ZOMAX OPTICAL MEDIA INC, S-1/A, 1998-04-30

ZOMAX OPTICAL MEDIA INC
S-1/A, 1998-04-30
PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1998

REGISTRATION NO. 333-50553

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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933
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ZOMAX OPTICAL MEDIA, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
MINNESOTA 3652 41-1833089
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code) Identification
incorporation or organization) Number)
</TABLE>

ZOMAX OPTICAL MEDIA, INC.
5353 NATHAN LANE
PLYMOUTH, MINNESOTA 55442
(612) 553-9300

(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

JAMES T. ANDERSON, CHIEF EXECUTIVE OFFICER
ZOMAX OPTICAL MEDIA, INC.
5353 NATHAN LANE
MINNEAPOLIS, MINNESOTA 55442
(612) 553-9300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------

COPIES TO:

MELODIE R. ROSE, ESQ. AVRON L. GORDON, ESQ.
JAMES H. SNELSON, ESQ. BRETT D. ANDERSON, ESQ.
Fredrikson & Byron, P.A. Briggs and Morgan, Professional
Association
900 Second Avenue South, Suite 1100 2400 IDS Center
Minneapolis, Minnesota 55402 Minneapolis, Minnesota 55402
(612) 347-7000 (612) 334-8400

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis, pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering: / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /

------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVENESS UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>

SUBJECT TO COMPLETION, DATED APRIL 30, 1998

2,000,000 SHARES

[LOGO]

COMMON STOCK

Of the Common Stock offered hereby, 1,600,000 shares are being sold by Zomax
Optical Media, Inc. (the "Company" or "Zomax") and 400,000 shares are being sold
by certain selling shareholders (the "Selling Shareholders"). The Company will
not receive any of the proceeds from the sale of the shares by the Selling
Shareholders. The Common Stock is traded on the Nasdaq National Market under the
symbol "ZOMX." On April 29, 1998, the closing sale price of the Common Stock as
reported by the Nasdaq National Market was $16.125 per share. See "Price Range
of Common Stock" and "Principal and Selling Shareholders."

------------------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share.................................. $ $ $ $
Total (3).................................. $ $ $ $
</TABLE>

(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $330,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Common Stock solely to cover over-allotments,
if any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to
Selling Shareholders will be $ , $ , $ and $ ,
respectively. See "Underwriting."

The shares of Common Stock are offered by the several Underwriters subject
to prior sale, when, as and if delivered to and accepted by them, and are
subject to the right of the Underwriters to withdraw, cancel or modify such
offer and to reject any order in whole or in part. It is expected that delivery
of the shares of Common Stock will be made on or about , 1998.

------------------------

JOHN G. KINNARD AND COMPANY,
I N C O R P O R A T E D

CRUTTENDEN ROTH
I N C O R P O R A T E D

PACIFIC CREST SECURITIES INC.
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The date of this Prospectus is , 1998
<PAGE>
The following are registered trademarks of the Company: "Zomax-Registered
Trademark-" and the related logo. Trade names and trademarks of other companies
appearing in this Prospectus are the property of their respective holders.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
<PAGE>

[LOGO]

[background photograph of hand holding a CD]

[photograph of various CD-ROM products manufactured by Zomax for software
publishers, computer manufacturers and other producers of multimedia products]

Complete CD-ROM outsource solutions for the expanding software and computer
industry.

[photograph of various CD-ROM products manufactured by Zomax for software
publishers, computer manufacturers and other producers of multimedia products]

Broad customer base including Gateway 2000, Microsoft, Novell, GT Interactive
and Expert Software.

[photograph of various CDs, diskettes and cassettes]

Multimedia products in all major formats including CD-ROM and diskettes,
CD-Audio and cassettes.

[photograph of various CD-Audios manufactured by Zomax for independent
record labels]

CD-Audio products and services for independent record labels.

<PAGE>

Zomax's Comprehensive Outsource Solution

Zomax is a leading outsource provider to software publishers, computer
manufacturers and other producers of multimedia products. The following
diagram illustrates the complete range of services Zomax offers its
customers. Zomax project managers coordinate all services between the
Customer and the Company.

[diagram depicting Zomax project manager having regular contact and coordination
with the customer regarding each available service, including graphic design,
print management, mastering, replication, CD printing, packaging, warehousing
and inventory management, distribution and fulfillment, and RMA processing]

[photograph of various multimedia products]
Graphic Design
Develop customer's product and packaging design.

[photograph of person examining film of print material for a CD]
Print Management
Manage customer's entire multimedia printing needs.

<PAGE>

[photograph of mastering equipment in operation]
Mastering
"State of the Art" mastering system can create both CD and DVD Masters
(originals).

[photograph of replicating equipment in operation]
Replication
Replication of all major media formats using automated manufacturing
technology.

[photograph of printing equipment in operation]
CD Printing
Automated six color printing labeling and print quality inspection.

[photograph of employees packaging various products manufactured by Zomax]
Packaging
Complete packaging services from automated, standard solutions to highly
custom configurations.

[photograph of warehouse containing products manufactured by Zomax]
Warehousing and Inventory Management
Comprehensive warehouse and inventory
management services to help customers minimize costs and gain quick access to
market.

<PAGE>

[photograph of products manufactured by Zomax packaged for distribution and
fulfillment]
Distribution and Fulfillment
Flexible, just-in-time and direct delivery programs and daily order
fulfillment.

[photograph of Zomax employees processing returned merchandise]
RMA Processing
Maximize customer resources by managing returned, obsolete and excess
customer inventory and test and redistribute computer peripherals.

<PAGE>
PROSPECTUS SUMMARY

THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION OR OUTSTANDING
OPTIONS AND WARRANTS. SEE "DESCRIPTION OF SECURITIES" AND "UNDERWRITING."

THE COMPANY

Zomax Optical Media, Inc. ("Zomax" or the "Company") is a leading outsource
service provider to software publishers, computer manufacturers and other
producers of multimedia products. These outsource services include compact disc
("CD") and digital versatile disc ("DVD") mastering; CD, diskette and cassette
replication; graphic design; print management; CD printing; packaging;
warehousing; inventory management; distribution and fulfillment; and returned
merchandise authorization ("RMA") processing services. By providing a full range
of multimedia services, Zomax differentiates itself from its competitors who
offer only a subset of these services.

Zomax services a broad customer base, including Gateway 2000, Inc.
("Gateway"), Microsoft Corp. ("Microsoft"), Novell, Inc. ("Novell"), GT
Interactive Software Corp. ("GT Interactive") and Expert Software, Inc. ("Expert
Software"). The Company has demonstrated an ability to provide consistently high
quality products and services in a short turnaround time. Zomax believes its
high level of customer service and responsiveness to customers' needs provides
it with a competitive advantage which differentiates the Company from its
competitors. Zomax's expertise and capital investment allow its customers to
focus on their core competencies, reduce costs, accelerate time to market,
access advanced replication and design capabilities, reduce capital investment,
improve inventory management and purchasing power, and access manufacturing,
warehousing and distribution capabilities in a variety of geographic regions.
Zomax has become one of a small number of service providers worldwide to be
awarded select authorized replicator status with Microsoft and in August 1997
was named Gateway's North American Supplier of the Year.

The multimedia services industry is comprised of companies that provide a
wide variety of services to software publishers, computer manufacturers, book
publishers, independent record labels and other producers of multimedia products
ranging from replication only to complete multimedia services. Growing consumer
demand for multimedia products such as CD-ROM (compact disc-read only memory),
DVD-ROM (digital versatile disc-read only memory) and CD-Audio and a
corresponding increase in the installed base of CD and DVD drives and CD-Audio
players have been significant factors driving the demand for outsourced
multimedia services. According to InfoTech Incorporated's Optical Publishing
Industry Assessment, the worldwide installed base of CD-ROM drives increased
from 68 million in 1995 to 195 million in 1997 and is estimated to increase to
338 million in 2000. Furthermore, InfoTech reports that the number of CD-ROMs
replicated worldwide increased from 500 million in 1995 to 1.4 billion in 1997
and is estimated to increase to 2.2 billion in 2000. The worldwide installed
base of DVD-ROM drives is estimated by InfoTech to increase from 330,000 in 1997
to 6.5 million in 1998 and 78 million in 2000. The number of DVD-ROMs replicated
worldwide is estimated to increase from 1.5 million in 1997 to 57 million in
1998 and 580 million in 2000.

Zomax's objective is to be the leading outsource service provider to
software publishers, computer manufacturers and other producers of multimedia
products. The Company's strategy for achieving this objective is to provide
customers with a comprehensive outsource solution to their multimedia service
needs, expand and diversify its customer base by adding new customers and
cross-marketing its full range of services to existing customers, expand its
operations on a national and international basis through acquisitions and
internal growth and capitalize on new and changing technologies, such as DVD.

3
<PAGE>
RECENT ACQUISITIONS

To enhance its position as a leading outsource service provider, Zomax has
expanded its geographic presence by acquiring production capacity as well as
distribution and RMA capabilities. Within the last year, the Company has
acquired Benchmark Media Services, Inc. ("Benchmark"), a software media
replicator located in Minneapolis, Minnesota; three companies in or near San
Jose, California, including Trotter Technologies, Inc. ("TTI"), an RMA
processing, warehousing and distribution company, Primary Marketing Group
("PMG"), a provider of manufacturers' representative services, and Next
Generation Services, LLC ("NGS"), an RMA processor; Primary Marketing Group Ltd.
("PMG Ireland"), an RMA processor and provider of manufacturers' representative
services located in Dublin, Ireland; and certain assets and contractual rights
of Kao Infosystems Company ("Kao"), including an agreement regarding the
manufacture and distribution of products for Novell. Management believes it has
demonstrated an ability to successfully expand through acquisitions and intends
to further explore opportunities for acquisitions as the industry continues to
consolidate. See "Business--Recent Acquisitions."

The Company was incorporated in Minnesota on February 22, 1996 as the
successor to the business of Zomax Optical Media Limited Partnership, a
Minnesota limited partnership (the "Partnership"). Unless otherwise specifically
indicated, references to the Company include its wholly-owned subsidiaries,
Benchmark, TTI, Zomax Services, Inc. ("ZSI"), successor to the operations of PMG
and NGS, and ZSI's wholly-owned subsidiary, PMG Ireland. The Company's executive
offices are located at 5353 Nathan Lane, Plymouth, Minnesota 55442, its
telephone number is (612) 553-9300 and its Internet site is www.zomx.com.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.... 1,600,000 shares

Common Stock offered by the Selling
Shareholders......................... 400,000 shares

Common Stock to be outstanding after
this offering........................ 6,874,892 shares(1)

Use of Proceeds........................ For capital expenditures, working capital and other
general corporate purposes, including acquisitions.
The Company will not receive any of the proceeds
from the sale of the shares by the Selling
Shareholders. See "Use of Proceeds."

Nasdaq National Market Symbol.......... ZOMX
</TABLE>

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(1) Excludes 708,000 shares issuable upon the exercise of outstanding options
and 131,725 shares issuable upon the exercise of outstanding warrants as of
the date of this Prospectus. See "Management--Stock Options" and
"Description of Securities--Warrants."

4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

On February 4, 1998, the Company merged with PMG, NGS and PMG Ireland. These
transactions were accounted for as a pooling-of-interests and, accordingly, the
Company's Consolidated Financial Statements have been restated to include the
accounts of PMG, NGS and PMG Ireland.

<TABLE>
<CAPTION>
FOR THE THIRTEEN
FOR THE YEARS ENDED WEEKS ENDED
---------------------------------------- ------------------------
DECEMBER 31, DECEMBER 27, DECEMBER 26, MARCH 28, MARCH 27,
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales............................................. $ 16,858 $ 26,866 $ 47,877 $ 7,952 $ 14,232
Operating income.................................. 1,779 3,410 5,244 574 1,582
Other (income) expense, net....................... (1,978) (231) (155) (51) 278
Income before taxes............................... 3,575 3,613 5,218 633 1,246
Pro forma(1):
Net income...................................... 2,141 2,152 3,128 382 748
Earnings per share(2):
Basic......................................... $ 0.59 $ 0.47 $ 0.60 $ 0.07 $ 0.14
Diluted....................................... $ 0.59 $ 0.47 $ 0.58 $ 0.07 $ 0.13
Weighted average number of shares outstanding:
Basic......................................... 3,600 4,599 5,224 5,188 5,259
Diluted....................................... 3,600 4,601 5,358 5,190 5,655
</TABLE>

<TABLE>
<CAPTION>
MARCH 27, 1998
-------------------------
DECEMBER 26, 1997 ACTUAL AS ADJUSTED(3)
----------------- --------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................................... $ 5,049 $ 2,062
Total assets....................................................... 31,026 37,624
Long-term notes payable, net of current portion.................... 3,104 2,673
Shareholders' equity............................................... 16,463 17,455
</TABLE>

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(1) A pro forma tax provision has been established as if all consolidated
companies were taxable entities for all periods presented.

(2) Pro forma earnings per share prior to the restatement for the acquisitions
of PMG, NGS and PMG Ireland were as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 27, 1996 DECEMBER 26, 1997
------------------- ------------------- -------------------
<S> <C> <C> <C>
Basic.............................. $ 0.19 $ 0.34 $ 0.52
Diluted............................ $ 0.19 $ 0.34 $ 0.51
</TABLE>

(3) Adjusted to reflect the sale of 1,600,000 shares of Common Stock offered by
the Company hereby at an offering price of $ per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."

5
<PAGE>
RISK FACTORS

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. THIS
PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WHICH REFLECT THE
COMPANY'S PLANS, ESTIMATES AND BELIEFS AND INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE FOLLOWING
RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. IN EVALUATING AN INVESTMENT IN
THE COMMON STOCK, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS.

SUSTAINING AND MANAGING GROWTH

The Company is currently undergoing a period of rapid growth, both
internally and through acquisitions. This growth has resulted in, and is
expected to continue to create, the need to effectively manage capacity, new and
increased responsibilities for management personnel and added pressures on the
Company's operating and financial systems. There can be no assurance that such
growth can be sustained or managed successfully. Zomax believes it has
demonstrated an ability to integrate acquired operations but could experience
certain inefficiencies as it integrates new operations and manages
geographically dispersed operations. The Company's ability to integrate acquired
operations, manage future growth effectively and accomplish its overall
objectives will depend in part on its ability to hire and retain qualified
management, sales, customer support and technical personnel. Competition for
such personnel is intense. The Company has recently commenced operations in its
new manufacturing facility in San Jose, California. The Company's ability to
bring this facility up to full production capacity is dependent upon, among
other things, its ability to generate sales, hire and train employees and
effectively allocate production requirements between its two manufacturing
facilities. If the Company is unable to manage growth effectively, its business,
financial condition and results of operations could be materially and adversely
affected. In addition, the Company's results of operations would be adversely
affected if sales do not achieve growth sufficient to offset increased
expenditures associated with expansion. See "Use of Proceeds," "Business-- The
Zomax Strategy" and "Business--Facilities."

CUSTOMER CONCENTRATION

Sales to Gateway accounted for 18.0%, 38.3% and 29.6% of the Company's
consolidated sales in 1996, 1997 and the first quarter of 1998, respectively.
Sales to Novell and Expert Software accounted for 18.2% and 10.3%, respectively,
of the Company's consolidated sales for the first quarter of 1998. The Company
has entered into an agreement with Gateway that governs the procedures for
making and receiving orders. This agreement expires on July 31, 1998, but may be
renewed for additional one-year terms by agreement of the parties, subject to
earlier termination by Gateway upon 30 days' notice. Although the Company
expects to renew this agreement, there can be no assurance of such renewal.
Zomax has been designated by Microsoft as a select authorized replicator of
Microsoft-Registered Trademark- products for Gateway under an agreement that
expires in October 1998. The Company expects to continue this select authorized
replicator status but there can be no assurance that it will be able to maintain
this status and execute new agreements with Microsoft in the future. The Company
also entered into an agreement to provide replication, packaging, distribution
and fulfillment services to Novell. This agreement expires in 2000 but may be
renewed annually, subject to earlier termination by Novell upon 90 days' notice.
As is typical in the multimedia services industry, the Company's agreements with
its customers, including Gateway and Microsoft, do not contain any long-term
commitments, nor do they guarantee an ongoing relationship with Zomax. The
Company's business, financial condition and results of operations would be
materially and adversely affected if it were to lose its select authorized
replicator status, if it were to lose Gateway as a customer or if the amounts of
Gateway's orders were to significantly decline. See "Business--Customers and
Markets."

6
<PAGE>
HIGHLY COMPETITIVE INDUSTRY

The multimedia services industry is highly competitive and is experiencing
consolidation. The Company faces its primary competition from independent
service providers including Kao Infosystems Company, Cinram International Inc.,
Nimbus CD International, Inc., Metatec Corporation, Denon Electronics, Inc. and
Disctronics, Inc. These service providers generally have the ability to handle
large volume requirements and offer varying degrees of service capability but do
not typically offer as complete a range of outsource services as Zomax. To a
lesser extent, the Company competes with large service providers who are
affiliated with major independent music companies and have significantly greater
resources than the Company, and small localized service providers. Affiliates of
major music companies such as Sony Music Entertainment, Inc., PolyGram N.V.,
Warner Music Group (a division of Time Warner Inc.), Bertelsmann Music Group
(BMG) and EMI Group plc, are primarily captive to the CD-Audio needs of the
affiliated record labels and typically offer a limited range of turnkey
services. Small localized service providers generally offer limited production
capacity as well as a limited range of related services.

Competition in the hardware and software RMA processing industry segment is
extremely fragmented. Generally, participants in this industry segment include a
number of independent companies as well as publishers and OEMs which dedicate
in-house resources to RMA processing.

Many of the Company's competitors are, and future potential competitors may
be, larger and more established with greater financial and other resources than
the Company, particularly as consolidation in the industry continues. As a
result, such competitors may be able to respond more quickly to market demands
or to devote greater resources to the manufacture, promotion and sale of their
products than can the Company. See "Business--Industry" and
"Business--Competition."

RISKS OF TECHNOLOGICAL CHANGE

The computer hardware and software publishing industries are subject to
change as existing technology is enhanced or new technology is developed and
customer needs shift. There can be no assurance that the Company will be able to
adapt its manufacturing processes to new technologies, such as the recently
introduced DVD technology, that it will have the financial resources to make the
capital expenditures necessary for such adaptations or that it will be able to
generate sufficient sales to recover these capital expenditures. Further, the
electronic on-line delivery of information, through such means as the Internet
or satellites, is a potential future competitor of CD and DVD technology. Recent
and continuing developments in broadband online data delivery have led to
speculation regarding the decreasing viability of physical media such as CD- and
DVD-ROM products. The Company believes, however, that online delivery of data
will not, for the foreseeable future, be a practical alternative for consumers
due to significant download time and hardware storage requirements. As a result,
the Company further believes that optical media will continue to be a
significant format. The Company believes that its future success will in part
depend on its ability to deliver services which meet changing technology and
customer needs. Failure by the Company to successfully anticipate and respond to
the changing technological needs of its customers on a cost-effective basis and
in a timely manner could have a material adverse effect on its business,
financial condition and results of operations. See "Business--Industry" and
"Business-- Competition."

DEPENDENCE ON HARDWARE AND SOFTWARE INDUSTRIES

A substantial portion of the Company's sales are to customers in the
computer hardware and software publishing industries. The Company is, therefore,
dependent upon the continued growth and financial stability of customers in
these industries, which are affected by general economic conditions, changing
consumer trends, sales of personal computers, the installed base of CD-ROM and
DVD drives and other interactive disc players and the ability of software
publishers to create products and applications for CDs and DVDs that achieve
market acceptance.

7
<PAGE>
RISKS RELATED TO ACQUISITIONS

The Company has experienced significant growth internally as well as through
acquisitions. Zomax intends to continue its strategy of growth through
acquisitions of technologies, products or businesses. However, no acquisitions
are currently being negotiated and no portion of the proceeds of the offering
has been allocated to specific acquisitions. The Company may complete future
acquisitions using a portion of the proceeds from this offering, through
issuances of its equity securities which could be dilutive, or through the
incurrence of additional debt. In addition, acquisitions may result in
significant amortization expenses related to goodwill and intangible assets.
Such methods of financing could adversely affect the Company's earnings.
Acquisitions also may involve numerous other risks, including difficulties in
assimilating the operations and products or services of an acquired business,
the diversion of management's attention from other business concerns, risks of
entering markets in which the Company has no or limited direct prior experience,
the potential loss of key employees of an acquired business and difficulties in
attracting additional key employees necessary to manage acquired operations. No
assurance can be given that the Company will be successful in integrating the
recently acquired operations of PMG, NGS and PMG Ireland or any other business
acquired in the future. In addition, no assurance can be given that the Company
will pursue or consummate future acquisitions or that any acquisitions, if
consummated, will ultimately be advantageous or profitable for the Company. See
"Business--The Zomax Strategy."

DEPENDENCE ON KEY PERSONNEL

The Company's success depends upon the continued contributions of its
executive officers. The Company does not have employment agreements with its
executive officers, other than with James T. Anderson, the Company's President
and Chief Executive Officer. The Company does not maintain key person life
insurance policies on any of its executive officers. The Company believes that
its future success also depends in large part upon the continued contributions
of its key management, operations, sales and marketing and information systems
personnel as well as on its ability to attract and retain additional highly
skilled personnel in such areas. Failure to attract and retain key personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management."

DEPENDENCE ON TECHNOLOGY LICENSES

The Company manufactures CDs using patented technology primarily under
nonexclusive licenses from U.S. Philips Corporation ("Philips") and Discovision
Associates ("DVA"). These licenses generally provide for the payment of
royalties based upon the number, type and size of CDs sold. The Company's
license from Philips expires in 2006 and the license from DVA continues until
the expiration of the last DVA patent covered by the license, which is currently
in 2010. Termination of a license to use the patented technology in the
manufacture of CDs or successful litigation for infringement by the holders of
other patents could have a material adverse effect on the Company's results of
operations. The Company may also be required to obtain licenses from the owners
of DVD technology to manufacture DVDs. Although the Company expects to obtain
such licenses as they are made available to industry participants, no assurances
can be made that such licenses will be obtained and the Company cannot predict
the amount of the royalty that will be payable under any such license. See
"Business--Proprietary Rights."

LIMITED INTERNATIONAL PRESENCE AND EXPERIENCE; RISKS OF INTERNATIONAL OPERATIONS

The Company intends to expand its international operations into Europe and
Asia. To date, the Company's international operations are limited to its
recently acquired Ireland facility, PMG Ireland. Accordingly, the Company has
limited experience in operations outside the U.S. The Company is exposed to
risks of doing business abroad, including but not limited to, fluctuations in
the value of foreign currency, export duties, changes in export and import
regulations, possible restrictions on the transfer of funds, employee turnover,
labor unrest, longer payment cycles, greater difficulty in collecting accounts
receivable, additional costs associated with compliance with foreign laws and
political and economic instability. There

8
<PAGE>
can be no assurance that these factors will not have an adverse impact on the
Company's business, financial condition and results of operations in the future.
The Company recently began the process of becoming ISO 9002 certified. There can
be no assurance that the Company will obtain such certification on a timely
basis, if at all, and its failure to do so may adversely impact its ability to
conduct international operations. See "Business--The Zomax Strategy."

RISK OF DECLINING COMPACT DISC PRICES

In the past, wholesale CD prices have declined, primarily due to increased
competition. During these periods of declining prices, the Company has been able
to maintain profitability by offsetting declining prices through increases in
sales volume and improvements in manufacturing efficiencies. Although prices
appear to have stabilized in the last year, there can be no assurance that such
prices will remain stable. If prices again experience declines, there can be no
assurance that the Company will be able to reduce its costs or increase its
volume to offset such price declines. Any significant industry-wide decline in
wholesale CD prices could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

The Company may experience variability in its net sales and net income on a
quarterly basis as a result of many factors, including the condition of the CD
and multimedia products industry in general, shifts in demand for software and
hardware products, volume of products and services outsourced to other service
providers, technological changes and industry announcements of new products and
upgrades, absence of long-term commitments from customers, timing and variable
lead-times of customer orders, delays in or cancellations of customer orders,
effectiveness in managing manufacturing processes and changes in national and
international economic conditions. The Company may be unable to adjust its
spending levels on a timely basis; therefore, if revenues do not meet
expectations in any given quarter, operating results may be materially adversely
affected.

The demand for CD and other multimedia consumer products is seasonal, with
the highest volumes occurring in the second half of the year, concurrent with
the new school year and holiday gift purchases. This seasonality could result in
significant quarterly variations in financial results, with the third and fourth
quarters generally being the strongest. As a result of the potential
fluctuations in quarterly operating results, the Company believes that
period-to-period comparisons of its financial results should not be relied upon
as an indication of future performance. Further, it is possible that in future
quarters the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected. See "Price Range of
Common Stock," "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

DEPENDENCE ON SUPPLIERS

The Company is dependent on certain suppliers for delivery of raw materials,
such as the polycarbonate from which CDs are made. The Company does not have
long-term agreements with any of its suppliers. While the Company believes that
alternative suppliers for these materials are available, any interruption of
supply could cause significant delays in the shipment of the Company's products
and may have a material adverse effect on the Company's business, financial
condition and results of operations.

DISCRETION IN THE USE OF PROCEEDS

While the Company intends to use a portion of the proceeds from this
offering for capital expenditures, a substantial portion of the proceeds is
expected to be used for working capital and other general

9
<PAGE>
corporate purposes, including acquisitions. Accordingly, the Company will have
broad discretion to allocate a significant amount of the proceeds of this
offering and to determine the timing of expenditures. See "Use of Proceeds."

CONTROL BY MANAGEMENT

Upon completion of this offering, the Company's executive officers and
directors will beneficially own approximately 26.5% (25.4% if the Underwriters'
over-allotment option is exercised in full) of the issued and outstanding shares
of Common Stock. As a result of such ownership, such shareholders may have the
ability to elect or remove all members of the Board of Directors and thereby
control the affairs and management of the Company and may have the power to
approve most actions requiring shareholder approval. Such a level of ownership
can have the effect of delaying, deferring or preventing a change in control of
the Company and can adversely affect the voting and other rights of the other
holders of Common Stock. See "Principal and Selling Shareholders."

POTENTIAL VOLATILITY OF STOCK PRICE

The Company's Common Stock has experienced in the past, and could experience
in the future, substantial price volatility as a result of a number of factors,
including quarter-to-quarter variations in the actual or anticipated financial
results of the Company, announcements by the Company, its competitors or its
customers, changes in stock market analysts' recommendations regarding the
Company or its competitors, developments in the industry and general market
conditions. In addition, the stock market has experienced significant price and
volume fluctuations which have affected the market price of many companies and
which have at times been unrelated to the operating performance of the specific
companies whose stock is traded. Broad market fluctuations and general economic
conditions may adversely affect the market price of the Company's Common Stock.
See "Price Range of Common Stock" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

REGULATORY COMPLIANCE

The Company is subject to a variety of governmental regulations, with which
it believes it is in substantial compliance. As a manufacturing company, the
Company is subject to safety regulation by the United States Department of Labor
and the Minnesota Department of Labor and Industry under the Occupational Safety
and Health Act. The Company is also subject to environmental regulations
relating to the use, storage, discharge and disposal of hazardous chemicals used
during its manufacturing process. Any failure by the Company to comply with
present and future regulations could subject it to future liabilities or the
suspension of production. In addition, such regulations could restrict the
Company's ability to expand its facilities or could require the Company to
acquire costly equipment or incur other significant expenses to bring its
operations into regulatory compliance.

ANTI-TAKEOVER EFFECTS OF MINNESOTA LAW AND UNDESIGNATED STOCK

The effect of certain provisions of the Minnesota Business Corporation Act
and the ability of the Board of Directors of the Company to issue preferred
stock without shareholder approval may have the effect of delaying or preventing
a change in control or merger of the Company, which could operate to the
detriment of other shareholders. Further, the anti-takeover effects of the
issuance of undesignated shares may deny shareholders the receipt of a premium
on their Common Stock and may also have a depressive effect on the market price.
See "Description of Securities."

10
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements under the captions, "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and "Business" and any other statements in this
Prospectus which are not historical facts are forward-looking statements. Such
forward-looking statements may be identified by the use of terminology such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "plans,"
"project," and similar expressions. Such statements involve risks and
uncertainties including, but not limited to, those relating to the uncertainty
of the Company's ability to manage and continue its growth and implement its
business strategy; the Company's dependence on its ability to adapt quickly to
changes in information storage and retrieval technology; the intense competition
within the Company's industry; the Company's dependence on its ability to obtain
and maintain licenses to use patented technology in the manufacture of its
products; the Company's dependence on its ability to attract and retain skilled
managers and other personnel; the Company's vulnerability to general economic
conditions and dependence on its principal customers; the Company's exposure to
unforeseen changes in international business conditions; the Company's
vulnerability to declining market prices for its products and services; the
extent of control by the Company's executive officers and directors; the
Company's future financial and operating results, cash needs and demand for its
services; effects of regulation; as well as other factors detailed in "Risk
Factors" and elsewhere in this Prospectus and in the Company's other filings
with the Securities and Exchange Commission. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated.

11
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,600,000 shares of
Common Stock offered to the public by the Company hereby at the Price to Public
of $ per share are estimated to be $ ($ if the
Underwriters' over-allotment option is exercised in full) after deducting the
underwriting discount and estimated offering expenses payable by the Company.
The Company will not receive any of the proceeds from the sale of the 400,000
shares of Common Stock offered by the Selling Shareholders.

The Company intends to use approximately $7.0 million of the net proceeds
from this offering for capital expenditures, including the expansion of its San
Jose manufacturing facility and enhancements to its Minneapolis facility to
allow for DVD replication and increased mastering and replication capacity. The
Company intends to use the remaining net proceeds for general corporate
purposes, including additions to working capital and acquisitions of
technologies, products or businesses as such opportunities may arise. Currently,
there are no commitments or agreements with respect to any such acquisitions.
See "Risk Factors--Risks Related to Acquisitions."

Pending utilization of the net proceeds of this offering, the Company plans
to invest such net proceeds in short-term money market investments, high-grade
commercial paper and interest-bearing bank accounts.

CAPITALIZATION

The following table sets forth the capitalization of the Company as of March
27, 1998 and as adjusted to reflect the sale of 1,600,000 shares of Common Stock
by the Company hereby and the application of the estimated net proceeds
therefrom. This table should be read in conjunction with the Consolidated
Financial Statements of the Company and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 27, 1998
----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
--------- -----------

<CAPTION>
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current portion of long-term notes payable................................................ $ 3,146 $
--------- -----------
--------- -----------
Long-term notes payable, net of current portion........................................... $ 2,673 $
--------- -----------
Shareholders' equity:
Common stock, no par value, 15,000,000 shares authorized; 5,273,327 shares issued and
outstanding; 6,873,327 shares issued and outstanding as adjusted(1)................... $ 12,861 $
Retained earnings......................................................................... 4,594
Total shareholders' equity................................................................ 17,455
--------- -----------
Total capitalization(2)................................................................... $ 20,128 $
--------- -----------
--------- -----------
</TABLE>

- ------------------------

(1) Excludes 708,000 shares issuable upon exercise of outstanding options and
134,725 shares issuable upon exercise of outstanding warrants as of the date
of this Prospectus. See "Management--Stock Options" and "Description of
Securities--Warrants."

(2) Does not include current portion of long-term notes payable.

12
<PAGE>
DIVIDEND POLICY

Zomax Optical Media, Inc. has never declared nor paid any cash dividends on
its Common Stock; however, in 1995, PMG, NGS and PMG Ireland distributed $2.0
million to its owners, as compared to $1.6 million in 1996 and $2.2 million in
1997. These distributions were made in accordance with the dividend policies of
these companies. Further, the Partnership made distributions to its partners of
$253,000 in 1995 and $1.1 million in 1996. The Board of Directors presently
intends to retain all earnings for use in the Company's business and does not
anticipate declaring or paying cash dividends in the foreseeable future. Any
future determinations as to declarations or payments of dividends will depend
upon the financial condition and results of operations of the Company and such
other factors as are deemed relevant by the Board of Directors. Further, the
Company's existing revolving credit and term loan agreement requires the consent
of the lender prior to the declaration or payment of dividends.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "ZOMX." The following table sets forth, for the periods indicated, the
high and low bid prices per share since the date of the Company's initial public
offering of Common Stock. These bid quotations represent inter-dealer prices and
do not include retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.

FISCAL YEAR ENDED DECEMBER 27, 1996:
Second Quarter (from May 7, 1996)........................................ $ 7.25 $ 6.75
Third Quarter............................................................ 8.13 6.75
Fourth Quarter........................................................... 7.50 4.75

FISCAL YEAR ENDED DECEMBER 26, 1997:
First Quarter............................................................ $ 6.75 $ 4.75
Second Quarter........................................................... 7.25 4.13
Third Quarter............................................................ 10.25 7.00
Fourth Quarter........................................................... 14.75 9.00

FISCAL YEAR ENDED DECEMBER 25, 1998:
First Quarter............................................................ $ 18.19 $ 9.13
Second Quarter (through April 29, 1998).................................. $ 19.75 $ 15.75
</TABLE>

As of April 20, 1998, there were approximately 110 record holders of the
Company's Common Stock, excluding shareholders whose stock is held either in
nominee name and/or street name brokerage accounts. Based on information which
the Company has obtained from its transfer agent, there are approximately 3,000
shareholders of the Company's Common Stock whose stock is held either in nominee
name and/or street name brokerage accounts.

13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following selected consolidated financial information as of December 27,
1996 and December 26, 1997 and for the three years in the period ended December
26, 1997 has been derived from the audited consolidated financial statements of
the Company included elsewhere in this Prospectus. The selected consolidated
financial information as of December 31, 1993, 1994 and 1995 and for the years
ended December 31, 1993 and 1994 have been derived from: (i) audited financial
statements of the Company not included herein and (ii) unaudited combined
financial statements of PMG, NGS and PMG Ireland. The selected consolidated
financial data for the thirteen weeks ended March 28, 1997 and March 27, 1998
have been derived from the unaudited interim financial statements of the Company
and PMG, NGS and PMG Ireland. Such unaudited financial statements contain, in
the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations for these periods. Operating results for the thirteen
weeks ended March 27, 1998 are not necessarily indicative of the results that
may be expected for the entire fiscal year. The following selected consolidated
financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and the notes thereto included elsewhere
in this Prospectus.

<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS
FOR THE YEARS ENDED ENDED
--------------------------------------------------------------------------- ------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 27, DECEMBER 26, MARCH 28, MARCH 27,
1993 1994 1995 1996 1997 1997 1998
--------------- ------------- ------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales...................... $ 2,794 $ 10,085 $ 16,858 $ 26,866 $ 47,877 $ 7,952 $ 14,232
Cost of sales.............. 2,496 7,544 11,226 18,090 32,773 5,663 9,938
------ ------------- ------------- ------------- ------------- ----------- -----------
Gross profit............... 298 2,541 5,632 8,776 15,104 2,289 4,294
Selling, general and
administrative
expenses................. 319 1,435 3,853 5,366 9,860 1,715 2,712
------ ------------- ------------- ------------- ------------- ----------- -----------
Operating income (loss).... (21) 1,106 1,779 3,410 5,244 574 1,582
Interest expense........... 38 237 318 357 409 74 117
Interest income............ (3) (56) (136) (329) (228) (82) (59)
Other (income) expense,
net...................... (14) (13) (1,978) (231) (155) (51) 278
------ ------------- ------------- ------------- ------------- ----------- -----------
Income (loss) before income
taxes.................... (42) 938 3,575 3,613 5,218 633 1,246
Pro forma(1):
Provision for income
taxes.................. (15) 362 1,434 1,461 2,090 251 498
------ ------------- ------------- ------------- ------------- ----------- -----------
Net income (loss)........ $ (27) $ 576 $ 2,141 $ 2,152 $ 3,128 $ 382 $ 748
------ ------------- ------------- ------------- ------------- ----------- -----------
------ ------------- ------------- ------------- ------------- ----------- -----------
Earnings (loss) per
share:
Basic.................. $ (0.01) $ 0.16 $ 0.59 $ 0.47 $ 0.60 $ 0.07 $ 0.14
------ ------------- ------------- ------------- ------------- ----------- -----------
------ ------------- ------------- ------------- ------------- ----------- -----------
Diluted................ $ (0.01) $ 0.16 $ 0.59 $ 0.47 $ 0.58 $ 0.07 $ 0.13
------ ------------- ------------- ------------- ------------- ----------- -----------
------ ------------- ------------- ------------- ------------- ----------- -----------
Weighted average number
of shares outstanding:
Basic.................. 3,600 3,600 3,600 4,599 5,224 5,188 5,259
Diluted................ 3,600 3,600 3,600 4,601 5,358 5,190 5,655
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 27, DECEMBER 26, MARCH 27,
1993 1994 1995 1996 1997 1998
--------------- --------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................... $ 295 $ 618 $ 2,631 $ 9,029 $ 5,049 $ 2,062
Total assets......................... 2,706 6,682 12,485 24,322 31,026 37,624
Long-term notes payable, net of
current portion.................... 1,168 2,188 2,979 1,834 3,104 2,673
Shareholders' equity................. 928 2,106 5,166 14,643 16,463 17,455
</TABLE>

- ------------------------
(1) A pro forma tax provision has been established as if all consolidated
companies were taxable entities for all periods presented.

14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

The Company is a leading outsource service provider to software publishers,
computer manufacturers and other producers of multimedia products. These
services include CD and DVD mastering; CD, diskette and cassette replication;
graphic design; print management; CD printing; packaging; warehousing; inventory
management; distribution and fulfillment; and RMA processing services. The
Company records sales to its customers at the time merchandise is shipped or as
services are rendered. For certain customers, merchandise is invoiced upon
completion of orders with shipment occurring based on written customer
instructions.

The multimedia services industry has been characterized by short lead times
for customer orders. For this reason and because of the timing of orders,
delivery intervals and the possibility of customer changes in delivery
schedules, the Company's backlog as of any particular date is not a meaningful
indicator of future financial results.

On March 31, 1997, the Company acquired the outstanding shares of Benchmark,
a software media replicator with operations in Minneapolis, Minnesota and
Indianapolis, Indiana. The Company agreed to pay consideration based on revenues
of Benchmark in 1997. Revenue levels were not met; therefore, no consideration
was paid. The Benchmark acquisition was accounted for using the purchase method
of accounting.

On May 1, 1997, the Company acquired the outstanding shares of TTI, an RMA
processing, warehousing and distribution company based in San Jose, California,
servicing the software publishing market. The purchase price of TTI was $712,000
cash and 59,268 shares of the Company's Common Stock. The acquisition of TTI was
accounted for using the purchase method of accounting. As a result of this
treatment, the TTI purchase price was allocated to net assets acquired based on
estimated fair values and approximately $1.2 million of cost in excess of net
assets acquired was recorded as goodwill.

On February 4, 1998, PMG, NGS and PMG Ireland were merged with and into ZSI.
As a result of these transactions, all ownership interests in the acquired
companies were exchanged for 800,002 shares of the Company's Common Stock. Prior
to these transactions, the businesses of PMG, NGS and PMG Ireland consisted of
providing manufacturers' representative services and RMA processing services to
the computer industry. PMG, NGS and PMG Ireland operated their respective
businesses from facilities located in and around San Jose, California; Boston,
Massachusetts; and Dublin, Ireland. In connection with the transactions
described above, the Company acquired certain assets and assumed certain
liabilities from Kao for $1.1 million. The acquisitions of PMG, NGS and PMG
Ireland were accounted for using the pooling-of-interests method of accounting,
and accordingly, all periods presented have been restated to reflect the effects
of these transactions.

Prior to the Company's initial public offering, the Company operated as a
partnership and, prior to the acquisitions described above, certain of the
companies operated as non-taxable entities. A pro forma tax provision has been
established as if all consolidated companies were taxable entities for all
periods presented.

15
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth certain operating data as a percentage of
sales for the periods indicated.

<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS
FOR THE YEARS ENDED ENDED
------------------------------------------------- ------------------------
DECEMBER 31, DECEMBER 27, DECEMBER 26, MARCH 28, MARCH 27,
1995 1996 1997 1997 1998
--------------- --------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 66.6 67.3 68.5 71.2 69.8
----- ----- ----- ----- -----
Gross profit.................................. 33.4 32.7 31.5 28.8 30.2
Selling, general and administrative
expenses.................................... 22.8 20.0 20.6 21.6 19.1
----- ----- ----- ----- -----
Operating income.............................. 10.6 12.7 10.9 7.2 11.1
Interest expense.............................. 1.9 1.3 0.8 0.9 0.8
Interest income............................... (0.8) (1.2) (0.5) (1.0) (0.4)
Other (income) expense, net................... (11.7) (0.8) (0.3) (0.7) 1.9
----- ----- ----- ----- -----
Income before income taxes.................... 21.2 13.4 10.9 8.0 8.8
Pro forma provision for income taxes(1)....... 8.5 5.4 4.4 3.2 3.5
----- ----- ----- ----- -----
Pro forma net income(1)....................... 12.7% 8.0% 6.5% 4.8% 5.3%
</TABLE>

- ------------------------

(1) A pro forma tax provision has been established as if all consolidated
companies were taxable entities for all periods presented.

FOR THE THIRTEEN WEEKS ENDED MARCH 28, 1997 AND MARCH 27, 1998

SALES. The Company's sales were $14.2 million for the first quarter of
1998, an increase of 79.0% from $8.0 million for the first quarter of 1997. The
increase in total sales resulted from a 48% increase in CD related sales, a 168%
increase in diskette related sales and a 3.5% increase in RMA services fees.
These increases were partially offset by a 40% decrease in audio cassette sales.
In addition, the Company, in connection with the acquisition of certain assets
and liabilities from Kao, began operating an assembly and distribution warehouse
facility which accounted for 37.5% of the total increase in Company sales.

COST OF SALES. Cost of sales as a percentage of sales for the first quarter
of 1998 was 69.8% as compared to 71.2% for the first quarter of 1997. The
decrease in the cost of sales percentage was due to higher CD production volumes
resulting in improved equipment utilization and other operating improvements
made by the Company. These cost improvements were partially offset by start-up
costs incurred by the Company in connection with building its new CD
manufacturing facility in San Jose and an increase in RMA processing related
costs. There was no outsourcing of CD production in the first quarters of 1997
and 1998. The San Jose facility had its initial production run in March 1998.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first quarter of 1998 were $2.7 million compared
to $1.7 million for the first quarter of 1997. The dollar increase in the first
quarter of 1998 resulted primarily from the dramatic increase in sales volume
and growth of the Company. As a percentage of sales, selling, general and
administrative expenses decreased from 21.6% in the first quarter of 1997 to
19.1%.

INTEREST INCOME AND EXPENSE. Interest income was $59,000 for the first
quarter of 1998 compared to $82,000 for the first quarter of 1997. Interest
expense was $118,000 for the first quarter of 1998 compared to $74,000 for the
first quarter of 1997. Interest expense increased due to borrowings used to
finance the purchase of mastering equipment in September 1997.

16
<PAGE>
OTHER (INCOME) EXPENSE, NET. In the first quarter of 1998, the Company
incurred nonrecurring expenses totaling $278,000 related to the acquisition of
PMG, NGS and PMG Ireland. These costs were expensed as incurred in accordance
with pooling of interests accounting. In the first quarter of 1997, the Company
generated other income totaling $51,000 resulting from PMG representing certain
manufacturers' products.

PRO FORMA PROVISION FOR INCOME TAXES. The pro forma effective income tax
rate for the first quarter of 1998 was 40.0% as compared to 39.7% for the first
quarter of 1997.

PRO FORMA NET INCOME. Pro forma net income was $748,000, an increase of
95.7% from $382,000 for the first quarter of 1997.

FOR THE YEARS ENDED DECEMBER 26, 1997 AND DECEMBER 27, 1996

SALES. The Company's sales were $47.9 million for 1997, an increase of
78.2% from $26.9 million in 1996. The 1997 sales increase was attributable to a
54% increase in sales to new and existing customers with the remaining increase
attributable to additional sales resulting from the acquisition of Benchmark and
TTI during the year. CD related sales increased 70% in 1997, due primarily to an
increase in the number of units sold, and diskette sales increased 1200% to $7.4
million. These increases were partially offset by a 12% decline in audio
cassette sales. The Company believes the growth in CD related sales was due to
its strategy of being a full-service provider of multimedia products and related
services, along with increased production capacity. Sales from PMG, NGS and PMG
Ireland represented $10.0 million of total sales in 1997, an increase of 19.9%
from $8.3 million in 1996. The increase in sales generated by PMG, NGS and PMG
Ireland was the result of an increase in the number of RMA processing customers
and the volume of returns processed. RMA processing revenue is comprised of
processing fees associated with handling customer returns from retail channels,
as well as sales of recycled diskettes which are received with returns and
processed for resale. In 1997, fewer recycled diskettes were processed and sold
than in 1996. As a result, revenue from RMA processing fees became a larger
component of the Company's total revenues.

COST OF SALES. Cost of sales as a percentage of sales was 68.5% and 67.3%
for 1997 and 1996, respectively. This cost of sales percentage increase is
primarily due to an increase in outsourced CD unit production, partially offset
by a change in the RMA processing sales mix from lower-margin recycled diskette
sales to higher-margin RMA processing fees. The Company outsources its CD
production when customer orders exceed its production capabilities. The Company
outsourced 9% of its CD manufacturing in 1997 and 3% in 1996. The cost for such
outsourced production is higher than the cost of CDs produced internally by the
Company.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of sales were 20.6% in 1997 and 20.0% in
1996. In dollars, selling, general and administrative expenses increased $4.5
million from 1996. The dollar increase in 1997 resulted primarily from the added
infrastructure necessary to support the significant increase in sales volume and
growth of the Company.

INTEREST INCOME AND EXPENSE. Interest income was $228,000 and $329,000 for
1997 and 1996, respectively. Interest expense was $409,000 and $357,000 for 1997
and 1996, respectively. Interest expense increased with borrowings used to
finance the purchase of additional CD manufacturing equipment in 1997.

OTHER (INCOME) EXPENSE, NET. Other income, net was $155,000 in 1997
compared to $231,000 in 1996. The Company generated other income resulting from
PMG representing certain manufacturers' products.

PRO FORMA PROVISION FOR INCOME TAXES. The pro forma effective income tax
rate for 1997 was 40.1% compared to 40.4% for 1996. Such rates principally
reflect the federal statutory tax rate plus the effect of state income taxes.

17
<PAGE>
PRO FORMA NET INCOME. Pro forma net income for 1997 was $3.1 million, an
increase of 45.4% from $2.2 million in 1996.

FOR THE YEARS ENDED DECEMBER 27, 1996 AND DECEMBER 31, 1995

SALES. The Company's sales were $26.9 million for 1996, an increase of
59.4% from $16.9 million in 1995. In 1996, CD related sales increased 46%, due
primarily to an increase in the number of units sold. Also in 1996, the Company
introduced diskette duplicating services, resulting in 3.3% of the total sales
increase. These increases were partially offset by a 16% decline in audio
cassette sales. Sales from PMG, NGS and PMG Ireland represented $8.3 million of
total 1996 sales, an increase of 128% over $3.6 million in 1995. The increase in
sales generated by PMG, NGS and PMG Ireland was the result of an increase in the
number of RMA processing customers and the volume of returns processed. In 1995,
RMA processing revenue consisted primarily of sales of recycled diskettes. In
1996, recycled diskette sales declined and RMA activities expanded to include
service fees for the handling and processing of customer returns from retail
channels.

COST OF SALES. Cost of sales as a percentage of sales was 67.3% and 66.6%
for 1996 and 1995, respectively. This cost of sales percentage increase was
primarily due to the reduction in selling price and quantity of recycled
diskettes from RMA processing activities. This increase was partially offset by
a decrease in outsourced CD unit production. The Company outsourced 3% of its CD
manufacturing during 1996 as compared to 35% in 1995. The Company was able to
reduce its outsourcing by increasing CD manufacturing capacity in 1996.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of sales were 20.0% in 1996 and 22.8% in
1995. In dollars, selling, general and administrative expenses increased $1.5
million in 1996. The dollar increase in 1996 resulted principally from an
increase in salary expense, resulting from hiring additional corporate staff in
sales, customer service, accounting and other administrative functions. In 1996,
the Company also increased its reserve for doubtful accounts principally due to
the uncertainty regarding the collection of certain receivable balances and an
overall increase in accounts receivable balances.

INTEREST INCOME AND EXPENSE. Interest income was $329,000 and $137,000 for
1996 and 1995, respectively. Interest income increased in 1996 with the
investment of the proceeds from the Company's initial public offering in May
1996. Interest expense was $357,000 and $318,000 for 1996 and 1995,
respectively. Interest expense increased with long-term borrowings used to
finance purchases of additional CD manufacturing equipment in 1996.

OTHER (INCOME) EXPENSE, NET. Other income, net was $231,000 and $2.0
million for 1996 and 1995, respectively. The Company generated other income
resulting from PMG representing certain manufacturers' products. This activity
declined significantly beginning in 1996.

PRO FORMA PROVISION FOR INCOME TAXES. The pro forma effective income tax
rate for 1996 was 40.4% compared to 40.1% for 1995. Such rates principally
reflect the federal statutory tax rate plus the effect of state income taxes.

PRO FORMA NET INCOME. Pro forma net income for 1996 was $2.2 million, an
increase of 0.5% from $2.1 million in 1995.

LIQUIDITY AND CAPITAL RESOURCES

As of March 27, 1998, the Company had working capital of $2.1 million,
compared to working capital of $5.0 million as of December 26, 1997 and $9.0
million as of December 27, 1996. The decrease in working capital in the first
quarter of 1998 was primarily due to the construction of a new CD facility in
San Jose.

18
<PAGE>
The decrease in working capital during 1997 was primarily the result of using
cash to purchase additional CD production lines, acquire TTI and support the
general growth of the Company.

As of March 27, 1998, the Company had cash totaling $6.6 million. Cash
generated from operating activities for the first quarter of 1998 was $2.2
million compared to cash used of $1.4 million during the first quarter of 1997.
Cash generated from operating activities was $6.9 million, $4.9 million and $2.3
million during 1997, 1996 and 1995, respectively. The increase in operating cash
flow is consistent with the Company's sales and net income growth.

Cash used in investing activities during the first quarter of 1998 was $4.4
million compared to $177,000 for the first quarter of 1997. Cash used in
investing activities was $6.6 million in 1997, $3.8 million in 1996 and $2.6
million in 1995. Cash used in investing activities during these periods is
primarily attributable to the purchase of property and equipment to support the
Company's growth in business.

During the first quarter of 1998, the Company acquired certain assets and
assumed certain liabilities from Kao in exchange for a short-term note in the
principal amount of $1.1 million. During the first quarter of 1997, the Company
financed equipment purchases with long-term debt totaling $1.1 million. The
Company financed equipment purchases with long-term debt totaling $3.8 million
in 1997, $791,000 in 1996 and $2.4 million in 1995. PMG, NGS and PMG Ireland
made distributions to its owners of $2.2 million in 1997, $1.6 million in 1996
and $2.0 million in 1995. These distributions were made in accordance with the
dividend policies of these companies. The Partnership made distributions to its
partners of $1.1 million in 1996 and $253,000 in 1995. Zomax Optical Media, Inc.
has never declared or paid dividends on its Common Stock.

The Company has committed to the purchase of equipment at a cost of $5.1
million in 1998. The majority of this equipment is related to the construction
of a new CD facility in San Jose, California. The Company plans to finance the
purchase of this equipment with long-term debt and cash. The Company has a
revolving line of credit facility for up to $5.0 million of borrowings. Such
borrowings are limited to an amount based on a formula using eligible accounts
receivable and inventories. There were $3.0 million of borrowings outstanding
under the revolving line of credit facility at March 27, 1998. In addition, the
Company has $4.3 million available under a capital term loan facility at March
27, 1998.

Future liquidity needs will depend on, among other factors, the timing of
capital expenditures and expenditures in connection with any acquisitions,
changes in customer order volume and the timing and collection of receivables.
The Company believes that the net proceeds from this offering, together with
existing cash balances, anticipated cash flow from operations and amounts
available under existing credit facilities, will be sufficient to fund its
operations for the foreseeable future.

YEAR 2000

In 1997, Zomax installed a new, Year 2000 compliant, computer system and
believes its systems are Year 2000 compliant. All expenditures to address this
issue are expensed as incurred, while the costs of new software are capitalized
and amortized over the software's useful life. Anticipated expenditures are not
expected to have a significant impact on the Company's ongoing results of
operations. The Company believes that failure by its customers or suppliers to
address this issue in a timely manner will not have a significant impact on the
Company or its operations.

INFLATION

Historically, inflation has not had a material impact on the Company. The
cost of the Company's products is influenced by the cost of raw materials and
labor. There can be no assurance that the Company will be able to pass on
increased costs to its customers in the future.

19
<PAGE>
SEASONALITY

The demand for CDs and other multimedia consumer products is seasonal, with
increases during the fall reflecting increased demand relative to the new school
year and holiday season purchases. This seasonality could result in significant
quarterly variations in financial results, with the third and fourth quarters
generally being the strongest.

QUARTERLY DATA

The Company's pro forma results of operations for each of the quarters in
the years ended December 27, 1996 and December 26, 1997 and for the first
quarter of 1998 reflect the pro forma effect of a provision for income taxes as
if they were taxable entities for all periods presented. The pro forma earnings
per share information also reflects the effects of the shares issued in
connection with the acquisition of PMG, NGS and PMG Ireland. The information in
the following tables is in thousands, except per share data.

<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------
MARCH 29 JUNE 30 SEPTEMBER 27 DECEMBER 27
----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
1996
Sales.......................................................... $ 4,588 $ 6,385 $ 7,292 $ 8,602
Gross profit................................................... 1,364 2,197 2,729 2,487
Net income..................................................... 106 278 860 908
Basic earnings per share....................................... 0.03 0.09 0.17 0.18
Diluted earnings per share..................................... 0.03 0.09 0.17 0.18
</TABLE>

<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------
MARCH 28 JUNE 27 SEPTEMBER 26 DECEMBER 26
----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
1997
Sales.......................................................... $ 7,952 $ 11,541 $ 13,842 $ 14,542
Gross profit................................................... 2,289 3,148 4,925 4,741
Net income..................................................... 382 343 1,306 1,097
Basic earnings per share....................................... 0.07 0.07 0.25 0.21
Diluted earnings per share..................................... 0.07 0.07 0.24 0.20
</TABLE>

<TABLE>
<CAPTION>
QUARTER
ENDED
-----------
MARCH 27
-----------
<S> <C> <C> <C> <C>
1998
Sales.......................................................... $ 14,232
Gross profit................................................... 4,294
Net income..................................................... 748
Basic earnings per share....................................... 0.14
Diluted earnings per share..................................... 0.13
</TABLE>

20
<PAGE>
BUSINESS

GENERAL

Zomax Optical Media, Inc. is a leading outsource service provider to
software publishers, computer manufacturers and other producers of multimedia
products. These outsource services include compact disc ("CD") and digital
versatile disc ("DVD") mastering; CD, diskette and cassette replication; graphic
design; print management; CD printing; packaging; warehousing; inventory
management; distribution and fulfillment; and returned merchandise authorization
("RMA") processing services. By providing a full range of multimedia services,
Zomax differentiates itself from its competitors who offer only a subset of
these services.

Zomax services a broad customer base, including Gateway, Microsoft, Novell,
GT Interactive and Expert Software. The Company has demonstrated an ability to
provide consistently high quality products and services in a short turnaround
time. Zomax believes its high level of customer service and responsiveness to
customers' needs provides it with a competitive advantage which differentiates
the Company from its competitors. Zomax has become one of a small number of
service providers worldwide to be awarded select authorized replicator status
with Microsoft and in August 1997 was named Gateway's North American Supplier of
the Year.

RECENT ACQUISITIONS

To enhance its position as a leading outsource service provider, Zomax has
expanded its geographic presence by acquiring production capacity as well as
distribution and RMA capabilities. The Company believes that its recent
acquisitions enable it to provide additional integrated services and create an
opportunity to attract new customers and cross-market its services to existing
customers. Management believes it has demonstrated an ability to successfully
expand through acquisitions and intends to further explore opportunities for
acquisitions as the industry continues to consolidate. Within the last year, the
Company has made the following acquisitions:

- BENCHMARK MEDIA SERVICES, INC., a software media replicator with
operations in Plymouth, Minnesota and Indianapolis, Indiana; acquired in
March 1997;

- TROTTER TECHNOLOGIES, INC., an RMA processing, warehousing and
distribution company based in San Jose, California; acquired in May 1997;

- PRIMARY MARKETING GROUP, a manufacturers' representative group servicing
the needs of computer hardware manufacturers and software publishers;
primary direct sales group in California for Kao Infosystems Company prior
to the acquisition; based in San Jose, California; acquired in February
1998;

- NEXT GENERATION SERVICES, LLC, an RMA processor with facilities in
Hayward, California and Boston, Massachusetts; acquired in February 1998;

- PRIMARY MARKETING GROUP LTD., an RMA processor and provider of
manufacturers' representative services in Ireland; acquired in February
1998; and

- CERTAIN ASSETS AND CONTRACTUAL RIGHTS OF KAO INFOSYSTEMS
COMPANY, including an agreement regarding the manufacture and distribution
of products for Novell; acquired in February 1998.

INDUSTRY

21
<PAGE>
consumer demand for multimedia products such as CD-ROM, DVD-ROM and CD-Audio and
a corresponding increase in the installed base of CD and DVD drives and CD-Audio
players have been significant factors driving the demand for multimedia
services.

CD technology was first introduced in 1982 as a means for digital audio
signal delivery and quickly became the standard audio media format in the
pre-recorded music market. In 1985, CD-ROM computer software products first
became available. CD-ROM has the ability to store approximately 630 megabytes of
information (the equivalent of 200,000 pages of text or 437 times more data than
a standard diskette) and offers the memory capacity necessary to fully integrate
sound, graphics and text. Standardization in multimedia technology and the
subsequent introduction of multimedia personal computers for consumers in 1992
triggered a significant increase in the demand for CD-ROM products. As
multimedia applications have expanded and become more complex, so has the demand
for improvement in storage capacity. In response to that demand, DVD technology
was introduced in 1997. DVD technology incorporates two disc layers, each
one-half the thickness of a standard CD, bonded together to form one DVD.
Depending on the configuration, DVD-ROM can store from 4.7 to 17 gigabytes of
information, approximately 7 to 27 times the storage capacity of CD-ROM.

According to the Optical Publishing Industry Assessment (9th ed. 1998)
prepared by InfoTech, Incorporated, an independent market research and
consulting firm headquartered in Woodstock, Vermont, the worldwide installed
base of CD-ROM drives more than doubled each year from 1992 to 1995, to 68
million and is estimated to increase from 195 million in 1997 to 338 million in
2000. Furthermore, InfoTech reports that the number of CD-ROMs replicated
worldwide increased from 500 million in 1995 to 1.4 billion in 1997 and is
estimated to increase to 2.2 billion in 2000. The worldwide installed base of
DVD-ROM drives is estimated by InfoTech to increase from 330,000 in 1997 to 6.5
million in 1998 and 78 million in 2000. The number of DVD-ROMs replicated
worldwide is estimated to increase from 1.5 million in 1997 to 57 million in
1998 and 580 million in 2000.

While CD-ROM technology has become the preferred medium in the computer
software industry, some software developers continue to demand diskettes.
Similarly, although CD-Audio is the preferred medium for audio products, audio
cassettes continue to be a significant format. According to InfoTech, the
worldwide installed base of CD-Audio players was estimated at 420 million in
1997 and is expected to reach 500 million in 1998. InfoTech estimates that the
number of replicated CD-Audio products worldwide will reach 3.3 billion units in
1998, up from 3.1 billion units in 1997. The Recording Industry Association of
America estimated that 173 million audio cassettes were distributed in the U.S.
in 1997.

Although some software publishers and computer hardware OEMs still dedicate
in-house resources to manufacturing and fulfillment, significant and increasing
demand exists for outsource services from providers who can reliably manufacture
and process multimedia products. Developers of various types of multimedia
products use independent multimedia service providers for several reasons. The
equipment required to replicate multimedia products, especially CD and DVD, is
capital intensive and changes in technology require incremental investments in
equipment and expertise. In addition, the industry is characterized by short
lead times requiring precise planning and flawless execution of production runs.
In-house replication takes away from a company's ability to focus on its core
competencies such as developing content and marketing and selling products.
These companies also find it difficult to manage other aspects of multimedia
production such as warehousing, inventory management and RMA processing. The
Company estimates that, based on discussions with software publishers, 15% of
all shipments to software retailers ultimately require RMA processing. The same
factors that have led to the trend toward more outsourcing are driving
consolidation in the industry as many small local and regional service providers
find it increasingly difficult to access the capital required to invest in new
capital equipment and additional value-added services.

22
<PAGE>
THE ZOMAX SOLUTION

Zomax provides a comprehensive outsource solution to its customers. As a
"one-stop shopping" source, Zomax offers its customers graphic design, print
management, mastering, replicating, printing, packaging, warehousing and
inventory management, distribution and fulfillment, and RMA services. By
providing a full range of multimedia services, Zomax differentiates itself from
its competitors who offer only a subset of services. Zomax's expertise and
capital investment allow its customers to focus on their core competencies,
reduce costs, accelerate time to market, access advanced replication and design
capabilities, reduce capital investment, improve inventory management and
purchasing power, and access manufacturing, warehousing and distribution
capabilities in a variety of geographic regions.

The Company believes that the dynamics of the multimedia services industry
will continue to change significantly in the foreseeable future. This change is
expected to be driven by continued demand for increased levels of service by
multimedia developers and technological changes, such as the introduction of DVD
technology. The Company expects that these changes will continue to drive
consolidation in the industry. Zomax has adapted to this changing business
environment by expanding its production capacity, geographic presence and the
level of services it offers its customers through both internal growth and
acquisitions.

THE ZOMAX STRATEGY

- PROVIDE A COMPREHENSIVE OUTSOURCE SERVICE SOLUTION. Zomax offers a
comprehensive outsource solution to the industry. By outsourcing to a
service provider like Zomax, software publishers and computer hardware
OEMs can concentrate on their core competencies while capitalizing on the
manufacturing expertise and capital investment of the outsource service
provider. By offering a full range of services from design to mastering
and replication to distribution and RMA processing, Zomax believes it is
well-positioned to meet its customers' unique multimedia outsourcing
needs.

- EXPAND AND LEVERAGE CROSS-MARKETING OPPORTUNITIES. The breadth of the
Company's value-added services provides an opportunity to cross-market
these services to existing customers who may currently rely on the Company
for only a portion of their multimedia outsourcing needs. The Company also
plans to expand and diversify its revenue base by adding new customers in
rapidly growing industry segments.

- EXPAND OPERATIONS GEOGRAPHICALLY. In anticipation of expected growth in
the software publishing industry, the Company intends to continue to
explore national and international expansion opportunities through both
internal growth and acquisitions. Zomax has expanded its geographic
presence by acquiring new facilities in California, Massachusetts, Indiana
and Ireland, to supplement its main facility in Minnesota. Zomax intends
to further its expansion into the Eastern and Southern regions of the U.S.
to meet the needs of existing and potential customers who value close
proximity to their outsource providers. Internationally, the Company views
its recently acquired facility in Ireland as a first step in penetrating
the worldwide multimedia market. Zomax intends to further develop its
international presence, initially in Europe and Asia, by expanding
facilities abroad and leveraging its relationships with multinational
customers.

- CAPITALIZE ON CHANGING TECHNOLOGIES. The market for multimedia services
is based upon sophisticated technology that is subject to change as new or
enhanced technologies are developed, new applications are created and
customer needs change. Zomax believes it is positioned to respond to
changing technologies and to make the related capital investments
necessary to adapt its operations. In anticipation of an increase in
demand for DVD technology, the Company has installed a

23
<PAGE>
mastering system capable of producing CD and DVD masters and has ordered
DVD replication equipment. The Company believes the increased complexity
of producing DVDs may provide it with a competitive advantage over less
technologically capable competitors.

SERVICES

Zomax provides a comprehensive outsource solution to its customers for all
phases of production and distribution. Customers can engage Zomax for a complete
project or on a service-by-service basis, depending on their needs. In all
cases, Zomax project management maintains regular contact with customers and
coordinates all services provided, as illustrated below. With the breadth of
services offered by the Company, customers can bring their end product to market
without ever handling the product themselves.

GRAPHIC DESIGN. The Company works directly with its customers in developing
product and packaging designs.

24
<PAGE>
PRINT MANAGEMENT. The Company receives print specifications from its
customers, facilitates printing purchases and implements quality controls to
ensure on-time delivery of the end product. Additionally, Zomax provides print
inventory management services.

MASTERING. During the mastering process, a laser beam recorder transfers
digital information onto a glass mastering substrate. This substrate then
undergoes an electroforming process that creates a metal stamper from which CDs
are molded. The mastering process is critical to product quality and is
conducted in a clean-room environment free of microscopic contaminants which can
obscure large amounts of data. The Company's recently acquired mastering system
can create both CD and DVD masters.

REPLICATION. CDs are replicated using an integrated robotic line process
that incorporates plastic injection molding, metalizing, lacquering and
inspection equipment. The replication process begins with the injection of high
quality, CD-grade polycarbonate into the mold cavity where the metal stamper has
been mounted. The extruded clear polycarbonate disc containing all of the
digitized data is then covered with a metallic coating to provide for reflection
of the reading laser beam in the player. A thin layer of lacquer is then applied
over the metal to protect it and to serve as a base for printing on the disc.
Unacceptable CDs are detected and discarded through the inline inspection
process. The Company currently has seven CD production lines at its Minnesota
facility and four CD production lines at its California facility. With the
installation of new equipment that is on order, the Company expects to have the
capability to replicate DVDs.

Computer diskettes are duplicated on multiple duplicating drives which are
connected to a PC-based controller. The master diskette is read into the system
and the controller sends the image of the master to each duplicating drive,
writing the information to the blank diskettes. After duplication, each diskette
is verified, labeled, collated, if necessary, and packaged for distribution.

Audio cassettes are mass-duplicated from a master tape which is run on an
endless loop on a high speed duplicating system comprised of a master unit which
feeds audio programming to "slave" units. The slave units make copies as the
master unit runs and reruns the tape, creating large reels or "pancakes" of
duplicated tape. The tape is then fed into cassette loaders which remove the
duplicated tape off the reel and place it into cassette housings. These housings
are then labeled or imprinted and combined with graphics.

CD PRINTING. CD printing is performed in batches off-line in order to take
advantage of the high speed nature of the printing process while avoiding the
production delays typically required for printer setup. The Company's printing
equipment includes screen printing presses with capabilities of up to six color
printing. The Company produces its own screens and custom mixes all ink
in-house. Automated label and print quality inspection equipment is integrated
with the screen printers to ensure high quality and reduce the need for manual
inspection.

PACKAGING. The Company has automated equipment to provide commonly
requested packaging configurations. Currently, the standard CD packaging
configuration is the plastic "jewel box" with the customer or Zomax supplying
print material. The standard audio cassette packaging is the "Norelco box." For
non-automated assembly requirements, the Company provides a full range of
hand-assembly options. As part of its dedication to providing full service, the
Company works with its customers to develop sophisticated retail packaging
configurations.

WAREHOUSING AND INVENTORY MANAGEMENT. To assist customers in minimizing
costs and reducing the time to market, Zomax offers comprehensive warehousing
and inventory management services. Increasingly, the Company is warehousing
products for customers and shipping those products directly into the customers'
distribution channels. The Company believes this service provides customers with
a more comprehensive solution and enables them to be more responsive to market
demands.

25
<PAGE>
DISTRIBUTION AND FULFILLMENT. The Company offers its customers flexible,
just-in-time delivery programs allowing product shipments to be closely
coordinated with customers' inventory requirements. Zomax can accommodate large
shipments to distribution centers and receive and fulfill same-day orders to
individual locations.

RMA PROCESSING. Zomax recently expanded its array of services to include
software and hardware return merchandise processing services. With the addition
of this service, the Company can offer its customers a solution to the difficult
problem of handling returned, obsolete and excess inventory. At the Company's
facilities in California, Indiana, Ireland, Massachusetts and Minnesota, Zomax
employees receive, sort, count, recycle, re-price, re-package and redistribute
returned software merchandise. The Company also receives, tests and
redistributes computer peripherals at one of its California facilities. A
customer can maximize its operating efficiencies by using Zomax's complete
outsource solution to coordinate RMA processing with inventory management and
replication orders.

SERVICES BY LOCATION. Zomax offers its comprehensive range of services from
a number of locations, as indicated in the following table.
<TABLE>
<CAPTION>
<S> <C> <C>
APPROXIMATE SQUARE
LOCATION SERVICES FEET

<CAPTION>
<S> <C> <C>
Minneapolis, Minnesota Graphic design, print management, 92,000
(Two facilities) mastering, CD replication (seven
production lines), diskette and cassette
duplication, CD printing, packaging,
warehousing, distribution and
fulfillment, and RMA processing
<CAPTION>
<S> <C> <C>
San Jose, California Graphic design, print management, CD 250,000
(Two facilities) replication (four production lines),
diskette duplication, CD printing,
packaging, warehousing, distribution and
fulfillment, and RMA processing
<CAPTION>
<S> <C> <C>
Hayward, California RMA processing and hardware return 64,000
testing and processing
<CAPTION>
<S> <C> <C>
Indianapolis, Indiana Diskette duplication, packaging, and 16,000
distribution and fulfillment
<CAPTION>
<S> <C> <C>
Billerica, Massachusetts RMA processing 25,000
<CAPTION>
<S> <C> <C>
Dublin, Ireland RMA processing 10,000
<CAPTION>
</TABLE>

CUSTOMERS AND MARKETS

The Company markets and sells multimedia services to a variety of customers,
including software publishers, computer manufacturers, book publishers,
independent record labels, marketing groups and data base suppliers. Zomax
currently services a broad customer base in these industry segments including
Gateway, Microsoft, Novell, GT Interactive and Expert Software.

The Company has obtained select authorized replicator status with Microsoft
that allows the Company to replicate Microsoft-Registered Trademark- products
for Gateway, a licensee of Microsoft-Registered Trademark- products. This status
is pursuant to an agreement with Microsoft that expires in October 1998. The
Company has been a select authorized replicator of Microsoft-Registered
Trademark- products for Gateway since 1995 and expects, but cannot guarantee,
that such status will continue. As part of its effort to diversify its customer
base, the Company intends to seek authorization to replicate
Microsoft-Registered Trademark- products for additional OEMs and licensees of
these products. In addition, the Company has an agreement with Microsoft to
provide RMA processing, which agreement may be terminated by Microsoft upon 30
days' notice.

26
<PAGE>
One of the Company's primary customers is Gateway, which accounted for
18.0%, 38.3% and 29.6% of the Company's consolidated sales in 1996, 1997 and the
first quarter of 1998, respectively. Zomax is a primary supplier of CDs to
Gateway and in August 1997 was named its North American Supplier of the Year.
The Company has an agreement with Gateway that governs the procedures for making
and receiving orders. This agreement expires July 31, 1998, but may be renewed
for additional one-year terms upon agreement of the parties, subject to earlier
termination by Gateway upon 30 days' notice.

In 1998, the Company began providing replication, packaging, distribution
and fulfillment services to Novell from its San Jose, California facilities
under an Agreement for Manufacturing Turnkey Products. This agreement expires in
2000 but may be renewed annually, subject to earlier termination by Novell upon
90 days' notice. Sales to Novell accounted for 18.2% of the Company's
consolidated sales for the first quarter of 1998. Sales to Expert Software
accounted for 10.3% of the Company's consolidated sales for the first quarter of
1998.

MARKETING AND SALES

Zomax focuses its marketing efforts on customers that require personal
service, flexibility, fast turnaround time and a complete outsource solution to
their multimedia service needs. The Company has successfully marketed itself to
these customers by managing all of the steps in the process from design to
replication to packaging to delivery. As part of its strategy, the Company also
intends to continue cross-marketing its services to customers who may currently
rely on the Company for only a portion of their multimedia service needs. For
example, software publishers often need diskettes as well as CD-ROM and
customers who may now use Zomax's replication and warehousing services could
also integrate and streamline their production process and maximize efficiencies
by using Zomax's RMA processing services.

The Company employs a direct sales staff that is responsible for maintaining
relationships with existing customers and developing new business relationships.
With the acquisition of PMG, the primary sales group for Kao Infosystems Company
in California, the Company expanded its direct sales staff to seven people.

The Company's direct sales staff is supported by a project management staff
of 33 people that is responsible for ensuring that each order is processed on a
timely basis, all required support materials are in place and desired quality
levels are achieved. Each customer account is assigned one or more project
managers to provide daily contact with the customer, coordinate the purchase and
manufacture of all necessary materials, adapt to order changes and generally act
as liaison with the customer.

COMPETITION

The multimedia services industry is highly competitive and is experiencing
consolidation. The Company competes primarily with independent service providers
and, to a lesser extent, with affiliates of major international music companies
and small localized service providers. Each of these producers generally
services a defined set of customer needs.

- INDEPENDENT SERVICE PROVIDERS. Participants in this segment include
companies such as Zomax, Kao Infosystems Company, Cinram International
Inc., Nimbus CD International, Inc., Metatec Corporation, Denon
Electronics, Inc. and Disctronics, Inc. Independent service providers
generally have the ability to meet large volume requirements and have
varying degrees of service capability. However, many independent service
providers do not offer a comprehensive range of outsource services.

- AFFILIATES OF MAJOR INTERNATIONAL MUSIC COMPANIES. This segment consists
of large service providers who are affiliated with major international
music companies such as Sony Music Entertainment, Inc., PolyGram N.V.,
Warner Music Group (a division of Time Warner Inc.), Bertelsmann Music
Group (BMG) and EMI Group plc. These service providers dedicate a majority
of their

27
<PAGE>
manufacturing capacity to the production of CD-Audio for the affiliated
record labels and typically offer a limited range of services.

- SMALL LOCALIZED SERVICE PROVIDERS. These service providers generally have
limited production capacity and offer a limited range of related services.
The complexity of the manufacturing process and the large capital
investment required to maintain and upgrade capacity generally constrain
these small service providers.

Other existing technologies compete with the Company's products in the
delivery of digital information. Portable media, such as digital audio tape,
digital compact cassette and mini-disc have been introduced commercially but
have not yet achieved widespread consumer acceptance. In addition, one-time
recordable CDs ("CD-R") are available and are often used to replicate short run
products that are more expensive to manufacture in the traditional manner. The
Company does not expect any of these technologies to expand beyond their current
market niches in the foreseeable future.

Electronic on-line delivery of digital information, through such means as
the Internet or satellites, is a potential future competitor of CD and DVD
technology. Recent and continuing developments in broadband online data delivery
have led to speculation regarding the decreasing viability of physical media
such as CD- and DVD-ROM products. The Company believes, however, that online
delivery of data will not, for the foreseeable future, be a practical
alternative for consumers due to significant download time and hardware storage
requirements. As a result, the Company believes optical media will continue to
be a significant format for the foreseeable future. Future advances in CD and
DVD technology, such as higher speed drives and greater data compression, could
increase the advantages of these technologies over electronic on-line delivery
and other potential competitive technologies.

Competition in the hardware and software RMA processing industry segment is
extremely fragmented. Generally, participants in this industry segment include a
number of small independent companies, such as Software Recovery and Robert J.
Punko Marketing, as well as software publishers and computer OEMs which dedicate
in-house resources to RMA processing. The Company believes that it is the
largest outsource provider of RMA processing services.

The Company believes that it competes favorably with its competitors with
respect to quality, service, reliability, price, manufacturing capacity and
timely delivery of product, the principal competitive factors in this industry.
As such, to enhance its competitive position, the Company offers a full range of
value-added services to customers including design, preparation and printing of
artwork and packaging, warehousing, shipping and RMA processing. Zomax believes
its high level of customer service and responsiveness to customers' needs
provides it with a competitive advantage which differentiates the Company from
its competitors. See "Business--Services."

PROPRIETARY RIGHTS

Zomax, like most other CD manufacturers, licenses patented technology for
use on a nonexclusive basis. Zomax currently has license agreements with U.S.
Philips Corporation ("Philips") and Discovision Associates ("DVA"). These
agreements grant to Zomax non-exclusive, royalty-bearing, non-transferable
licenses to make, use and sell CDs. The royalty payments due under the licenses
generally depend on the number of CDs manufactured, their size and their use.
The Company's license from Philips expires in 2006. The term of the DVA license
continues until the expiration of the last DVA patent covered by the license,
which is currently in 2010. This date may change in the event of a patent
invalidity ruling, premature expiration of a currently licensed patent or the
subsequent issuance of a related patent. See "Risk Factors--Dependence on
Technology Licenses."

The Company may also be required to obtain licenses from the owners of DVD
technology to manufacture DVDs. Although the Company expects to obtain such
licenses as they are made available to

28
<PAGE>
industry participants, no assurances can be made that such licenses will be
obtained and the Company cannot predict the amount of the royalty that will be
payable under any such license.

EMPLOYEES

The Company has approximately 434 full-time employees, of which 264 perform
manufacturing-related functions, 82 perform RMA processing services and 88
perform administrative functions, including customer service and sales and
marketing. The Company hires additional employees on a temporary, full-time
basis to perform manufacturing-related services as the need arises. The Company
currently operates its Minneapolis facility 24 hours a day, seven days a week.
The Company is currently operating one shift in its recently opened San Jose
facility, but anticipates adding more shifts as customer demand requires. The
Company believes that its relations with its employees are good. None of the
Company's employees is covered by a collective bargaining agreement.

FACILITIES

The Company leases facilities in Minneapolis, Minnesota; San Jose,
California; Indianapolis, Indiana; Boston, Massachusetts; and Dublin, Ireland.
Each of the Company's facilities, with the exception of its main headquarters in
Minnesota, were added as a result of acquisitions by the Company during the last
12 months. Management believes its facilities are adequate for the foreseeable
future. See "Business-- Services."

The Company leases approximately 64,000 square feet of manufacturing, office
and warehouse space in Minneapolis, Minnesota, from Nathan Lane Limited
Partnership, a Minnesota limited liability partnership, of which Phillip T.
Levin, Chairman of the Board of Zomax, owns a one-third interest. The average
base rent is $4.57 per net rentable square foot per annum. The lease expires on
December 31, 2000, with the option to extend two additional periods of three
years each. The Company is also obligated to pay its proportionate share of
taxes and operating expenses. See "Certain Transactions."

The Company leases approximately 108,000 square feet at its manufacturing
facility in San Jose. The average base rent is $3.06 per square foot per annum
for the first year of the lease and increases by 3.0% each year thereafter. This
lease commenced in 1997 and expires in 2002, but the Company may, at its option,
extend the lease term for an additional five years. The Company is also
obligated to pay its proportionate share of taxes and operating expenses.

LEGAL PROCEEDINGS

The Company is involved in claims arising in the normal course of business.
In management's opinion, the final resolution of these claims will not have a
material adverse effect on the Company's financial position or results from
operations.

29
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ------------------------------
<S> <C> <C>
Phillip T. Levin.............. 55 Chairman of the Board of
Directors
James T. Anderson............. 41 President, Chief Executive
Officer and Director
James E. Flaherty............. 44 Chief Financial Officer and
Secretary
Michelle S. Bedard............ 39 Executive Vice President
Anthony Angelini.............. 34 Vice President--Western U.S.
and European Operations
Robert Ezrilov(1)(2).......... 53 Director
Howard P. Liszt(1)(2)......... 51 Director
Janice Ozzello Wilcox(1)(2)... 44 Director
</TABLE>

- ------------------------

(1) Audit Committee

(2) Compensation Committee

All directors hold office until the next annual meeting of shareholders or
until their successors have been duly elected and qualified. Executive officers
of the Company are appointed by and serve at the discretion of the Board of
Directors. The Audit Committee reviews the selection and work of the Company's
independent auditors and the adequacy of internal controls for compliance with
corporate policies and directives. The Compensation Committee recommends to the
Board of Directors from time to time the salaries to be paid to executive
officers of the Company and any plans for additional compensation it deems
appropriate. In addition, this committee is vested with the same authority as
the Board of Directors with respect to the granting of options and the
administration of the Company's 1996 Stock Option Plan.

PHILLIP T. LEVIN has served as Chairman of the Board of Directors of the
Company since he co-founded it in February 1996. Mr. Levin was Chairman and
Chief Executive Officer of ZOMI Corp., the General Partner of the Partnership,
the Company's predecessor, from 1993, when he co-founded it and the Partnership,
until May 1996. Mr. Levin has served as a director and officer of Metacom, Inc.,
a leading distributor of audio cassettes and a principal shareholder of the
Company, since he co-founded it in 1970. He has served as Metacom's Chief
Executive Officer since 1991.

JAMES T. ANDERSON has served as President, Chief Executive Officer and as a
director of the Company since he co-founded it in February 1996. He was
President of ZOMI Corp. from 1993, when he co-founded it and the Partnership,
until May 1996. Mr. Anderson served with Metacom from May 1982 to June 1993,
including five years as Vice President of Manufacturing where he was responsible
for all manufacturing activities, including purchasing, inventory control,
production, warehousing and distribution. Mr. Anderson is married to Michelle S.
Bedard, the Executive Vice President of the Company.

JAMES E. FLAHERTY has served as Chief Financial Officer of the Company since
December 1996 and as Secretary since January 1997. From May 1989 until December
1996, Mr. Flaherty was employed by Racotek Inc., a wireless data software
company in Minneapolis, Minnesota, serving in various capacities including Chief
Financial Officer, Controller and Secretary. For five years, Mr. Flaherty served
as an accountant with Coopers and Lybrand, LLP. Mr. Flaherty is a Certified
Public Accountant.

MICHELLE S. BEDARD has served as Executive Vice President of the Company
since its inception in February 1996, prior to which she served as Vice
President of Sales and National Sales Manager of the Partnership since its
inception in 1993. From June 1991 to August 1993, Ms. Bedard was National Sales
Manager of Metacom, where she was responsible for sales revenue and staff,
including eight inside sales

30
<PAGE>
representatives and thirteen independent sales groups, the customer service
department and various support staff, for all four sales divisions. Ms. Bedard
is married to James T. Anderson, President, Chief Executive Officer and a
director of the Company.

ANTHONY ANGELINI has served as Vice President--Western U.S. and European
Operations since February 4, 1998, when the Company acquired PMG, PMG Ireland
and NGS. Mr. Angelini co-founded PMG, PMG Ireland and NGS in October 1989,
September 1995 and May 1996, respectively. Mr. Angelini served as Vice President
of PMG, a Director of PMG Ireland and Manager of NGS, and he was a major equity
owner of each. Mr. Angelini's responsibilities included managing and directing a
staff of more than 30 persons and planning of financial and operating budgets.

ROBERT EZRILOV has served as President of Metacom, Inc. since July 1997. Mr.
Ezrilov was self-employed as a business consultant from April 1995 to July 1997.
Prior to April 1995, he was a partner with Arthur Andersen LLP, which he joined
in 1966. Mr. Ezrilov also serves on the Board of Directors of C.H. Robinson
Worldwide, Inc., a publicly-held transportation and logistics service provider
located in Eden Prairie, Minnesota.

HOWARD P. LISZT currently serves as Chief Executive Officer of Campbell
Mithun Esty, an advertising agency in Minneapolis, Minnesota, where he has been
employed since 1976.

JANICE OZZELLO WILCOX has served as Senior Vice President and Chief
Financial Officer of Marquette Bancshares, Inc., a bank holding company in
Minneapolis, Minnesota, since January 1993. From April 1991 to December 1992,
Ms. Wilcox served as Senior Vice President and Chief Financial Officer of
Marquette Bank Minneapolis, N.A. in Minneapolis, Minnesota.

DIRECTOR COMPENSATION

The Company pays fees to the non-officer members of the Board of Directors
of $500 for each Board meeting and $250 for each Committee meeting attended. The
Company reimburses the directors for out-of-pocket expenses incurred while
attending Board or Committee meetings.

The Company's 1996 Stock Option Plan (the "Plan") provides for automatic
option grants to each director who is not an employee of the Company. Each
non-employee director who was elected for the first time as a director on or
after the adoption of the Plan on March 1, 1996 was granted a nonqualified
option to purchase 10,000 shares of the Common Stock, vesting at the rate of
2,000 shares per year for the first five years. Each non-employee director who
is re-elected as a director of the Company or whose term of office continues
after a meeting of shareholders at which directors are elected shall, as of the
date of such re-election or shareholder meeting, automatically be granted a
nonqualified option to purchase 2,000 shares of the Common Stock. A non-employee
director who receives a 10,000-share option upon initial election to the Board
may not receive a 2,000-share option for at least 12 months. All options granted
pursuant to these provisions are granted at a per share exercise price equal to
100% of the fair market value of the Common Stock on the date of grant and they
expire on the earlier of (i) three months after the optionee ceases to be a
director (except by death) or (ii) ten (10) years after the date of grant. In
the event of the death of a non-employee director, any option granted to such
director pursuant to this formula plan may be exercised at any time within
twelve (12) months of the death of such director or until the date on which the
option, by its terms, expires, whichever is earlier.

EXECUTIVE COMPENSATION

COMPENSATION SUMMARY. The following table sets forth all cash compensation
paid or to be paid by the Company, as well as certain other compensation paid or
accrued, during each of the Company's last three fiscal years to the Company's
chief executive officer and each other executive officer whose total salary and
bonus exceeded $100,000 during fiscal 1997 ("Named Executive Officers").

31
<PAGE>
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- -------------
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) OPTIONS
- ---------------------------------------------------------------- ----------- ---------- ------- -------------
<S> <C> <C> <C> <C>
James T. Anderson............................................... 1997 214,935 204,441 125,000
President and Chief 1996 225,533(2) 113,429 125,000
Executive Officer 1995 150,000 53,520 --

Michelle S. Bedard.............................................. 1997 356,437(3) 20,000 25,000
Executive Vice President 1996 168,574(3) 20,000 75,000
1995 130,053(3) 6,475 --

James E. Flaherty............................................... 1997 98,398 15,000 35,000
Chief Financial Officer

George F. Esbensen.............................................. 1997 105,750(4) -- --
Former Vice President of 1996 108,720(4) -- 35,000
Sales--Software Manufacturing Group 1995 104,456(4) 3,650 --
</TABLE>

- ------------------------

(1) All compensation earned prior to May 10, 1996 was earned from the
Partnership.

(2) Includes payment for accrued vacation in the amount of $30,533.

(3) Includes commissions of $256,233, $78,320 and $50,053 for 1997, 1996 and
1995, respectively.

(4) Includes commissions of $25,266, $28,351 and $24,456 for 1997, 1996 and
1995, respectively.

OPTION GRANTS DURING 1997 FISCAL YEAR. The following table provides
information regarding stock options granted during fiscal 1997 to the Named
Executive Officers. The Company has not granted any stock appreciation rights.

OPTION GRANTS

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED ANNUAL
-------------------------------------------------------------------- RATES OF STOCK PRICE
PERCENT OF TOTAL APPRECIATION FOR OPTION
NUMBER OF SHARES OPTIONS GRANTED TO EXERCISE OR TERM(1)
UNDERLYING EMPLOYEES IN FISCAL BASE PRICE EXPIRATION ------------------------
NAME OPTIONS GRANTED YEAR PER SHARE(2) DATE 5% ($) 10% ($)
- --------------------------------- ----------------- --------------------- ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
James T. Anderson................ 125,000(3) 42.1% $ 5.50 05/01/07 $ 432,365 $ 1,095,698
Michelle S. Bedard............... 25,000(4) 8.4% $ 5.50 05/01/07 $ 86,473 $ 219,140
James E. Flaherty................ 35,000(5) 11.8% $ 5.25 12/29/06 $ 101,307 $ 292,850
George F. Esbensen............... -- -- -- -- -- --
</TABLE>

- ------------------------

(1) The potential realizable value columns of the foregoing table illustrate
values that might be realized upon exercise of the options immediately prior
to their expiration, assuming the specified compounded rates of appreciation
on the Company's Common Stock over the related option's term.

(2) Exercise price is equal to the fair market value on the date of grant.

(3) Option becomes exercisable with respect to 31,250 shares on each of May 2,
1998, 1999, 2000 and 2001.

(4) Option becomes exercisable with respect to 6,250 shares on each of May 2,
1998, 1999, 2000 and 2001.

(5) Option becomes exercisable with respect to 7,000 shares on each of December
30, 1997, 1998, 1999, 2000 and 2001.

32
<PAGE>
OPTION EXERCISES DURING 1997 FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES. The following table provides information as to options exercised by the
Named Executive Officers during fiscal 1997 and the number and value of options
at December 26, 1997. The Company does not have any outstanding stock
appreciation rights.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 26, IN-THE-MONEY OPTIONS AT
1997 DECEMBER 26, 1997(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James T. Anderson......................................... 65,000 185,000 $ 156,390 $ 601,672
Michelle S. Bedard........................................ 35,000 65,000 $ 84,210 $ 187,640
James E. Flaherty......................................... 7,000 28,000 $ 27,342 $ 109,368
George F. Esbensen........................................ 11,000 24,000 $ 26,466 $ 57,744
</TABLE>

- ------------------------

(1) Value is calculated on the basis of the difference between the option
exercise price and $9.156, the closing sale price for the Company's Common
Stock at December 26, 1997, as quoted by the Nasdaq National Market,
multiplied by the number of shares of Common Stock underlying the option.

EMPLOYMENT AGREEMENTS

On March 1, 1996, the Company entered into an Employment Agreement, which
was effective on May 10, 1996, the closing date of the Company's public
offering, with James T. Anderson, President and Chief Executive Officer of the
Company. Pursuant to the terms of the agreement, the base annual salary is
reviewed annually by the Board and has been set at $250,000 for 1998. In
addition, Mr. Anderson is entitled to a bonus equal to five percent of the
Company's earnings before taxes, as defined in the agreement. The agreement also
provided him with a ten-year option to purchase 125,000 shares of the Company's
Common Stock at an exercise price equal to $6.75 per share, vesting 35,000
shares immediately and 30,000 shares each year for three years. Upon termination
of Mr. Anderson's employment for any reason, such option shall continue to be
exercisable during its term but only to the extent the option was exercisable
and unexercised on the date of termination of employment. Mr. Anderson is
required by the agreement to maintain confidentiality of all Company trade
secrets and upon termination of employment will be prohibited from participating
in a competing venture for a period of one year. The initial term of the
agreement will end on December 31, 1998 unless terminated earlier in accordance
with the provisions of the agreement. If the Company terminates Mr. Anderson
without "cause" or if Mr. Anderson resigns for "good reason" or within one year
after a "change in control" (as those terms are defined in the agreement), Mr.
Anderson will be entitled to receive, among other things, (i) an amount equal to
twice any bonus payments earned by him for the immediately preceding fiscal year
and (ii) an amount equal to twice the base salary in effect at that time.

COMPENSATION COMMITTEE INTERLOCKS

A member of the Company's Compensation Committee, Robert Ezrilov, is also
the President of Metacom, Inc., a principal shareholder of the Company. Metacom
and the Company are parties to a Manufacturing Agreement pursuant to which the
Company will provide Metacom with its full requirement of compact discs and
audio cassettes at the same price as Metacom could obtain such products and
services from an unrelated third party. See "Certain Transactions."

33
<PAGE>
STOCK OPTIONS

On January 21, 1998, the Board amended the Company's 1996 Stock Option Plan
(the "Plan") to provide for the automatic acceleration of options upon the
change of control; and, on March 9, 1998, the Board amended the Plan to increase
the shares reserved under the Plan from 850,000 to 1,300,000 shares. These
amendments are subject to approval of the Company's shareholders at the annual
meeting scheduled to be held May 14, 1998. As of April 20, 1998, the Company had
outstanding incentive and nonqualified options for the purchase of an aggregate
of 708,000 shares of the Company's Common Stock with an average exercise price
of $7.16 per share granted under the Plan. Options to purchase 5,000 shares
under the Plan had been exercised as of April 20, 1998.

CERTAIN TRANSACTIONS

Metacom, Inc., a significant shareholder of the Company, is a party to a
Manufacturing Agreement with the Company. Phillip T. Levin, the Chairman of the
Board and a significant shareholder of the Company, is the Chief Executive
Officer and majority shareholder of Metacom; and Robert Ezrilov, a director of
the Company, is President of Metacom. Pursuant to the Manufacturing Agreement,
the Company will provide Metacom with its full requirement of CDs and audio
cassettes at the same price as Metacom could obtain such products and services
from an unrelated third party. The Manufacturing Agreement, as amended,
terminates December 31, 2000. Metacom is a customer of the Company and accounted
for 5.9% and 2.0% of the Company's revenues in 1996 and 1997, respectively.
Metacom has not met its obligations under the Manufacturing Agreement and is
negotiating a settlement on such default with the Company. Neither Mr. Levin nor
Mr. Ezrilov participate in Board or management discussions regarding Metacom or
vote as a Company director on any matter involving Metacom.

On January 1, 1995, the Company entered into an Office/Warehouse Lease with
Metacom, which lease was amended on October 28, 1997 and subsequently assigned
to Nathan Lane Partnership, LLP, a Minnesota limited liability partnership of
which Mr. Levin owns a one-third interest. Pursuant to this lease, as amended,
the Company leases approximately 64,000 square feet at an average base rent of
$4.57 per net rentable square foot per annum. The lease expires on December 31,
2000 with the option to extend two additional periods of three years each.
Additionally, the Company is obligated to pay its proportionate share of taxes
and operating expenses.

In connection with the Company's acquisitions of PMG, PMG Ireland and NGS in
February 1998, Anthony Angelini became the Company's Vice President Western U.S.
and European Operations and received 215,513 of the 800,002 shares of the
Company's Common Stock issued to the equity owners of PMG, PMG Ireland and NGS
as consideration in connection with the acquisitions. Of the remaining 584,489
shares, 215,513 shares were issued to Ronald Silzer, 215,513 shares to Brian
Fleury, 76,449 shares to Andrew Berg, 76,449 shares to Blake White and 565
shares to Patrick Burke. These individuals continue to be employees of the
Company. Messrs. Angelini, Silzer, Fleury, Berg and White are Selling
Shareholders in this offering.

34
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS

The following table provides information as of April 20, 1998 concerning the
beneficial ownership of the Company's Common Stock by (i) each director, (ii)
each Named Executive Officer, (iii) each shareholder known by the Company to be
the beneficial owner of more than 5% of the Company's outstanding Common Stock,
(iv) the directors and executive officers as a group and (v) each Selling
Shareholder. Except as otherwise indicated, the persons named in the table have
sole voting and investing power with respect to all shares of Common Stock owned
by them.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1)
------------------------- SHARES -------------------------
NAME AND ADDRESS NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
- ----------------------------------------------------- ---------- ------------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Phillip T. Levin(2)(3)............................... 1,222,823 23.2% -- 1,222,823 17.8%

James T. Anderson(2)(4).............................. 500,161 9.2% -- 500,161 7.1%

Robert Ezrilov(2)(5)................................. 5,000 * -- 5,000 *

Howard P. Liszt(2)(6)................................ 6,000 * -- 6,000 *

Janice Ozzello Wilcox(2)(7).......................... 3,000 * -- 3,000 *

Michelle S. Bedard(2)(8)............................. 500,161 9.2% -- 500,161 7.1%

James E. Flaherty(2)(9).............................. 7,000 * -- 7,000 *

George F. Esbensen................................... 0 -- -- 0 --

Metacom, Inc.(2)..................................... 257,311 4.9% -- 257,311 3.7%

All current directors and executive officers as a
group (8 persons)(10).............................. 1,959,497 35.8% 85,513 1,873,984 26.5%

SELLING SHAREHOLDERS:
Anthony Angelini(2)(11).............................. 215,513 4.1% 85,513 130,000 1.9%

Ronald Silzer(11).................................... 215,513 4.1% 152,691 62,822 *

Brian Fleury(11)..................................... 215,513 4.1% 95,051 120,462 1.8%

Andrew Berg(11)...................................... 76,449 1.4% 33,745 42,704 *

Blake White(11)...................................... 76,449 1.4% 33,000 43,449 *
</TABLE>

- ------------------------

(1) Under the rules of the Securities and Exchange Commission ("SEC"), shares
not actually outstanding are deemed to be beneficially owned by an
individual if such individual has the right to acquire the shares within 60
days of April 20, 1998. Pursuant to such SEC rules, shares deemed
beneficially owned by virtue of an individual's right to acquire them are
also treated as outstanding when calculating the percent of the class owned
by such individual and when determining the percent owned by any group in
which the individual is included.

(2) Address is 5353 Nathan Lane, Plymouth, Minnesota 55442.

(3) Includes 257,311 shares held by Metacom, Inc., of which Mr. Levin is the
majority shareholder and Chief Executive Officer, 2,000 shares held by Mr.
Levin as custodian for his children and 2,000 shares which may be purchased
by Mr. Levin upon exercise of a currently exercisable option.

(4) Includes 126,250 shares which may be purchased by Mr. Anderson upon
exercise of currently exercisable options and 61,250 shares which may be
purchased by Ms. Bedard, his wife, upon exercise of currently exercisable
options.

(5) Includes 2,000 shares held through retirement plans for Mr. Ezrilov's
benefit and 2,000 shares which may be purchased by Mr. Ezrilov upon
exercise of a currently exercisable option.

35
<PAGE>
(6) Includes 2,000 shares which may be purchased by Mr. Liszt upon exercise of
a currently exercisable option.

(7) Includes 2,000 shares which may be purchased by Ms. Wilcox upon exercise of
a currently exercisable option.

(8) Includes 61,250 shares which may be purchased by Ms. Bedard upon exercise
of currently exercisable options, 312,661 shares held by Mr. Anderson, her
husband, and 126,250 shares which may be purchased by Mr. Anderson upon
exercise of currently exercisable options.

(9) Represents shares which may be purchased by Mr. Flaherty upon exercise of a
currently exercisable option.

(10) Includes 202,500 shares which may be purchased by current executive
officers and directors upon exercise of currently exercisable options; see
above footnotes for shares held indirectly for the benefit of family
members.

(11) The Selling Shareholders received these shares in connection with the
acquisition of PMG, NGS and PMG Ireland. See "Certain Transactions."

DESCRIPTION OF SECURITIES

The authorized capital stock of the Company consists of 25,000,000 shares of
capital stock without par value, of which 15,000,000 shares are Common Stock and
10,000,000 shares are not designated as to terms and preferences.

COMMON STOCK

As of the date of this Prospectus, the Company had 5,274,892 shares of
Common Stock issued and outstanding. The holders of the Common Stock: (i) have
equal ratable rights to dividends from funds legally available therefor, when,
as and if declared by the Board of Directors of the Company; (ii) are entitled
to share ratably in all the assets of the Company available for distribution to
holders of the Common Stock upon liquidation, dissolution or winding up of the
affairs of the Company; (iii) do not have preemptive, subscription or conversion
rights and there are no redemption or sinking fund provisions applicable
thereto; and (iv) are entitled to one vote per share on all matters which
shareholders may vote on at all meetings of shareholders. All shares of the
Common Stock now outstanding are fully paid and nonassessable.

The holders of the Common Stock do not have cumulative voting rights, which
means that the holders of more than 50 percent of such outstanding shares voting
for the election of directors can elect all of the directors of the Company to
be elected, if they so choose. In such event, the holders of the remaining
shares will not be able to elect any of the Company's directors.

UNDESIGNATED STOCK

Under governing Minnesota law and the Company's Articles of Incorporation,
no action by the Company's shareholders is necessary, and only action of the
Board of Directors is required, to authorize the issuance of any of the
undesignated stock. The Board of Directors is empowered to establish, and to
designate the name of, each class or series of the undesignated shares and to
set the terms of such shares (including terms with respect to redemption,
sinking fund, dividend, liquidation, preemptive, conversion and voting rights
and preferences). Accordingly, the Board of Directors, without shareholder
approval, may issue undesignated stock with terms (including terms with respect
to redemption, sinking fund, dividend, liquidation, preemptive, conversion and
voting rights and preferences) that could adversely affect the voting power and
other rights of holders of the Common Stock.

The existence of undesignated stock may have the effect of discouraging an
attempt, through acquisition of a substantial number of shares of Common Stock,
to acquire control of the Company with a

36
<PAGE>
view to effecting a merger, sale or exchange of assets or a similar transaction.
The anti-takeover effects of the undesignated shares may deny shareholders the
receipt of a premium on their Common Stock and may also have a depressive effect
on the market price of the Common Stock.

WARRANTS

The Company has outstanding warrants to purchase 131,725 shares of its
Common Stock at an exercise price of $8.10 per share. These warrants expire in
May 2001 and have certain demand and piggyback registration rights. See "Shares
Eligible for Future Sale--Registration Rights."

MINNESOTA BUSINESS CORPORATION ACT

Section 302A.671 of the Minnesota Business Corporation Act provides that,
unless the acquisition of certain new percentages of voting control of the
Company (in excess of 20%, 33 1/3% or 50%) by an existing shareholder or other
person is approved by the holders of a majority of the outstanding voting stock
other than shares held by the acquirer (if already a shareholder) and officers
and directors who are also employees of the Company, the shares acquired above
any such new percentage level of voting control will not be entitled to voting
rights. In addition, if the requirements of this Section are not satisfied, the
Company may redeem the shares so acquired by the acquirer at their market value.
Section 302A.671 generally does not apply to a cash offer to purchase all shares
of voting stock of the issuing corporation if such offer has been approved by a
majority vote of disinterested directors of the issuing corporation.

Section 302A.673 of the Minnesota Business Corporation Act restricts certain
transactions between the Company and a shareholder who becomes the beneficial
holder of 10% or more of any class of the Company's outstanding voting stock (an
"interested shareholder") unless a majority of the disinterested directors of
the Company have approved, prior to the date on which the shareholder acquired a
10% interest, either the business combination transaction suggested by such a
shareholder or the acquisition of shares that made such a shareholder a
statutory interested shareholder. If such prior approval is not obtained, this
section imposes a four-year prohibition from the interested shareholder's share
acquisition date on mergers, sales of substantial assets, loans, substantial
issuance of stock and various other transactions involving the Company and the
interested shareholder or its affiliates.

In the event of certain tender offers for stock of the Company, Section
302A.675 of the Minnesota Business Corporation Act precludes the tender offeror
from acquiring additional shares of stock (including acquisitions pursuant to
mergers, consolidations or statutory share exchanges) within two years following
the completion of such an offer unless the selling shareholders are given the
opportunity to sell the shares on terms that are substantially equivalent to
those contained in the earlier tender offer. The Section does not apply if a
committee of the Board consisting of all of its disinterested directors
(excluding present and former officers of the corporation) approves the
subsequent acquisition before the shares are acquired pursuant to the earlier
tender offer.

These statutory provisions could have the effect of delaying or preventing a
change in the control of the Company in a transaction or series of transactions
not approved by the Board of Directors.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar with respect to the Company's Common Stock
is Norwest Bank Minnesota, N.A.

SHARES ELIGIBLE FOR FUTURE SALE

As of the date of this Prospectus, the Company has outstanding 5,274,892
shares of Common Stock, 708,000 shares reserved for issuance upon exercise of
options granted under the Plan and 131,725 shares issuable upon exercise of
outstanding warrants. The Company has filed a Registration Statement on

37
<PAGE>
Form S-8 under the Securities Act of 1993, as amended ("Securities Act"), to
register shares of Common Stock reserved for issuance upon exercise of stock
options, thus permitting the resale of such shares by non-affiliates in the
public market without restrictions under the Securities Act and by affiliates
subject to volume and manner of sale limitations under Rule 144.

Of the 6,874,892 shares to be outstanding after the offering, 6,415,622
shares, including the 2,000,000 shares offered hereby, will be freely tradable
without restrictions or registration under the Securities Act. The remaining
459,270 shares were issued in connection with the Company's recent acquisitions,
are subject to the restrictions of Rule 144 and may not be sold until expiration
of applicable holding periods, which expire for 59,268 shares in May 1998 and
expire for the remaining 400,002 shares in February 1999. The Selling
Shareholders and the directors, executive officers and certain other
shareholders of the Company, who beneficially own an aggregate of 2,143,421
shares, have agreed not to offer, sell or otherwise dispose of any of their
shares for a period of 120 days after the effective date of this offering,
without the prior written consent of John G. Kinnard and Company, Incorporated.
Further, these holders are subject to the restrictions of Rule 144 of the
Securities Act with respect to the sale of such shares.

In general, under Rule 144 a person (or persons whose sales are aggregated)
who beneficially owns shares acquired privately from the Company or an affiliate
of the Company at least one year previously and an affiliate of the Company who
beneficially owns shares acquired (whether or not such shares were acquired
privately) from the Company or an affiliate of the Company at least one year
previously, are entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
the Company's Common Stock (approximately 68,000 shares) or the average weekly
trading volume in the Company's Common Stock during the four calendar weeks
preceding the filing of notice with the Commission in connection with such sale.
Sales under Rule 144 are also subject to certain manner-of-sale provisions,
notice requirements and the availability of current public information about the
Company. A person who has not been an affiliate of the Company at any time
during the three months preceding a sale and who beneficially owns shares
acquired from the Company or an affiliate of the Company at least two years
previously is entitled to sell all such shares under Rule 144(k) without regard
to any of the limitations of the Rule.

The Company cannot predict the effect, if any, that sales of the securities
subject to the previously described lockup or Rule 144 restrictions or the
availability of such securities for sale could have on the market price, if any,
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Company's securities, including the securities offered hereby, could adversely
affect prevailing market prices of the Company's securities and the Company's
ability to raise additional capital by occurring at a time when it would be
beneficial for the Company to sell securities.

REGISTRATION RIGHTS

Holders of outstanding warrants to purchase an aggregate of 131,725 shares
of the Company's Common Stock have been granted certain demand and piggyback
registration rights with respect to these shares.

38
<PAGE>
UNDERWRITING

The Underwriters named below (the "Underwriters"), for which John G. Kinnard
and Company, Incorporated, Cruttenden Roth Incorporated and Pacific Crest
Securities Inc. are acting as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement with the Company to purchase from the Company and the Selling
Shareholders the 2,000,000 shares of Common Stock offered hereby. The number of
shares that each Underwriter has agreed to purchase is set forth opposite its
name below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
John G. Kinnard and Company, Incorporated........................................

Cruttenden Roth Incorporated.....................................................

Pacific Crest Securities Inc.....................................................

----------

Total........................................................................ 2,000,000
----------
----------
</TABLE>

The Underwriting Agreement provides that the several Underwriters will be
obligated to purchase all of the shares offered hereby, if any are purchased.
The obligation of the Underwriters to purchase the shares is several and not
joint meaning that, subject to the terms of the Underwriting Agreement, each
Underwriter is obligated to purchase only the number of shares set forth
opposite its name.

The Underwriters propose to offer the shares to the public at the Price to
Public set forth on the cover page of this Prospectus and to dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other brokers and dealers. After the public offering, the Price
to Public, concession and reallowance may be changed by the Representatives.

The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional 300,000
shares at the Price to Public, less the Underwriting Discount and Commission
shown on the cover page of this Prospectus. The Underwriters may exercise such
option only for the purpose of covering any over-allotments in the sale of the
shares offered hereby.

The Underwriting Agreement provides for reciprocal indemnification between
the Selling Shareholders, the Company, the Underwriters and their controlling
persons against civil liabilities in connection with the offering, including
liabilities under the Securities Act. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted pursuant to the foregoing
provisions, the Company has been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in such
Act and is therefore unenforceable.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.

In order to facilitate the offering of Common Stock, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
the Common Stock. Specifically, the Underwriters may over-allot Common Stock in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock,

39
<PAGE>
the Underwriters may bid for and purchase shares of Common Stock in the open
market. The Underwriters may also reclaim selling concessions allowed to an
underwriter or dealer for distributing Common Stock in the offering, if the
Underwriters repurchase previously distributed Common Stock in transactions to
cover their short positions, in stabilization transactions or otherwise.
Finally, the Underwriters may bid for and purchase shares of Common Stock in
market making transactions and impose penalty bids. These activities may
stabilize or maintain the market price of the Common Stock above the market
level that may otherwise prevail. The Underwriters are not required to engage in
these activities and may end any of these activities at any time.

In connection with this offering, certain of the Underwriters and selling
group members may engage in passive market making transactions with the Common
Stock on the Nasdaq National Market immediately prior to the commencement of
sales in this offering, in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended ("Exchange Act"). Passive market
making consists of displaying bids on the Nasdaq National Market which are
limited by the bid prices of independent market makers and making purchases
limited by such prices and effected in response to order flow. Net purchases by
passive market makers on each day are generally limited to a specified
percentage of the passive market maker's average daily trading volume in the
Common Stock during a specified prior period and must be discontinued when such
limit is reached. Passive market making may stabilize the market price of the
Common Stock at a level above that which might otherwise prevail in the open
market and, if commenced, may be discontinued at any time.

Each of the directors, executive officers and certain shareholders of the
Company, including the Selling Shareholders, have agreed, for a period of 120
days from the effective date of this offering, not to offer, sell or otherwise
dispose of an aggregate of 2,143,421 shares of Common Stock beneficially held by
them without the prior written consent of John G. Kinnard and Company,
Incorporated.

The foregoing is a brief summary of the material provisions of the
Underwriting Agreement and does not purport to be a complete statement of their
terms and conditions. The Underwriting Agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Fredrikson & Byron, P.A. Certain legal matters for the Underwriters
will be passed upon by Briggs and Morgan, Professional Association. Certain
legal matters for the Selling Shareholders will be passed upon by .

EXPERTS

The audited financial statements of the Company included in this Prospectus
and elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to such Registration Statement, exhibits and schedules.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement or such other document, each such statement being
qualified in all respects by such reference.

40
<PAGE>
The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports, proxy or information statements and
other information with the Commission. Such reports, proxy or information
statements and other information, as well as the Registration Statement of which
this Prospectus is a part and the exhibits and schedules thereto, may be
inspected by anyone without charge at the principal office of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, or at one of the Commission's
regional offices: 500 West Madison, Suite 1400, Chicago, Illinois 60661-2511 and
7 World Trade Center, 13th Floor, New York, New York, 10048. Copies of all or
any part of such material may be obtained upon payment of the prescribed fees
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.
Washington, D.C. The Commission maintains a World Wide Website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company.

41
<PAGE>
ZOMAX OPTICAL MEDIA, INC.

CONSOLIDATED FINANCIAL STATEMENTS

INDEX

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2

Consolidated Balance Sheets as of December 27, 1996 and December 26, 1997 and as of March 27, 1998
(unaudited).............................................................................................. F-3

Consolidated Statements of Operations for the years ended December 31, 1995, December 27, 1996 and December
26,1997 and for the thirteen weeks ended March 28, 1997 and March 27, 1998 (unaudited)................... F-4

Consolidated Statements of Partners' Capital and Shareholders' Equity for the years ended December 31,
1995, December 27, 1996 and December 26, 1997 and for the thirteen weeks ended March 27, 1998
(unaudited).............................................................................................. F-5

Consolidated Statements of Cash Flows for the years ended December 31, 1995, December 27, 1996 and December
26, 1997 and for the thirteen weeks ended March 28, 1997 and March 27, 1998 (unaudited).................. F-6

Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Zomax Optical Media, Inc.:

We have audited the accompanying consolidated balance sheets of Zomax
Optical Media, Inc. (a Minnesota corporation) as of December 27, 1996 and
December 26, 1997, and the related consolidated statements of operations,
partners' capital and shareholders' equity and cash flows for each of the three
fiscal years in the period ended December 26, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zomax
Optical Media, Inc. as of December 27, 1996 and December 26, 1997, and the
results of its operations and its cash flows for each of the three fiscal years
in the period ended December 26, 1997, in conformity with generally accepted
accounting principles.

/s/ ARTHUR ANDERSEN LLP

Minneapolis, Minnesota,
February 21, 1998

F-2
<PAGE>
ZOMAX OPTICAL MEDIA, INC.

CONSOLIDATED BALANCE SHEETS

AS OF

<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1996 1997
------------ ------------ MARCH 27,
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 7,944,699 $ 5,213,417 $ 6,596,330
Accounts receivable, net of allowance for doubtful accounts of
$531,000, $881,000 and $1,138,000................................. 6,251,831 7,160,198 7,873,172
Inventories......................................................... 1,464,461 1,603,170 2,479,530
Deferred income taxes............................................... 494,000 897,000 1,056,000
Prepaid expenses and deposits....................................... 233,861 879,714 797,892
------------ ------------ ------------
Total current assets............................................ 16,388,852 15,753,499 18,802,924

PROPERTY AND EQUIPMENT, net........................................... 7,791,412 14,002,694 17,607,497

GOODWILL, net......................................................... -- 1,228,023 1,210,323

OTHER ASSETS, net..................................................... 141,830 42,194 3,597
------------ ------------ ------------
$ 24,322,094 $ 31,026,410 $ 37,624,341
------------ ------------ ------------
------------ ------------ ------------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit............................................ $ -- $ -- $ 3,000,000
Current portion of notes payable.................................... 1,778,607 2,293,950 3,146,361
Accounts payable.................................................... 3,356,781 3,524,892 4,812,491
Accrued expenses--
Accrued royalties................................................. 793,468 2,994,768 3,515,221
Accrued compensation.............................................. 466,896 1,155,298 1,147,226
Other............................................................. 450,271 494,882 675,565
Income taxes payable................................................ 513,819 240,882 444,382
------------ ------------ ------------
Total current liabilities....................................... 7,359,842 10,704,672 16,741,246

LONG-TERM NOTES PAYABLE, net of current portion....................... 1,714,374 3,103,975 2,673,465

NOTE PAYABLE TO FORMER OWNER, net of current portion.................. 120,000 -- --

DEFERRED INCOME TAXES................................................. 485,000 755,000 755,000

COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)

SHAREHOLDERS' EQUITY:
Common stock, no par value, 15,000,000 shares authorized; 5,185,002,
5,250,817 and 5,273,327 shares issued and outstanding............. 12,350,116 12,721,513 12,860,654
Retained earnings................................................... 2,292,762 3,741,250 4,593,976
------------ ------------ ------------
Total shareholders' equity...................................... 14,642,878 16,462,763 17,454,630
------------ ------------ ------------
$ 24,322,094 $ 31,026,410 $ 37,624,341
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

F-3
<PAGE>
ZOMAX OPTICAL MEDIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS
FOR THE YEARS ENDED ENDED
------------------------------------------- ---------------------------
DECEMBER 31, DECEMBER 27, DECEMBER 26, MARCH 28, MARCH 27,
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SALES................................. $ 16,858,401 $ 26,866,557 $ 47,876,953 $ 7,952,495 $ 14,232,712
COST OF SALES......................... 11,226,259 18,090,158 32,773,368 5,663,191 9,938,446
------------- ------------- ------------- ------------ -------------
Gross profit.................. 5,632,142 8,776,399 15,103,585 2,289,304 4,294,266

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 3,852,944 5,366,247 9,859,906 1,714,635 2,712,036
------------- ------------- ------------- ------------ -------------
Operating income.............. 1,779,198 3,410,152 5,243,679 574,669 1,582,230

INTEREST EXPENSE...................... 318,087 357,166 408,915 74,475 117,722

INTEREST INCOME....................... (136,566) (329,169) (228,348) (82,158) (59,047)

OTHER (INCOME) EXPENSE, net........... (1,977,652) (231,114) (155,321) (50,692) 277,829
------------- ------------- ------------- ------------ -------------
Income before income taxes.... 3,575,329 3,613,269 5,218,433 633,044 1,245,726

PROVISION FOR INCOME TAXES............ -- 668,000 1,520,000 180,000 393,000
------------- ------------- ------------- ------------ -------------
NET INCOME............................ $ 3,575,329 $ 2,945,269 $ 3,698,433 $ 453,044 $ 852,726
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
PRO FORMA:
Income before income taxes.......... $ 3,575,329 $ 3,613,269 $ 5,218,433 $ 633,044 $ 1,245,726
Provision for income taxes.......... 1,434,000 1,461,000 2,090,000 251,000 498,000
------------- ------------- ------------- ------------ -------------
Net income.......................... $ 2,141,329 $ 2,152,269 $ 3,128,433 $ 382,044 $ 747,726
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
Earnings per share--
Basic............................. $ 0.59 $ 0.47 $ 0.60 $ 0.07 $ 0.14
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
Diluted........................... $ 0.59 $ 0.47 $ 0.58 $ 0.07 $ 0.13
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
Weighted average number of shares
outstanding:
Basic......................... 3,600,002 4,598,877 5,224,168 5,187,502 5,259,108
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
Diluted....................... 3,600,002 4,601,446 5,357,511 5,190,077 5,655,302
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-4
<PAGE>
ZOMAX OPTICAL MEDIA, INC.

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL AND SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1995, DECEMBER 27, 1996, DECEMBER 26, 1997
AND FOR THE THIRTEEN WEEKS ENDED MARCH 27, 1998

<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
----------------------------------------------------
COMMON STOCK
PARTNERS' ------------------------ RETAINED
CAPITAL SHARES AMOUNT EARNINGS TOTAL
------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994, as previously
reported.................................... $ 1,634,632 -- $ -- $ -- $ 1,634,632
Adjustments for the Companies' pooling of
interests (Note 1)........................ (1,634,632) 3,316,100 1,870,371 1,350,550 1,586,289
------------ ---------- ------------ ------------ ------------
BALANCE, December 31, 1994.................... -- 3,316,100 1,870,371 1,350,550 3,220,921
Net income.................................. -- -- -- 3,575,329 3,575,329
Capital contributions and common stock
issued, net of issuance costs............. -- 384,235 1,527,895 -- 1,527,895
Repurchase of ownership interests........... -- (79,820) (300,000) (562,000) (862,000)
Dividends and distributions................. -- -- -- (2,296,234) (2,296,234)
------------ ---------- ------------ ------------ ------------
BALANCE, December 31, 1995.................... -- 3,620,515 3,098,266 2,067,645 5,165,911
Net income.................................. -- -- -- 2,945,269 2,945,269
Dividends and distributions................. -- -- -- (2,710,152) (2,710,152)
Repurchase of ownership interests........... -- (20,513) -- (10,000) (10,000)
Sales of common stock at $6.75 per share,
net of offering costs of $1,446,900....... -- 1,585,000 9,251,850 -- 9,251,850
------------ ---------- ------------ ------------ ------------
BALANCE, December 27, 1996.................... -- 5,185,002 12,350,116 2,292,762 14,642,878
Net income.................................. -- -- -- 3,698,433 3,698,433
Common stock issued under Employee Stock
Purchase Plan............................. -- 6,547 30,606 -- 30,606
Common stock issued in connection with the
acquisition of Trotter Technologies, Inc.
on May 1, 1997............................ -- 59,268 340,791 -- 340,791
Dividends and distributions................. -- -- -- (2,249,945) (2,249,945)
------------ ---------- ------------ ------------ ------------
BALANCE, December 26, 1997.................... -- 5,250,817 12,721,513 3,741,250 16,462,763
Common stock issued under Employee Stock
Purchase Plan (unaudited)................. -- 3,826 24,391 -- 24,391
Common stock issued upon exercise of stock
options and warrants (unaudited).......... -- 18,684 114,750 -- 114,750
Net income (unaudited)...................... -- -- -- 852,726 852,726
------------ ---------- ------------ ------------ ------------
BALANCE, March 27, 1998 (unaudited)........... $ -- 5,273,327 $ 12,860,654 $ 4,593,976 $ 17,454,630
------------ ---------- ------------ ------------ ------------
------------ ---------- ------------ ------------ ------------
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-5
<PAGE>
ZOMAX OPTICAL MEDIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS
FOR THE YEARS ENDED ENDED
---------------------------------------- ----------------------
DECEMBER 31, DECEMBER 27, DECEMBER 26, MARCH 28, MARCH 27,
1995 1996 1997 1997 1998
------------ ------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income......................................... $3,575,329 $2,945,269 $3,698,433 $ 453,044 $ 852,726
Adjustments to reconcile net income to net cash
provided by (used in) operating activities--
Depreciation and amortization.................... 620,641 1,128,213 2,245,734 372,301 836,282
Write-down of other asset........................ -- 250,000 -- -- --
Deferred income taxes............................ -- (9,000) (133,000) -- (159,000)
Changes in operating assets and liabilities:
Accounts receivable............................ (3,058,481) (1,358,752) 910,259 12,845 (712,974)
Inventories.................................... (375,488) (674,587) 20,512 (236,805) (876,360)
Prepaid expenses and deposits.................. 53,119 (24,173) (580,951) (2,137,415) 81,822
Accounts payable............................... 1,218,980 1,353,311 (945,712) (286,055) 1,287,599
Accrued expenses............................... 304,145 761,098 1,999,672 878,103 693,064
Income taxes payable........................... -- 513,819 (272,937) (434,432) 203,500
------------ ------------ ------------ ---------- ----------
Net cash provided by (used in) operating
activities................................. 2,338,245 4,885,198 6,942,010 (1,378,414) 2,206,659
------------ ------------ ------------ ---------- ----------
INVESTING ACTIVITIES:
Purchase of property and equipment, net............ (2,544,392) (4,087,236) (6,006,728) (309,785) (4,422,885)
Acquisitions, net of cash acquired................. -- -- (775,094) -- --
Change in other assets............................. (151,052) 5,850 192,249 133,041 38,097
Sale of financial instruments...................... 519,275 515,157 -- -- --
Purchase of financial instruments.................. (391,406) (259,000) -- -- --
------------ ------------ ------------ ---------- ----------
Net cash used in investing activities........ (2,567,575) (3,825,229) (6,589,573) (176,744) (4,384,788)
------------ ------------ ------------ ---------- ----------
FINANCING ACTIVITIES:
Capital contributions, net of issuance costs....... 1,527,895 -- -- -- --
Proceeds from notes payable--
Affiliate........................................ 207,341 -- -- -- --
Other............................................ 2,405,171 790,500 3,750,000 1,134,000 1,124,346
Repayment of notes payable--
Affiliate........................................ (129,167) (78,175) -- -- --
Other............................................ (720,412) (1,464,937) (3,899,134) (448,597) (702,445)
Short-term borrowings (repayments), net............ -- -- (715,246) -- 3,000,000
Repurchase of ownership interests.................. (862,000) (10,000) -- -- --
Dividends and distributions........................ (2,273,165) (2,710,152) (2,249,945) (498,940) --
Issuance of common stock, net of offering costs.... -- 9,251,850 30,606 16,698 139,141
------------ ------------ ------------ ---------- ----------
Net cash provided by (used in) financing
activities................................. 155,663 5,779,086 (3,083,719) 203,161 3,561,042
------------ ------------ ------------ ---------- ----------
Net increase (decrease) in cash.............. (73,667) 6,839,055 (2,731,282) (1,351,997) 1,382,913

CASH AND CASH EQUIVALENTS:
Beginning of period................................ 1,179,311 1,105,644 7,944,699 7,944,699 5,213,417
------------ ------------ ------------ ---------- ----------
End of period...................................... $1,105,644 $7,944,699 $5,213,417 $6,592,702 $6,596,330
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest............................. $ 296,524 $ 357,055 $ 427,224 $ 76,975 $ 117,175
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
Cash paid for income taxes......................... $ -- $ 162,000 $1,953,937 $ 605,432 $ 489,814
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
Issuance of common stock in connection with the
acquisition of Trotter Technologies, Inc......... $ -- $ -- $ 340,791 $ -- $ --
------------ ------------ ------------ ---------- ----------
------------ ------------ ------------ ---------- ----------
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-6
<PAGE>
ZOMAX OPTICAL MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
DECEMBER 27, 1996 AND DECEMBER 26, 1997

1. BUSINESS DESCRIPTION:

Zomax Optical Media, Inc. (Zomax or the Company) is a leading outsource
service provider to software publishers, computer manufacturers and other
producers of multimedia products operating primarily in North America. These
outsource services include compact disc (CD) and digital versatile disc (DVD)
mastering; CD, diskette and cassette replication; graphic design; print
management; CD printing; packaging; warehousing; inventory management;
distribution and fulfillment; and returned merchandise authorization processing
services.

The Company was incorporated on February 22, 1996 and completed its initial
public offering of common stock on May 10, 1996. Concurrent with the initial
public offering of common stock, the Company received all of the operating
assets and liabilities of Zomax Optical Media Limited Partnership in exchange
for 2,800,000 shares of its common stock.

On February 4, 1998, the Company acquired all of the outstanding shares of
Primary Marketing Group, Next Generation Services, LLC and Primary Marketing
Group Limited (collectively, the Companies) in exchange for 800,002 shares of
the Company's common stock. Prior to the acquisitions, the Companies' business
consisted of providing manufacturers' representative services and returned
merchandise processing services for the computer industry. The Companies intend
to provide substantially the same products and services they provided prior to
these transactions. In connection with the transactions described above, Zomax
acquired certain assets and assumed certain liabilities, including a lease
obligation from an unrelated third party for $1,124,000. The acquisitions of the
Companies have been accounted for as a pooling of interests and, accordingly,
the consolidated financial statements for all periods presented have been
restated to reflect the effects of the transactions.

Net sales and pro forma net income (pro forma for the effect of income
taxes) were as follows (in thousands):

<TABLE>
<CAPTION>
THE
ZOMAX COMPANIES
--------- -----------
<S> <C> <C>
1995:
Net sales................................................................ $ 13,218 $ 3,641
Net income............................................................... 540 1,601

1996:
Net sales................................................................ 18,548 8,319
Net income............................................................... 1,291 861

1997:
Net sales................................................................ 37,907 9,970
Net income............................................................... 2,307 821
</TABLE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

F-7
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FISCAL YEAR-END

The Company's fiscal year ends on the last Friday of the calendar year. For
the purposes of these notes to the consolidated financial statements, the fiscal
years ended December 31, 1995, December 27, 1996 and December 26, 1997 are
referred to as 1995, 1996 and 1997, respectively. The thirteen-week periods
ended March 28, 1997 and March 27, 1998 are referred to as first quarter of 1997
and first quarter of 1998, respectively.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.

INTERIM FINANCIAL INFORMATION (UNAUDITED)

The accompanying balance sheet as of March 27, 1998, the statements of
operations and cash flows for the first quarter of 1997 and the first quarter of
1998, and the statement of shareholders' equity for the first quarter of 1998
are unaudited, but in the opinion of management, include all adjustments,
consisting solely of normal recurring adjustments, necessary for a fair
presentation of results for these interim periods. The results of operations for
the first quarter of 1998 are not necessarily indicative of results to be
expected for the entire year.

REVENUE RECOGNITION

The Company records sales to its customers at the time merchandise is
shipped or as services are rendered. For certain customers, merchandise is
invoiced upon completion of orders with shipment occurring based on written
customer instructions.

In 1995, two customers accounted for 15.0% and 12.5%, respectively, of the
Company's sales. In 1996 and 1997, one customer accounted for 18.0% and 38.3%,
respectively, of the Company's sales. Sales to three customers accounted for
29.6%, 18.2% and 10.3% of the Company's sales for the first quarter 1998. At
March 27, 1998, three customers accounted for 24.8%, 19.2% and 16.1% of accounts
receivable.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid short-term investments with
original maturities of 90 days or less and are recorded at cost, which
approximates market value.

INVENTORIES

Inventories, consisting of material, labor and overhead, are stated at the
lower of first-in, first-out cost or market. Inventories were as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26, MARCH 27,
1996 1997 1998
------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.......................................... $ 1,132 $ 1,070 $ 2,009
Finished goods......................................... 328 498 438
Work in process........................................ 4 35 33
------ ------ -----------
$ 1,464 $ 1,603 $ 2,480
------ ------ -----------
------ ------ -----------
</TABLE>

F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Repairs and maintenance are
charged to expense as incurred, while significant improvements are capitalized.
Depreciation is calculated using the straight-line method for financial
reporting purposes over the estimated useful lives. Property and equipment
consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26, MARCH 27,
1996 1997 1998 LIVES
------------ ------------ ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Manufacturing equipment................. $ 9,171 $ 16,689 $ 20,268 7 years
Office equipment........................ 650 1,244 1,592 5-7 years
Leasehold improvements.................. 117 624 1,043 Lease term
Vehicles................................ 29 55 55 5 years
------------ ------------ -----------
9,967 18,612 22,958
Less--Accumulated depreciation.......... (2,176) (4,609) (5,351)
------------ ------------ -----------
Property and equipment, net............. $ 7,791 $ 14,003 $ 17,607
------------ ------------ -----------
------------ ------------ -----------
</TABLE>

GOODWILL

Goodwill is being amortized on a straight-line basis over 15 years.
Amortization expense in 1997 totaled approximately $50,000 and approximately
$18,000 for the first quarter of 1998.

INCOME TAXES

Deferred income taxes are provided for differences between the tax basis of
assets and liabilities and their carrying amounts for financial reporting
purposes, based on income tax rates in effect at the balance sheet date.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The financial instruments with which the Company is involved are primarily
of a traditional nature. For most instruments, including cash, receivables,
accounts payable, accrued expenses and short-term debt, the Company has assumed
that the carrying amounts approximate fair value because of their short-term
nature.

LONG-LIVED ASSETS

Long-lived assets, such as property and equipment and goodwill, are
evaluated for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value. No
impairment losses have been necessary through March 27, 1998.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," effective beginning in 1998, establishes standards of
disclosure and financial statement display for reporting total comprehensive
income and the individual components thereof. The adoption of SFAS No. 130 will
not have a material impact on the Company's financial position or results of
operations.

F-9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In addition, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," effective in 1998, establishes new standards for segment
reporting. Management has not yet determined the impact of SFAS No. 131 on the
Company's financial position or results of operations.

3. ACQUISITIONS:

On March 31, 1997, the Company acquired all of the outstanding shares of
Benchmark, Inc. (Benchmark) for no initial consideration. However, the Company
agreed to pay additional consideration based on revenues of Benchmark during
1997. Such levels were not met; therefore, no additional consideration was paid.
The acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to net assets acquired based on
their estimated fair values. Benchmark's results of operations have been
included in the accompanying statements of operations since the date of
acquisition. Benchmark was a software replicator located in Plymouth, Minnesota,
with operations in Orlando, Florida, and Indianapolis, Indiana.

On May 1, 1997, the Company acquired all of the outstanding shares of
Trotter Technologies, Inc. (Trotter). The purchase price of Trotter was $712,000
payable in cash and 59,268 shares of the Company's common stock. The acquisition
was accounted for using the purchase method of accounting and, accordingly, the
purchase price was allocated to net assets acquired based on their estimated
fair values. This treatment resulted in approximately $1.2 million of cost in
excess of net assets acquired which has been recorded as goodwill in the
accompanying financial statements. Trotter's results of operations have been
included in the accompanying statements of operations since the date of
acquisition. Trotter was a return merchandise processing, warehousing and
distribution company based in San Jose, California, servicing the software
publishing market.

Pro forma consolidated results of operations as if the acquisitions had
taken place at the beginning of 1996 are as follows (in thousands, except per
share data):

<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Net sales................................................................... $ 34,670 $ 50,062
Net income.................................................................. 2,584 3,572

Earnings per share:
Basic..................................................................... $ 0.55 $ 0.68
--------- ---------
--------- ---------
Diluted................................................................... $ 0.55 $ 0.66
--------- ---------
--------- ---------
</TABLE>

These pro forma amounts are not necessarily indicative of what the actual
results of operations might have been if the acquisitions had been effective at
the beginning of 1996.

4. BANK CREDIT FACILITIES AND LONG-TERM NOTES PAYABLE:

As of December 26, 1997, the Company has a revolving line-of-credit facility
with a lender for up to $5,000,000, which expires on April 30, 1999. The
interest rate is at prime (8.5% at March 27, 1998). Maximum borrowings are
limited to an amount based on a formula using eligible accounts receivable and
inventories ($5,000,000 at March 27, 1998). During 1997, maximum borrowings
outstanding were $3,000,000. There were no borrowings outstanding at December
27, 1996 and December 26, 1997. As of March 27, 1998, borrowings outstanding
were $3,000,000.

In addition, the Company has a capital expenditure term loan facility with
the lender for up to $8,000,000 of which $4,350,000 was available at March 27,
1998. Borrowings under the capital expenditure term loan may be for up to 60
months, and interest rates will vary based on the length of the term loan and

F-10
<PAGE>
4. BANK CREDIT FACILITIES AND LONG-TERM NOTES PAYABLE: (CONTINUED)
the interest rate structure selected. The interest rate structure that can be
selected by the Company varies from a variable rate of prime plus 1/4% or a
fixed rate equal to the three-year U.S. Treasury rate plus 3%. Amounts
outstanding as of December 27, 1996, December 26, 1997 and March 27, 1998 were
approximately $634,000, $3,458,000 and $3,258,000.

The Company has a note payable totaling $390,000, $120,000 and $50,000 at
December 27, 1996, December 26, 1997 and March 27, 1998 in connection with the
redemption of the equity interests of a former owner. This note is scheduled to
be paid off during 1998.

The Company also has several installment notes, with monthly installments
payable through February 2002, at interest rates ranging from 8.4% to 10.5%. The
notes are collateralized by certain equipment. At December 27, 1996, December
26, 1997 and March 27, 1998, borrowings under these notes were approximately
$2,589,000, $1,820,000 and $1,407,000, respectively.

The line-of-credit agreement and certain of the notes contain covenants
related to levels of net income and net worth. The Company was in compliance
with these covenants as of December 26, 1997 and March 27, 1998.

As of March 27, 1998, the Company had notes payable to a third party in
connection with the acquisition of certain assets and liabilities as described
in Note 1. These notes, which total $1,124,000, are scheduled to be paid in
1998.

Future scheduled maturities of long-term debt are as follows as of December
26, 1997 (in thousands):

<TABLE>
<S> <C>
1998.................................................................. $ 2,294
1999.................................................................. 1,314
2000.................................................................. 987
2001.................................................................. 800
2002 and thereafter................................................... 3
---------
Total............................................................... 5,398
Less--Current portion................................................. (2,294)
---------
Long-term notes payable, net of current portion..................... $ 3,104
---------
---------
</TABLE>

5. SHAREHOLDERS' EQUITY:

On May 10, 1996, the Company completed the sale of 1,400,000 shares of
common stock in an initial public stock offering. On June 17, 1996, the
underwriter exercised an overallotment option and purchased an additional
185,000 shares. The Company received proceeds from the offering, net of issuance
costs, of $9,251,850. The underwriter also purchased, for a nominal purchase
price, warrants to purchase 140,000 shares of common stock at a price of $8.10
per share. The warrants are exercisable for a period of four years, commencing
one year from the offering date. During the first quarter of 1998, 1,684 shares
were issued in a cashless exercise of 5,275 warrants.

6. EARNINGS PER SHARE:

The Company follows the procedures of SFAS No. 128, "Earnings per Share."
SFAS No. 128 establishes accounting standards for computing and presenting
earnings per share (EPS). Under SFAS No. 128, basic earnings per common share is
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. No dilution for potentially dilutive
securities is included. Diluted earnings per share is computed under the
treasury stock method and is calculated to compute the dilutive effect of
outstanding options, warrants and other securities. SFAS No. 128 also requires
the restatement of prior years' EPS amounts.

F-11
<PAGE>
6. EARNINGS PER SHARE: (CONTINUED)

The pro forma components of basic EPS and diluted EPS are as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NET SHARES PER SHARE
INCOME OUTSTANDING AMOUNT
--------- ------------- -----------
<S> <C> <C> <C>
1995
Basic EPS........................................................ $ 2,141 3,600 $ 0.59
Dilutive effect of stock options and warrants.................... -- -- --
--------- ----- -----
Diluted EPS...................................................... $ 2,141 3,600 $ 0.59
--------- ----- -----
--------- ----- -----

1996
Basic EPS........................................................ $ 2,152 4,599 $ 0.47
Dilutive effect of stock options and warrants.................... -- 2 --
--------- ----- -----
Diluted EPS...................................................... $ 2,152 4,601 $ 0.47
--------- ----- -----
--------- ----- -----

1997
Basic EPS........................................................ $ 3,128 5,224 $ 0.60
Dilutive effect of stock options and warrants.................... -- 134 (0.02)
--------- ----- -----
Diluted EPS...................................................... $ 3,128 5,358 $ 0.58
--------- ----- -----
--------- ----- -----

FIRST QUARTER OF 1997
Basic EPS........................................................ $ 382 5,188 $ 0.07
Dilutive effect of stock options and warrants.................... -- 2 --
--------- ----- -----
Diluted EPS...................................................... $ 382 5,190 $ 0.07
--------- ----- -----
--------- ----- -----

FIRST QUARTER OF 1998
Basic EPS........................................................ $ 748 5,259 $ 0.14
Dilutive effect of stock options and warrants.................... -- 396 (.01)
--------- ----- -----
Diluted EPS...................................................... $ 748 5,655 $ 0.13
--------- ----- -----
--------- ----- -----
</TABLE>

7. STOCK PLANS:

EMPLOYEE STOCK PURCHASE PLAN

In March 1996, the board of directors of the Company adopted an Employee
Stock Purchase Plan (the Employee Plan) effective July 1, 1996. The Employee
Plan enables employees to contribute up to 10% of their compensation toward the
purchase of the Company's common stock at a price equal to 85% of fair market
value. A total of 250,000 shares have been reserved for issuance under this
plan. No shares were issued in 1996; 6,547 and 3,826 shares were issued under
this plan in 1997 and in the first quarter of 1998, respectively.

STOCK OPTION PLAN

In March 1996, the board of directors of the Company adopted the 1996 Stock
Option Plan (the Plan) in order to provide for the granting of stock options to
employees, officers, directors and independent consultants of the Company at
exercise prices not less than 100% of the fair market value of the

F-12
<PAGE>
7. STOCK PLANS: (CONTINUED)
Company's common stock on the date of grant. In April 1997, the shareholders
approved an increase in the number of shares reserved for issuance upon exercise
of options granted under the Plan from 600,000 to 850,000. In March 1998, the
board of directors approved an increase in the number of shares for issuance
under the Plan from 850,000 to 1,300,000. These options, which can be either
incentive stock options or nonqualified options, vest over a three- to five-year
period and expire ten years after the grant date.

Information regarding the Company's stock option plan is summarized below
(shares in thousands):
<TABLE>
<CAPTION>
THIRTEEN
WEEKS ENDED
MARCH 27,
1996 1997 1998
------------------------ ------------------------ -----------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Options outstanding, beginning of period............... -- $ -- 360 $ 6.79 655
Granted.............................................. 395 6.79 295 5.74 103
Exercised............................................ -- -- -- -- (17)
Canceled............................................. (35) 6.75 -- -- (33)
--- ----- --- ----- ---
Options outstanding, end of period..................... 360 $ 6.79 655 $ 6.44 708
--- ----- --- ----- ---
--- ----- --- ----- ---
Options exercisable, end of period..................... 63 $ 6.75 151 $ 6.72 134
--- ----- --- ----- ---
--- ----- --- ----- ---

WEIGHTED
AVERAGE
EXERCISE
PRICE
-----------

<S> <C>
Options outstanding, beginning of period............... $ 6.44
Granted.............................................. 10.81
Exercised............................................ 6.75
Canceled............................................. 6.88
-----------
Options outstanding, end of period..................... $ 7.16
-----------
-----------
Options exercisable, end of period..................... $ 6.71
-----------
-----------
</TABLE>

Options outstanding at December 26, 1997 have exercise prices ranging
between $5.25 and $10.50 and a weighted average remaining contractual life of
9.17 years.

The Company accounts for its stock option grants under Accounting Principles
Board Opinion No. 25. Since options have been granted at not less than the
market value on the date of grant, no compensation expense has been recognized
for the stock options granted. Had compensation cost of option grants been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's income and earnings per share, on a pro forma
basis, would have been reported as follows (in thousands, except per share
data):

<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Net income:
As reported.................................................................. $ 2,152 $ 3,128
--------- ---------
--------- ---------
Pro forma.................................................................... $ 1,782 $ 2,615
--------- ---------
--------- ---------
Earnings per share:
Basic........................................................................ $ 0.47 $ 0.60
--------- ---------
--------- ---------
Diluted...................................................................... $ 0.47 $ 0.58
--------- ---------
--------- ---------
Pro forma:
Basic........................................................................ $ 0.39 $ 0.50
--------- ---------
--------- ---------
Diluted...................................................................... $ 0.39 $ 0.49
--------- ---------
--------- ---------
</TABLE>

F-13
<PAGE>
7. STOCK PLANS: (CONTINUED)
In determining the compensation cost of the options granted, as specified by
SFAS No. 123, the fair value of each option grant has been estimated on the date
of grant using the Black-Scholes option pricing model. The weighted average
assumptions used in these calculations are summarized below:

<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Risk-free interest rate.................................................... 6.97% 6.72%
Expected life of options granted........................................... 10 years 10 years
Expected volatility of options granted..................................... 76.45% 50.23%
Weighted average fair value of options granted............................. $5.95 $4.47
</TABLE>

8. INCOME TAXES:

Prior to the Company's initial public offering, the Company operated as a
partnership, and prior to the acquisitions described in Note 1, the Companies
operated as nontaxable entities. A pro forma income tax provision has been
established as if they were taxable entities for all periods presented.

Effective with the termination of the Companies' nontaxable status, the
Company established deferred tax assets of approximately $160,000 for cumulative
temporary differences between the tax basis and financial reporting basis of the
Companies' assets and liabilities at the date of termination.

The pro forma provision for income taxes for the Company was as follows (in
thousands):

<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current.............................................................. $ 1,319 $ 1,655 $ 2,381
Deferred............................................................. 115 (194) (291)
--------- --------- ---------
Total provision.................................................. $ 1,434 $ 1,461 $ 2,090
--------- --------- ---------
--------- --------- ---------
</TABLE>

A reconciliation of the statutory federal income tax rate to the Company's
pro forma effective income tax rate is as follows:

<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax rate.................................... 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit................ 5.4 4.9 5.0
Other................................................................ 0.7 1.5 1.1
--- --- ---
Effective income tax rate............................................ 40.1% 40.4% 40.1%
--- --- ---
--- --- ---
</TABLE>

The components of the deferred tax asset (liability) were as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1996 1997
------------- -------------
<S> <C> <C>
Current:
Accounts receivable reserves....................................... $ 202 $ 297
Inventories reserves............................................... -- 115
Accrued liabilities................................................ 292 485
----- -----
Total current deferred tax asset................................. $ 494 $ 897
----- -----
----- -----
Long-term:
Long-lived assets.................................................. $ (485) $ (755)
----- -----
----- -----
</TABLE>

F-14
<PAGE>
9. RELATED-PARTY TRANSACTIONS:

OPERATING LEASE

The Company leases one of its manufacturing and office facilities from
Metacom, Inc. (Metacom), a significant shareholder of the Company. The Company
believes the terms were equivalent to those that would be paid under an arm's
length transaction. Lease payments totaled approximately $381,000, $460,000 and
$600,000 for 1995, 1996 and 1997, respectively.

METACOM MANUFACTURING ASSETS--MANUFACTURING AGREEMENT

In January 1995, the Company acquired the entire manufacturing operation of
Metacom in exchange for cash, notes payable and assumption of liabilities
totaling $567,000 and limited interests in the Zomax Optical Media Limited
Partnership which, upon completion of the initial public offering, were
exchanged for common stock of the Company (see Note 1). As a result of the
common control of the partnership and Metacom, the acquisition was accounted for
essentially as a pooling of interests and no value was assigned to the limited
partnership units issued in the transaction.

In connection with this transaction, Metacom and the Company entered into a
manufacturing agreement (the Agreement) whereby Metacom must purchase minimum
quantities of audio cassettes and CDs from the Company under normal trade terms.
In 1996 and 1997, Metacom did not fulfill its purchase commitments. As a result
of the 1996 shortfall, the Company and Metacom agreed to allow Metacom to make
up the shortfall during 1997 in exchange for a contract extension until the year
2000. This contract extension specifies that Metacom is to purchase all of its
supply of CDs and audio cassettes exclusively from the Company under normal
trade terms. No minimum quantities have been established. No final agreement has
been reached regarding remediation of the 1997 shortfall.

Metacom purchases totaled $2,524,000, $1,587,000 and $1,209,000 in 1995,
1996 and 1997, respectively.

10. COMMITMENTS AND CONTINGENCIES:

LITIGATION

The Company is involved in various claims arising in the normal course of
business. In management's opinion, the final resolution of these claims should
not have a material adverse effect on the Company's financial position or the
results of its operations.

OPERATING LEASES

The Company is committed under operating leases with related and unrelated
parties for the rental of manufacturing, warehouse and office facilities. Rent
expense for the years ended December 31, 1995, 1996 and 1997 was approximately
$618,000, $749,000 and $1,096,000, respectively. Future minimum lease
obligations are as follows as of December 26, 1997 (in thousands):

<TABLE>
<S> <C>
1998................................................................... $ 1,894
1999................................................................... 2,124
2000................................................................... 2,035
2001................................................................... 1,082
2002 and thereafter.................................................... 551
</TABLE>

F-15
<PAGE>
10. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
ROYALTY PAYMENTS

The Company accrues for all known royalties using estimated rates on all
units manufactured. Currently, the Company has license agreements with certain
companies for the use of certain CD manufacturing technology. While other
companies may claim rights to patented CD technology, the Company believes that
these claims will not have a material effect on the Company's financial position
or the results of its operations.

PURCHASE COMMITMENTS

As of December 26, 1997, the Company is committed to the purchase of
approximately $5,100,000 of manufacturing equipment. The Company plans to
finance the equipment on a long-term basis.

EMPLOYMENT AGREEMENT

The Company has in place an employment agreement with its chief executive
officer which provides for annual compensation and severance under certain
conditions specified in the agreement. The agreement expires on December 31,
1998, but it is renewable annually upon mutual agreement of the chief executive
officer and the board of directors.

401(K) PLAN

The Company has a discretionary 401(k) plan for all employees who are at
least 21 years of age and have completed one year of service with the Company.
The Company made no contributions during 1995, 1996 or 1997. During the first
quarter of 1998, the Company's discretionary contributions totalled $20,000.

11. SUPPLEMENTARY DATA (UNAUDITED):

The Company's pro forma results of operations for each of the quarters in
the years ended December 27, 1996 and December 26, 1997 reflect the pro forma
effect of providing a provision for income taxes for all consolidated companies
as if they were taxable entities for all periods presented. The pro forma EPS
information also reflects the effects of the shares issued in connection with
the acquisition of the Companies. Unaudited quarterly data is as follows (in
thousands except per share data):
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------
MARCH 29 JUNE 30 SEPTEMBER 27 DECEMBER 27
----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
1996
Sales.......................................... $ 4,588 $ 6,385 $ 7,292 $ 8,602
Gross profit................................... 1,364 2,197 2,729 2,487
Net income..................................... 106 278 860 908
Basic EPS...................................... 0.03 0.09 0.17 0.18
Diluted EPS.................................... 0.03 0.09 0.16 0.18

QUARTERS ENDED
--------------------------------------------------
MARCH 28 JUNE 27 SEPTEMBER 26 DECEMBER 26
----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
1997
Sales.......................................... $ 7,952 $ 11,541 $ 13,842 $ 14,542
Gross profit................................... 2,289 3,148 4,925 4,741
Net income..................................... 382 343 1,306 1,097
Basic EPS...................................... 0.07 0.07 0.25 0.21
Diluted EPS.................................... 0.07 0.07 0.24 0.20
</TABLE>

F-16
<PAGE>

[photograph of Zomax corporate headquarters]
Zomax Headquarters

[geographical map indicating six locations of Zomax facilities: Minneapolis,
Minnesota; Indianapolis, Indiana; Hayward and San Jose, California; Boston,
Massachusetts; and Dublin, Ireland.]

Zomax Locations
Today, Zomax services its customers from six locations in the United States
and Ireland. The Company intends to expand further in the Eastern and
Southern U.S., Europe and Asia.

<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 12
Capitalization................................. 12
Dividend Policy................................ 13
Price Range of Common Stock.................... 13
Selected Consolidated Financial Data........... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 15
Business....................................... 21
Management..................................... 30
Certain Transactions........................... 34
Principal and Selling Shareholders............. 35
Description of Securities...................... 36
Shares Eligible for Future Sale................ 37
Underwriting................................... 39
Legal Matters.................................. 40
Experts........................................ 40
Available Information.......................... 40
Index to Financial Statements.................. F-1
</TABLE>

2,000,000 SHARES

[LOGO]

COMMON STOCK

---------------------

PROSPECTUS

---------------------

JOHN G. KINNARD AND COMPANY,
I N C O R P O R A T E D

CRUTTENDEN ROTH
I N C O R P O R A T E D

PACIFIC CREST SECURITIES INC.

, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following expenses will be paid by the Company in connection with the
distribution of the securities registered hereby and do not include the
underwriting discount to be paid to the Underwriters. All of such expenses,
except for the SEC registration fee, NASD fee and Nasdaq listing fee, are
estimated.

<TABLE>
<S> <C>
SEC Registration Fee................................................. $ 12,213
NASD Fee............................................................. 4,640
Nasdaq National Market Listing Fee................................... 17,500
Legal Fees........................................................... 100,000
Accountants' Fees and Expenses....................................... 115,000
Printing Expenses.................................................... 50,000
Blue Sky Fees and Expenses........................................... 2,000
Transfer Agent Fees and Expenses..................................... 5,000
Miscellaneous........................................................ 23,647
---------
Total.............................................................. $ 330,000
---------
---------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 302A.521, subd. 2, of the Minnesota Statutes requires the Company to
indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect to
the Company, against judgments, penalties, fines, including, without limitation,
excise taxes assessed against the person with respect to an employee benefit
plan, settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions if such person (1) has not been
indemnified by another organization or employee benefit plan for the same
judgments, penalties or fines: (2) acted in good faith; (3) received no improper
personal benefit and statutory procedure has been followed in the case of any
conflict of interest by director; (4) in the case of a criminal proceeding, had
no reasonable cause to believe the conduct was unlawful; and (5) in the case of
acts or omissions occurring in the person's official capacity as a director,
officer, board committee member or employee, reasonably believed that the
conduct was in the best interests of the Company, or, in the case of acts or
omissions occurring in the person's official capacity as a director, officer or
employee of the Company involving service as a director, officer, partner,
trustee, employee or agent of another organization or employee benefit plan,
reasonably believed that the conduct was not opposed to the best interests of
the Company. In addition, Section 302A.521, subd. 3, requires payment by the
Company, upon written request, of reasonable expenses in advance of final
disposition of the proceeding in certain circumstances. A decision as to
required indemnification is made by a disinterested majority of the Board of
Directors present at a meeting at which a disinterested quorum is present, or by
a designated committee of the Board, by special legal counsel, by the
shareholders or by a court.

The Company's Bylaws provide for indemnification to the full extent
permitted by the laws of the state of Minnesota, pursuant to Minnesota Statutes
Section 302A.521, as now enacted or hereafter amended, against and with respect
to threatened, pending or completed actions, suits or proceedings arising from,
or alleged to arise from, a party's actions or omissions as a director, officer,
employee or agent of the Company or any subsidiary of the Company or of any
other corporation, partnership, joint venture, trust or other enterprise which
has served in such capacity at the request of the Company if such acts or
omissions occurred or were or are alleged to have occurred, while said party was
a director or officer of the Company. Generally, under Minnesota law,
indemnification will only be available where an officer or

II-1
<PAGE>
director can establish that he/she acted in good faith and in a manner he/she
reasonably believed to be in or not opposed to the best interests of the
Company.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

During the last three years, the Registrant issued and sold the following
unregistered securities:

1. In February 1996, one share was issued to the Company's Chief Executive
Officer and President for $7.00. This share was redeemed by the Company for
$7.00 in May 1996.

2. In May 1997, the Registrant issued 59,268 shares of its Common Stock to
the former shareholder of TTI in connection with the acquisition of TTI by the
Registrant.

3. In February 1998, the Registrant issued an aggregate of 800,002 shares
of its Common Stock to the shareholders of NGS, PMG and PMG Ireland in
connection with the acquisition of these entities by Registrant. Of these
shares, 215,513 were issued to Anthony Angelini, an executive officer of the
Registrant.

4. In February 1998, the Registrant issued 1,684 shares of its Common Stock
to an investor in connection with the cashless exercise of an outstanding
warrant to purchase an aggregate of 5,275 shares at $8.10 per share. An
aggregate of 3,591 shares underlying the warrant were forfeited as
consideration.

5. In April 1998, the Registrant issued 1,565 shares of its Common Stock to
three investors in connection with the cashless exercises of outstanding
warrants to purchase an aggregate of 3,000 shares at $8.10 per share. An
aggregate of 1,435 shares underlying the warrants were forfeited as
consideration.

The sales of the above securities were made in reliance upon Section 4(2) of
the Securities Act, which provides an exemption for transactions not involving a
public offering. The purchasers of securities described above acquired them for
their own account and not with a view to any distribution thereof to the public.
The certificates evidencing the securities bear legends stating that the shares
are not to be offered, sold or transferred other than pursuant to an effective
registration statement under the Securities Act or an exemption from such
registration requirements. No underwriting commissions or discounts were paid
with respect to the sales of unregistered securities described above.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------------
<C> <S>
4.2 Articles of Incorporation(1)
4.3 Bylaws(1)
4.4 Form of Representative's Warrant(1)
5.1** Opinion and Consent of Fredrikson & Byron, P.A.
10.1 1996 Stock Option Plan, as amended March 7, 1997, and Forms of
Incentive and Non-qualified Stock Option Agreements (Incorporated by
reference to Exhibits 10.1 and 10.17 to Registration Statement on Form
S-1, SEC File No. 333-2430)
10.2 1996 Employee Stock Purchase Plan(1)
10.3 Manufacturing Agreement between the Company and Metacom, Inc. dated
January 1, 1995, as amended January 31, 1997 (Incorporated by
reference to Exhibit 10.3 to Registration Statement on Form S-1, SEC
File No. 333-2430, and Exhibit 10.15 to Annual Report on Form 10-KSB
for the year ended December 27, 1996)
10.4 Lease between the Company and the Company and Nathan Lane Partnership,
LLP dated January 1, 1995, as amended October 28, 1997 (Incorporated
by reference to Exhibit 10.5 to Registration Statement on Form S-1,
SEC File No. 333-2430 and Exhibit 10.18 to Annual Report on Form
10-KSB for the year ended December 26, 1997)
10.5 Employment Agreement with James T. Anderson dated March 1, 1996
(Incorporated by reference to Exhibit 10.6 to Registration Statement
on Form S-1, SEC File No. 333-2430)
10.6 License Agreement with U.S. Phillips Corporation effective January 1,
1996 (Incorporated by reference to Exhibit 10.7 to Registration
Statement on Form S-1, SEC File No. 333-2430)
10.7 License Agreement with Discovision Associates dated January 1, 1994
(Incorporated by reference to Exhibit 10.8 to Registration Statement
on Form S-1, SEC File No. 333-2430)
10.8 Loan and Security Agreement with Phoenixcor, Inc. dated May 24, 1993
(Incorporated by reference to Exhibit 10.9 to Registration Statement
on Form S-1, SEC File No. 333-2430)
10.9 Loan and Security Agreement with Phoenixcor, Inc. dated July 22, 1993
(Incorporated by reference to Exhibit 10.10 to Registration Statement
on Form S-1, SEC File No. 333-2430)
10.10 Loan and Security Agreement with Phoenixcor, Inc. dated February 10,
1994 (Incorporated by reference to Exhibit 10.11 to Registration
Statement on Form S-1, SEC File No. 333-2430)
10.11 Loan and Security Agreement with Phoenixcor, Inc. dated July 5, 1995
(Incorporated by reference to Exhibit 10.12 to Registration Statement
on Form S-1, SEC File No. 333-2430)
10.12 Promissory Note issued by the Company to Norwest Equipment Finance,
Inc. dated May 22, 1996 and related documents (Incorporated by
reference to Exhibit 10.13 to Registration Statement on Form S-1, SEC
File No. 333-2430)
10.13 Revolving Credit and Term Loan Agreement between the Company and
Marquette Capital Bank, N.A. dated December 31, 1995, as amended April
30 1997 (Incorporated by reference to Exhibit 10.14 to Registration
Statement on Form S-1, SEC File No. 333-2430, and Exhibit 10.16 to
Quarterly Report on Form 10-QSB for the quarter ended March 28, 1997)
10.14 Lease between the Company and Chaboya Ranch dated June 5, 1997
(Incorporated by reference to Exhibit 10.16 to Quarterly Report on
Form 10-QSB for the quarter ended March 28, 1997)
21.1* Subsidiaries of the Company
23.1 Consent of Fredrikson & Byron, P.A. (Included in Exhibit 5.1)
23.2* Consent of Arthur Andersen LLP
24* Power of Attorney (included on signature page of this registration
statement)
27** Financial Data Schedule (included in electronic version only)
</TABLE>

- ------------------------

(1) Incorporated by reference to the same exhibit number to Registration
Statement on Form S-1, SEC File No. 333-2430.

* Previously filed.

** Filed herewith.

II-3
<PAGE>
ITEM 17. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.

The undersigned Registrant further undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on April 29, 1998.

<TABLE>
<S> <C>
ZOMAX OPTICAL MEDIA, INC.

By /s/ JAMES T. ANDERSON
------------------------------------------
James T. Anderson,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------

*
- ------------------------------ Chairman of the Board of
Phillip T. Levin Directors

President, Chief Executive
/s/ JAMES T. ANDERSON Officer and Director
- ------------------------------ (principal executive April 29, 1998
James T. Anderson officer)

Chief Financial Officer
/s/ JAMES E. FLAHERTY and Secretary (principal
- ------------------------------ accounting and financial April 29, 1998
James E. Flaherty officer)

*
- ------------------------------ Director
Robert Ezrilov

*
- ------------------------------ Director
Howard P. Liszt

*
- ------------------------------ Director
Janice Ozzello Wilcox

<TABLE>
<S> <C>
*By: /s/ JAMES T. ANDERSON
--------------------------------------
James T. Anderson, as
ATTORNEY-IN-FACT
Date: April 29, 1998
</TABLE>

II-5
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

ZOMAX OPTICAL MEDIA, INC.

EXHIBIT INDEX TO FORM S-1 REGISTRATION STATEMENT

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Form of Stock Purchase Agreement(1)
2.2 Stock Purchase Agreement dated March 31, 1997 between the Company and
Jesse Aweida (Incorporated by reference to Exhibit 2.1 to Current
Report on Form 8-K dated March 31, 1997)
2.3 Stock Purchase Agreement dated February 3, 1998 by and among the
Company, Zomax Services, Inc., Primary Marketing Group Limited ("PMG
Limited") and shareholders of PMG Limited (Incorporated by reference
to Exhibit 2.1 to Current Report on Form 8-K dated February 4, 1998)
2.4 Merger Agreement dated February 3, 1998 by and among the Company,
Zomax Services, Inc., Next Generation Services, LLC ("NGS"), Primary
Marketing Group ("PMG") and holders of all membership interests of NGS
and shares of PMG (Incorporated by reference to Exhibit 2.2 to Current
Report on Form 8-K dated February 4, 1998)
2.5 Asset Purchase Agreement dated February 3, 1998 by and among the
Company and Kao Infosystems Company (Incorporated by reference to
Exhibit 2.3 to Current Report on Form 8-K dated February 4, 1998)
3.1 Articles of Incorporation(1)
3.2 Bylaws(1)
4.1 Form of Stock Certificate(1)
4.2 Articles of Incorporation(1)
4.3 Bylaws(1)
4.4 Form of Representative's Warrant(1)
5.1** Opinion and Consent of Fredrikson & Byron, P.A.
10.1 1996 Stock Option Plan, as amended March 7, 1997, and Forms of
Incentive and Non-qualified Stock Option Agreements (Incorporated by
reference to Exhibits 10.1 and 10.17 to Registration Statement on Form
S-1, SEC File No. 333-2430)
10.2 1996 Employee Stock Purchase Plan(1)
10.3 Manufacturing Agreement between the Company and Metacom, Inc. dated
January 1, 1995, as amended January 31, 1997 (Incorporated by
reference to Exhibit 10.3 to Registration Statement on Form S-1, SEC
File No. 333-2430, and Exhibit 10.15 to Annual Report on Form 10-KSB
for the year ended December 27, 1996)
10.4 Lease between the Company and the Company and Nathan Lane Partnership,
LLP dated January 1, 1995, as amended October 28, 1997 (Incorporated
by reference to Exhibit 10.5 to Registration Statement on Form S-1,
SEC File No. 333-2430 and Exhibit 10.18 to Annual Report on Form
10-KSB for the year ended December 26, 1997)
10.5 Employment Agreement with James T. Anderson dated March 1, 1996
(Incorporated by reference to Exhibit 10.6 to Registration Statement
on Form S-1, SEC File No. 333-2430)
10.6 License Agreement with U.S. Phillips Corporation effective January 1,
1996 (Incorporated by reference to Exhibit 10.7 to Registration
Statement on Form S-1, SEC File No. 333-2430)
10.7 License Agreement with Discovision Associates dated January 1, 1994
(Incorporated by reference to Exhibit 10.8 to Registration Statement
on Form S-1, SEC File No. 333-2430)
10.8 Loan and Security Agreement with Phoenixcor, Inc. dated May 24, 1993
(Incorporated by reference to Exhibit 10.9 to Registration Statement
on Form S-1, SEC File No. 333-2430)
</TABLE>

II-6
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------------------------
<C> <S>
10.9 Loan and Security Agreement with Phoenixcor, Inc. dated July 22, 1993
(Incorporated by reference to Exhibit 10.10 to Registration Statement
on Form S-1, SEC File No. 333-2430)
10.10 Loan and Security Agreement with Phoenixcor, Inc. dated February 10,
1994 (Incorporated by reference to Exhibit 10.11 to Registration
Statement on Form S-1, SEC File No. 333-2430)
10.11 Loan and Security Agreement with Phoenixcor, Inc. dated July 5, 1995
(Incorporated by reference to Exhibit 10.12 to Registration Statement
on Form S-1, SEC File No. 333-2430)
10.12 Promissory Note issued by the Company to Norwest Equipment Finance,
Inc. dated May 22, 1996 and related documents (Incorporated by
reference to Exhibit 10.13 to Registration Statement on Form S-1, SEC
File No. 333-2430)
10.13 Revolving Credit and Term Loan Agreement between the Company and
Marquette Capital Bank, N.A. dated December 31, 1995, as amended April
30 1997 (Incorporated by reference to Exhibit 10.14 to Registration
Statement on Form S-1, SEC File No. 333-2430, and Exhibit 10.16 to
Quarterly Report on Form 10-QSB for the quarter ended March 28, 1997)
10.14 Lease between the Company and Chaboya Ranch dated June 5, 1997
(Incorporated by reference to Exhibit 10.16 to Quarterly Report on
Form 10-QSB for the quarter ended March 28, 1997)
21.1* Subsidiaries of the Company
23.1 Consent of Fredrikson & Byron, P.A. (Included in Exhibit 5.1)
23.2* Consent of Arthur Andersen LLP
24* Power of Attorney (included on signature page of this registration
statement)
27** Financial Data Schedule (included in electronic version only)
</TABLE>

- ------------------------

(1) Incorporated by reference to the same exhibit number to Registration
Statement on Form S-1, SEC File No. 333-2430.

* Previously filed.

** Filed herewith.

II-7

<PAGE>

Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402

April 29, 1998

Zomax Optical Media, Inc.
5353 Nathan Lane
Plymouth, Minnesota 55442

RE: REGISTRATION STATEMENT ON FORM S-1 - EXHIBIT 5.1

Gentlemen/Ladies:

We have acted as counsel for Zomax Optical Media, Inc. (the "Company") in
connection with the Company's filing of a Registration Statement on Form S-1
(the "Registration Statement") relating to the registration under the Securities
Act of 1933 (the "Act") of 2,300,000 shares of Common Stock, including 300,000
shares subject to an over-allotment option and 400,000 shares being sold by
certain selling shareholders of the Company (collectively, the "Shares").

In connection with rendering this opinion, we have reviewed the following:

1. The Company's Articles of Incorporation;

2. The Company's Bylaws; and

3. Certain corporate resolutions, including resolutions of the Company's
Board of Directors pertaining to the issuance by the Company of the
Shares covered by the Registration Statement.

Based upon the foregoing and upon representations and information provided
by the Company, we hereby advise you that in our opinion:

1. The Company's Articles of Incorporation validly authorize the issuance
of the Shares registered pursuant to the Registration Statement.

2. Upon the delivery and payment therefor in accordance with the terms of
the Registration Statement and the Underwriting Agreement described in
the Registration Statement, the Shares to be issued and sold by the
Company will be validly issued, fully paid and nonassessable.

<PAGE>

Page 2

3. The Shares to be sold by the selling shareholders named in the
Registration Statement are validly issued, fully paid and
nonassessable.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" included in the Registration Statement and the related Prospectus.

Very truly yours,

FREDRIKSON & BYRON, P.A.

By /s/ Melodie R. Rose
Melodie R. Rose, Vice President

<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR YEAR 3-MOS
3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-27-1996 DEC-26-1997 DEC-26-1997
DEC-25-1998
<PERIOD-START> JAN-01-1995 JAN-01-1996 DEC-28-1996 DEC-28-1996
DEC-27-1997
<PERIOD-END> DEC-31-1995 DEC-27-1996 DEC-26-1997 MAR-28-1997
MAR-27-1998
<CASH> 0 7944699 5213417 6592702
6596330
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 0 6782831 8041198 6139324
9011172
<ALLOWANCES> 0 531000 881000 635000
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<INVENTORY> 0 1464461 1603170 1701266
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<CURRENT-ASSETS> 0 16388852 15753499 16904230
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<PP&E> 0 9967412 18611694 7974214
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<DEPRECIATION> 0 2176000 4609000 2582900
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<TOTAL-ASSETS> 0 24322094 31026410 24650915
37624341
<CURRENT-LIABILITIES> 0 7359842 10704672 8762854
16741246
<BONDS> 0 1714374 3103975 1274381
2673465
0 0 0 0
0
0 0 0 0
0
<COMMON> 0 12350116 12721513 12366814
12860654
<OTHER-SE> 0 2292762 3741250 2246866
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<TOTAL-LIABILITY-AND-EQUITY> 0 24322094 31026410 24650915
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<SALES> 16858401 26866577 47876953 7952495
14232712
<TOTAL-REVENUES> 16994967 27195726 48105301 8034653
14291759
<CGS> 11226259 18090158 32773368 5663191
9938446
<TOTAL-COSTS> 15397290 23813571 43042189 7452301
12928311
<OTHER-EXPENSES> 0 0 0 0
0
<LOSS-PROVISION> 0 0 0 0
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<INTEREST-EXPENSE> 318087 357166 408915 74475
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<INCOME-PRETAX> 3575329 3613269 5218433 633044
1245726
<INCOME-TAX> 1434000 1461000 2090000 251000
498000
<INCOME-CONTINUING> 2141329 2152269 3128433 382044
747726
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 2141329 2152269 3128433 382044
747726
<EPS-PRIMARY> .59 .47 .60 .07
.14
<EPS-DILUTED> .59 .47 .58 .07
.13

</TABLE>