS No. 123, the Companys net income and basic and diluted earnings per share
for the year ended December 31, 2005 would have been adjusted to the proforma
amounts stated in the following table (in thousands, except for per share
data):

35

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|                                               |  |                                |        |  
|---------------------------------------------- |  | ------------------------------ | ------ | -
|                                               |  | Year Ended
 December 31,
 2005 |       
|                                               |  |                                |       
|Net income:                                    |  |                                |        |  
|                                               |  |                                |        |  
|As reported                                    |  | $                              | 11,368 |  
|                                              
|Stock-based employee
 compensation, net of tax |  |                                | (1,122 | )
|                                               |  |                                |        |  
|                                               |  |                                |        |  
|Proforma                                       |  | $                              | 10,246 |  
|                                               |  |                                |        |  
|                                               |  |                                |        |  
|Basic net income per share:                    |  |                                |        |  
|                                               |  |                                |        |  
|As reported                                    |  | $                              | 1.19   |  
|                                               |  |                                |        |  
|Stock-based employee
 compensation, net of tax |  |                                | (0.11  | )
|                                               |  |                                |        |  
|Proforma                                       |  | $                              | 1.08   |  
|                                               |  |                                |        |  
|                                               |  |                                |        |  
|Diluted net income per
 share:                 |  |                                |        |  
|                                               |  |                                |        |  
|As reported                                    |  | $                              | 1.10   |  
|                                               |  |                                |        |  
|Stock-based employee compensation,
 net of tax |  |                                | (0.10  | )
|                                               |  |                                |        |  
|                                               |  |                                |        |  
|Proforma                                       |  | $                              | 1.00   |  
|                                               |  |                                |        |  

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

Income TaxesDeferred 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 ShareBasic 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 / TransactionsThe functional currency for each of the Companys
foreign subsidiaries is the respective local currency. The assets and
liabilities of the Companys foreign subsidiaries are translated into U.S.
dollars using period-end exchange rates, while revenues and expenses are
translated at average exchange rates prevailing during the year. The resulting
translation adjustments are recorded as a separate component of stockholders
equity in accumulated other comprehensive income (loss). The Company recorded net gains on foreign
currency translation in comprehensive income of $0.3 million for the years
ended December 31, 2007 and 2006, and a net loss of $0.3 million for the year
ended December 31, 2005.

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.

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Comprehensive IncomeComprehensive 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 LeasesThe Company leases 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 CustomersSales 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 EstimatesThe 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.

New Accounting PronouncementsIn
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a single
authoritative definition of fair value, sets out a framework for measuring fair
value and requires additional disclosures about fair value measurements. This Statement applies only to fair value
measurements that are already required or permitted by other accounting
standards, except for measurements of share-based payments and measurements
that are similar to, but not intended to be, fair value. This Statement is expected to increase the
consistency of fair value measurements, but imposes no requirements for
additional fair value measures in financial statements. The provisions under SFAS No. 157 are
effective for the Company beginning January 1, 2008 and are expected to be
applied prospectively. The Company does
not expect the adoption of this pronouncement to have a material impact on its
consolidated financial statements and related disclosures.

In February
2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115.
SFAS No. 159 permits entities to choose to measure many financial instruments
and certain warranty and insurance contracts at fair value on a
contract-by-contract basis. A business entity is required to report unrealized
gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. SFAS No. 159 includes financial statement
presentation and disclosure requirements for assets and liabilities reported at
fair value as a consequence of the election. The objective of this Statement is
to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The provisions of SFAS No. 159 are effective for the Company
beginning January 1, 2008. The Company does not expect the adoption
of this pronouncement to have a material impact on its consolidated financial
statements and related disclosures.

In December 2007, the FASB issued SFAS No.
141R (revised 2007), Business Combinations.
SFAS No. 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired in the business combination. SFAS No. 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of
the business combination. The provisions of SFAS No. 141R are effective for the
Company beginning January 1, 2009. The
Company is currently evaluating the impact of adopting this pronouncement on
its consolidated financial statements and related disclosures.

In December 2007, the FASB issued SFAS No.
160, Noncontrolling Interests in Consolidated Financial Statementsan
amendment of Accounting Research Bulletin No. 51. SFAS No. 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parents ownership interest and the valuation of
retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and distinguish between
the interests of the parent and the interests of the noncontrolling
owners. The provisions of SFAS No.

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160 are effective for the Company beginning
January 1, 2009. The Company is
currently evaluating the impact of adopting this pronouncement on its
consolidated financial statements and related disclosures.

|   |                                                       
|-- | ------------------------------------------------------
|2) | Stock-Based
 Compensation and Common Stock Repurchases

In May 2007,
the Companys shareholders approved the 2007 Stock Incentive Plan (the 2007
Plan). The 2007 Plan provides for the
grant of stock incentive awards in the form of incentive and non-qualified
stock options, stock appreciation rights, restricted stock, restricted stock
units, performance stock, performance units and other awards in stock and/or
cash to certain key employees, non-employee directors and service
providers. The 2007 Plan permits the
issuance of up to 730,320 shares of the Companys common stock. At December 31, 2007, a total of 507,320
shares were available for future grant under the 2007 Plan. Effective with the approval of the 2007 Plan
in May 2007, the Company may not issue any new awards or options under its 1992
Plan. The exercise price of stock
options granted under the 2007 Plan is equal to the market value on the date of
grant. Options issued to employees
through March 31, 2006 under the 1992 Plan generally become exercisable over a
two-year period and terminate ten years from the date of grant. Options issued to employees after March 31,
2006 under both the 1992 Plan and the 2007 Plan generally become exercisable
over a four-year period and terminate ten years from the date of grant. Stock options granted to non-employee
directors vest six months from the date of grant and terminate ten years from
the date of grant. Restricted shares
issued to non-employee directors under the 2007 Plan vest immediately and
restrictions lapse one year from the date of grant. Performance shares granted to employees under the 1992 Plan
provide a right to receive shares of the Companys common stock contingent on
the Companys achievement of revenue and operating income performance goals for
the calendar year which follows two years after the grant date.

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

|                                                                               |  |                               |       |                               |   |       |  
|------------------------------------------------------------------------------ |  | ----------------------------- | ----- | ----------------------------- | - | ----- | -
|                                                                               |  | Year Ended
 December 31, 2007 |       | Year Ended
 December 31, 2006 |  
|                                                                               |  |                               |       |                               |  
|                                                                               |  |                               |       |                               |   |       |  
|Total stock-based compensation cost                                            |  | $                             | 1,617 |                               | $ | 1,682 |  
|Amounts capitalized in inventory                                               |  |                               |      |                               |   | (1    | )
|Amounts recognized in income for amounts previously capitalized in
 inventory  |  |                               | 1     |                               |   |      |  
|                                                                               |  |                               |       |                               |   |       |  
|                                                                               |  |                               |       |                               |   |       |  
|Amounts charged against income, before income tax benefit                      |  | $                             | 1,618 |                               | $ | 1,681 |  
|                                                                               |  |                               |       |                               |   |       |  
|                                                                               |  |                               |       |                               |   |       |  
|Income tax benefit related to stock-based compensation included in net
 income |  | $                             | (611  | )                             | $ | (480  | )
|                                                                               |  |                               |       |                               |   |       |  

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

Stock OptionsThe fair value of each option award is estimated at
the date of grant using the Black-Scholes option pricing model. This model estimates the fair value of each
option award based on the grant date exercise price and assumptions regarding
expected life of the award, expected stock price volatility, expected interest
rates and the expected dividend yield. The assumptions used to determine the
fair value of stock option awards granted during the years ended December 31,
2007, 2006 and 2005 were as follows:

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|                                   |  |                         |             |      |  |               |  |  |               | 
|---------------------------------- |  | ----------------------- | ----------- | ---- |  | ------------- |  |  | ------------- | 
|                                   |  | Year Ended December 31, |            
|                                   |  | 2007                    |             | 2006 |  | 2005          | 
|                                   |  |                         |             |      |  |               | 
|                                   |  |                         |             |      |  |               |  |  |               | 
|Expected life of options
 in years |  |                         | 6.0         |      |  | 5.0
 - 6.0    |  |  | 5.0           | 
|                                   |  |                         |             |      |  |               |  |  |               | 
|Risk-free interest rate            |  |                         | 4.0
 - 4.8% |      |  | 4.3
 - 5.0%   |  |  | 3.8
 - 4.6%   | 
|                                   |  |                         |             |      |  |               |  |  |               | 
|Expected volatility                |  |                         | 38
 - 40%   |      |  | 37.8
 - 50.4% |  |  | 26.0
 - 51.6% | 
|                                   |  |                         |             |      |  |               |  |  |               | 
|Expected dividend yield            |  |                         | 0.0%        |      |  | 0.0%          |  |  | 0.0%          | 
|                                   |  |                         |             |      |  |               |  |  |               | 

In accordance
with SFAS 123R, the Company reviews these assumptions at the time of each new
option award and adjusts them as necessary to ensure proper option
valuation. The expected life represents
the period that the stock option awards are expected to be outstanding and is
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. The
risk-free interest rate is based on the yield of constant maturity U.S.
treasury bonds with a remaining term equal to the expected life of the
awards. The Company estimated the stock
price volatility using historical weekly price observations over the expected
life of the awards. The expected
dividend yield is zero, as the Company has not paid or declared any cash
dividends on its common stock, and does not currently have plans to pay
dividends.

A summary of
share option activity under the 2007 and 1992 Plans as of and for the year
ended December 31, 2007 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, 2006         |  |        | 1,319 |       | $ | 13.52                                                     |  |                               |      |  |   |        | 
|Granted                                           |  |        | 248   |       |   | 27.03                                                     |  |                               |      |  |   |        | 
|Exercised                                         |  |        | (275  | )     |   | 9.99                                                      |  |                               |      |  |   |        | 
|Canceled                                          |  |        | (52   | )     |   | 24.04                                                     |  |                               |      |  |   |        | 
|                                                  |  |        |       |       |   |                                                           |  |                               |      |  |   |        | 
|                                                  |  |        |       |       |   |                                                           |  |                               |      |  |   |        | 
|Options outstanding at
 December 31, 2007         |  |        | 1,240 |       | $ | 16.57                                                     |  |                               | 6.13 |  | $ | 11,653 | 
|                                                  |  |        |       |       |   |                                                           |  |                               |      |  |   |        | 
|Options subject to exercise
 at December 31, 2007 |  |        | 962   |       | $ | 14.14                                                     |  |                               | 5.31 |  | $ | 11,221 | 

*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, 2007 and
changes during the year ended December 31, 2007 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,
 2006 |  |                  | 246  |                                         | $ | 10.36 | 
|                                |  |                  |      |                                         |   |       | 
|Granted                         |  |                  | 248  |                                         | $ | 12.24 | 
|                                |  |                  |      |                                         |   |       | 
|Vested                          |  |                  | (169 | )                                       | $ | 9.86  | 
|                                |  |                  |      |                                         |   |       | 
|Canceled                        |  |                  | (47  | )                                       | $ | 11.87 | 
|                                |  |                  |      |                                         |   |       | 
|                                |  |                  |      |                                         |   |       | 
|Nonvested at December 31,
 2007 |  |                  | 278  |                                         | $ | 12.06 | 

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As of December 31, 2007,
there was $2,798,000 of total stock option compensation expense not yet
recognized related to non-vested option awards, which is expected to be
recognized over a weighted average period of 2.98 years.

Other information pertaining
to options is as follows:

|                                                         |  |                                       |       |      |   |       |  |   |       | 
|-------------------------------------------------------- |  | ------------------------------------- | ----- | ---- | - | ----- |  | - | ----- | 
|                                                         |  | Year Ended December 31,               |      
|                                                         |  | 2007                                  |       | 2006 |   | 2005  | 
|                                                         |  |                                       |       |      |   |       | 
|                                                         |  | (in thousands, except per share data) |      
|                                                         |  |                                       |       |      |   |       |  |   |       | 
|Number of options granted                                |  |                                       | 248   |      |   | 265   |  |   | 316   | 
|Fair value of options granted                            |  | $                                     | 3,036 |      | $ | 3,132 |  | $ | 2,002 | 
|Per share weighted average fair value of options granted |  | $                                     | 12.24 |      | $ | 11.82 |  | $ | 6.34  | 
|Total fair value of stock options vested                 |  | $                                     | 1,649 |      | $ | 1,538 |  | $ | 1,385 | 
|Total intrinsic value of stock options exercised         |  | $                                     | 4,613 |      | $ | 4,551 |  | $ | 3,738 | 

Cash received
from the exercise of stock options was $2,754,000, $1,934,000 and $1,572,000
for the years ended December 31, 2007, 2006 and 2005, respectively. The income tax benefit realized from the
exercise of stock options and recorded as an increase to additional paid-in
capital was $1,545,000, $1,583,000 and $868,000 for the years ended December
31, 2007, 2006 and 2005, respectively.

Employee Stock
Purchase PlanThe Employee Stock Purchase Plan was approved by
shareholders in May 2001. Under this
plan, employees were entitled to purchase the Companys common stock at 85% of
the lower of the market price of such shares on the first or last business day
of each one-year period. The Employee
Stock Purchase Plan was terminated effective July 1, 2006, and no additional
shares will be issued under that plan.
Shares originally authorized and reserved for issuance under the
Employee Stock Purchase Plan and remaining unissued after its termination
amounted to 165,126 shares. Such shares
are no longer reserved for issuance under the Employee Stock Purchase Plan.

Performance SharesDuring 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 will 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 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, 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 for the 2006 performance shares during the third
quarter 2007, amounting to approximately $111,000, of which $41,000 related to
expense recorded in 2006. Since
issuance of the performance shares in 2006, 1,125 and 1,117 shares were
cancelled in 2006 and 2007, respectively, leaving 14,725 outstanding
performance shares at December 31, 2007.

Restricted StockOn May 15, 2007, the Company issued 1,000 shares of
restricted stock to each of the five external members of its Board of
Directors. The restricted stock was
valued based on the market value of the Companys shares on the date of grant,
which was equal to the intrinsic value of the shares on that date. Such restricted stock vested on the date of
grant and restrictions lapse one year from the date of grant. The Company recognized expense for the full
intrinsic value of the restricted stock of $135,000 during the year ended
December 31, 2007.

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Common Stock
Repurchases

On July 25,
2007, the Companys Board of Directors authorized the repurchase of up to
500,000 shares of its common stock. The
program adopted by the Companys Board of Directors in July 2007 replaced the
repurchase program adopted in May 1999.
During the year ended December 31, 2007, the Company repurchased 500,000
shares of its common stock at an average purchase price of $25.26 per share
under the authorization. The repurchase
program was funded from cash on hand.
On October 17, 2007, the Companys Board of Directors adopted a new
stock repurchase program authorizing the repurchase of up to 500,000 shares of
the Companys common stock. This new
program replaces the completed share repurchase program that was adopted in
July 2007. Shares will be purchased at
prevailing market prices in the open market or in private transactions, subject
to market conditions, share price, trading volume and other factors, and the
repurchase program may be discontinued at any time. The Company will finance the purchase of the shares using cash on
hand.  As of December 31, 2007, no
shares of the Companys common stock had been repurchased under this
authorization. In February 2008, the
Companys Board of Directors increased the share repurchase authorization by an
additional 500,000 shares, bringing total shares available for repurchase to
1,000,000.

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

The amortized
cost, gross unrealized holding gains, gross unrealized holding losses and fair
value of available-for-sale securities by major security type and class of
security at December 31, 2007 and 2006 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 |   | Gross
 unrealized
 holding losses |  | Fair value |    
|                        |  |                 |        |                                  |   |                                   |  |            |    
|At
 December 31, 2007   |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|Short term:             |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|Government securities   |  | $               | 3,779  |                                  | $ | 2                                 |  | $          |    |   | $ | 3,781  | 
|Corporate securities    |  |                 | 6,031  |                                  |   | 1                                 |  |            | (5  | ) |   | 6,027  | 
|Municipal securities    |  |                 | 6,720  |                                  |   | 8                                 |  |            |    |   |   | 6,728  | 
|Money market securities |  |                 | 35,000 |                                  |   | 69                                |  |            |    |   |   | 35,069 | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|Total                   |  | $               | 51,530 |                                  | $ | 80                                |  | $          | (5  | ) | $ | 51,605 | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|Long term:              |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|Government securities   |  | $               | 2,021  |                                  | $ | 26                                |  | $          |    |   | $ | 2,047  | 
|Corporate securities    |  |                 | 4,192  |                                  |   | 42                                |  |            |    |   |   | 4,234  | 
|Municipal securities    |  |                 | 28,742 |                                  |   | 180                               |  |            | (2  | ) |   | 28,920 | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|Total                   |  | $               | 34,955 |                                  | $ | 248                               |  | $          | (2  | ) | $ | 35,201 | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|At
 December 31, 2006   |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|Short term:             |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|Government securities   |  | $               | 1,990  |                                  | $ |                                  |  | $          | (1  | ) | $ | 1,989  | 
|Municipal securities    |  |                 | 24,322 |                                  |   | 11                                |  |            | (3  | ) |   | 24,330 | 
|Money market securities |  |                 | 3,946  |                                  |   | 1                                 |  |            |    |   |   | 3,947  | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|Total                   |  | $               | 30,258 |                                  | $ | 12                                |  | $          | (4  | ) | $ | 30,266 | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|Long term:              |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|Corporate securities    |  | $               | 7,058  |                                  | $ | 5                                 |  | $          | (1  | ) | $ | 7,062  | 
|Municipal securities    |  |                 | 31,547 |                                  |   | 7                                 |  |            | (22 | ) |   | 31,532 | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 
|Total                   |  | $               | 38,605 |                                  | $ | 12                                |  | $          | (23 | ) | $ | 38,594 | 
|                        |  |                 |        |                                  |   |                                   |  |            |     |   |   |        | 

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

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

|                                            |  |      |       |      |   |       | 
|------------------------------------------- |  | ---- | ----- | ---- | - | ----- | 
|                                            |  | 2007 |       | 2006 |  
|                                            |  |      |       |      |  
|                                            |  |      |       |      |   |       | 
|Finished goods and
 demonstration equipment |  | $    | 1,879 |      | $ | 1,958 | 
|Purchased parts and
 subassemblies          |  |      | 6,196 |      |   | 4,114 | 
|                                            |  |      |       |      |   |       | 
|                                            |  | $    | 8,075 |      | $ | 6,072 | 
|                                            |  |      |       |      |   |       | 

|   |                       
|-- | ----------------------
|5) | Property and Equipment

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

|                                                |  |      |        |      |   |        |  
|----------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                |  | 2007 |        | 2006 |  
|                                                |  |      |        |      |  
|                                                |  |      |        |      |   |        |  
|Manufacturing equipment                         |  | $    | 2,933  |      | $ | 2,630  |  
|Development fixtures and
 equipment             |  |      | 750    |      |   | 696    |  
|Data equipment and
 furniture                   |  |      | 4,667  |      |   | 4,251  |  
|Leasehold improvements                          |  |      | 1,073  |      |   | 1,053  |  
|                                                |  |      |        |      |   |        |  
|                                                |  |      | 9,423  |      |   | 8,630  |  
|Less accumulated
 depreciation and amortization |  |      | (6,217 | )    |   | (5,004 | )
|                                                |  |      |        |      |   |        |  
|                                                |  | $    | 3,206  |      | $ | 3,626  |  
|                                                |  |      |        |      |   |        |  

Depreciation
and amortization expense was $1,525,000, $1,519,000 and $1,228,000 for the
years ended December 31, 2007, 2006 and 2005, respectively.

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

|   |                 
|-- | ----------------
|6) | Credit Agreement

On March 29,
2004, the Company entered into a term note agreement (the Credit Agreement)
with a bank. The Credit Agreement, as amended effective June 7, 2007, is effective
until July 1, 2009, and allows for advances under an unsecured revolving loan
up to a maximum advance of $10 million to be used for general Company operating
expenses. The outstanding principal balance of the note bears interest at a
fluctuating rate per annum equal to the Prime Rate in effect from time to time,
or at a fixed rate per annum at one and one-half percent (1.50%) above LIBOR in
effect on the first day of the applicable fixed rate term. No amounts were outstanding under the Credit
Agreement at December 31, 2007 and 2006.

The Credit
Agreement contains various covenants pertaining to minimum tangible net worth,
minimum EBITDA and minimum unencumbered liquid assets. The Company was in compliance with all
covenants as of December 31, 2007.

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|   |             
|-- | ------------
|7) | Income Taxes

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

|               |  |                         |        |      |   |        |   |   |       |  
|-------------- |  | ----------------------- | ------ | ---- | - | ------ | - | - | ----- | -
|               |  | Year Ended December 31, |       
|               |  |                        
|               |  | 2007                    |        | 2006 |   | 2005   |  
|               |  |                         |        |      |   |        |  
|               |  |                         |        |      |   |        |   |   |       |  
|Current:       |  |                         |        |      |   |        |   |   |       |  
|U.S. Federal   |  | $                       | 7,718  |      | $ | 6,813  |   | $ | 5,687 |  
|State          |  |                         | 1,637  |      |   | 1,239  |   |   | 1,026 |  
|Foreign        |  |                         | 396    |      |   | 378    |   |   | 354   |  
|               |  |                         |        |      |   |        |   |   |       |  
|Total current  |  |                         | 9,751  |      |   | 8,430  |   |   | 7,067 |  
|               |  |                         |        |      |   |        |   |   |       |  
|               |  |                         |        |      |   |        |   |   |       |  
|Deferred:      |  |                         |        |      |   |        |   |   |       |  
|U.S. Federal   |  |                         | (897   | )    |   | (899   | ) |   | (328  | )
|State          |  |                         | (221   | )    |   | (157   | ) |   | (64   | )
|               |  |                         |        |      |   |        |   |   |       |  
|Total deferred |  |                         | (1,118 | )    |   | (1,056 | ) |   | (392  | )
|               |  |                         |        |      |   |        |   |   |       |  
|               |  |                         |        |      |   |        |   |   |       |  
|               |  | $                       | 8,633  |      | $ | 7,374  |   | $ | 6,675 |  
|               |  |                         |        |      |   |        |   |   |       |  

Current tax
liabilities are lower than the associated expense reflected for 2007 and 2006
by approximately $1.6 million for each year, and by $0.9 million for 2005, due
to the income tax benefit derived from employees and directors exercises of
non-qualified stock options and disqualifying dispositions of incentive stock
options. The benefit of the lower taxes
payable was recorded primarily as an increase to additional paid-in capital.

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

|                                               |  |                         |       |      |   |       |   |   |       |  
|---------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                               |  | Year Ended December 31,
|                                               |  |                        
|                                               |  | 2007                    |       | 2006 |   | 2005  |  
|                                               |  |                         |       |      |   |       |  
|                                               |  |                         |       |      |   |       |  
|                                               |  |                         |       |      |   |       |   |   |       |  
|Expected income tax
 expense                   |  | $                       | 8,540 |      | $ | 7,160 |   | $ | 6,315 |  
|State income taxes, net of
 federal tax effect |  |                         | 920   |      |   | 703   |   |   | 625   |  
|Extraterritorial income
 exclusion             |  |                         |      |      |   | (83   | ) |   | (110  | )
|Manufacturers deduction                       |  |                         | (234  | )    |   | (95   | ) |   | (101  | )
|Federal R&D credit                             |  |                         | (130  | )    |   | (79   | ) |   | (115  | )
|Tax-exempt interest income                     |  |                         | (751  | )    |   | (446  | ) |   |      |  
|Change in valuation
 allowance                 |  |                         | 250   |      |   | 186   |   |   | 55    |  
|Taxes on foreign income in
 excess of 35%      |  |                         |      |      |   | 47    |   |   | 34    |  
|Benefit of lower federal
 tax bracket          |  |                         |      |      |   |      |   |   | (44   | )
|Other, net                                     |  |                         | 38    |      |   | (19   | ) |   | 16    |  
|                                               |  |                         |       |      |   |       |   |   |       |  
|                                               |  |                         |       |      |   |       |   |   |       |  
|                                               |  | $                       | 8,633 |      | $ | 7,374 |   | $ | 6,675 |  
|                                               |  |                         |       |      |   |       |   |   |       |  

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

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

|                                                         |  |      |       |      |   |       |  
|-------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|                                                         |  | 2007 |       | 2006 |  
|                                                         |  |      |       |      |  
|                                                         |  |      |       |      |   |       |  
|Inventory provisions                                     |  | $    | 396   |      | $ | 421   |  
|Accounts receivable
 allowances                          |  |      | 191   |      |   | 315   |  
|Gross margin recognition onsales to foreign subsidiary   |  |      | 580   |      |   | 523   |  
|Unrealized foreign exchange
 loss                        |  |      | 13    |      |   | 64    |  
|Unrealized gain on
 marketable securities                |  |      | (125  | )    |   |      |  
|Non-qualified stock option
 and restricted stock expense |  |      | 1,027 |      |   | 478   |  
|Uniform capitalization                                   |  |      | 182   |      |   | 104   |  
|Deferred maintenance
 revenue                            |  |      | 756   |      |   | 277   |  
|Accrued payroll                                          |  |      | 140   |      |   | 130   |  
|Warranty accrual                                         |  |      | 140   |      |   | 110   |  
|Amortization                                             |  |      | 50    |      |   | 46    |  
|Fixed asset impairment
 charge                           |  |      | 146   |      |   | 120   |  
|Fixed asset depreciation,
 loss on disposal              |  |      | (91   | )    |   | (143  | )
|Loss generated by foreign
 subsidiary                    |  |      | 491   |      |   | 242   |  
|Other                                                    |  |      | 150   |      |   | 8     |  
|                                                         |  |      |       |      |   |       |  
|                                                         |  |      | 4,046 |      |   | 2,695 |  
|Valuation allowance                                      |  |      | (491  | )    |   | (242  | )
|                                                         |  |      |       |      |   |       |  
|Total net deferred tax
 assets                           |  | $    | 3,555 |      | $ | 2,453 |  
|                                                         |  |      |       |      |   |       |  

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 losses generated by a subsidiary in
Japan established in May 2005. The
pre-tax loss amounts generated by the Japanese subsidiary approximated
$713,000, $533,000 and $157,000 in 2007, 2006 and 2005, respectively. The valuation allowances were calculated in
accordance with the provisions of SFAS No. 109, Accounting for Income Taxes,
which requires that a valuation allowance be established or maintained when it
is more likely than not that all or a portion of deferred tax assets will not
be realized.

The Company
implemented the provisions of FASB Interpretation (FIN) No. 48, Accounting
for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109,
effective January 1, 2007. This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and
measurement criteria for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.

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

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

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|                                                     |  |   |      |  
|---------------------------------------------------- |  | - | ---- | -
|Gross unrecognized tax benefits at January 1, 2007   |  | $ | 251  |  
|Increases related to:                                |  |   |      |  
|Prior year income tax
positions                      |  |   | 69   |  
|Current year income tax
positions                    |  |   | 57   |  
|Decreases related to:                                |  |   |      |  
|Prior year income tax
positions                      |  |   | (155 | )
|Settlements                                          |  |   | (15  | )
|Expiration of statute of limitations                 |  |   | (20  | )
|                                                     |  |   |      |  
|Gross unrecognized tax benefits at December 31, 2007 |  | $ | 187  |  
|                                                     |  |   |      |  

Included in the balance of unrecognized tax benefits at January 1, 2007 and December 31, 2007 are
potential benefits of $186,000 and $145,000, respectively, that if recognized, would affect the effective tax rate. The difference
between these amounts and the corresponding amounts of gross unrecognized tax benefits relate primarily to the deferred federal
benefit for state income tax related amounts.

The Company believes that it is likely that the amount of unrecognized tax benefits as of December
31, 2007 relating to filing positions with certain state taxing authorities will decrease by up to $72,000 by December 31, 2008 as
a result of expected tax payments associated with agreements reached on such filing positions with the applicable state taxing
authorities.

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 $98,000 and $49,000 on a gross basis at January
1, 2007 and December 31, 2007, respectively, and are excluded from the reconciliation of unrecognized tax benefits presented
above. Interest and penalties recognized in the Consolidated Statements of Income related to uncertain tax positions amounted to a
$49,000 benefit in 2007.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. As of December 31, 2007, 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 2003 in the
case of state taxing authorities, consisting primarily of Minnesota, California and Maryland.

8)        Stockholders Equity

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

Each Right entitles the registered holder to purchase from the Company 1/100 of a Series A Junior
Participating Preferred Share at a price of $100.00 per 1/100 of a Preferred Share, subject to adjustment. In the event that any
person or group becomes an Acquiring Person, each holder of a Right, other than Rights that are or were beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the right to receive, upon exercise thereof at the then
current exercise price of the Right, that number of Common Shares having a market value of two times the exercise price of the
Right, subject to certain possible adjustments. If the Company is acquired in certain mergers or other business combination
transactions, or 50% or more of the assets or earning power of the Company and its subsidiaries (taken as a whole) are sold, each
holder of a Right (other than Rights that have become void under the terms of the Rights Agreement) will thereafter have the right
to receive, upon exercise of the Right at the then current exercise price of the Right, the number of common shares of the
acquiring company (or, in certain cases, on of its affiliates) having a market value of two times the exercise price of the Right.
At any time prior to the time that a person or group has become an Acquiring Person, the Companys Board of Directors may
redeem the Rights in whole, but not in part, at a price of $.001 per Right, subject to adjustment, payable in cash. 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, 2007.

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9)        Net Income Per Share

The following table
identifies the components of net income per basic and diluted share (in
thousands, except for per share amounts). Stock options to acquire 321,000, 185,000
and 623 weighted common shares have been excluded from the computation of
diluted weighted average shares outstanding for 2007, 2006 and 2005,
respectively, as the exercise of such options would have an antidilutive
effect.

|                                 |  |            |        |                                           |  |                    |  |   |       |  
|-------------------------------- |  | ---------- | ------ | ----------------------------------------- |  | ------------------ |  | - | ----- | -
|                                 |  | Net income |        | Weighted
  average
  shares
  outstanding |  | Per share
  amount | 
|                                 |  |            |        |                                           |  |                    | 
|2007:                            |  |            |        |                                           |  |                    |  |   |       |  
|Basic                            |  | $          | 15,761 |                                           |  | 9,915              |  | $ | 1.59  |  
|Dilutive effect of stock
options |  |            |       |                                           |  | 456                |  |   | (0.07 | )
|                                 |  |            |        |                                           |  |                    |  |   |       |  
|Diluted                          |  | $          | 15,761 |                                           |  | 10,371             |  | $ | 1.52  |  
|                                 |  |            |        |                                           |  |                    |  |   |       |  
|                                 |  |            |        |                                           |  |                    |  |   |       |  
|2006:                            |  |            |        |                                           |  |                    |  |   |       |  
|Basic                            |  | $          | 13,084 |                                           |  | 9,812              |  | $ | 1.33  |  
|Dilutive effect of stock
options |  |            |       |                                           |  | 544                |  |   | (0.07 | )
|                                 |  |            |        |                                           |  |                    |  |   |       |  
|Diluted                          |  | $          | 13,084 |                                           |  | 10,356             |  | $ | 1.26  |  
|                                 |  |            |        |                                           |  |                    |  |   |       |  
|                                 |  |            |        |                                           |  |                    |  |   |       |  
|2005:                            |  |            |        |                                           |  |                    |  |   |       |  
|Basic                            |  | $          | 11,368 |                                           |  | 9,530              |  | $ | 1.19  |  
|Dilutive effect of stock
options |  |            |       |                                           |  | 782                |  |   | (0.09 | )
|                                 |  |            |        |                                           |  |                    |  |   |       |  
|Diluted                          |  | $          | 11,368 |                                           |  | 10,312             |  | $ | 1.10  |  
|                                 |  |            |        |                                           |  |                    |  |   |       |  

10)       Lease Commitments

The Company leases 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 |      
|                             |  |                            |       | 
|                             |  |                            |       | 
|2008                         |  | $                          | 805   | 
|2009                         |  |                            | 450   | 
|2010                         |  |                            | 292   | 
|2011                         |  |                            | 132   | 
|2012                         |  |                            | 1     | 
|                             |  |                            |       | 
|                             |  |                            |       | 
|Net minimum
  lease payments |  | $                          | 1,680 | 
|                             |  |                            |       | 

Rent expense under operating
leases amounted to approximately $1,161,000, $1,116,000 and $870,000 for the
years ended December 31, 2007, 2006 and 2005, respectively.

11)       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 $313,000, $314,000 and $278,000 in 2007, 2006 and 2005, respectively.

46

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12)       Business Segment Information / Major
Customers

The Company
has identified one operating segment consisting of high-performance digital
publishing systems that are used by businesses to produce recordable CD, DVD
and blue laser discs with customized digital content on an on-demand basis. The
Companys hardware products consist of two primary product lines: The Producer
line, which accommodates higher volume requirements for production of
recordable CD, DVD or blue laser media, and the Desktop line of lower-cost
products for office and other desktop applications. The Company conducts
operations from its U.S. corporate headquarters and from subsidiaries in Europe
and Japan.

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

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

|           |  |                         |        |      |   |        |  |   |        | 
|---------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|           |  | Year ended December 31, |       
|           |  |                        
|           |  | 2007                    |        | 2006 |   | 2005   | 
|           |  |                         |        |      |   |        | 
|           |  | Revenues                |       
|           |  |                        
|          
|Customer A |  | $                       | 14,921 |      | $ | 15,612 |  | $ | 11,791 | 
|Customer B |  |                         | *      |      | $ | 14,322 |  |   | *      | 
|Customer C |  |                         | *      |      |   | *      |  | $ | 10,664 | 

|           |  |                     |       |      |   |       |  |   |       | 
|---------- |  | ------------------- | ----- | ---- | - | ----- |  | - | ----- | 
|           |  | December 31,        |      
|           |  |                    
|           |  | 2007                |       | 2006 |   | 2005  | 
|           |  |                     |       |      |   |       | 
|           |  | Accounts Receivable |      
|           |  |                    
|           |  |                     |       |      |   |       |  |   |       | 
|Customer A |  | $                   | 1,982 |      | $ | 2,916 |  | $ | 1,518 | 
|Customer B |  |                     | *     |      | $ | 2,960 |  |   | *     | 
|Customer C |  |                     | *     |      |   | *     |  | $ | 1,243 | 

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

47

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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, |        
|               |  |                        
|               |  | 2007                    |         | 2006 |   | 2005    | 
|               |  |                         |         |      |   |         |  |   |        | 
|North
 America |  | $                       | 70,046  |      | $ | 68,641  |  | $ | 63,152 | 
|Europe         |  |                         | 31,885  |      |   | 28,908  |  |   | 26,798 | 
|Other          |  |                         | 6,943   |      |   | 5,703   |  |   | 5,460  | 
|               |  |                         |         |      |   |         |  |   |        | 
|              
|Total          |  | $                       | 108,874 |      | $ | 103,252 |  | $ | 95,410 | 
|               |  |                         |         |      |   |         |  |   |        | 

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

|               |  |                   |       |                   |   |       | 
|-------------- |  | ----------------- | ----- | ----------------- | - | ----- | 
|               |  | December 31, 2007 |       | December 31, 2006 |  
|               |  |                   |       |                   |  
|North
 America |  | $                 | 2,485 |                   | $ | 2,983 | 
|Germany        |  |                   | 712   |                   |   | 632   | 
|Japan          |  |                   | 9     |                   |   | 11    | 
|               |  |                   |       |                   |   |       | 
|Total          |  | $                 | 3,206 |                   | $ | 3,626 | 
|               |  |                   |       |                   |   |       | 

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

|                                |  |                         |         |  |   |         |  |   |        | 
|------------------------------- |  | ----------------------- | ------- |  | - | ------- |  | - | ------ | 
|                                |  | Year Ended December 31, |        
|                                |  |                        
|                                |  |                         | 2007    |  |   | 2006    |  |   | 2005   | 
|                                |  |                         |         |  |   |         |  |   |        | 
|Equipment:                      |  |                         |         |  |   |         |  |   |        | 
|Producer                        |  | $                       | 46,829  |  | $ | 44,874  |  | $ | 48,428 | 
|Desktop                         |  |                         | 9,435   |  |   | 10,640  |  |   | 10,692 | 
|                                |  |                         |         |  |   |         |  |   |        | 
|Total                           |  |                         | 56,264  |  |   | 55,514  |  |   | 59,120 | 
|                               
|Consumables, parts and
 repairs |  |                         | 45,381  |  |   | 42,376  |  |   | 32,737 | 
|                               
|Maintenance contracts           |  |                         | 7,229   |  |   | 5,362   |  |   | 3,553  | 
|                                |  |                         |         |  |   |         |  |   |        | 
|                               
|Total                           |  | $                       | 108,874 |  | $ | 103,252 |  | $ | 95,410 | 
|                                |  |                         |         |  |   |         |  |   |        | 

13)       Related Party Transactions

One of the
Companys non-employee directors was a member of the board of directors through
August 2007 of one of the Companys vendors, a supplier of printed circuit
boards used in the assembly of the Companys digital publishing systems. The
Company purchased component parts from this supplier approximating $1.9
million, $1.6 million and $2.2 million for the years ended December 31, 2007,
2006 and 2005, respectively. Outstanding accounts payable with this supplier
totaled approximately $70,000, $199,000 and $127,000 at December 31, 2007, 2006
and 2005, respectively, payable under standard 30-day payment terms. This
related party relationship no longer exists as of December 31, 2007.

14)       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.

15)       Fair Value of Financial Instruments

The following
methods and assumptions were used by the Company in estimating the fair value
of its financial instruments.

Cash and cash equivalents: The carrying
amount approximates fair value because of the short maturity of these
instruments.

48

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Marketable securities:
The fair values are determined using quoted market prices.

Foreign currency forward exchange contracts:
The fair value is the amount the Company would receive or pay to terminate the
contracts at the reporting date. The fair value of foreign currency forward
exchange contracts at December 31, 2007 and 2006 were net losses of $34,000 and
$164,000, respectively, recorded in other current liabilities.

Trade accounts receivable and accounts
payable: The carrying amount approximates fair value
because of the short maturity of these instruments.

49

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

|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|----------------------------------- |  | ------ | ------ | ----- | - | ------ | - | ----- | ------ | ------ | - | ------ |  | ------ | ------ | ----- | -
|                                    |  | 2007   |        | 2006  |  
|                                    |  |        |        |       |  
|                                    |  | Fourth |        | Third |   | Second |   | First |        | Fourth |   | Third  |  | Second |        | First |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|Revenues                            |  | $      | 28,212 |       | $ | 33,650 |   | $     | 25,486 |        | $ | 21,526 |  | $      | 30,519 |       | $
|Cost of revenues                    |  |        | 14,615 |       |   | 17,238 |   |       | 14,088 |        |   | 11,778 |  |        | 16,856 |       |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|Gross profit                        |  |        | 13,597 |       |   | 16,412 |   |       | 11,398 |        |   | 9,748  |  |        | 13,663 |       |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|Operating expenses:                 |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|Research and development            |  |        | 1,280  |       |   | 1,592  |   |       | 1,441  |        |   | 1,590  |  |        | 1,956  |       |  
|Selling, general and administrative |  |        | 6,079  |       |   | 6,180  |   |       | 6,284  |        |   | 5,828  |  |        | 6,612  |       |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|Total operating expenses            |  |        | 7,359  |       |   | 7,772  |   |       | 7,725  |        |   | 7,418  |  |        | 8,568  |       |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|Operating income                    |  |        | 6,238  |       |   | 8,640  |   |       | 3,673  |        |   | 2,330  |  |        | 5,095  |       |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|Other income (expense):             |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|Interest, net                       |  |        | 898    |       |   | 889    |   |       | 861    |        |   | 803    |  |        | 774    |       |  
|Gain (loss) on currency exchange    |  |        | 6      |       |   | 163    |   |       | (95    | )      |   | 6      |  |        | (87    | )     |  
|Other, net                          |  |        |       |       |   | (31    | ) |       | (7     | )      |   | 20     |  |        |       |       |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|Total other income, net             |  |        | 904    |       |   | 1,021  |   |       | 759    |        |   | 829    |  |        | 687    |       |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|Income before income taxes          |  |        | 7,142  |       |   | 9,661  |   |       | 4,432  |        |   | 3,159  |  |        | 5,782  |       |  
|Income tax expense                  |  |        | 2,627  |       |   | 3,458  |   |       | 1,511  |        |   | 1,037  |  |        | 2,157  |       |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|Net income                          |  | $      | 4,515  |       | $ | 6,203  |   | $     | 2,921  |        | $ | 2,122  |  | $      | 3,625  |       | $
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|Net income per basic share          |  | $      | 0.46   |       | $ | 0.63   |   | $     | 0.29   |        | $ | 0.21   |  | $      | 0.37   |       | $
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  
|Net income per diluted share        |  | $      | 0.45   |       | $ | 0.59   |   | $     | 0.28   |        | $ | 0.20   |  | $      | 0.34   |       | $
|                                    |  |        |        |       |   |        |   |       |        |        |   |        |  |        |        |       |  

The Company
recorded pre-tax charges to cost of revenues of $0.5 million in the second
quarter of 2007 and $0.6 million in the fourth quarter of 2006 to establish
provisions primarily for excess raw material inventory and to write down fixed
assets for impairments in the carrying amount of manufacturing tooling. Charges
in both periods resulted from slow sales of the Rimage 360i Desktop product
line.

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

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

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

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

The Companys internal control report is
included in this report under Item 8, under the caption Managements Report on
Internal Control over Financial Reporting.

(b)         Changes in Internal Control Over Financial
Reporting

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

|         |                  
|-------- | -----------------
|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 2008 Annual Meeting
of Shareholders, which will be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the close of the
fiscal year for which this report is filed (the Proxy Statement):

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

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

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

51

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|         |                                                                                               
|-------- | ----------------------------------------------------------------------------------------------
|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 and Related Stockholder Matters
of this Annual Report on Form 10-K.

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

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

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

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

PART IV

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

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

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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 14, 2008 |  | RIMAGE CORPORATION        
|                     
|                      |  | By: /s/ Bernard P.
Aldrich
|                      |  |                            |                                                 
|                      |  |                            | Bernard P.
 Aldrich 
    Chief Executive
Officer
|                      |  |                            |                                                 
|                      |  | By:
 /s/ Robert M. Wolf   
|                      |  |                            |                                                 
|                      |  |                            | Robert M. Wolf
    Chief Financial Officer      

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

|                           |  |                                                                                              |  |               
|-------------------------- |  | -------------------------------------------------------------------------------------------- |  | --------------
|Signature                  |  | Title                                                                                        |  | Date          
|                           |  |                                                                                              |  |               
|                           |  |                                                                                              |  |               
|/s/ Bernard P. Aldrich     |  | Chief Executive Officer, Director and President (Principal Executive Officer)                |  | March 14, 2008
|                           | 
|Bernard P. Aldrich         | 
|                           |  |                                                                                              |  |               
|/s/ Robert M. Wolf         |  | Chief Financial Officer (Principal Financial and Accounting Officer and Corporate Secretary) |  | March 14, 2008
|                           | 
|Robert M. Wolf             | 
|                           |  |                                                                                              |  |               
|/s/ James L. Reissner      |  | Director, Chairman of the Board                                                              |  | March 14, 2008
|                           | 
|James L. Reissner          | 
|                           |  |                                                                                              |  |               
|/s/ David J. Suden         |  | Director                                                                                     |  | March 14, 2008
|                           | 
|David J. Suden             | 
|                           |  |                                                                                              |  |               
|/s/ Thomas F. Madison      |  | Director                                                                                     |  | March 14, 2008
|                           | 
|Thomas
 F. Madison         | 
|                           |  |                                                                                              |  |               
|/s/ Steven M. Quist        |  | Director                                                                                     |  | March 14, 2008
|                           | 
|Steven M. Quist            | 
|                           |  |                                                                                              |  |               
|/s/ Lawrence M. Benveniste |  | Director                                                                                     |  | March 14, 2008
|                           | 
|Lawrence M. Benveniste     | 
|                           |  |                                                                                              |  |               
|/s/ Philip D. Hotchkiss    |  | Director                                                                                     |  | March 14, 2008
|                           | 
|Philip D. Hotchkiss        | 

53

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INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                               
|No.     |  | Description                                                                                                                                                                                                                                                                                   
|3.1     |  | 1992 Restated Articles of
 Incorporation of Rimage Corporation (Incorporated herein by reference to
 Exhibit 3.1 to the Companys Registration Statement on Form SB-2 (File No.
 33-22558)).                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                               
|3.2     |  | Articles of Amendment to
 1992 Restated Articles of Incorporation of Rimage Corporation (Incorporated
 by reference to Exhibit 4.2 to the Companys Registration Statement on Form
 S-8 (File No. 333-69550)).                                                                                
|        |  |                                                                                                                                                                                                                                                                                               
|3.3     |  | Amended and Restated Bylaws
 of Rimage Corporation, as amended (Incorporated by reference to Exhibit 3.2
 to the Companys Current Report on Form 8-K dated March 7, 2007).                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                               
|3.4     |  | Rights Agreement dated as
 of September 17, 2003 between Rimage Corporation and Wells Fargo Bank, as
 Rights Agent (Incorporated by reference to Exhibit 1 to the Companys
 Registration Statement on Form 8-A (File No. 000-20728)).                                                        
|        |  |                                                                                                                                                                                                                                                                                               
|10.1    |  | Rimage Corporation Amended
 and Restated 1992 Stock Option Plan (As amended through May 17, 2005) *
 (Incorporated by reference to Exhibit 4.1 to the Companys Registration
 Statement on Form S-8 (File No. 333-127244)).                                                                   
|        |  |                                                                                                                                                                                                                                                                                               
|10.2    |  | Rimage Corporation 2001
 Stock Option Plan for Non-Employee Directors * (Incorporated by reference to
 Exhibit 10.2 to the Companys Annual Report on Form 10-K for the year ended
 December 31, 2001).                                                                                       
|        |  |                                                                                                                                                                                                                                                                                               
|10.3    |  | Rimage Corporation 2001
 Employee Stock Purchase Plan * (Incorporated by reference to Exhibit 10.3 to
 the Companys Annual Report on Form 10-K for the year ended December 31,
 2001).                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                               
|10.4    |  | Rimage Corporation 2007
 Stock Incentive Plan (As amended through May 15, 2007) * (Incorporated by
 reference to Exhibit 4.1 to the Companys Registration Statement on Form S-8
 (File No. 333-147344)).                                                                                     
|        |  |                                                                                                                                                                                                                                                                                               
|10.5    |  | Lease dated July 31, 2004,
 between Rimage Corporation and 7725 Washington Avenue Corporation
 (Incorporated by reference to Exhibit 10.1 of the Companys Quarterly Report
 on Form 10-Q for the quarter ended June 30, 2004).                                                               
|        |  |                                                                                                                                                                                                                                                                                               
|10.6    |  | Amended and Restated Form
 of Severance/Change in Control Letter Agreement dated March 7, 2007, 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 March 7,
 2007).                          
|        |  |                                                                                                                                                                                                                                                                                               
|10.7    |  | Letter Agreement dated
 December 21, 2007 between Rimage Corporation and David J. Suden *
 (Incorporated by reference to Exhibit 10.1 of the Companys Current Report on
 Form 8-K dated December 31, 2007).                                                                                  
|        |  |                                                                                                                                                                                                                                                                                               
|10.8    |  | 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).                                                
|        |  |                                                                                                                                                                                                                                                                                               
|10.9    |  | 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).                              
|        |  |                                                                                                                                                                                                                                                                                               
|10.10   |  | Performance Share Award
 Agreement under the Rimage Corporation Amended and Restated 1992 Stock Option
 Plan 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
 May 16, 2006).               
|        |  |                                                                                                                                                                                                                                                                                               
|10.11   |  | 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).                            
|        |  |                                                                                                                                                                                                                                                                                               
|10.12   |  | Revolving Line of Credit
 Note, dated August 8, 2006, in the principal amount of $10,000,000 issued to
 the Company by Wells Fargo Bank, National Association (Incorporated by
 reference to Exhibit 10.10 of the Companys Annual Report on Form 10-K for
 the year ended December 31, 2006).
|        |  |                                                                                                                                                                                                                                                                                               
|10.13   |  | Third Amendment to Credit
 Agreement, dated June 7, 2007, by and between the Company and Wells Fargo
 Bank, National Association.                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                               
|10.14   |  | Revolving Line of Credit
 Note, dated June 7, 2007, in the principal amount of $10,000,000 issued to
 the Company by Wells Fargo Bank, National Association.                                                                                                                                  

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Table of Contents

|     |  |                                                                                                      
|---- |  | -----------------------------------------------------------------------------------------------------
|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

55

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Table of Contents

Schedule II

RIMAGE
CORPORATIONValuation
and Qualifying Accounts(in thousands)

|                                            |  |                          |     |      |   |      |   |   |     |  
|------------------------------------------- |  | ------------------------ | --- | ---- | - | ---- | - | - | --- | -
|Allowance for
Doubtful Accounts Receivable: |  |                          |    
|                                            |  |                          |    
|                                            |  | Years ended December 31, |    
|                                            |  | 2007                     |     | 2006 |   | 2005 |  
|                                            |  |                          |     |      |   |      |  
|                                            |  |                          |     |      |   |      |   |   |     |  
|Balance at beginning of year                |  | $                        | 309 |      | $ | 246  |   | $ | 156 |  
|                                            |  |                          |     |      |   |      |   |   |     |  
|Write-offs and other adjustments            |  |                          | (89 | )    |   | (51  | ) |   | (77 | )
|Recoveries                                  |  |                          | (57 | )    |   | (16  | ) |   | (19 | )
|Additions charged to costs and expenses     |  |                          | 81  |      |   | 130  |   |   | 186 |  
|                                            |  |                          |     |      |   |      |   |   |     |  
|                                            |  |                          |     |      |   |      |   |   |     |  
|Balance at end of year                      |  | $                        | 244 |      | $ | 309  |   | $ | 246 |  
|                                            |  |                          |     |      |   |      |   |   |     |  

See accompanying report of
Independent Registered Public Accounting Firm.

56

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