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

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

Overview

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

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

The Company expects it will be able to maintain current operations, including anticipated capital expenditure requirements, through its internally generated funds and, if required, from Rimage's existing credit agreement. The credit agreement allows for advances under an unsecured revolving loan up to a maximum advance of $10 million. At December 31, 2008, no amounts were outstanding under the credit agreement.

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

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

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

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

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

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

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

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

(1) Amounts include principal and interest.

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

Critical Accounting Policies

Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company's accounting policies. The accounting policies described below are considered by management to be the most critical to the presentation of the consolidated financial statements because they require the most difficult, subjective and complex judgments. Management made no changes to the Company's critical accounting policies during the year ended December 31, 2008.

In applying the critical accounting policies described below, management reassesses its estimates each reporting period based on available information. Changes in such estimates did not have a significant impact on earnings for the year ended December 31, 2008.

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

• Persuasive evidence of an arrangement exists. Orders are received for all sales and sales invoices are mailed on shipment.

• Delivery has occurred. Product has been transferred to the customer or the customer's designated delivery agent, at which time title and risk of loss transfers.