Table of Contents





|                                                           
|-----------------------------------------------------------
|FORM 10-K                                                  
|U.S. SECURITIES AND EXCHANGE COMMISSION                    
|WASHINGTON,
 DC 20549                                      
|                                                           
|xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
 THE     
|SECURITIES
 EXCHANGE ACT OF 1934                           
|FOR
 THE FISCAL YEAR ENDED DECEMBER 31, 2010               
|OR                                                         
|o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
|SECURITIES
 EXCHANGE ACT OF 1934                           
|                                                           
|COMMISSION FILE NO. 000-20728                              
|                                                           
|RIMAGE CORPORATION                                         
|(Exact name of registrant as specified in its charter)     

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

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

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

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

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

Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). YesoNoo

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. x

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

Large Accelerated Filer o Accelerated Filer x

Non-Accelerated Filer o Smaller Reporting Company o

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

YesoNox

The aggregate market value of
common stock held by non-affiliates of the registrant, computed by reference to
the last quoted price at which such stock was sold on such date as reported by
the Nasdaq Stock Market as of the last business day of the registrants most
recently completed second fiscal quarter was approximately $126,600,000.

As of February 28, 2011, 9,484,272 shares of the registrants common stock were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of
the registrants definitive proxy statement for its 2011 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                                                                       |    | 5   
|           | Competition                                                                                      |    | 5   
|           | Manufacturing                                                                                    |    | 5   
|           | Research and Development                                                                         |    | 5   
|           | Patents and Government Regulation                                                                |    | 6   
|           | Employees                                                                                        |    | 6   
|           | Cautionary Note Regarding Forward-Looking Statements                                             |    | 6   
|Item 1A.   | Risk Factors                                                                                     |    | 7   
|Item 1B.   | Unresolved Staff Comments                                                                        |    | 12  
|Item 2.    | Properties                                                                                       |    | 12  
|Item 3.    | Legal Proceedings                                                                                |    | 13  
|Item 4.    | [Reserved]                                                                                       |    | 13  
|           |                                                                                                  |    |     
|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                                            |    | 14  
|           | Performance Graph                                                                                |    | 15  
|Item 6.    | Selected Financial Data                                                                          |    | 16  
|Item 7.    | Managements Discussion and Analysis of Financial Condition and
 Results of Operations           |    | 17  
|           | Overview                                                                                         |    | 17  
|           | Results of Operations                                                                            |    | 17  
|           | Liquidity and Capital Resources                                                                  |    | 20  
|           | Critical Accounting Policies                                                                     |    | 22  
|           | New Accounting Pronouncements                                                                    |    | 23  
|           | Available Information                                                                            |    | 23  
|Item 7A.   | Quantitative and Qualitative Disclosures About Market Risk                                       |    | 24  
|Item 8.    | Financial Statements and Supplementary Data                                                      |    | 25  
|Item 9.    | Changes in and Disagreements with Accountants on Accounting and
 Financial Disclosure            |    | 50  
|Item 9A.   | Controls and Procedures                                                                          |    | 51  
|Item 9B.   | Other Information                                                                                |    | 51  
|           |                                                                                                  |    |     
|PART III   |                                                                                                  |    | 51  
|           |                                                                                                  |    |     
|Item 10.   | Directors, Executive Officers and Corporate Governance                                           |    | 51  
|Item 11.   | Executive Compensation                                                                           |    | 51  
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management and
 Related Stockholders Matters |    | 51  
|Item 13.   | Certain Relationships and Related Transactions and Directors
 Independence                       |    | 52  
|Item 14.   | Principal Accountant Fees and Services                                                           |    | 52  
|           |                                                                                                  |    |     
|PART IV    |                                                                                                  |    | 52  
|           |                                                                                                  |    |     
|Item 15.   | Exhibits and Financial Statement Schedules                                                       |    | 52  
|           |                                                                                                  |    |     
|SIGNATURES |                                                                                                  | 53

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Table of Contents

General Information

PART I

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

General

Rimage Corporation (Rimage or the Company) is a leading provider of
high-performance workflow-integrated digital publishing systems that are used
by businesses to produce recordable CD, DVD and Blu-ray Discs with customized
content and durable disc labeling. Rimages publishing systems, which include
equipment to handle a full range of low-to-high production volumes, incorporate
robotics, software and custom printing technology for disc labeling. Rimage
focuses its digital publishing solutions on a set of vertical markets with
special needs for customized, on-demand digital information, including digital
photography; medical imaging; business services; video workflows and law
enforcement, including surveillance and evidence management.

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

The market for Rimages core disc publishing products is mature and
technology substitution is occurring. For this reason, Rimage launched a
multi-year process in 2009 aimed at transforming Rimage into a
higher-performing business. Rimages comprehensive strategy involves
strengthening its core disc publishing business; generating new revenue streams
by leveraging its core capabilities and transitioning from a hardware supplier
into a provider of total solutions; and identifying and investing in future
opportunities in adjacent markets with strong growth potential. As part of its
growth strategy, in 2010 Rimage began investing in the development of a
solution that provides virtual publishing of digital content to help address the
needs of customers exploring this technology as an alternative to optical disc
publishing.

Products

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

The principal benefits to users of Rimages products include unattended
operation, reduced labor costs and higher throughput and quality than
alternative systems. One of the essential elements of Rimages marketing and
development strategy is to retain customers over time. Rimage provides 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 also focuses on providing customers
whose products have reached the end of their useful lives a migration path to a
new Rimage solution. Rimage has made a long-term commitment to its customers by
providing maintenance service contracts, replacement parts and repair services
for current as well as past products.

Sales of Rimages publishing systems comprised 46%, 40%, and 39% of its
revenue from operations during 2010, 2009 and 2008, respectively. Rimages
other major sources of revenue are recurring in nature and consist of
consumables (ribbons, ink cartridges and Rimage-branded blank recordable CD,
DVD and Blu-ray media), parts and maintenance contracts.

Rimages traditional digital disc publishing systems are divided into
three primary product lines: the Producer line of equipment for higher volume
requirements for production of recordable CD, DVD or Blu-ray media; the
Professional line of equipment for front office production of recordable CD,
DVD or Blu-ray media; and the Desktop line of lower-cost products for office
and other desktop applications. The Producer line of hardware products
continues to generate a significant portion of Rimages revenue, comprising 17%
of total revenues during 2010 at $15.3 million, 21% during 2009 at $17.5
million and 22% during 2008 at $20.3 million. The Professional line of hardware
products contributed 25% of total revenues in 2010 at $21.9 million, 12% in
2009 at $10.4 million and 11% in 2008 at $10.0 million. The Desktop line of
hardware products contributed 4% of total revenues in 2010 at $3.6 million, 6%
of total revenues in 2009 at $5.1 million and 6% in 2008 at $5.8 million. The
balance of revenue in each year was generated through sale of Rimage-branded
blank recordable CD, DVD and Blu-ray media, ribbons, ink cartridges, parts,
repair services and maintenance contracts. These recurring revenues comprised
54% of total revenues during 2010 at $47.9 million, 60% of total revenues
during 2009 at $50.3 million and 61% during 2008 at $55.3 million. The decrease
in recurring revenues has been driven mainly by customers use of alternative
technologies and the economic downturn, which have compressed demand for many
products including the CD, DVD, and Blu-ray media products created by Rimage
customers.

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In 2010, Rimage rationalized its Producer, Professional and Desktop
product lines, reducing the number of product models sold from 27 to 13, and
replacing some older models in the Professional line with new technologies. In
addition to fortifying its traditional digital disc publishing platform, Rimage
has started to invest in the development of a virtual publishing solution to
provide its customers a full digital publishing portfolio.

The ProducerIII Series.The
Producer III Series of digital disc publishing systems, introduced in 2006,
represent the latest generation of the high-performance Producer line and
consists of a family of products that cover a broad range of applications for
the publishing and duplication of CD, DVD and Blu-ray discs with digital
content. Each product in the Producer line incorporates recorders capable of
recording on CD, DVD or Blu-ray media, customized robotics, a thermal or
thermal re-transfer printer for on-disc color printing, software and computer
hardware components.

In 2010, Rimage reduced its Producer line of products from seven to
three basic configurations in order to simplify operations and reduce costs
while continuing to meet the varying needs of its commercial customers. The
Rimage 8100N system, part of the Producer III Series of publishing systems
introduced in 2006, provides industry leading speed and throughput for
on-demand production of CD, DVD or Blu-ray discs with digital content. The
Rimage 8100N system utilizes up to four simultaneous data streams and four
recorders and provides for a capacity of 300 discs. The Rimage 7100N system,
also part of the Producer III Series, has two recorders. The Rimage 6100N
system, introduced in 2008 as an expansion of the Producer III Series, has a
single recorder. All Rimage Producer systems are network-attached, have a
control center embedded inside the unit and are available with either Rimages
Everest or Prism printers. The Producer line also includes AutoPrinter systems,
which incorporate either an Everest or Prism printer. List prices for the
Producer line of publishing systems currently range from $14,950 to $37,950.

The Everest printer was developed to meet customer needs for an
on-demand, direct-to-disc printer that prints color and monochrome disc labels
with quality similar to offset and silkscreen printing systems. The Everest
printer produces images on recordable CD, DVD and Blu-ray media that are
indelible and cover the full surface of the media. The Everest printer sold
with the Producer product line enables users to print on discs with 600 dpi
print resolution, while the Everest printer sold with the Professional Series
line of systems (discussed below) provides 400 dpi print resolution. Both
provide for the printing of photo quality images and clear, crisp text.
Rimages Prism printer provides high-speed, laser quality monochrome and spot
color printing on standard recordable CD and DVD media for in-house, customized
printing.

The Professional
Series. The Company augmented its Producer product
line with the introduction of the Professional Series line of digital disc
publishing systems in 2007. The Professional Series systems are compact, network-attached
publishing systems that feature an Everest printer and a small footprint.
Rimage introduced two new digital publishing systems to its Professional Series
line of products effective March 1, 2010. The Rimage Professional Series 5400N
and Rimage Professional Series 3400 offer an entry point for on-demand disc
publishing. Both systems utilize two recorders, three input bins and an Everest
printer. The Rimage Professional Series 5400N has a control center embedded
inside the unit, while the Rimage Professional Series 3400 does not contain an
embedded control center. The Professional Series 5400N and 3400 line of systems
replaced the 5300N and 5100N, which were removed from general availability in
October 2010. List prices for the Professional Series 5400N and 3400 currently
range from $6,950 to $15,950.

The Producer and Professional Series products are sold as standalone
systems for disc publishing, and are also sold in combination with
application-specific hardware and software to provide an integrated solution to
address specific needs in vertical markets, including but not limited to law
enforcement, video workflows and medical imaging. The Company launched the
following solutions-based systems in 2010 to address the needs of some of these
new applications:

| |   |                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Rimage Evidence Disc System was launched in April 2010. It
 automates the digital forensic analysis of optical disc evidence for criminal
 investigators.                                                                                                                                                                 
| |  | The Rimage Surveillance System was launched in May 2010 to streamline
 digital video surveillance archiving and distribution using DVD and/or
 Blu-ray Discs.                                                                                                                                                                 
| |  | The Rimage Disc Copy Station was launched in October 2010. It makes
 near-perfect copies of optical discs with a simple user process, similar in
 complexity to making paper copies with a paper printer.                                                                                                                     
| |  | A complete disc publishing solution for medical imaging in Chinese
 hospitals was launched with the establishment in August 2010 of a
 majority-owned joint venture operation in China. This solution enables the
 transition from analog film to optical technology for distribution of patient
 imaging related information.

The Desktop Series.
Rimages Desktop Series of CD-R/DVD-R products feature economical pricing, a
compact desktop design, software, network compatibility and stand-alone,
plug-and-play technology ideal for office environments. The Company introduced
the two-drive recorder Rimage 2000i Desktop publishing system and Rimage 480i
thermal inkjet printer in June 2004. Co-developed by the Company and
Hewlett-Packard, the Rimage 480i inkjet printer features 4800 dpi resolution
for high clarity color printing on CD-R/DVD-R discs. The current list price for
the Rimage 2000i Desktop publishing system is $3,450.

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Marketing and
Distribution

Rimages channel partners, primarily consisting of value-added
resellers, other strategic partners and distributors, currently generate the
majority of the Companys sales. Until March 31, 2010, Rimage utilized the
following principal means of distributing its products: A two-tier distribution
channel of distributors to value-added resellers in Europe, the U.S. and Latin
America; a distributor or OEM to end-user distribution channel in Asia Pacific,
some areas in Europe and some U.S. market applications; and direct sales to
select accounts using its own sales force. On April 1, 2010, Rimage terminated
its relationships with distributors in the United States, Germany, and the
United Kingdom. The termination of these distributors is part of the Companys
plan to improve the efficiency of its sales channels. Following termination of
the distributors, the Company sells products in these regions to end-user
customers primarily through value-added resellers or other strategic partners,
as well as to select accounts directly through its own sales force.

Rimage has historically focused its sales and marketing efforts on
high-volume recordable CD, DVD and Blu-ray disc publishing solutions in such
areas as banking and finance, wholesale photo processing labs, medical imaging,
and retail photography. Rimage plans to continue to expand its position in some
of these markets while also focusing on marketing new solutions for
applications with high-growth potential in business services, video workflows
and law enforcement; including surveillance and evidence management. The
Companys sales and marketing organization is focused on penetrating these
targeted markets and strengthening marketing support for new products with more
intensive web-based marketing and selling activities.

Sales to one of the Companys strategic partners represented 18%, 11%
and 10% of revenues during 2010, 2009 and 2008, respectively. During 2010, 2009
and 2008, Rimage derived 4%, 18% and 15% of its respective revenues from one of
its distributors, and derived 3%, 10% and 11% of its revenues from a second
distributor during the same respective periods. The agreement governing these
sales is the Companys standard distributor agreement (in the case of the
distributors) or standard form of purchase order (in the case of the strategic
partner).

Rimage conducts foreign sales through its U.S. operation and its
subsidiaries in Germany and Japan, and effective in the third quarter 2010,
through its majority-owned joint venture in China. Foreign sales constituted
approximately 35% of Rimages revenues for the year ended December 31, 2010,
41% for the year ended December 31, 2009 and 42% of revenues for the year ended
December 31, 2008.

Competition

Technology substitution is expected to be the primary competitive force
impacting the disc publishing business over the next several years. Rimage
competes with online distribution, cloud transport and alternative technologies
in the storage media industry, such as high capacity hard drives, tape drives
and flash memory. Rimage believes that within its targeted markets its
technology has advantages over certain other technologies in terms of
usability, reliability, performance, security and cost.

Additionally, within the on-demand disc publishing market, Rimage
competes with a number of manufacturers of CD-R/DVD-R/Blu-ray production
equipment and related products. Primary competitors of the Company currently
include Primera Technology, Inc., Teac, Microtech Systems, Inc. and Seiko Epson
Corporation. Rimage is able to compete effectively in the sale of disc publishing
systems because of technological leadership in automated solutions and its
early start within the CD-R/DVD-R digital content publishing industry. Rimage
believes that its quality printing capabilities for recordable CD, DVD and
Blu-ray media, its transporter mechanisms, its software, its serviceability and
its integration tools differentiate its products from those of competitors.

Manufacturing

Rimages manufacturing operations consist primarily of the assembly of
products from components purchased from third parties. Some parts are standard
components and others are manufactured to Rimages specifications. Rimages
employees at its facility in Edina, Minnesota conduct assembly and testing
operations. Components include DVD-R drives, Blu-ray recorders, printers,
circuit boards, electric motors, machined and molded parts, precision sheet
metal assemblies, computer components and other mechanical parts. The Company
depends upon a single-source supplier for its Everest printers and associated
ribbons and, beginning in March 2010, its Rimage Professional Series 5400N and
Rimage Professional Series 3400 systems. The Company currently purchases these
products pursuant to its standard form of purchase order, submitted to the
supplier from time to time as the products are needed.

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

Research and
Development

At December 31, 2010, 32 full-time employees were involved in research
and development at Rimage. This staff, with software, electrical, mechanical
and drafting capabilities, engages in research and development of new products
and enhancements to existing products. In addition to investing in its core
disc publishing products, Rimage began investing during 2010 in new technology
to enable a virtual digital publishing solution for its customers. In
addition, Rimage partners with third-parties to utilize their competencies in
creating products to enhance its product offering.

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The industries served by Rimage are subject to rapid technological
changes. Other technologies, including online distribution, cloud transport and
alternative data storage media, including high capacity hard drives, tape
drives and flash memory, currently exist or are under development. All these
forces may affect the usage of recordable CD, DVD and Blu-ray media. Rimage
believes that it must continue to innovate and anticipate advances in the
storage media and digital publishing industries in order to remain competitive.

Rimages expenditures for research and development were $6.5 million,
$7.1 million and $5.3 million in 2010, 2009 and 2008, representing 7.3%, 8.6%
and 5.7% of revenues, respectively. Rimage anticipates its expenditures in
research and development in 2011 will increase relative the levels experienced
during 2010 to support a sustained level of new product development initiatives
and improve existing products.

Patents and
Government Regulation

Rimage currently maintains 17 U.S. patents, 12 foreign patents and has
three provisional patents filed and two utility patents pending in the U.S. In
addition, Rimage has one foreign patent application which is also pending.
Further, Rimage protects the proprietary nature of its software primarily
through copyright and license agreements and through close integration with its
hardware offerings. It is Rimages policy to protect the proprietary nature of
its newly developed products whenever they are likely to become significant
sources of revenue. No assurance can be given that Rimage will be able to
obtain patent or other protection for its products. In addition, Rimage has
registered and may in the future register trademarks and other marks used in
its business.

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

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

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

Employees

At December 31, 2010, Rimage had 189 full-time employees, of which 32
were involved in research and development, 69 in production, testing, repair
and customer service, and 88 in sales, marketing, administration and
management. None of Rimages employees are represented by a labor union or
covered by a collective bargaining agreement.

Cautionary Note Regarding
Forward-Looking Statements

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

Our
future results, including results expressed in or implied by forward-looking
statements, involve a number of risks and uncertainties. Forward-looking
statements are not guarantees of future actions, results or performance. Any
forward-looking statement made by or on behalf of us speaks only as of the date
on which such statement is made. We do not undertake any obligation to update
or keep current any forward-looking statement to reflect events or
circumstances arising after the date of such statement.

In
addition to other matters identified or described by us from time to time in
filings with the SEC, there are many important factors that could cause our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or the results expressed in or implied by any
forward-looking statements. These important factors are described below under
Item 1A. Risk Factors.

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

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

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

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

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

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

Technology in our industry evolves rapidly,
potentially causing our products to become obsolete, and we must continue to
enhance existing systems and develop new digital publishing platforms to
sustain and grow our business.

Rapid technological advances, rapidly changing customer requirements
and fluctuations in demand characterize the current market for our products.
Further, technology substitution is negatively impacting our revenues. Online
distribution, cloud transport and alternative data storage media is available,
including high capacity hard drives, tape drives and flash memory. Our existing
and development-stage products may become obsolete if our competitors introduce
newer or more appealing technologies. If these technologies are patented or
proprietary to our competitors, we may not be able to access these technologies.
We believe that we must continue to innovate and anticipate advances in the
digital content publishing 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 revenues will decline.

We may not be successful at implementing our
virtual publishing growth strategy.

Although our growth strategy includes the development and
commercialization of a virtual publishing solution designed to increase revenue
and drive earnings growth, we cannot ensure that this growth strategy will be
successful either in the short-term or in the long-term, or that this strategy
will generate a positive return on our investment. Our virtual publishing
solution is currently in the proof of concept stage, focusing on video
staging, cloud transport, mobile delivery and security technologies. We expect
to start beta testing during the first half of 2011, with the goal of launching
a first-generation virtual publishing solution by late 2011. The virtual
publishing solution is more software centric than our traditional core disc
publishing and employs a SaaS (Software as a Service) model, which is a new
business for us. We may not currently possess the proper skills to effectively
develop and market this new publishing solution and related products or to
achieve success in this new type of market.

We also intend to evaluate acquisition opportunities, including those
that can augment and accelerate our technology development and go-to-market
plans for the virtual publishing solution. We cannot ensure we can acquire
suitable candidates on acceptable terms or that any acquired businesses,
technologies or products will contribute to our revenue or earnings to any
material extent. Further, we cannot ensure that we will be able to
successfully integrate any businesses, technologies, or products that we might
acquire in the future. Our failure to identity and acquire new businesses, technologies,
or products, or to successfully integrate them into our operations could
disrupt our business and have a material adverse effect on our business,
results of operations and financial condition.

7

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Our market is competitive and such
competition may result in price reductions, lower gross profits and loss of
market share.

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

| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | Technologically advanced systems and solutions that anticipate and
 satisfy the demands of end-users;
|
| |  | Continuing advancements in our recordable CD, DVD and Blu-ray digital
 publishing systems;           
|
| |  | Innovations in digital content publishing beyond CD, DVD and Blu-ray
 publishing systems;            
|
| |  | A responsive and effective sales force;                                                              
|
| |  | A dependable and efficient sales distribution network;                                               
|
| |  | Superior customer service; and                                                                       
|
| |  | High levels of quality and reliability.                                                              

We cannot assure you that we will be able to compete successfully
against our current or future competitors. The digital content publishing
industry has increased visibility, which may lead to large, well-known,
well-financed companies entering into this market. Increased competition from
manufacturers of online solutions, 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 solutions or newly-developed products for the
digital content publishing industries, our business will suffer.

The success of our products depends upon our end users choosing our
digital publishing solutions for their content archiving and distribution
needs. However, online distribution, cloud transport and alternative data
storage media exist, such as high capacity hard drives, tape drives and flash
memory. Further, new technologies and additional media are under development.
If end users perceive any technology that is competing with ours as more
reliable, higher performing, less expensive or having other advantages over our
technology, the demand for our products could decrease. Additionally, some of
our competitors may make strategic acquisitions or establish cooperative
relationships with suppliers or companies that produce complementary products.
Competition from other publishing systems, online distribution or other storage
media is likely to increase. If our products do not compete successfully with
existing or new competitive products, our business will suffer.

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

We sell a significant amount of our products to customers outside the
United States, particularly in Europe, Asia and Latin America. International
sales accounted for 35% of our revenues for the year ended December 31, 2010,
41% of our revenues for the year ended December 31, 2009, and 42% for the year
ended December 31, 2008. We expect that shipments to international customers,
including customers in Europe, Asia and Latin America, will continue to account
for a significant portion of our net sales. Sales outside the United States
involve the following risks, among others:

| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Foreign governments may impose tariffs, quotas and taxes;                                                                                                                                            
|
| |  | The demand for our products will depend, in part, on local economic
 health;                                                                                                                         
|
| |  | Political and economic instability may reduce demand for our
 products;                                                                                                                              
|
| |  | Restrictions on the export or import of technology may reduce or
 eliminate our ability to sell in certain markets;                                                                                  
|
| |  | Potentially limited intellectual property protection in certain
 countries may limit our recourse against infringing products or cause us to
 refrain from selling in certain markets;               
|
| |  | Potential 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;                                                                           
|
| |  | Potential challenges operating our new majority-owned China joint
 venture in an emerging market characterized by strict government controls and
 working effectively with our joint venture partner;
|
| |  | Potential difficulties in collecting receivables; and                                                                                                                                                
|
| |  | We may not be able to control our international distributors efforts
 on our behalf.                                                                                                                

The financial results of our German and Japanese subsidiaries and
majority-owned Chinese joint venture 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 may
also 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.

8

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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 on the rights of others, third
parties have claimed, and may claim in the future, that our products infringe
on their rights, and these third parties may assert infringement claims against
us in the future.

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

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

Products that provide integrated solutions and new publishing platforms
are new businesses for us. There is a risk that we may not have the proper
skills to be effective in selling these new products.

For sales that are made to customers through value-added resellers,
distributors or other strategic partners, we depend on these businesses to
provide effective sales and marketing support to our products. Our resellers
and distributors are independent businesses that we do not control. Our
agreements with resellers and distributors do not contain requirements that a
certain percentage of such parties sales are of our products. Further, some of
our channel partners are small organizations with limited capital, and our
success in distributing our products to end-users will depend upon the
continued viability and financial stability of these entities. These channel
partners may choose to devote their efforts to other products in different
markets or reduce or fail to devote the necessary resources to provide
effective sales and marketing support of our products, any of which could harm
our business by reducing sales to customers.

A significant portion of our sales are made into applications that
require our solutions to be integrated into a workflow that includes other
equipment. The companies that make and sell this equipment are independent
businesses that we do not control. Our integration and coordination with these
companies is material to the effectiveness of our solutions. These companies
may choose to take actions that impair the effectiveness of our products in
customer workflows.

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

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

We forecast production based on past sales and our estimates of future
demand. In the event that we significantly underestimate our needs or encounter
an unexpectedly high level of demand for our systems or our suppliers are
unable to deliver our orders of components in a timely manner, we may be unable
to fill our product orders on time which could harm our reputation and result
in reduced sales.

9

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

The termination or interruption of any of these relationships, or the
failure of these manufacturers or suppliers to supply products or components to
us on a timely basis or in sufficient quantities, likely would cause us to be
unable to meet orders for our products and harm our reputation and our
business. For the majority of our critical components, we have identified
alternative suppliers. We depend upon a single-source supplier for our Everest
printers and associated ribbons, and beginning in March 2010, our Rimage
Professional Series 5400N and Rimage Professional Series 3400 systems. This
single-source supplier is located in Japan. An earthquake and accompanying
tsunami struck the north-east area of Japan on March 11, 2011, causing
significant damage in the surrounding region. A disruption in the supply of
these products and systems from this supplier would adversely affect our
results of operations. Also, for these products, it is more difficult to
identify an alternative supplier because of the proprietary information and
technology currently held by this supplier. Although we own the rights to the
technology, if we were unable to effectively transition the technology and
proprietary information used by this supplier to alternative suppliers, the
design and manufacture of these products to our specifications may be
significantly delayed, resulting in potential production delays and significant
expense. Further, if we obtain a new supplier for a component or product or use
an alternative component in our product, we may need to conduct additional
testing of our products to ensure the product meets our quality and performance
standards. Any delays in delivery of our product to end-users, distributors or
resellers could be extended, and our costs associated with the change in
product manufacturing could increase.

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

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

Our digital disc 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.

10

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Unpredictable catastrophic events could have
a material adverse effect on our business.

The occurrence of catastrophic events such as hurricanes, tropical
storms, earthquakes, tsunamis, floods and other catastrophes could adversely
affect our financial condition or results of operations. The manufacturing
facilities of many of our suppliers are concentrated in certain geographic
locations in Asia. A flood, earthquake, tsunami or other disaster, condition or
event that adversely affects any of these facilities, or disrupts cargo
operations or freight lanes, would significantly affect our supply of
components and products, which could impact our operating results by impairing
our ability to timely and efficiently deliver our products.

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 development projects and market launch of new
 business platforms;
|
| |  | The availability and cost of components and materials;                                
|
| |  | Timing, costs and benefits of new product introductions;                              
|
| |  | Customer order size and shipment timing;                                              
|
| |  | Seasonal factors affecting timing of purchase orders;                                 
|
| |  | Promotions by ourselves or competitors, and the timing of the
 promotion;             
|
| |  | The impact to the marketplace of competitive products and pricing;
 and               
|
| |  | The timing and level of operating expenses; and                                       
|
| |  | General economic and market conditions including market uncertainty.                  

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

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

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

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

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

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

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

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

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

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

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

| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The provisions of Minnesota law relating to business combinations and
 control share acquisitions;                                                                                                          
|
| |  | The provisions of our bylaws regarding the business properly brought
 before shareholders;                                                                                                                  
|
| |  | The right of our Board of Directors to establish more than one class
 or series of shares and to fix the relative rights and preferences of any
 such different classes or series;                          
|
| |  | Our shareholder rights plan, which would cause substantial dilution
 to any person or group attempting to acquire our company on terms not
 approved in advance by our Board of Directors;                  
|
| |  | The provisions of our stock option plans allowing for the
 acceleration of vesting or payments of awards granted under the plans in the
 event of specified events that result in a change in control; and
|
| |  | The provisions of our agreements provide for severance payments to
 our executive officers in the event of certain terminations following a
 change in control.                                           

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

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

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

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

None.

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

Rimage
headquarters are located in a facility of 58,500 square feet at 7725 Washington
Avenue South, Edina, Minnesota 55439. This facility is used for manufacturing,
engineering, service, sales, marketing and administration.

In
July 2006, Rimage entered into a facility lease of approximately 18,200 square
feet in Dietzenbach, Germany, used for service, sales and light assembly. The
current term of the lease in Germany expires June 30, 2011, and monthly base
rent is 14,833 (or approximately $20,000 U.S. dollars). Under a renewed lease
agreement that becomes effective July 1, 2011, the Company will continue to
lease approximately 13,000 square feet of the facility in Germany at a monthly
base rent of 9,556 (or approximately $12,700) through June 30, 2014. In May
2008, the Company entered into a facility lease of 2,689 square feet in Tokyo,
Japan, used for sales and service. The current term of the lease in Japan
expires April 30, 2012, and monthly base rent is ¥ 1,685,441 (or approximately
$19,000 U.S. dollars). In July 2010, the Companys majority-owned joint venture
in China initiated a facility lease of approximately 3,500 square feet in
Shanghai, China, used for sales, service and engineering. The lease expires in
June 2012, with monthly base rent of 36,518 Chinese Yuan Renminbi
(approximately $5,500 U.S. dollars). Additionally, effective October 2010, the
Company entered into a facility lease in Hyderabad, India for 4,781 square
feet, used for software development and testing, with monthly base rent of
189,328 Indian Rupees (or approximately $4,200 U.S. dollars). The current term
of the lease in India expires in October 2015.

12

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

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

|        |           
|------- | ----------
|ITEM 4. | [RESERVED]

PART II

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

Market Information

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

|            |  |     |       |      |   |       | 
|----------- |  | --- | ----- | ---- | - | ----- | 
|            |  | Low |       | High |  
|           
|Year 2010:  |  |     |       |      |   |       | 
|1st Quarter |  | $   | 13.93 |      | $ | 17.75 | 
|2nd Quarter |  | $   | 14.32 |      | $ | 17.89 | 
|3rd Quarter |  | $   | 14.55 |      | $ | 17.46 | 
|4th Quarter |  | $   | 14.00 |      | $ | 18.25 | 
|Year 2009:  |  |     |       |      |   |       | 
|1st Quarter |  | $   | 11.14 |      | $ | 15.11 | 
|2nd Quarter |  | $   | 12.58 |      | $ | 18.00 | 
|3rd Quarter |  | $   | 14.97 |      | $ | 17.86 | 
|4th Quarter |  | $   | 15.47 |      | $ | 19.38 | 

Shareholders

As of February 17, 2011, there were 41 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 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. On February 23, 2011, the Companys Board of Directors
approved the initiation of a quarterly dividend policy and authorized a
dividend of $0.10 per share, payable on April 15, 2011 to shareholders of
record as of March 31, 2011. The dividend issuance is expected to require a
cash outlay of approximately $4.0 million on an annual basis.

13

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Other Information Regarding Equity
Compensation Plans

The following table sets forth
information regarding Rimages equity compensation plans in effect as of
December 31, 2010. 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:         |  |                                                                                                             |  | 1,059,901                                                                      |  |                                                                                                                 |  | $ | 18.25 |  |  |  | 456,083 | 
|                                                             |  |                                                                                                             |  |                                                                                |  |                                                                                                                 |  |   |       |  |  |  |         | 
|Equity compensation plans
 not approved by shareholders (2): |  |                                                                                                             |  | 200,000                                                                        |  |                                                                                                                 |  | $ | 14.10 |  |  |  |        | 
|Total                                                        |  |                                                                                                             |  | 1,259,901                                                                      |  |                                                                                                                 |  | $ | 17.59 |  |  |  | 456,083 | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)
 Excludes shares of common stock listed in the first column.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(2)
 Consists of a non-qualified stock option grant to Sherman L. Black on April
 1, 2009, the first day of his employment with Rimage. The stock option was
 granted outside of the Companys current equity incentive plan, the 2007
 Stock Incentive Plan, as an inducement award pursuant to Nasdaq Marketplace
 Rule 4350(i)(1)(A)(iv). The option has an exercise price equal to the closing
 price of the Companys common stock as reported by the Nasdaq Stock Market on
 April 1, 2009, vests in four equal installments on each of the first four
 anniversaries of the date of grant, and has a term of seven years. In other
 respects, the option was structured to mirror the terms of options granted
 under the Companys 2007 Stock Incentive Plan and is subject to a stock
 option plan and agreement entered into by and between the Company and Mr.
 Black dated April 1, 2009.

14

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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, 2006 to
December 31, 2010 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)

|                                           |  |          |        |          |   |          |  |          |       |          |   |        |  |   |        | 
|------------------------------------------ |  | -------- | ------ | -------- | - | -------- |  | -------- | ----- | -------- | - | ------ |  | - | ------ | 
|                                           |  | 12/29/06 |        | 12/31/07 |   | 12/31/08 |  | 12/31/09 |       | 12/31/10 |  
|                                          
|Nasdaq National Market
 Index              |  | $        | 100.00 |          | $ | 108.47   |  | $        | 52.27 |          | $ | 75.13  |  | $ | 89.17  | 
|                                          
|Nasdaq Computer
 Manufacturer Stocks Index |  | $        | 100.00 |          | $ | 146.29   |  | $        | 61.45 |          | $ | 134.97 |  | $ | 192.63 | 
|                                          
|Rimage Corporation                         |  | $        | 100.00 |          | $ | 99.81    |  | $        | 51.58 |          | $ | 66.69  |  | $ | 57.35  | 

15

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Table of Contents

ITEM 6.SELECTED FINANCIAL DATA

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

Consolidated Statements of Income Information:

|                                              |  |                             |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|--------------------------------------------- |  | --------------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                                              |  | Year ended December 31,     |        
|                                              |  | 2010                        |         | 2009 |   | 2008    |  | 2007 |         | 2006 |  
|Revenues                                      |  | $                           | 88,731  |      | $ | 83,227  |  | $    | 91,394  |      | $ | 108,874 |  | $ | 103,252 | 
|Cost of revenues                              |  | $                           | 45,221  |      | $ | 42,894  |  | $    | 51,731  |      | $ | 57,719  |  | $ | 56,014  | 
|Gross profit                                  |  | $                           | 43,510  |      | $ | 40,333  |  | $    | 39,663  |      | $ | 51,155  |  | $ | 47,238  | 
|Operating expenses                            |  | $                           | 31,938  |      | $ | 29,087  |  | $    | 27,915  |      | $ | 30,274  |  | $ | 29,464  | 
|Operating income                              |  | $                           | 11,572  |      | $ | 11,246  |  | $    | 11,748  |      | $ | 20,881  |  | $ | 17,774  | 
|Other income, net                             |  | $                           | 524     |      | $ | 1,866   |  | $    | 2,711   |      | $ | 3,513   |  | $ | 2,684   | 
|Income tax expense                            |  | $                           | 4,494   |      | $ | 4,617   |  | $    | 5,028   |      | $ | 8,633   |  | $ | 7,374   | 
|Net income                                    |  | $                           | 7,602   |      | $ | 8,495   |  | $    | 9,431   |      | $ | 15,761  |  | $ | 13,084  | 
|Loss attributable to
 noncontrolling interest |  | $                           | 98      |      | $ |        |  | $    |        |      | $ |        |  | $ |        | 
|Net income attributable to
 Rimage            |  | $                           | 7,700   |      | $ | 8,495   |  | $    | 9,431   |      | $ | 15,761  |  | $ | 13,084  | 
|                                              |  |                             |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Basic net income per share                    |  | $                           | 0.81    |      | $ | 0.91    |  | $    | 0.99    |      | $ | 1.59    |  | $ | 1.33    | 
|Diluted net income per
 share                 |  | $                           | 0.80    |      | $ | 0.89    |  | $    | 0.97    |      | $ | 1.52    |  | $ | 1.26    | 
|Weighted average shares
 outstanding:         |  |                             |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Basic                                         |  |                             | 9,524   |      |   | 9,374   |  |      | 9,559   |      |   | 9,915   |  |   | 9,812   | 
|Diluted                                       |  |                             | 9,596   |      |   | 9,507   |  |      | 9,729   |      |   | 10,371  |  |   | 10,356  | 
|                                              |  |                             |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Consolidated
 Balance Sheet Information:      |  |                             |         |      |   |         |  |      |         |      |   |        
|                                              |  |                             |        
|                                              |  | Balances as of December 31, |        
|                                              |  | 2010                        |         | 2009 |   | 2008    |  | 2007 |         | 2006 |  
|Cash and cash equivalents                     |  | $                           | 107,982 |      | $ | 72,507  |  | $    | 14,885  |      | $ | 7,416   |  | $ | 8,500   | 
|Marketable securities                         |  | $                           | 8,790   |      | $ | 28,581  |  | $    | 39,870  |      | $ | 51,605  |  | $ | 30,266  | 
|Receivables, net                              |  | $                           | 13,764  |      | $ | 13,732  |  | $    | 11,099  |      | $ | 14,447  |  | $ | 21,697  | 
|Inventories                                   |  | $                           | 4,502   |      | $ | 4,123   |  | $    | 5,625   |      | $ | 8,075   |  | $ | 6,072   | 
|Current assets                                |  | $                           | 136,532 |      | $ | 120,760 |  | $    | 74,151  |      | $ | 84,771  |  | $ | 70,116  | 
|Property and equipment,
 net                  |  | $                           | 7,528   |      | $ | 7,855   |  | $    | 6,183   |      | $ | 3,206   |  | $ | 3,626   | 
|Marketable securities -
 non-current          |  | $                           |        |      | $ | 9,037   |  | $    | 40,647  |      | $ | 35,201  |  | $ | 38,594  | 
|Total assets                                  |  | $                           | 148,044 |      | $ | 140,282 |  | $    | 123,456 |      | $ | 125,096 |  | $ | 112,359 | 
|Current liabilities                           |  | $                           | 16,303  |      | $ | 17,589  |  | $    | 12,010  |      | $ | 17,882  |  | $ | 16,163  | 
|Long-term liabilities                         |  | $                           | 3,104   |      | $ | 2,744   |  | $    | 2,398   |      | $ | 2,153   |  | $ | 720     | 
|Stockholders equity                          |  | $                           | 128,637 |      | $ | 119,949 |  | $    | 109,048 |      | $ | 105,061 |  | $ | 95,476  | 

16

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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, 2010 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 | 
|                                    |  | 2010                        |       | 2009                                              |  | 2008  |   | 2010
 vs. 2009 |       | 2009
 vs. 2008 | 
|Revenues                            |  |                             | 100.0 |                                                   |  | 100.0 |   |                | 100.0 |                |  | 6.6   |   |  | (8.9  | )
|Cost of revenues                    |  |                             | (51.0 | )                                                 |  | (51.5 | ) |                | (56.6 | )              |  | 5.4   |   |  | (17.1 | )
|Gross profit                        |  |                             | 49.0  |                                                   |  | 48.5  |   |                | 43.4  |                |  | 7.9   |   |  | 1.7   |  
|Operating expenses:                 |  |                             |       |                                                   |  |       |   |                |       |                |  |       |   |  |       |  
|Research and development            |  |                             | (7.3  | )                                                 |  | (8.6  | ) |                | (5.7  | )              |  | (8.9  | ) |  | 36.0  |  
|Selling, general and administrative |  |                             | (28.7 | )                                                 |  | (26.4 | ) |                | (24.8 | )              |  | 15.9  |   |  | (3.2  | )
|Operating income                    |  |                             | 13.0  |                                                   |  | 13.5  |   |                | 12.9  |                |  | 2.9   |   |  | (4.3  | )
|Other income, net                   |  |                             | 0.6   |                                                   |  | 2.2   |   |                | 2.9   |                |  | (71.9 | ) |  | (31.2 | )
|Income before income taxes          |  |                             | 13.6  |                                                   |  | 15.7  |   |                | 15.8  |                |  | (7.7  | ) |  | (9.3  | )
|Income tax expense                  |  |                             | (5.0  | )                                                 |  | (5.5  | ) |                | (5.5  | )              |  | (2.7  | ) |  | (8.2  | )
|Net income                          |  |                             | 8.6   |                                                   |  | 10.2  |   |                | 10.3  |                |  | (10.5 | ) |  | (9.9  | )
|Noncontrolling interest             |  |                             | 0.1   |                                                   |  | 0.0   |   |                | 0.0   |                |  |      |   |  |      |  
|Net income attributable to
 Rimage  |  |                             | 8.7   |                                                   |  | 10.2  |   |                | 10.3  |                |  | (9.4  | ) |  | (9.9  | )

Overview

Rimage
develops, manufactures and markets work-flow integrated digital publishing
systems that are used by businesses to produce recordable CD, DVD and Blu-ray
discs with customized digital content and durable disc labeling on an on-demand
basis. Rimage distributes its publishing systems from its operations in the
United States, Germany and Japan, and effective in the third quarter 2010, from
its joint venture operations in China. The Company also distributes related
consumables for use with its systems, consisting of media kits, ribbons, ink
cartridges and Rimage-branded blank CD-R, DVD-R and Blu-ray media. These
systems allow customers to benefit from cost savings by eliminating their
manual labor efforts in markets and applications such as digital photography,
medical imaging, business services, video workflows and law enforcement,
including surveillance and evidence management. As Rimages sales within North
America and Europe have averaged 91% of total sales over the past three years,
the strength of the economies in these regions plays an important role in
determining the success of Rimage.

Rimage
earns revenues through the sale of equipment, consumables and parts (included
in Product revenues on the accompanying consolidated statements of income), as
well as maintenance contracts, repair and installation services (included as
Service revenues on the consolidated statements of income). Rimages recurring
revenues (consumables, parts, maintenance contracts and service) comprised
approximately 54%, 60% and 61% of its consolidated revenues in 2010, 2009 and
2008, 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.

As
part of its plan to improve the efficiency of its sales channels, effective
April 1, 2010, Rimage discontinued its distributor relationships with
distributors in the United States, Germany, and the United Kingdom, and now
sells products in these regions to end-user customers primarily through
value-added resellers or other strategic partners, and also directly to select
accounts through its own sales force.

Results of
Operations

Revenues. Total revenues were $88.7 million for 2010, reflecting a 7% increase
from total revenues of $83.2 million in 2009, which declined 9% from total
revenues of $91.4 million in 2008.

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Table of Contents

The
$5.5 million growth in total revenues from 2009 to 2010 reflects a $6.5 million
or 9% increase in product revenues, partially offset by a $1.0 million or 9%
decrease in service revenues. The increase in product revenues resulted from a
$7.9 million increase in equipment sales, partially offset by a $1.4 million
reduction in sales of consumable products and parts. The overall increase in
equipment sales in the current year was primarily impacted by $9.3 million in
sales of Professional product line equipment under a multi-system sales
agreement with a retail customer, as well as increased sales to federal
government agencies, driven by sales of the Companys new surveillance
solutions. These gains were partially offset by decreases in equipment sales in
the Companys European markets, impacted unfavorably by foreign currency
fluctuations and reduced sales to medical equipment manufacturers and channel partners. The decrease in
consumable product sales included a $0.6 million decline in the volume of
ribbon and ink cartridge sales and a $0.5 million reduction in media and media
kit sales. Reduced utilization by end-user customers of the Companys installed
base of digital publishing systems in its U.S. and European markets impacted
the reduction in sales of consumable products. The decline in service-related
revenues in the current year was primarily impacted by the timing and amount of
maintenance contract renewals resulting in the recognition of a reduced level
of maintenance contract revenues. Recurring revenues, consisting of
consumables, parts, maintenance contracts and service, comprised 54% of total
revenues for the year ended December 31, 2010, compared to 60% in the
prior-year period. Sales of Producer and Professional product line equipment
comprised 17% and 25% of total revenues in 2010, respectively, compared to 21%
and 12%, respectively, in the prior-year period. The higher volume and concentration
of Professional product line equipment sales in 2010 resulted from strong sales
of Rimages Professional Series 5400N and 3400 publishing systems, introduced
by the Company in March 2010, including sales of the 5400N under the
multi-system sales agreement with a retail customer described above. Remaining
revenues in each year were generated by sales of Desktop product line
equipment, representing 4% and 6% of revenues in 2010 and 2009, respectively.

The $8.2 million
reduction in total revenues from 2008 to 2009 reflects a $9.6 million or 12%
decrease in product revenues, partially offset by an increase in service
revenues of $1.4 million or 17%. The decrease in product revenues resulted from
a $6.5 million reduction in sales of consumable products and a $3.1 million
reduction in sales of equipment. The decrease in consumable product sales
consisted of a $3.7 million decline in the volume of ribbon and ink cartridge
sales and a $2.8 million reduction in media and media kit sales. The decline in
sales of consumable products from 2008 to 2009 was primarily attributable to a
reduction in sales in the retail market segment of $4.0 million, impacted by
the economy-related reductions in consumer demand and reduced utilization by
end-user customers. Also contributing to the decrease in sales of consumable
products from 2008 to 2009 was a $1.1 million reduction in sales to the
Companys U.S. channel partners. The overall decline in equipment sales from
2008 to 2009 was primarily impacted by a reduced volume of sales in the
Companys European market of $3.6 million, spurred by lower sales of Producer
product line equipment and the impact of fluctuations in the Euro relative to
the U.S. dollar. The reduction in equipment sales from 2008 to 2009 was also
impacted by a shift in the distribution of sales to lower-end Producer and
Professional product line equipment, which have lower average selling prices
than higher-end Producer product line equipment. The partially offsetting
growth in service revenues of $1.4 million was impacted by increased coverage
of the Companys installed base of systems with maintenance contracts, driven
primarily by new and renewed maintenance contracts in the retail market
segment. Recurring revenues comprised 60% of total revenues for the year ended
December 31, 2009, compared to 61% in the prior-year period. Sales of Producer
and Professional product line equipment comprised 21% and 12%, respectively, of
total revenues in 2009, compared to 22% and 11%, respectively, in 2008.
Remaining revenues in each year were generated by sales of Desktop product line
equipment, representing 6% of revenues in 2009 and 2008.

International sales
decreased 8% in 2010 from 2009 and comprised 35% of total sales, compared to
41% in 2009 and 42% in 2008. The decline in international sales in the current
year was driven by a 13% reduction in sales in the Companys European market,
partially offset by sales growth in the Companys Asian markets of 11%. The
current-year reduction in sales in the Companys European market was the result
of a general decline in product sales and the impact of foreign currency
fluctuations, which reduced European sales by approximately 5% in 2010. The
European market, however, continued to generate the majority of international
sales. In the aggregate, currency fluctuations affecting the Companys European
and Japanese operations decreased consolidated revenues by 1.1% in 2010
relative to 2009 and by 1.4% in 2009 relative to 2008.

Future revenues will be
dependent upon many factors, including the effectiveness of changes that
occurred effective April 1, 2010 to improve the efficiency of the Companys
sales channels, the success of the Companys deployment of a complete digital
publishing solution for medical imaging in hospitals in China and the rate of
adoption of other new solutions-based products introduced by the Company. Other
factors that will influence future revenues include the Companys ability to
successfully commercialize its virtual publishing solution currently under
development, the timing of other new product introductions, the rate of
adoption of new applications for the Companys products in its targeted
markets, the performance of the Companys channel partners, the timing of
customer orders and related product deliveries, the impact of changes in
economic conditions and the impact of foreign currency exchange rate
fluctuations.

Gross
Profit. Gross profit as a percentage of total revenues was
49.0% for the year ended December 31, 2010, compared to 48.5% and 43.4% for the
years ended December 31, 2009, and 2008, respectively.

Gross profit as a
percentage of total revenues in the current year benefitted from increased
selling prices for consumables and certain equipment sales in the Companys
U.S. and major European channel markets, reflecting the impact of removing
distributors from these markets effective April 1, 2010. Margins in the current
year were also favorably impacted by a higher concentration of Producer and
Professional Series product line equipment sales, which generally carry higher
gross margins than Desktop product line equipment or recurring revenues.
Additionally, margins in the current year were favorably impacted by sales of
the Companys new surveillance solutions which contain enhanced functionality
and resulting higher margins.

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Table of Contents

Partially offsetting the
favorable impact of the above on gross profit as a percentage of revenue was
the impact of foreign currency fluctuations which reduced reported revenues for
the Companys European operations to a greater degree than associated costs of
revenue. Additionally, the following factors combined to create an aggregate
reduction in average selling prices in the current year for Producer and
Professional Series equipment, producing an unfavorable impact on equipment
margins: (1) an increased volume and concentration of sales in the U.S. retail
market segment, which generally carry lower selling prices than other market
segments, (2) an increased volume and concentration of Professional product
line equipment sales, which generally have lower margins relative to Producer
product line equipment sales, (3) and a price reduction on sales of 8100N
systems, the high-end of the Producer product line. Further, margins for the
current year were unfavorably impacted by a reduction in service-related
revenues, driven by the timing and amount of maintenance contract renewals,
while associated service support costs declined only slightly, sustained by
continued investments to strengthen the service support infrastructure of the Companys
international subsidiaries.

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

Future gross profit
margins will continue to be affected by many factors, including the impact of
recently implemented changes in the Companys sales distribution model
described above, product mix, the timing of new product introductions, the
timing of customer orders and related product deliveries, changes in material
costs, manufacturing volume, the growth rate of service related revenues
relative to associated service support costs and foreign currency exchange rate
fluctuations.

Operating
Expenses. Research and development expenses were $6.5
million, $7.1 million and $5.3 million for the years ended December 31, 2010,
2009 and 2008, respectively, representing 7.3%, 8.6% and 5.7% of revenues,
respectively.

Research and development
expenses in 2010 decreased 9% from 2009, stemming from a lower level of
expenses incurred to support new product development projects. This decrease
was impacted largely by $2.3 million in expenses incurred in 2009 as part of a
development arrangement with a third party supplier to develop the 5400N and
3400 Professional Series products launched by the Company in the first quarter
of 2010. Partially offsetting this decline were increased compensation costs of
$1.1 million associated with late 2009 and 2010 personnel additions and $0.6
million of expenses incurred to begin development of a new virtual publishing
solution and to develop other new products.

The 36% increase in
research and development expense from 2008 to 2009 was primarily due to $2.3
million in expenses incurred in 2009 as part of the development arrangement
described above. Partially offsetting this increase was the impact in 2009 of a
7% reduction in average headcount.

Rimage anticipates its
expenditures in research and development in 2011 will increase from the levels
experienced during 2010 to support continued development of its new online
virtual publishing solution as well as development and improvement of other
products.

Selling, general and
administrative expenses for the years ended December 31, 2010, 2009 and 2008
were $25.4 million, $21.9 million and $22.7 million, respectively, representing
28.7%, 26.4% and 24.8% of revenues, respectively.

The rise in expenses in
the current year primarily reflects the impact of investments made to
strengthen the Companys core business and implement its growth strategy,
including increased compensation-related costs of $2.4 million from personnel
additions, stock-based compensation and new hire recruiting costs; increased
expenses for travel and promotional programs approximating $0.6 million and
increased legal expenses of $0.3 million associated with new business
initiatives, including the formation of the Companys majority-owned joint
venture in China in the third quarter. Additionally, the Company incurred
increased expenses in 2010 approximating $0.4 million to further develop its enterprise
resource planning system, including implementation of an enhanced sales order
processing system to support the changes made effective April 1, 2010 in its
sales distribution model and development of expanded reporting capabilities.
Partially offsetting the increases in expenses described above was a reduced
level of one-time employee separation costs in 2010 of $0.2 million, primarily
reflecting the impact of the retirement of an executive officer in late 2009
and the departure of another executive officer in third quarter 2010.
Additionally, foreign currency fluctuations primarily impacting the Companys
European operations reduced selling, general and administrative expenses by
$0.2 million in 2010 relative to 2009.

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

Other
Income, Net.The Company recognized interest income on cash
and marketable securities of $0.5 million, $1.5 million and $2.8 million in
2010, 2009 and 2008, respectively. The reduction in interest income in 2010
relative to 2009 was the result of a decline in average effective yields
stemming from the Companys change to a more conservative investment strategy,
as well as an environment of generally lower interest rates. Partially
offsetting the impact of the reduction in interest rates was an increase in average
cash equivalent and marketable securities balances of $15.7 million. Other
income in 2009 included the Companys recognition of a gain on sale of
marketable securities of $0.3 million as a result of the sale of approximately
$33 million of municipal securities and reinvestment in U.S. treasury
securities. The reduction in interest income in 2009 relative to 2008 was the
result of a decline of approximately one and a half percentage points in the
effective yield on the Companys investment portfolio, partially offset by
higher average cash and marketable securities balances of $9.4 million. 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,
2010, 2009 and 2008, income tax expense amounted to $4.5 million, $4.6 million
and $5.0 million, respectively, representing 37.2%, 35.2% and 34.8% of income
before income taxes, respectively. The year-over-year increase in the effective
tax rate was primarily impacted by a significantly reduced amount of tax-exempt
interest income comprising a smaller percentage of pre-tax income relative to
the prior year. Partially offsetting the unfavorable effect of lower tax-exempt
interest income in 2010 was an increased benefit from the Section 199
deduction, impacted by an increase in the rate applied to excludable production
activities income from 6% to 9% effective January 1, 2010, and a decline in state
income tax expense due primarily to a reduction in apportionment factors in
certain states. In addition to the impact of a reduced amount of tax-exempt
interest income, the rise in the effective tax rate in 2009 relative to 2008
was affected by higher state income taxes resulting primarily from changes in
certain state tax apportionment factors. Partially offsetting the unfavorable
effect of the above was the impact in 2009 of the implementation of
recommendations of a transfer price study which reduced U.S. pre-tax income as
a result of a re-allocation to the U.S. parent company of expenses incurred in
the Companys Japanese subsidiary to properly reflect expenses for each legal
entity.

Net
Income / Net Income Per Share. Net income for the years ended
December 31, 2010, 2009 and 2008 amounted to $7.7 million, $8.5 million and
$9.4 million, representing 8.7%, 10.2% and 10.3% of revenues, respectively.
Related net income per diluted share amounts were $0.80 in 2010, $0.89 in 2009
and $0.97 in 2008.

Liquidity and Capital Resources

The Company expects it
will be able to maintain current operations and anticipated capital expenditure
requirements for the foreseeable future through its internally generated funds
and cash reserves. The Companys former credit agreement, which allowed for
advances under an unsecured revolving loan up to a maximum of $10 million,
expired in accordance with its terms effective July 1, 2010 and was not
renewed.

At December 31, 2010, the
Company had working capital of $120.0 million, an increase of $17.0 million
from working capital reported at December 31, 2009. The increase was primarily
the result of a non-cash change in the classification of $9.0 million of
marketable securities from non-current as of December 31, 2009 to current as of
December 31, 2010, net income adjusted for non-cash items of $11.5 million, a
contribution of $0.6 million from the noncontrolling interest in the Companys
joint venture in China and proceeds from stock option exercises of $0.9
million, partially offset by the use of $4.2 million of cash to purchase
property and equipment and $1.8 million to repurchase shares of the Companys
common stock. 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, 2010.

On October 17, 2007, the
Companys Board of Directors authorized the repurchase of up to 500,000 shares
of its common stock. In February 2008, the Companys Board of Directors
increased the share repurchase authorization by an additional 500,000 shares,
bringing total shares authorized for repurchase to 1,000,000. Shares may be
purchased at prevailing market prices in the open market or in private
transactions, subject to market conditions, share price, trading volume and
other factors. The repurchase program may be discontinued at any time. The
Company will finance the purchase of the shares using cash on hand. The Company
did not repurchase any shares of its common stock during 2009. Effective
October 2010, the Companys Board approved the continuation of common stock
repurchases under the current authorization. During the fourth quarter 2010,
the Company acquired 117,377 shares of its common stock at an aggregate cost of
$1,826,000. As of December 31, 2010, 305,540 shares remained available for
repurchase under the current authorization. The Company also intends on
utilizing its cash primarily for its continued organic growth and potential
future strategic initiatives or alliances.

20

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Table of Contents

Net cash provided by
operating activities totaled $11.6 million, $14.2 million and $12.2 million for
the years ended December 31, 2010, 2009 and 2008, respectively. The $2.5
million decrease in cash provided by operating activities in 2010 relative to
2009 resulted from changes in operating
assets and liabilities producing a $3.6 million smaller increase in cash,
partially offset by a $1.1 million increase in net income adjusted for non-cash
and non-operating items. Primarily contributing to the change in operating
assets and liabilities were unfavorable changes of $1.9 million in inventories,
$2.0 million in deferred income, $1.0 million in prepaid expenses and other
current assets and $1.0 million in the aggregate amount of trade accounts
payable, accrued compensation, other accrued expenses and income taxes payable,
partially offset by a $2.3 million smaller increase in receivables. The change
in inventories resulted from a $0.4 million increase in the current year,
compared to a $1.5 million decline in the prior year, impacted by a change in
the Companys sales model effective April 1, 2010 under which it sells products
to end user customers through value-added resellers instead of through
distributors in major markets, requiring increased inventory levels. The unfavorable
change in deferred income stemmed from a $0.3 million decrease in the current
year, compared to a $1.7 million increase in the prior year, resulting from the
amount and timing of maintenance contract renewals. The unfavorable change in
the aggregate amount of trade accounts payable, accrued compensation, other
accrued expenses and income taxes payable resulted primarily from increased
payments in the current year for annual incentive bonuses to employees for
calendar year 2009 performance, expenditures for property, plant and equipment
and the timing of estimated tax payments, partially offset by a higher level of
inventory purchases remaining in accounts payable at the end of 2010. The
smaller increase in receivables in the current year was primarily impacted by a
smaller increase in sales in the last two months of 2010 from the last two
months in 2009 compared to the change in the same prior-year periods.

Investing activities
provided net increases in cash of $24.1 million, $42.2 million and $2.7 million
for the years ended December 31, 2010, 2009 and 2008, respectively. Cash
provided by investing activities for each year primarily reflects maturities
and sales of marketable securities, net of purchases of marketable securities.
Maturities and sales of marketable securities, net of related purchases,
generated a net increase in cash and cash equivalents of $28.6 million, $42.6
million and $7.0 million in 2010, 2009 and 2008, respectively. Investing
activities in 2010 also included the Companys cash outlay of $0.3 million for
an investment in a convertible note receivable with a privately-held Israeli
company that develops video synopsis software for surveillance applications.
Investing activities also included purchases of property and equipment of $4.2
million in 2010, $0.4 million in 2009, and $4.4 million in 2008. Capital
expenditures in 2010 included $2.4 million of production tooling capitalized by
the Company in late 2009 associated with a new product line launched during the
first quarter of 2010. Remaining capital expenditures during 2010 consisted
primarily of costs to support the Companys enhancement of its enterprise
resource management system and office equipment. Capital expenditures in 2009
included purchases of office equipment, manufacturing tooling and information
technology related infrastructure. Purchases in 2008 consisted primarily of the
purchase of the Companys U.S. corporate headquarters and manufacturing
facility ($3.9 million), previously leased by the Company, and purchases of
manufacturing tooling and office equipment. In 2011, the Company expects
capital expenditure related investments to primarily support the Companys
information technology infrastructure and office equipment requirements.
Capital expenditures in 2011 are expected to be less than $1.0 million.

Financing activities used
net cash of $0.3 million in 2010, generated net cash of $1.3 million in 2009
and used net cash of $7.4 million in 2008. The net use of cash in financing
activities in 2010 and 2008 was primarily attributable to the Companys
repurchase of shares of its common stock, requiring $1.8 million of cash to
purchase 117,377 shares in 2010 and $9.6 million to purchase 577,083 shares in
2008. Financing activities in each year included proceeds from employee stock
plans of $0.9 million, $1.2 million and $1.6 million, respectively. A $0.6
million equity investment from the noncontrolling interest in the Companys
majority-owned joint venture in China positively impacted financing activities
in 2010. Additionally, financing activities in each year include excess tax
benefits recognized as an addition to the Additional Paid-in Capital (APIC)
pool of $0.1 million in both 2010 and 2009 and $0.7 million in 2008. Such
amounts are required to be reported as an addition to financing activities and
a reduction in operating activities in the Consolidated Statements of Cash
Flows.

A summary of Rimages
contractual obligations for minimum lease payments under non-cancelable
operating or capital leases and income tax liabilities under Accounting
Standards Codification (ASC) Topic 740 at December 31, 2010 is as follows (in
thousands):

|                                          |  |                         |       |      |   |      |  |      |     |      |   |      |  |   |     |  |   |    | 
|----------------------------------------- |  | ----------------------- | ----- | ---- | - | ---- |  | ---- | --- | ---- | - | ---- |  | - | --- |  | - | -- | 
|                                          |  | Payments
 due by period |      
|Contractual Obligations                   |  | Total                   |       | 2011 |   | 2012 |  | 2013 |     | 2014 |   | 2015 | 
|Operating leases                          |  | $                       | 1,621 |      | $ | 730  |  | $    | 437 |      | $ | 265  |  | $ | 146 |  | $ | 43 | 
|Capital leases
 (1)                       |  |                         | 88    |      |   | 23   |  |      | 23  |      |   | 23   |  |   | 19  |  |   |   | 
|Income tax
 liabilities under ASC 740 (2) |  |                         |      |      |   |     |  |      |    |      |   |     |  |   |    |  |   |   | 
|                                          |  |                         |       |      |   |      |  |      |     |      |   |      |  |   |     |  |   |    | 
|Total
 contractual cash obligations       |  | $                       | 1,709 |      | $ | 753  |  | $    | 460 |      | $ | 288  |  | $ | 165 |  | $ | 43 | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Amounts include
 principal and interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (2) | The Company does not currently
 expect any income tax liabilities accrued under ASC 740 as of December 31,
 2010 to be paid to the applicable tax authorities in 2011. The full balance
 of unrecognized tax benefits under ASC 740 of $360,000 at December 31, 2010
 has been excluded from the above table as the period of payment or reversal
 cannot be reasonably estimated. This amount is before reduction for deferred
 federal benefits of uncertain tax positions and also excludes potential
 interest and penalties.

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Critical Accounting Policies

Management utilizes its
technical knowledge, cumulative business experience, judgment and other factors
in the selection and application of the Companys accounting policies. The
accounting policies described below are considered by management to be the most
critical to the presentation of the consolidated financial statements because
they require the most difficult, subjective and complex judgments. In applying
the critical accounting policies described below, management reassesses its
estimates each reporting period based on available information. Changes in such
estimates did not have a significant impact on earnings for the year ended
December 31, 2010.

Revenue Recognition. The Company earns
revenues through the sale of tangible products, consisting primarily of
equipment and consumables. As part of its product offering, the Company also
sells optional services, consisting primarily of separately-priced maintenance
contracts and installation services. When sold as part of a multiple-element
arrangement, each of these deliverables qualifies as a separate unit of
accounting.

Revenue for product sales
(including equipment and consumables), which do not include any requirement for
installation or training, is recognized on shipment, at which point the following
criteria have been satisfied:

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

Revenue associated with
separately-priced maintenance agreements and installation services is deferred
until earned. 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 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.

In an arrangement
including equipment, separately-priced maintenance and installation services,
the amount deferred and recognized as revenue over the contract period for a
separately-priced maintenance contract is the stated amount of the contract.
The remaining consideration is allocated to the equipment and the installation
service using the relative selling price method. The relative selling price is
determined based on the Companys stand-alone selling prices, or in the absence
of stand-alone selling prices, estimated selling price for the equipment and
installation 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 value-added resellers
to restrict the volume of returned products.

Allowance for Doubtful Accounts. The Company records an allowance for
doubtful accounts for potentially uncollectible receivables. The allowance is
established based on a specific assessment of accounts with known collection
exposure, based upon a review of the age of the receivable, the customers
payment history, the customers financial condition and industry and general
economic conditions, as well as a general assessment of collection exposure in
the remaining receivable population based upon the Companys bad debt history.
Actual bad debt exposure could differ significantly from managements estimates
if economic conditions worsened for the Companys customers.

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

Income Taxes. The Company is required
to estimate income taxes in each of the jurisdictions in which it operates.
This process involves estimating actual current tax expense and assessing
temporary differences resulting from differing treatment of items for book and
tax purposes. These temporary differences result in deferred tax assets and
liabilities, which are included in the consolidated balance sheets. Management
records a valuation allowance to reduce its deferred tax assets to the amount
that is more likely than not to be realized. Increases in the valuation
allowance result in the recognition of additional income tax expense. Income
tax expense could be materially different from actual results because of
changes in managements expectations regarding future taxable income, the
relationship between book and taxable income and tax planning strategies
employed by the Company. As of December 31, 2010, the Company carried a
valuation allowance totaling $0.8 million to reduce the full tax benefit of
loss carryforwards for a subsidiary in Japan established in May 2005 and a majority-owned
joint venture established in August 2010.

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Management recognizes a
tax accrual for estimated exposures associated with uncertain tax positions and
adjusts this accrual in light of changing facts and circumstances. However, due
to the complexity of some of these uncertainties, the ultimate settlement may
result in payments that are significantly different from managements current
estimate of tax liabilities, resulting in the recognition of additional charges
or benefits to income tax expense. As of December 31, 2010, the Company
recognized tax liabilities of $25,000, before reduction for the federal benefit
for state income tax related amounts, for new uncertainties related to
current-year income tax positions and reversed gross tax liabilities, exclusive
of interest and penalties, amounting to $29,000 for prior-year tax positions.

Stock-Based Compensation.The Company
accounts for stock-based awards using the modified prospective method. Under
this method, the Company recognizes compensation expense on a straight-line
basis over the vesting period for all stock-based awards granted on or after
January 1, 2006, and for previously granted awards not yet vested as of January
1, 2006. The Company recognized stock-based compensation costs of approximately
$1.9 million, $1.5 million and $1.1 million for the years ended December 31,
2010, 2009 and 2008, respectively.

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

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

Impairment of Long-lived Assets.Long-lived
assets at December 31, 2010 consisted of property and equipment, including
capitalized internally developed software costs, and software source code owned
by the Companys majority-owned joint venture established in China in August
2010. The Company reviews the carrying amount of its long-lived assets when
events or changes in circumstances such as market value, asset utilization,
physical change, legal factors or other matters indicate that the carrying
amount of the assets may not be recoverable. When this review indicates the
carrying amount of an asset or asset group exceeds the sum of the future
undiscounted cash flows expected to be generated by the assets, the Company
recognizes an asset impairment charge against operations for the amount by
which the carrying amount of the impaired asset exceeds its fair value.
Considerable judgment is required in the evaluation of whether certain events
or circumstances lead to an indication of impairment, and in the assumptions
used in determining the amount and period over which future revenues are
expected to be earned, related costs, terminal values and discount rates. No
impairment charges were recognized by the Company during the year ended
December 31, 2010.

New Accounting Pronouncements

In
January 2010, the FASB issued Accounting Standards Update (ASU) No.
2010-06, Fair Value Measurements and Disclosures  Improving Disclosures about
Fair Value Measurements, which requires new disclosures about recurring and
nonrecurring fair-value measurements including significant transfers into and
out of Level 1 and Level 2 of the fair value hierarchy. The ASU also requires
additional information in the roll-forward of Level 3 assets and liabilities
including the presentation of purchases, sales, issuances and settlements on a
gross basis. Further clarification for existing disclosure requirements
provides for the disaggregation of assets and liabilities presented, and the
enhancement of disclosures around inputs and valuation techniques. This ASU
impacts disclosures only. The Company adopted the disclosure provisions of this
ASU effective January 1, 2010, with the exception of the additional required
information in the roll-forward of Level 3 assets and liabilities, which will
be effective for the Company January 1, 2011. The Companys adoption of the
requirement to provide additional information in the rollforward of Level 3
assets and liabilities is not expected to have a material impact on the
Companys consolidated financial statements and related disclosures.

Available Information

Rimage maintains a
website at www.rimage.com. Its annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available on
its website, as soon as reasonably practicable after these documents are filed
with the SEC. To obtain copies of these reports, go to www.rimage.com and click
on Investors, 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.

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Table of Contents

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, Japanese Yen and
Chinese Yuan to the U.S. dollar as the financial position and operating results
of the Companys German subsidiary, Rimage Europe GmbH, its Japanese
subsidiary, Rimage Japan Co., Ltd. and its majority-owned joint venture in
China, Rimage Information Technology (Shanghai) Co., Ltd., 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 |       |      | 
|                                                  |  | 2011                                  |       | 2012 |  | 2013 |  | 2014 |   | There-
 after |  | Total |  | Fair
 Value |  
|                                                  |  | (US$ Equivalent in Thousands)         |       |      |  |     
|Anticipated Transactions and
 Related Derivatives |  |                                       |       |      |  |      |  |      |   |               |  |       |  |             |   |  |   |       |  |   |    |  
|                                                  |  |                                       |       |      |  |      |  |      |   |               |  |       |  |             |   |  |   |       |  |   |    |  
|Forward Exchange Agreements (Receive $US/Pay )   |  |                                       |       |      |  |      |  |      |   |               |  |       |  |             |   |  |   |       |  |   |    |  
|Contract Amount                                   |  | $                                     | 695   |      |  |     |  |      |  |               |  |      |  |             |  |  | $ | 695   |  | $ | (2 | )
|Average Contractual Exchange Rate                 |  |                                       | 1.318 |      |  |     |  |      |  |               |  |      |  |             |  |  |   | 1.318 |  |   |    |  

A hypothetical 10%
appreciation or depreciation in the value of the U.S. dollar relative to the
Euro as of December 31, 2010, assuming all other variables are held constant,
would result in a larger gain or loss in fair value of approximately $70,000,
respectively, than that reflected above as of December 31, 2010.

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Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

Financial Statements

|                                                                                                                                |  |                                                                        | 
|------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------- | 
|                                                                                                                                |  | Page in Annual
 Report on Form 10-K
 For Year Ended
 December 31, 2010
|                                                                                                                                |  |                                                                       
|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, 2010 and 2009                                                                   |  | 29                                                                     | 
|                                                                                                                                |  |                                                                        | 
|Consolidated Statements of Income for the
 years ended December 31, 2010, 2009 and 2008                                         |  | 30                                                                     | 
|                                                                                                                                |  |                                                                        | 
|Consolidated Statements of Stockholders
 Equity and Comprehensive Income for the years ended December 31, 2010, 2009
 and 2008 |  | 31                                                                     | 
|                                                                                                                                |  |                                                                        | 
|Consolidated Statements of Cash Flows for
 the years ended December 31, 2010, 2009 and 2008                                     |  | 32                                                                     | 
|                                                                                                                                |  |                                                                        | 
|Notes to Consolidated Financial Statements                                                                                      |  | 33
 - 50                                                               | 

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Table of Contents

Managements
Report on Internal Control over Financial Reporting

|                                       
|---------------------------------------
|The Board of Directors and Stockholders
|Rimage Corporation:                    

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

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

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

Under the supervision of our chief executive officer and our chief
financial officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal Control  Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our assessment and those criteria, management believes that the
Company maintained effective internal control over financial reporting as of
December 31, 2010. 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.

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Table of Contents

Report of Independent
Registered Public Accounting Firm

|                                        
|----------------------------------------
|The Board of Directors and
 Stockholders
|Rimage Corporation:                     

We
have audited the accompanying consolidated balance sheets of Rimage Corporation and subsidiaries as of
December 31, 2010 and 2009 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, 2010. 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,
2010, 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, 2010 and 2009, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2010, in conformity with U.S. generally accepted accounting principles.
Also in our opinion, the related financial statement schedule referred to above,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Rimage Corporations internal control over
financial reporting as of December 31, 2010, 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,
2011, expressed an unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.

/s/ KPMG LLP

|                      
|----------------------
|Minneapolis, Minnesota
|March 14, 2011        

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Table of Contents

Report of Independent Registered Public
Accounting Firm

|                                        
|----------------------------------------
|The
 Board of Directors and Stockholders
|Rimage
 Corporation:                    

We
have audited Rimage Corporation and subsidiaries (the company) internal
control over financial reporting as of December 31, 2010, based on criteria
established inInternal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.

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

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

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

In
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010, based
on criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).

We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Rimage Corporation as of December 31, 2010 and 2009, 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, 2010, and our report
dated March 14, 2011, expressed an unqualified opinion on those consolidated
financial statements.

/s/ KPMG LLP

|                       
|-----------------------
|Minneapolis,
 Minnesota
|March
 14, 2011        

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Table of Contents

RIMAGE CORPORATION AND
SUBSIDIARIESConsolidated Balance Sheets 
December 31, 2010 and 2009(In
thousands, except share data)

|                                                                                                                          |  |                    |         |                    |   |         | 
|------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ------------------ | - | ------- | 
|Assets                                                                                                                    |  | December 31,
 2010 |         | December 31,
 2009 |  
|                                                                                                                          |  |                    |         |                    |   |         | 
|Current assets:                                                                                                           |  |                    |         |                    |   |         | 
|Cash and cash equivalents                                                                                                 |  | $                  | 107,982 |                    | $ | 72,507  | 
|Marketable securities                                                                                                     |  |                    | 8,790   |                    |   | 28,581  | 
|Receivables, net of allowance for doubtful accounts
 and sales returns of $286 and $327, respectively                     |  |                    | 13,764  |                    |   | 13,732  | 
|Inventories                                                                                                               |  |                    | 4,502   |                    |   | 4,123   | 
|Prepaid expenses and other current assets                                                                                 |  |                    | 1,069   |                    |   | 1,271   | 
|Deferred income taxes - current                                                                                           |  |                    | 425     |                    |   | 546     | 
|Total current assets                                                                                                      |  |                    | 136,532 |                    |   | 120,760 | 
|                                                                                                                          |  |                    |         |                    |   |         | 
|Marketable securities - non-current                                                                                       |  |                    |        |                    |   | 9,037   | 
|Property and equipment, net                                                                                               |  |                    | 7,528   |                    |   | 7,855   | 
|Deferred income taxes - non-current                                                                                       |  |                    | 2,509   |                    |   | 2,630   | 
|Other assets - non-current                                                                                                |  |                    | 1,475   |                    |   |        | 
|Total assets                                                                                                              |  | $                  | 148,044 |                    | $ | 140,282 | 
|                                                                                                                          |  |                    |         |                    |   |         | 
|Liabilities
 and Stockholders Equity                                                                                     |  |                    |         |                    |   |         | 
|Current liabilities:                                                                                                      |  |                    |         |                    |   |         | 
|Trade accounts payable                                                                                                    |  | $                  | 6,045   |                    | $ | 6,898   | 
|Accrued compensation                                                                                                      |  |                    | 3,821   |                    |   | 3,834   | 
|Other accrued expenses                                                                                                    |  |                    | 663     |                    |   | 911     | 
|Income taxes payable                                                                                                      |  |                    | 139     |                    |   | 222     | 
|Deferred income and customer deposits                                                                                     |  |                    | 5,615   |                    |   | 5,706   | 
|Other current liabilities                                                                                                 |  |                    | 20      |                    |   | 18      | 
|Total current liabilities                                                                                                 |  |                    | 16,303  |                    |   | 17,589  | 
|                                                                                                                          |  |                    |         |                    |   |         | 
|Long-term liabilities:                                                                                                    |  |                    |         |                    |   |         | 
|Deferred income and customer deposits - non-current                                                                       |  |                    | 2,225   |                    |   | 2,452   | 
|Income taxes payable - non-current                                                                                        |  |                    | 215     |                    |   | 213     | 
|Other non-current liabilities                                                                                             |  |                    | 664     |                    |   | 79      | 
|Total long-term liabilities                                                                                               |  |                    | 3,104   |                    |   | 2,744   | 
|Total liabilities                                                                                                         |  |                    | 19,407  |                    |   | 20,333  | 
|                                                                                                                          |  |                    |         |                    |   |         | 
|Commitments and contingencies (Notes 12 and 16)                                                                           |  |                    |        |                    |   |        | 
|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 9,479,272 and 9,471,885, respectively |  |                    | 95      |                    |   | 94      | 
|Additional paid-in capital                                                                                                |  |                    | 43,062  |                    |   | 40,296  | 
|Retained earnings                                                                                                         |  |                    | 84,657  |                    |   | 78,782  | 
|Accumulated other comprehensive income                                                                                    |  |                    | 317     |                    |   | 777     | 
|Total Rimage stockholders equity                                                                                         |  |                    | 128,131 |                    |   | 119,949 | 
|Noncontrolling interest                                                                                                   |  |                    | 506     |                    |   |        | 
|Total stockholders equity                                                                                                |  |                    | 128,637 |                    |   | 119,949 | 
|Total
 liabilities and stockholders equity                                                                               |  | $                  | 148,044 |                    | $ | 140,282 | 

See accompanying notes to
consolidated financial statements.

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Table of Contents

RIMAGE CORPORATION AND
SUBSIDIARIESConsolidated Statements of IncomeYears Ended December 31, 2010, 2009 and 2008(In
thousands, except per share data)

|                                                     |  |      |        |      |   |        |   |   |        |  
|---------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                     |  | 2010 |        | 2009 |   | 2008   |  
|Revenues:                                            |  |      |        |      |   |        |   |   |        |  
|Product                                              |  | $    | 78,746 |      | $ | 72,285 |   | $ | 81,848 |  
|Service                                              |  |      | 9,985  |      |   | 10,942 |   |   | 9,546  |  
|Total revenues                                       |  |      | 88,731 |      |   | 83,227 |   |   | 91,394 |  
|Cost of revenues:                                    |  |      |        |      |   |        |   |   |        |  
|Product                                              |  |      | 37,981 |      |   | 35,491 |   |   | 42,381 |  
|Service                                              |  |      | 7,240  |      |   | 7,403  |   |   | 9,350  |  
|Total cost of revenues                               |  |      | 45,221 |      |   | 42,894 |   |   | 51,731 |  
|Gross profit                                         |  |      | 43,510 |      |   | 40,333 |   |   | 39,663 |  
|                                                     |  |      |        |      |   |        |   |   |        |  
|Operating expenses:                                  |  |      |        |      |   |        |   |   |        |  
|Research and development                             |  |      | 6,506  |      |   | 7,143  |   |   | 5,251  |  
|Selling, general and administrative                  |  |      | 25,432 |      |   | 21,944 |   |   | 22,664 |  
|Total operating expenses                             |  |      | 31,938 |      |   | 29,087 |   |   | 27,915 |  
|Operating income                                     |  |      | 11,572 |      |   | 11,246 |   |   | 11,748 |  
|                                                     |  |      |        |      |   |        |   |   |        |  
|Other income (expense):                              |  |      |        |      |   |        |   |   |        |  
|Interest, net                                        |  |      | 507    |      |   | 1,542  |   |   | 2,819  |  
|Realized gain on sale of marketable securities       |  |      |       |      |   | 278    |   |   |       |  
|Gain (loss) on currency exchange                     |  |      | 14     |      |   | 48     |   |   | (105   | )
|Other, net                                           |  |      | 3      |      |   | (2     | ) |   | (3     | )
|Total other income, net                              |  |      | 524    |      |   | 1,866  |   |   | 2,711  |  
|                                                     |  |      |        |      |   |        |   |   |        |  
|Income before income taxes                           |  |      | 12,096 |      |   | 13,112 |   |   | 14,459 |  
|Income tax expense                                   |  |      | 4,494  |      |   | 4,617  |   |   | 5,028  |  
|Net income                                           |  |      | 7,602  |      |   | 8,495  |   |   | 9,431  |  
|Net loss attributable to the noncontrolling interest |  |      | 98     |      |   |       |   |   |       |  
|Net income attributable to Rimage                    |  | $    | 7,700  |      | $ | 8,495  |   | $ | 9,431  |  
|                                                     |  |      |        |      |   |        |   |   |        |  
|Net income per basic share                           |  | $    | 0.81   |      | $ | 0.91   |   | $ | 0.99   |  
|                                                     |  |      |        |      |   |        |   |   |        |  
|Net income per diluted share                         |  | $    | 0.80   |      | $ | 0.89   |   | $ | 0.97   |  
|                                                     |  |      |        |      |   |        |   |   |        |  
|Basic weighted average shares outstanding            |  |      | 9,524  |      |   | 9,374  |   |   | 9,559  |  
|                                                     |  |      |        |      |   |        |   |   |        |  
|Diluted weighted average shares outstanding          |  |      | 9,596  |      |   | 9,507  |   |   | 9,729  |  

See accompanying notes to consolidated
financial statements.

30

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Table of Contents

|                                                                         
|-------------------------------------------------------------------------
|RIMAGE
 CORPORATION AND SUBSIDIARIES                                     
|Consolidated Statements of Stockholders
 Equity and Comprehensive Income
|Years Ended December 31, 2010, 2009 and
 2008                            
|(In
 thousands)                                                          

|                                                                                    |  |              |       |                            |   |                    |   |                                                |        |                          |   |        |   |   |       |   |   |     |   |   |         |  
|----------------------------------------------------------------------------------- |  | ------------ | ----- | -------------------------- | - | ------------------ | - | ---------------------------------------------- | ------ | ------------------------ | - | ------ | - | - | ----- | - | - | --- | - | - | ------- | -
|                                                                                    |  | Common stock |       | Additional
 paid-incapital |   | Retained
 earnings |   | Accumulated
 othercomprehensive
 income (loss) |        | Noncontrolling
 Interest |   |        |  
|                                                                                    |  | Shares       |       | Amount                     |   |                    |   |                                                |        | Total                    |  
|                                                                                   
|Balance at December 31, 2007                                                        |  |              | 9,706 |                            | $ | 97                 |   | $                                              | 33,827 |                          | $ | 70,462 |   | $ | 675   |   |   |    |   | $ | 105,061 |  
|                                                                                    |  |              |       |                            |   |                    |   |                                                |        |                          |   |        |   |   |       |   |   |     |   |   |         |  
|Stock issued for employee stock plans                                               |  |              | 201   |                            |   | 2                  |   |                                                | 1,548  |                          |   |       |   |   |      |   |   |    |   |   | 1,550   |  
|Issuance of restricted stock                                                        |  |              | 5     |                            |   |                   |   |                                                |       |                          |   |       |   |   |      |   |   |    |   |   |        |  
|Net tax benefit relating to exercise of
 stock options                              |  |              |      |                            |   |                   |   |                                                | 982    |                          |   |       |   |   |      |   |   |    |   |   | 982     |  
|Stock-based compensation                                                            |  |              |      |                            |   |                   |   |                                                | 1,127  |                          |   |       |   |   |      |   |   |    |   |   | 1,127   |  
|Repurchase of common stock                                                          |  |              | (577  | )                          |   | (6                 | ) |                                                |       |                          |   | (9,606 | ) |   |      |   |   |    |   |   | (9,612  | )
|Comprehensive income:                                                               |  |              |       |                            |   |                    |   |                                                |        |                          |   |        |   |   |       |   |   |     |   |   |         |  
|Net income                                                                          |  |              |      |                            |   |                   |   |                                                |       |                          |   | 9,431  |   |   |      |   |   |    |   |   | 9,431   |  
|Translation adjustment                                                              |  |              |      |                            |   |                   |   |                                                |       |                          |   |       |   |   | 90    |   |   |    |   |   | 90      |  
|Change in unrealized gain from
 available-for-sale securities, net of taxes of $258 |  |              |      |                            |   |                   |   |                                                |       |                          |   |       |   |   | 419   |   |   |    |   |   | 419     |  
|Total comprehensive income                                                          |  |              |       |                            |   |                    |   |                                                |        |                          |   |        |   |   |       |   |   |     |   |   | 9,940   |  
|                                                                                    |  |              |       |                            |   |                    |   |                                                |        |                          |   |        |   |   |       |   |   |     |   |   |         |  
|Balance at December 31, 2008                                                        |  |              | 9,335 |                            | $ | 93                 |   | $                                              | 37,484 |                          | $ | 70,287 |   | $ | 1,184 |   | $ |    |   | $ | 109,048 |  
|                                                                                    |  |              |       |                            |   |                    |   |                                                |        |                          |   |        |   |   |       |   |   |     |   |   |         |  
|Stock issued for employee stock plans                                               |  |              | 117   |                            |   | 1                  |   |                                                | 1,224  |                          |   |       |   |   |      |   |   |    |   |   | 1,225   |  
|Issuance of restricted stock                                                        |  |              | 20    |                            |   |                   |   |                                                |       |                          |   |       |   |   |      |   |   |    |   |   |        |  
|Net tax benefit relating to exercise of
 stock options                              |  |              |      |                            |   |                   |   |                                                | 46     |                          |   |       |   |   |      |   |   |    |   |   | 46      |  
|Stock-based compensation                                                            |  |              |      |                            |   |                   |   |                                                | 1,542  |                          |   |       |   |   |      |   |   |    |   |   | 1,542   |  
|Comprehensive income:                                                               |  |              |       |                            |   |                    |   |                                                |        |                          |   |        |   |   |       |   |   |     |   |   |         |  
|Net income                                                                          |  |              |      |                            |   |                   |   |                                                |       |                          |   | 8,495  |   |   |      |   |   |    |   |   | 8,495   |  
|Translation adjustment                                                              |  |              |      |                            |   |                   |   |                                                |       |                          |   |       |   |   | (42   | ) |   |    |   |   | (42     | )
|Change in unrealized gain from
 available-for-sale securities, net of taxes of $225 |  |              |      |                            |   |                   |   |                                                |       |                          |   |       |   |   | (365  | ) |   |    |   |   | (365    | )
|Total comprehensive income                                                          |  |              |       |                            |   |                    |   |                                                |        |                          |   |        |   |   |       |   |   |     |   |   | 8,088   |  
|                                                                                    |  |              |       |                            |   |                    |   |                                                |        |                          |   |        |   |   |       |   |   |     |   |   |         |  
|Balance at December 31, 2009                                                        |  |              | 9,472 |                            | $ | 94                 |   | $                                              | 40,296 |                          | $ | 78,782 |   | $ | 777   |   | $ |    |   | $ | 119,949 |  
|                                                                                    |  |              |       |                            |   |                    |   |                                                |        |                          |   |        |   |   |       |   |   |     |   |   |         |  
|Stock issued for employee stock plans                                               |  |              | 105   |                            |   | 1                  |   |                                                | 944    |                          |   |       |   |   |      |   |   |    |   |   | 945     |  
|Issuance of restricted stock                                                        |  |              | 20    |                            |   |                   |   |                                                |       |                          |   |       |   |   |      |   |   |    |   |   |        |  
|Contribution from noncontrolling interest                                           |  |              |      |                            |   |                   |   |                                                |       |                          |   |       |   |   |      |   |   | 588 |   |   | 588     |  
|Net tax shortfall relating to exercise and
 expiration of stock options             |  |              |      |                            |   |                   |   |                                                | (114   | )                        |   |       |   |   |      |   |   |    |   |   | (114    | )
|Stock-based compensation                                                            |  |              |      |                            |   |                   |   |                                                | 1,936  |                          |   |       |   |   |      |   |   |    |   |   | 1,936   |  
|Repurchase of common stock                                                          |  |              | (117  | )                          |   |                   |   |                                                |       |                          |   | (1,825 | ) |   |      |   |   |    |   |   | (1,825  | )
|Comprehensive income:                                                               |  |              |       |                            |   |                    |   |                                                |        |                          |   |        |   |   |       |   |   |     |   |   |         |  
|Net income                                                                          |  |              |      |                            |   |                   |   |                                                |       |                          |   | 7,700  |   |   |      |   |   | (98 | ) |   | 7,602   |  
|Translation adjustment                                                              |  |              |      |                            |   |                   |   |                                                |       |                          |   |       |   |   | (294  | ) |   | 16  |   |   | (278    | )
|Change in unrealized gain from
 available-for-sale securities, net of taxes of $107 |  |              |      |                            |   |                   |   |                                                |       |                          |   |       |   |   | (166  | ) |   |    |   |   | (166    | )
|Total comprehensive income                                                          |  |              |       |                            |   |                    |   |                                                |        |                          |   |        |   |   |       |   |   |     |   |   | 7,158   |  
|Balance at December 31, 2010                                                        |  |              | 9,480 |                            | $ | 95                 |   | $                                              | 43,062 |                          | $ | 84,657 |   | $ | 317   |   | $ | 506 |   | $ | 128,637 |  

See accompanying notes to
consolidated financial statements.

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Table of Contents

RIMAGE
CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows 
Years ended December 31, 2010, 2009 and 2008(In thousands)

|                                                                                   |  |      |         |      |   |         |   |   |         |  
|---------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                   |  | 2010 |         | 2009 |   | 2008    |  
|Cash flows from operating
 activities:                                             |  |      |         |      |   |         |   |   |         |  
|Net income                                                                         |  | $    | 7,602   |      | $ | 8,495   |   | $ | 9,431   |  
|Adjustments to reconcile net income to net cash provided by operating
 activities: |  |      |         |      |   |         |   |   |         |  
|Depreciation and amortization                                                      |  |      | 2,108   |      |   | 1,250   |   |   | 1,372   |  
|Deferred income tax charge (benefit)                                               |  |      | (123    | )    |   | (573    | ) |   | 672     |  
|Gain on sale of marketable securities                                              |  |      |        |      |   | (278    | ) |   |        |  
|Loss on sale of property and equipment                                             |  |      | 9       |      |   | 40      |   |   | 7       |  
|Stock-based compensation                                                           |  |      | 1,937   |      |   | 1,542   |   |   | 1,128   |  
|Excess tax benefits from stock-based compensation                                  |  |      | (58     | )    |   | (64     | ) |   | (673    | )
|Changes in operating assets and liabilities:                                       |  |      |         |      |   |         |   |   |         |  
|Receivables                                                                        |  |      | (302    | )    |   | (2,572  | ) |   | 3,349   |  
|Inventories                                                                        |  |      | (429    | )    |   | 1,486   |   |   | 2,450   |  
|Prepaid expenses and other current assets                                          |  |      | (25     | )    |   | 930     |   |   | (617    | )
|Trade accounts payable                                                             |  |      | 1,213   |      |   | (194    | ) |   | (3,019  | )
|Income taxes payable                                                               |  |      | 276     |      |   | 623     |   |   | 238     |  
|Accrued compensation                                                               |  |      | 44      |      |   | 1,948   |   |   | (1,258  | )
|Other accrued expenses and other current liabilities                               |  |      | (286    | )    |   | (178    | ) |   | (125    | )
|Deferred income and customer deposits                                              |  |      | (325    | )    |   | 1,707   |   |   | (762    | )
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Net
 cash provided by operating activities                                         |  |      | 11,641  |      |   | 14,162  |   |   | 12,193  |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Cash flows from investing
 activities:                                             |  |      |         |      |   |         |   |   |         |  
|Purchases of marketable securities                                                 |  |      |        |      |   | (70,479 | ) |   | (77,714 | )
|Maturities of marketable securities                                                |  |      | 28,555  |      |   | 106,231 |   |   | 80,016  |  
|Sales of marketable securities                                                     |  |      |        |      |   | 6,835   |   |   | 4,663   |  
|Purchases of property and equipment                                                |  |      | (4,178  | )    |   | (424    | ) |   | (4,366  | )
|Issuance of note receivable                                                        |  |      | (290    | )    |   |        |   |   |        |  
|Other non-current items                                                            |  |      |        |      |   |        |   |   | 108     |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Net
 cash provided by investing activities                                         |  |      | 24,087  |      |   | 42,163  |   |   | 2,707   |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Cash flows from financing
 activities:                                             |  |      |         |      |   |         |   |   |         |  
|Contribution from noncontrolling interest                                          |  |      | 588     |      |   |        |   |   |        |  
|Principal payments on capital lease obligations                                    |  |      | (19     | )    |   | (35     | ) |   | (24     | )
|Repurchase of common stock                                                         |  |      | (1,826  | )    |   |        |   |   | (9,612  | )
|Excess tax benefits from stock-based compensation                                  |  |      | 58      |      |   | 64      |   |   | 673     |  
|Proceeds from employee stock plans                                                 |  |      | 944     |      |   | 1,225   |   |   | 1,550   |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Net
 cash provided by (used in) financing activities                               |  |      | (255    | )    |   | 1,254   |   |   | (7,413  | )
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Effect of exchange rate
 changes on cash                                           |  |      | 2       |      |   | 43      |   |   | (18     | )
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Net increase in cash and
 cash equivalents                                         |  |      | 35,475  |      |   | 57,622  |   |   | 7,469   |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Cash and cash equivalents,
 beginning of year                                      |  |      | 72,507  |      |   | 14,885  |   |   | 7,416   |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Cash and cash equivalents,
 end of year                                            |  | $    | 107,982 |      | $ | 72,507  |   | $ | 14,885  |  
|                                                                                   |  |      |         |      |   |         |   |   |         |  
|Supplemental disclosures of net cash paid during the period for:                   |  |      |         |      |   |         |   |   |         |  
|Income
 taxes                                                                      |  | $    | 4,346   |      | $ | 4,031   |   | $ | 4,872   |  
|Non-cash investing and financing activties:                                        |  |      |         |      |   |         |   |   |         |  
|Capital lease obligations                                                          |  | $    |        |      | $ | 98      |   | $ |        |  

See accompanying notes to
consolidated financial statements.

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|                                           
|-------------------------------------------
|RIMAGE CORPORATION AND SUBSIDIARIES        
|NOTES TO CONSOLIDATED
 FINANCIAL STATEMENTS

1)          Nature of Business and Summary of Significant Accounting
Policies

Basis of Presentation and Nature of Business

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

Rimage
develops, manufactures and markets workflow-integrated digital publishing
systems that are used by businesses to produce recordable CD, DVD and Blu-ray
discs with customized content and durable disc labeling.

Revenue Recognition

The
Company earns revenues through the sale of tangible products, consisting
primarily of equipment and consumables. As part of its product offering, the
Company also sells optional services, consisting primarily of separately-priced
maintenance contracts and installation services. When sold as part of a
multiple-element arrangement, each of these deliverables qualifies as a
separate unit of accounting.

Revenue
for product sales, which do not include any requirement for installation or
training, is recognized on shipment, at which point the following criteria have
been satisfied:

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

Revenue
associated with separately-priced maintenance agreements and installation services
is deferred until earned. 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 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.

In
an arrangement including equipment, separately-priced maintenance and
installation services, the amount deferred and recognized as revenue over the
contract period for a separately-priced maintenance contract is the stated
amount of the contract. The remaining consideration is allocated to the
equipment and the installation service using the relative selling price method.
The relative selling price is determined based on the Companys stand-alone
selling prices, or in the absence of stand-alone selling prices, estimated
selling price for the equipment and installation service.

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

Sales Returns

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

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Receivables and Allowance for Doubtful Accounts

The
Company records accounts receivable at face amount less an allowance for
doubtful accounts for potentially uncollectible receivables. The allowance is
established based on a specific assessment of accounts with known collection
exposure, based upon a review of the age of the receivable, the customers
payment history, the customers financial condition and industry and general
economic conditions, as well as a general assessment of collection exposure in
the remaining receivable population based upon bad debt history. The
uncollectible portion of receivables is charged against the allowance for
doubtful accounts when collection efforts have ceased. Recoveries of
receivables previously charged-off are recorded when received.

Cash Equivalents

All
short-term investments with original maturities of three months or less at date
of purchase are considered cash equivalents.

Marketable Securities

Marketable
securities generally consist of U.S. treasury bills, money market securities,
municipal securities, corporate securities, and U.S. government agency
securities with long-term credit ratings of AAA and short-term credit ratings
of A-1. Marketable securities are classified as short-term or long-term in the
accompanying consolidated balance sheet based on their effective maturity date.
All marketable securities have original maturities ranging from three to 36
months. Marketable securities are classified as available-for-sale.
Available-for-sale securities are recorded at fair value and any unrealized
holding gains and losses, net of the related tax effect, are excluded from
earnings and are reported as a separate component of accumulated other
comprehensive income (loss) until realized. See Note 4, Fair Value
Measurements, for a discussion of inputs used to measure the fair value of the
Companys available-for-sale securities. The Companys
investment portfolio at December 31, 2010 did not include any auction-rate
securities, high-yield sub-prime backed paper or other affected securities
which are subject to significant market value declines or liquidity issues.

Sources of Supply

Many
of the purchased components used to assemble the Companys products are
standard parts and are readily available. Other components and subassemblies
are manufactured to the Companys specifications. For the majority of the
Companys critical components, the Company has identified alternative
suppliers. The Company depends upon a single-source supplier for its Everest
printers and, beginning in March 2010, its Rimage Professional Series 5400N and
Rimage Professional Series 3400 systems, which are a significant source of the
Companys sales. For these products, it is more difficult to identify an
alternative supplier because of the proprietary information and technology
currently held by this supplier. Although the Company owns the rights to the
technology, if the Company were unable to effectively transition the technology
and proprietary information used by this supplier to alternative suppliers, the
design and manufacture of these products to the Companys specifications may be
significantly delayed, resulting in potential production delays and significant
expense. Further, if the Company obtains a new supplier for a component or
product or uses an alternative component in its product, the Company may need
to conduct additional testing of its products to ensure the product meets its
quality and performance standards. Any delays in delivery of its product to
end-users, resellers or distributors could be extended, and costs associated
with the change in product manufacturing could increase.

Inventories

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

Property and Equipment

Property
and equipment are stated at cost and depreciated on a straight-line basis over
estimated useful lives ranging from two to seven years for most assets, and 15
years for the Companys headquarters facility purchased in September 2008.
Leasehold improvements are amortized using the straight-line method over the
shorter of the propertys useful life or the term of the underlying lease.
Repairs and maintenance costs are charged to operations as incurred.

Impairment of Long-lived Assets

Long-lived
assets at December 31, 2010 and 2009 consisted of property and equipment,
including capitalized internally developed software costs, and also at December
31, 2010, software source code owned by the Companys majority-owned joint
venture established in China in August 2010. 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. No impairment charges were recognized by the Company
during the year ended December 31, 2010.

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Product Warranty

The
Companys non-consumable products are warranted to the end-user to ensure
confidence in design, workmanship and overall quality for a period of 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, 2010, 2009 and 2008 (in thousands):

|                  |  |                    |     |                      |   |                  |  |                          |      |                 |   |    |   |   |     | 
|----------------- |  | ------------------ | --- | -------------------- | - | ---------------- |  | ------------------------ | ---- | --------------- | - | -- | - | - | --- | 
|Years ended:      |  | Beginning
 Balance |     | Warranty
 Provisions |   | Warranty
 Claims |  | Foreign
 Exchange Impact |      | Ending
 Balance |  
|                 
|December 31, 2010 |  | $                  | 221 |                      | $ | 360              |  | $                        | (350 | )               | $ |   |   | $ | 231 | 
|                  |  |                    |     |                      |   |                  |  |                          |      |                 |   |    |   |   |     | 
|December 31, 2009 |  | $                  | 263 |                      | $ | 376              |  | $                        | (419 | )               | $ | 1  |   | $ | 221 | 
|                  |  |                    |     |                      |   |                  |  |                          |      |                 |   |    |   |   |     | 
|December 31, 2008 |  | $                  | 420 |                      | $ | 314              |  | $                        | (468 | )               | $ | (3 | ) | $ | 263 | 

Stock-Based Compensation

The
Company measures the cost of employee services received in exchange for the
award of equity instruments based on the fair value of the award at the date of
grant. The cost is recognized on a straight-line basis over the period during
which an employee is required to provide services in exchange for the entire
award. The benefits of tax deductions in excess of recognized compensation
expense is reported as a financing cash flow. The Company issues new shares of
its common stock to satisfy employee equity awards.

The
Company accounts for stock options using the modified prospective method. Under
this method, the Company recognizes compensation expense on a straight-line
basis over the vesting period for all stock-based awards granted on or after
January 1, 2006, and for previously granted awards not yet vested as of January
1, 2006. The Company recognizes stock-based compensation net of an estimated
forfeiture rate, resulting in the recognition of compensation cost for only
those shares expected to vest. Compensation cost is recognized for all awards
over the vesting period to the extent the employees or directors meet the
requisite service requirements, whether or not the award is ultimately
exercised. Conversely, when an employee or director does not meet the requisite
service requirements and forfeits the award prior to vesting, any compensation
expense previously recognized for the award is reversed. See Note 2 to the
Consolidated Financial Statements for additional information on stock-based
compensation.

Research and Development Costs

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

Income Taxes

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

Net Income Per Share

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

Foreign Currency Translation / Transactions

The functional currency for each of the Companys foreign subsidiaries
and majority-owned foreign joint venture is the respective local currency. The
assets and liabilities of the Companys foreign entities are translated into
U.S. dollars using period-end exchange rates, while revenues and expenses are
translated at average exchange rates prevailing during the year. The resulting
translation adjustments are recorded as a separate component of stockholders
equity in accumulated other comprehensive income (loss). The Company recorded
net gains (losses) on foreign currency translation in comprehensive income of
$(278,000), ($42,000) and $90,000 for the years ended December 31, 2010, 2009
and 2008, respectively.

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

Comprehensive Income

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

Operating Leases

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

Taxes Collected From Customers

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

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
estimates on items such as allowance for doubtful accounts and sales returns,
inventory provisions, asset impairment charges, deferred tax asset valuation
allowances, accruals for uncertain tax positions and warranty accruals. These
estimates and assumptions are based on managements best judgment. Management
evaluates estimates and assumptions on an ongoing basis using its technical
knowledge, historical experience and other factors, including consideration of
the impact of the current economic environment. Management believes its
assumptions are reasonable and adjusts such estimates and assumptions when
facts and circumstances change. Illiquid credit markets, volatile equity,
foreign currency and energy markets, and declines in business and consumer
spending have combined to increase the uncertainty inherent in such estimates and
assumptions. As future events and their effects cannot be determined with
precision, actual results could differ significantly from these estimates. Any
required changes in those estimates will be reflected in the financial
statements in future periods.

New Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (FASB)
issued two new revenue recognition standards. The first new standard is
Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (ASC
Topic 605)  Multiple-Deliverable Revenue Arrangements, a consensus of the FASB
Emerging Issues Task Force. Under ASU No. 2009-13, when vendor specific
objective evidence or third party evidence for deliverables in an arrangement
cannot be determined, a best estimate of the selling price is required to
separate deliverables and allocate arrangement consideration using the relative
selling price method. The second new standard is ASU No. 2009-14, Software
(Topic 985)  Certain Revenue Arrangements That Include Software Elements.
Under ASU 2009-14, tangible products containing software components and
non-software components that function together to deliver the products
essential functionality will no longer be within the scope of the software
revenue recognition guidance, and software-enabled products that meet this
scope exception will now be subject to the new guidance for multiple
deliverable arrangements discussed above. The guidance under both standards is
effective for revenue arrangements entered into or materially modified in
fiscal years beginning after June 15, 2010. Early adoption is permitted, and
the Company elected to adopt the guidance under both standards on a prospective
basis effective January 1, 2010. The adoption of ASU 2009-13 and ASU 2009-14 did
not have a material impact on the Companys consolidated financial statements,
nor did it result in a significant change from prior periods in how the Company
allocates arrangement consideration to various units of accounting and did not
significantly change the pattern and timing of revenue recognition.

In September 2009, the FASB issued ASU No. 2009-12, Fair Value
Measurements and Disclosures  Investments in Certain Entities That Calculate
Net Asset Value per Share (or its Equivalent). ASU 2009-12 allows companies to
use net asset value as a practical expedient to estimate fair value of
investments that are within the scope of this ASU that do not have readily
determinable fair values. The Company adopted this guidance in the first
quarter of 2010, and the adoption did not have a material impact on the
Companys consolidated financial statements.

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In January 2010, the FASB issued ASU No. 2010-06, Fair Value
Measurements and Disclosures  Improving Disclosures about Fair Value
Measurements, which requires new disclosures about recurring and nonrecurring
fair-value measurements including significant transfers into and out of Level 1
and Level 2 of the fair value hierarchy. The ASU also requires additional
information in the roll-forward of Level 3 assets and liabilities including the
presentation of purchases, sales, issuances and settlements on a gross basis.
Further clarification for existing disclosure requirements provides for the
disaggregation of assets and liabilities presented, and the enhancement of disclosures around inputs and valuation techniques.
This ASU impacts disclosures only. The Company adopted the disclosure
provisions of this ASU effective January 1, 2010, with the exception of the
additional required information in the roll-forward of Level 3 assets and
liabilities, which will be effective for the Company January 1, 2011. No
transfers of assets or liabilities into or out of Level 1 or 2 of the fair
value hierarchy occurred or were required during the year ended December 31, 2010.
The Companys adoption of this guidance did not have a material impact on the
Companys 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. In May
2009, the Companys shareholders approved amendments to the 2007 Plan,
including an increase in the number of shares authorized for issuance by
500,000 shares to a total of 1,230,320 shares. At December 31, 2010, a total of
456,083 shares were available for future grant under the 2007 Plan, as amended.
Effective with the approval of the 2007 Plan in May 2007, the Company may not
issue any new awards or options under its Amended and Restated 1992 Stock
Option Plan (the 1992 Plan). The exercise price of stock options granted
under the 2007 Plan is equal to the market value on the date of grant. Options
issued to employees through March 31, 2006 under the 1992 Plan generally become
exercisable over a two-year period and terminate ten years from the date of
grant. Options issued to employees after March 31, 2006 under both the 1992
Plan and the 2007 Plan generally become exercisable over a four-year period.
Options issued to employees through May 13, 2008 under the 1992 Plan and the
2007 Plan terminate ten years from the date of grant, while options issued
effective May 14, 2008 under the 2007 Plan terminate seven years from the date
of grant. Stock options granted to non-employee directors vest six months from
the date of grant and terminate ten years from the date of grant. Restricted
stock and restricted stock units issued to employees and to non-employee
directors under the 2007 Plan are subject to the risk of forfeiture and
transfer restrictions that generally lapse in varying time periods from the
date of grant.

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

Amounts recognized in the financial statements for the years ended
December 31, 2010, 2009 and 2008 with respect to the Companys share-based
payment arrangements are as follows (in thousands):

|                                                                                 |  |                         |       |      |   |       |   |   |       |  
|-------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                                                 |  | Year Ended December 31, |      
|                                                                                 |  | 2010                    |       | 2009 |   | 2008  |  
|                                                                                
|Stock-based compensation cost charged
 against income, before income tax benefit |  | $                       | 1,937 |      | $ | 1,542 |   | $ | 1,128 |  
|Income tax benefit related to stock-based
 compensation included in net income   |  | $                       | (668  | )    | $ | (539  | ) | $ | (397  | )

Total stock-based compensation cost of $1,937,000 for 2010 consisted of
$1,467,000 for the issuance of stock options and $470,000 associated with the
grant of restricted stock and restricted stock units to independent Board
members and certain employees. Total stock-based compensation cost of $1,542,000
for 2009 consisted of $1,174,000 for the issuance of stock options and $368,000
associated with the grant of restricted stock and restricted stock units to
independent Board members and certain employees. Total stock-based compensation
cost of $1,128,000 for 2008 consisted of $1,072,000 for the issuance of stock
options and $56,000 associated with the grant of restricted stock to
independent Board members.

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Stock Options

The fair value of each option award is estimated at the date of grant
using the Black-Scholes option pricing model. The assumptions used to determine
the fair value of stock option awards granted during the years ended December
31, 2010, 2009 and 2008 were as follows:

|                                   |  |                         |               |      |  |               |  |  |               | 
|---------------------------------- |  | ----------------------- | ------------- | ---- |  | ------------- |  |  | ------------- | 
|                                   |  | Year Ended December 31, |              
|                                   |  | 2010                    |               | 2009 |  | 2008          | 
|                                  
|Expected life of options in
 years |  |                         | 4.75          |      |  | 4.75          |  |  | 4.75
 - 6.00  | 
|                                   |  |                         |               |      |  |               |  |  |               | 
|Risk-free interest rate            |  |                         | 1.55
 - 2.65% |      |  | 1.58
 - 2.30% |  |  | 3.1%          | 
|                                   |  |                         |               |      |  |               |  |  |               | 
|Expected volatility                |  |                         | 49.2
 - 49.6% |      |  | 48.5
 - 49.9% |  |  | 39.1
 - 40.0% | 
|                                   |  |                         |               |      |  |               |  |  |               | 
|Expected dividend yield            |  |                         | 0.0%          |      |  | 0.0%          |  |  | 0.0%          | 

The Company reviews these assumptions at the time of each new option
award and adjusts them as necessary to ensure proper option valuation. The
expected life represents the period that the stock option awards are expected
to be outstanding. Effective April 2008, the Companys Board of Directors
approved a change in the contractual term of stock options granted to employees
from 10 to seven years. Given the reduction in the contractual term of its
employee stock option awards, the Company determined it was unable to rely on
its historical exercise data as a basis for estimating the expected life of
stock options granted to employees subsequent to this change. As such, the
Company used the simplified method for determining the expected life of stock
options granted to employees in 2008, 2009 and 2010, as specified by Staff
Accounting Bulletin (SAB) No. 107, Valuation of Share-Based Payment
Arrangements for Public Companies, which bases the expected life calculation
on the average of the vesting term and the contractual term of the awards. The
risk-free interest rate is based on the yield of constant maturity U.S.
treasury bonds with a remaining term equal to the expected life of the awards.
The Company estimated the stock price volatility using historical weekly price
observations over the expected life of the awards. At the time of the grant of
option awards through 2010, the Company had not paid or declared any cash
dividends on its common stock, and did not have plans to pay dividends. As
such, the expected dividend yield for option awards during this period was
zero.

A summary of share option activity under the 2007 and 1992 Plans as of
and for the year ended December 31, 2010 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, 2009         |  |        | 1,270 |       | $ | 17.26                                                        |  |                                 |      |  |   |     | 
|Granted                                           |  |        | 284   |       |   | 17.10                                                        |  |                                 |      |  |   |     | 
|Exercised                                         |  |        | (117  | )     |   | 9.82                                                         |  |                                 |      |  |   |     | 
|Canceled                                          |  |        | (177  | )     |   | 19.58                                                        |  |                                 |      |  |   |     | 
|                                                  |  |        |       |       |   |                                                              |  |                                 |      |  |   |     | 
|Options outstanding at
 December 31, 2010         |  |        | 1,260 |       | $ | 17.59                                                        |  |                                 | 5.35 |  | $ | 681 | 
|                                                  |  |        |       |       |   |                                                              |  |                                 |      |  |   |     | 
|Options subject to exercise
 at December 31, 2010 |  |        | 653   |       | $ | 18.75                                                        |  |                                 | 4.67 |  | $ | 549 | 

*Weighted Average Exercise Price

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

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A summary of
the status of the Companys nonvested option shares as of December 31, 2010 and
changes during the year ended December 31, 2010 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, 2009 |  |                  | 546  |                                         | $ | 7.09 | 
|Granted                         |  |                  | 284  |                                         |   | 7.52 | 
|Vested                          |  |                  | (167 | )                                       |   | 6.82 | 
|Canceled                        |  |                  | (56  | )                                       |   | 7.44 | 
|                               
|Nonvested at
 December 31, 2010 |  |                  | 607  |                                         | $ | 7.34 | 

As of December 31, 2010, $3,437,000 of total stock option compensation
expense (gross of the impact of potential forfeitures) was not yet recognized
related to non-vested option awards, and is expected to be recognized over a
weighted average period of 2.8 years.

Other
information pertaining to options is as follows:

|                                                          |  |                                       |       |      |   |       |  |   |       | 
|--------------------------------------------------------- |  | ------------------------------------- | ----- | ---- | - | ----- |  | - | ----- | 
|                                                          |  | Year Ended December 31,               |      
|                                                          |  | 2010                                  |       | 2009 |   | 2008  | 
|                                                          |  | (in thousands, except per share data) |      
|                                                          |  |                                       |       |      |   |       |  |   |       | 
|Number of options granted                                 |  |                                       | 284   |      |   | 449   |  |   | 184   | 
|Fair value of options
 granted                            |  | $                                     | 2,138 |      | $ | 2,850 |  | $ | 1,282 | 
|Per share weighted average
 fair value of options granted |  | $                                     | 7.52  |      | $ | 6.36  |  | $ | 6.98  | 
|Total fair value of stock
 options vested                 |  | $                                     | 1,137 |      | $ | 958   |  | $ | 1,144 | 
|Total intrinsic value of
 stock options exercised         |  | $                                     | 758   |      | $ | 718   |  | $ | 2,641 | 

Cash received from the exercise of stock options was $945,000,
$1,225,000 and $1,550,000 for the years ended December 31, 2010, 2009 and 2008,
respectively. The aggregate impact of the exercise of stock options,
expirations of vested stock options and lapse of restrictions on restricted
stock generated a net tax impact of $114,000 in 2010, recorded as a reduction
in additional paid-in capital, and a net tax benefit of $46,000 and $982,000 in
2009 and 2008, respectively, recorded as an increase to additional paid-in
capital.

Restricted Stock

On May 12, 2010 and May 13, 2009, the Company issued 3,500 shares of
restricted stock units to each of the five independent members of its Board of
Directors. The restricted stock units were valued based on the market value of
the Companys shares on the date of grant of $307,000 and $258,000,
respectively, which was equal to the intrinsic value of the shares on the date
of grant. Such restricted stock units vest and the restrictions lapse one year
after the date of grant. As such, the Company is recognizing expense for the
intrinsic value of the restricted stock units ratably over the one-year vesting
period, resulting in $290,000 and $164,000 of expense for the year ended
December 31, 2010 and 2009, respectively.

During 2010 and 2009, the Company issued 10,000 and 20,000 shares of
restricted stock in each respective year to certain management employees, and
on May 14, 2008, the Company issued 1,000 shares of restricted stock to each of
the five independent members of its Board of Directors. The restricted stock
was valued based on the market value of the Companys shares on the date of
grant which was equal to the intrinsic value of the shares on that date. The
restricted stock awards vest and the restrictions lapse over varying periods
from the date of grant. The Company recognizes expense for the intrinsic value
of the restricted stock ratably over the vesting period, resulting in $180,000,
$203,000 and $56,000 of expense for the years ended December 31, 2010, 2009 and
2008, respectively.

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A summary of the status of the Companys nonvested shares and share
units as of December 31, 2010 and changes during the year ended December 31,
2010 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,
 2009 |  |                  | 37.5  |                                         | $ | 14.91 | 
|Granted                         |  |                  | 27.5  |                                         |   | 16.98 | 
|Vested                          |  |                  | (37.5 | )                                       |   | 14.91 | 
|Canceled                        |  |                  |      |                                         |   |      | 
|                               
|Nonvested at December 31,
 2010 |  |                  | 27.5  |                                         | $ | 16.98 | 

As
of December 31, 2010, $221,000 of total compensation expense (gross of the
impact of potential forfeitures) was not yet recognized related to non-vested
shares and share unit awards, which is expected to be recognized over a
weighted average period of 1.2 years. The market value of restricted shares and
share units at the vesting date was $632,000 and $76,000 for the years ended
December 31, 2010 and 2009, respectively.

Common Stock Repurchases

On
October 17, 2007, the Companys Board of Directors authorized the repurchase of
up to 500,000 shares of its common stock. In February 2008, the Companys Board
of Directors increased the share repurchase authorization by an additional
500,000 shares, bringing total shares authorized for repurchase to 1,000,000.
Shares may be purchased at prevailing market prices in the open market or in
private transactions, subject to market conditions, share price, trading volume
and other factors. The repurchase program may be discontinued at any time.
During the year ended December 31, 2008, the Company repurchased 577,083 shares
of its common stock under the authorization at an average purchase price of
$16.66. The Company did not repurchase any shares of its common stock during
the year ended December 31, 2009. Effective October 2010, the Companys Board
approved the continuation of common stock repurchases under the current
authorization, and the Company repurchased 117,377 shares of its common stock
at an average purchase price of $15.56 per share during the fourth quarter
2010. The repurchase program in each period was funded from cash on hand. As of
December 31, 2010, 305,540 shares remained available for repurchase under the
authorizations.

3) Marketable Securities

The
amortized cost, gross unrealized holding gains and fair value of available-for-sale
marketable securities by major security type and class of security at December
31, 2010 and 2009 are reflected in the following table (in thousands).
Unrealized holding gains and losses are included in accumulated other
comprehensive income (loss) until realized.

|                                             |  |                  |        |                                  |   |            |  |   |        | 
|-------------------------------------------- |  | ---------------- | ------ | -------------------------------- | - | ---------- |  | - | ------ | 
|                                             |  | Amortized 
 cost |        | Gross
 unrealized
 holding gains |   | Fair value | 
|At
 December 31, 2010:                       |  |                  |        |                                  |   |            |  |   |        | 
|                                             |  |                  |        |                                  |   |            |  |   |        | 
|Short term:                                  |  |                  |        |                                  |   |            |  |   |        | 
|Government guaranteed - corporate securities |  | $                | 3,996  |                                  | $ | 95         |  | $ | 4,091  | 
|Municipal securities                         |  |                  | 4,660  |                                  |   | 39         |  |   | 4,699  | 
|                                            
|Total                                        |  | $                | 8,656  |                                  | $ | 134        |  | $ | 8,790  | 
|                                             |  |                  |        |                                  |   |            |  |   |        | 
|At December 31, 2009:                        |  |                  |        |                                  |   |            |  |   |        | 
|                                             |  |                  |        |                                  |   |            |  |   |        | 
|Short term:                                  |  |                  |        |                                  |   |            |  |   |        | 
|Government guaranteed - corporate securities |  | $                | 6,017  |                                  | $ | 59         |  | $ | 6,076  | 
|U.S. Treasury bills                          |  |                  | 5,999  |                                  |   | 1          |  |   | 6,000  | 
|Municipal securities                         |  |                  | 16,401 |                                  |   | 104        |  |   | 16,505 | 
|                                            
|Total                                        |  | $                | 28,417 |                                  | $ | 164        |  | $ | 28,581 | 
|Long term:                                   |  |                  |        |                                  |   |            |  |   |        | 
|Government guaranteed - corporate securities |  | $                | 3,992  |                                  | $ | 136        |  | $ | 4,128  | 
|Municipal securities                         |  |                  | 4,801  |                                  |   | 108        |  |   | 4,909  | 
|                                            
|Total                                        |  | $                | 8,793  |                                  | $ | 244        |  | $ | 9,037  | 

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4) Fair Value Measurements

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

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

The
Companys assets and liabilities measured at fair value on a recurring basis
and the fair value hierarchy utilized to determine such fair values is as
follows at December 31, 2010:

|                                            |  |                                          |       |                                             |                               |                                                  |  |                                              |       |  |   |   | 
|------------------------------------------- |  | ---------------------------------------- | ----- | ------------------------------------------- | ----------------------------- | ------------------------------------------------ |  | -------------------------------------------- | ----- |  | - | - | 
|                                            |  |                                          |       |                                             | Fair Value Measurements Using
|(in thousands)                              |  | Total Fair 
 Value at
 December 31, 2010 |       | Quoted Prices in
 Active Markets
 (Level 1) |                               | Significant Other
 Observable
 Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |      
|Assets:                                     |  |                                          |       |                                             |                               |                                                  |  |                                              |       |  |   |   | 
|Available-for-sale securities               |  | $                                        | 8,790 |                                             | $                             |                                                 |  | $                                            | 8,790 |  | $ |  | 
|Liabilities:                                |  |                                          |       |                                             |                               |                                                  |  |                                              |       |  |   |   | 
|Foreign currency forward exchange contracts |  | $                                        | 2     |                                             | $                             |                                                 |  | $                                            | 2     |  | $ |  | 

Available-for-sale
securities in the preceding table are classified as current marketable
securities in the accompanying consolidated balance sheets. Available-for-sale
securities are carried at fair value based on significant observable inputs
other than quoted market prices. Such inputs may include benchmark yields,
reported trades, broker/dealer quotes, issuer spreads, two-sided markets,
benchmark securities, bids, offers and other reference data. Foreign currency
forward exchange contracts are also carried at fair value based on significant
other observable market inputs, in this case, quoted foreign currency exchange
rates. Such valuation represents the amount the Company would receive or pay to
terminate the forward exchange contracts at the reporting date.

5) Derivatives

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

As
of December 31, 2010, the Company had five outstanding foreign exchange
contracts with a notional amount totaling approximately $695,000. These
contracts mature during 2011 and bear exchange rates ranging from 1.3025 and
1.3539 U.S. Dollars per Euro. As of December 31, 2010, the fair value of
foreign exchange contracts resulted in a net loss position of $2,000, which is
recorded in other current liabilities.

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

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

|                           |  |                                   |  |                           |     |      |   |     | 
|-------------------------- |  | --------------------------------- |  | ------------------------- | --- | ---- | - | --- | 
|                           |  |                                   |  | Year Ended 
 December 31, |    
|Derivative
 Instrument     |  | Location                          |  | 2010                      |     | 2009 |  
|                          
|Foreign Exchange Contracts |  | Gain (loss) on currency
 exchange |  | $                         | (61 | )    | $ | 266 | 

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

The
gross fair market value of derivative instruments related to foreign currency
exchange contracts and their location on the Companys consolidated balance
sheets is as follows as of December 31, 2010 (in thousands):

|                           |  |                   |                           |                       |   |          |  |                     |                               |  |   |   | 
|-------------------------- |  | ----------------- | ------------------------- | --------------------- | - | -------- |  | ------------------- | ----------------------------- |  | - | - | 
|                           |  | Asset Derivatives |                           | Liability Derivatives |  
|Derivative Instrument      |  | Location          |                           | December 31, 
 2010   |   | Location |  | December 31, 
 2010 |                              
|                          
|Foreign Exchange Contracts |  |                   | Other
 current assets (1) |                       | $ |         |  |                     | Other
 current liabilities(1) |  | $ | 2 | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | As
 the Companys foreign exchange agreement is subject to a master netting
 arrangement, the Companys policy is to record the fair value of outstanding
 foreign exchange contracts as other current assets or other current
 liabilities, based on whether outstanding contracts are in a net gain or loss
 position, respectively. See Note 4, Fair Value Measurements, for additional
 information regarding the fair value measurements of derivative instruments
 related to foreign currency exchange contracts.

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

6) Inventories

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

|                                            |  |   |       |  |   |       | 
|------------------------------------------- |  | - | ----- |  | - | ----- | 
|                                            |  |   | 2010  |  |   | 2009  | 
|                                            |  |   |       |  |   |       | 
|Finished goods and
 demonstration equipment |  | $ | 1,521 |  | $ | 1,425 | 
|Purchased parts and
 subassemblies          |  |   | 2,981 |  |   | 2,698 | 
|                                            |  | $ | 4,502 |  | $ | 4,123 | 

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7) Property and Equipment

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

|                                                |  |      |         |      |   |        |  
|----------------------------------------------- |  | ---- | ------- | ---- | - | ------ | -
|                                                |  | 2010 |         | 2009 |  
|                                                |  |      |         |      |   |        |  
|Land and land improvements                      |  | $    | 1,096   |      | $ | 1,096  |  
|Building and building
 improvements             |  |      | 2,816   |      |   | 2,809  |  
|Manufacturing equipment                         |  |      | 5,469   |      |   | 5,543  |  
|Development fixtures and
 equipment             |  |      | 760     |      |   | 760    |  
|Data equipment and
 furniture                   |  |      | 6,611   |      |   | 5,116  |  
|Leasehold improvements                          |  |      | 1,247   |      |   | 1,106  |  
|                                                |  |      | 17,999  |      |   | 16,430 |  
|Less accumulated
 depreciation and amortization |  |      | (10,471 | )    |   | (8,575 | )
|                                                |  | $    | 7,528   |      | $ | 7,855  |  

Depreciation and amortization expense was $2,018,000, $1,250,000 and
$1,372,000 for the years ended December 31, 2010, 2009 and 2008, respectively.

Data equipment and furniture as of December 31, 2010 includes
approximately $1.0 million of internally developed software costs capitalized
during 2010 in connection with projects to further develop the Companys
enterprise resource planning system, including implementation of an enhanced
sales order processing system and development of expanded reporting
capabilities. Accumulated depreciation and amortization as of December 31, 2010
includes approximately $0.2 million of amortization expense associated with
such internally developed software costs, based on a three-year amortization
period. Included in manufacturing equipment as of December 31, 2010 and 2009 is
$2.4 million of production tooling capitalized by the Company in late 2009 in
conjunction with a development and manufacturing arrangement. The Company began
depreciation of the production tooling over a three-year period upon
commencement of production in the first quarter of 2010. The capitalized amount
of $2.4 million was included in trade accounts payable as of December 31, 2009
and was paid in 2010.

8) Credit Agreement

On March 29, 2004, the Company entered into a term note agreement (the
Credit Agreement) with a bank. The Credit Agreement was renewed each year
through July 1, 2010, at which time the Company allowed the agreement to
expire. The Company did not draw against the line at any time during the term
of the agreement.

9) Income Taxes

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

|                            |  |                         |        |      |   |        |  |   |        | 
|--------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                            |  | Year Ended December 31, |       
|                            |  | 2010                    |        | 2009 |   | 2008   | 
|                            |  |                         |        |      |   |        |  |   |        | 
|Income before income taxes: |  |                         |        |      |   |        |  |   |        | 
|Domestic                    |  | $                       | 11,593 |      | $ | 12,065 |  | $ | 14,427 | 
|Foreign                     |  |                         | 503    |      |   | 1,047  |  |   | 32     | 
|                            |  | $                       | 12,096 |      | $ | 13,112 |  | $ | 14,459 | 

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

|               |  |                         |       |      |   |       |   |   |       |  
|-------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|               |  | Year Ended December 31, |      
|               |  | 2010                    |       | 2009 |   | 2008  |  
|               |  |                         |       |      |   |       |   |   |       |  
|Current:       |  |                         |       |      |   |       |   |   |       |  
|U.S. Federal   |  | $                       | 3,667 |      | $ | 3,671 |   | $ | 4,007 |  
|State          |  |                         | 563   |      |   | 827   |   |   | 641   |  
|Foreign        |  |                         | 223   |      |   | 348   |   |   | 319   |  
|Total current  |  |                         | 4,453 |      |   | 4,846 |   |   | 4,967 |  
|               |  |                         |       |      |   |       |   |   |       |  
|Deferred:      |  |                         |       |      |   |       |   |   |       |  
|U.S. Federal   |  |                         | (35   | )    |   | (143  | ) |   | (37   | )
|State          |  |                         | 76    |      |   | (86   | ) |   | 98    |  
|Total deferred |  |                         | 41    |      |   | (229  | ) |   | 61    |  
|               |  |                         |       |      |   |       |   |   |       |  
|               |  | $                       | 4,494 |      | $ | 4,617 |   | $ | 5,028 |  

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

|                                               |  |                         |       |      |   |       |   |   |       |  
|---------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                               |  | Year Ended December 31, |      
|                                               |  | 2010                    |       | 2009 |   | 2008  |  
|                                               |  |                         |       |      |   |       |   |   |       |  
|Expected income tax
 expense                   |  | $                       | 4,234 |      | $ | 4,589 |   | $ | 5,061 |  
|State income taxes, net of
 federal tax effect |  |                         | 415   |      |   | 481   |   |   | 480   |  
|Manufacturers deduction                       |  |                         | (149  | )    |   | (120  | ) |   | (80   | )
|Federal R&D credit                             |  |                         | (62   | )    |   | (38   | ) |   | (34   | )
|Tax-exempt interest income                     |  |                         | (80   | )    |   | (367  | ) |   | (663  | )
|Change in valuation
 allowance                 |  |                         | (69   | )    |   | (22   | ) |   | 437   |  
|Benefit of lower federal
 tax bracket          |  |                         | (100  | )    |   | (100  | ) |   | (100  | )
|Other, net                                     |  |                         | 305   |      |   | 194   |   |   | (73   | )
|                                               |  |                         |       |      |   |       |   |   |       |  
|                                               |  | $                       | 4,494 |      | $ | 4,617 |   | $ | 5,028 |  

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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):

|                                                           |  |      |       |      |   |       |  
|---------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|                                                           |  | 2010 |       | 2009 |  
|Deferred tax assets:                                       |  |      |       |      |   |       |  
|Inventory provisions and
 uniform capitalization           |  | $    | 229   |      | $ | 302   |  
|Accounts receivable
 allowances                            |  |      | 91    |      |   | 109   |  
|Non-qualified stock option
 and restricted stock expense   |  |      | 1,795 |      |   | 1,629 |  
|Deferred maintenance
 revenue                              |  |      | 685   |      |   | 855   |  
|Unrecognized tax benefits                                  |  |      | 34    |      |   | 32    |  
|Loss carryforward of
 foreign subsidiary and joint venture |  |      | 837   |      |   | 906   |  
|Other accruals and reserves                                |  |      | 155   |      |   | 253   |  
|Other                                                      |  |      |      |      |   | 154   |  
|Total deferred tax assets before valuation allowance       |  |      | 3,826 |      |   | 4,240 |  
|Less valuation allowance                                   |  |      | (837  | )    |   | (906  | )
|Total deferred tax assets                                  |  | $    | 2,989 |      | $ | 3,334 |  
|                                                           |  |      |       |      |   |       |  
|Deferred tax liabilities:                                  |  |      |       |      |   |       |  
|Unrealized gain on marketable
 securities                  |  | $    | (51   | )    | $ | (158  | )
|Other                                                      |  |      | (4    | )    |   |      |  
|Total deferred tax liabilities                             |  | $    | (55   | )    | $ | (158  | )
|Total net deferred tax assets                              |  | $    | 2,934 |      | $ | 3,176 |  

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 full valuation allowances on the tax benefits of
loss carryforwards for a subsidiary in Japan established in May 2005 and a
majority-owned joint venture in China established in August 2010. The
cumulative pre-tax loss amounts generated by the Japanese subsidiary from 2005
through 2010 approximated $2.2 million. The pre-tax loss generated in 2010 by
the majority-owned joint venture in China approximated $0.2 million. The
valuation allowances were calculated in accordance with the requirement that a
valuation allowance be established or maintained when it is more likely than
not that all or a portion of deferred tax assets will not be realized. The
available loss carryforwards at December 31, 2010 of the Companys Japanese
subsidiary and majority-owned joint venture in China are scheduled to expire
between tax years 2012 and 2017 in Japan and in 2015 in China.

The Company has not provided deferred taxes on unremitted earnings
attributable to its international subsidiary in Germany that are considered to
be reinvested indefinitely. These earnings relate to ongoing operations and
were approximately $5.7 million as of December 31, 2010.

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

A reconciliation of the beginning and ending amounts of gross
unrecognized tax benefits for the years ended December 31, 2010 and 2009 is
presented in the table below (in thousands):

|                                                      |  |      |     |      |   |      |  
|----------------------------------------------------- |  | ---- | --- | ---- | - | ---- | -
|                                                      |  | 2010 |     | 2009 |  
|Gross
 unrecognized tax benefits at beginning of year |  | $    | 364 |      | $ | 361  |  
|Increases related to:                                 |  |      |     |      |   |      |  
|Prior year income tax positions                       |  |      |    |      |   | 259  |  
|Current year income tax positions                     |  |      | 25  |      |   | 30   |  
|Decreases related to:                                 |  |      |     |      |   |      |  
|Prior year income tax positions                       |  |      | (29 | )    |   | (224 | )
|Settlements                                           |  |      |    |      |   | (62  | )
|Gross
 unrecognized tax benefits at end of year       |  | $    | 360 |      | $ | 364  |  

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Included in the balance of unrecognized tax benefits at December 31,
2010 are potential benefits of $340,000 that if recognized, would affect the
effective tax rate. The Company does not anticipate that the total amount of
unrecognized tax benefits as of December 31, 2010 will change significantly by
December 31, 2011.

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 $43,000 and $36,000 on a gross basis at
December 31, 2010 and 2009, respectively, and are excluded from the
reconciliation of unrecognized tax benefits presented above. Interest and
penalties recognized in the consolidated statements of income related to
uncertain tax positions amounted to a net $7,000 of expense in 2010 and a net
$23,000 benefit in 2009.

The Company files income tax returns in the U.S. federal jurisdiction
and various state and foreign jurisdictions. As of December 31, 2010, the
Company was no longer subject to income tax examinations for taxable years
before 2007 and 2006 in the case of U.S. federal and German taxing authorities,
respectively, and taxable years generally before 2006 in the case of state
taxing authorities, consisting primarily of Minnesota, California and Maryland.

10) 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, one of
its affiliates) having a market value of two times the exercise price of the
Right. At any time prior to the time that a person or group has become an
Acquiring Person, the Companys Board of Directors may redeem the Rights in
whole, but not in part, at a price of $.001 per Right, subject to adjustment,
payable in cash. The Rights will expire at the close of business on September
16, 2013, unless extended or earlier redeemed by the Company. No preferred
shares have been issued or are outstanding under the shareholder rights plan as
of December 31, 2010.

11) Net Income Per Share

Basic net income per common share is determined by dividing net income
by the basic weighted average number of shares of common stock outstanding.
Diluted net income per common share includes the potentially dilutive effect of
common shares issued in connection with outstanding stock options using the
treasury stock method and the dilutive impact of restricted stock units. Stock
options to acquire 1,126,000, 735,000 and 739,000 weighted average common
shares for the years ended December 31, 2010, 2009 and 2008 have been excluded
from the computation of diluted weighted average shares outstanding for each
respective period as their effect is anti-dilutive.

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

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|                                                             |  |              |       |      |   |       |  |   |       | 
|------------------------------------------------------------ |  | ------------ | ----- | ---- | - | ----- |  | - | ----- | 
|                                                             |  | December 31, |      
|                                                             |  | 2010         |       | 2009 |   | 2008  | 
|                                                             |  |              |       |      |   |       |  |   |       | 
|Shares outstanding at end
 of period                         |  |              | 9,479 |      |   | 9,472 |  |   | 9,335 | 
|                                                             |  |              |       |      |   |       |  |   |       | 
|Basic weighted average
 shares outstanding                   |  |              | 9,524 |      |   | 9,374 |  |   | 9,559 | 
|                                                             |  |              |       |      |   |       |  |   |       | 
|Dilutive effect of stock
 options and restricted stock units |  |              | 72    |      |   | 133   |  |   | 170   | 
|Total diluted weighted
 average shares outstanding           |  |              | 9,596 |      |   | 9,507 |  |   | 9,729 | 
|                                                             |  |              |       |      |   |       |  |   |       | 
|Net income                                                   |  | $            | 7,700 |      | $ | 8,495 |  | $ | 9,431 | 
|                                                             |  |              |       |      |   |       |  |   |       | 
|Basic net income per common
 share                           |  | $            | 0.81  |      | $ | 0.91  |  | $ | 0.99  | 
|                                                             |  |              |       |      |   |       |  |   |       | 
|Diluted net income per
 common share                         |  | $            | 0.80  |      | $ | 0.89  |  | $ | 0.97  | 

12) Lease Commitments

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

|                          |  |                            |       | 
|------------------------- |  | -------------------------- | ----- | 
|Year ending
 December 31, |  | Total 
 operating 
 leases |      
|                          |  |                            |       | 
|2011                      |  | $                          | 730   | 
|2012                      |  |                            | 437   | 
|2013                      |  |                            | 265   | 
|2014                      |  |                            | 146   | 
|2015                      |  |                            | 43    | 
|                          |  |                            |       | 
|Minimum lease payments    |  | $                          | 1,621 | 

Rent expense under operating leases amounted to approximately $855,000,
$903,000 and $1,259,000 for the years ended December 31, 2010, 2009 and 2008,
respectively.

13) 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 $279,000, $260,000 and $302,000
in 2010, 2009 and 2008, respectively.

14) Business Segment Information / Major
Customers

The Company has
identified one operating segment consisting of work-flow integrated
digital publishing systems that are used by businesses to produce recordable
CD, DVD and Blu-ray discs with customized digital content and durable disc
labeling. The Companys hardware products consist of three primary product
lines: The Producer line, which accommodates higher volume requirements for
production of recordable media; the Professional line, which is well suited for
production of recordable media in front office applications; and the Desktop
line of lower-cost products for office and other desktop applications. The
Company also sells related consumables (media kits, ribbons, ink cartridges and
Rimage-branded blank CD-R, DVD-R and Blu-ray media) and services (primarily
maintenance contracts and repairs) for use with its digital publishing systems.
The Company conducts operations from its U.S. corporate headquarters, from
subsidiaries in Europe and Japan, and effective in the third quarter 2010, from
its majority-owned joint venture operation in China.

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The Companys three primary product lines (Producer, Professional and
Desktop) and four primary geographic locations have similar economic
characteristics. Each product line consists of digital publishing systems as
described above. The production processes are also similar; each product line
is assembled from components purchased from third party suppliers, consisting
of recordable DVD or Blu-ray drives, printers, circuit boards, electric motors,
machined and molded parts, precision sheet metal assemblies and other
mechanical parts. Each product line is sold from the Companys geographic
locations to similar classes of commercial customers in similar vertical
markets, including digital photography, medical imaging, business services, law
enforcement and video workflows. Each product line utilizes Rimage consumables
and services and generates recurring revenues from both sources. Rimage uses
similar methods to distribute its products from each geographic location. These
methods primarily consisted of a network of value-added resellers and distributors,
or through strategic partners or direct sales. 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
three primary product lines sold from four 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, |       
|           |  | 2010                    |        | 2009 |   | 2008   | 
|           |  | Revenues                |       
|           |  |                         |        |      |   |        |  |   |        | 
|Customer A |  | $                       | 15,577 |      | $ | 9,425  |  | $ | 9,497  | 
|Customer B |  |                         | *      |      | $ | 14,972 |  | $ | 13,883 | 
|Customer C |  |                         | *      |      | $ | 8,673  |  | $ | 9,686  | 
|           |  |                         |        |      |   |        |  |   |        | 
|           |  | December 31,            |       
|           |  | 2010                    |        | 2009 |   | 2008   | 
|           |  | Accounts Receivable     |       
|           |  |                         |        |      |   |        |  |   |        | 
|Customer A |  | $                       | 2,045  |      | $ | 438    |  | $ | 773    | 
|Customer B |  |                         | *      |      | $ | 2,047  |  | $ | 1,042  | 
|Customer C |  |                         | *      |      | $ | 1,486  |  | $ | 1,198  | 

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

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

|                                |  |                         |        |      |   |        |  |   |        | 
|------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                                |  | Year Ended December 31, |       
|                                |  | 2010                    |        | 2009 |   | 2008   | 
|North America                   |  | $                       | 57,301 |      | $ | 48,956 |  | $ | 52,992 | 
|Europe                          |  |                         | 23,050 |      |   | 26,509 |  |   | 31,610 | 
|Other (Asia and Latin
 America) |  |                         | 8,380  |      |   | 7,762  |  |   | 6,792  | 
|                                |  |                         |        |      |   |        |  |   |        | 
|Total                           |  | $                       | 88,731 |      | $ | 83,227 |  | $ | 91,394 | 

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

|              |  |                   |       |                   |   |       | 
|------------- |  | ----------------- | ----- | ----------------- | - | ----- | 
|              |  | December 31, 2010 |       | December 31, 2009 |  
|North America |  | $                 | 7,008 |                   | $ | 7,275 | 
|Germany       |  |                   | 475   |                   |   | 536   | 
|Asia          |  |                   | 45    |                   |   | 44    | 
|              |  | $                 | 7,528 |                   | $ | 7,855 | 

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

|                      |  |                         |        |      |   |        |  |   |        | 
|--------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                      |  | Year Ended December 31, |       
|                      |  | 2010                    |        | 2009 |   | 2008   | 
|Equipment:            |  |                         |        |      |   |        |  |   |        | 
|Producer              |  | $                       | 15,339 |      | $ | 17,516 |  | $ | 20,271 | 
|Professional          |  |                         | 21,928 |      |   | 10,352 |  |   | 10,026 | 
|Desktop               |  |                         | 3,575  |      |   | 5,089  |  |   | 5,783  | 
|Total                 |  |                         | 40,842 |      |   | 32,957 |  |   | 36,080 | 
|                      |  |                         |        |      |   |        |  |   |        | 
|Consumables and parts |  |                         | 37,904 |      |   | 39,328 |  |   | 45,768 | 
|                      |  |                         |        |      |   |        |  |   |        | 
|Service               |  |                         | 9,985  |      |   | 10,942 |  |   | 9,546  | 
|                      |  |                         |        |      |   |        |  |   |        | 
|Total                 |  | $                       | 88,731 |      | $ | 83,227 |  | $ | 91,394 | 

15) Consolidation of Joint Venture Entity and
Noncontrolling Interest

In mid August 2010, the Company received approval of its registration
of a majority-owned joint venture in China, Rimage Information Technology
(Shanghai) Co., Ltd. (RIT), and was issued a business license which allowed
initiation of operations. RIT will deploy a complete digital publishing
solution for medical imaging in hospitals in China. The initial capitalization
of RIT consisted of $1,200,000 in cash, of which Rimage invested $612,000 for a
51% interest, and Taiwan Electronic Data Processing (TEDPC), a Taiwanese
software provider in the healthcare solutions market, invested $588,000 for the
remaining 49% interest.

RIT will purchase digital publishing systems from Rimage and utilize
medical disc system software source code purchased from TEDPC, and integrate
the software with Rimages digital publishing systems to allow deployment of a
complete digital publishing solution in the Chinese medical imaging market. RIT
has a commitment to pay TEDPC a minimum of $1,000,000 over the first three
years of operations for the purchase of the software source code and associated
intellectual property, which was acquired by RIT from TEDPC in December 2010.
To the extent RITs sales over the initial three-year period exceed established
thresholds, RIT has agreed to pay TEDPC an incremental fee based on unit sales
volumes. The Company capitalized the $1,000,000 purchase price for the software
source code in other non-current assets and recorded the associated liability
in current accounts payable ($400,000) and other non-current liabilities
($600,000) in the accompanying consolidated balance sheets as of December 31,
2010. The software source code is being amortized over its expected useful life
of five years. Amortization expense recognized during the year ended December
31, 2010 was approximately $75,000.

The key operating decisions of the entity are subject to simple
majority approval of the Board of Directors of RIT, and Rimage has majority
representation on the Board. Given Rimages control over the operations of RIT
and its majority voting interest, the Company consolidates the financial
statements of RIT with its consolidated financial statements, with the equity
and earnings (loss) attributed to the noncontrolling interest identified
separately in the accompanying condensed consolidated balance sheets and
statements of income.

During 2010, RIT had revenue of approximately $67,000 and incurred a
net loss of approximately $200,000, of which approximately $98,000 was
attributed to the noncontrolling interest. Consolidated stockholders equity as
of December 31, 2010 included $506,000 attributable to the noncontrolling
interest.

16) 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.

17) Subsequent Events

At December 31, 2010, the Company held a $290,000 convertible note
receivable with a privately-held Israeli company that develops proprietary
software used to augment security and surveillance systems to facilitate review
of video output. In February 2011, the Company participated in the funding of
the Israeli companys preferred stock issuance, with an equity investment of
$2.0 million, and concurrently converted its note receivable into the same
series of convertible preferred stock, achieving an ownership interest of less
than 20%. Rimage expects to account for this equity investment using the cost
method. Rimage may negotiate the rights to integrate this technology into its
digital publishing solutions at a future date.

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On February 23, 2011, the Companys Board of Directors approved the initiation
of a quarterly dividend policy and authorized a dividend of $0.10 per share,
payable on April 15, 2011 to shareholders of record as of March 31, 2011. The
dividend issuance is expected to require a cash outlay of approximately $4.0
million on an annual basis.

The manufacturing facilities of a number of the Companys suppliers are
located in Japan, including its single-source supplier of Everest printers,
associated printer ribbons and Professional Series 5400N and 3400 disc
publishing systems. These products collectively generate a significant portion
of the Companys revenues. An earthquake and accompanying tsunami struck the
north-east area of Japan on March 11, 2011, causing significant damage in the
surrounding region. The Company is currently evaluating the impact of this
event, if any, on the continued supply of these products and its near-term
operating results. An estimate of any such impact on the Companys consolidated
financial statements cannot be made at this time.

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

|                                               |  |        |        |       |   |        |  |       |        |        |   |        |   |        |        |       |   |        |   |   |        |  |   |        |  
|---------------------------------------------- |  | ------ | ------ | ----- | - | ------ |  | ----- | ------ | ------ | - | ------ | - | ------ | ------ | ----- | - | ------ | - | - | ------ |  | - | ------ | -
|                                               |  | 2010   |        | 2009  |  
|                                               |  | Fourth |        | Third |   | Second |  | First |        | Fourth |   | Third  |   | Second |        | First |  
|Revenues                                       |  | $      | 24,691 |       | $ | 23,367 |  | $     | 22,303 |        | $ | 18,370 |   | $      | 22,686 |       | $ | 22,365 |   | $ | 19,818 |  | $ | 18,358 |  
|Cost of revenues                               |  |        | 12,160 |       |   | 11,675 |  |       | 11,668 |        |   | 9,718  |   |        | 11,203 |       |   | 11,268 |   |   | 10,630 |  |   | 9,793  |  
|Gross profit                                   |  |        | 12,531 |       |   | 11,692 |  |       | 10,635 |        |   | 8,652  |   |        | 11,483 |       |   | 11,097 |   |   | 9,188  |  |   | 8,565  |  
|                                               |  |        |        |       |   |        |  |       |        |        |   |        |   |        |        |       |   |        |   |   |        |  |   |        |  
|Operating expenses:                            |  |        |        |       |   |        |  |       |        |        |   |        |   |        |        |       |   |        |   |   |        |  |   |        |  
|Research and development                       |  |        | 1,852  |       |   | 1,796  |  |       | 1,417  |        |   | 1,441  |   |        | 2,153  |       |   | 1,514  |   |   | 1,501  |  |   | 1,975  |  
|Selling, general and administrative            |  |        | 6,723  |       |   | 6,412  |  |       | 6,030  |        |   | 6,267  |   |        | 6,445  |       |   | 5,009  |   |   | 5,148  |  |   | 5,342  |  
|Total
 operating expenses                      |  |        | 8,575  |       |   | 8,208  |  |       | 7,447  |        |   | 7,708  |   |        | 8,598  |       |   | 6,523  |   |   | 6,649  |  |   | 7,317  |  
|                                               |  |        |        |       |   |        |  |       |        |        |   |        |   |        |        |       |   |        |   |   |        |  |   |        |  
|Operating income                               |  |        | 3,956  |       |   | 3,484  |  |       | 3,188  |        |   | 944    |   |        | 2,885  |       |   | 4,574  |   |   | 2,539  |  |   | 1,248  |  
|                                               |  |        |        |       |   |        |  |       |        |        |   |        |   |        |        |       |   |        |   |   |        |  |   |        |  
|Other income (expense):                        |  |        |        |       |   |        |  |       |        |        |   |        |   |        |        |       |   |        |   |   |        |  |   |        |  
|Interest, net                                  |  |        | 101    |       |   | 110    |  |       | 128    |        |   | 168    |   |        | 219    |       |   | 309    |   |   | 458    |  |   | 556    |  
|Realized gain on sale of marketable securities |  |        |       |       |   |       |  |       |       |        |   |       |   |        |       |       |   |       |   |   | 278    |  |   |       |  
|Gain (loss) on currency exchange               |  |        | 8      |       |   | 38     |  |       | (5     | )      |   | (27    | ) |        | 1      |       |   | 5      |   |   | 87     |  |   | (45    | )
|Other, net                                     |  |        | (1     | )     |   |       |  |       |       |        |   | 4      |   |        | 3      |       |   | (4     | ) |   |       |  |   | (1     | )
|Total other income, net                        |  |        | 108    |       |   | 148    |  |       | 123    |        |   | 145    |   |        | 223    |       |   | 310    |   |   | 823    |  |   | 510    |  
|                                               |  |        |        |       |   |        |  |       |        |        |   |        |   |        |        |       |   |        |   |   |        |  |   |        |  
|Income before income taxes                     |  |        | 4,064  |       |   | 3,632  |  |       | 3,311  |        |   | 1,089  |   |        | 3,108  |       |   | 4,884  |   |   | 3,362  |  |   | 1,758  |  
|Income tax expense                             |  |        | 1,507  |       |   | 1,335  |  |       | 1,258  |        |   | 394    |   |        | 880    |       |   | 1,775  |   |   | 1,389  |  |   | 573    |  
|                                               |  |        |        |       |   |        |  |       |        |        |   |        |   |        |        |       |   |        |   |   |        |  |   |        |  
|Net income                                     |  |        | 2,557  |       |   | 2,297  |  |       | 2,053  |        |   | 695    |   |        | 2,228  |       |   | 3,109  |   |   | 1,973  |  |   | 1,185  |  
|Net loss attributable to the                   |  |        |        |       |   |        |  |       |        |        |   |        |   |        |        |       |   |        |   |   |        |  |   |        |  
|noncontrolling interest                        |  |        | 68     |       |   | 30     |  |       |       |        |   |       |   |        |       |       |   |       |   |   |       |  |   |       |  
|Net income attributable to Rimage              |  | $      | 2,625  |       | $ | 2,327  |  | $     | 2,053  |        | $ | 695    |   | $      | 2,228  |       | $ | 3,109  |   | $ | 1,973  |  | $ | 1,185  |  
|                                               |  |        |        |       |   |        |  |       |        |        |   |        |   |        |        |       |   |        |   |   |        |  |   |        |  
|Net income per basic share                     |  | $      | 0.28   |       | $ | 0.24   |  | $     | 0.22   |        | $ | 0.07   |   | $      | 0.24   |       | $ | 0.33   |   | $ | 0.21   |  | $ | 0.13   |  
|                                               |  |        |        |       |   |        |  |       |        |        |   |        |   |        |        |       |   |        |   |   |        |  |   |        |  
|Net income per diluted share                   |  | $      | 0.27   |       | $ | 0.24   |  | $     | 0.22   |        | $ | 0.07   |   | $      | 0.23   |       | $ | 0.33   |   | $ | 0.20   |  | $ | 0.13   |  

|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
 ACCOUNTING AND FINANCIAL DISCLOSURE

None.

50

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

a)          Evaluation
of Disclosure Controls and Procedures

The Companys Chief Executive Officer, Sherman L. Black, and the
Companys Chief Financial Officer, James R. Stewart, have evaluated the
Companys disclosure controls and procedures as of December 31, 2010. Based
upon such evaluation, they have concluded that these disclosure controls and
procedures are effective. The Companys Chief Executive Officer and Chief
Financial Officer used the definition of disclosure controls and procedures
as set forth in Rule 13a-15(e) under the Exchange Act in making their
conclusion as to the effectiveness of such controls and procedures.

b)          Changes
in Internal Control Over Financial Reporting

There have been no changes in internal controls over financial
reporting that occurred during the fourth quarter ended December 31, 2010 that
have materially affected, or are reasonable likely to materially affect, the
Companys internal control over financial reporting.

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

|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION

None.

PART III

|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated herein by
reference to the following sections of the Companys Proxy Statement for its
2011 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;                                  
| |   |                                                                     
| |  | Executive
 Officers;                                                
| |   |                                                                     
| |  | 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 sections of the Companys Proxy Statement entitled Executive
Compensation and Director Compensation.

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

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

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

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

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

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

PART IV

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

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

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Table of Contents

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, 2011 | RIMAGE
 CORPORATION
|                       |                     |     |                        
|                       |                     | By: | /s/ Sherman L. Black   
|                       |                     |     | Sherman L. Black       
|                       |                     |     | Chief Executive Officer
|                       |                     |     |                        
|                       |                     | By: | /s/ James R. Stewart   
|                       |                     |     | James R. Stewart       
|                       |                     |     | Chief Financial Officer

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

|                           |  |                                          |  |                |  |  | 
|-------------------------- |  | ---------------------------------------- |  | -------------- |  |  | 
|Signature                  |  | Title                                    |  | Date          
|                           |  |                                          |  |               
|/s/ Sherman L. Black       |  | Chief Executive Officer and
 President   |  | March 14, 2011
|Sherman L. Black           |  | (Principal Executive
 Officer), Director |  |               
|                           |  |                                          |  |               
|/s/ James R. Stewart       |  | Chief Financial Officer
 (Principal      |  | March 14, 2011
|James R. Stewart           |  | Financial and Accounting
 Officer)       |  |               
|                           |  |                                          |  |               
|/s/ James L. Reissner      |  | Director                                 |  | March 14, 2011
|James L. Reissner          |  |                                          |  |               
|                           |  |                                          |  |               
|/s/ Thomas F. Madison      |  | Director                                 |  | March 14, 2011
|Thomas F. Madison          |  |                                          |  |               
|                           |  |                                          |  |               
|/s/ Steven M. Quist        |  | Director                                 |  | March 14, 2011
|Steven M. Quist            |  |                                          |  |               
|                           |  |                                          |  |               
|/s/ Lawrence M. Benveniste |  | Director                                 |  | March 14, 2011
|Lawrence M. Benveniste     |  |                                          |  |               
|                           |  |                                          |  |               
|/s/ Philip D. Hotchkiss    |  | Director                                 |  | March 14, 2011
|Philip D. Hotchkiss        |  |                                          |  |               

53

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Table of Contents

INDEX TO EXHIBITS

|                                                                      |                                                                                                                                                                                                                                                                            
|--------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo.                                                            | Description                                                                                                                                                                                                                                                                
|3.1                                                                   | 1992 Restated Articles of Incorporation of Rimage Corporation
 (Incorporated herein by reference to Exhibit 3.1 to the Companys
 Registration Statement on Form SB-2 (File No. 33-22558)).                                                                                
|                                                                      |                                                                                                                                                                                                                                                                            
|3.2                                                                   | Articles of Amendment to 1992 Restated Articles of Incorporation of
 Rimage Corporation (Incorporated by reference to Exhibit 4.2 to the Companys
 Registration Statement on Form S-8 (File No. 333-69550)).                                                              
|                                                                      |                                                                                                                                                                                                                                                                            
|3.3                                                                   | Amended and Restated Bylaws of Rimage Corporation, as amended
 (Incorporated by reference to Exhibit 3.2 to the Companys Current Report on
 Form 8-K dated March 7, 2007).                                                                                                
|                                                                      |                                                                                                                                                                                                                                                                            
|3.4                                                                   | Rights Agreement dated as of September 17, 2003 between Rimage
 Corporation and Wells Fargo Bank, as Rights Agent (Incorporated by reference
 to Exhibit 1 to the Companys Registration Statement on Form 8-A (File No.
 000-20728)).                                     
|                                                                      |                                                                                                                                                                                                                                                                            
|10.1                                                                  | Rimage Corporation Amended and Restated 1992 Stock Option Plan (as
 amended through May 17, 2005) * (Incorporated by reference to Exhibit 4.1 to
 the Companys Registration Statement on Form S-8 (File No. 333-127244)).                                                 
|                                                                      |                                                                                                                                                                                                                                                                            
|10.2                                                                  | Rimage Corporation 2001 Stock Option Plan for Non-Employee Directors
 * (Incorporated by reference to Exhibit 10.2 to the Companys Annual Report
 on Form 10-K for the year ended December 31, 2001).                                                                     
|                                                                      |                                                                                                                                                                                                                                                                            
|10.3                                                                  | Rimage Corporation Amended and Restated 2007 Stock Incentive Plan *
 (Incorporated by reference to Appendix A to the Companys Proxy Statement for
 the 2009 Annual Meeting of Shareholders held on May 13, 2009).                                                         
|                                                                      |                                                                                                                                                                                                                                                                            
|10.4                                                                  | Amended and Restated Form of Severance/Change in Control Letter
 Agreement dated December 22, 2008, between the Company and certain executive
 officers * (Incorporated by reference to Exhibit 10.1 of the Companys
 Current Report on Form 8-K dated December 22, 2008).
|                                                                      |                                                                                                                                                                                                                                                                            
|10.5                                                                  | Letter from Rimage Corporation to Sherman L. Black regarding offer of
 employment, accepted on January 29, 2009 * (Incorporated by reference to
 Exhibit 10.1 of the Companys Current Report on Form 8-K dated January 29,
 2009).                                        
|                                                                      |                                                                                                                                                                                                                                                                            
|10.6                                                                  | Restricted Stock Agreement dated April 1, 2009 by and between Sherman
 L. Black and the Company * (Incorporated by reference to Exhibit 10.2 of the
 Companys Current Report on Form 8-K dated January 29, 2009).                                                         
|                                                                      |                                                                                                                                                                                                                                                                            
|10.7                                                                  | Stock Option Agreement dated April 1, 2009 by and between Sherman L.
 Black and the Company * (Incorporated by reference to Exhibit 10.1 of the
 Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2009).                                             
|                                                                      |                                                                                                                                                                                                                                                                            
|10.8                                                                  | Letter from Rimage Corporation to Samir Mittal regarding offer of
 employment, accepted on August 20, 2009 * (Incorporated by reference to
 Exhibit 10.1 of the Companys Current Report on Form 8-K dated April 20,
 2009).                                               
|                                                                      |                                                                                                                                                                                                                                                                            
|10.9                                                                  | Letter Agreement dated November 4, 2009 by and between Rimage
 Corporation and Sherman L. Black * (Incorporated by reference to Exhibit 10.1
 of the Companys Current Report on Form 8-K dated November 4, 2009).                                                         
|                                                                      |                                                                                                                                                                                                                                                                            
|10.10                                                                 | Form of Non-Employee Director Restricted Stock Unit Agreement with
 Deferral Election *(Incorporated by reference to Exhibit 10.18 of the
 Companys Annual Report on Form 10-K dated March 12, 2010.                                                                      
|                                                                      |                                                                                                                                                                                                                                                                            
|10.11                                                                 | Termination and Release Agreement dated June 14, 2010 by and between
 Robert M. Wolf and Rimage Corporation * (Incorporated by reference to Exhibit
 10.1 of the Companys Current Report on Form 8-K dated June 14, 2010).                                                
|                                                                      |                                                                                                                                                                                                                                                                            
|10.12                                                                 | Letter from Rimage Corporation to James R. Stewart regarding offer of
 employment, accepted on July 7, 2010 * (Incorporated by reference to Exhibit
 10.1 of the Companys Current Report on Form 8-K dated July 7, 2010).                                                 
|                                                                      |                                                                                                                                                                                                                                                                            
|21.1                                                                  | Subsidiaries of Rimage Corporation.                                                                                                                                                                                                                                        
|                                                                      |                                                                                                                                                                                                                                                                            
|23.1                                                                  | Consent of KPMG LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                                        
|                                                                      |                                                                                                                                                                                                                                                                            
|31.1                                                                  | Certificate of Chief Executive Officer pursuant to Rules 13a-14(a)
 and 15d-14(a) of the Exchange Act.                                                                                                                                                                     
|                                                                      |                                                                                                                                                                                                                                                                            
|31.2                                                                  | Certificate of Chief Financial Officer pursuant to Rules 13a-14(a) and
 15d-14(a) of the Exchange Act.                                                                                                                                                                     
|                                                                      |                                                                                                                                                                                                                                                                            
|32                                                                    | Certification pursuant to 18 U.S.C. §1350.                                                                                                                                                                                                                                 
|                                                                     
|* Indicates a management contract or compensatory plan or arrangement

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Table of Contents

Schedule II

RIMAGE CORPORATION 
Valuation and Qualifying Accounts
(in thousands)

|                                            |  |                          |     |      |   |      |   |   |     |  
|------------------------------------------- |  | ------------------------ | --- | ---- | - | ---- | - | - | --- | -
|Allowance for Doubtful Accounts Receivable: |  |                          |     |      |   |      |   |   |     |  
|                                           
|                                            |  | Years ended December 31, |    
|                                            |  | 2010                     |     | 2009 |   | 2008 |  
|                                            |  |                          |     |      |   |      |   |   |     |  
|Balance at beginning of year                |  | $                        | 206 |      | $ | 196  |   | $ | 244 |  
|                                            |  |                          |     |      |   |      |   |   |     |  
|Write-offs and other adjustments            |  |                          | (85 | )    |   | (132 | ) |   | (52 | )
|Recoveries                                  |  |                          | 1   |      |   | 6    |   |   | (6  | )
|Additions charged to costs and expenses     |  |                          | 79  |      |   | 136  |   |   | 10  |  
|                                            |  |                          |     |      |   |      |   |   |     |  
|Balance at end of year                      |  | $                        | 201 |      | $ | 206  |   | $ | 196 |  

See
accompanying report of Independent Registered Public Accounting Firm.

55

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