The following table sets forth, for the periods indicated, selected items from the Company's condensed consolidated statements of income.

                                            Percentage (%)          Percentage (%)
                                             of Revenues          Increase/(Decrease)
                                          Three Months Ended       of Dollar Amounts
                                              March 31,             Between Periods
                                           2009         2008         2009 vs. 2008
  Revenues                                   100.0       100.0                   (19.3 )
  Cost of revenues                           (53.3 )     (57.5 )                 (25.1 )
  Gross profit                                46.7        42.5                   (11.5 )
  Operating expenses:
  Research and development                   (10.8 )      (5.9 )                  46.2
  Selling, general and administrative        (29.1 )     (29.2 )                 (19.5 )
  Operating income                             6.8         7.4                   (26.1 )
  Other income, net                            2.8         4.8                   (52.8 )
  Income before income taxes                   9.6        12.2                   (36.5 )
  Income tax expense                          (3.1 )      (4.3 )                 (41.8 )
  Net income                                   6.5         7.9                   (33.7 )

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 reducing or 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 condensed consolidated statements of income), as well as maintenance contracts, repair and installation services (included in Service revenues on the condensed consolidated statements of income). Rimage's recurring revenues (consumables, parts, maintenance contracts and service) comprised 64% and 62% of its consolidated revenues during the three months ended March 31, 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 for its ongoing operations as all fabrication of its products is outsourced to vendors.

Revenues. Total revenues decreased 19% to $18.4 million for the three months ended March 31, 2009 from $22.7 million for the same prior-year period. The $4.4 million reduction in total revenues between periods reflects a $5.1 million or 25% decline in product revenues, partially offset by a $0.7 million or 30% increase in service-related revenues. The reduction in product revenues resulted from a $3.1 million and $2.0 million reduction in sales of consumable products and equipment, respectively.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

The decrease in consumable product sales consisted primarily of declines in the volume of media and media kit sales of $1.5 million and ribbon and ink cartridge sales of $1.3 million. The lower level of media and media kit sales in the current period was largely impacted by the timing of an order from a retail customer. Equipment sales reflect a $1.4 million and $0.6 million decline in sales of Producer and Desktop product line equipment, respectively, from the same prior-year period. The overall decline in equipment sales was primarily impacted by a reduced volume of sales to the Company's U.S. channel partners. The reduction in equipment sales was also impacted by a shift in the distribution of sales to lower-end Producer products with lower average selling prices. The growth in service-related revenues was primarily impacted by a higher level of maintenance contract revenue recognized in the current period.

Recurring revenues, consisting of consumables, parts, maintenance contracts and service, comprised 64% of total revenues for the three months ended March 31, 2009, compared to 62% in the same prior-year period. Sales of Producer product line equipment comprised 31% of total revenues in both the first quarter 2009 and the prior year's comparable period. Remaining revenues in each period were generated by sales of Desktop product line equipment, representing 5% and 7% of revenues for the three months ended March 31, 2009 and 2008, respectively.

International sales decreased 10% in the first quarter of 2009 compared to the same period last year and comprised 48% of total sales, compared to 43% in the prior year's first quarter. Currency fluctuations primarily affecting the Company's European operation generated the decline in international revenues and reduced reported consolidated revenues for the three months ended March 31, 2009 by 5% compared to the same prior-year period.

As of and for the three months ended March 31, 2009, the Company's German and Japanese operations generated foreign revenues from unaffiliated customers of $8.0 million and operating income of $0.1 million. Net identifiable assets for these operations amounted to $9.5 million. These amounts pertain primarily to the Company's German operations. Comparable amounts for the Company's German and Japanese operations as of and for the three months ended March 31, 2008 were revenues of $8.8 million, operating income of $0.2 million and net identifiable assets of $10.7 million.

Gross profit. Gross profit as a percentage of total revenues was 47% for the three months ended March 31, 2009, compared to 43% for the same period in 2008. The rise in gross profit as a percentage of total revenues resulted primarily from a higher level of maintenance contract revenues in the current period, coupled with reduced service costs related to improvements in the serviceability of the Company's products and lower compensation costs stemming from workforce reductions over the prior twelve-month period. Also contributing to the improvement in gross profit as a percentage of total revenue was a lower volume and concentration of sales of media and media kits, which generally carry lower margins than other product offerings, comprising 17% of revenues in the first quarter of 2009 compared to 20% in same period in 2008. Partially offsetting the favorable impact of the above was a shift in the distribution of equipment sales to lower-end Producer products, resulting in lower average selling prices and reduced equipment margins.

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.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Operating expenses. Research and development expenses totaled $2.0 million, or 11% of revenues, and $1.4 million, or 6% of revenues, for the quarterly periods ended March 31, 2009 and 2008, respectively. The increase in expenses between periods resulted from a higher level of investments in new product development as well as continued enhancements to existing products. Rimage anticipates expenditures in research and development to continue at a similar level in the second quarter of 2009.

Selling, general and administrative expenses for the three months ended March 31, 2009 amounted to $5.3 million, or 29% of revenues, compared to $6.6 million, or 29% of revenues for the three months ended March 31, 2008. The $1.3 million decline in expenses primarily reflects the impact of cost reduction measures implemented over the prior twelve-month period, including reduced compensation related costs stemming from workforce reductions and the absence of personnel recruiting costs ($0.5 million), reduced expenditures for marketing and promotional programs ($0.3 million) and reduced travel expenses ($0.2 million). Also contributing to the decrease in expenses was the impact of currency fluctuations primarily affecting the Company's European operation ($0.2 million). The Company expects a similar level of selling, general and administrative expenses in the second quarter of 2009.

Other income, net. The Company recognized net interest income on cash and marketable securities of $0.6 million for the three months ended March 31, 2009, compared to $0.8 million for the same prior-year period. The reduction in interest income in the current period was the result of a decline in average effective yields approximating one percentage point relative to the same prior-year period. Other income for the three months ended March 31, 2009 included a net loss on foreign currency transactions of $45,000, compared to a net gain on foreign currency transactions of $247,000 in the same prior-year period. Translation gains of $0.2 million associated with an intercompany loan that was deemed to be permanently invested in the first quarter of 2008 were recorded as transaction gains during the first quarter of 2008, but should have been recorded as other comprehensive income at that time. The Company recorded a pre-tax out-of-period adjustment during the second quarter 2008 to reduce the transaction gains and to increase other comprehensive income to properly state other comprehensive income as of June 30, 2008.

Income taxes. The provision for income taxes represents federal, state and foreign income taxes on income. Income tax expense for the three months ended March 31, 2009 and 2008 amounted to $0.6 million and $1.0 million, respectively, or 32.6% and 35.5% of income before taxes in each respective period. The decrease in the effective tax rate for the three months ended March 31, 2009 primarily reflects the impact of tax-exempt interest income comprising a larger percentage of pre-tax income, the impact of a lower tax bracket from lower pre-tax income, an increased benefit from the research credit and the recognition of a benefit in the first quarter 2009 for a reduction in the liability for unrecognized tax benefits related to prior-year income tax positions. Partially offsetting the favorable impact of the above was the increased impact of recording no tax benefit on foreign operating losses for the Company's Japanese subsidiary and a reduced benefit from the manufacturer's tax deduction. The Company anticipates its effective tax rate will range between 34% and 35% for the full year 2009.

Net income / net income per share. Resulting net income for the three months ended March 31, 2009 was $1.2 million, or 6% of revenues. This compares to net income of $1.8 million, or 8% of revenues for the same prior-year period. Related net income per diluted share amounts were $0.13 and $0.18 for the three months ended March 31, 2009 and 2008, respectively, reflecting a 7% reduction in diluted weighted average shares outstanding between periods.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

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, if required, from Rimage's existing credit agreement. This credit agreement allows for advances under an unsecured revolving loan up to a maximum advance of $10 million. At March 31, 2009, no amounts were outstanding under the credit agreement.

At March 31, 2009, the Company had working capital of $71.7 million, an increase of $9.6 million from working capital reported at December 31, 2008. The increase was primarily the result of the impact of a non-cash change in the classification of $9.9 million of marketable securities from non-current as of December 31, 2008 to current as of March 31, 2009 and net income of $1.2 million, partially offset by a $1.6 million net use of cash to purchase non-current marketable securities.

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, if any, using cash on hand. During the three months ended March 31, 2009, the Company did not repurchase any shares of its common stock. 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 $1.3 million for the three months ended March 31, 2009, compared to a $3.1 million net use of cash in operating activities in the same prior-year period. The $4.4 million favorable change in cash generated from operating activities resulted from changes in operating assets and liabilities producing a $4.7 million smaller net use of cash in the current-year period compared to the same prior-year period, partially offset by a reduction in net income adjusted for non-cash items of $0.3 million between periods. Primarily contributing to the change in operating assets and liabilities compared to the comparable prior-year period was a $4.7 million favorable change in the aggregate amount of trade accounts payable, accrued compensation and accrued expenses and a $1.8 million smaller increase in net prepaid income taxes, partially offset by an unfavorable variation of $1.8 million in receivables. The change in trade accounts payable, accrued compensation and accrued expenses reflects a $0.2 million aggregate increase in the amount of these balances in the first quarter of 2009, compared to a $4.5 million aggregate decrease in the same period last year. These changes were primarily due to reduced payments in the current-year period for inventory purchases, in the case of accounts payable, and reduced payments for bonus accruals, in the case of accrued compensation. The unfavorable change in receivables resulted from a $0.1 million increase in receivables in the current period, compared to a $1.4 million decrease in the comparable prior-year period, primarily impacted by a $1.5 million increase in revenue in March 2009 relative to December 2008 (last month of each quarter), compared to a $0.7 million decrease in revenue between the comparable prior-year periods.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Investing activities used net cash of $1.0 million for the three months ended March 31, 2009, compared to a net generation of cash of $5.3 million for the same prior-year period. The fluctuations in investing activities were primarily the result of $1.0 million in purchases of marketable securities, net of related maturities, during the three months ended March 31, 2009, compared to $5.5 million in maturities of marketable securities, net of related purchases, in the same prior-year period. Purchases of property and equipment during the three months ended March 31, 2009 and 2008 amounted to $0.1 million and $0.2 million, respectively. Capital expenditures in both periods consisted primarily of purchases of office equipment.

Financing activities generated net cash of $0.2 million and $0.9 million for the three months ended March 31, 2009 and 2008, respectively. Financing activities in each period included proceeds from employee stock plans of $0.2 million and $0.9 million, respectively. Financing activities for the three months ended March 31, 2008 also benefited from excess tax benefits recognized as an addition to the additional paid-in capital pool of $0.6 million. Partially offsetting the increases in cash generated by financing activities in the prior year's first quarter was the Company's repurchase of 26,510 shares of its common stock for $0.6 million.

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 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 include revenue recognition, allowance for doubtful accounts and sales returns, inventory provisions, deferred tax asset valuation allowances, accruals for uncertain tax positions, warranty accruals, stock-based compensation and impairment of long-lived assets. These accounting policies are discussed in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report on Form 10-K for the year ended December 31, 2008. Management made no changes to the Company's critical accounting policies during the three months ended March 31, 2009.

In applying its critical accounting policies, 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 three months ended March 31, 2009.

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. The Company adopted SFAS No. 157 for financial assets and liabilities effective January 1, 2008. In February 2008, FASB Staff Position ("FSP") No. 157-2 was issued, which delayed the effective date of FASB No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and liabilities, except for items that are recognized and disclosed at fair value in the financial statements on a recurring basis (at least annually). Effective January 1, 2009, the company adopted the requirements of SFAS No. 157 that had been deferred under FSP No. 157-2. The adoption did not impact the Company's consolidated financial statements and related disclosures for the three months ended March 31, 2009.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities-an Amendment to SFAS No. 133." SFAS No. 161 requires additional quantitative and qualitative disclosures for derivative instruments. The required disclosures include information about an entity's objectives and strategies for using derivatives, the existence and nature of credit-risk-related contingent features in derivative instruments, counterparty credit risk, the relative volume of derivative activity, the fair value of derivative instruments and related amounts of gains and losses. The Company adopted the disclosure provisions of SFAS No. 161 effective January 1, 2009.

In June 2008, the FASB issued FSP No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." FSP No. EITF 03-6-1 requires all outstanding unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) to be considered participating securities and shall be included in the computation of basic and diluted earnings per share using the two-class method. All prior-period earnings per share data presented shall be adjusted retrospectively. The Company adopted FSP No. EITF 03-6-1 effective January 1, 2009. The adoption did not have a material impact on the Company's consolidated financial statements.

In November 2007, the FASB issued EITF No. 07-1, "Accounting for Collaborative Arrangements." This Issue applies to participants in a collaborative arrangement, defined as a contractual arrangement that involves a joint operating activity involving two (or more) parties who are both (a) active participants in the activity and (b) exposed to significant risks and rewards dependent on the commercial success of the activity. Revenues and costs incurred with third parties in connection with a collaborative arrangement should be presented gross or net by the collaborators based on the criteria in EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," and other applicable accounting literature. Payments to or from collaborators should be presented in the income statement based on the nature of the arrangement, the nature of the Company's business and whether the payments are within the scope of other accounting literature. This Issue is effective for the Company as of January 1, 2009, and should be applied to collaborative arrangements in existence at the date of adoption using the modified retrospective method that requires reclassification in all periods presented for those arrangements still in effect at the transition date, unless that application is impracticable. The adoption of EITF No. 07-1 did not have an impact on the Company's consolidated financial statements and related disclosures for three months ended March 31, 2009.

This report contains forward-looking statements that involve risks and uncertainties. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "estimate" or "continue" or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties. The Company's actual results could differ significantly from those discussed in the forward-looking statements.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Factors that could cause or contribute to such differences include, but are not limited to, the following, as well as other factors not now identified:
the economic health of the markets from which Rimage derives its sales and, in particular, the strength of the economies within North America and Europe where the Company has averaged 95% of total sales over the past three years; the Company's ability to keep pace with changes in technology in the computer and storage media industries as well as technology changes in the retail, medical and business services markets; increasing competition and the ability of the Company's products to successfully compete with products of competitors and newly developed media storage products; the ability of the Company's newly developed products to gain acceptance and compete against products in their markets; the significance of the Company's international operations and the risks associated with international operations including currency fluctuations, local economic health and management of these operations over long distances; the Company's ability to protect its intellectual property and to defend claims of others relating to its intellectual property; the Company's dependence upon the selling efforts of the Company's key channel partners; the Company's ability to maintain adequate inventory of products; the Company's reliance on single source suppliers; the ability of the Company's products to operate effectively with the computer products developed and to be developed by other manufacturers; the negative effect upon the Company's business from manufacturing or design defects; the effect of U.S. and international regulation; fluctuations in the Company's operating results; the Company's dependence upon its key personnel; the volatility of the price of the Company's common stock; provisions governing the Company relating to a change of control, compliance with corporate governance and securities disclosures rules and other risks, including those set forth in the Company's reports filed with the Securities and Exchange Commission, including Item 1A of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2008. These forward-looking statements are made as of the date of this report and the Company assumes no obligation to update such forward-looking statements, or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.