FUTURE MEDIA PRODUCTIONS, S-1/A, 2000-05-08

FUTURE MEDIA PRODUCTIONS
S-1/A, 2000-05-08
PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS

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<PAGE>

As filed with the Securities and Exchange Commission on May 8, 2000

Registration No. 333-32444
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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AMENDMENT NO. 1

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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FUTURE MEDIA PRODUCTIONS, INC.
(Exact Name of Registrant as Specified in its Charter)

<TABLE>
<CAPTION>
California 3652 95-4486758
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>

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24811 Avenue Rockefeller
Valencia, California 91355
(661) 294-5575
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)

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ALEX SANDEL,
President
Future Media Productions, Inc.

24811 Avenue Rockefeller
Valencia, California 91355
(661) 294-5575
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service)

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Copies to:

Murray Markiles, Esq. Robert K. Montgomery, Esq.
Scott D. Galer, Esq. Anton W. Leung, Esq.
Phillip Gharabegian, Esq. Gibson, Dunn & Crutcher LLP
Troop Steuber Pasich Reddick & 2029 Century Park East
Tobey, LLP Los Angeles, California 90067
2029 Century Park East (310) 552-8500
Los Angeles, California 90067
(310) 728-3000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.

If any of the securities being registered in 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 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(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 the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]

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CALCULATION OF REGISTRATION FEE

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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered Offering Price(1) Registration Fee
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<S> <C> <C>
Common Stock, no par value................... $70,000,000 $18,480
</TABLE>

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(1) Estimated solely for the purpose of calculating the registration fee,
pursuant to Rule 457(o) under the Securities Act of 1933.

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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date 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>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. Future +
+Media may not sell these securities until the registration statement filed +
+with the Securities and Exchange Commission is effective. This prospectus is +
+not an offer to sell these securities and it is not soliciting an offer to +
+buy these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION-MAY 8, 2000

PROSPECTUS
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[LOGO OF FUTURE MEDIA PRODUCTIONS]

Common Stock

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Future Media is offering 4,685,185 shares and the selling shareholders are
offering 500,000 shares of common stock in an initial public offering. Prior to
this offering, there has been no public market for Future Media's common stock.
Future Media will not receive any proceeds from the sale of shares by the
selling shareholders.

Future Media is an independent manufacturer/replicator of Digital Versatile
Discs (DVDs) and Compact Discs (CDs). Future Media targets its sales to
companies in industries including Internet/online, film and entertainment,
edutainment software, publishing and computer hardware.

It is anticipated that the public offering price will be between $12 and $15
per share. Application has been made to include the common stock for quotation
in the Nasdaq National Market under the symbol "FMPI".

<TABLE>
<CAPTION>
Per
Share Total
<S> <C> <C>
Public offering price........................................ $ $
Underwriting discounts and commissions....................... $ $
Proceeds, before expenses, to Future Media................... $ $
Proceeds to selling shareholders............................. $ $
</TABLE>

See "Risk Factors" on pages 8 to 13 for factors that should be considered
beforeinvesting in the shares of Future Media.

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Neither the Securities and Exchange Commission nor any state securities
commission hasapproved or disapproved of these securities or passed upon the
accuracy or adequacy of thisprospectus. Any representation to the contrary is a
criminal offense.

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The underwriters may purchase up to 777,777 additional shares from Future Media
at the public offering price, less underwriting discounts and commissions.
Delivery of the shares will be on , 2000.

Prudential Volpe Technology
a unit of Prudential Securities

CIBC World Markets

, 2000
<PAGE>

Description of Photographs:

. Photographs of Future Media's headquarters, mastering facility,
replication machines and printing machines.

. Collage of manufactured DVDs and CDs.

<PAGE>

TABLE OF CONTENTS

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Page
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Prospectus Summary.................. 4

Risk Factors........................ 8

Forward-Looking Statements.......... 13

Termination Of S Corporation
Status............................. 14

Use Of Proceeds..................... 15

Dividend Policy..................... 15

Dilution............................ 16

Capitalization...................... 17

Selected Financial Data............. 18

Management's Discussion and Analysis
Of Financial Condition and Results
Of Operations...................... 20

Industry Overview................... 28

Page
----
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Business............................ 30
Management.......................... 40

Related Party Transactions.......... 46

Principal and Selling Shareholders.. 49
Description Of Capital Stock........ 50

Shares Eligible For Future Sale..... 52

Underwriting........................ 53

Legal Matters....................... 55

Experts............................. 55

Where You Can Find More
Information........................ 55

Index To Financial Statements....... F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.

<PAGE>

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all of the information you should consider before
investing in the common stock of Future Media. You should read the entire
prospectus carefully.

Future Media

We are an independent manufacturer/replicator of Digital Versatile Discs
(DVDs) and Compact Discs (CDs). We target our sales to companies in industries
including Internet/online, film and entertainment, edutainment software,
publishing and computer hardware. Our major customers include America Online,
Inc., Modus Media International Holdings, Inc., Havas Interactive, Inc., GT
Interactive Software, infoUSA Inc., Interplay Entertainment Corp., Juno Online
Services, Inc. and a major motion picture distributor.

We have successfully implemented our business model, which consists of the
following elements:

. High volume customers: We believe our customer base is comprised of some
of the highest volume customers of DVDs and CDs.

. High replication capacity: Since inception we have continued to add new
equipment and believe we are one of the largest independent
manufacturers/replicators of DVDs and CDs in the United States.

. Low cost structure: We achieve economies of scale through our optimally
designed facility at a single locale, our dedication to maximizing
machine uptime and our flat organizational structure.

. Superior turnaround service: We are dedicated to providing superior
turnaround service, as short as a few hours, by maintaining high
throughput mastering technologies and high DVD/CD graphic printing
capacity and by efficiently managing operational workflow.

To implement our business model, we have developed a focused operating
approach founded on the following key principles:

. High capacity manufacturing capabilities at a single locale;

. Optimally designed manufacturing facilities;

. Self sufficient repair, maintenance and engineering capabilities;

. Technologically advanced manufacturing equipment; and

. Marketing our services directly to senior management.

We believe that our focused operating approach distinguishes us from our
competitors. We also believe that the effectiveness of our operating approach
has been proven through the growth in our targeted customer base, the retention
of our customers and our demonstrated long-term financial performance.

To foster our continued growth in line with our business model, we plan to
pursue the following opportunities:

. Capitalize on the continuing growth of the DVD market;

. Expand our position as a low cost CD manufacturer within the
Internet/online, film and entertainment, edutainment software, publishing
and computer hardware industries; and

. Actively stimulate new CD replicating business through targeted Internet
related marketing programs.

We are a California corporation. Our executive offices are located at 24811
Avenue Rockefeller, Valencia, California 91355, and our telephone number is
(661) 294-5575.

4
<PAGE>

The Offering

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<C> <S>
Shares offered by Future Media................ 4,685,185 shares

Shares offered by the selling shareholders.... 500,000 shares

Total shares outstanding after this offering.. 19,535,185 shares

Use of proceeds by Future Media............... To repay all existing debt, to
purchase capital equipment, to
distribute retained earnings
including an amount for the
purpose of paying income taxes
on our 2000 S Corporation
earnings to our existing
shareholders, and for general
corporate purposes, including
potential strategic
investments.

Proposed Nasdaq National Market symbol........ FMPI
</TABLE>

All information in this prospectus has been adjusted to give effect to a 1.65
for 1 stock split approved by the board on April 13, 2000. Also, except as
otherwise noted, all information in this prospectus regarding the number of
outstanding shares of common stock does not include:

. shares that the underwriters may purchase if they exercise their over-
allotment option;

. 3,250,000 shares of common stock available for issuance pursuant to our
stock incentive plans, of which 1,598,350 shares were subject to
outstanding options as of the date of this prospectus;

. 604,890 shares of common stock issuable upon exercise of warrants issued
to David Moss, our Vice President-Operations, at an exercise price of
$0.0010 per share; and

. 25,000 shares of common stock issuable upon exercise of warrants issued
to Levy, Small & Lallas, at an exercise price equal to the initial public
offering price.

5
<PAGE>

Summary Selected Financial and Other Data
(in thousands, except for per share and employee data)

The following table summarizes certain selected financial and operating data
contained in the financial statements and elsewhere in this prospectus.

<TABLE>
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Three Months
Year Ended December 31 Ended March 31
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1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income
Data:
Net sales............... $26,972 $25,814 $36,042 $43,311 $53,002 $ 8,675 $14,780
Cost of goods sold...... 14,821 11,972 23,132 27,304 31,938 5,865 9,342
------- ------- ------- ------- ------- ------- -------
Gross profit............ 12,151 13,842 12,910 16,007 21,064 2,810 5,438
Selling, general and
administrative
expenses............... 6,093 2,537 4,214 4,232 4,201 1,072 1,593
Other general and
administrative
expense--stock related
compensation(1)........ -- -- -- 3,055 720 -- --
Abandoned offering
costs.................. -- -- -- 676 -- -- --
------- ------- ------- ------- ------- ------- -------
Income from operations.. 6,058 11,305 8,696 8,044 16,143 1,738 3,845
Interest income......... 12 252 42 35 1 -- 8
Interest expense........ (957) (1,108) (818) (1,264) (1,404) (351) (399)
Loss in equity of
unconsolidated entity.. -- -- -- -- -- -- (155)
Change in accounting
estimate for
royalties(2)........... -- 3,770 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income before state
income taxes........... 5,113 14,219 7,920 6,815 14,740 1,387 3,299
Provision for state
income taxes........... 72 223 120 102 2 1 1
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 5,041 $13,996 $ 7,800 $ 6,713 $14,738 $ 1,386 $ 3,298
======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic.................. $ 0.34 $ 0.94 $ 0.53 $ 0.45 $ 0.99 $ 0.09 $ 0.22
======= ======= ======= ======= ======= ======= =======
Diluted................ $ 0.34 $ 0.94 $ 0.53 $ 0.43 $ 0.92 $ 0.09 $ 0.20
======= ======= ======= ======= ======= ======= =======
Shares used in computing
earnings per share
Basic.................. 14,850 14,850 14,850 14,850 14,850 14,850 14,850
======= ======= ======= ======= ======= ======= =======
Diluted................ 14,850 14,850 14,850 15,672 16,026 15,859 16,124
======= ======= ======= ======= ======= ======= =======
Pro Forma Statement of
Income Data
(unaudited)(3):
Income before provision
for income taxes....... $14,740 $ 3,299
Pro forma income tax
provision.............. 5,896 1,320
------- -------
Pro forma net income.... $ 8,844 $ 1,979
======= =======
Pro forma basic earnings
per share.............. $ 0.60 $ 0.13
======= =======
Pro forma diluted
earnings per share..... $ 0.52 $ 0.11
======= =======
Weighted average shares
outstanding--basic..... 14,850 14,850
======= =======
Weighted average shares
outstanding--diluted... 17,136 17,435
======= =======
Other Data:
Capital expenditures.... $ 6,277 $ 1,585 $ 3,642 $ 6,752 $15,226 $ 1,456 $ 5,266
Depreciation and
amortization........... 1,053 1,389 1,950 2,861 4,368 897 1,150
Number of full-time
employees at period
end.................... 44 57 75 92 127 92 140
</TABLE>

6
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<CAPTION>
March 31, 2000
--------------------------------
Pro
Actual Pro Forma As
(unaudited) Forma(4) Adjusted(5)
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<S> <C> <C> <C>
Balance Sheet Data:
Current assets................................. $ 5,020 $ 5,320 $33,141
Property and equipment, net.................... 34,874 34,874 34,874
Total assets................................... 45,503 45,803 73,624
Current liabilities............................ 20,161 34,850 12,206
Long-term debt, less current portion........... 7,399 7,399 --
Total shareholders' equity..................... 17,817 387 57,710
</TABLE>
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(1) On January 1, 1998, we granted warrants to purchase 604,890 shares of
common stock at an exercise price of $0.0010 per share to David Moss, our
Vice President--Operations. These warrants expire on December 31, 2007. In
connection with the grant of these warrants, we recognized compensation
expense of $3,055,000 in 1998 representing the excess of the estimated fair
value of the shares over the exercise price. In 1999 our existing
shareholders committed to give 49,500 shares of their stock to a director
for services to us. For the year ended December 31, 1999 we recorded stock
related compensation expense of $720,000 for this commitment, based upon
the estimated fair value of the shares to be given. On April 13, 2000 we
granted 25,000 warrants to purchase common stock at an exercise price equal
to the initial public offering price to the law firm of Levy, Small &
Lallas for legal services provided to us in connection with this offering.
These warrants will be issued and vest only upon the close of this offering
and expire one year from the close of this offering.
(2) We executed license agreements with two developers of CD technology
effective June 1, 1996 and October 1, 1996, respectively. The agreements
set forth royalty rates payable to the licensors for the license to
manufacture and sell CDs. We reached settlements totaling $70,000 for CD
sales occurring before the effective dates of the agreements. Because of
the settlement amounts, our prior estimates of royalty liabilities were
overstated by approximately $3,770,000 and the adjustment to the accruals
was made in 1996.

(3) We have been exempt from paying federal income taxes and have paid certain
state income taxes at a reduced rate because of our S Corporation status.
Upon the completion of this offering, our S Corporation status will
terminate. Pro forma statement of income data reflect the income tax
expense recordable had we not been exempt from paying taxes under the S
Corporation election. Because of the termination of our S Corporation
status, we will be required to record a one-time, non-cash charge against
historical earnings for additional deferred taxes based upon the increase
in the effective tax rate from our S Corporation status (1.5%) to C
Corporation status (approximately 40%). This charge will occur in the
quarter during which our S Corporation status is terminated. If this charge
was recorded at March 31, 2000, the amount would have been approximately
$2.7 million.

(4) The pro forma balance sheet reflects (i) an accrual for the distribution of
retained earnings of approximately $14.7 million to our current
shareholders, including an amount totaling approximately $7.9 million for
the purpose of paying income taxes on S Corporation earnings and (ii) the
recording of additional deferred taxes of approximately $2.7 million based
on the increase in the effective tax rate upon our anticipated change from
an S Corporation to a C Corporation.

(5) Adjusted for pro forma adjustments discussed above and to give effect to
the receipt and application of the estimated net proceeds of this offering,
including a deduction of $525,000 to be paid to Averil Capital Markets
Group, Inc., a company controlled by one of our directors upon the closing
of this offering and the repayment of existing bank debt.

7
<PAGE>

RISK FACTORS

You should carefully consider the following risk factors, in addition to the
other information in this prospectus, before purchasing shares of our common
stock. Each of these risk factors could adversely affect our business,
operating results and financial condition as well as adversely affect the value
of an investment in our common stock.

Risks Related to Our Business

We do not have long-term purchase contracts with our customers and
therefore our customers could stop doing business with us at any time.

Generally, we do not have agreements with our customers that contain purchase
commitments or guarantees for an ongoing business relationship. Accordingly,
our customers could stop doing business with us at any time and we cannot
guarantee an ongoing business relationship with our customers. Since we operate
with virtually no backlog, if a customer stops doing business with us, we may
not be able to replace the lost business with business from another existing
client or a new client. To the extent we are unable to replace the business,
some of our capacity would go unused, our revenues could decline and our
results of operations may be adversely affected.

Our focus on high volume customers results in customer concentration and
increases the likelihood that losing a single customer would have an
adverse impact on our revenues and results of operations.

As part of our business model, we seek to replicate DVDs and CDs for high
volume customers to reduce our marginal production costs. This strategy results
in customer concentration and has inherent risks. For example, our top three
customers, America Online, Inc., Modus Media International Holdings, Inc., and
Havas Interactive, Inc. accounted for approximately 56% of our net sales for
the year ended December 31, 1999. If we lose any of our large customers, our
revenues may be reduced and our operating results may be adversely impacted.
Additionally, the merger between America Online, Inc. and Time Warner may
result in the diversion of some replication business from us to Time Warner's
internal DVD and CD manufacturing operations.

If DVD and/or CD prices decline, our revenues and margins may be reduced
and our operating results may be adversely impacted.

Since the introduction of CD media in 1982, there has been a significant
growth in the CD replicating business, which has attracted numerous entrants
and resulted in increased worldwide CD production capacity. As a result of this
increased competition, wholesale CD prices have historically declined. If CD
prices decline further we may not be able to reduce our costs or increase our
volume to offset the decline in price. Additionally, if the acceptance of the
DVD medium continues to grow, the DVD replicating business may attract new
entrants, which may result in an increased worldwide DVD production capacity.
As a result, wholesale DVD prices may decline and we may not be able to reduce
our costs or increase our volume to offset the decline in price. These pricing
pressures in the DVD and CD replication business could reduce our revenues and
margins, which would adversely impact our operating results.

We may not succeed in developing a substantial DVD customer base, which
would adversely impact our growth strategy.

We commenced our DVD production in the fourth quarter of 1999. Our growth
strategy depends in part on our ability to attract additional DVD customers. We
believe motion picture producers and distributors, computer hardware
manufacturers and producers of computer software and games will primarily drive
DVD sales. Although we plan to expand our customer relationships, we will be
competing for DVD business with captive DVD manufacturers of major motion
picture companies and we may not be successful in attracting additional DVD
customers.

8
<PAGE>

We may experience operational downtime if we are forced to move production
to another facility.

Since our business model is based on operating replicating facilities at a
single geographic locale to achieve efficiencies associated with high volume,
we will not be able to move production quickly to another facility if we
experience operational downtime or capacity reduction. Earthquakes, power
outages, or other events outside of our control could cause such operational
downtime or capacity reduction. Any operational downtime or capacity reduction
could result in the loss of major orders or customers and have a
disproportionate adverse impact on our business, financial condition and
results of operation.

We substantially depend upon our key personnel and they would be difficult
to replace.

We depend on our executive officers for our success and the loss of any of
these officers or key employees could disrupt our business. We depend on our
key executives, including Alex Sandel, who is our Chief Executive Officer and
David Moss, who is our Vice President--Operations. In addition to his
management duties, Mr. Sandel also plays a key role in our sales and marketing
efforts. We have entered into an employment agreement with Mr. Moss. In
addition, we have purchased $3 million of "key person" life insurance on each
of Messrs. Sandel and Moss, of which we are the sole beneficiary. However, in
the event of the death of either of these executive officers, the proceeds of
such insurance may not be sufficient to offset our loss.

Because our operating results may fluctuate and are unpredictable from
quarter to quarter, our share price may be adversely affected.

Our net sales, net income and results of operations have fluctuated from
quarter to quarter, and we expect these fluctuations to continue in the future
because of many factors, including:

. seasonal pattern of certain of the businesses we serve;

. timing of new product releases by our customers;

. commercial success of products offered by our customers;

. timing of expenses incurred to obtain and support new business; and

. general changes in economic and industry conditions.

The demand for DVDs and CDs is usually highest 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.
Additionally, we anticipate that demand for DVDs will be somewhat dependent on
the timing of motion picture releases, with DVDs typically being released six
months following the theatrical release of a motion picture. We may not be able
to adequately reduce our costs on a timely basis if our revenues do not meet
expectations in any given quarter. In addition, historically our product mix
has been more heavily weighted to lower margin customers in the first six
months of each year. If our results of operations for any period fall below the
expectations of securities analysts or investors, the price of our common stock
could decline.

We heavily rely on our customers in the Internet and computer software
industries and our operations could be impaired if demand from such
industries drops.

For the quarter ended March 31, 2000, approximately 78% of our net sales were
to Internet service providers and computer software companies. We are dependent
upon the continued growth and financial stability of the Internet and computer
software industries, which may be affected by changes in any of the following:

. economic conditions;

. consumer trends and preferences;

. sales of personal computers;

. the installed base of CD-ROM and DVD drives in computers; and

. sales of interactive game consoles.

9
<PAGE>

Our sales are also dependent upon the ability of software publishers to
create commercially successful content and Internet service providers
continuing to market their services through the mass distribution of CDs.

If we do not respond to technological change, we could lose customers and
our services could become obsolete.

The industries in which we compete are characterized by rapidly changing
technologies. We may not be able to successfully adapt our manufacturing
processes to new technologies. Additionally, we may not have the financial
resources to make the capital expenditures necessary for such adaptations or be
able to generate sufficient sales to recover these capital expenditures. If we
fail to keep pace with rapidly changing industry technology, we will be at a
competitive disadvantage and could lose customers. In addition, the electronic
delivery of information through such means as the Internet or broadband online
data delivery are potential future competitors of DVD and CD technology. Such
technologies could potentially cause a significant shift from the utilization
of DVDs and CDs to broadband and other online delivery mechanisms and render
DVDs and CDs obsolete. In addition, it is possible that as the demand for DVDs
increases the demand for CDs will decrease.

Our future performance and profitability could be impaired if we are unable
to manage growth.

Our future performance and profitability will depend on a number of factors,
including our ability to obtain production machinery, and recruit, motivate and
retain qualified personnel. In addition, our performance will depend on whether
we are able to implement enhancements to our operational and financial systems,
including our reporting obligations for being a public company. Moreover, our
management and our administrative and financial resources may face significant
demands resulting from any future expansion, whether internally or through
acquisitions.

If we are unable to compete successfully against current and future
competitors our revenues and operating results could be impaired.

The DVD and CD replication industries are highly competitive. Our primary
competitors include the following DVD and/or CD replication companies:
AmericDisc; Carlton Communications PLC; Cinram International, Inc.; Denon
Electronics, Inc.; Disctronics, Inc.; DOCdata N.V.; JVC Corporation; and Zomax
Optical Media, Inc.

A number of these companies can handle large volume requirements and offer
services not currently offered by us. In addition to the above listed
companies, we compete with foreign manufacturers that can operate at lower
costs. To a limited extent, we compete with large captive manufacturing
divisions of major music and entertainment companies. Many of our existing
competitors and future potential competitors may be larger and more established
and have greater financial and other resources. As a result, such competitors
may respond more quickly than us to market demands or devote greater resources
to the manufacture, promotion and sale of their products.

Price increases and shortages of raw materials could adversely affect the
volume of our sales and our profitability.

We use raw materials, such as plastic and oil, in our DVD and CD
manufacturing and replicating process. Although we have not experienced any
material shortages in raw materials, if a shortage of raw materials were to
occur, our costs could increase and we may have to delay shipments, and in
either case our operating results would be adversely affected. We also depend
on a small number of suppliers for many of the raw materials that we use in our
business. If we were unable to continue to purchase these raw materials from
our suppliers, our operating results would be adversely affected.

10
<PAGE>

We heavily depend on licenses for DVD and CD technology and we may not be
successful in obtaining and maintaining such licenses. We could incur
significant loss of revenues if we are unable to obtain and maintain such
licenses.

We cannot guarantee that we will successfully obtain and maintain licenses
for the patented technology we use. We manufacture CDs using patented
technology primarily under nonexclusive licenses from U.S. Philips Corporation
and Discovision Associates. These CD licenses generally provide for the payment
of royalties based upon the number, type and size of CDs sold. Our license from
Discovision Associates continues until the last patent covered by such license
expires and our license from U.S. Philips Corporation continues until the
earlier of October 1, 2006 or the expiration of the last patent covered by such
license.

In order to manufacture/replicate DVDs we must obtain licenses from U.S.
Philips Corporation and Sony Corporation for certain patented DVD technology.
We have entered into nonexclusive DVD licenses with U.S. Philips Corporation,
which continue until October 1, 2009. Additionally, we believe we have
finalized a nonexclusive DVD licensing agreement with Sony Corporation to use
Sony Corporation's patented DVD technology. We are currently awaiting the
receipt of the executed copy of this DVD licensing agreement with Sony
Corporation. These DVD licenses generally provide for the payment of royalties
based upon the number and type of DVDs sold. We cannot assure you neither we
nor our licensors will not be sued for patent infringement and have to stop
using the licensed technologies.

Our operating results could be impaired by burdensome environmental
regulation and other legal uncertainties.

Since the DVD and CD manufacturing processes involve the use of hazardous
materials, we are subject to federal, state and local regulations governing the
storage, use and disposal of hazardous materials. Our liability in the event of
an accident or the costs of remediation could exceed our resources or insurance
coverage. Also, we may have to incur substantial expenditures as a result of
having to engage in preventive or remedial action, having to reduce chemical
exposure or dealing with waste treatment or disposal.

Risks Related to this Offering and Our Common Stock

The rights of our shareholders could be adversely affected because our
founders control us.

Upon completion of this offering, two of our founders can elect or remove all
members of the board of directors and thereby control our affairs and
management. Moreover, upon completion of this offering, these two founders,
Alex Sandel and Jason Barzilay, will beneficially own approximately 74% (71% if
the underwriters' over-allotment option is exercised in full) of our
outstanding shares. As a result of such ownership, these founding shareholders,
acting together, can determine the outcome of elections and other matters
presented to our shareholders for approval. Such concentration of ownership may
cause any of the following:

. delay, defer or prevent a change in our control;

. adversely affect the voting and other rights of our other shareholders;
and

. depress the price of our common stock.

Purchasers in this offering will experience immediate and substantial
dilution.

If you purchase our common stock upon completion of this offering, you will
experience an immediate and substantial dilution in that you will pay a price
per share of common stock that substantially exceeds the value of our assets
after subtracting our liabilities. In addition, you will have contributed 100%
of the total to fund Future Media, but will only own 24.0% of the outstanding
shares. If outstanding stock options and warrants are exercised then you will
experience additional dilution.

11
<PAGE>

Our stock price could fluctuate and we cannot assure you that the shares
offered pursuant to this offering will trade at market prices in the range
of the initial public offering price.

The initial public offering price does not necessarily bear any relationship
to our book value, assets, past operating results, financial condition or any
other established criteria of value. The initial public offering price of the
shares of our common stock is negotiated with the selling shareholders and the
underwriters. The trading price of our common stock could be subject to wide
fluctuations in response to any of the following:

. variations in our operating results;

. announcements relating to our business (including new product
introductions by us or by our competitors);

. technological trends;

. securities analysts changing financial estimates;

. changes in the stock price or operating performance of other companies
investors may deem comparable to us;

. changes in general economic conditions or the financial markets; and

. changes in the manufacturing or retail industries.

Sales of additional shares of our common stock into the public market may
cause our stock price to fall.

Upon completion of this offering, we will have 19,535,185 shares of common
stock outstanding, 20,312,962 if the underwriters' over-allotment option is
exercised in full. Of those 19,535,185 shares, a total of 5,185,185 shares,
5,962,962 shares if the underwriters exercise their over-allotment option in
full will be freely tradeable without restriction or further registration under
the Securities Act of 1933, as amended, unless purchased or held by our
affiliates as that term is defined in Rule 144 under the Securities Act.
Pursuant to Rule 144, sales of common stock by our affiliates are subject to
the volume limitations, manner of sale, and notice requirements. All of our
executive officers, directors and shareholders, including the selling
shareholders, will execute lock-up agreements under which they will agree to
not sell or otherwise transfer, directly or indirectly, any shares of common
stock or any securities convertible into, or exercisable or exchangeable for,
any shares of common stock for a period of 180 days after the date of this
prospectus without the prior written consent of Prudential Securities
Incorporated, on behalf of the underwriters. After the expiration of the 180-
day period, shares that can be sold under Rule 144 will be eligible for sale.
Prudential Securities Incorporated may, in its sole discretion, at any time and
without notice, release all or any portion of the shares of our common stock
subject to these lock-up agreements. Sales of substantial amounts of our common
stock in the public market, or the perception sales could occur, could
adversely affect the prevailing market price for the common stock and could
impair our ability to raise capital through a public offering of equity
securities.

<TABLE>
<CAPTION>
Number of shares Date of eligibility for resale into public market
---------------- -------------------------------------------------
<C> <S>
14,850,000 180 days after the date of this prospectus due to a lock-up
agreement our two existing shareholders have with
Prudential Securities Incorporated.
</TABLE>

12
<PAGE>

Provisions in our charter documents could deter takeover efforts or depress
our stock price.

Provisions of our Articles of Incorporation, Bylaws and California law could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our shareholders. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock issued in the future. Our board of directors has the
authority to issue up to 10,000,000 shares of preferred stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by our shareholders.
Following this offering, we will not have any shares of preferred stock
outstanding and we have no present intention to issue any shares of preferred
stock. However, preferred stock could be issued with voting, liquidation,
dividend and other rights superior to those of the common stock. An issuance of
preferred stock could make it more difficult for a third party to acquire a
majority of our outstanding voting stock, which may depress the market value of
our common stock.

Provisions of our Articles of Incorporation make it difficult for minority
shareholders to obtain representation on the board of directors. Our Articles
of Incorporation and California law provide cumulative voting rights of
shareholders, which cease at such time we have 800 or more holders of our
common stock as of the record date of our most recent annual meeting of
shareholders. This provision has the effect of making it more difficult for
minority shareholders to obtain representation on the board of directors once
we have 800 or more shareholders.

FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of
risks, uncertainties and assumptions about us, including, among other things:

. general economic and business conditions, both nationally and in our
markets;

. our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;

. anticipated trends in our business;

. existing and future regulations affecting our business;

. successful implementation of our business strategy;

. our relationship with large customers;

. fluctuations in our operating results;

. increasing adoption of alternative data delivery systems;

. technological trends in the DVD and CD industries; and

. other risk factors described under "Risk Factors" in this prospectus.

In addition, in this prospectus, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intend," "expect" and similar
expressions, as they relate to us, our business or our management, are intended
to identify forward-looking statements.

Because of these risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus may not occur and actual results
could differ materially from those anticipated or implied in the forward-
looking statements.

13
<PAGE>

TERMINATION OF S CORPORATION STATUS

We have been treated as an S Corporation since our inception. As a result,
our shareholders have been directly taxed on our earnings for federal income
tax purposes instead of us. Other than a tax imposed on S Corporations by the
State of California (currently 1.5% of income), our shareholders have also been
responsible for state income taxes on earnings. Such taxation of our
shareholders will continue through the date immediately preceding the date of
termination of our S Corporation status. The termination date will occur
immediately prior to the closing of this offering. On the termination date, we
will become a C Corporation for tax purposes and be subject to federal and
state corporate income taxes.

From January 1, 2000 through the date of this prospectus we paid an aggregate
of approximately $9.1 million in dividends to our shareholders for the purpose
of paying S Corporation taxes for 1998 and 1999. Out of the proceeds of this
offering, we expect to pay approximately $9.3 million in dividends to our
shareholders, including approximately $1.8 million for the purpose of paying S
Corporation taxes. Pursuant to our current loan agreement with Greyrock, we may
not declare or pay any dividends or make any distribution without the prior
written consent of Greyrock, except for distributions to existing shareholders
for the purpose of paying income taxes on our S Corporation earnings.

We have entered into a tax indemnification agreement with our existing
shareholders relating to their respective income tax liabilities. The tax
indemnification agreement is intended to assure we assume the taxes relating to
the income we receive and our existing shareholders assume the taxes relating
to the income they receive. We will also indemnify the existing shareholders
for all taxes imposed upon them as the result of their receipt of an
indemnification payment under the tax indemnification agreement. Any payment
made by us to the existing shareholders pursuant to the tax indemnification
agreement may be considered by the Internal Revenue Service or state taxing
authorities to be non-deductible by us for income tax purposes. The tax
indemnification agreement will continue in effect until the expiration of the
relevant statutes of limitations with respect to the tax periods covered by the
agreement.

14
<PAGE>

USE OF PROCEEDS

The net proceeds to us from this offering, at an assumed initial public
offering price of $13.50 per share, are estimated to be approximately $57.3
million, $67.1 million if the underwriters' over-allotment option is exercised
in full, after deducting the underwriting discounts and commissions and
estimated offering expense of $1,500,000.

We expect to use a portion of the net proceeds to repay all existing bank
debt to Greyrock Capital, a division of Banc of America Commercial Finance
Corporation, in an amount estimated to be approximately $23.4 million at
closing. The bank debt was used to purchase capital equipment, to pay a
distribution to the existing shareholders and for general corporate purposes.
The existing shareholders have personally guaranteed repayment of the bank debt
and upon repayment of the loan from Greyrock, the shareholder guarantees will
terminate.

We also expect to use approximately $14.1 million to purchase capital
equipment.

We also plan to distribute $9.3 million to our existing shareholders as a
distribution of the retained earnings through the closing of this offering,
including an amount of approximately $1.8 million for the purpose of paying
income taxes on our S Corporation earnings.

Upon the closing of this offering we plan to pay $525,000 to Averil Capital
Markets Group, Inc., for services rendered in connection with this offering.
Averil Capital Markets Group, Inc., is a financial advisory firm founded and
controlled by Diana Maranon, who is one of our directors. This amount has been
deducted from the net proceeds of the offering in the calculation above.

NASD members, affiliates, associated persons and related persons will not be
paid, in the aggregate, ten percent (10%) or more of the gross proceeds of this
offering (through repayment of debt or otherwise.)

The balance of the net proceeds will be used for working capital and general
corporate purposes, including potential strategic investments in companies that
could add value to Future Media. Currently, we do not have any acquisition
target identified. Pending such uses, we intend to invest the net proceeds in
short-term, interest bearing securities or guaranteed obligations of the United
States government.

We will not receive any proceeds from the sale of shares by the selling
shareholders.

DIVIDEND POLICY

Historically we have paid cash dividends when operating as an S Corporation.
However, other than paying approximately $9.3 million out of the net proceeds
of this offering to our existing shareholders as a distribution of retained
earnings, including an amount of approximately $1.8 million for the purpose of
paying income taxes on S Corporation earnings, we have no current intention to
declare or pay dividends on our common stock following our conversion to C
Corporation status. Instead, we intend to follow a policy of retaining earnings
to finance the growth of our business. Our board of directors will have the
discretion to determine any future dividend payments and such discretion may
depend on the following: our results of operations; our financial condition;
contractual and legal restrictions; and other factors our board of directors
deems relevant.

Pursuant to our current loan agreement with Greyrock, we may not declare or
pay any dividends or make any distribution without the prior written consent of
Greyrock, except for distributions to existing shareholders for the purpose of
paying income taxes on our S Corporation earnings.

15
<PAGE>

DILUTION

Purchasers of our common stock in this offering will experience immediate and
substantial dilution in the pro forma net tangible book value of our common
stock from the initial public offering price. The pro forma net tangible book
value of our common stock as of March 31, 2000 was $387,000. Pro forma net
tangible book value per share is equal to our total tangible assets, less total
liabilities, divided by the number of shares of common stock outstanding, after
giving effect to:

. the distribution by us of approximately $14.7 million to our existing
shareholders as a retained earnings distribution, including an amount of
approximately $7.9 million for the purpose of paying income taxes on S
Corporation earnings,

. the recording by us of additional deferred taxes as if we were treated
as a C Corporation at March 31, 2000, and

. to give effect to a 1.65 for 1 stock split approved by our board of
directors on April 13, 2000.

After giving effect to the sale of 4,685,185 shares of common stock by us and
the receipt and application of the estimated net proceeds, assuming an initial
public offering price of $13.50 per share, after deducting the underwriting
discounts and commissions and estimated offering expenses, including an amount
of $525,000 to be paid to Averil Capital Markets Group, Inc., a company
controlled by one of our directors upon the closing of this offering, our pro
forma net tangible book value as of March 31, 2000 would have been
approximately $57.7 million or $2.95 per share. This represents an immediate
increase in net tangible book value of $2.92 per share to our current
shareholders and an immediate and substantial dilution of $10.55 per share to
new shareholders purchasing shares in this offering. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price......................... $13.50
Pro forma net tangible book value as of March 31, 2000...... $0.03
Increase attributable to new shareholders................... 2.92
-----
Pro forma net tangible book value as of March 31, 2000 after
the offering................................................. 2.95
------
Dilution to new shareholders.................................. $10.55
======
</TABLE>

The following table summarizes a comparison of the number of shares of common
stock acquired from us, the percentage ownership of such shares, the total
consideration, the percentage of total consideration and the average price per
share paid by the existing shareholders and by the investors purchasing shares
of common stock in this offering, before the deduction of underwriting
discounts and commissions and offering expenses.

<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Current shareholders........ 14,850,000 76.0% $ 15,000 -- % $ --
New investors............... 4,685,185 24.0% 63,250,000 100.0% $13.50
---------- ----- ----------- -----
19,535,185 100.0% $63,265,000 100.0% $ 3.24
========== ===== =========== ===== ======
</TABLE>

The foregoing tables and calculations assume no exercise of outstanding
options under our stock incentive plans, no exercise of the warrants granted to
David Moss and no exercise of warrants granted to Levy, Small and Lallas. At
the date of this prospectus, 1,598,350 shares of common stock were subject to
outstanding options under our stock incentive plans, 604,890 shares of common
stock were issuable upon exercise of the warrants held by David Moss at an
exercise price of $0.0010 per share and 25,000 warrants to be granted to Levy,
Small & Lallas upon the closing of this offering at an exercise price equal to
the initial public offering price. To the extent options or warrants are
exercised, there will be further dilution to new investors.

16
<PAGE>

CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2000 on

. an actual basis;

. on a pro forma basis to give effect to the accrual for the payment of
$14.7 million to our current shareholders as a distribution of retained
earnings, including approximately $7.9 million for the purposes of
paying income taxes on S Corporation earnings and the recording of
additional deferred taxes of approximately $2.7 million based on the
increase in the effective tax rate upon our anticipated change from an S
Corporation to C Corporation; and

. pro forma as adjusted to reflect the pro forma adjustments and to give
effect to our receipt of approximately $57.3 million in estimated net
proceeds from this offering, including a deduction of $525,000 to be
paid to Averil Capital Markets Group, Inc., a company controlled by one
of our directors upon the closing of this offering and the application
of these net proceeds, including the repayment of existing bank debt of
$14.1 million at March 31, 2000, of which $7.4 million was classified as
long-term debt.

<TABLE>
<CAPTION>
At March 31, 2000
--------------------------------
Actual Pro Pro Forma
(unaudited) Forma As Adjusted
----------- ------- -----------
(in thousands)
<S> <C> <C> <C>
Long-term debt, less current portion.......... $ 7,399 $ 7,399 $ --
------- ------- -------
Shareholders' equity:
Preferred Stock, no par value;
10,000,000 shares authorized; no shares
issued or outstanding actual, pro forma
or pro forma as adjusted................. -- -- --
Common Stock, no par value;
75,000,000 shares authorized; 14,850,000
shares issued and outstanding actual and
pro forma; 19,585,185 shares outstanding
pro forma as adjusted.................... 3,790 3,790 61,113
Notes receivable from officers.............. (4,058) (4,058) (4,058)
Accumulated other comprehensive income...... 655 655 655
Retained earnings........................... 17,430 -- --
------- ------- -------
Total shareholders' equity.............. 17,817 387 57,710
------- ------- -------
Total capitalization.................... $25,216 $ 7,786 $57,710
======= ======= =======
</TABLE>

The number of issued and outstanding shares in the foregoing table excludes
the following options and warrants that could result in further dilution for
new investors:

(a) 3,250,000 shares of common stock available for issuance pursuant to our
stock incentive plans, of which 1,598,350 shares were subject to
outstanding options as of the date of this prospectus;

(b) 604,890 shares of common stock issuable upon exercise of warrants
issued to David Moss, our Vice President--Operations, at an exercise
price of $0.0010 per share; and

(c) 25,000 shares of common stock issuable upon exercise of warrants
issued to Levy, Small & Lallas, at an exercise price equal to the
initial public offering price.

17
<PAGE>

SELECTED FINANCIAL DATA

We derived the statement of income data for the years ended December 31,
1997, 1998 and 1999 and the three months ended March 31, 1999 and 2000 and the
balance sheet data as of December 31, 1998 and 1999 and March 31, 2000
presented below from our financial statements included in another part of this
prospectus. The statement of income data for the years ended December 31, 1995
and 1996 and the balance sheet data as of December 31, 1995, 1996 and 1997 are
derived from our audited financial statements not included in this prospectus.
The financial statements as of and for the years ended December 31, 1997, 1998
and 1999 have been audited by Ernst & Young, LLP, independent auditors. The
statement of income data for the three months ended March 31, 1999 and 2000 and
the balance sheet data as of March 31, 2000 are unaudited but have been
prepared on the same basis as our audited financial statements, and in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of our operating
results for these periods and our financial condition as of that date. You
should read the selected financial data together with the historical financial
statements and related notes to our audited reports, as well as the section
included in this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
Three Months
Ended March 31
Year Ended December 31 (unaudited)
------------------------------------------- ---------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------ -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income
Data:
Net sales............... $26,972 $25,814 $36,042 $43,311 $53,002 $8,675 $14,780
Cost of goods sold...... 14,821 11,972 23,132 27,304 31,938 5,865 9,342
------- ------- ------- ------- ------- ------ -------
Gross profit............ 12,151 13,842 12,910 16,007 21,064 2,810 5,438
Selling, general and
administrative
expenses............... 6,093 2,537 4,214 4,232 4,201 1,072 1,593
Other general and
administrative expense-
stock related
compensation(1)........ -- -- -- 3,055 720 -- --
Abandoned offering
costs.................. -- -- -- 676 -- -- --
------- ------- ------- ------- ------- ------ -------
Income from operations.. 6,058 11,305 8,696 8,044 16,143 1,738 3,845
Interest income......... 12 252 42 35 1 -- 8
Interest expense........ (957) (1,108) (818) (1,264) (1,404) (351) (399)
Loss in equity of
unconsolidated entity.. -- -- -- -- -- -- (155)
Change in accounting
estimate for
royalties(2)........... -- 3,770 -- -- -- -- --
------- ------- ------- ------- ------- ------ -------
Income before state
income taxes........... 5,113 14,219 7,920 6,815 14,740 1,387 $ 3,299
Provision for state
income taxes........... 72 223 120 102 2 1 1
------- ------- ------- ------- ------- ------ -------
Net income.............. $ 5,041 $13,996 $ 7,800 $ 6,713 $14,738 $1,386 $ 3,298
======= ======= ======= ======= ======= ====== =======
Earnings per share:
Basic.................. $ 0.34 $ 0.94 $ 0.53 $ 0.45 $ 0.99 $ 0.09 $ 0.22
======= ======= ======= ======= ======= ====== =======
Diluted................ $ 0.34 $ 0.94 $ 0.53 $ 0.43 $ 0.92 $ 0.09 $ 0.20
======= ======= ======= ======= ======= ====== =======
Shares used in computing
earnings per share:
Basic.................. 14,850 14,850 14,850 14,850 14,850 14,850 14,850
======= ======= ======= ======= ======= ====== =======
Diluted................ 14,850 14,850 14,850 15,672 16,026 15,859 16,124
======= ======= ======= ======= ======= ====== =======
Pro Forma Statement of
Income
Data(3)(unaudited):
Pro forma net income
data:
Income before provision
for income taxes....... $14,740 $ 3,299
Pro forma income tax
provision.............. 5,896 1,320
------- -------
Pro forma net income.... $ 8,844 $ 1,979
======= =======
Pro forma basic earnings
per share.............. $ 0.60 $ 0.13
======= =======
Pro forma diluted
earnings per share..... $ 0.52 $ 0.11
======= =======
Weighted average shares
outstanding--basic..... 14,850 14,850
======= =======
Weighted average shares
outstanding--diluted... 17,136 17,435
======= =======
</TABLE>

18
<PAGE>

<TABLE>
<CAPTION>
December 31, March 31, 2000
--------------------------------------- -----------------------------------------
Actual Pro Forma
1995 1996 1997 1998 1999 (unaudited) Pro Forma (4) As Adjusted (5)
------- ------- ------- ------- ------- ----------- ------------- ---------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets.......... $10,846 $11,252 $ 8,036 $ 9,204 $ 8,253 $ 5,020 $ 5,320 $33,141
Property and equipment,
net.................... 11,896 12,097 17,636 21,898 29,837 34,874 34,874 34,874
Total assets............ 22,909 24,155 25,920 31,438 41,089 45,503 45,803 73,624
Current liabilities..... 12,839 8,865 14,132 16,246 16,165 20,161 34,850 12,206
Long term debt, less
current portion........ 4,750 2,129 1,755 9,085 5,327 7,399 7,399 --
Total shareholders'
equity................. 5,305 13,144 9,936 5,999 19,469 17,817 387 57,710
Dividends per share..... -- 0.41 0.74 0.92 0.03 0.20
</TABLE>
- --------

(1) On January 1, 1998, we granted warrants to purchase 604,890 shares of
common stock at an exercise price of $0.0010 per share to David Moss, our
Vice President--Operations. These warrants expire on December 31, 2007. In
connection with the grant of these warrants, we recognized compensation
expense of $3,055,000 in 1998 representing the excess of the estimated fair
value of the shares over the exercise price. In 1999 our existing
shareholders committed to give 49,500 shares of their stock to a director
for services to us. For the year ended December 31, 1999 we recorded stock
related compensation expense of $720,000 for this commitment, based upon
the estimated fair value of the shares to be given. On April 13, 2000 we
granted 25,000 warrants to purchase common stock to the law firm of Levy,
Small & Lallas for legal services provided to us in connection with this
offering. The warrants vest upon the closing of this offering and expire
one year from the close of this offering.
(2) We executed license agreements with two developers of CD technology
effective June 1, 1996 and October 1, 1996, respectively. The agreements
set forth royalty rates payable to the licensors for the license to
manufacture and sell CDs. We reached settlements totaling $70,000 for CD
sales occurring before the effective dates of the agreements. Because of
the settlement amounts, our prior estimates of royalty liabilities were
overstated by approximately $3,770,000 and the adjustment to the accruals
was made in 1996.

19
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
"Selected Financial Data" and the financial statements and related notes, which
are included in this prospectus.

Results of Operations

Sales are generally recorded at the time of shipment. However, in certain
instances, sales are recognized upon completion of an order, prior to shipment,
if the risks of ownership have passed to the customer. In these circumstances,
which have been insignificant at the end of reporting periods, we obtain
written instructions from the customer to hold the product for future shipment.

Cost of goods sold consists primarily of the following:

. raw materials;

. direct labor;

. depreciation of plant equipment;

. repairs and maintenance of plant equipment;

. royalties payable on the sale of DVDs and CDs; and

. rent and utilities related to the plant facility.

In addition to changes in these costs, our cost of goods sold as a percentage
of net sales are affected by various factors, including the following:

. DVD and CD units manufactured and associated number of units sold as a
percentage of our total DVD and CD production capacity in any period,
which directly affects gross margin due to the high component of fixed
costs inherent in our operations;

. average unit prices we are able to charge for our products, which are
subject to market conditions; and

. raw material packaging costs and associated direct labor costs required
to fulfill customer orders during any particular period.

Quarterly Results

The following table sets forth certain unaudited statement of income data for
the last eight quarters and has been prepared on the same basis as the annual
information and in management's opinion includes all adjustments necessary to
present fairly the information for each of the quarters below.

<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------------
1998 1999 2000
--------------------------------- ------------------------------------------ --------
June 30 September 30 December 31 March 31 June 30 September 30 December 31 March 31
------- ------------ ----------- -------- ------- ------------ ----------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $9,794 $12,025 $14,577 $8,675 $11,313 $14,960 $18,054 $14,780
Cost of goods sold...... 6,389 7,727 8,554 5,865 6,744 9,283 10,047 9,342
------ ------- ------- ------ ------- ------- ------- -------
Gross profit............ 3,405 4,298 6,023 2,810 4,569 5,677 8,007 5,438
Selling, general and
administrative
expenses............... 1,146 812 1,413 1,072 1,030 888 1,211 1,593
Other general and
administrative expense-
stock related
compensation........... -- -- -- -- -- -- 720 --
Abandoned offering
costs.................. -- -- 676 -- -- -- -- --
------ ------- ------- ------ ------- ------- ------- -------
Income (loss) from
operations............. 2,259 3,486 3,934 1,738 3,539 4,789 6,076 3,845
Interest income......... 15 20 -- -- 24 28 (51) 8
Interest expense........ (317) (416) (400) (351) (330) (372) (351) (399)
Loss in equity of
unconsolidated entity.. -- -- -- -- -- -- -- (155)
------ ------- ------- ------ ------- ------- ------- -------
Income (loss) before
state income taxes..... 1,957 3,090 3,534 1,387 3,233 4,445 5,674 3,299
Provision (benefit) for
state income taxes..... 19 46 53 1 -- 1 1 1
------ ------- ------- ------ ------- ------- ------- -------
Net income (loss)....... $1,938 $ 3,044 $ 3,481 $1,386 $ 3,233 $ 4,444 $ 5,673 $ 3,298
====== ======= ======= ====== ======= ======= ======= =======
</TABLE>

20
<PAGE>

We have experienced, and expect to experience in the future, quarterly
variations in revenues and earnings as a result of various factors, many of
which are outside our control, including:

.seasonal patterns of certain of the businesses we serve;

.timing of new product releases by our customers;

.commercial success of products offered by our customers;

.timing of expenses incurred to obtain and support new business; and

.general changes in economic and industry conditions.

Typically, we experience increased demand for our products in our third and
fourth quarters. Such increase is primarily due to the release of new products
by our customers for the new school year and the holiday season.

Operating Results

The following table provides certain statement of income data expressed as a
percentage of net sales for the specified periods.

<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31 March 31,
------------------------- --------------------
1997 1998 1999 1999 2000
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........... 64.2 63.0 60.3 67.6 63.2
------- ------- ------- --------- ---------
Gross profit................. 35.8 37.0 39.7 32.4 36.8
Selling, general and
administrative expenses..... 11.7 9.8 7.9 12.4 10.8
Other general and
administrative expense--
stock related compensation.. -- 7.1 1.4 -- --
Abandoned offering costs..... -- 1.6 -- -- --
------- ------- ------- --------- ---------
Income from operations....... 24.1 18.5 30.4 20.0 26.0
Interest income.............. 0.1 0.1 -- -- --
Interest expense............. (2.2) (2.9) (2.6) (4.0) (2.7)
Loss in equity of
unconsolidated entity....... -- -- -- -- (1.0)
------- ------- ------- --------- ---------
Income before state income
taxes....................... 22.0 15.7 27.8 16.0 22.3
Provision for state income
taxes....................... 0.3 0.2 -- -- --
------- ------- ------- --------- ---------
Net income................... 21.7% 15.5% 27.8% 16.0% 22.3%
======= ======= ======= ========= =========
</TABLE>

As shown by the above table, over the last three years, as a percentage of
sales our gross profit margins have increased from 35.8% in 1997 to 39.7% in
1999. In addition our selling, general and administrative expenses have
decreased as a percentage of sales from 11.7% in 1997 to 7.9% in 1999. These
favorable trends are a result of the fact that our business has a high
percentage of fixed costs, both in costs of goods sold, which directly effects
our gross profit, and in selling, general and administrative expenses.
Therefore, by increasing revenues, our costs as a percentage of revenues tend
to decrease resulting in higher income from operations as a percentage of
sales. The amounts shown for the three months ended March 31, 2000 and 1999 are
not necessarily indicative of trends that may be expected on an annual basis.
These amounts are shown for informational purposes only.

Three Months ended March 31, 2000 compared to March 31, 1999

Net Sales. Net sales totaled $14,780,253 for the three months ended March 31,
2000 as compared to $8,674,760 for the three months ended March 31, 1999. This
represents an increase of $6,105,493 or 70.4%. This increase is the result of
increased CD unit sales and DVD revenues in 2000 (for which there were none in
1999), partially offset by lower packaging revenues and lower average CD unit
prices in 2000 as compared to

21
<PAGE>

1999. During the three months ended March 31, 2000 our CD unit sales increased
approximately 64.5%. This increased demand for our CD's was fulfilled by an
increase in the utilization of our manufacturing equipment in 2000 as compared
to 1999 and by the addition of CD manufacturing capacity subsequent to March
31, 1999. Our average CD sales price decreased approximately 5.4% in the three
months ended March 31, 2000 as compared to the three months ended March 31,
1999. Our DVD revenues in the three months ended March 31, 2000 totaled
$1,947,850 (of which there were none in 1999). Packaging revenues decreased to
$801,935 in the three months ended March 31, 2000 from $946,937 for the same
period in 1999, a decrease of $145,002 or 15.3%.

Cost of Goods Sold. Cost of goods sold was $9,341,733 for the three months
ended March 31, 2000 and $5,864,842 for three months ended March 31, 1999, an
increase of $3,476,891 or 59.3%. Cost of goods sold as a percentage of sales
decreased to 63.2% for the three months ended March 31, 2000 from 67.6% for the
three months ended March 31, 1999. As a percentage of sales in 2000, our
factory overhead costs decreased 2.4%, depreciation of plant equipment
decreased 2.5% and shipping and other overhead decreased approximately 1%.
These decreases were partially offset by increases in raw material costs of
1.3% and a net increase of .2% in royalties and other production costs as a
percentage of sales.

Gross Profit. Our gross profit increased as a result of our increased volume
of CD and DVD units sold during the three months ended March 31, 2000 as
compared to the three months ended March 31, 1999. The increased gross profit
in the three months ended March 31, 2000 was also the result decreased of
production expenses as a percentage of sales as discussed above. Gross profit
for the three months ended March 31, 2000 was $5,438,520 or 36.8% of net sales
as compared to $2,809,918 or 32.4% of net sales for three months ended March
31, 1999.

Selling, General and Administrative Expenses. As a percentage of net sales,
selling, general and administrative expenses decreased from 12.4% for the three
months ended March 31, 1999 to 10.8% for the three months ended March 31, 2000.
Selling, general and administrative expenses were $1,593,581 for three months
ended March 31, 2000 as compared to $1,071,812 for the three months ended March
31, 1999, an increase of $521,769 or approximately 48.7%. This increase is the
partially the result of increased salaries and related taxes ($93,991) and
additional rental and moving expenses (totaling $245,000) recognized as
selling, general and administrative expenses during the three months ended
March 31, 2000. We incurred rental expenses for both our old and new production
headquarters during the three months ended March 31, 2000 as we were operating
from both during the period. We took possession of our new facility in order to
make the necessary leasehold improvements and power upgrades required for our
operations. We do not anticipate the additional rental and moving expenses to
occur in the future. The remaining increase in selling, general and
administrative expenses in the three months ended March 31, 2000 compared to
the three months ended March 31, 1999 is a result of increased expenses
commensurate with our increased sales.

Income from Operations. As a result of the foregoing, income from operations
totaled $3,844,939 for the three months ended March 31, 2000 and $1,738,106 for
the three months ended March 31, 1999. This represents an increase of
$2,146,833 or 123.5%. Income from operations was 26.0% of net sales for the
three months ended March 31, 2000 and 20.0% of net sales for the three months
ended March 31, 1999.

Equity in Loss of Unconsolidated Entity. During the three months ended March
31, 2000 we recognized $155,000 as our share of the net loss of Synthonics
Technologies, Inc., an investment carried on the equity method. We made this
investment in late December 1999 so there is no corresponding amount for the
first quarter of 1999.

Interest Expense. Interest expense was $398,614 for the three months ended
March 31, 2000 and $351,396 for the three months ended March 31, 1999. The
increase of 13.4% in 2000 as compared to 1999 is the result of higher average
interest rates, partially offset by lower average borrowings during the three
months ended March 31, 2000. The weighted average interest rate on our debt was
10.8% for the three months ended March 31, 2000 and 9.6% for the three months
ended March 31, 1999.

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<PAGE>

Income Tax Expense. We have operated as an S Corporation for federal and
state income tax purposes, and accordingly we are not subject to federal taxes
and subject to only a minimal percentage of state income taxes. The only
provision for income taxes was the amount required for state income tax
purposes. Our total income tax expense was approximately $1,000 for the three
months ended March 31, 2000 and 1999 due to credits we receive for state taxes
for purchases of manufacturing equipment.

Net Income. Based on our S Corporation status and the factors discussed
above, net income was $3,297,846 for the three months ended March 31, 2000 and
$1,386,210 for the three months ended March 31, 1999. This represents an
increase of $1,911,636 or 137.9% for the three months ended March 31, 2000 as
compared to the three months ended March 31, 1999.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Net Sales. Net sales totaled $53,001,871 for the year ended December 31, 1999
as compared to $43,311,180 for the year ended December 31, 1998. This
represents an increase of $9,690,691 or 22.4% for the year ended December 31,
1999, as compared to the year ended December 31, 1998. This increase is a
result of increased CD unit sales of approximately 26.3%, partially offset by
lower packaging revenues. Our pricing is comprised of a price for the unit (CD
or DVD) and a price for packaging, when our customers request this service.
While our unit prices for CDs remained constant during 1999 as compared to
1998, our packaging revenues decreased by approximately $3,048,011. The
additional CD unit sales during 1999 are a result of increased demand for our
products with fulfillment of these orders made possible by production capacity
added subsequent to 1998. In addition, we commenced production and shipment of
DVDs during the fourth quarter of 1999, which added $2,718,333 to revenues for
the year.

Cost of Goods Sold. Cost of goods sold was $31,937,704 for the year ended
December 31, 1999 and $27,304,178 for the year ended December 31, 1998. Cost of
goods sold as a percentage of sales was approximately 60.3% for the year ended
December 31, 1999 as compared to 63.0% for the year ended December 31, 1998. As
a percentage of sales in 1999, our raw materials costs decreased 4.8% and
shipping costs decreased 0.7%, partially offset by increases in depreciation
expense of 1.3%, factory overhead of 1.9% and royalties of 0.5%.

Gross Profit. Gross profit for the year ended December 31, 1999 was
$21,064,167 or 39.7% of net sales as compared to $16,007,002 or 37.0% of net
sales for the year ended December 31, 1998. Our gross profit increased because
our volume of CD and DVD units sold increased, in line with our business model,
as a result of the increased production capacity we added during 1999.

Selling, General and Administrative Expenses. As a percentage of net sales,
selling, general and administrative expenses decreased from 9.8% for the year
ended December 31, 1998 to 7.9% for the year ended December 31, 1999. Selling,
general and administrative expenses were $4,200,969 for the year ended December
31, 1999 as compared to $4,232,741 for the year ended December 31, 1998, a
decrease of $31,772 or approximately 0.8%. This decrease is the net result of
reduced amounts paid for consulting fees (approximately $396,000), taxes (sales
taxes paid on materials used in production) and licenses (approximately
$107,000) and miscellaneous items (approximately $147,000), offset by higher
amounts paid for salaries and related benefits (approximately $486,000) and
office related expenses (approximately $132,000) in 1999.

Other General and Administrative Expense--Stock Related Compensation. In 1999
our existing shareholders committed to give 49,500 shares of their stock to a
director for services to us. For the year ended December 31, 1999 we recorded
compensation expense of $720,000 for this commitment, based upon the estimated
fair value of the shares to be given. On January 1, 1998, we granted warrants
to purchase 604,890 shares of stock at $0.0010 per share to one of our
officers, with the warrants expiring on December 31, 2007. In connection with
these warrants, we recognized compensation expense for $3,055,000 in 1998
representing the excess of the estimated fair value of the shares over the
exercise price.

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<PAGE>

Income from Operations. Income from operations totaled $16,143,198 for the
year ended December 31, 1999 and $8,043,528 for the year ended December 31,
1998. This represents an increase of $8,099,670 or 100.7% for the year ended
December 31, 1999, as compared to the year ended December 31, 1998. Income from
operations was 30.4% of net sales for the year ended December 31, 1999 and
18.5% of net sales for the year ended December 31, 1998. Excluding the stock
related compensation expense in 1999 and 1998 and abandoned offering costs
recognized in 1998, income from operations would have been 16,863,198 or 31.8%
of net sales in 1999 and $11,774,261 or 27.2% of net sales in 1998. As a
result, income from operations in 1999 as compared to 1998 would have increased
$5,088,937 or 43.2%.

Interest Expense. Interest expense was $1,403,694 for the year ended December
31, 1999 and $1,263,861 for the year ended December 31, 1998. The increase of
11.1% in 1999 as compared to 1998 is the net result of higher average
borrowings during 1999, partially offset by lower average interest rates. Our
weighted average interest rate on our debt was 10.1% for the year ended
December 31, 1999 and 10.4% for the year ended December 31, 1998.

Income Tax Expense. We have operated as an S Corporation for federal and
state income tax purposes, and accordingly we are not subject to federal taxes
and subject to only a minimal percentage of state income taxes. The only
provision for income taxes was the amount required for state income tax
purposes. Our total income tax expense was $2,000 for the year ended December
31, 1999 due to our S Corporation status and credits we receive for state taxes
for purchases of manufacturing equipment.

Net Income. Based on our S Corporation status and the factors discussed
above, net income was $14,738,174 for the year ended December 31, 1999 and
$6,712,633 for the year ended December 31, 1998. This represents an increase of
$8,025,541 or 119.6% for the year ended December 31, 1999 as compared to the
year ended December 31, 1998.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Net Sales. Net sales for the year ended December 31, 1998 totaled $43,311,180
compared to net sales for the year ended December 31, 1997, which totaled
$36,042,427. This increase of $7,268,753, or 20.2%, is attributable to an
increase in the number of CDs sold of approximately 55.9%, offset by lower
average CD sales prices for the year ended December 31, 1998 compared to 1997.
Our pricing is comprised of a price for the unit (CD) and a price for
packaging, when our customers request this service. Our average unit price
declined in 1998 as compared to 1997 by approximately 14.8%. In addition, our
packaging revenues decreased by $1,384,468 in 1998 from the amounts in 1997.
The additional unit sales during 1998 are a result of increased demand for our
products with fulfillment of these orders made possible by production capacity
added subsequent to 1997.

Cost of Goods Sold. Cost of goods sold for the year ended December 31, 1998
totaled $27,304,178 or 63.0% of net sales, compared to $23,132,442 or 64.2% of
net sales for the year ended December 31, 1997. As a percentage of net sales,
increases in cost of sales in the year ended December 31, 1998 were related to
increases in royalties of 2.2% and depreciation of production equipment of
1.3%, offset by decreases in factory overhead of 2.3%, raw material costs of
1.0% and obsolescence reserves of 1.4%.

Gross Profit. Because of the foregoing, gross profit for the year ended
December 31, 1998 was $16,007,002, as compared to $12,909,985 for the year
ended December 31, 1997, an increase of $3,097,017 or 24.0%. As a percentage of
net sales, gross profit was 37.0% in 1998 as compared to 35.8% in 1997.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $4,232,741 for the year ended December 31, 1998
and $4,214,033 for the year ended December 31, 1997. This represents an
increase of $18,708 or less than 1.0% in 1998 over 1997. As a percentage of net
sales, selling, general and administrative expenses decreased from 11.7% for
the year ended December 31, 1997 to 9.8% for the year ended December 31, 1998.

24
<PAGE>

Income from Operations. Because of the above items, income from operations
was $8,043,528 for the year ended December 31, 1998 and $8,695,952 for the year
ended December 31, 1997, a decrease of $652,424 or 7.5%. As a percentage of net
sales, income from operations was 18.6% in 1998 and 24.1% in 1997. Excluding
the stock warrant compensation expense and abandoned offering costs recognized
in the year ended December 31, 1998, income from operations would have been
$11,774,261 or 27.2% of net sales. This represents an increase of $3,078,309 or
35.4% of the amount in 1997.

Interest Expense. Interest expense totaled $1,263,861 for the year ended
December 31, 1998 and $817,998 for the year ended December 31, 1997. This
increase in 1998 of $445,863, or 54.5%, is a result of higher average
borrowings in 1998 as compared to 1997. The weighted average interest rate on
our debt was 10.4% for the year ended December 31, 1998 and 10.5% for the year
ended December 31, 1997.

Income Tax Expense. We have operated as an S Corporation for federal and
state income tax purposes, and accordingly we were not subject to federal taxes
and we were only subject to a minimal percentage (1.5% of pretax income) of
state income taxes. The only provision for income taxes was the amount required
for state income tax purposes.

Net Income. Because of the items discussed above, net income was
approximately $6,712,633 for the year ended December 31, 1998 and was
approximately $7,800,159 for the year ended December 31, 1997, a decrease of
$1,087,526 or 13.9%.

Liquidity and Capital Resources

Historically we have funded our operations and capital expenditures through
cash flow from operations, borrowings under our lines of credit and favorable
terms from our equipment vendors for the purchase of equipment used in our
manufacturing operations. In February 1997, we entered into a credit agreement
with Greyrock Capital, a division of Banc of America Commercial Finance
Corporation ("Greyrock"), which was amended in January 1998 and further amended
in April 1998, July 1998, June 1999 and January 2000. The credit agreement
currently provides:

. receivable loans based on 80% of our eligible receivables;

. equipment loans based on 90% of the net purchase price of new equipment
purchased and delivered subsequent to June 1999; and

. additional revolving loans.

Under the credit agreement we are allowed to borrow the lower of $30,000,000,
or an amount equal to 80% of our eligible receivables and up to $15,000,000 of
equipment loans plus the unpaid balance of the revolving loans. The credit
agreement had an original maturity date of February 28, 1998 and provided for
automatic renewals. In January 2000, the maturity date was extended to June 30,
2001, and continues to provide for automatic renewals. The credit agreement is
secured by accounts receivable, equipment, inventory and other assets and is
personally guaranteed by our existing shareholders. Unlike a typical revolving
loan or line of credit, loans under the Greyrock credit agreement are advanced
at Greyrock's sole discretion. Accordingly, there can be no guarantee that
funds will be available under this credit agreement in the future. To date
Greyrock has never refused our request for a loan. The credit agreement also
includes, among others, various negative covenants, including the prohibition
to merge or consolidate with another corporation, make any loans of money or
assets, redeem, retire, purchase or otherwise acquire any of our stock and make
any change in our capital structure which would have a material adverse effect
on our ability to pay our obligations under the credit agreement without
Greyrock's prior written consent. We obtained permission from Greyrock for the
loans and advances to related parties that are described in the Related Party
Transactions in this Prospectus. We are in compliance with the terms of the
credit agreement. We do not pay any commitment fees for the unused portion of
the credit facility.

Borrowings under receivable loans bear interest at the prime rate (8.5% at
December 31, 1999 and 9.0% at March 31, 2000) plus 2.0% per annum; however, the
interest rate will not be less than 7.0% per annum. At

25
<PAGE>

December 31, 1999 there was a total of $1,852,303 borrowed under the receivable
loans. At March 31, 2000 there was a total of $1,919,620 borrowed under the
receivable loans.

Under the amendment of April 1998, the revolving loans were for up to
$15,000,000, payable in monthly principal installments of $312,500 through the
earlier of the date the credit agreement terminates, or is terminated, or April
2002. In addition, this amendment disallowed any distributions to shareholders
except for the purpose of paying income taxes on S corporation earnings. The
revolving loans bear interest at the prime rate (8.5% at December 31, 1999 and
9.0% at March 31, 2000) plus 2.0% per annum; however the interest rate will not
be less than 7.0% per annum. The outstanding balance of the revolving loans was
$9,062,500 at December 31, 1999 and $8,125,000 at March 31, 2000.

Under the amendment of June 1999, amounts borrowed under the equipment loans
are to be repaid in 48 equal monthly payments of principal through the earlier
of the earlier of the date the credit agreement terminates, or is terminated or
the date such equipment loans have been repaid in full. The equipment loans
bear interest at the prime rate (8.5% at December 31, 1999 and 9.0% at March
31, 2000) plus 2.0% per annum; however, the interest rate will not be less than
7.0% per annum. At December 31, 1999 no amounts had been borrowed under the
equipment loans. At March 31, 2000 there was $4,782,500 borrowed under the
equipment loans.

Historically, we have funded our capital requirements with cash flows from
operations and borrowings under our credit arrangements. Cash flows provided
from operating activities were $10,843,926 in 1998, $23,046,306 in 1999 and
$7,465,147 in the first three months of fiscal 2000. In 1998, operating cash
flows were provided primarily by net income, including the effect of increasing
non-cash expenses related to stock related compensation expense and
depreciation and amortization offset by increases in receivables and a net
decrease in payables and accrued expenses. In 1999 and the first three months
of fiscal 2000, operating cash flows were provided primarily by net income,
including the effect of increasing non-cash expenses related to depreciation
and amortization, and increases in payables and accrued expenses. These
increases in cash flows were used primarily to fund capital expenditures and
repayments of borrowings.

We spent a total of $6,731,862 in 1998, $17,378,635 in 1999 and $5,266,358 in
the first three months of fiscal 2000 for investing activities, primarily for
property and equipment for our operations. In 1999, we made cash investments
totaling $2,152,400 in two companies with whom we entered into strategic
alliances. We made a $1,652,400 investment in Lions Gate Entertainment, which
allowed us to align ourselves with a motion picture production company, which
also distributes DVDs from films in its library and new releases. Additionally,
we made a $500,000 investment in Synthonics Technologies, Inc. and agreed to
establish a catalog entity to develop and produce 3D interactive catalogs on
behalf of Synthonics Technologies, Inc. and its customers.

We used a total of $4,112,064 in 1998, $5,667,671 in 1999 and $2,198,789 in
the first three months of fiscal 2000 in financing activities. In each of the
periods presented amounts were used in financing activities primarily for
repayments of borrowings, loans to officers and distributions to shareholders
for the payment of S Corporation taxes. These uses of cash were funded by
borrowings under our credit arrangement and cash flows generated from operating
activities.

As of the date of this prospectus, we have entered into purchase orders for
equipment to be used in our operations requiring future payments totaling
approximately $9.4 million. On March 1, 2000 we entered into a lease agreement
with a company owned by our President. The lease is for a period of thirteen
years and requires monthly base rent payments of $53,843, subject to annual
increases based on the consumer price index. At the end of both the fifth and
tenth year the monthly rental will be adjusted to fair market value as of those
dates.

Out of the net proceeds of this offering, we anticipate investing
approximately $14,100,000 in capital equipment. This new equipment will expand
our capacity for replication of DVDs and CDs. It should be noted, however, the
purchase of equipment is subject to many factors, including but not limited to
future demand for

26
<PAGE>

our product. Therefore, no assurance can be given we will purchase equipment as
described above, and actual equipment purchased may vary significantly from our
projections.

We believe cash flows from operations, net proceeds from this offering,
together with available funds under the credit agreement, will be sufficient to
support our operating and capital expenditures for the next twelve months.
However, long-term capital requirements depend on many factors, including, but
not limited to, the rate at which we expand our business, whether internally or
through acquisitions and strategic alliances. To the extent the funds generated
from the sources described above are insufficient to fund our activities in the
short or long term, we will be required to raise additional funds through
public or private financings. No assurance can be given additional funds will
be available on terms acceptable to us.

Seasonality

The demand for DVDs and CDs is usually highest 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.

Impact of Recently Issued Accounting Standards

Effective in 2001, accounting for gains and losses resulting from changes in
the value of derivatives would be changed depending on the use of the
derivative and whether they qualify for hedge accounting. The adoption of this
new requirement is not expected to have a material impact on our financial
position or results of operations.

Inflation

Prices for raw materials used in the production of DVDs and CDs had not
changed substantially as a percentage of sales since 1996, and in certain
instances decreased during the year 1999. Since November 1999 the price we pay
for optical grade polycarbonate plastic has increased approximately 10% per
pound due to the change in oil prices. In addition, some of our other
manufacturing and selling, general and administrative costs have continued to
increase (primarily in the aggregate and sometimes as a percentage of net
sales) since the beginning of 1996. As our general CD selling price has been
relatively unchanged over the last two years, we have been unable to pass these
costs on to our customers. Despite this trend we have remained profitable by
increasing net sales.

Impact of Year 2000

In 1999, we completed our remediation and testing of systems. Because of
those planning and implementation efforts, we experienced no significant
disruptions in mission critical information technology and non-information
technology systems and those systems have successfully responded to the Year
2000 date change. We did not incur any significant expenses during 1999 in
connection with remediating our systems. We are not aware of any material
problems resulting from Year 2000 issues, either with our products, internal
systems, or the products and services of third parties. We will continue to
monitor our mission critical computer applications and those of our suppliers
and vendors throughout the year 2000 to ensure any latent Year 2000 matters
arising are addressed promptly.

Qualitative and Quantitative Disclosures About Market Risk

We are exposed to market risk related to changes in interest rates. There are
currently no risks related to foreign currency exchange rates and we do not use
derivative financial instruments, swaps, commodity investments or hedging. Our
interest expense is sensitive to changes in the prime rate. Due to the nature
of our debt, we have concluded that there is no material market risk exposure.

27
<PAGE>

INDUSTRY OVERVIEW

The projections discussed in this Industry Overview section include industry
projections, and any growth rates discussed are industry growth rates and do
not reflect our growth rates over the same period.

The Digital Versatile Disc (DVD) and Compact Disc (CD) are among the most
popular optical media for content delivery and are widely used in the
distribution of movies, music, application and edutainment software, publishing
content and Internet/online promotional materials. The wide acceptance of DVD
and CD as a content delivery media has fueled the growth of the replication
industry.

The first commercial application of CD technology was storage and playback of
pre-recorded music, or CD-Audio, which was adopted as an international standard
in 1982, and introduced to the consumer market in 1983. The CD-ROM entered the
market in 1991, providing cost-effective storage and retrieval of any
combination of data, text, graphics, audio and video. The DVD entered
commercial distribution in December 1996. DVDs are currently capable of storing
up to 13 times as much data as CDs and are suitable for high quality playback
of film and video, multi-channel surround sound audio and interactive media.

An important advantage of DVD players and DVD-ROM drives, which should speed
their market penetration, is their compatibility with CD-Audio and CD-ROMs.
This compatibility feature of DVD players and DVD-ROM drives is expected to
increase consumer acceptance of DVD technology. Unlike the introduction of CDs,
when consumers were reluctant to purchase CD players because they would be
required to spend substantial amounts on new music collections, consumers will
be able to acquire the DVD players and DVD-ROM drives without making their CDs
obsolete.

During the past decade, CDs have become one of the most popular formats in
audio and portable data storage and retrieval markets. Since its introduction,
the popularity of DVDs has grown rapidly and the DVD is increasingly becoming a
standard format for video. DVDs and CDs can be replicated faster than
traditional tape storage mediums at a comparable cost. In addition, consumer
acceptance of the DVD and CD formats is due in part to the following
combination of advantages over other mass storage formats:

. Higher storage capacity / longer play time;

. Greater portability and ease of storage;

. Higher quality presentation including crisper sounds and sharper video;

. Longer life as a result of lack of degradation; and

. Random accessibility of data.

CD-ROM. According to Infotech, CD-ROM disc units sold in the United States by
CD-ROM replicators have grown at a compound annual growth rate of 34.0% from
approximately 443 million units in 1996 to approximately 1.066 billion units in
1999. The consumer market has emerged within the past several years and its
substantial growth is expected to help sustain CD-ROM unit sales in the next
few years. Infotech estimates that total worldwide CD-ROM disc units sold will
continue to increase through the year 2001.

CD-ROM is well suited to applications involving the storage of large amounts
of information in a form that can be distributed to a diverse user population.
CD-ROM was developed in the late 1980s and was initially limited to business
and professional applications such as library references and parts catalogs. In
the 1990s, the increasingly widespread presence of personal computers (PCs) and
CD-ROM drives has created a thriving consumer market for CD-ROM applications.
Infotech estimates that in the United States, the installed base of CD-ROM
drives will grow from approximately 60.4 million in 1996 to approximately 338.8
million by 2004 representing a compounded annual growth rate of 24.1%. In
addition, CD-ROM discs can be played on DVD-ROM drives. This rapidly growing
installed base of CD-ROM drives, as well as the growth in the installed base of
DVD-ROM drives, expands the potential consumer market for publishers of CD-ROM
software, data and entertainment products.

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<PAGE>

DVD. DVD is becoming the accepted new medium for home video distribution.
Unlike videocassettes, DVD-Video experiences no image or sound degradation with
normal use and offers greater storage capacity, indexing, random access and
lower manufacturing costs. DVD is capable of holding a full length motion
picture with up to three spoken languages, three foreign language subtitles and
multi-channel, digital surround sound. Added features such as multilingual
voice tracks, soundtrack albums, director's notes, out takes, story-based games
and other CD applications may be available with the higher storage capacity
afforded with DVDs.

The home video market, both rental and purchased videos, has been served
primarily by pre-recorded videotape (VHS). We believe the DVD-Video format will
surpass the VHS format in the pre-recorded video market over time. Infotech
estimates the following:

. The installed base of DVD-Video players in the United States will
increase from approximately 300,000 in 1997 to 39.6 million in 2004,
representing a compounded annual growth rate of approximately 100.9%.
Infotech estimates the worldwide installed base of DVD-Video players
will reach 96.7 million players by 2004.

. DVD-Video disc units sold in the United States by replicators will
increase from 3.4 million units in 1997 to approximately 991.0 million
units in 2004, representing a compounded annual growth rate of 124.9%.

. In the United States, more than 5,000 DVD-Video titles are currently
available and the number of titles will approach 42,500 by the end of
2004.

In addition to the growth in home video, Infotech projects that DVD-ROM drive
shipments in the United States will increase from approximately 125,000 in 1997
to 134.2 million in 2004, representing a compounded growth rate of 171.0%.
Also, the next generation of game consoles being manufactured by Sega,
Nintendo, Sony and Microsoft will be DVD-based. Consequently, there will be
pressure on some software game manufacturers to produce higher-capacity
software games in the DVD format. We believe that certain of our software game
customers will supplement their CD business in this area. Infotech estimates
that DVD-ROM disc units sold by replicators in the United States will increase
from approximately 520,000 in 1997 to 589.0 million in 2004, representing a
compounded growth rate of 173.1%.

Growth of Internet Usage and E-Commerce

As the number of Internet users has increased the functionality of the
Internet has expanded to a medium that enables complex business-to-business
communications and commerce. The Internet and related online technologies are
revolutionizing the way businesses and consumers communicate, share information
and conduct business.

We believe CDs and DVDs will play an important role in the expansion of the
Internet and online commerce. Specifically, we believe CDs, and potentially
DVDs, will function as an important marketing medium for integrating Internet
or online strategies with traditional commerce, distribution and communication
channels, such as "bricks and mortar" stores, mail order catalogs, television
sales and retail-based kiosks. DVDs and CDs have special features, in addition
to those discussed above, which particularly enhance their use in connection
with the Internet and e-commerce programs. These include the following:

. The ability of a DVD or CD to direct or link consumers to a website; and

. The increased ability to include special promotional or customer brand
information in the form of graphics, audio, video and other data.

In fact, certain of our Internet and e-commerce customers, most notably
America Online, have already adopted a technique of mass-mailing CDs for
marketing purposes as a cost effective alternative to other methods of
advertising.

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BUSINESS

We are an independent manufacturer/replicator of Digital Versatile Discs
(DVD) and Compact Discs (CD). We target our sales to companies in industries
including Internet/online, film and entertainment, edutainment software,
publishing and computer hardware. We have successfully implemented our business
model, which consists of the following elements:

. High volume customers: We believe our customer base is comprised of some
of the highest volume customers of DVDs and CDs.

. High replication capacity: Since inception we have continued to add new
equipment and believe we are one of the largest independent
manufacturers/replicators of DVDs and CDs in the United States.

. Low cost structure: We achieve economies of scale through our optimally
designed facility at a single locale, our dedication to maximizing
machine uptime and our flat organizational structure.

Our customers include America Online, Inc., Modus Media International
Holdings, Inc., Havas Interactive, Inc., GT Interactive Software, Lions Gate
Entertainment, infoUSA Inc., Interplay Entertainment Corp., Juno Online
Services, Inc. and a major motion picture distributor. Of these customers,
America Online, Modus Media and Havas Interactive each accounted for 10% or
more of our revenues for the year ended December 31, 1999. In order to achieve
significant cost efficiencies we focus on customers requiring high volume
production runs and have designed our business processes to support them. We
are thereby able to achieve lower overall unit costs and therefore we believe
we are less vulnerable to competitive pricing pressures and have greater
flexibility in the pricing of our products and services.

Due to our technologically advanced equipment, plant design, in-house
engineering capabilities and workflow techniques, we believe we are one of the
most efficient high volume, low cost DVD and CD manufacturers in the industry.
As a result of these factors, as well as our self-sufficient engineering,
repair and maintenance capabilities, we believe we are able to provide superior
turnaround service. This is not only a fundamental selling advantage but also
helps foster long-term relationships with our high volume customers.

Based upon our strong business model, we believe we are well positioned to
capitalize on the anticipated growth in the DVD market, the continuing growth
in the CD-ROM market, as well as the growing use of CDs in connection with
marketing of Internet, e-commerce and other distribution channels.

Operating Approach

We believe that our operating approach distinguishes us from our competitors
and that the effectiveness of our operating approach has been proven through
the growth in our targeted customer base, the retention of our customers and
our demonstrated long-term financial performance. Our focused operating
approach is based on the following principles.

High Capacity Manufacturing Capabilities at a Single Locale. We maintain all
of our production and mastering facilities within two buildings, aggregating
approximately 112,000 square feet, in Valencia, California. With our current
equipment configuration, we have current production capacity of approximately
150 million CDs per year and 30 million DVDs per year. Prior to the end of 2000
we plan to purchase additional replicating machines which will be convertible
between DVD and CD. With the purchase of this equipment we will increase our
production capacity to 220 million CDs or 150 million CDs and 60 million DVDs.
By aggregating our production capacity in a single locale, we can maintain high
product yield rates, manage costs and facilitate overall profitability. In
addition, we believe we can more closely administer our daily production
schedule and quickly respond to unanticipated time sensitive customer requests.
Because of our fast turnaround times, we are able to fulfill the replication
needs of a national customer base from our

30
<PAGE>

Valencia, California facility. We believe we have one of the most efficient
facilities in the industry. As compared to others in the industry, our
manufacturing facilities are relatively new and were designed to facilitate
high volume production. We believe our sales per employee, operating income per
employee, operating margins and yield rates historically have been among the
highest in the industry.

Optimally Designed Manufacturing Facilities. Our manufacturing facilities
have been engineered to provide optimal efficiency. The layout of our
facilities, coupled with redundant operating systems, has allowed us to
efficiently manage operational workflow and to maximize factory throughput. We
are able to complete and control all mastering, replication, printing and
packaging functions internally without dependence on outside subcontractors. As
a result, we believe we have established faster turnaround times for customer
orders than most others in the industry.

Self-Sufficient Repair, Maintenance and Engineering Capabilities. We operate
24 hours a day, seven days a week, and have staff engineers on the production
floor at all times to monitor and maintain a smooth production flow. In order
to maximize our machine uptime, we maintain a full machine shop with
substantial spare parts inventory for our manufacturing equipment. Our
engineering talent, coupled with our investment in spare parts inventory, has
allowed us to develop a high degree of self-sufficiency, resulting in higher
productivity. We also maintain a close technical working relationship with each
of our equipment vendors.

Technologically Advanced Manufacturing Equipment. To implement our business
model, we have always invested in the most advanced, high volume equipment
available. As of December 31, 1999, we have invested approximately $39.1
million in our mastering, replication, printing and packaging equipment. We
expect to invest approximately $18.0 million toward the purchase of new
equipment during 2000, including $14.1 million of the net proceeds of this
offering.

Marketing Our Services Directly to Senior Management. Since our business
model requires us to attract customers with large annual replication
requirements, the selection of the replication vendor by our customers usually
has higher visibility and importance at the executive levels. Consequently, we
are able to more precisely target our prospective customers and minimize the
use of field sales personnel. Alex Sandel, who has extensive relationships in
the computer hardware and software industries, spearheads our sales and
marketing effort. As a result, we are able to actively target and market our
services at the executive level. A strong sales team with substantial
experience in the CD replicating business and extensive industry knowledge and
contacts supports Mr. Sandel. In addition to our sales team, we plan to utilize
the relationships of the members of our board of directors to increase our
visibility and penetration with both DVD and CD customers.

Growth Strategy

In order to foster our continued growth in line with our business model, we
plan to pursue the following opportunities.

Capitalize on the Continuing Growth of DVD. We commenced our DVD production
in the fourth quarter of 1999. In order to continue our participation in this
growing market, we have purchased and plan to purchase additional machines that
will significantly increase our DVD manufacturing capacity. Through a direct
sales effort targeting motion picture production companies, post production and
authoring houses and existing edutainment customers, we intend to pursue a
marketing strategy targeted at senior executives similar to the one we have
successfully implemented in the CD-ROM market. We believe that our location in
Southern California, as well as our independence from large entertainment
companies, will provide an advantage in obtaining business from independent
motion picture production companies as well as overflow work from the major
motion picture production companies having captive replicating facilities. We
have made and intend to continue to make strategic investments, where
appropriate, in selected companies that either currently or in the future may
have high volume DVD replication requirements. By making this type of strategic
investment, we have the ability to negotiate a long-term exclusive DVD
replication agreement.

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<PAGE>

Expand our Position as a Low Cost CD-ROM Manufacturer. Our penetration of the
marketplace for CDs is focused on the CD-ROM market with a significant presence
among computer software developers and Internet/online providers. Because of
our success as a low cost, high volume replicator, we believe we are well
positioned to address the growth in the market for CD-ROM. We believe we can
offer our customers cost effective CD manufacturing services with turnaround
times among the shortest in the industry. In addition to maintaining our
existing customer base, we intend to use the contacts of our board of directors
and our senior executives' direct selling efforts to expand our customer base
to other companies with high volume replicating needs.

Stimulate CD Demand through Targeted Internet-Related Marketing Programs. The
rise of the Internet and related services has caused various industries to re-
examine traditional distribution methods, such as "bricks and mortar" retail
stores, direct mail catalogs, television sales and retail-based kiosks, and
their connection to online users. This has caused both business-to-business and
business-to-consumer companies to alter their marketing and distribution
programs in order to address changing market trends caused by growing Internet
commerce. In Europe, the CD has been a significant marketing tool, often
distributed as inserts to magazines or other publications. In our market, some
of our largest customers, such as America Online and Juno, are using CDs as
marketing tools. We believe CDs, and potentially DVDs, will play an
increasingly important role in the marketing strategy of many e-commerce and
catalog companies.

CDs are relatively inexpensive to both manufacture and mail. As compared to
paper based catalogs, creating an updated or subsequent version of catalogs on
CDs and DVDs is generally easier and less expensive. CDs and DVDs also provide
interactive functionality and an entertaining means of advertising. Certain of
our Internet and e-commerce customers, most notably America Online, have
already adopted a technique of mass-mailing CDs for marketing purposes as a
cost effective alternative to other methods of advertising.

In order to capitalize on this market need, our objective is to assist
companies in establishing and producing marketing programs enhancing, promoting
and integrating their e-commerce businesses utilizing CDs and DVDs. We will
focus on promoting our business through three principal avenues:

. the digital production and distribution of product catalogs through CDs
and, in the future, DVDs;

. e-commerce programs capitalizing on the convergence of traditional
retail, catalog, kiosk and online formats through various CD-based
applications; and

. marketing programs utilizing the CD as an advertising medium used to
drive customers to a targeted online destination by either new or
existing retailers and e-tailers.

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Customers

We service a broad range of high volume DVD and CD customers. The following
table summarizes the principal market segments within DVD and CD-ROM and our
market orientation, our current customer base and our estimate of the growth
potential of the DVD and CD markets. Customers who are affiliated with us have
been identified with an astrix (*).

<TABLE>
<CAPTION>
Estimated Estimated
Selected CD-ROM DVD
Market Segment Customers Demand(1) Demand(1)
-------------- -------------------------- ---------- ---------
(All CD customers except
where DVD is indicated)
<S> <C> <C> <C>
Online Providers
These customers are large America Online High Low
users due to the continued and Juno
growing prevalence of Internet
and online services. These
customers are attractive to us
due to their less seasonal and
higher volume requirements.

Internet Marketing
These customers include Synthonics Technologies* High High
"bricks and mortar," direct
mail catalog, kiosk and online
companies. They are looking to
promote their e-commerce
presence and integrate it with
other distribution channels.
The DVD and CD formats can
stimulate new customer growth
and also connect to the
current customer base.

Film/Entertainment
One of the largest users of A major motion picture Not High
DVD products. We are distributor/DVD applicable
positioned to penetrate this Lions Gate Entertainment*/
market segment based upon our DVD
capacity and rapid turnaround
capabilities.

Edutainment Software
This segment is one of the Havas Interactive High High
mass-market segments most GT Interactive
appropriately suited to our Interplay
speed and quality Encore
capabilities. These companies
are expected to be large
volume users driven by
edutainment, games and
application software.

Microsoft Authorized
Replicators and Turnkey
Manufacturers
These replicators are Modus Media High High
authorized by Microsoft to Zomax
assemble and distribute Banta
operating systems,
applications and manuals to
computer manufacturers. These
companies outsource a
significant portion of their
CD requirements.

Publishing
Publishing companies are a infoUSA/CD and DVD High Medium
large and increasing user of Ziff/Davis
the DVD and CD formats given
the continued transition from
print to electronic media.
This segment is expected to
continue to grow because of
the low cost of storing a high
volume of printed product on
DVD or CD.

Computer Hardware &
Peripherals
This is a substantial market 3dfx High Medium
sector in which we have a Toshiba
demonstrated track record; we Fountain Technology
intend to continue to
aggressively pursue PC and
peripheral manufacturers.
</TABLE>
- --------

(1) "High" demand for CD-ROM refers to market segments where the replication
and distribution of CDs is either directly a part of the product, such as
in software games, or an integral part of the sales and marketing process,
as in some online providers. "High" demand for DVD refers to market
segments were the DVD format is not only a part of the product or integral
part of the sales and marketing process, but also provides additional value
added as a result of its enhanced capabilities over the CD-ROM format.
Conversely, "low" demand and "medium" demand reflect reduced importance of
the format based upon the above criteria.

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<PAGE>

Currently, approximately 40 customers account for substantially all of our
net sales. Our top three customers, America Online, Modus Media and Havas
Interactive, accounted for approximately 32%, 14% and 10%, respectively, of our
net sales for the year ended December 31, 1999. We have expanded our customer
base aggressively since our founding in July 1994 primarily due to the focused
efforts of our senior management and sales team. We plan to continue expanding
and diversifying our customer base in order to reduce our dependence on any one
customer and to optimize our production capacity. Specifically, we plan to
further expand and diversify our customer base beyond our current presence by
further penetrating the Internet, film/entertainment, and publishing
industries.

Our current customer base is characterized primarily by customers requiring
production runs that are annual and ongoing, less cyclical in nature and less
time-sensitive, such as America Online and customers with substantial annual
production requirements tied to seasonal consumer purchasing trends and product
announcement cycles such as Havas Interactive and GT Interactive. To the extent
we are successful in our efforts to promote DVD and CD business within the
film/entertainment industry or through Internet related marketing programs, we
will attract and acquire customers with substantial production requirements
revolving around film releases, retail cycles and other planned marketing
events. Our large capacity allows us to manage the competing demands of our
customers on a daily basis. We work closely with customers to monitor the
actual production schedule and the product quality and service delivered.

Our business is based primarily on purchase orders. Due to our fast
turnaround time, high capacity and strong customer service support, we believe
that we have been able to develop excellent relationships with our customers.
However, we do not have any significant backlog and we do not typically enter
into supply contracts with our customers.

As part of our effort to secure certain DVD business, we recently invested
$1.7 million in Lions Gate Entertainment, a Canadian production and
distribution film and entertainment studio, in order to become affiliated with
and establish relationships within the entertainment industry. In December
1999, we purchased 648 units of Lions Gate, each unit consisting of a 5.25%
convertible redeemable preferred shares and 425 common share purchase warrants,
which at the time represented a less than 5% ownership percentage in Lions Gate
on a fully diluted basis. In addition, assuming price and quality are in line
with industry standards, we have obtained the right to replicate primarily all
of the DVD needs of Lions Gate for a period of two years. In December 1999, we
invested $500,000 in Synthonics Technologies, Inc., a company which owns
various patents in 3D modeling, in return for a note convertible into
11,518,096 shares of Synthonics common stock, which at the time represented
approximately 38% of Synthonics outstanding shares. In addition, we agreed to
replicate and package up to 2 million CDs without charge to Synthonics and
establish a catalog entity to develop and produce 3D interactive digital
catalogs on behalf of Synthonics for its customers. Our agreement with
Synthonics Technologies, Inc. grants us exclusive rights to all DVD and CD
replication needs of Synthonics for a period of five years, assuming price and
quality are in line with industry standards. At the time of the investment,
Diana Maranon, one of our directors, was a member of the board of directors of
Synthonics.

Sales and Marketing

Our sales and marketing effort is tailored to a customer base consistent with
our business model. We have targeted customers who require and depend upon high
volume DVD and CD manufacturing capacity. We maintain a focused sales and
marketing effort led by Alex Sandel and supported by a strong sales staff who
have significant experience in the replication industry. Our sales and
marketing efforts are focused on expanding our reach across the United States,
across a broader industrial base, to customers in the Internet/online area and
to the future users of DVDs and CDs. These efforts are supported by
relationships and contacts of our board of directors and sales and marketing
team.

Develop DVD Customer Base. We believe DVD technology is positioned to become
the new medium for home video and the high-capacity medium for software
distribution and high-capacity computer games.

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<PAGE>

Home Video: We anticipate DVD demand will continue to grow in the motion
picture industry, the primary area utilizing the DVD format today. We
intend to broaden our sales and marketing efforts in this industry through
relationships certain of our directors have with leading motion picture
producers and distributors. In order to further stimulate our growth and
broaden our relationships within the entertainment industry, and where
appropriate, we intend to continue making strategic investments in selected
companies that can direct their DVD replication requirements exclusively to
us. As an example, we recently invested $1.7 million in Lions Gate
Entertainment, a Canadian production and distribution film and
entertainment studio. As part of the investment, we received exclusive
rights to all DVD replication needs of Lions Gate for the next three years,
assuming price and quality are in line with acceptable industry standards.
Additionally, we are marketing to independent post-production companies
that provide DVD authoring services to the motion picture industry because
of the long-term relationships they have with the movie studios and, in
certain cases, the autonomy to independently select the services of DVD
replicators.

Software Distribution and Computer Games: DVD-ROM drives are becoming
increasingly popular. Furthermore, home video game companies, such as Sony,
Nintendo and Sega, are introducing home video game consoles that are
compatible with the DVD format. Microsoft has also announced its plans to
introduce a DVD compatible game console. With this large installed base,
which is projected to continue to grow, we believe there will be a growing
demand for high-capacity computer games playable on the DVD format. In
addition, some of our current customers in the software publishing industry
are moving selected product titles to the DVD format. We will be well-
positioned to attract future DVD business from our current computer
hardware and software customers as a result of our strong relationships and
demonstrated performance with these customers.

Stimulate CD Demand through Targeted Internet-Related Marketing Programs. As
a result of the increasing popularity of the Internet, many companies now have
to integrate an Internet strategy with their traditional retail and direct mail
marketing strategies. We believe CDs, and potentially DVDs, will play an
increasingly important role as part of the marketing strategy of many e-
commerce and catalog companies. When a CD or DVD is used as a catalog or
promotional tool in the Internet e-commerce space, we believe it will generate
high-volume demand. In order to capitalize on this market, our objective is to
assist companies to establish and produce marketing programs enhancing,
promoting and integrating their e-commerce businesses utilizing CDs and DVDs.
We will focus on three principal areas:

Targeted Internet Marketing Programs: We believe the CD format is well
suited for driving customer traffic to designated online sites because it
is less expensive than other advertising media, it can be targeted to an
intended audience, it can deliver a dynamic, interactive advertising
message and it can deliver to the customer software that currently cannot
be delivered via the Internet due to file size concerns. The most notable
example of this use, which involves our leading customer, is that of
America Online. We are identifying and marketing to our current customers
as well as potential customers this technique in stimulating growth in CDs.

E-Commerce Programs: The introduction of online and digital capabilities
has also introduced new and more engaging ways in which retailers and e-
tailers can interact with their customers. There will be application
programs that interactively promote commerce. These types of interactive
programs may require CDs and DVDs as a program medium. We recently invested
in Synthonics Technologies, Inc., a 3D technology firm, which utilizes its
technology in the digital catalog, kiosk and e-commerce areas. As a result,
we believe there will be opportunities for future CD replication.

Digital Catalog Business: In order to respond to an increasingly
"digital" consumer as well as the increasing popularity of online e-
commerce, many direct mail catalog companies are considering various
changes to their traditional distribution programs. One possible
alternative is the partial or total substitution of the traditional paper-
based catalog with a CD or DVD catalog. By following this approach, a
company can appeal to the new and growing base of online consumers, "link"
and drive traffic to its website, interact with customers in a more
entertaining way, and more effectively integrate a customer with its online
capabilities.

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<PAGE>

Many customers and potential customers interested in CD or DVD marketing
programs lack the knowledge and resources to internally develop and execute
these programs. We will oversee the coordination of the overall production
process of these programs. We intend to outsource the creative, graphic and
production services necessary to implement the above programs. Where the
customer handles creative programming, we will carry out our replicating and
packaging functions upon delivery of a master from the customer. By following
this model, we can stimulate growth in our main business, the replication of
DVDs and CDs, while maintaining our core high volume business model.

Broader Industry Coverage for CDs. Our marketing efforts have been
historically targeted toward companies in the computer hardware and software
industries, and we intend to further penetrate these areas. As a result of the
rise of the Internet, we will also continue to focus on online service
providers and other related companies. Because of our efficiency, high
capacity, fast turnaround time and independence within the replicating
industry, we have obtained overflow work from other CD replicators that do not
have sufficient internal capacity. We only accept orders from replicators who
provide such work on a year-round basis. Our main marketing thrust is to
attract new customers whose usage patterns are driven by fundamentals that
counterbalance the seasonal usage patterns of the computer hardware and
software market segments. We believe this strategy helps to balance capacity
demands and thereby moderate seasonal fluctuations.

Suppliers

We seek to reduce costs and enhance quality by purchasing from a limited
number of suppliers. However, all raw materials needed to manufacture our
products are readily available from multiple suppliers at competitive prices.
The principal raw materials used to manufacture DVDs are optical grade
polycarbonate, aluminum, nickel, ultraviolet-curable lacquers and ink. Also,
certain types of DVDs require a minimal amount of gold. The principal raw
materials used to manufacture CDs are the same as those used for manufacturing
DVDs, except for gold.

Warehousing and Distribution

We primarily use common carriers to ship products to customers throughout the
United States. We also deliver products by truck directly to a small number of
customers who demand direct shipping. To meet the needs of customers distant
from our facility, we ship unpackaged or "spindled" DVDs and CDs directly to
the customer or its distribution facility. If required, we have relationships
with packaging companies in other parts of the United States that would be able
to handle individual customer fulfillment needs. We currently believe that this
strategy is superior to building multiple manufacturing facilities. The cost to
ship unpackaged DVDs or CDs to a packaging company is lower than the investment
required to construct, operate and maintain multiple manufacturing facilities.
Also, by aggregating our production capacity in a single locale, we believe we
can optimize our production capacity, maintain high product yield rates, manage
costs and facilitate overall profitability. In addition, we believe we can more
closely administer our daily production schedule and quickly respond to large
volume, unanticipated time sensitive customer requests. Because of our low-cost
structure and fast turnaround times, we are able to fulfill the replication
needs of a national customer base from our Valencia, California facility.

Seasonality and Backlog

Our peak sales activity normally occurs in the four-month period from August
through November, as hardware manufacturers and software developers introduce
new products before the back-to-school and holiday season. Typically, DVDs and
CDs are produced and shipped as orders are received and we operate with
virtually no backlog during most of the year. As a result, net sales in any
quarter generally are dependent on orders shipped in that quarter. However, we
believe focusing our marketing efforts on a more diversified customer base will
help reduce the effects of seasonal cycles of our business. For example, to the
extent we are successful in our efforts to promote DVD and CD business within
the film/entertainment industry or through Internet related marketing programs,
we will attract and acquire customers with substantial production

36
<PAGE>

requirements revolving around film releases, retail cycles and other planned
marketing events, which are not as seasonal as our computer hardware and
software customers.

Competition

The DVD and CD replication industries are highly competitive. We believe that
the principal competitive factors in the DVD replicating industry are price,
quality, turnaround time, capacity and service and relationships with studios,
with price and quality being the most important. We believe the factors listed
above are also critical in the CD replicating industry, with price and
turnaround time typically being the most important. We believe that we compete
favorably with respect to each of these factors in both DVD and CD replicating
and that the quality of our products and services, our low cost manufacturing
operations, our ability to accommodate tight delivery schedules, and our
flexibility in production create significant competitive advantages.

The replication industry can be divided into two categories: companies that
are affiliated with and are captives of large entertainment companies (music
and motion pictures), and independent companies, such as us, that have no
affiliation. We compete more directly with the independent replicators, which
include: AmericDisc, Carlton Communications PLC, Cinram International, Inc.,
Denon Electronics, Inc., Disctronics, Inc., DOCdata N.V., JVC Corporation, and
Zomax Optical Media, Inc. In addition to the above listed companies, we also
compete with foreign manufacturers that can operate at lower costs than us. We
do not typically compete directly with captive manufacturers. In some
instances, we provide replication services to them to cover their overflow work
caused by their own capacity constraints. These captive replicators include the
following: Sony Music Entertainment, Inc., Polygram Holdings, Inc., Warner
Advanced Media Operations and Warner Music Group (both divisions of Time
Warner, Inc.), Bertelsmann Music Group and Capitol-EMI Music.

Many of the independent replicators are manufacturers of DVDs and CDs but
also other pre-recorded multimedia products including video cassettes, audio
cassettes and audio CDs. In addition, certain of these independent replicators
consider themselves full outsource service providers offering such services as
call center operations, customer support, warehousing inventory management,
distribution and fulfillment.

We concentrate on providing high volume, low cost DVD and CD replication
along with mastering, packaging and fulfillment services which are essential to
our customers needs. We believe we distinguish ourselves from our competitors
through our strict focus on those replication and affiliated services necessary
to meet our customers' requirements for high capacity manufacturing and quick
turnaround of DVDs and CDs.

We believe we compete favorably with respect to price, quality, turnaround
time, capacity and service with our competitors who are independent replicators
as well as companies that are captives of large entertainment companies.
However, companies that are captives of large entertainment companies as well
as some of the independent replicators may have greater resources at their
disposal than we do.

We may also face indirect competition from broadband online service
providers, such as telephone, cable and wireless service providers. However, we
believe online delivery of data will not, for the foreseeable future, be a
practical alternative for consumers due to significant time and hardware
storage requirements to download the capacity of a DVD or CD.

DVD and CD Manufacturing Process

The DVD and CD manufacturing process consists of three stages.

Pre-production. Pre-production of DVDs and CDs consists of three distinct
processes: pre-mastering, mastering and electroplating. Through these
processes, metal stampers are created which contain tracks with pits and lands
holding data in a digital format. The metal stampers are then mounted in the
proper injection molding equipment to produce either DVDs or CDs. Pre-
production begins with receipt of the customer's data, which is supplied in any
number of approved input media.

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The mastering process forms the master image of the DVD or CD from which the
polycarbonate replicas are molded. Mastering begins with the preparation of a
glass substrate, which is coated with a thin photo resist layer and placed on a
computer-controlled laser beam recorder. The laser exposes a series of areas in
the photo-resist layer on the glass plate as the data is transferred from a
playback device. Chemicals etch the exposed areas of photo resist layer,
producing a series of microscopic "pits" and "lands," or physical
representations of the digital information. The glass substrate is then
developed and then initialized to produce the glass master.

An electroplating unit is then used to electroplate the glass master with
nickel vanadium to create the metal master (commonly referred to as the metal
"father"). The metal father is then separated from the glass master and
electroplated a second time to create an inverted impression on a metal
"mother." A further electroplating process is used to produce several stampers
from the metal mother. The nickel-plated stampers are punched, polished and
mounted in the proper injection molding machine to replicate DVDs or CDs.

Replication and Printing. CD replication uses a fully integrated in-line
process, which incorporates injection molding machines, metallizing equipment,
protective coating machinery and inspection equipment. To begin, optical grade
polycarbonate plastic is heated and injected under high pressure into the mold
cavity of the machine against the metal stamper. The molding process creates a
clear polycarbonate disc with pits on one side containing all of the digitized
data. In order to make the disc readable by reflected laser light, a thin layer
of reflective aluminum is deposited onto the disc surface by a metallizing
machine. A clear protective coating is then applied to the disc by a spin
coating device in order to protect the disc from scratches and oxidation and to
serve as a base for printing on the disc. An in-line inspection device is used
to scan each disc for physical flaws. Thereafter, the disc is ready for label
printing, the final step of production.

The DVD production process is essentially the same as the CD production
process, except that DVD replication entails the use of a special substrate-
bonding machine, which is integrated into the replication line itself. In
addition, the replication process is slightly different from the production of
other CD formats in that each replication line has two presses, which produce
two polycarbonate substrates, each one-half the thickness of a standard CD.
Information is molded onto a layer or multiple layers of a substrate depending
on the specific data requirements. The two substrates are bonded together to
form a DVD. A DVD-5 contains 4.7 gigabytes of data molded onto one layer of the
polycarbonate substrate. A DVD-10 contains 9.4 gigabytes of data molded into
both polycarbonate substrates. A DVD-9 contains approximately 8.5 gigabytes of
data molded onto both polycarbonate substrates, one of which is semi-
transparent. The semi-transparent layer contains a thin layer of reflective
material, usually gold.

Post-Production Services. Post-production services primarily involve
printing, packaging, fulfillment and distribution, including confectionering,
stickering, cellophaning, shrink-wrapping, spine printing, bundling and other
services. We maintain equipment to provide for most customer-requested
packaging configurations and use temporary labor to manage labor intensive
packaging requests. Currently the standard packaging configuration is the jewel
box with customer supplied print material on the bottom and top of the box. The
jewel box is typically shrink-wrapped for protection.

DVD and CD Licenses. We manufacture CDs using patented technology primarily
under nonexclusive licenses from U.S. Philips Corporation and Discovision
Associates. These CD licenses generally provide for the payment of royalties
based upon the number, type and size of CDs sold. Our license from Discovision
Associates continues until the last patent covered by such license expires and
our license from U.S. Philips Corporation continues until the earlier of
October 1, 2006 or the expiration of the last patent covered by such license.

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<PAGE>

Sony Corporation. These DVD licenses generally provide for the payment of
royalties based upon the number and type of DVDs sold.

Employees

At March 31, 2000, we had 140 full-time employees, including 3 engaged in
sales and marketing, 13 engaged in general administration and finance and 124
engaged in DVD and CD replicating/manufacturing. In addition, we use temporary
employees in varying numbers throughout the year, who are primarily engaged in
packaging. We rely on our ability to vary the number of part-time and temporary
employees in order to respond to fluctuating market demand for our packaging
services. None of our employees are covered by a collective bargaining
agreement. We believe we have a good relationship with our employees.

Properties

Our executive offices and manufacturing, sales and marketing operations are
located at 24811 Avenue Rockefeller, Valencia, California, where we lease
approximately 83,000 square feet of space. This lease expires on December 31,
2013. Our mastering facilities are located near our executive offices at 24833
Anza Drive, Valencia, California, in leased facilities occupying an aggregate
of approximately 28,500 square feet of space. This lease expires on May 31,
2007. We are currently negotiating the release from our lease for the property
located 25136 Anza Drive in Valencia, and we do not believe that this will
result in any material out-of-pocket costs to us. We believe that our new
facilities will be adequate to meet our projected needs for the foreseeable
future.

Legal Proceedings

We are not involved in any pending, nor are we aware of any threatened, legal
proceedings which we believe could reasonably be expected to have a material
adverse effect on our business, operating results or financial condition.

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<PAGE>

MANAGEMENT

Directors and Executive Officers

The following table sets forth certain information with respect to our
directors and executive officers as of February 15, 2000:

<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Alex Sandel.................. 57 Chairman of the Board, Chief Executive
Officer and President
David Moss................... 39 Vice President--Operations
Louis L. Weiss............... 49 Chief Financial Officer, Principal Accounting
Officer and Secretary
Sanford R. Climan(1)(2)...... 44 Director
Mark Dyne(1)(2).............. 39 Director
Diana Maranon................ 41 Director
Jason Barzilay............... 47 Director
Martin Schuerman(1).......... 34 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.

Directors are elected at each annual meeting of shareholders and hold office
until the following annual meeting and their successors are duly elected and
qualified. Our Bylaws presently provide the number of directors shall not be
less than five nor more than nine, with the exact number to be fixed from time
to time by resolution of our board of directors. The current number of
directors is fixed at seven. The remaining directors may fill any vacancy on
the board of directors, including a vacancy resulting from an increase in the
size of the board of directors. The board of directors cannot decrease the
number of directors or shorten the term of any incumbent director.

The board of directors appoints the executive officers and subject to
employment contracts, such officers serve at the discretion of the board of
directors.

Alex Sandel is one of our co-founders and he has served as our Chairman of
the Board, Chief Executive Officer and President since we were founded in June
1994. Mr. Sandel was one of the original founders of Packard Bell Electronics
(1986), an innovative PC manufacturer that was first to market PCs via
traditional consumer electronics retail outlets. Mr. Sandel served as a
director of Packard Bell Electronics since its inception until 1999. Mr. Sandel
is also a principal shareholder in Argoguest, Inc., an incubator focused on
investing in early stage Israeli-based Internet and Internet enabling
technology companies. From December 1994 through December 1997, Mr. Sandel
served as a director and President of Cal Circuit Abco II, Inc., a distributor
of computer memory products. From 1983 until December 1994, Mr. Sandel served
as a director and President of Cal Circuit Abco, Inc. which operated as a
distributor of computer memory and peripheral components to the personal
computer industry. In December 1994, certain assets of Cal Circuit Abco, Inc.
were spun off to form Cal Circuit Abco II, Inc., and Mr. Sandel served as
President and a director of Cal Circuit Abco, II, until 1997. Also in December
1994, Cal Circuit Abco, Inc. changed its name to Reveal Computer Products Inc.
and continued operating under the management of Jason Barzilay until it filed
for bankruptcy in 1996. Mr. Sandel has founded, managed and held engineering
positions with several companies over the past thirty years. He was educated at
the Israeli Institute of Technology, Haifa, Israel. While continuing his
education in the United States, he received his BSEE from California State
College, Pomona, California (1969) and MSOR from the University of Southern
California (1974).

David Moss has served as our Vice President--Operations since our founding in
June 1994. From May 1993 through May 1994, Mr. Moss served as Vice President
and General Manager of ASR Recording, a

40
<PAGE>

manufacturer of CDs. From April 1991 through April 1993, Mr. Moss served as
director of manufacturing at Denon Digital, also a manufacturer of CDs. Mr.
Moss has worked in the CD and other media replication business for 15 years. He
has a B.A. degree in Production and Operation Management and a B.A. degree in
Computer Science, both from California State University at Northridge.

Louis L. Weiss joined us in May 1998 as Chief Financial Officer and Principal
Accounting Officer. From December 1996 through April 1998, Mr. Weiss served as
Chief Financial Officer of P.D.I. Industries, Inc., a pharmaceuticals
distributor. From January 1996 through September 1996, Mr. Weiss served as
Chief Financial Officer of Cardkey Industries, a manufacturer of keycards for
building security systems. From June 1992 through December 1995, Mr. Weiss
served as President of LLW Associates, a financial consulting firm founded by
Mr. Weiss. Mr. Weiss is a Certified Public Accountant (inactive status) and he
has a B.B.A. and M.B.A. from the University of Wisconsin.

Sanford R. Climan has served as a Director since August 1998. Mr. Climan is
Managing Director of Entertainment Media Ventures (EMV), a Los Angeles-based
venture capital fund focused on investment in the areas of technology, media,
and the Internet. From October 1995 through May 1997, Mr. Climan was Executive
Vice President and President of Worldwide Business Development for Universal
Studios, Inc., where he oversaw corporate international strategy and the
following Universal Studios operating units: Consumer Products; Home Video; Pay
Television; New Media; Spencer Gifts and Strategic Marketing. From June 1997
through February 1999 and from June 1986 to September 1995, Mr. Climan was a
member of the senior management team at Creative Artists Agency, a leading
talent and literary representation firm, working with both talent and corporate
clients. Prior to joining CAA, Mr. Climan held executive positions at various
entertainment companies, working in general management capacities, as well as
overseeing areas of motion picture and television production and distribution.
Mr. Climan serves as a director of a number of public and private companies.
Mr. Climan received his B.A. from Harvard College, a M.S. in Health Policy and
Management from the Harvard School of Public Health and his M.B.A. from Harvard
Business School.

Mark Dyne has served as a Director since August 1998. Since October 1996, Mr.
Dyne has served as Chairman of the Board of Directors and as Chief Executive
Officer of Brilliant Digital Entertainment, Inc., a production and development
studio producing digital entertainment. Currently, Mr. Dyne is a Director of
Ozisoft Pty. Limited, a company he founded in 1982. From November 1998 through
January 2000, Mr. Dyne was Chief Executive Officer of Virgin Interactive
Entertainment. From June 1995 through May 1997, Mr. Dyne served as an executive
officer of Sega Enterprises (Australia) Pty., Ltd., a theme park developer,
which operated the $70 million interactive indoor theme park in Darling Harbor
in Sydney, Australia. Moreover, currently, Mr. Dyne is Chairman of the Board of
Directors of Tag-It Pacific, Inc., a manufacturer of buttons, tags and other
apparel trim products, and a director of Talent Connection.com, an
entertainment portal.

Diana Maranon has served as a Director since August 1998. Ms. Maranon is the
President and Managing Director of Averil Capital Markets Group, Inc., a
financial advisory firm, and a member of the National Association of Securities
Dealers. Ms. Maranon serves as a director of Brilliant Digital Entertainment,
Inc. Before founding Averil Capital Markets Group, Inc., in 1994, Ms. Maranon
was a Vice President with Wasserstein Perella & Co., Inc., an investment
banking firm, with whom she started in 1988. From 1985 to 1988, Ms. Maranon
practiced securities law with Skadden Arps Slate Meagher & Flom, LLP. Ms.
Maranon received J.D. and M.B.A. degrees from the University of California at
Los Angeles and is a member of the California Bar.

Jason Barzilay is one of our co-founders and served as a Director from our
founding until 1998. In April 2000, Mr. Barzilay rejoined our Board as a
Director. Mr. Barzilay was one of the original founders of Packard Bell
Electronics, an innovative PC manufacturer that was first to market PCs via
traditional consumer electronics retail outlets. Mr. Barzilay served as a
Director of Packard Bell Electronics from its inception in 1986 until 1999. In
1996 Mr. Barzilay founded Argoquest, Inc., a private venture capital firm. Mr.
Barzilay serves as a Director to a number of companies that are part of
Argoquest, Inc.'s portfolio of start-up companies. In 1983, Mr. Barzilay co-
founded Cal Circuit Abco, Inc., a distributor of computer memory and peripheral
components to the personal computer industry. In December 1994, Cal Circuit
Abco, Inc. changed its name to

41
<PAGE>

Reveal Computer Products, Inc. Mr. Barzilay served as Chief Executive Officer
and President of Reveal Computer Products from 1992 until it filed for
bankruptcy in 1996.

Martin Schuermann has served as a Director since April 2000. From 1995 to
1999, Mr. Schuermann was the Managing Director of CLT-UFA Los Angeles and US
Representative CLT-UFA, S.A., Europe's largest TV-company with interests in 22
television channels with 120 million daily viewers and 18 radio stations with
an estimated 25 million daily listeners. From 1994 to 1995 Mr. Schuermann was a
producer with Paramount Pictures (International Co-Productions). From 1992 to
1994 he was the Executive Vice President for Don Johnson Productions at
Paramount Pictures. Mr. Schuermann is a member of the Supervising Board of
INTERTAINMENT AG, a leading media company that is listed on Germany's "Neuer
Market" stock exchange.

Board Committees

The board of directors will maintain an audit committee and a compensation
committee. The audit committee will review the scope of our audits, the
engagement of our independent auditors and their audit reports. The members of
the audit committee are Sanford Climan, Mark Dyne and Martin Schuermann. The
compensation committee will evaluate our compensation policies and administer
our stock option plan. The members of the compensation committee are Sanford
Climan and Mark Dyne.

Director Compensation

We intend to pay non-employee directors fees of $1,500 for each meeting
personally attended and $500 for each telephonic meeting attended. In addition,
our directors are eligible to receive grants under our stock incentive plans.
As of the date of this prospectus, our current non-employee directors have
received options to purchase a total of 297,000 shares of our common stock. Our
directors are also reimbursed for their reasonable travel expenses incurred in
attending board or committee meetings.

In 1999, our shareholders committed to give 49,500 shares of their stock to
Mark Dyne for services he has provided to us.

We have entered into an engagement agreement with Averil Capital Markets
Group, Inc., a financial advisory firm founded and controlled by Diana Maranor,
who is also one of our directors. As consideration for services rendered in
connection with this offering, we have agreed to pay Averil Capital Markets
Group. Inc. a cash payment of 0.75% of the gross proceeds raised upon
consummation of this offering and warrants to purchase shares of our common
stock equivalent to 0.25% of the gross proceeds raised at an exercise price
equal to 110% of the initial public offering price. The number of warrants to
be issued will be based on a compensation value of $175,000, will vest upon the
closing of this offering and will expire three years from the closing of this
offering.

Compensation Committee Interlocks and Insider Participation

We did not have a compensation committee for the fiscal year ended December
31, 1999. Our board of directors made all decisions regarding executive
compensation for the fiscal year ended December 31, 1999. No interlocking
relationship exists between any member of our compensation committee and any
member of any other company's board of directors or compensation committee.

Executive Compensation

The following table presents both cash and noncash compensation paid or to be
paid by us to each of our executive officers who received compensation for the
year ended December 31, 1999 in excess of $100,000:

Summary Compensation Table

<TABLE>
<CAPTION>
Annual
Compensation
Year Ended ----------------
Name and Principal Position December 31 Salary Bonus
- --------------------------- ----------- -------- -------
<S> <C> <C> <C>
Alex Sandel, Chief Executive Officer and
President....................................... 1999 $540,000 --
David Moss, Vice President--Operations........... 1999 $461,561 $52,000
Louis Weiss, Chief Financial Officer............. 1999 $228,894 --
</TABLE>

42
<PAGE>

Employment Agreements with Executive Officers

David Moss has an employment agreement with us. According to his agreement,
he is entitled to a salary of $395,000 per year subject to automatic annual
increases of six percent. The compensation committee can make further salary
increase adjustments to Mr. Moss' agreement if they choose to do so. In
addition, the compensation committee can grant bonus compensation to Mr. Moss.
If Mr. Moss' employment is terminated without cause, he will be entitled to
severance pay at his then-current annual salary through the expiration of his
employment agreement plus a lump sum payment of $1,000,000. Mr. Moss'
employment agreement is effective August 26, 1998 through August 26, 2003,
subject to extension through August 26, 2006 upon our written consent and Mr.
Moss' written consent.

Fiscal Year-End Option Values

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options and
Options and Warrants Warrants at Fiscal Year-
at Fiscal Year-End End
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
<S> <C> <C>
Alex Sandel, Chief
Executive Officer and
President................ 113,025/339,075 $758,398/$2,275,193
David Moss, Vice
President--Operations.... 664,703/179,437 $8,567,360/$1,204,022
Louis Weiss, Chief
Financial Officer........ 35,063/70,125 $235,272/$705,805
</TABLE>

Stock Plan

We adopted a stock incentive plan in May 1998. Each of our executive
officers, other employees, non-employee directors or consultants is eligible to
be considered for the grant of awards under our 1998 stock incentive plan. A
maximum of 1,598,350 shares of common stock may be issued under our 1998 stock
incentive plan. If any award expires or terminates for any reason, then the
common stock subject to that award will again be available for issuance under
our 1998 stock incentive plan.

We also adopted a stock incentive plan in April 2000. Each of our executive
officers, other employees, non-employee directors or consultants is eligible to
be considered for the grant of awards under our 2000 stock incentive plan. A
maximum of 1,651,650 shares of common stock may be issued under our 2000 stock
incentive plan. If any award expires or terminates for any reason, then the
common stock subject to that award will again be available for issuance under
our 2000 stock incentive plan.

Our board of directors or a committee of two or more non-employee directors
appointed by the board of directors will administer our 1998 and 2000 stock
incentive plans. The administrator will have full and final authority to select
the executives and other employees to whom awards will be granted.
Additionally, the administrator will have the full and final authority to grant
the awards and to determine the terms and conditions of the awards and the
number of shares to be issued.

Awards. Our 1998 and 2000 stock incentive plans authorize the administrator
to enter into both incentive and non-statutory options. An award under the 1998
or 2000 stock incentive plan may permit the recipient to pay the entire
purchase price of the shares by delivering previously owned shares of our
capital stock.

Plan Duration. Our board of directors adopted our 1998 stock incentive plan
on May 7, 1998 and on the same day our shareholders approved the plan. Our 1998
stock incentive plan was subsequently amended on August 25, 1998. Our
shareholders approved the amendment on the same day. As of the date of this
prospectus, our board of directors has granted options covering an aggregate of
1,598,350 shares of our common stock to our directors, officers and employees,
with a weighted average exercise price of $7.74 per share pursuant to the 1998
stock incentive plan. The options pursuant to the 1998 stock incentive plan
will typically vest in four equal annual installments commencing on the first
anniversary of the date of grant. We have granted all of the shares available
under our 1998 stock incentive plan and any future grant will be pursuant to
our 2000 stock incentive plan.

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<PAGE>

Our board of directors adopted our 2000 stock incentive plan on April 13,
2000. The 2000 stock incentive plan was approved by the shareholders on the
same day and has not since been amended. 1,651,650 shares of our common stock
are reserved for issuance pursuant to the 2000 stock incentive plan. As of the
date of this prospectus, our board of directors has not granted any options
pursuant to this plan. The options pursuant to the 2000 stock incentive plan
will typically vest in four equal annual installments commencing on the first
anniversary of the date of grant. Any award duly granted on or prior to April
13, 2010 may be exercised or settled in accordance with its terms. No award may
be granted on or after April 13, 2010.

Amendments. The administrator may amend or terminate our 1998 and 2000 stock
incentive plans at any time and in any manner. However, no recipient of any
option may be deprived of any of his or her rights under the option as a result
of any amendment or termination without his or her consent. Shareholder
approval is required to increase the number of shares available for issuance
under our 1998 our 2000 stock incentive plans.

Form S-8 Registration. We intend to file a registration statement under the
Securities Act to register the 1,598,350 shares of our common stock reserved
for issuance under our 1998 stock incentive plan, 1,651,650 shares of our
common stock reserved for issuance under our 2000 stock incentive plan and the
604,890 shares issuable upon David Moss' exercise of his warrants. The
registration statement is expected to be filed shortly following the date of
this prospectus and will become effective immediately upon filing with the
Securities and Exchange Commission. Shares issued under our 2000 stock
incentive plan after the effective date of this registration statement
generally will be available for sale to the public without restriction, except
for the 180-day lock-up provisions and except for shares issued to our
affiliates, which will remain subject to the volume and manner of sale
limitations of Rule 144. See "Shares Eligible for Future Sale."

Limitation of Liability and Indemnification Matters

Our Articles of Incorporation include a provision eliminating the personal
liability of our directors to us and to our shareholders for monetary damages
for breach of the director's fiduciary duties in certain circumstances. This
limitation has no effect on a director's liability for any of the following:

. for acts or omissions involving intentional misconduct or a knowing and
culpable violation of law;

. for acts or omissions a director believes to be contrary to our best
interest or to the best interest of our shareholders;

. for acts or omissions involving the absence of good faith on the part of
the director;

. for any transaction from which a director derived an improper personal
benefit;

. for acts or omissions showing a reckless disregard for the director's
duty to us or to our shareholders in circumstances in which the director
was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of serious injury to us or to
our shareholders;

. for acts or omissions constituting an unexcused pattern of inattention
amounting to abdication of the director's duty to us or to our
shareholders;

. under Section 310 of the California Corporations Code (concerning
contracts or transactions between a director and us); or

. under Section 316 of the California Corporations Code (concerning
director's liability for improper dividends, loan and guarantees).

This limitation of liability does not apply to a director acting in his
capacity as an officer. Further, this limitation of liability provision does
not affect the availability of injunctions and other equitable remedies
available including injunctive relief or recession.

Our Articles of Incorporation and Bylaws provide indemnification of our
directors and executive officers and discretionary indemnification of our other
officers and employees and other agents to the fullest extent permitted by law.
Pursuant to this provision, our Bylaws provide for indemnification of our
directors, officers

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<PAGE>

and employees. In addition, we may provide indemnification to persons whom we
are not obligated to indemnify. The Bylaws also allow us to enter into
indemnity agreements with individual directors, officers, employees and other
agents. We have entered into indemnification agreements designed to provide the
maximum indemnification permitted by law with all our directors and executive
officers. These agreements, together with our Bylaws and Articles of
Incorporation, may require us, among other things, to indemnify these directors
against certain liabilities that arise by reason of their status or service as
directors (other than liabilities resulting from willful misconduct of a
culpable nature), to advance expenses to them as they are incurred, provided
they undertake to repay the amount advanced if it is ultimately determined by a
court that are not entitled to indemnification, and to obtain directors' and
officers' insurance if available on reasonable terms. We maintain director and
officer liability insurance.

Section 317 of the California Code, our Bylaws and our indemnification
agreements with our directors and executive officers make provision for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons, under certain circumstances, for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers, and controlling
persons pursuant to the foregoing provisions, or otherwise, we have been
advised in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.

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<PAGE>

RELATED PARTY TRANSACTIONS

General Shareholder Transactions

We have been treated as an S Corporation since our inception. We distributed
an aggregate of approximately $27.6 million in dividends, of which
approximately $23.3 million were in cash dividends to our shareholders from
January 1, 1997 through March 1, 2000. These dividends were paid to our
shareholders to pay their income taxes, and as a return of their investment. We
intend to pay dividends aggregating approximately $9.3 million to our
shareholders prior to the closing of this offering as a distribution of
retained earnings, including an amount of approximately $1.8 million for the
purpose of paying income taxes on 2000 S Corporation earnings.

Our current shareholders have personally guaranteed repayment of the Greyrock
bank debt. Upon completion of this offering and the application of the net
proceeds to repay the loan from Greyrock, the shareholder guarantees will
terminate. See "Use of Proceeds."

Our current shareholders have entered into a tax indemnification agreement
with us relating to their respective income tax liabilities. See "Termination
of S Corporation Status."

Loans to Officers, Directors and Shareholders

In January 2000, we loaned $2,630,000 to Alex Sandel for the partial payment
for the purchase of shares of our stock from a former shareholder. The loan is
evidenced by a note bearing interest at our borrowing rate from Greyrock (prime
plus 2%). If we have no borrowings outstanding from Greyrock the note bears
interest at prime plus 1%. As of April 30, 2000 we have accrued $86,370
interest under this note. We expect this note to be repaid in full prior to or
concurrently with the closing of this offering.

During 1999, we made non-interest bearing loans to Alex Sandel totaling
$1,472,000 and interest bearing loans totaling $1,075,000 (interest accrued at
our borrowing rate from Greyrock, at prime plus 2%). These loans were repaid in
their entirety during 1999 except for interest accrued, totaling approximately
$72,000, which was subsequently forgiven by our board of directors.

In December 1999, we made advances totaling $2,500,000 to Jason Barzilay, one
of our shareholders for the purpose of investment in Argoquest. This amount was
repaid before the end of 1999. During 1999, we also made a loan of $1,000,000
to a company owned by Alex Sandel and Jason Barzilay for the purpose of
investment in Argoquest, which was repaid before the end of the year. Interest
on these loans totaling $7,520 accrued at our borrowing rate from Greyrock.

In connection with the warrants to purchase 604,890 shares of our common
stock, for an exercise price of $.0010 per share, issued to David Moss, our
Vice President--Operations, we loaned him a total of $1,428,000 in 1999 under
promissory notes bearing compound interest at the rate of 4.6% per annum, in
order to allow him to pay the federal and state taxes due as a result of the
receipt of the warrants. The unpaid principal balance and any accrued but
unpaid interest shall be due and payable on the earlier of: (1) January 1,
2006; or (2) the fifteenth day following the date of delivery of written demand
for payment made at any time after the later of (a) the closing of a liquidity
event (which includes this offering), or (b) if applicable, the expiration of
any lock-up period imposed in connection with such liquidity event on our
common stock held by David Moss.

Business Relationships with Officers, Directors and Shareholders

From November 1999 through February 2000, we made rental payments on a new
facility totaling $172,000 to a company owned by Alex Sandel, our president and
majority shareholder. In March 2000 we entered into a lease agreement through
December 31, 2013 with this company. The lease calls for monthly base rent of
$52,843, with annual increases based on the Consumer Price Index. In addition,
at the end of the fifth and tenth years the monthly base rent is to be adjusted
to fair market value as determined by the parties. We

46
<PAGE>

believe the lease, including the amount of the lease payments, is on terms
similar with those currently prevailing in the market and no less favorable
than would be obtained with an independent third party.

In December 1999, we invested $500,000 in Synthonics Technologies, Inc., a
company which owns various patents in 3D modeling, in return for a note
convertible into 11,518,096 shares of Synthonics common stock, which at the
time represented approximately 38% of Synthonics outstanding shares. In
addition, we agreed to replicate and package up to 2 million CDs without charge
to Synthonics and establish a catalog entity to develop and produce 3D
interactive digital catalogs on behalf of Synthonics for its customers. At the
time of the investment, Diana Maranon, one of our directors, was a member of
the board of directors of Synthonics. Our agreement with Synthonics grants us
exclusive rights to all DVD and CD replication needs of Synthonics for a period
of five years, assuming price and quality are in line with industry standards.

Since September 1997, Averil Capital Markets Group, Inc., a financial
advisory firm founded and controlled by Diana Maranon, has performed various
services for us including investigation of strategic and financing
alternatives. As consideration for these services rendered, we have paid Averil
Capital Markets Group, Inc. approximately $186,184, including expenses. As
consideration for services rendered in connection with this offering, we have
agreed to pay Averil Capital Markets Group, Inc. a cash payment of 0.75% of the
gross proceeds raised upon consummation of this offering and warrants to
purchase shares of our common stock equivalent to 0.25% of the gross proceeds
raised at an exercise price equal to 110% of the initial public offering price.
The warrants given to Averil Capital Markets Group, Inc. will become
exercisable on the first anniversary of this offering. We have entered into an
indemnification agreement with Averil Capital Markets Group, Inc. pursuant to
which we will indemnify Averil Capital Markets Group, Inc. and Ms. Maranon
against any amounts these parties may become obligated to pay in connection
with Ms. Maranon's service as one of our directors and her consulting services
to us.

We lease one of our two facilities in Valencia, California, from Bascal
Properties II, a partnership owned by our existing shareholders. This lease
expires in May 2007 and currently provides for a monthly base rent of $20,000,
with periodic adjustments based on the consumer price index. We believe this
lease is at prevailing market rates for similar properties. Rental payments to
Bascal Properties II were $240,000 for the year ended December 31, 1999,
$240,000 for the year ended December 31, 1998 and $140,000 for the year ended
December 31, 1997. In June 1997, we loaned approximately $1.9 million to Bascal
Properties II. This loan bore interest at prime plus two percent and was repaid
in full in September 1997.

On November 1, 1997, we entered into a Purchase and Sale Agreement with
Packard Bell NEC. The Packard Bell NEC Agreement governed our relationship with
Packard Bell NEC with respect to the procedures for ordering, pricing and
delivering products, as well as product warranties. Pursuant to the Packard
Bell NEC Agreement, Packard Bell NEC agreed to purchase from us substantially
all of its United States requirements for CDs, so long as the pricing, terms,
conditions and quality of the CDs being sold by us were at least as favorable
as those available from any other third party supplier. The Packard Bell NEC
Agreement expired in November 1999. At the time this agreement was entered
into, our current shareholders owned a significant minority interest in Packard
Bell NEC and Alex Sandel was a director of Packard Bell NEC.

Historically, significant portions of our net sales have been to Packard Bell
NEC. Our net sales to Packard Bell NEC were approximately $554,000 for the year
ended December 31, 1999, $5.3 million for the year ended December 31, 1998,
$12.1 million for the year ended December 31, 1997, $14.2 million for the year
ended December 31, 1996 and $20.9 million for the year ended December 31, 1995.
Such sales represented approximately 1.0% of our net sales for the year ended
December 31, 1999, 12.4% of our net sales for the year ended December 31, 1998,
33.5% of our net sales for the year ended December 31, 1997, 55.3% of our net
sales for the year ended December 31, 1996 and 65.8% of our net sales for the
year ended December 31, 1995. At December 31, 1999, accounts receivable from
Packard Bell NEC were approximately $23,000, or 0.3% of total trade receivables
as of such date.

We had net sales to Reveal Computer Products (formerly named Cal Circuit
Abco, Inc. prior to December 1994), a re-packager of computer peripherals
managed by Jason Barzilay and controlled by our current and former
shareholders, amounting to $35,000 for the year ended December 31, 1996 and
$4,212,000 for the year

47
<PAGE>

ended December 31, 1995. During the second quarter of 1996, we wrote off
accounts receivable balances of $1,559,000 due from Reveal Computer Products.
Moreover, from June 1995 to November 1995, we loaned an aggregate of
approximately $3.3 million to Reveal Computer Products bearing interest at
prime plus three percent. We determined this amount was uncollectible and
reserved for it at December 31, 1995. We ultimately wrote off such amount in
1996, the same year Reveal Computer Products entered bankruptcy and ceased
operations.

Other than our decision to forgive interest on certain loans made to our
shareholders, we believe that the terms of the foregoing transactions were no
less favorable to Future Media than we would expect to negotiate with an
unrelated third party. Future transactions with related parties will require
the approval of our disinterested directors and will be on terms no less
favorable to us than those that could be obtained from unrelated third parties.

48
<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The following table presents information regarding the beneficial ownership
of our common stock as of May 1, 2000, and as adjusted to reflect our sale of
shares of our common stock and the selling shareholders sale of our common
stock offered by this prospectus, for:

. each person who is known to us to be the beneficial owner of more than
5% of our outstanding common stock;

. each of our directors; and

. the named executive officers as a group.

The address of each person listed is in care of us, at 24811 Avenue
Rockefeller, Valencia, California 91355, unless otherwise provided below such
person's name.

<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Owned After the
Offering(1) Offering
--------------------- Number of ----------------------
Number of Percent of Shares Number of Percent of
Name of Beneficial Owner Shares Class Offered Shares Class
- ------------------------ ---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Alex Sandel(2)........... 10,126,050 67.2%
Jason Barzilay........... 4,950,000 33.3%
David Moss(3)............ 724,515 4.7%
Louis Weiss(4)........... 70,125 * 70,125 *
Sanford R. Climan(4)(5).. 49,500 * 49,500 *
Mark Dyne(4)(6).......... 12,375 * 61,875(9) *
Diana Maranon(4)(7)...... 12,375 * 12,375 *
Martin Schuermann........ -- * -- *
All of the directors and
executive officers as a
group (eight
persons)(8)............. 15,944,940 100.0%
</TABLE>
- --------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power with
respect to such shares. Shares of common stock under warrants or options
currently exercisable or exercisable within 60 days of the date of this
offering are deemed outstanding for purposes of computing the percentage
ownership of the person holding such warrants or options but are not
deemed outstanding for computing the percentage ownership of any other
person. Unless otherwise indicated, the persons named in this table have
sole voting and sole investment power with respect to all shares shown as
beneficially owned, subject to community property laws where applicable.

(2) Includes 239,250 shares of common stock, which may be purchased upon
exercise of options that are currently exercisable.

(3) Includes 604,890 shares of common stock, which may be purchased upon
exercise of warrants that are currently exercisable and 119,625 shares of
common stock, which may be purchased upon exercise of options that are
currently exercisable.
(4) Represents shares of common stock, which may be purchased upon exercise of
options that are currently exercisable.
(5) Mr. Climan's address is c/o Entertainment Media Ventures, LLC, 828 Moraga
Drive Second Floor, Los Angeles, California 90049.
(6) Mr. Dyne's address is c/o Brilliant Digital Entertainment, Inc., 6355
Topanga Canyon Boulevard, Suite 513, Woodland Hills, California 91367.
(7) Ms. Maranon's address is c/o Averil Capital Markets Group, Inc., 2029
Century Park East, Suite 1900, Century City, California 90067.

(8) Includes 1,108,140 shares of common stock, which may be purchased upon
exercise of warrants and options that are currently exercisable.

(9) Includes 49,500 shares to be given by the existing shareholders to Mr.
Dyne.

49
<PAGE>

DESCRIPTION OF CAPITAL STOCK

We are authorized to issue 75,000,000 shares of our common stock, no par
value and 10,000,000 shares of preferred stock, no par value. As of March 1,
2000, there were 14,850,000 shares of our common stock outstanding and there
were two holders of record of the common stock. Currently, there are no shares
of preferred stock outstanding. The following statements are brief summaries of
our capital stock.

Common Stock

The holders of common stock are entitled to one vote for each share held of
record on all matters on which the holders of common stock are entitled to vote
and have cumulative voting rights with respect to the election of directors.
The right to cumulate votes will automatically cease as of the first record
date of our annual meeting of shareholders where we have at least 800 holders
of our equity securities. The holders of our common stock are entitled to
receive dividends in proportion to their ownership when, as and if declared by
our board of directors out of legally available funds. In the event of our
liquidation, dissolution or winding up, the holders of common stock are
entitled subject to the rights of holders of preferred stock issued by us, if
any, to share proportionally in all assets remaining available for distribution
to them after payment of liabilities and after provision is made for each class
of stock, if any, having preference over the common stock.

The holders of common stock have no preemptive or conversion rights and they
are not subject to further calls or assessments by us. Our common stock does
not have any redemption or sinking fund provisions. The outstanding shares of
our common stock are, and the common stock issuable pursuant to this offering
will be, when issued, fully paid and nonassessable.

Preferred Stock

Our board of directors has the authority to issue the authorized and unissued
preferred stock in one or more series and our board of directors may determine
the designations, rights and preferences of the preferred stock. Accordingly,
and without the need for shareholder approval, our board of directors has the
power to issue preferred stock with dividend, liquidation, conversion, voting
or other rights, which adversely affect the voting power or other rights of the
holders of our common stock. In the event of issuance, and under certain
circumstances, we could use our preferred stock as a way of discouraging,
delaying or preventing an acquisition or a change in our control. We do not
currently intend to issue any shares of our preferred stock.

Warrants

We have granted to David Moss warrants to purchase 604,890 shares of our
common stock. The warrants granted to David Moss expire on December 31, 2007
and are exercisable for $0.0010 per share. None of the warrants granted to
David Moss will have any voting rights, dividend rights or preferences until
such time as they are exercised for shares of our common stock.

Effective upon the closing of this offering, we will grant to Averil Capital
Markets Group, Inc. warrants to purchase shares of our common stock equivalent
to 0.25% of the gross proceeds raised in this offering with an exercise price
equal to 110% of the initial public offering price. The warrants granted to
Averil Capital Markets Group, Inc. expire five years after they are granted.
See "Certain Relationships and Related Transactions."

We intend to grant warrants to purchase 25,000 shares of our common stock to
Levy, Small and Lallas for legal services rendered to us in connection with
this offering. The warrants to be granted Levy, Small and Lallas are contingent
upon the closing of this offering, will be granted at the initial public
offering price and will expire one year from the close of this offering.

Possible Anti-Takeover Effect of Certain Charter Provisions

The holders of our common stock are currently entitled to one vote for each
share held of record on all matters submitted to a vote of the shareholders
other than the election of directors, in which event any holder may demand
cumulative voting. Under cumulative voting, the holders of common stock are
entitled to cast for each share held the number of votes equal to the number of
directors to be elected, which is currently seven. A holder may cast all of his
or her votes for one nominee or distribute them among any number of nominees
for

50
<PAGE>

election. Our Amended and Restated Articles of Incorporation provide that the
shareholders' right to cumulative voting will terminate when we become a
"listed corporation" within the meaning of Section 301.5 of the California
General Corporation Law. Under Section 301.5 of the California General
Corporation Law we will be a "listed corporation" when our shares are qualified
for trading as a National Market security on Nasdaq if we have at least 800
shareholders as of the record date for the most recent annual meeting of
shareholders. We presently expect that upon consummation of this offering, our
common stock will be qualified for trading on Nasdaq and we will have at least
800 shareholders. The absence of cumulative voting may have the effect of
limiting the ability of minority shareholders to effect changes in our board of
directors and, as a result, may have the effect of deterring hostile takeovers
or delaying or preventing changes in control or management of Future Media.

Transfer Agent

Our transfer agent and registrar for our common stock is U.S. Stock Transfer
Corporation.

51
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common stock.
We cannot predict the effect, if any, that future sale of shares, or the
availability of shares for future sale, will have on the prevailing market
price for our common stock. Sales of substantial amounts of our common stock in
the public market following this offering, or the perception that these sales
may occur, could adversely affect the prevailing market prices for our common
stock. See "Risk Factors--Sales of additional shares of our common stock into
the public market may cause our stock price to fall."

Upon completion of this offering, we will have 19,535,185 shares of our
common stock outstanding, 20,312,962 shares if the underwriters' over-allotment
option is exercised in full. Of those shares, a total of 5,185 185 shares,
5,962,962 shares if the underwriters' over-allotment option is exercised in
full, will be freely tradable without restriction or further registration under
the Securities Act, unless purchased or held by our "affiliates" as that term
is defined in Rule 144.

All of our executive officers, directors and shareholders, including the
selling shareholders have signed lock-up agreements under which they agreed not
to sell or otherwise transfer, directly or indirectly, any shares of common
stock or any securities convertible into, or exercisable or exchangeable for,
any shares of common stock for a period of 180 days from the date of this
prospectus without the prior written consent of Prudential Securities
Incorporated. These lock-up agreements do not prevent us from granting
additional options under our stock incentive plan. After the expiration of the
180-day period, shares that can be sold under Rule 144 will be eligible for
sale. Prudential Securities Incorporated may, in its sole discretion, at any
time and without notice, release all or any portion of the securities subject
to these lock-up agreements.

In general, under Rule 144 as currently in effect, any person who has
beneficially owned restricted securities for at least one year would be
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 common stock; or

. the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which the notice of the
sale on Form 144 is filed with the Securities and Exchange Commission.

Within 90 days after the date of this prospectus, we intend to file a
Registration Statement on Form S-8 covering an aggregate of approximately
3,250,000 shares of common stock, including the 1,598,350 shares of common
stock which will then be subject to outstanding options and 604,890 shares of
common stock underlying the warrants granted to David Moss. Additionally, we
have agreed to file a Registration Statement on Form S-3 covering the shares of
common stock underlying the warrants to be granted to Averil Capital Markets
Group, Inc., and Levy, Small & Lallas, after these warrants become exercisable.
After the effective date of the Form S-8, shares of common stock issued upon
exercise of options granted pursuant to our stock incentive plan and upon
exercise of the warrants granted to David Moss will be available for sale in
the public market. However, these shares will remain subject to Rule 144 volume
limitations applicable to our affiliates and to the lock-up agreements. Shares
of common stock issuable upon exercise of the warrants to be granted to Averil
Capital Markets Group, Inc. will become exercisable subject to Rule 144 volume
limitations, one year after the date these warrants were granted or the filing
of the related Form S-3, whichever occurs first.

52
<PAGE>

UNDERWRITING

We and the selling shareholders have entered into an underwriting agreement
with the underwriters named below, for whom Prudential Securities Incorporated
and CIBC World Markets Corp. are acting as representatives. We and the selling
shareholders are obligated to sell, and the underwriters are obligated to
purchase, all of the shares offered on the cover page of this prospectus, if
any are purchased. Subject to conditions of the underwriting agreement, each
underwriter has severally agreed to purchase the shares indicated opposite its
name:

<TABLE>
<CAPTION>
Number
of
Underwriters Shares
- ------------ ------
<S> <C>
Prudential Securities Incorporated.......................................
CIBC World Markets Corp. ................................................
----
Total..................................................................
====
</TABLE>

The underwriters may sell more shares than the total number of shares offered
on the cover page of this prospectus and they have, for a period of 30 days
from the date of this prospectus, an over-allotment option to purchase up to
777,777 additional shares from us. If any additional shares are purchased, the
underwriters will severally purchase the shares in the same proportion as per
the table above.

The representatives of the underwriters have advised us and the selling
shareholders that the shares will be offered to the public at the offering
price indicated on the cover page of this prospectus. The underwriters may
allow a concession not in excess of $ per share to selected dealers and such
dealers may reallow a concession not in excess of $ per share to certain
other dealers. After the shares are released for sale to the public, the
representatives may change the offering price and the concessions. The
representatives have informed us and the selling shareholders that the
underwriters do not intend to sell shares to any investor who has granted them
discretionary authority.

We and the selling shareholders have agreed to pay to the underwriters the
following fees, assuming both no exercise and full exercise of the
underwriters' over-allotment option to purchase additional shares:

<TABLE>
<CAPTION>
Total Fees
-------------------------------------------
Fee Without Exercise of Full Exercise of
Per Share Over-Allotment Option Over-Allotment Option
--------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by us......... $ $ $
Fees paid by the selling
shareholders........... $ $ N/A
</TABLE>

We have also agreed to pay Averil Capital Markets Group, Inc. a cash payment
of 0.75% of the gross proceeds and to grant Averil Capital Markets Group, Inc.
a warrant to purchase shares of our common stock equivalent to 0.25% of the
gross proceeds raised at an exercise price equal to 110% of the public offering
price. The warrant will become exercisable on the first anniversary of this
offering. However, the warrant and the underlying shares of our common stock
are restricted from sale, transfer, assignment, pledge or hypothecation for a
period of one year from the date of this offering.

In addition, we estimate that we will spend approximately $1.5 million in
expenses for this offering, including those of the selling shareholders. We
have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or contribute to payments that
the underwriters may be required to make in respect of these liabilities.

We, our officers and directors, and all shareholders including our selling
shareholders have entered into lock-up agreements pursuant to which we and they
have agreed not to offer or sell any shares of common stock or securities
convertible into or exchangeable or exercisable for shares of common stock for
a period of 180 days from the date of this prospectus without the prior written
consent of Prudential Securities Incorporated, on

53
<PAGE>

behalf of the underwriters. Prudential Securities Incorporated may, at any time
and without notice, waive the terms of the lock-up agreements specified in the
underwriting agreement.

Prior to this offering, there has been no public market for our common stock.
The public offering price, negotiated among Future Media, the selling
shareholders, and the representatives is based upon various factors such as our
financial and operating history and condition, our prospects, the prospects for
the industry we are in and prevailing market conditions.

Prudential Securities Incorporated, on behalf of the underwriters, may engage
in the following activities in accordance with applicable securities rules:

. Over-allotments involving sales in excess of the offering size, creating
a short position. Prudential Securities Incorporated may elect to reduce
this short position by exercising some or all of the over-allotment
option.

. Stabilizing and short covering; stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in
the open market may also reduce the short position. These activities may
cause the price of the shares to be higher than would otherwise exist in
the open market.

. Penalty bids permitting the representatives to reclaim concessions from
syndicate members which sold shares received in the offering and that
were purchased in the stabilizing or short covering transactions. One of
the factors considered at the time of the allocation of the shares is the
history of investors in selling quickly the shares received in prior
offerings.

. Any stabilization or short covering activities and the imposition of
penalty bids might have an effect on the price of the shares, which may
be higher than the price that may otherwise exist in the open market.

Such activities, which may be commenced and discontinued at any time, may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.

Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:

. the Public Offers of Securities Regulations 1995;

. the Financial Services Act 1986; and

. the Financial Services Act 1986, (Investment Advertisements) (Exemptions)
Order 1996 (as amended).

We have asked the underwriters to reserve shares for sale at the same
offering price directly to our officers, directors, employees and other
business affiliates or related third parties. The number of shares available
for sale to the general public in the offering will be reduced to the extent
such persons purchase the reserved shares.

Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
AdvisorSM, a full service brokerage firm program, may view offering terms and a
prospectus online and place orders through their financial advisors.

54
<PAGE>

LEGAL MATTERS

Our counsel, Troop Steuber Pasich Reddick & Tobey, LLP, Los Angeles,
California, has rendered an opinion that the common stock offered by us, upon
its sale will be duly and validly issued, fully paid and non-assessable.
Gibson, Dunn & Crutcher LLP, Los Angeles, California, has acted as counsel to
the underwriters in connection with certain legal matters relating to this
offering.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1999, and for each of the three years in
the period ended December 31, 1999, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission in Washington,
D.C., a registration statement under the Securities Act with respect to this
offering. This prospectus does not contain all of the information set forth in
such registration statement and the exhibits thereto. With respect to any
contract or other document filed as an exhibit to such registration statement,
reference is made to the exhibit for a complete description of the matter
involved, and each such statement is qualified in its entirety by such
reference. For further information about us and the shares offered, please
review the registration statement and the exhibits. A copy of the registration
statement, including the exhibits, may be inspected without charge at the
Securities and Exchange Commission's principal office in Washington, D.C., and
copies of all or any part thereof may be obtained from the Public Reference
Section of the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of certain prescribed rates.

When this offering is consummated, we will become subject to the
informational requirements of the Securities Exchange Act and will file reports
and other information with the Securities and Exchange Commission in accordance
with its rules. These reports and other information concerning us may be
inspected and copied at the public reference facilities referred to above as
well as some of the regional offices of the Securities and Exchange Commission.

The Securities and Exchange Commission maintains a web site, which contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Securities and Exchange Commission at
http://www.sec.gov.

55
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Balance Sheets at December 31, 1998 and December 31, 1999................ F-3
Statements of Income for years ended December 31, 1997, 1998 and 1999.... F-4
Statements of Shareholders' Equity for years ended December 31, 1997,
1998 and 1999........................................................... F-5
Statements of Cash Flows for years ended December 31, 1997, 1998 and
1999.................................................................... F-6
Notes to Financial Statements for December 31, 1997, 1998 and 1999....... F-7
Condensed Consolidated Balance Sheets at December 31, 1999 and March 31,
2000 (unaudited)........................................................ F-18
Condensed Consolidated Statements of Income for the three months ended
March 31, 1999 and 2000 (unaudited)..................................... F-19
Condensed Consolidated Statement of Shareholders' Equity for the three
months ended March 31, 2000 (unaudited)................................. F-20
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 2000 (unaudited)............................... F-21
Notes to Condensed Consolidated Financial Statements for March 31, 2000
(unaudited)............................................................. F-22
</TABLE>

F-1
<PAGE>

Report of Independent Auditors

The Board of Directors
Future Media Productions, Inc.

We have audited the accompanying balance sheets of Future Media Productions,
Inc. as of December 31, 1998 and 1999 and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Future Media Productions, Inc.
as of December 31, 1998 and 1999 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

Los Angeles, California

February 25, 2000, except as
to Note 11, as to which the
date is April 13, 2000

F-2
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.
BALANCE SHEETS

<TABLE>
<CAPTION>
December 31
-----------------------
1998 1999
----------- -----------
<S> <C> <C>
Assets
Current assets:
Accounts receivable (net of allowance for doubtful
accounts of $163,000 in 1998 and $265,778 in
1999).............................................. $ 8,035,270 $ 7,202,126
Inventories......................................... 726,774 766,868
Prepaid expenses.................................... 433,497 284,101
Deferred income taxes............................... 8,000 --
----------- -----------
Total current assets.................................. 9,203,541 8,253,095
Property and equipment, net........................... 21,898,093 29,837,448
Investments........................................... -- 2,852,400
Other assets.......................................... 336,268 145,845
----------- -----------
Total assets.......................................... $31,437,902 $41,088,788
=========== ===========

Liabilities and Shareholders' Equity
Current liabilities:
Bank overdraft...................................... $ 517,258 $ 370,489
Line of credit...................................... 1,616,537 1,852,303
Accounts payable--trade............................. 2,648,974 2,762,457
Accounts payable--capital equipment................. 4,449,059 1,530,356
Accrued expenses--royalties......................... 2,213,294 4,101,760
Accrued expenses.................................... 1,032,631 1,043,268
Deferred revenue.................................... -- 700,000
Deferred income taxes............................... -- 40,500
Current portion of long-term debt................... 3,756,987 3,757,698
Current portion of capital lease obligations........ 11,666 5,938
----------- -----------
Total current liabilities............................. 16,246,406 16,164,769
Long-term debt, less current portion.................. 9,084,805 5,327,108
Capital lease obligations, less current portion....... 17,479 11,525
Deferred income taxes................................. 90,000 116,000
Commitments
Shareholders' equity:
Preferred stock, no par value:
Authorized shares--10,000,000.....................
Issued and outstanding shares--none............... -- --
Common stock, no par value:
Authorized shares--75,000,000.....................
Issued and outstanding shares--14,850,000......... 3,070,000 3,790,000
Retained earnings................................... 2,929,212 17,107,386
Note receivable from officer........................ -- (1,428,000)
----------- -----------
Total shareholders' equity............................ 5,999,212 19,469,386
----------- -----------
Total liabilities and shareholders' equity............ $31,437,902 $41,088,788
=========== ===========
</TABLE>

The accompanying notes to the financial statements are an integral part of
these statements.

F-3
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.
STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net sales to unaffiliated companies.... $23,974,131 $37,962,123 $52,448,072
Net sales to related parties........... 12,068,296 5,349,057 553,799
----------- ----------- -----------
Total net sales........................ 36,042,427 43,311,180 53,001,871
Cost of goods sold..................... 23,132,442 27,304,178 31,937,704
----------- ----------- -----------
Gross profit........................... 12,909,985 16,007,002 21,064,167
Selling, general and administrative
expenses.............................. 4,214,033 4,232,741 4,200,969
Other general and administrative
expense--stock related compensation... -- 3,055,000 720,000
Abandoned offering costs............... -- 675,733 --
----------- ----------- -----------
Income from operations................. 8,695,952 8,043,528 16,143,198
Other income (expense):
Interest income...................... 42,105 35,189 670
Interest expense..................... (817,998) (1,263,861) (1,403,694)
----------- ----------- -----------
Other income (expense), net.......... (775,893) (1,228,672) (1,403,024)
----------- ----------- -----------
Income before provision for state
income taxes.......................... 7,920,059 6,814,856 14,740,174
Provision for state income taxes....... 119,900 102,223 2,000
----------- ----------- -----------
Net income............................. $ 7,800,159 $ 6,712,633 $14,738,174
Earnings per share:
Basic................................ $ 0.53 $ 0.45 $ 0.99
=========== =========== ===========
Diluted.............................. $ 0.53 $ 0.43 $ 0.92
=========== =========== ===========
Shares used in computing earnings per
share:
Basic................................ 14,850,000 14,850,000 14,850,000
=========== =========== ===========
Diluted.............................. 14,850,000 15,672,174 16,025,686
=========== =========== ===========
Pro forma net income data (Notes 1 and
7, unaudited):
Income before provision for income
taxes............................... $ 7,920,059 $ 6,814,856 $14,740,174
Pro forma income tax provision....... 3,161,100 2,725,942 5,896,070
----------- ----------- -----------
Pro forma net income................. $ 4,758,959 $ 4,088,914 $ 8,844,104
Pro forma basic earnings per share... $ 0.60
===========
Pro forma diluted earnings per
share............................... $ 0.52
===========
Weighted average shares outstanding--
basic............................... 14,850,000
===========
Weighted average shares outstanding--
diluted............................. 17,135,628
===========
</TABLE>

The accompanying notes to the financial statements are an integral part of
these statements.

F-4
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
Note
Common Stock Receivable
--------------------- from Retained
Shares Amount Officer Earnings Total
---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... 14,850,000 $ 15,000 $ -- $ 13,129,440 $ 13,144,440
Dividends, $0.74 per
share.................. -- -- -- (11,009,020) (11,009,020)
Net income.............. -- -- -- 7,800,159 7,800,159
---------- ---------- ----------- ------------ ------------
Balance at December 31,
1997................... 14,850,000 15,000 -- 9,920,579 9,935,579
Dividends, $0.92 per
share.................. -- -- -- (13,704,000) (13,704,000)
Issuance of stock
warrants............... -- 3,055,000 -- -- 3,055,000
Net income.............. -- -- -- 6,712,633 6,712,633
---------- ---------- ----------- ------------ ------------
Balance at December 31,
1998................... 14,850,000 3,070,000 -- 2,929,212 5,999,212
Dividends, $0.03 per
share.................. -- -- -- (560,000) (560,000)
Loan to officer......... -- -- (1,428,000) -- (1,428,000)
Contribution of
capital................ -- 720,000 -- -- 720,000
Net income.............. -- -- -- 14,738,174 14,738,174
---------- ---------- ----------- ------------ ------------
Balance at December 31,
1999................... 14,850,000 $3,790,000 $(1,428,000) $ 17,107,386 $ 19,469,386
========== ========== =========== ============ ============
</TABLE>

The accompanying notes to the financial statements are an integral part of
these statements.

F-5
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Operating activities
Net income............................ $ 7,800,159 $ 6,712,633 $ 14,738,174
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization....... 1,949,838 2,860,789 4,368,177
Stock related compensation expense.. -- 3,055,000 720,000
Provision for bad debts............. 955,243 120,000 120,000
Loss on disposals of property and
equipment.......................... 20,959 57,058 --
Deferred income taxes............... 17,000 22,000 74,500
Changes in operating assets and
liabilities:
Accounts receivable................ (3,195,350) (1,347,486) 713,144
Inventories........................ 1,523,072 (92,276) (40,094)
Prepaid expenses................... (121,019) (123,088) 149,396
Other assets....................... 279,437 (92,411) 190,423
Other receivables.................. -- 275,000 --
Accounts payable................... (850,930) 941,330 113,483
Accrued expenses................... 39,622 408,583 10,637
Accrued expenses--royalties........ 3,090,416 (1,953,206) 1,888,466
----------- ------------ ------------
Net cash provided by operating
activities........................... 11,508,447 10,843,926 23,046,306
Investing activities
Capital expenditures.................. (3,641,686) (6,751,862) (15,226,235)
Purchases of investments.............. -- -- (2,152,400)
Proceeds from disposals of property
and equipment........................ -- 20,000 --
----------- ------------ ------------
Net cash used in investing
activities........................... (3,641,686) (6,731,862) (17,378,635)
Financing activities
Net borrowings (repayments) on line of
credit............................... (103,316) 1,352,893 235,766
Net payments on bank overdraft........ (914,366) (226,150) (146,769)
Proceeds from long-term debt.......... 6,537,612 11,321,000 --
Repayments on long-term debt.......... (6,700,928) (2,844,843) (3,756,986)
Note receivable from officer.......... -- -- (1,428,000)
Payments on capital lease
obligations.......................... (14,221) (10,964) (11,682)
Dividends paid to shareholders........ (6,671,542) (13,704,000) (560,000)
Advanced to related parties........... (1,900,000) -- (6,002,000)
Repayments on advances to related
parties.............................. 1,900,000 -- 6,002,000
----------- ------------ ------------
Net cash used in financing
activities........................... (7,866,761) (4,112,064) (5,667,671)
Net change in cash and cash
equivalents.......................... -- -- --
Cash and cash equivalents at beginning
of period............................ -- -- --
----------- ------------ ------------
Cash and cash equivalents at end of
period............................... $ -- $ -- $ --
=========== ============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest........................... $ 817,998 $ 1,121,507 $ 1,403,749
State income taxes................. $ 107,000 $ 61,500 $ 1,800
Supplemental disclosure of non-cash
transactions
</TABLE>

During the year ended December 31, 1997, the Company distributed $11,009,020
to shareholders consisting of a $4,337,478 reduction of notes receivable due
from shareholders and cash payments of $6,671,542.

In 1999, the Company agreed to provide replications of two million CD's to
Synthonics partially as part of the Company's investment in Synthonics (valued
at $700,000).

The accompanying notes to the financial statements are an integral part of
these statements.

F-6
<PAGE>

FUTURE MEDIA PRODUCTION, INC.

NOTES TO FINANCIAL STATEMENTS
December 31, 1999

1. Business and Summary of Significant Accounting Policies

Description of Business

Future Media Productions, Inc. (the Company) is an independent
manufacturer/replicator of digital versatile discs (DVDs) and compact disks
(CDs) to companies in industries including Internet/online, film and
entertainment, edutainment software, publishing and computer hardware. The
majority of the Company's business is targeted at high volume customers in
these markets. The Company operates in one business segment.

Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
affecting the reported amounts in the financial statements and accompanying
notes. Actual results could differ from those estimates, although management
does not believe differences would materially affect the Company's financial
position or results of operations.

Concentration of Credit Risk

The Company manufactures and distributes DVDs and CDs principally to
companies in the Internet/online, film and entertainment, edutainment software,
publishing and computer hardware industries throughout the United States. The
Company grants credit to its customers and does not require collateral. Credit
evaluations are performed periodically as needed. Concentrations of sales and
credit exist and are described in Note 5.

Cash Equivalents

The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.

Inventories

Inventories are stated at the lower of cost (determined on a first-in, first-
out basis) or market.

Property and Equipment

Property and equipment is stated at cost and depreciated over its useful life
ranging from three to ten years using the straight-line method. Maintenance and
repairs are charged to expense as incurred and costs of additions and
betterments increasing useful lives are capitalized. Amortization of leased
property is computed by the straight-line method over the lesser of the asset
life or, life of the lease.

Income Taxes

The Company has elected to be taxed under the S Corporation provisions of the
Internal Revenue Code which provides, in lieu of corporate income taxes, the
shareholders separately account for their pro rata share of the Company's items
of income, deductions, losses and credits. Therefore, these statements do not
include any provision for corporate federal income taxes. Similar provisions
apply for California income tax reporting; however, California tax law provides
for a 1.5% rate on taxable income at the corporate level. Accordingly, the
income tax provision consists of 1.5% tax due on the California taxable income
of the Company offset by certain manufacturing credits.

F-7
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999

In connection with the closing of the proposed public offering, the Company's
S Corporation status will terminate and the Company will be taxed thereafter as
a C Corporation. The pro forma statements of income reflect a provision for
federal and state income taxes as if the Company was a C Corporation for the
periods presented. Upon conversion to a C Corporation, the Company will
establish a net deferred tax liability with an accompanying increase to income
tax expense. If this charge were recorded at December 31, 1999, the amount
would have been approximately $2,700,000 (unaudited), consisting primarily of
timing differences related to depreciation.

Immediately prior to the closing of the proposed public offering, the Company
will enter into a tax indemnification agreement with the existing shareholders
relating to respective income tax liabilities. The tax indemnification
agreement is intended to assure the Company assumes taxes for the related
income giving rise to such taxes and the existing shareholders assume taxes for
which they have received the related income giving rise to such taxes.

Revenue Recognition

Revenues are recorded when products are shipped or orders are completed under
purchase orders or contracts and are due to be shipped but awaiting
instructions from the customer of the shipping destination. Revenues related to
the latter have been insignificant at the end of reporting periods.

Royalty Agreements

The Company has license agreements with certain companies for the use of
certain DVD and CD manufacturing technology. The Company accrues for royalties
based on units sold and royalty expense is included as a component of cost of
goods sold.

Stock-Based Compensation

The Company accounts for employee and director stock options using the
intrinsic value method. Generally, the exercise price of the Company's employee
stock options equals or exceeds the market price of the underlying stock on the
date of grant and no compensation expense is recognized. If the option price is
less than fair value, the Company records compensation expense over the vesting
period of the stock option. Options granted to non-employees are accounted for
using a fair value method. The Company has disclosed the pro forma material
effects of using the fair value method of all options in its financial
statements.

Earnings Per Share

Basic earnings per share has been computed by dividing net income by the
weighted average number of common shares outstanding for the periods presented.
Diluted earnings per share has been computed by dividing net income by
securities or other contracts to issue common stock as if these securities were
exercised or converted to common stock.

F-8
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999

The following table sets forth the calculation for basic and diluted earnings
per share for the periods presented:

<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Earnings:
Net income............................. $7,800,159 $6,712,633 $14,738,174
========== ========== ===========
Shares:
Weighted average shares for basic
earnings per share.................... 14,850,000 14,850,000 14,850,000
Stock options and warrants............. -- 822,174 1,175,686
---------- ---------- -----------
Weighted average shares for diluted
earnings per share.................... 14,850,000 15,672,174 16,025,686
========== ========== ===========
</TABLE>

Pro Forma Earnings Per Share (unaudited)

The Company is currently taxed as an S Corporation for federal income and
California franchise tax purposes. Accordingly, the provision for income taxes
for the periods presented reflect primarily state income tax. The pro forma
unaudited earnings per share information is calculated as if the Company had
been subject to tax as a C Corporation and for the dilutive effect of share
equivalents in the amount of 1,109,942 shares for expected dividends to
shareholders for the most recent period presented.

Long-Lived Assets

The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
the carrying amount of any asset may not be recoverable. An impairment loss
would be recognized when the estimated undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition is less than
the carrying amount. If impairment is indicated, the amount of the loss to be
recorded is based upon an estimate of the difference between the carrying
amount and the fair value of the asset. Fair value is based upon discounted
estimated cash flows expected to result from the use of the asset and its
eventual disposition and other valuation methods. The Company has identified no
such impairment losses.

Comprehensive Income

There were no significant items of comprehensive income and no impact of
these items on the Company's results of operations for the years ended December
31, 1997, 1998 and 1999, and therefore no further disclosures related to this
matter have been made.

Newly Issued Accounting Standards

Effective in 2001, accounting for gains or losses resulting from changes in
the value of derivatives would be changed depending on the use of the
derivative and whether they qualify for hedge accounting. The adoption of this
new requirement is not expected to have a material impact on the financial
position or results of operations of the Company.

F-9
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999

Reclassifications

Certain reclassifications have been made to the December 31, 1997 and 1998
financial statements to conform to the presentation in 1999.

2. Inventories

Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------
1998 1999
--------- ---------
<S> <C> <C>
Raw materials........................................... $ 604,972 $ 668,515
Work-in process and finished goods...................... 121,802 98,353
--------- ---------
$ 726,774 $ 766,868
========= =========
</TABLE>

3. Property and Equipment

Property and equipment, net, consisted of the following:

<TABLE>
<CAPTION>
December 31
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Plant equipment......... $ 27,799,629 $ 39,057,036
Computer equipment and
software............... 95,736 237,871
Office furniture and
equipment.............. 83,564 83,558
Automotive equipment.... 71,080 96,865
Leasehold improvements.. 815,912 1,698,122
Leased property under
capital leases......... 57,540 57,540
------------ ------------
28,923,461 41,230,992
Less accumulated depre-
ciation and amortiza-
tion................... (7,025,368) (11,393,544)
------------ ------------
$ 21,898,093 $ 29,837,448
============ ============
</TABLE>

4. Investments

Investments in affiliates where the Company owns more than 20% but not in
excess of 50% of the investees' outstanding equity where the Company is not
deemed to be able to exercise controlling influence are recorded under the
equity method. Investments in affiliates where the Company owns less than 20%
of the investees' outstanding equity where the Company is not deemed to be able
to exercise controlling influence are recorded under the cost method. Under the
equity method, investments are carried at acquisition cost and adjusted for the
proportionate share of the affiliates' earnings or losses. Under the cost
method, investments are recorded at acquisition cost and adjusted to fair value
based on the investment classification.

On December 21, 1999, the Company purchased, through an underwriting, 648
units of Lions Gate Entertainment, a Canadian motion picture production and
distribution company. Each unit was purchased for $2,550 or a total of
$1,652,400. Each unit consists of one 5.25% Convertible Redeemable Preferred
Stock and 425 warrants. Each share of preferred stock is convertible into 1,000
shares of common stock and each warrant entitles the holder to purchase one
share of Lions Gate common stock at $5.00 per share. In connection with this
investment, assuming price and quality are in line with industry standards, the
Company obtained the right to replicate primarily all of the DVD needs of Lions
Gate for a period of two years. The closing quoted market value per share of
Lions Gate on February 28, 2000 was $2.625. The warrants expire January 2004.
This investment has been accounted for under the cost method and classified as
available-for-sale. Future changes in market valuation for this investment will
be recognized as a separate component of shareholders' equity.

F-10
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999

On December 23, 1999, the Company paid in cash $500,000 to Synthonics
Technologies, Inc. (Synthonics) in return for a note receivable convertible
into 11,518,096 shares of Synthonics common stock, which at the time
represented 38% of Synthonics outstanding shares. The Company agreed to
replicate and package up to two million CDs without charge to Synthonics and
establish a catalog company to develop and produce 3D interactive digital
catalogs on behalf of Synthonics for its customers. A member of Synthonics
Board of Directors is also a member of the Company's Board of Directors. The
investment in Synthonics totaling $1,200,000 (including an amount of $700,000
as the fair market value of the replication services to be performed), will be
accounted for under the equity method.

5. Related Party Transactions and Major Customers

During the years ended December 31, 1997 and 1998, a significant portion of
the Company's revenue activity consisted of sales to one affiliated company,
which at the time was partially owned by the shareholders of the Company. Net
sales to this affiliate, an original manufacturer of personal computers, were
$12,068,296, $5,349,057 and $553,799 for the years ended December 31, 1997,
1998 and 1999, respectively, and represented 33.5%, 12.4% and 1.0% of the
Company's net sales, respectively. At December 31, 1998 and 1999, accounts
receivable from this affiliate were $614,538 and $23,103, or 7.5% and 0.3% of
total trade receivables, respectively.

Net sales to the Company's top two unaffiliated customers in 1997 and 1998
and top three unaffiliated customers in 1999 were 35.4%, 47.6% and 55.6% of
total net sales, respectively, including one customer in 1999 which represented
32.1% of total net sales. Accounts receivable in the aggregate from these
significant customers at December 31, 1998 and 1999 were $1,457,142, or 17.9%
and $2,434,045, or 32.5% of total trade receivables, respectively.

During the year ended December 31, 1997, the Company wrote off accounts
receivable balances due from related parties in the aggregate of $670,263, none
of which related to the receivables from the affiliated company discussed
above.

A director of the Company performed services for the Company including
investigation of strategic and financing alternatives. As consideration for
such services, the Company paid to the director $25,000, $101,184 and $0,
including out of pocket expenses during the years ended December 31, 1997, 1998
and 1999. The Company has committed, upon consummation of an offering, to a
cash payment to the director of 0.75% of the gross proceeds of an offering and
additional equity securities, warrants, or other participating interests in the
Company representing 0.25% of the consideration raised in value, priced in
accordance with a Black-Scholes option model, with a minimum amount of warrants
issuable pursuant to this transaction not to be less than $50,000 in value.
After the end of the year, the Company paid a non-refundable retainer of
$60,000 to this director, which will be credited against any transaction fees
payable pursuant to the offering.

During the year ended December 31, 1999, the Company made non-interest
bearing loans totaling $1,427,000 and interest bearing loans totaling
$1,075,000 (interest accrued at the Company's borrowing rate with its major
lender) to its president. These loans were repaid in their entirety during 1999
except for interest accrued, totaling approximately $72,000, which was
subsequently forgiven by the Company's Board of Directors. After the end of
1999, the Company loaned $2,630,000 to this officer with interest at the
Company's borrowing rate with its major lender.

During 1999, advances totaling $2,500,000 were made to one of the Company's
shareholders. This amount was repaid before the end of 1999. In addition, a
loan totaling $1,000,000 was made during 1999 to a company partially owned by
the Company's president and this shareholder. This amount was repaid prior to
the end of 1999.

F-11
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999

In connection with stock warrants issued to an officer of the Company (see
Note 9), the Company loaned an officer a total of $1,428,000 under promissory
notes bearing compound interest at the rate of 4.6% per annum. The unpaid
principal balance and any accrued but unpaid interest shall be due and payable
on the earlier of: (1) January 1, 2006; or (2) the fifteenth day following the
date of delivery by the Company to Maker of written demand therefore made at
any time after the later of (a) the closing of a Liquidity Event (as defined),
or (b) if applicable, the expiration of any lock-up period imposed in
connection with such Liquidity Event on the common stock of the Company, or any
successor to the Company, held by Maker.

In 1999, the Company made payments in lieu of lease payments on a new
production facility to a company owned by the Company's president. Such
payments during the year totaled $86,000. Subsequent to December 31, 1999, the
Company expects to enter into a multi-year lease agreement with this company.
Lease payments are expected to be negotiated at rates commensurate with
commercial terms charged for similar properties in the area with increases
based on the Consumer Price Index.

6. Financing

In February 1997, the Company entered into a credit agreement (Credit
Agreement) with a lender, which was amended in January 1998 and further amended
in April 1998, July 1998, June 1999 and January 2000. The Credit Agreement
currently provides loans based on 80% of the Company's eligible receivables (as
defined) (Receivable Loans), loans based on 90% of the net purchase price of
new equipment purchased and delivered subsequent to June 1999 (Equipment Loans)
and additional revolving loans (Revolving Loans). Under the Credit Agreement
the Company is allowed to borrow the lesser of $30,000,000 or an amount equal
to 80% of the Company's eligible receivables (as defined), $15,000,000 of
Equipment Loans plus the unpaid balance of the Revolving Loans. The Credit
Agreement had an original maturity date of February 28, 1998 and provided for
automatic renewals. In January 1998, the agreement was amended to have an
original maturity of April 30, 1998 and in January 2000 the maturity date was
extended to June 30, 2001, and continues to provide for automatic renewals.
Borrowings under Receivable Loans bear interest at the prime rate (8.5% at
December 31, 1999) plus 2.0% per annum; however, the interest rate will not be
less than 7.0% per annum. Outstanding borrowings under the Receivable Loans
amounted to $1,616,537 at December 31, 1998 and $1,852,303 at December 31,
1999. The Credit Agreement is secured by accounts receivable, equipment,
inventory and other assets and is personally guaranteed by the shareholders of
the Company. Interest expense related to the Receivable Loans for the years
ended December 31, 1997, 1998 and 1999 was $234,778, $116,959 and $274,833,
respectively.

Under the amendment of April 1998, the Revolving Loans were for an amount of
$15,000,000, which is payable in monthly principal installments of $312,500
through (i) the earlier of the date the Credit Agreement terminates, or is
terminated, or (ii) April 2002. The Revolving Loans bear interest at the prime
rate (8.5% at December 31, 1999) plus 2.0% per annum; however, the interest
rate will not be less than 7.0% per annum. The outstanding balance of the
Revolving Loans was $12,812,500 and $9,062,500 at December 31, 1998 and 1999,
respectively. As part of the Credit Agreement, the Revolving Loans are
collateralized by accounts receivable, equipment, inventory and other assets
and is personally guaranteed by the shareholders of the Company.

Under the amendment of June 1999, amounts borrowed under the Equipment Loans
are to be repaid in 48 equal monthly payments of principal through the earlier
of (i) the earlier of the date the Credit Agreement terminates, or is
terminated or (ii) the date such Equipment Loans have been repaid in full. The
Equipment Loans bear interest at the prime rate (8.5% at December 31, 1999)
plus 2.0% per annum; however, the interest rate will not be less than 7.0% per
annum. At December 31, 1999 no amounts had been borrowed under the Equipment
Loans.

F-12
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999

The Credit Agreement also includes, among others, various negative covenants,
including the prohibition to merge or consolidate with another corporation,
make any loans of money or assets, redeem, retire, purchase or otherwise
acquire any of the Company's stock and make any changes in the Company's
capital structure which would have a material adverse impact on the Company's
ability to repay its obligations under the Credit Agreement without the
lender's prior written consent. The Company is in compliance with all terms of
the Credit Agreement. The Company obtained permission from the lender for the
loans and advances to related parties.
Subsequent to the closing of the offering described in Note 11, the Company
anticipates renegotiating the terms under the Credit Facility, including
maturity dates, covenants, interest rates and personal guarantees.

Future maturities of long-term debt are as follows:

<TABLE>
<S> <C>
Year ended December 31:
2000........................................................... $ 3,757,697
2001........................................................... 3,758,480
2002........................................................... 1,568,629
-----------
$ 9,084,806
===========
</TABLE>

Interest expense incurred for long-term debt was $579,123, $1,142,893 and
$1,125,167 for the years ended December 31, 1997, 1998 and 1999, respectively.

The Company's weighted average interest rate on its debt was 10.5%, 10.4% and
10.1% for the years ended December 31, 1997, 1998 and 1999, respectively.

7. Income Taxes

The provision (benefit) for state income taxes is as follows:

<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1997 1998 1999
--------- -------- ---------
<S> <C> <C> <C>
Current........................................ $ 102,900 $ 80,223 $ (72,500)
Deferred....................................... 17,000 22,000 74,500
--------- -------- ---------
$ 119,900 $102,223 $ 2,000
========= ======== =========
</TABLE>

As described in Note 1 to the financial statements, the Company is currently
an S Corporation for federal income and California franchise tax purposes under
Subchapter S of the Internal Revenue Code and the corresponding provisions of
the California statute. In connection with the closing of the proposed public
offering as discussed in Note 11, the Company's S Corporation status will
terminate and the Company will be taxed as a C Corporation. This will result in
the establishment of a provision for income taxes and deferred tax liability of
approximately $2,700,000 (unaudited) upon the closing date. The following
unaudited pro forma income tax information has been determined as if the
Company operated as a C Corporation for the periods presented:

<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Federal tax provision..................... $2,460,000 $2,115,600 $4,598,935
State income taxes net of federal
benefit.................................. 701,100 602,800 1,297,135
---------- ---------- ----------
Total pro forma income tax provision...... $3,161,100 $2,718,400 $5,896,070
========== ========== ==========
</TABLE>

F-13
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999

The difference between actual income tax expense and the U. S. Federal
statutory income tax rate is as follows:

<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Statutory rate................................. 34.0 % 34.0 % 34.0 %
State tax provision............................ 1.5 1.5 1.5
Manufacturers credit........................... -- -- (1.5)
S Corporation status........................... (34.0) (34.0) (34.0)
------- ------- -------
Effective tax rate............................. 1.5 % 1.5 % 0.0 %
======= ======= =======
</TABLE>

The difference between the unaudited pro forma income tax expense and the
U.S. Federal statutory income tax rate is as follows:

<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Statutory rate................................. 34.0 % 34.0 % 34.0 %
State tax provision............................ 6.0 6.0 6.0
Manufacturers credit........................... -- -- (1.3)
Other.......................................... (0.1) -- 1.3
------- ------- -------
Effective tax rate............................. 39.9 % 40.0 % 40.0 %
======= ======= =======
</TABLE>

Deferred income tax assets and liabilities are computed for those differences
having future tax consequences using the currently enacted tax laws and rates.
Income tax expenses equal the current tax payable or refundable for the period,
plus or minus the net change in the deferred tax asset and liabilities
accounts.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

Significant components of our deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
December 31
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Bad debt allowance..................................... $ 2,400 $ 4,000
Other.................................................. 5,600 9,000
Credit carryovers...................................... -- 43,000
--------- ---------
Total deferred assets.................................. 8,000 56,000
Depreciation........................................... (90,000) (116,000)
Other.................................................. -- (96,500)
--------- ---------
Total deferred liabilities............................. (90,000) (212,500)
--------- ---------
Net deferred tax liabilities........................... $ (82,000) (156,500)
========= =========
Balance sheet classification:
Current deferred tax assets.......................... $ 8,000 $ --
Current deferred tax liabilities..................... -- 40,500
Long-term deferred tax liabilities................... 90,000 116,000
</TABLE>

F-14
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999

8. Commitments

The Company leases two office and manufacturing facilities in Valencia,
California, under operating leases. One of the leases expires in February 2002.
The other lease expires in May 2007 and is with a company owned by the
shareholders of the Company. Both leases provide for adjustments to the monthly
base rent periodically, based on the Consumer Price Index.

At December 31 1999, future minimum lease payments required under the lease
arrangement are as follows:

<TABLE>
<CAPTION>
Related Party Other Total
------------- -------- ----------
<S> <C> <C> <C>
Year ended December 31:
2000..................................... $ 240,000 $276,638 $ 516,638
2001..................................... 240,000 273,358 513,358
2002..................................... 240,000 49,345 289,345
2003..................................... 240,000 570 240,570
2004..................................... 240,000 -- 240,000
Thereafter............................... 580,000 -- 580,000
---------- -------- ----------
$1,780,000 $599,911 $2,379,911
========== ======== ==========
</TABLE>

Total rent expense pursuant to these leases was $395,672, $507,886 and
$504,312 for the years ended December 31, 1997, 1998 and 1999, respectively.
Rental payments to related parties were $140,000 for the year ended December
31, 1997 and $240,000 for both the years ended December 31, 1998 and 1999.

Subsequent to December 31, 1999, the Company expects to enter into a multi-
year lease agreement for a new production facility and negotiated a termination
of its lease agreement for one of its existing facilities. The new lease is
expected to be a multi-year operating lease with a company owned by the
shareholders of the Company to be negotiated at rates commensurate with
commercial terms charged for similar properties with periodic adjustments to
the monthly base rent based on the Consumer Price Index. The Company does not
expect to incur significant expenses in terminating its existing lease under
the terms of the agreement with the current landlord.

9. Stockholders' Equity

Stock Options

In April 1998, the Company adopted a Stock Incentive Plan (Stock Plan). Each
executive officer, employee, non-employee director or consultant of the Company
or any of its future subsidiaries is eligible to be considered for the grant of
awards under the Stock Plan. A maximum of 1,980,000 shares of common stock may
be issued pursuant to awards granted under the Stock Plan, subject to certain
adjustments to prevent dilution. Any shares of common stock subject to an
award, which for any reason expires or terminates unexercised, are again
available for issuance under the Stock Plan. The options vest generally at
periods up to 5 years. The Stock Plan will be administered by the Company's
Board of Directors or by a committee of two or more non-employee directors
appointed by the Board of Directors. The Stock Plan authorizes the grant of
nonqualified stock options, incentive stock options, stock appreciation rights,
restricted stock and stock bonuses. No stock appreciation rights are
outstanding at December 31, 1999.

F-15
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999

A summary of the Company's stock option activity, and related information is
as follows:

<TABLE>
<CAPTION>
Outstanding Stock Options
-----------------------------
Weighted
Average
Exercise Range of
Price Exercise
Number of Per Prices Per
Options Share Share
--------- -------- ----------
<S> <C> <C> <C>
Outstanding at January 1, 1998................... -- $ -- $ --
Granted........................................ 1,366,200 6.88 6.79-7.21
--------- ----- ----------
Outstanding at December 31, 1998................. 1,366,200 6.88 6.79-7.21
--------- ----- ----------
Outstanding at December 31, 1999................. 1,366,200 $6.88 $6.79-7.21
========= ===== ==========
Exercisable at:
December 31, 1998.............................. -- $ -- $ --
========= ===== ==========
December 31, 1999.............................. 353,925 $6.89 $6.79-7.21
========= ===== ==========
</TABLE>

At December 31, 1999, 613,800 shares were available for future grant. The
weighted average remaining contractual life for the outstanding options is 8.46
years at December 31, 1999.

If the Company had elected to recognize compensation expense based on the
fair value of the options granted at grant date for its stock-based
compensation plans, the Company's net income would have been reduced by
approximately $350,000 and $600,000 for the years ended December 31, 1998 and
1999, respectively, and basic and diluted earnings per share would have been
$0.43 and $0.40, respectively, for the year ended December 31, 1998, and $0.95
and $0.83, respectively, for the year ended December 31, 1999. The fair value
of the options is estimated using a minimum value option pricing model with the
following weighted average assumptions for grants in 1998: dividend yield of
0.0%; risk free interest rate of 6.0%; and expected life of 5.0 years.

Warrants

On January 1, 1998, the Company granted to one of its officers warrants to
purchase 604,890 shares of common stock. Each warrant provides for the purchase
of one share of common stock at $.00010 per share, resulting in stock warrant
compensation expense of $3,055,000 for the year ended December 31, 1998, with
the warrants expiring on December 31, 2007. These warrants have no voting
rights, dividend rights or preferences until such time as they are exercised
for shares of common stock. As of December 31, 1999 no warrants have been
exercised.

Stock Related Compensation Expense

In 1999, the shareholders of the Company committed to give 49,500 shares of
their stock to a director for services to the Company. For the year ended
December 31, 1999, the Company has recorded stock related compensation expense
of $720,000 for this commitment based on the estimated fair value of the shares
given, and a contribution to capital for the same amount from the shareholders.

10. Fair Value of Financial Instruments

In estimating its fair value disclosures for financial statements, the
Company used the following methods and assumptions:

Cash and cash equivalents: The carrying amount approximates fair value.

F-16
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

December 31, 1999

Accounts receivable, other receivables, accounts payable and accounts
payable-equipment: The carrying amount approximates fair value. The fair
value of the note receivable from officer discounted at the Company's
borrowing rate is approximately $1,096,000.

Line of credit and long-term debt: The carrying amounts of the Company's
borrowings under its short-term revolving credit arrangements approximate
their fair value. The fair values of the Company's long-term debts are
estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amounts of long-term debts approximate their
fair values.

11. Proposed Initial Public Offering

On April 13, 2000, the Company's Board of Directors authorized the filing of
a registration statement with the Securities and Exchange Commission, relating
to an initial public offering of up to 5,775,000 shares of the Company's
unissued common stock and up to 1,155,000 shares to be sold by selling
shareholders.

In connection with the initial public offering, on April 13, 2000 the Board
of Directors approved and effected a 1.65-for-1 stock split of the Company's
common stock. All references in the accompanying financial statements to the
number of shares of common stock or per share amounts have been retroactively
adjusted to reflect the stock split. In addition, the Company's capital
structure changed, to reflect 75,000,000 authorized shares of common stock and
to reflect 10,000,000 shares of preferred stock. The Board of Directors has
authority to fix the rights, preferences, privileges and restrictions,
including voting rights, of these shares or preferred stock without any future
vote or action by the shareholders.

The S Corporation status of the Company will terminate upon the closing of
the offering and, thereafter, the Company will be subject to federal and state
income taxes. As a result of terminating its S Corporation status, the Company
will pay a distribution of the retained earnings balance prior to closing to
its shareholders.

On April 13, 2000, the Company granted a total of 256,900 stock options under
the Stock Plan to employees and a director at an exercise price of $12.25 per
share, which was determined to be not less than the estimated fair market value
of the stock on the date of grant.

Additionally, on April 13, 2000, the Company adopted a 2000 Stock Option Plan
(2000 Plan). Upon the closing of this offering there would be no new grants
under the Stock Plan. The 2000 Plan provides for a maximum of 1,340,000, plus
any shares reserved for issuance under the existing Stock Plan which have not
been issued as of the offering.

F-17
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
Pro Forma
December 31, March 31, March 31,
1999 2000 2000
------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Accounts receivables (net of allowance
for doubtful accounts of $265,778 in
1999 and $295,778 in 2000)............ $ 7,202,126 $ 3,850,816
Inventories............................ 766,868 877,457
Prepaid expenses....................... 284,101 291,635
Deferred income taxes.................. -- -- 300,000
----------- -----------
Total current assets.................... 8,253,095 5,019,908
Property and equipment, net............. 29,837,448 34,874,168
Investments............................. 2,852,400 3,351,880
Other assets............................ 145,845 2,256,687
----------- -----------
Total assets............................ $41,088,788 $45,502,643
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Bank overdraft......................... $ 370,489 $ 706,699
Line of credit......................... 1,852,303 1,919,620
Accounts payable--trade................ 2,762,457 3,323,063
Accounts payable--capital equipment.... 1,530,356 2,450,520
Accrued expenses--royalties............ 4,101,760 4,238,654
Accrued expenses....................... 1,043,268 1,985,922
Deferred revenue....................... 700,000 700,000
Deferred income taxes.................. 40,500 40,500 --
Current portion of long-term debt...... 3,757,698 4,790,198
Current portion of capital lease
obligations........................... 5,938 5,938
Distributions payable.................. -- -- 14,686,732
----------- -----------
Total current liabilities............... 16,164,769 20,161,114
Long-term debt, less current portion.... 5,327,108 7,399,204
Capital lease obligations, less current
portion................................ 11,525 9,613
Deferred income taxes................... 116,000 116,000 3,200,000
Commitments
Shareholders' equity:
Preferred stock, no par value:
Authorized shares--10,000,000
Issued and outstanding--none -- --
Common stock, no par value:
Authorized shares--75,000,000
Issued and outstanding--14,850,000..... 3,790,000 3,790,000 3,790,000
Accumulated other comprehensive
income................................ -- 654,480 654,480
Retained earnings...................... 17,107,386 17,430,232 --
Notes receivable from officers......... (1,428,000) (4,058,000) (4,058,000)
----------- ----------- ----------
Total shareholders' equity.............. 19,469,386 17,816,712 386,480
----------- -----------
Total liabilities and shareholders'
equity................................. $41,088,788 $45,502,643
=========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-18
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
1999 2000
----------- -----------
<S> <C> <C>
Net sales to unaffiliated companies................... $ 8,615,155 $14,780,253
Net sales to related parties.......................... 59,605 --
----------- -----------
Total net sales....................................... 8,674,760 14,780,253
Cost of goods sold.................................... 5,864,842 9,341,734
----------- -----------
Gross profit.......................................... 2,809,918 5,438,519
Selling, general and administrative expenses.......... 1,071,812 1,593,580
----------- -----------
Income from operations................................ 1,738,106 3,844,939
Other income (expense):
Interest income..................................... -- 7,521
Interest expense.................................... (351,396) (398,614)
Loss in equity of unconsolidated entity............. -- (155,000)
----------- -----------
Other income (expense), net......................... (351,396) (546,093)
----------- -----------
Income before provision for income taxes.............. 1,386,710 3,298,846
Provision for income taxes............................ 500 1,000
----------- -----------
Net income............................................ $ 1,386,210 $ 3,297,846
=========== ===========
Earnings per share:
Basic............................................... $0.09 $0.22
=========== ===========
Diluted............................................. $0.09 $0.20
=========== ===========
Shares used in computing earnings per share:
Weighted average shares outstanding--basic.......... 14,850,000 14,850,000
=========== ===========
Weighted average shares outstanding--diluted........ 15,859,207 16,123,995
=========== ===========
Pro forma net income data:
Income before provision for income taxes............ $ 1,386,710 $ 3,298,846
Pro forma income tax provision...................... 554,684 1,319,538
----------- -----------
Pro forma net income................................ $ 832,026 $ 1,979,308
Pro forma basic earnings per share.................. $0.13
===========
Pro forma diluted earnings per share................ $0.11
===========
Weighted average shares outstanding--basic.......... 14,850,000
===========
Weighted average shares outstanding--diluted........ 17,434,725
===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-19
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)

<TABLE>
<CAPTION>
Notes Accumulated
Common Stock Receivable Other
--------------------- from Comprehensive Retained
Shares Amount Officers Income Earnings Total
---------- ---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999................... 14,850,000 $3,790,000 $(1,428,000) $ -- $17,107,386 $19,469,386
Dividends at $0.20 per
share.................. -- -- -- -- (2,975,000) (2,975,000)
Loan to officer......... -- -- (2,630,000) -- -- (2,630,000)
Comprehensive income:
Net income............ -- -- -- -- 3,297,846 3,297,846
Unrealized gain in
investment of Lions
Gate Entertainment... -- -- -- 654,480 -- 654,480
---------- ---------- ----------- -------- ----------- -----------
Total comprehensive
income............... 3,952,326
---------- ---------- ----------- -------- ----------- -----------
Balance at March 31,
2000................... 14,850,000 $3,790,000 $(4,058,000) $654,480 $17,430,232 $17,816,712
========== ========== =========== ======== =========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-20
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31 March 31
1999 2000
----------- -----------
<S> <C> <C>
Operating activities
Net income........................................... $ 1,386,210 $ 3,297,846
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 896,774 1,149,803
Loss in equity of unconsolidated entity............. -- 155,000
Provision for bad debts............................. 30,000 30,000
Changes in operating assets and liabilities
Accounts receivable................................. 4,955,472 3,321,310
Inventories......................................... 449,851 (110,589)
Prepaid expenses.................................... 15,224 (7,534)
Other assets........................................ (1,205,048) (2,010,843)
Accounts payable.................................... (1,372,965) 560,606
Accrued expenses.................................... 84,534 942,654
Accrued expenses--royalties......................... 1,221,200 136,894
----------- -----------
Net cash provided by operating activities............ 6,461,252 7,465,147
Investing activities
Capital expenditures................................. (1,456,133) (5,266,358)
----------- -----------
Net cash used in investing activities................ (1,456,133) (5,266,358)
Financing activities
Net borrowings (repayments) on line of credit........ (2,905,061) 67,317
Net borrowings (payments) on bank overdraft.......... (232,824) 336,210
Proceeds from long-term debt......................... -- 4,130,000
Repayments on long-term debt......................... (939,193) (1,125,403)
Notes receivable from officers....................... (365,000) (2,630,000)
Payments on capital lease obligations................ (3,041) (1,913)
Dividends paid to shareholders....................... (560,000) (2,975,000)
----------- -----------
Net cash used in financing activities................ (5,005,119) (2,198,789)
Net change in cash and cash equivalents.............. -- --
Cash and cash equivalents at beginning of period..... -- --
----------- -----------
Cash and cash equivalents at end of period........... $ -- $ --
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................ 483,520 398,474
State income taxes.................................. 1,500 4,200
</TABLE>

The accompanying notes are an integral part of these statements.

F-21
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying interim condensed consolidated financial statements of the
Company are unaudited and include all of the accounts of the Company and its
wholly owned subsidiary, Future Media Cdlogue, Inc. In the opinion of
management, the unaudited financial statements have been prepared on the same
basis as the Company's audited financial statements and all adjustments
necessary for a fair presentation (consisting of only normal recurring
adjustments) have been reflected in the interim periods presented. Due
principally to the seasonal nature of some of the Company's business, results
may not be indicative of results for a full year. The accompanying financial
statements should be read in conjunction with the Company's financial
statements for the year ended December 31, 1999 included in this Prospectus.

Future Media Productions, Inc. (the Company) is an independent
manufacturer/replicator of digital versatile discs (DVDs) and compact discs
(CDs) to companies in industries including Internet/online, film and
entertainment, edutainment software, publishing and computer hardware. The
majority of the Company's business is targeted at high volume customers in
these markets.

2. Future Media Cdlogue

In February 2000 the Company formed a wholly owned subsidiary, Future Media
Cdlogue ("Cdlogue") for the purpose of pursuing opportunities in the
replication of digital catalogs. From the period of its incorporation through
March 31, 2000 Cdlogue has had no revenues or expenses.

3. Property and Equipment

Property and equipment, net, consisted of the following:

<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ------------
<S> <C> <C>
Plant equipment......... $ 39,057,036 $ 43,989,249
Computer equipment and
software............... 237,871 237,871
Office furniture and
equipment.............. 83,558 108,905
Automotive equipment.... 96,865 96,865
Leasehold improvements.. 1,698,122 2,927,086
Leased property under
capital leases......... 57,540 57,540
------------ ------------
41,230,992 47,417,517
Less accumulated
depreciation and
amortization........... (11,393,544) (12,543,348)
------------ ------------
$ 29,837,448 $ 34,874,168
============ ============
</TABLE>

4. Shareholders' Equity

On January 12, 2000 the Company loaned its President $2,630,000 under a note
due no later than June 30, 2000. The note bears interest at the rate charged
the Company by its major lender (prime plus 2%). If the Company has no
borrowings from its major lender the loan will bear interest at the prime rate
plus 1%.

On April 13, 2000 the Company's Board of Directors authorized and effected a
1.65 for one stock split. All references in the accompanying condensed
consolidated financial statements to the number of shares of common stock and
per common share amounts have been retroactively adjusted to reflect the stock
split.

On April 13, 2000, the Company granted stock options to a director and
employees to purchase a total of 266,800 shares of common stock under the 1998
Stock Incentive Plan. These stock options vest over a four year period.

F-22
<PAGE>

FUTURE MEDIA PRODUCTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(Unaudited)

On April 13, 2000 the Company granted 25,000 warrants to purchase common
stock to Levy, Small and Lallas for legal services in connection with the
offering. The warrant will have an exercise price equal to the initial price of
common stock sold in this offering. The warrants vest upon the completion of
this offering and expire within one year of the close of this offering. The
value of the warrants will be deducted from the proceeds of this offering.

On April 13, 2000 the Company adopted a new stock option incentive plan ("the
2000 Stock Incentive Plan"). Each of our executive officers, other employees,
non-employee directors or consultants are eligible to be considered for the
grant of awards under the 2000 Stock Incentive Plan. A maximum of 1,651,650
shares of common stock may be issued under the 2000 Stock Incentive Plan. If
any award expires or terminates for any reason, then the common stock subject
to that award will again be available under the 2000 Stock Incentive Plan.

5. Comprehensive Income

For the three months ended March 31, 1999 and 2000, comprehensive income
amounted to $1,386,210 and $3,952,326, respectively. The difference between net
income and comprehensive income relates to the unrealized gain the Company
recorded for its available-for-sale securities on its investment in its
affiliate Lions Gate Entertainment.

6. Pro Forma Information

The Company is an S Corporation for income tax purposes. The pro forma
unaudited March 31, 2000 information in the accompanying balance sheet reflects
the distribution, in the amount of approximately $14,686,732, to shareholders
upon conversion from an S Corporation and the establishment of a deferred tax
liability of approximately $2,900,000, resulting in an approximately $2,700,000
reduction of retained earnings, upon conversion.

In connection with the closing of a proposed public offering, the Company's S
Corporation status will terminate and the Company will be taxed thereafter as a
C Corporation. The pro forma condensed consolidated statements of income
reflect a provision for federal and state income taxes as if the Company was a
C Corporation for the periods presented. Upon conversion to a C Corporation,
the Company will establish a net deferred tax liability with an accompanying
increase to income tax expense. If this charge were recorded at March 31, 2000,
the amount would have been approximately $2,700,000, consisting primarily of
timing differences related to depreciation.

The pro forma earnings per share information is calculated as if the Company
had been subject to tax as a C Corporation and for the dilutive effect of share
equivalents in the amount of 1,307,730 shares for expected dividends to
shareholders for the most recent three month period presented.

7. Commitments

The Company entered into a lease agreement for its new headquarters effective
March 1, 2000, with a company owned by the Company's President. The lease
expires December 31, 2013 and has an initial base rent of $53,843, subject to
annual increases based on the Consumer Price Index. At the end of the fifth and
tenth year of the lease the base rent is to be adjusted to fair market value on
these dates as agreed to by the parties. The Company believes the lease is no
less favorable than would be obtained from an independent third party.

F-23
<PAGE>

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

Until , all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

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

[LOGO OF FUTURE MEDIA APPEARS HERE]

Prudential Volpe Technology
a unit of Prudential Securities

CIBC World Markets

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table itemizes the expenses incurred by the Registrant in
connection with the issuance and distribution of the Securities being
registered, other than underwriting discounts. All the amounts shown are
estimates except the Securities and Exchange Commission registration fee and
the NASD filing fee.

<TABLE>
<S> <C>
Registration fee--Securities and Exchange Commission............. $ 18,480
NASD filing fee.................................................. 7,500
Nasdaq National Market fee....................................... 50,000
Accounting fees and expenses..................................... 250,000
Legal fees and expenses (other than blue sky).................... 325,000
Blue sky fees and expenses, including legal fees................. 10,000
Printing; stock certificates..................................... 200,000
Transfer agent and registrar fees................................ 10,000
Consulting fees.................................................. 525,000
Miscellaneous.................................................... 104,020
----------
Total.......................................................... $1,500,000
==========
</TABLE>

Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Registrant's Articles of Incorporation include a provision that
eliminates the personal liability of its directors to the Registrant and its
shareholders for monetary damages for breach of the directors' fiduciary duties
in certain circumstances. This limitation has no effect on a director's
liability (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that a
director believes to be contrary to the best interests of the Registrant or its
shareholders or that involve the absence of good faith on the part of the
director, (iii) for any transaction from which a director derived an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard for
the director's duty to the Registrant or its shareholders in circumstances in
which the director was aware, or should have been aware, in the ordinary course
of performing a director's duties, of a risk of a serious injury to the
Registrant or its shareholders, (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the
director's duty to the Registrant or its shareholders, (vi) under Section 310
of the California Corporations Code (the "California Code") (concerning
contracts or transactions between the Registrant and a director) or (vii) under
Section 316 of the California Code (concerning directors' liability for
improper dividends, loans and guarantees). The provision does not extend to
acts or omissions of a director in his capacity as an officer. Further, the
provision will not affect the availability of injunctions and other equitable
remedies available to the Registrant's shareholders for any violation of a
director's fiduciary duty to the Registrant or its shareholders.

The Registrant's Articles of Incorporation also include an authorization for
the Registrant to indemnify its agents (as defined in Section 317 of the
California Code), through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this latter provision, the
Registrant's Bylaws provide for indemnification of the Registrant's directors,
officers and employees. In addition, the Registrant, at its discretion, may
provide indemnification to persons whom the Registrant is not obligated to
indemnify. The Bylaws also allow the Registrant to enter into indemnity
agreements with individual directors, officers, employees and other agents.
These indemnity agreements have been entered into with all directors and
provide the maximum indemnification permitted by law. These agreements,
together with the Registrant's Bylaws and Articles of Incorporation, may
require the Registrant, among other things, to indemnify such directors against
certain liabilities that may arise by reason of their status or service as
directors (other than liabilities resulting

II-1
<PAGE>

from willful misconduct of a culpable nature), to advance expenses to them as
they are incurred, provided that they undertake to repay the amount advanced if
it is ultimately determined by a court that they are not entitled to
indemnification, and to obtain directors' and officers' insurance if available
on reasonable terms.

The Company and certain of the Company's shareholders (the "Existing
Shareholders") plan to enter into a tax indemnification agreement (the "Tax
Agreement") relating to their respective income tax liabilities. Because the
Company will be fully subject to corporate income taxation after the
termination of the Company's S Corporation status, the reallocation of income
and deductions between the period during which the Company was treated as an S
Corporation and the period during which the Company will be subject to
corporate income taxation may increase the taxable income of one party while
decreasing that of another party. Accordingly, the Tax Agreement is intended to
assure that taxes are borne by the Company on the one hand and the Existing
Shareholders on the other only to the extent that such parties received the
related income. The Tax Agreement generally provides that, if an adjustment is
made to the taxable income of the Company for a year in which it was treated as
an S Corporation, the Company will indemnify the Existing Shareholders and the
Existing Shareholders will indemnify the Company against any increase in the
indemnified party's income tax liability (including interest and penalties and
related costs and expenses), with respect to any tax year to the extent such
increase results in a related decrease in the income tax liability of the
indemnifying party for that year. The Company will also indemnify the Existing
Shareholders for all taxes imposed upon them as the result of their receipt of
an indemnification payment under the Tax Agreement.

Section 317 of the California Code and the Registrant's Bylaws make provision
for the indemnification of officers, directors and other corporate agents in
terms sufficiently broad to indemnify such persons, under certain
circumstances, for liabilities (including reimbursement of expenses incurred)
arising under the Securities Act of 1933 ("Securities Act").

Section of the Underwriting Agreement filed as Exhibit 1.1 hereto sets forth
certain provisions with respect to the indemnification of certain controlling
persons, directors and officers against certain losses and liabilities,
including certain liabilities under the Securities Act.

The Registrant maintains director and officer liability insurance.

Insofar as indemnification for liabilities arising under the Securities Act
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 and is, therefore, unenforceable.

Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:

<TABLE>
<CAPTION>
Exhibit
Document Number
-------- -------
<S> <C>
Proposed form of Underwriting Agreement.............................. 1.1
Registrant's Amended and Restated Articles of Incorporation.......... 3.1
Registrant's Amended and Restated Bylaws............................. 3.2
Registrant's Form of Indemnification Agreement....................... 10.4
Tax Agreement........................................................ 10.5
</TABLE>

Item 15. RECENT SALES OF UNREGISTERED SECURITIES.

In April 2000, pursuant to its 1998 Stock Plan the Company issued stock
options to purchase an aggregate of 256,900 shares of common stock at $12.25
per share to one of the Company's directors and 61 employees of the Company.
The issuance and sale of these securities is exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act as a transaction not involving any public offering, and also pursuant Rule
701 because the offer and sale of the securities was pursuant to a compensatory
benefit plan relating to compensation.

II-2
<PAGE>

The Company has agreed to issue to Levy, Small, & Lallas, LLP warrants to
purchase 25,000 shares of the Company's common stock for a purchase price equal
to the initial sales price for the shares sold pursuant to this offering. The
issuance of these warrants was exempt from registration pursuant to Section
4(2) of the Securities Act as a transaction not involving any public offering.

In August, 1998, the Company issued pursuant to its 1998 Stock Incentive Plan
(the "Stock Plan") stock options to purchase an aggregate of 272,250 shares of
common stock at $7.21 per share to four directors of the Company. The issuance
and sale of these securities is exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) of the Securities Act as a
transaction not involving any public offering, and also pursuant to Rule 701
because the offer and sale of the securities was pursuant to a compensatory
benefit plan relating to compensation.

In May 1998, pursuant to its 1998 Stock Plan the Company issued stock options
to purchase an aggregate of 1,069,200 shares of common stock at $6.79 per share
to 15 employees of the Company. The issuance and sale of these securities is
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act as a transaction not involving any public
offering, and also pursuant Rule 701 because the offer and sale of the
securities was pursuant to a compensatory benefit plan relating to
compensation.

The Company has agreed to issue to Averil Capital Markets Group, Inc.
warrants to purchase shares of common stock equivalent to 0.25% of the gross
proceeds raised in the Offering. The issuance of these warrants was exempt from
registration pursuant to Section 4(2) of the Securities Act as a transaction
not involving any public offering.

On January 1, 1998 the Company issued warrants to purchase 604,890 shares of
common stock to David Moss, the Company's Vice President--Operations, for
services which had been rendered by Mr. Moss. The issuance of these warrants
was exempt from registration pursuant to Section 4(2) of the Securities Act as
a transaction not involving any public offering, and also pursuant to Rule 701
because the offer and sale of the securities was pursuant to a compensatory
benefit plan relating to compensation.

Item 16. EXHIBITS.

II-3
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
10.9 Lease Agreement, dated May 1, 1997, between the Registrant and
Bascal Properties.*
10.10 Loan and Security Agreement dated February 26, 1997, between the
Registrant and Greyrock Business Credit.*
10.11 Extension Agreement, dated January 16, 1998, between the Registrant
and Greyrock Business Credit.*
10.12 Amendment to Loan Agreement, dated April 29, 1998, between the
Registrant and Greyrock Business Credit.*
10.13 Extension Agreement, dated September 4, 1998, between the Registrant
and Greyrock Business Credit.*
10.14 Amendment to Loan Document, dated June 17, 1999 between the
Registrant and Greyrock Business Capital.*
10.15 Amendment to Loan Document, dated January 25, 2000, between the
Registrant and Greyrock Business Capital.*
10.16 Comprehensive CD Disc License Agreement, dated October 1, 1996,
between the Registrant and U.S. Phillips Corporation.*
10.17 Non-Exclusive Patent License Agreement for Disc Product
Manufacturers, dated June 1, 1996, between the Registrant and
Discovision Associates.*
10.18 Letter Agreement, dated June 15, 1998, between the Registrant and
Averil Capital Markets Group, Inc.*
10.19 Engagement Agreement, dated June 15, 1998, between the Registrant
and Averil Capital Markets Group, Inc.*
10.20 DVD Format and Logo License, dated January 11, 2000, between the
Registrant and Toshiba Corporation.*
10.21 DVD Video Disc and DVD Rom Disc Patent License Agreement, dated
October 1, 1999, between the Registrant and U.S. Philips
Corporation.*
10.22 Patent License Agreement for the Use of AC-3 Technology in the
Manufacture of DVD Discs, dated October 1, 1999, between Registrant
and U.S. Phillips Corporation.*
10.23 Subscription Agreement, dated December 22, 1999, between the
Registrant and Synthonics Technologies, Inc.**
10.24 Letter Agreement, between the Registrant and Lions Gate
Entertainment Corp.**
10.25 Lease Agreement for 24811 Avenue Rockefeller.**
10.26 Warrant Agreement between the Registrant and Averil Capital Markets
Group, Inc.**
10.27 Warrant Agreement between the Registrant and Levy, Small and
Lallas.**
10.28 2000 Stock Incentive Plan.
23.1 Consent of Troop Steuber Pasich Reddick & Tobey, LLP (included in
its opinion filed as Exhibit 5.1 hereto).*
23.2 Consent of Ernst & Young LLP.

23.3 Consent of Infotech.
24.1 Power of Attorney (included on signature page).*
27.1 Financial Data Schedule.*
</TABLE>
- --------

*Previously filed.

**To be filed by Amendment.

(b) Financial Statement Schedules

Report of Independent Auditors.

Schedule II Valuation and Qualifying Accounts

II-4
<PAGE>

Item 17. UNDERTAKINGS.

(a) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities
Act 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 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 of 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 a 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 and will be governed by the final adjudication of such issue.

(1) For the purposes of determining any liability under the Securities
Act, 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, 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-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act, 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 Amendment No. 1 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on May 8, 2000.

Future Media Productions, Inc.

/s/ Alex Sandel
By: _________________________________
Alex Sandel
Chairman of the Board,
Chief Executive Officer and
President

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Alex
Sandel and Louis Weiss, and each of them, as his true and lawful attorneys-in-
fact and agents with full power of substitution and resubstitution, for him and
his name, place and stead, in any and all capacities, to sign any or all
amendments (including post effective amendments) to this Registration Statement
and a new Registration Statement filed pursuant to Rule 462(b) of the
Securities Act and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the foregoing, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.

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 stated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Alex Sandel Chairman of the Board, May 8, 2000
______________________________________ Chief Executive Officer
Alex Sandel and President

/s/ Louis Weiss Chief Financial Officer, May 8, 2000
______________________________________ Principal Accounting
Louis Weiss Officer and Secretary

* Director May 8, 2000
______________________________________
Sanford R. Climan

* Director May 8, 2000
______________________________________
Mark Dyne
</TABLE>

II-6
<PAGE>

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director May 8, 2000
______________________________________
Diana Maranon

/s/ Jason Barzilay Director May 8, 2000
______________________________________
Jason Barzilay

/s/ Martin Schuermann Director May 8, 2000
______________________________________
Martin Schuermann

* Power of Attorney

*By: /s/ Alex Sandel
_________________________________
Alex Sandel, Attorney-in-Fact
</TABLE>
II-7
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Future Media Productions, Inc.

We have audited the financial statements of Future Media Productions, Inc. as
of December 31, 1998 and 1999 and for each of the three years in the period
ended December 31, 1999 and have issued our report thereon dated February 25,
2000 except as to Note 11, as to which the date is April 13, 2000 (included
elsewhere in this Registration Statement). Our audits also included the
financial statement schedule listed in Item 16(b) of this Registration
Statement. The schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.

In our opinion, the financial statement schedule referred to above as of
December 31, 1998 and 1999 and for each of the three years in the period ended
December 31, 1999, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

/s/ Ernst & Young LLP

Los Angeles, California
February 25, 2000

II-8
<PAGE>

SCHEDULE II

FUTURE MEDIA PRODUCTIONS, INC.

VALUATION AND QUALIFYING ACCOUNTS

ALLOWANCE FOR DOUBTFUL ACCOUNTS
For the Years Ended December 31, 1997, 1998 and 1999

<TABLE>
<CAPTION>
Charged Balance
Balance at to Costs Charged at End
Beginning and to Other of
Description of Period Expenses Accounts Deductions(1) Period
- ----------- ---------- -------- -------- ------------- --------
Column A Column B Column C Column D Column E
- -------- ---------- ----------------- ------------- --------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1997..................... $298,439 $955,243 $ -- $1,003,682 $250,000
Year Ended December 31,
1998..................... 250,000 120,000 -- 207,000 163,000
Year Ended December 31,
1999..................... 163,000 120,000 -- 17,222 265,778
Three Months Ended March
31, 2000 (unaudited)..... 265,778 30,000 -- -- 295,778
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
1.1 Form of Underwriting Agreement.**
3.1 Amended and Restated Articles of Incorporation of Registrant.*
3.2 Amended and Restated Bylaws of Registrant.*
4.1 Specimen Stock Certificate of Common Stock of Registrant.
5.1 Opinion and Consent of Troop Steuber Pasich Reddick & Tobey, LLP.
10.1 1998 Stock Incentive Plan.*
10.2 Form of Registrant's Stock Option Certificate (Non-Statutory Stock
Option).*
10.3 Form of Registrant's Stock Option Certificate (Incentive Stock
Option).*
10.4 Form of Director and Officer Indemnification Agreement.*
10.5 Form of Tax Indemnification Agreement to be entered into among
Registrant and the Existing Shareholders.*
10.6 Employment Agreement, dated August 26, 1998, between the Registrant
and David Moss.*
10.7 Warrant Agreement, dated January 1, 1998, between the Registrant and
David Moss.*
10.8 Lease Agreement and Notice of Extension thereof, dated August 24,
1994 and June 13, 1996, respectively, between the Registrant and
Hermann Rosen & Florence W. Rosen, Trustees.*
10.9 Lease Agreement, dated May 1, 1997, between the Registrant and
Bascal Properties.*
10.10 Loan and Security Agreement dated February 26, 1997, between the
Registrant and Greyrock Business Credit.*
10.11 Extension Agreement, dated January 16, 1998, between the Registrant
and Greyrock Business Credit.*
10.12 Amendment to Loan Agreement, dated April 29, 1998, between the
Registrant and Greyrock Business Credit.*
10.13 Extension Agreement, dated September 4, 1998, between the Registrant
and Greyrock Business Credit.*
10.14 Amendment to Loan Document, dated June 17, 1999 between the
Registrant and Greyrock Business Capital.*
10.15 Amendment to Loan Document, dated January 25, 2000, between the
Registrant and Greyrock Business Capital.*
10.16 Comprehensive CD Disc License Agreement, dated October 1, 1996,
between the Registrant and U.S. Phillips Corporation.*
10.17 Non-Exclusive Patent License Agreement for Disc Product
Manufacturers, dated June 1, 1996, between the Registrant and
Discovision Associates.*
10.18 Letter Agreement, dated June 15, 1998, between the Registrant and
Averil Capital Markets Group, Inc.*
10.19 Engagement Agreement, dated June 15, 1998, between the Registrant
and Averil Capital Markets Group, Inc.*
10.20 DVD Format and Logo License, dated January 11, 2000, between the
Registrant and Toshiba Corporation.*
10.21 DVD Video Disc and DVD Rom Disc Patent License Agreement, dated
October 1, 1999, between the Registrant and U.S. Philips
Corporation.*
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
10.22 Patent License Agreement for the Use of AC-3 Technology in the
Manufacture of DVD Discs, dated October 1, 1999, between Registrant
and U.S. Phillips Corporation.*
10.23 Subscription Agreement, dated December 22, 1999, between the
Registrant and Synthonics Technologies, Inc.**
10.24 Letter Agreement, between the Registrant and Lions Gate
Entertainment Corp.**
10.25 Lease Agreement for 24811 Avenue Rockefeller.**
10.26 Warrant Agreement between the Registrant and Averil Capital Markets
Group, Inc.**
10.27 Warrant Agreement between the Registrant and Levy, Small and
Lallas.**
10.28 2000 Stock Incentive Plan.
23.1 Consent of Troop Steuber Pasich Reddick & Tobey, LLP (included in
its opinion filed as Exhibit 5.1 hereto).*
23.2 Consent of Ernst & Young LLP.

23.3 Consent of Infotech.
24.1 Power of Attorney (included on signature page).*
27.1 Financial Data Schedule.*
</TABLE>
- --------

*Previously filed.

**To be filed by Amendment.

<PAGE>

EXHIBIT 4.1

===============================================================================

COMMON STOCK COMMON STOCK
[LOGO OF FUTURE MEDIA
[NUMBER] [SHARES]
PRODUCTIONS]
INCORPORATED UNDER THE SEE REVERSE FOR STATEMENTS
LAWS OF THE STATE OF RELATING TO RIGHTS, PREFERENCES,
CALIFORNIA PRIVILEGES AND RESTRICTIONS

CUSIP 36115P 10 0
------------------------------------------------------------------------
THIS CERTIFIES THAT

is the record holder of
------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
WITH NO PAR VALUE, OF

-------------------- FUTURE MEDIA PRODUCTIONS, INC. --------------------
transferable on the books of the Corporation by the holder hereof in
person or by duly authorized attorney upon surrender of this Certificate
properly endorsed. This Certificate is not valid unless countersigned
and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.

Dated:

[SEAL OF FUTURE MEDIA PRODUCTIONS, INC.]
[INCORPORATED]
[JUNE 8, 1994]
[CALIFORNIA]

/s/ [illegible] /s/ [illegible]
SECRETARY CHAIRMAN AND PRESIDENT

COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY

AUTHORIZED SIGNATURE

================================================================================

<PAGE>
EXHIBIT 5.1

[LETTERHEAD OF TROOP STEUBER PASICH REDDICK & TOBEY, LLP]

May 8, 2000

Future Media Productions, Inc.
24811 Avenue Rockefeller
Valencia, California 91355

Ladies and Gentlemen:

At your request, we have examined the Registration Statement on Form S-1
(the "Registration Statement") to which this letter is attached as Exhibit 5.1
filed by Future Media Productions, Inc., a California corporation (the
"Company"), in order to register under the Securities Act of 1933, as amended
(the "Act"), 5,185,185 shares of Common Stock, no par value per share, of the
Company, and an additional 777,777 shares of Common Stock, no par value per
share, of the Company subject to the underwriters' over-allotment option, and
any additional shares of Common Stock of the Company which may be registered
pursuant to Rule 462(b) under the Act (collectively, the "Shares").

We are of the opinion that the shares have been duly authorized and upon
issuance and sale of the Shares in conformity with and pursuant to the
Registration Statement, the Shares will be validly issued, fully paid and non-
assessable.

We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name in the Prospectus constituting a part
thereof.

Respectfully submitted,

TROOP STEUBER PASICH
REDDICK & TOBEY, LLP

<PAGE>

EXHIBIT 10.28

FUTURE MEDIA PRODUCTIONS, INC.

2000 STOCK INCENTIVE PLAN

1. Purpose of the Plan.

The purpose of this 2000 Stock Incentive Plan (the "Plan") is to provide
incentives and rewards to selected eligible directors, officers, employees and
consultants of Future Media Productions, Inc. (the "Company") or its
subsidiaries in order to assist the Company and its subsidiaries in attracting,
retaining and motivating those persons by providing for or increasing the
proprietary interests of those persons in the Company, and by associating their
interests in the Company with those of the Company's shareholders.

2. Administration of the Plan.

The Plan shall be administered by the Board of Directors of the Company
(the "Board"), or a committee of the Board (the "Committee") consisting of two
or more directors, at least two of whom shall be both "Non-Employee Directors",
as that term is defined in Rule 16b-3(b) of the Rules and Regulations (the
"Rules") of the Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended, and an "outside director" for purposes of Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations of the Internal Revenue Service adopted thereunder, as such Rules
and such Section and regulations may from time to time be amended or
interpreted. Members of the Committee, if any, shall serve at the pleasure of
the Board. If administration is delegated to the Committee, the Committee shall
have, in connection with the administration of the Plan, the powers theretofore
possessed by the Board (and references in this Plan to the Board shall
thereafter be to the Committee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan as may be adopted from time to time
by the Board.

The Board shall have all the powers vested in it by the terms of the Plan,
including exclusive authority (i) to select from among eligible directors,
officers, employees and consultants, those persons to be granted "Awards" (as
defined below) under the Plan; (ii) to determine the type, size and terms of
individual Awards (which need not be identical) to be made to each person
selected; (iii) to determine the time when Awards will be granted and to
establish objectives and conditions (including, without limitation, vesting and
performance conditions), if any, for earning Awards; (iv) to amend the terms or
conditions of any outstanding Award, subject to applicable legal restrictions
and to the consent of the other party to such Award; (v) to determine the
duration and purpose of leaves of absences which may be granted to holders of
Awards without constituting termination of their employment for purposes of
their Awards; (vi) to authorize any person to execute, on behalf of the Company,
any instrument required to carry out the purposes of the Plan; and (vii) to make
any and all other determinations which it determines to be necessary or
advisable in the administration of the Plan. The Board shall have full power
and authority to administer and interpret the Plan and to adopt, amend and
revoke such rules, regulations, agreements, guidelines and instruments for the
administration of the Plan and for the conduct of its business as the Board
deems necessary or advisable. The Board's interpretation of the Plan, and all
actions taken and determinations made by the Board pursuant to the powers vested
in it hereunder, shall be conclusive and binding on all
<PAGE>

parties concerned, including the Company, its shareholders, any participants in
the Plan and any other employee of the Company or any of its subsidiaries.

3. Persons Eligible Under the Plan.

Any person who is a director, officer, employee or consultant of the
Company, or any of its subsidiaries (a "Participant"), shall be eligible to be
considered for the grant of Awards under the Plan.

4. Awards.

(a) Common Stock and Derivative Security Awards. Awards authorized under
the Plan shall consist of any type of arrangement with a Participant that is not
inconsistent with the provisions of the Plan and that, by its terms, involves or
might involve or be made with reference to the issuance of (i) shares of the
Common Stock, no par value per share, of the Company (the "Common Stock") or
(ii) a "derivative security" (as that term is defined in Rule 16a-1(c) of the
Rules, as the same may be amended from time to time) with an exercise or
conversion price related to the Common Stock or with a value derived from the
value of the Common Stock.

(b) Types of Awards. Awards are not restricted to any specified form or
structure and may include, but need not be limited to, sales, bonuses and other
transfers of stock, restricted stock, stock options, reload stock options, stock
purchase warrants, other rights to acquire stock or securities convertible into
or redeemable for stock, stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance shares, or any other type of Award
which the Board shall determine is consistent with the objectives and
limitations of the Plan. An Award may consist of one such security or benefit,
or two or more of them in tandem or in the alternative.

(c) Consideration. Common Stock may be issued pursuant to an Award for any
lawful consideration as determined by the Board, including, without limitation,
a cash payment, services rendered, or the cancellation of indebtedness.

(d) Guidelines. The Board may adopt, amend or revoke from time to time
written policies implementing the Plan. Such policies may include, but need not
be limited to, the type, size and term of Awards to be made to participants and
the conditions for payment of such Awards.

(e) Terms and Conditions. Subject to the provisions of the Plan, the
Board, in its sole and absolute discretion, shall determine all of the terms and
conditions of each Award granted pursuant to the Plan, which terms and
conditions may include, among other things:

(i) any provision necessary for such Award to qualify as an
incentive stock option under Section 422 of the Code (an "Incentive Stock
Option");

(ii) a provision permitting the recipient of such Award to pay the
purchase price of the Common Stock or other property issuable pursuant to
such Award, or to pay such recipient's tax withholding obligation with
respect to such issuance, in whole or in part, by delivering previously
owned shares of capital stock of the Company (including "pyramiding")

2
<PAGE>

or other property, or by reducing the number of shares of Common Stock or
the amount of other property otherwise issuable pursuant to such Award; or

(iii) a provision conditioning or accelerating the receipt of
benefits pursuant to the Award, or terminating the Award, either
automatically or in the discretion of the Board, upon the occurrence of
specified events, including, without limitation, a change of control of the
Company, an acquisition of a specified percentage of the voting power of
the Company, the dissolution or liquidation of the Company, a sale of
substantially all of the property and assets of the Company or an event of
the type described in Section 7 of the Plan.

(f) Suspension or Termination of Awards. If the Company believes that a
Participant has committed an act of misconduct as described below, the Company
may suspend the Participant's rights under any then outstanding Award pending a
determination by the Board. If the Board determines that a Participant has
committed an act of embezzlement, fraud, nonpayment of any obligation owed to
the Company or any subsidiary, breach of fiduciary duty or deliberate disregard
of the Company's rules resulting in loss, damage or injury to the Company, or if
a Participant makes an unauthorized disclosure of trade secret or confidential
information of the Company, engages in any conduct constituting unfair
competition, or induces any customer of the Company to breach a contract with
the Company, neither the Participant nor his or her estate shall be entitled to
exercise any rights whatsoever with respect to such Award. In making such
determination, the Board shall act fairly and shall give the Participant a
reasonable opportunity to appear and present evidence on his or her behalf to
the Board.

(g) Maximum Grant of Awards to any Participant. During any fiscal year, no
Participant shall receive Awards under the Plan representing more than 100,000
shares of Common Stock, subject to adjustment as provided in Section 7.

5. Shares of Common Stock Subject to the Plan.

The aggregate number of shares of Common Stock that may be issued or
issuable pursuant to all Awards under the Plan (including Awards in the form of
Incentive Stock Options and Non-Statutory Options) shall not exceed an aggregate
of 1,626,900 shares of Common Stock, subject to adjustment as provided in
Section 7 of the Plan. Shares of Common Stock subject to the Plan may consist,
in whole or in part, of authorized and unissued shares or treasury shares. Any
shares of Common Stock subject to an Award which for any reason expires or is
terminated unexercised as to such shares shall again be available for issuance
under the Plan. For purposes of this Section 5, the aggregate number of shares
of Common Stock that may be issued at any time pursuant to Awards granted under
the Plan shall be reduced by: the number of shares of Common Stock previously
issued pursuant to Awards granted under the Plan, other than shares of Common
Stock subsequently reacquired by the Company pursuant to the terms and
conditions of such Awards and with respect to which the holder thereof received
no benefits of ownership, such as dividends; and the number of shares of Common
Stock which were otherwise issuable pursuant to Awards granted under this Plan
but which were withheld by the Company as payment of the purchase price of the
Common Stock issued pursuant to such Awards or as payment of the recipient's tax
withholding obligation with respect to such issuance.

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6. Payment of Awards.

The Board shall determine the extent to which Awards shall be payable in
cash, shares of Common Stock or any combination thereof. The Board may, upon
request of a Participant, determine that all or a portion of a payment to that
Participant under the Plan, whether it is to be made in cash, shares of Common
Stock or a combination thereof, shall be deferred. Deferrals shall be for such
periods and upon such terms as the Board may determine in its sole discretion.

7. Dilution and Other Adjustment.

In the event of any change in the outstanding shares of the Common Stock or
other securities then subject to the Plan by reason of any stock split, reverse
stock split, stock dividend, recapitalization, merger, consolidation,
combination or exchange of shares or other similar corporate change, or if the
outstanding securities of the class then subject to the Plan are exchanged for
or converted into cash, property or a different kind of securities, or if cash,
property or securities are distributed in respect of such outstanding securities
(other than a regular cash dividend) , then, unless the terms of such
transaction shall provide otherwise, such equitable adjustments shall be made in
the Plan and the Awards thereunder (including, without limitation, appropriate
and proportionate adjustments in (i) the number and type of shares or other
securities or cash or other property that may be acquired pursuant to Incentive
Stock Options and other Awards theretofore granted under the Plan, (ii) the
maximum number and type of shares or other securities that may be issued
pursuant to Incentive Stock Options and other Awards thereafter granted under
the Plan; and (iii) the maximum number of securities with respect to which
Awards may thereafter be granted to any Participant in any fiscal year) as the
Board determines are necessary or appropriate, including, if necessary, any
adjustments in the maximum number of shares referred to in Section 5 of the
Plan. Such adjustments shall be conclusive and binding for all purposes of the
Plan.

8. Miscellaneous Provisions.

(a) Definitions. As used herein, "subsidiary" means any current or future
corporation which would be a "subsidiary corporation," as that term is defined
in Section 425 of the Code, of the Company; and the term "or" means "And/or."

(b) Conditions on Issuance. Securities shall not be issued pursuant to
Awards unless the grant and issuance thereof shall comply with all relevant
provisions of law and the requirements of any securities exchange or quotation
system upon which any securities of the Company are listed, and shall be further
subject to approval of counsel for the Company with respect to such compliance.
Inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is determined by Company counsel to be necessary
to the lawful issuance and sale of any security or Award, shall relieve the
Company of any liability in respect of the nonissuance or sale of such
securities as to which requisite authority shall not have been obtained.

(c) Rights as Shareholder. A participant under the Plan shall have no
rights as a holder of Common Stock with respect to Awards hereunder, unless and
until certificates for shares of such stock are issued to the participant.

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(d) Assignment or Transfer. Subject to the discretion of the Board, and
except with respect to Incentive Stock Options which are not transferable except
by will or the laws of descent and distribution, Awards under the Plan or any
rights or interests therein shall be assignable or transferable.

(e) Agreements. All Awards granted under the Plan shall be evidenced by
written agreements in such form and containing such terms and conditions (not
inconsistent with the Plan) as the Board shall from time to time adopt.

(f) Withholding Taxes. The Company shall have the right to deduct from all
Awards hereunder paid in cash any federal, state, local or foreign taxes
required by law to be withheld with respect to such awards and, with respect to
awards paid in stock, to require the payment (through withholding from the
participant's salary or otherwise) of any such taxes. The obligation of the
Company to make delivery of Awards in cash or Common Stock shall be subject to
the restrictions imposed by any and all governmental authorities.

(g) No Rights to Award. No Participant or other person shall have any
right to be granted an Award under the Plan. Neither the Plan nor any action
taken hereunder shall be construed as giving any Participant any right to be
retained in the employ of the Company or any of its subsidiaries or shall
interfere with or restrict in any way the rights of the Company or any of its
subsidiaries, which are hereby reserved, to discharge a Participant at any time
for any reason whatsoever, with or without good cause.

(h) Costs and Expenses. The costs and expenses of administering the Plan
shall be borne by the Company and not charged to any Award nor to any
Participant receiving an Award.

(i) Funding of Plan. The Plan shall be unfunded. The Company shall not be
required to establish any special or separate fund or to make any other
segregation of assets to assure the payment of any Award under the Plan.

9. Amendments and Termination.

(a) Amendments. The Board may at any time terminate or from time to time
amend the Plan in whole or in part, but no such action shall adversely affect
any rights or obligations with respect to any Awards theretofore made under the
Plan. However, with the consent of the Participant affected, the Board may amend
outstanding agreements evidencing Awards under the Plan in a manner not
inconsistent with the terms of the Plan.

(b) Shareholder Approval. To the extent that Section 422 of the Code,
other applicable law, or the rules, regulations, procedures or listing agreement
of any national securities exchange or quotation system, requires that any
amendment of the Plan be approved by the shareholders of the Company, no such
amendment shall be effective unless and until it is approved by the shareholders
in such a manner and to such a degree as is required.

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(c) Termination. Unless the Plan shall theretofore have been terminated as
above provided, the Plan (but not the awards theretofore granted under the Plan)
shall terminate on and no awards shall be granted after April 13, 2010.

10. Effective Date.

The Plan is effective on April 13, 2000, the date on which it was
originally adopted by the Board of Directors of the Company and the holders of
the majority of the Common Stock of the Company.

11. Governing Law.

The corporate law of Delaware shall govern issues related to the validity
and issuance of Common Stock. Otherwise, the Plan and any agreements entered
into thereunder shall be construed and governed by the laws of the State of
Delaware applicable to contracts made within, and to be performed wholly within,
such state.

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EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 25, 2000 except for Note 11, as to which
the date is April 13, 2000 in the Registration Statement (Form S-1 333-32444)
and related Prospectus of Future Media Productions, Inc. for the registration
of 5,962,962 shares of its common stock.

/s/ Ernst & Young LLP

Los Angeles, California

May 5, 2000

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EXHIBIT 23.3

[LETTERHEAD OF INFOTECH]

MEMO TO: Ted Fundoukos, Prudential Securities
Via FAX: 1.310.586.0575 VOX 1.310.586.0599
FROM: Julie B. Schwerin, InfoTech

We understand and approve of the use of InfoTech data as delivered in documents
exchanged between out two firms during the last two months in a prospectus
offering on behalf of your client. We understand that the data will be included
in the prospectus providing that the following stipulations are met:

1. Please note that the client and Prudential Securities are responsible for the
accurate application of InfoTech time-series data and the attachment of InfoTech
data to its source and copyright in any subsequent publication. No other party
is authorized to reprint in part or in total.

2. InfoTech time-series data delivered to clients may not be incorporated into a
document sold or underwritten for its content value directly except under fair
use as provided in copyright law.

3. To ensure the accuracy of information in fast-changing times, InfoTech
time-series data may not be introduced into a publication more than 18 months
after release by InfoTech.

Please rely on us for any additional clarification with regard to the
application or interpretation of InfoTech time-series data in valuing business
properties. We appreciate the opportunity to be of service and wish you every
success.

/s/ Julie B. Schwerin