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RIMAGE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED JUNE 30, 2004

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PART 1 FINANCIAL INFORMATION

Item 1.   Unaudited Financial Statements

RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
(Unaudited)

See accompanying condensed notes to consolidated financial statements

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RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)

See accompanying condensed notes to the consolidated financial statements

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RIMAGE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)

See accompanying condensed notes to the consolidated financial statements

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RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Continued)

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RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Continued)

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RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Continued)

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RIMAGE CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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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 operations. Percentage amounts may not total due to rounding.

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 and Germany. These systems allow customers to benefit from cost savings by eliminating their manual labor efforts in industries such as banking, medical, photography and government. Rimage anticipates increased sales and marketing expenditures as a result of increased resources focused on developing these markets. As approximately 94% of Rimage’s sales occur within North America and Europe, 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 (media kits, ribbons, ink cartridges and blank CD-R and DVD-R media), maintenance contracts, parts and service. Rimage’s aftermarket sales (consumables, maintenance contracts, parts and service) represent approximately 39% of its consolidated revenues. Rimage has no long-term debt and does not require significant capital investment as all fabrication of its products is outsourced to vendors.

Results of Operations

Revenues.   Revenues increased 37.8% to $17.6 million and 31.8% to $32.1 million for the three- and six-month periods ended June 30, 2004, respectively, from $12.8 million and $24.3 million for the same prior-year periods. The increase in revenues was primarily due to sales of Rimage-branded media kits totaling $1.8 million and $2.4 million, increased producer line sales of $1.2 million and $2.1 million, and increased consumable sales of $948,000 and $1.7 million for the three- and six-

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

month periods ended June 30, 2004, respectively. The increase in revenues was also due to the positive impact on our European operations of the weakening U.S. dollar.

As of and for the six months ended June 30, 2004, foreign revenues from unaffiliated customers, operating income, and net identifiable assets were $10,934,000, $459,000 and $5,136,000, respectively. As of and for the six months ended June 30, 2003, foreign revenues from unaffiliated customers, operating income, and net identifiable assets were $8,992,000, $306,000 and $5,462,000, respectively. The growth is due to increasing penetration in the European markets of sales of CD-R and DVD-R products in 2004 versus 2003.

Gross profit.   Gross profit as a percent of revenues was 45.8% and 47.2% for the three- and six-month periods ended June 30, 2004, respectively, compared to 49.5% and 49.6% for the same prior-year periods. The decrease during the three- and six-month period ended June 30, 2004 was primarily due to the incremental sales of lower margin Rimage branded media kits which the Company began to sell in 2004, additional manufacturing costs related to the June introduction of the next-generation Desktop product line, and inventory costs associated with the discontinuation of the previous Desktop product line.

Operating expenses.   Selling, general and administrative expenses during the three- and six-month periods ended June 30, 2004 were $2.8 million or 20.7% of revenues and $6.9 million or 21.4% of revenues, respectively compared to $2.8 million or 22.1% of revenues and $5.5 million or 22.4% of revenues during the same prior year periods. The increase of $1.4 million during the six-month period ended June 30, 2004 primarily related to focused efforts to strengthen the Company’s sales and marketing organization. Research and development expense during the three- and six-month periods ended June 30, 2004 were $1.2 million or 7.2% of revenues and $2.4 million or 7.3% of revenues, respectively compared to $927,000 or 7.2% of revenues and $1.8 million or 7.3% of revenues during the same periods of 2003. This increase is due to increased development cost related to new product development during 2004 versus 2003.

Other income/(expense).   The Company recognized net interest income on cash investments of $124,000 and $267,000 during the respective three- and six-month periods ended June 30, 2004 compared to $134,000 and $271,000 during the same prior year periods. This decrease is due to a decrease in interest rates. Also included in other income, the Company recognized a $14,000 loss and $24,000 loss on foreign currency exchange for both the three- and six-month periods ended June 30, 2004 compared to a $9,000 gain and $13,000 loss during the same prior year periods.

Income taxes.   The provision for income taxes represents federal, state, and foreign income taxes on earnings before income taxes. Income tax expense for the three- and six-month periods ended June 30, 2003 amounted to $1.2 million and $2.2 million, or 36.5% of income before income taxes, respectively. The Company anticipates an effective tax rate of 36.5% for the remainder of 2004. Income tax expense for the three- and six-month periods ended June 30, 2003 amounted to $1.0 million and $1.9 million or 36.5%, of income before income taxes, respectively.

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

Liquidity and Capital Resources

The Company expects to fund its anticipated cash requirements (including the anticipated cash requirements of its capital expenditures) with internally generated funds and, if required, from the Company’s existing credit agreement. This credit agreement allows for advances under an unsecured revolving loan up to a maximum advance of $10,000,000. At June 30, 2004, there were no amounts outstanding under the credit agreement.

Current assets increased to $65.1 million as of June 30, 2004 compared to $59.8 million as of December 31, 2003, primarily reflecting increased accounts receivable and inventory levels. The increase in accounts receivable is due to a significant portion of the Company’s sales occurring during June 2004. The increase in inventory is due to the buildup of inventory for long lead-time materials and newly released products including the new Desktop products. The Company intends on utilizing its current assets primarily for its continued organic growth. In addition, the Company may use its available cash for potential future acquisitions. The allowance for doubtful accounts and sales returns as a percentage of receivables was 7% and 10% as of June 30, 2004 and 2003, respectively. This reduction is primarily due to decreased sales returns activity. Current liabilities increased to $10.2 million as of June 30, 2004 compared to $9.0 million as of December 31, 2003 primarily reflecting timing of accounts payable payments.

Net cash provided by operating activities was $1.3 million and $3.5 million for the six months ended June 30, 2004 and 2003, respectively. This decrease was primarily the result of increased inventory levels of long lead-time items and newly released products including the new Desktop products and an increase in accounts receivables due to the timing of collection of receivables offset by an increase in accounts payables due to timing of payments.

Net cash provided by (used in) investing activities was $7.1 million and $(3.5) million for the six months ended June 30, 2004 and 2003, respectively. This increase was primarily due to fewer purchases of short-term investments during the six months ended June 30, 2004. Net cash provided by financing activities of $418,000 and $489,000 during the six months ended June 30, 2004 and 2003, respectively, represented proceeds from stock option exercises.

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 following accounting policies 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:

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

Revenue Recognition.   Revenue for product sales, including hardware and consumables, which are bundled together for shipment to the customer, is recognized on shipment, at which point the following criteria of SAB 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 the risk of loss transfers.
• The vendor’s price is fixed or determinable. All sales prices are fixed at the time of the sale (shipment).
• Collectibility is probable. All sales are made on the basis that collection is expected in line with our standard net 30 days’ terms.

We accrue for warranty costs and sales returns at the time of shipment based upon past experiences.

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) based on renewal prices.

Revenue Arrangements with Multiple Deliverables.   EITF 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. In some arrangements, the different revenue-generating activities are sufficiently separable and there exists sufficient evidence of their fair values to separately account for some or all of the activities. In other arrangements, some or all of the deliverables are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. This issue addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. This issue does not change otherwise applicable revenue recognition criteria. The adoption of EITF 00-21 did not have any impact on the financial position or results of operations of the Company.

Allowance For Doubtful Accounts And Sales Returns.   The Company records a reserve for accounts receivable that are potentially uncollectible. The reserve is established by estimating the amounts that are potentially uncollectible based on a review of customer accounts, the age of the receivable, the customer’s financial condition and industry, and general economic conditions. 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. Results could be materially different if economic conditions worsened for the Company’s customers.

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, physical inventory and cycle count adjustments, 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.

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

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 records a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, anticipated 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.

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. Factors that could cause or contribute to such differences include, but are not limited to, changes in media or method used for distribution of software, technological changes in products offered by the Company or its competitors and changes in general conditions in the computer market, as well as other factors not now identified. 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.

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Item 3.   Quantitative and Qualitative Disclosures about Market Risk

The Company has a policy of using forward exchange contracts to hedge net exposures related to its foreign currency-denominated monetary assets and liabilities. The primary objective of these hedging activities is to maintain an approximately balanced position in foreign currencies so that exchange gains and losses resulting from exchange rate changes, net of related tax effects, are minimized. (See footnote 6.)

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 review, they have concluded that these disclosure controls and procedures are effective in ensuring that material information related to the Company is made known to them by others within the Company.

(b)   Changes in Internal Control Over Financial Reporting

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

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PART II — OTHER INFORMATION

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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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