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.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

Rimage develops, manufactures and distributes CD-Recordable (CD-R) and DVD-Recordable (DVD-R) publishing and duplication systems from its operations in the United States, Germany and Japan. These systems allow customers to benefit from cost savings by reducing their manual labor efforts in industries such as photography, medical, banking and government. Rimage anticipates increased sales and marketing expenditures as a result of increased resources focused on developing these markets. As Rimage’s sales within North America and Europe have averaged 94% of total sales over the past three years, the strength of the economies in each of these regions plays an important role in determining the success of Rimage.

Rimage earns revenues through the sale of equipment, consumables (ribbons, ink cartridges, media kits and Rimage-branded blank CD-R and DVD-R media), maintenance contracts, parts and repair services. Rimage’s recurring revenues (consumables, maintenance contracts, parts and service) comprised approximately 46% and 39% of consolidated revenues during the six months ended June 30, 2006 and 2005, respectively. Exclusive of a small amount of capital lease obligations, Rimage has no long-term debt and does not require significant capital investments as all fabrication of its products is outsourced to vendors.

Stock-Based Compensation

The Company implemented the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based Payment” effective January 1, 2006, using the modified prospective method, and therefore has not restated prior periods’ results. Prior to the adoption of SFAS 123R, the Company followed the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” to account for the issuance of stock incentives to employees and directors. Accordingly, no compensation expense was recognized for equity compensation awards granted with no intrinsic value and the proforma disclosures required by SFAS 123 were presented in the notes to the Company’s consolidated financial statements.

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

As a result of the adoption of SFAS 123R, the Company’s income before taxes as reported in the Consolidated Statements of Income for the three and six months ended June 30, 2006, was $0.4 million and $0.6 million lower, respectively, than under the previous accounting method for stock-based compensation. In addition, basic net income per share for the three and six months ended June 30, 2006 was $.03 and $.05 lower, respectively, and diluted net income per share was $.02 and $.04 lower, respectively, than under the previous accounting method. SFAS 123R also requires that the benefits of tax deductions in excess of recognized compensation expense be reported as a component of cash flows from financing activities in the Consolidated Statements of Cash Flows. This change increased cash flows provided by financing activities by $0.8 million and reduced cash flows provided by operating activities by the same amount. Compensation cost not yet recognized as of June 30, 2006 related to nonvested awards totaled $2.7 million, which is expected to be recognized over a weighted average period of 1.47 years.

Results of Operations

Revenues. Revenues increased 14% to $25.3 million and 11% to $48.0 million for the three and six months ended June 30, 2006, respectively, from $22.3 million and $43.2 million for the respective prior-year periods. The growth in revenues for both the quarterly and year-to-date periods was impacted by a $1.9 million and a $5.4 million respective increase in the volume of recurring revenues, consisting of sales of media kits, blank CD-R and DVD-R media, printer ribbons, ink cartridges, parts and maintenance contracts. The strong 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. Additionally, revenues for the three months ended June 30, 2006 reflect a $2.2 million increase in the volume of producer product line equipment sales, primarily driven by increased sales into retail applications. Sales of desktop product line equipment decreased $1.1 million in the second quarter 2006, due to strong sales in the same prior year quarter of the Rimage 360i desktop product, released in April 2005.

International sales rose 11% for both the three and six months ended June 30, 2006 over the same prior year periods and comprised 34% and 36% of total sales, respectively, consistent with the same periods in the prior year. The European market continued to generate the majority of international sales, and contributed most of the increase in both current year periods. Sales in Asian markets also increased, reflecting increased sales efforts in this region with the establishment of a subsidiary operation in Japan in 2005. Currency fluctuations affecting the Company’s European and Japanese operations had a minimal impact on reported revenues for the three months ended June 30, 2006, and decreased reported revenues for the six months ended June 30, 2006 by approximately $0.8 million, or less than 2% of consolidated revenues.

As of and for the six months ended June 30, 2006, foreign revenues from unaffiliated customers generated by the Company’s German and Japanese operations and the operating income and net identifiable assets of such operations were $14.7 million, $0.2 million and $7.4 million, respectively. These amounts related primarily to the Company’s German operations, as the establishment of subsidiary operations in Japan occurred in June 2005. Comparable amounts for the Company’s German and Japanese operations as of and for the six months ended June 30, 2005 were revenues of $12.9 million, operating income of $0.5 million and net identifiable assets of $6.6 million. The growth is due to increasing penetration in foreign markets of sales of CD-R and DVD-R products.

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

The Company is estimating that third quarter 2006 consolidated revenues will range between $23 million and $25 million.

Gross profit. Gross profit as a percentage of revenues was 46% and 44% for the three and six months ended June 30, 2006, respectively, compared to 43% and 45% for the respective prior year periods. The increase in gross profit as a percentage of revenues for the second quarter 2006 primarily reflects an increase in both the volume and concentration of producer product line equipment sales, which generally carry higher margins than desktop product line equipment or recurring revenues. Producer product line equipment sales comprised 46% of sales in the second quarter 2006, compared to 43% in the same quarter in the prior year. Also favorably impacting the second quarter gross profit was a decline in lower margin desktop product line equipment sales. The small decline in gross profit as a percentage of revenues for the year-to-date period in 2006 was impacted by an increase in both the volume and concentration of recurring revenues, which generally carry lower margins than equipment sales. Recurring revenues comprised 46% of total revenues for the six months ended June 30, 2006, compared to 39% in the same prior year period. The decline in gross profit as a percentage of revenues for the year-to-date period was also impacted by increased manufacturing and service labor and overhead costs stemming from increased investments in these areas to support an expected continued growth in total sales. Stock-based compensation expense included in cost of revenue for the three and six months ended June 30, 2006 had a minimal impact on gross profit as a percentage of revenues, and amounted to $16,000 and $32,000, respectively.

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

Operating expenses. Research and development expenses totaled $1.7 million and $3.3 million for the three and six months ended June 30, 2006, respectively, representing approximately 7% of revenues for both periods. Expenses for the same prior year periods totaled $1.5 million and $2.8 million, representing 7% and 6% of revenues, respectively. The 16% and 20% respective increases in expenses for the three and six months ended June 30, 2006 were primarily due to an 18% increase in average headcount to support continued development of new products and enhancements to existing products. Research and development expenses for the three and six months ended June 30, 2006 were minimally impacted by stock-based compensation expense of $37,000 and $81,000, respectively.

Rimage anticipates continued expenditures in research and development in 2006 to support new product development initiatives and to improve existing products.

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

Selling, general and administrative expenses for the three and six months ended June 30, 2006 were 20% and 23% of revenues at $5.0 million and $11.1 million, respectively, compared to expenses in the same prior year periods at 21% of revenues, or $4.8 million and $9.1 million, respectively.

The net dollar growth in selling, general and administrative expenses for the three and six months ended June 30, 2006 reflects a decrease in sales and marketing expenses of $0.5 million and $0.2 million, respectively, and an increase in general and administrative expenses of $0.7 million and $2.1 million, respectively. The decline in sales and marketing expenses is primarily the result of reduced costs for advertising and promotional activities due to implementation of programs in the prior year’s second quarter to support the launch of the Rimage 360i desktop product, and a reduction in cooperative marketing program costs resulting from the Company’s transition to an alternative program format with its distributors. The increase in general and administrative expenses for both the quarterly and the year-to-date periods was impacted by $0.5 million of expenses incurred to support the implementation of a new enterprise resource planning system. Also significantly impacting expenses for the six months ended June 30, 2006 were $1.2 million of consulting expenses incurred in the first quarter for the completion of a strategic analysis of the Company’s operations and new applications for its products. Stock-based compensation expenses increased aggregate selling, general and administrative expenses by $0.3 million and $0.45 million for the three and six months ended June 30, 2006, respectively.

Other income, net. The Company recognized net interest income on cash investments of $0.7 million and $1.3 million for the three and six months ended June 30, 2006, compared to $0.3 million and $0.6 million for the same prior year periods. The increase in the quarterly and year-to-date periods was due to a $14 million and $13 million respective increase in average cash equivalent and marketable securities balances and an increase in effective yields. Other income in each period was negatively impacted by net losses on foreign currency transactions, amounting to $39,000 and $27,000 for the three and six months ended June 30, 2006, respectively, compared to $6,000 and $73,000 for the respective prior year periods.

Income taxes. The provision for income taxes represents federal, state and foreign income taxes on income. Income tax expense for the three and six months ended June 30, 2006 amounted to $2.2 million and $3.2 million, or 39.3% and 38.6% of income before taxes, respectively. Income tax expense for the three and six months ended June 30, 2005 was $1.4 million and $2.9 million, or 38.1% and 36.7% of income before taxes, respectively. The increase in the effective tax rate in the current year periods primarily reflects the impact of a valuation allowance on the projected pre-tax loss for Rimage Japan, the impact of non tax deductible equity compensation expense associated with incentive stock options and a reduced benefit for the research tax credit, impacted by the delay in the U.S. government’s expected reinstatement of the federal research credit for 2006.

Net income / net income per share. Resulting net income for the three and six months ended June 30, 2006 was $3.4 million, or 13.3% of revenues, and $5.0 million, or 10.5% of revenues, respectively. Comparable amounts for the three and six months ended June 30, 2005 were net income of $2.3 million, or 10.3% of revenues, and $5.0 million, or 11.5% of revenues, respectively. Related net income per diluted share amounts for the three and six months ended June 30, 2006 were $0.33 and $0.49, respectively, compared to $0.22 and $0.49 per diluted share for the respective prior year periods. The Company expects third quarter 2006 net income to range between $0.24 to $0.28 per diluted share.

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

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. This credit agreement allows for advances under an unsecured revolving loan up to a maximum advance of $10 million. At June 30, 2006, no amounts were outstanding under the credit agreement.

At June 30, 2006, the Company had working capital of $64.7 million, a decrease of $9.3 million from working capital reported at December 31, 2005. The decline was primarily impacted by the purchase of $16.3 million of non-current marketable securities and capital expenditures of $1.1 million, partially offset by year-to-date net income of $5.0 million and proceeds from stock option exercises of $1.0 million. The Company intends on utilizing its current assets primarily for its continued organic growth. To help strengthen the Company’s ability to manage anticipated future growth, the Company expects to invest approximately $4 million in 2006 for the implementation of an enterprise resource planning system. Additionally, the Company may use its available cash for potential future strategic initiatives or alliances.

Net cash provided by operating activities totaled $4.4 million for the six months ended June 30, 2006, compared to $4.2 million in the same prior year period. The $0.2 million increase in cash generated from operations was primarily impacted by a $0.6 million increase in net income adjusted for non-cash items and a $0.4 million smaller use of cash from changes in operating assets and liabilities, partially offset by the impact of an $0.8 million non-cash reduction in operating cash flows associated with excess tax benefits recognized as an addition to the APIC (additional paid-in capital) pool under SFAS 123R. SFAS 123R requires such amounts to be reported as an addition to financing activities and a reduction in operating activities in the Statements of Cash Flows. Primarily contributing to the change in operating assets and liabilities compared to the prior year’s year-to-date period was a $1.0 million variation in the change in prepaid expenses, a $0.5 million smaller increase in accounts receivable and a $0.45 million larger increase in deferred income, partially offset by reductions or smaller increases in accounts payable and accrued expenses. The change in prepaid expenses was primarily due to the impact on the prior year’s six month period of an $0.8 million prepayment in the first quarter for the renewal of a paid-up software license agreement, compared to a decline in prepaid expenses for the first six months of 2006. The increase in deferred income occurred due to the sale of maintenance contracts on a growing base of installed CD-R and DVD-R publishing systems. The net reduction in accounts payable and accrued expenses during the six months ended June 30, 2006 was impacted by the payment of $1.8 million of consulting fees accrued at December 31, 2005.

Net cash provided by investing activities was $7.0 million for the six months ended June 30, 2006, compared to $4.7 million during the same period in 2005. The increase in cash provided by investing activities was the result of a $2.2 million increase in maturities of marketable securities, net of related purchases of marketable securities, partially offset by a $0.2 million increase in capital expenditures. Capital expenditures for the six months ended June 30, 2006 totaled $1.1 million, and consisted primarily of the purchase of enterprise resource planning system software and related hardware.

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

Net cash provided by financing activities totaled $1.7 million and $0.5 million for the six months ended June 30, 2006 and 2005, respectively. Financing activities in each period included proceeds from stock option exercises of $1.0 million and $0.6 million, respectively. Additionally, the current year period includes $0.8 million associated with excess tax benefits recognized as an addition to the APIC pool, which as discussed above, are required to be reported as an addition to financing activities in the Statements of Cash Flows under the provisions of SFAS 123R.

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. With the implementation effective January 1, 2006 of SFAS 123R, “Share-Based Payment,” the Company has added as a new critical accounting policy its accounting for stock-based compensation, discussed below.

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 three and six months ended June 30, 2006.

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 SAB Topic 13(A)(1) have been satisfied:

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

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

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

Revenue for maintenance agreements is recognized on a straight-line basis over the life of the contracts (commencing once the period covered by standard warranty expires).

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

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

Inventory Reserves. The Company records reserves for inventory shrinkage and for potentially excess, obsolete and slow moving inventory. The amounts of these reserves are based upon 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.

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

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

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

Stock-Based Compensation. The Company implemented the fair value recognition provisions of SFAS No. 123R effective January 1, 2006 using the modified prospective method. Under this method, the Company recognizes compensation expense 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 utilizes a Black-Scholes option pricing model to estimate the fair value of each award on the date of grant. The Black-Scholes model requires the input of certain assumptions that involve management judgment. Key assumptions that affect the calculation of fair value include the expected life of stock-based awards and the Company’s stock price volatility. Additionally, the Company is required to estimate the expected forfeiture rate of unvested awards and recognize expense for only those shares expected to vest. The assumptions used in calculating the fair value of stock-based awards and the forfeiture rate of such awards reflect management’s best estimates. However, circumstances may change and additional data may become available over time, which could result in changes to these assumptions that materially impact the fair value determination of future awards or their estimated rate of forfeiture. If factors change and the Company uses different assumptions in the application of SFAS 123R in future periods, the compensation expense recorded under SFAS 123R may differ significantly from the expense recorded in the current period. See Note 2 under the Notes to Condensed Consolidated Financial Statements in this Form 10Q for additional information on stock-based compensation.

Recently Issued Accounting Standards

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This Interpretation is effective for the Company beginning in fiscal year 2007. The Company is currently evaluating the impact of adopting this pronouncement on its consolidated financial statements and related disclosures.

Cautionary Note Regarding Forward-Looking Statements

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.

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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 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, banking, government and office 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, including the costs of implementing and complying with new regulations enacted in various countries requiring the reduction of hazardous substances in electrical and electronic equipment, including the European Union Waste Electrical and Electronic Equipment Directive and Restriction of Hazardous Substances Directive; 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, 2005. 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.

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

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

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.

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Item 4.     Controls and Procedures

(a)  Evaluation of Disclosure Controls and Procedures

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

(b)  Changes in Internal Control Over Financial Reporting

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

PART II — OTHER INFORMATION

The Company’s Annual Meeting of Shareholders’ was held on May 16, 2006. Of the 9,806,317 shares outstanding and entitled to vote at the meeting, 9,118,697 shares were present, either in person or by proxy. The following describes the matters considered by the Company’s shareholders at the Annual Meeting, as well as the results of the votes cast at the meeting:

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SIGNATURES

In accordance with the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

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