MODUS MEDIA INTERNATIONAL HOLDINGS INC, S-1/A, 2000-01-18

MODUS MEDIA INTERNATIONAL HOLDINGS INC
S-1/A, 2000-01-18
MANAGEMENT SERVICES

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<PAGE>

As filed with the Securities and Exchange Commission on January 18, 2000

Registration No. 333-92559
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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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MODUS MEDIA INTERNATIONAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 7379 04-3357799
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)

690 Canton Street
Westwood, MA 02090
(781) 407-2000
(Address including zip code, and telephone number including area code, of
Registrant's principal executive offices)
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TERENCE M. LEAHY
Chairman of the Board
and Chief Executive Officer
Modus Media International Holdings, Inc.
690 Canton Street
Westwood, MA 02090
(781) 407-2000
(Name, address including zip code and telephone number including area code, of
agent for service)
Copies to:

MARK G. BORDEN, ESQ. KEITH F. HIGGINS, ESQ.
PHILIP P. ROSSETTI, ESQ. Ropes & Gray
Hale and Dorr LLP One International Place
60 State Street Boston, Massachusetts 02110
Boston, Massachusetts 02109 Telephone: (617) 951-7000
Telephone: (617) 526-6000 Telecopy: (617) 951-7050
Telecopy: (617) 526-5000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
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, 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 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 number of the earlier effective registration statement for the
same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed maximum
Title of each class of Amount Proposed maximum aggregate Amount of
securities to be to be offering price offering registration
registered registered per share (1) price(1) fee(2)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share....... 9,200,000 $16.00 $147,200,000 $38,861(3)
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933,
as amended.
(2) Calculated pursuant to Rule 457(a) based on an estimate of the proposed
maximum aggregate offering price.

(3) Previously paid in connection with the initial filing of this Registration
Statement.
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.

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

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We 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 we are not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

PROSPECTUS SUBJECT TO COMPLETION, DATED JANUARY , 2000

8,000,000 Shares

[MODUS MEDIA INTERNATIONAL LOGO APPEARS HERE]
Modus Media International Holdings, Inc.
Common Stock

---------

We are selling 8,000,000 shares of our common stock. The underwriters named
in this prospectus may purchase up to 1,200,000 additional shares of our common
stock to cover over-allotments.

This is an initial public offering of common stock. We currently expect the
initial public offering price to be between $14.00 and $16.00 per share, and
have applied to have the common stock included for quotation on the Nasdaq
National Market under the symbol "EMMI".

---------

Investing in the common stock involves risks. See "Risk Factors" beginning on
page 7.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

---------

<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Initial Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Modus Media (before expenses) $ $
</TABLE>

The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
2000.

---------

Salomon Smith Barney
Donaldson, Lufkin & Jenrette
Robertson Stephens
Thomas Weisel Partners LLC

January , 2000
<PAGE>

[Inside Front Cover -- Gatefold]

A Proven Supply Chain Partner

[Intuit logo]

[Sun MicroSystems logo]

[Microsoft logo]

[macromedia logo]

[network associates logo]

[micron pc.com logo]

[2Wire logo]

[Electronics for Imaging logo]

[Novell logo]

[photoalley.com logo]

[McAfee logo] [Meta Creations logo]

[Media Farm logo]

[beyond.com logo]
[FileMaker logo]
[Palm Computing Platform logo]

[IBM logo]

[ABN-AMRO logo]
[AT&T logo]

[Reel.com logo]
[SBC logo]

All logos are the trademarks of their respective companies.
<PAGE>

[Inside Front Cover - Gatefold]

Modus Media Worldwide

[graphic depicting world map]

20 Solution Centers

North America Europe Asia Pacific

California France(2) Australia
Idaho Ireland(4) China
North Carolina United Kingdom Japan
Utah(3) The Netherlands Singapore
Washington Taiwan

[Modus Media Logo]

<PAGE>

[Inside Front Cover]

Extended Supply Chain Management

Customer Relationship Management

[small, circular [small, circular photograph of inside
photograph of Web Site of a response center]

e-Commerce Support Services Customer Service and Support
Developing Web Storefronts Electronic Software Licensing Services
with Direct Connections To Processing Product Returns,
Fulfillment Services Refunds and Rebates

Order Entry and Processing
<TABLE>
<S> <C> <C>
[small, circular [small, circular photograph [small, circular photograph
photograph of solution of data information of currencies from
center operator] numbers] foreign countries]

Order Receipt Managing License Programs Local Tax Calculation
and Entry Customer Registration Processing Online
Phone, US Mail, Fax Order Activity Reporting Payments in Multiple Currencies
Email, and Web Orders
</TABLE>

Manufacturing and Fulfillment Services

<TABLE>
<S> <C> <C>
[small, circular [small, circular photograph [small, circular photograph
photograph of of assembly line in a of map of Asia]
CD's] warehouse]

Intellectual Property Kitting and Assembly Distribution
Management Managing Inventory Logistics
Procurement and Materials Customs and Export
Disk/CD Replication Picking and Packing Compliance
Print On Demand Warehousing Shipping Documentation
</TABLE>

[Modus Media Logo]

<PAGE>

You should rely only on the information contained in this prospectus. Modus
Media has not authorized anyone to provide you with different information.
Modus Media is not making an offer of these securities in any state where the
offer is not permitted. You should not assume that the information provided by
this prospectus is accurate as of any date other than the date on the front of
this prospectus.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements........................ 15
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Results of Operations and Finan-
cial Condition.......................................................... 20
Business................................................................. 28
Management............................................................... 39
Certain Transactions..................................................... 48
Principal Stockholders................................................... 50
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 54
Underwriting............................................................. 56
Validity of Common Stock................................................. 58
Experts.................................................................. 58
Where You Can Find Additional Information................................ 58
Index to Consolidated Financial Statements............................... F-1
</TABLE>

Until 2000, all dealers that buy, sell or trade the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary highlights information contained in this prospectus
and does not contain all the information that may be important to you. You
should read the entire prospectus carefully, including the section entitled
"Risk Factors" and our financial data and related notes, before making an
investment decision.

Modus Media International

We are a leading, global provider of extended supply chain management
services for the technology industry. Manufacturers of hardware and software
and Internet companies engage us to manage and perform the multiple processes
that must occur between the acquisition of materials for their products and the
manufacture or assembly, packaging and delivery of those products to their
customers. These many discrete processes are traditionally referred to as the
supply chain. In addition, we perform services that are at the front end of the
supply chain, such as management of orders that customers submit via phone,
fax, e-mail and over the web. We also provide post-sale, or back end, services
such as tracking of order status and management of product returns. We refer to
the traditional supply chain, together with these additional front end and back
end processes, as the extended supply chain.

We have been in operation since 1982 and have built a worldwide
infrastructure in 12 countries, consisting of 20 facilities, which we refer to
as solution centers, and over 4,500 employees. Our clients include original
equipment manufacturers such as Dell, Hewlett Packard, IBM and Sun
Microsystems; independent software vendors such as Intuit, Microsoft, Network
Associates and Novell; and leading consumer electronics, telecommunications and
Internet companies such as Sony, AT&T, E-Stamp and Beyond.com. The length of
our relationships with our five leading clients, based on 1999 revenue, has
averaged over ten years.

Companies, particularly in the technology industry, have increasingly sought
to engage third parties to provide, or outsource, critical non-core business
processes so that they can focus on their core competencies. Market demands for
increased productivity have led companies to move beyond outsourcing only their
basic production and fulfillment processes to outsourcing all of the business
processes involved in their extended supply chains. The goal of extended supply
chain management is to link supply and demand as closely as possible in order
to reduce costs, minimize business risk and better meet client expectations for
performance and quality. We believe that the growth of e-commerce is increasing
demand for supply chain outsourcing. According to G2R, a subsidiary of Gartner
Group, the market for supply chain management outsourcing is estimated to grow
from $17.0 billion in 1998 to $42.2 billion in 2003, representing a compound
annual growth rate of 20%.

We offer a full range of extended supply chain management services that
provide our clients with a "one-stop shop" for their outsource requirements.
Our capabilities include:

. an integrated end-to-end solution, which enables our clients to link
supply and demand immediately, or in real time, reducing costs and
improving efficiency and customer satisfaction;

. e-commerce support services, which integrate web ordering with
fulfillment operations where we manufacture, pack and ship our clients'
customer orders;

. flexible production, which allows us to facilitate the customization of
hardware and software products;

. a global presence, which enables us to reduce time to market, integrate
product introductions, and provide local customization and efficient
inventory management; and

. substantial experience in supply chain management, which has earned us a
reputation as a trusted part of our clients' supply chains.

We refer to our services as content manufacturing solutions and e-
fulfillment solutions. By content manufacturing solutions, we mean the supply
chain management services that we provide to original

3
<PAGE>

equipment manufacturers, or OEMs, and independent software vendors, or ISVs. By
e-fulfillment solutions, we mean our expanded services that combine some or all
of the services we provide in our content manufacturing solutions with
additional services that support direct interaction with our clients'
customers, who may be end users or retailers. We distinguish our content
manufacturing solutions from our e-fulfillment solutions by the manner in which
product orders originate. Orders for products that we fulfill through e-
fulfillment solutions come directly from end users or retailers, while orders
for products that we fulfill through our content manufacturing solutions come
from our OEM and ISV clients. While a majority of the orders received through
our e-fulfillment solutions currently are submitted by telephone or facsimile,
we expect that an increasing portion will be received over the web as we
provide more e-fulfillment services and the Internet becomes a more prevalent
medium for commerce. To date, we have built more than 40 e-commerce sites for
our clients, ranging from web sites for the sale of products, known as
storefronts, to online order tracking and order information sites. In some
cases, we have built multiple sites for the same client.

The following shows our principal outsource services:

<TABLE>
<S> <C>
e-Fulfillment Solutions
Content Manufacturing Solutions
. Design of web site storefronts and
. Management of intellectual connection of web sites to fulfillment
property and other content, operations;
such as software code;
. Operating response centers, which
. Procurement; process orders and inquiries received by
telephone, fax, email and web;
. Inventory and other materials
management; . Processing online payments in multiple
currencies;
. Software manufacturing;
. Handling of product inquiries by
. Assembly; and clients' customers;

. Fulfillment and warehousing. . Processing product returns, refunds and
rebates;

. Reporting on the ordering activities of
our clients' customers; and

. Providing passwords and registration as
part of our electronic license
distribution services.
</TABLE>

Our strategy is to take advantage of the market trends towards more frequent
product introductions; mass customization and growth of e-commerce by
implementing strategies to:

. Grow our e-fulfillment solutions business;

. Expand our services to existing clients;

. Capitalize on our global presence and
information technology capabilities;

. Continue to achieve high ratings in
outsourcing industry performance
measurements;

. Improve our financial returns from higher
productivity operations that can be expanded
efficiently;

. Pursue select, high-growth markets and
expand client base; and

. Pursue strategic acquisitions.

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

We are a Delaware corporation. Our principal executive offices are located
at 690 Canton Street, Westwood, Massachusetts 02090 and our telephone number is
(781) 407-2000. Our World Wide Web site address is www.modusmedia.com. This
reference is not intended to incorporate the information on our web site into
this prospectus.

4
<PAGE>

The Offering

<TABLE>
<S> <C>
Common stock offered........ 8,000,000 shares
Common stock to be
outstanding after this
offering................... 34,006,116 shares
Use of proceeds............. For general corporate purposes, including working
capital, payment of debt and potential
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National
Market symbol.............. EMMI
</TABLE>

The number of shares that will be outstanding after the offering is based on
the number of shares outstanding as of December 31, 1999 and excludes:

. 6,310,616 shares of common stock issuable upon exercise of stock options
outstanding as of December 31, 1999, with a weighted average exercise
price of $1.87 per share, of which options to purchase 1,673,506 shares
were then exercisable; and

. 266,500 shares of common stock reserved for future grant under our stock
option plans.

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

Unless specifically stated, the information in this prospectus:

. assumes no exercise of the underwriters' over-allotment option;

. assumes an initial offering price of $15.00 per share, the midpoint of
our initial public offering price range;

. reflects a 2-for-1 stock split which will be effected prior to this
offering;

. assumes the conversion of all shares of non-voting common stock into
common stock; and

. reflects the filing, as of the closing of the offering, of our Second
Amended and Restated Certificate of Incorporation, referred to in this
prospectus as the restated certificate of incorporation, and the
adoption of our Amended and Restated By-Laws, referred to in this
prospectus as the restated by-laws, implementing the provisions
described below under "Description of Capital Stock--Delaware Law and
Certain Charter and By-Law Provisions, Anti-Takeover Effects."

Modus Media and its logo are trademarks of Modus Media. All other trademarks
or tradenames referred to in this prospectus are the property of their
respective owners.

5
<PAGE>

Summary Consolidated Financial Data

The following summary historical consolidated financial data should be read
along with "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and the consolidated financial statements and related
notes included elsewhere in this prospectus. The as adjusted balance sheet data
gives effect to our receipt of the estimated proceeds from the sale of
8,000,000 shares of common stock we are selling in this offering at an assumed
public offering price of $15.00 per share, after deducting estimated
underwriting discounts and commissions and offering expenses.

<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1996 1997 1998 1999
--------- --------- ----------- -----------
(in thousands, except share and per share
data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue........................ $ 811,905 $ 684,523 $ 630,082 $ 697,468
Gross profit................... 124,116 119,735 133,902 147,787
Restructuring charges.......... 100,883 -- -- --
Operating income (loss)........ (107,675) (17,014) 17,172 28,554
Income (loss) before income
taxes......................... (122,107) (29,843) 15,012 25,510
Net income (loss).............. $(111,096) $ (32,667) $ 10,747 $ 17,960
========= ========= =========== ===========
Preferred stock dividends,
net........................... -- 172 5,922 (6,659)
--------- ----------- -----------
Net income (loss) available to
common shareholders........... $ (32,839) $ 4,825 $ 24,619
========= =========== ===========
Net income (loss) per share(1):
Basic........................ $ 0.19 $ 0.98
=========== ===========
Diluted...................... $ 0.18 $ 0.84
=========== ===========
Number of shares used in per
share calculations(1):
Basic........................ 25,497,466 25,227,672
Diluted...................... 26,144,234 29,428,426
Selected Operating Data:
Depreciation and amortization.. $ 28,200 $ 26,371 $ 18,731 $ 17,407
EBITDA(2)...................... (79,475) 9,357 35,903 45,961
Capital expenditures........... 15,800 34,032 12,307 17,168
</TABLE>

<TABLE>
<CAPTION>
As of December 31,
1999
--------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................................. $ 29,759 $ 91,859
Working capital............................................ 29,589 91,689
Total assets............................................... 286,610 348,710
Total debt................................................. 56,303 8,603
Total shareholders' equity................................. 43,369 153,169
</TABLE>
- --------

(1) Prior to the Reorganization on December 15, 1997, as described in Note 2
of the Consolidated Financial Statements, no common shares were
outstanding; therefore, income per share data prior to 1998 is not
meaningful and has been excluded.

(2) EBITDA is defined as operating income before depreciation and
amortization. EBITDA is presented because we believe that EBITDA is a
widely accepted financial indicator of an entity's ability to incur and
service debt. EBITDA should not be considered by an investor as an
alternative to net income or income from operations, as an indicator of
our operating performance or other combined operations or cash flow data
prepared in accordance with generally accepted accounting principles, or
as an alternative to cash flows as a measure of liquidity. Our computation
of EBITDA may differ from similarly titled computations of other
companies.

6
<PAGE>

RISK FACTORS

This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before you decide whether to buy our common stock. While these are
the risks and uncertainties we believe are most important for you to consider,
you should know that they are not the only risks or uncertainties facing us or
which may adversely affect our business. If any of the following risks or
uncertainties actually occurs, our business, financial condition and operating
results would likely suffer. In that event, the market price of our common
stock could decline, and you could lose all or part of the money you paid to
buy our common stock.

Risks Related to Our Business

Because most of our revenue is derived from a small number of key clients, our
revenue will be significantly lower than we expect if we cannot keep these
clients

A limited number of our clients account for a substantial portion of our
revenue and the loss of any one or more of these clients could cause our
revenue to decline below expectations. Our largest eight clients accounted for
approximately 63% of our revenue in 1998 and 65% in 1999. Microsoft Corporation
accounted for approximately 17% of our revenue in 1997, 23% in 1998 and 26% in
1999. IBM accounted for approximately 14% of our revenue in 1997, 12% in 1998
and less than 10% in 1999. There can be no assurance that our revenue from key
clients will not decline in future periods. The loss of a significant amount of
business with Microsoft, IBM or any other key client could cause our revenue to
decline significantly below our expectations.

If we do not respond rapidly to technological changes, we may lose clients and
experience a significant decrease in revenue

Our clients' products are subject to rapid change as new technologies
develop and replace existing products, such as the replacement of CD-ROM
technology with DVD technology. In addition, advances in electronic delivery of
information, such as broadband online data delivery, when fully developed and
accepted in the marketplace, could reduce the need for physical media, which
could in turn adversely affect the demand for our services. Also, new
technologies for distributing licensed software may be less expensive or more
effective than our current services, which could reduce the prices that we are
able to charge and could reduce demand for our content manufacturing services.
In addition, OEMs are increasingly incorporating more options within the
personal computer itself and therefore reducing the number of separate
components that must be included in a shipkit. If we do not successfully
introduce outsource solutions in response to these and other new trends and
technologies, we may lose clients and experience a significant decrease in
revenue.

If we fail to meet client expectations, we could lose revenue, incur increased
expenses and suffer negative publicity

Many of our engagements involve technology solutions that are critical to
our clients' businesses. Our clients face significant uncertainties in
forecasting the demand for their products, and limitations on the size of our
facilities, number of our personnel and availability of raw materials could
make it difficult for us to respond to their changing product requirements. In
addition, any disruption in our e-fulfillment services could adversely affect
our clients' ability to conduct commerce on their web sites. Any defects or
errors in our solutions, or failure to meet clients' specifications, capacity
requirements or expectations, could result in:

. delayed or lost revenue due to adverse client reaction;

. requirements to provide additional services to a client at no charge;

. negative publicity about us and our services, which could adversely
affect our ability to attract or retain clients; and

7
<PAGE>

. claims for substantial damages against us, regardless of our
responsibility for such failure, which may not be covered by our
insurance policies and which may not be limited by contractual terms of
our engagement.

Our quarterly revenues and operating results may fluctuate in future periods;
any resulting failure to meet market expectations may cause the price of our
common stock to decline

Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter because some of our
products and services are relatively new and the future growth of the
outsourcing market, and the market for our products and services in particular,
is uncertain. If our quarterly revenues or operating results fall below the
expectations of investors or public market research analysts, the price of our
common stock could decline substantially. Factors that are likely to cause
quarterly fluctuations in our operating results include:

. timing of new product introductions or software releases by our clients
or their competitors;

. seasonal fluctuations in demand or fluctuations in production;

. the level of product and price competition that we encounter, including
the frequency of changes in pricing policies;

. temporary shortages in supply from vendors;

. inability to add temporary labor during seasonal peaks;

. our ability to expand our operations and the amount and timing of
expansion-related and infrastructure expenditures;

. political instability or natural disasters in the countries in which we
operate; and

. facility or systems disruption.

If Microsoft Corporation were to modify its authorized replicator program in a
way that made authorized replicator services less important to OEMs, or if we
were to lose authorized replicator status, our revenues may suffer and it may
be difficult to attract new business

We have been designated as an Authorized Replicator (AR) for Microsoft
Corporation, which gives us a worldwide license to replicate Microsoft software
products and documentation for OEMs who want to bundle licensed software with
their hardware products. Failure to maintain AR status, or to render Microsoft
AR-related services to OEMs, could result in reduced business and revenues. The
AR agreement is renegotiated annually, and the current AR agreement expires on
August 31, 2000. Microsoft recently announced that it intends to modify the AR
program during the year 2000 for Windows operating system software. The
modifications could involve a reduction in the printed materials required by
OEMs. There can be no assurance that we will continue as an AR for Microsoft or
that we will continue to derive revenues under this program at levels
comparable with those realized in the past.

We face substantial competition and our failure to compete successfully will
limit our ability to retain and increase our market share

The market for our services is very competitive. We expect the intensity of
competition to continue to increase. Our failure to maintain and enhance our
competitive position will limit our ability to maintain and increase our market
share, which would result in serious harm to our business. Increased
competition may also result in price reductions, reduced gross margins and loss
of market share.

We compete against companies engaged in turnkey printing, hardware assembly,
CD and diskette replication and teleservices. In addition to large regional and
global competitors, we face competition from numerous local producers and from
internal departments of our clients and prospective clients. Additionally, we

8
<PAGE>

expect competition to emerge from companies engaged in electronic manufacturing
services and logistics services as they attempt to deliver a broader range of
services. We compete on the basis of quality, performance, service levels,
global capabilities, technology, operational efficiency and price.

Some of our competitors have substantially greater financial,
infrastructure, personnel and other resources than we have. Furthermore, some
of our competitors have well established, large and experienced marketing and
sales capabilities and greater name recognition than we have, including well
established relationships with our current and potential clients. As a result,
our competitors may be in a stronger position to respond quickly to new or
emerging technologies and changes in client requirements. They may also develop
and promote their services more effectively than we do. Also, we may lose
potential clients to competitors for various reasons, including the ability or
willingness of our competitors to offer lower prices and other incentives that
we cannot match. In addition, clients may subject projects to competitive
bidding. Our business could also be adversely affected if two or more of our
competitors consolidate and offer broader products and services than we do. We
may not be able to compete successfully against current and future competitors,
and competitive pressures may seriously harm our business.

If we are not able to establish client sites where requested, or if we fail to
retain key clients at established sites, our client relationships, revenue and
expenses could be seriously harmed

Our clients have, at times, requested that we add capacity or open a
facility in locations near their sites. If we elect not to add required
capacity at sites near existing clients or establish sites near existing or
potential clients, clients may decide to seek alternate outsource suppliers. In
addition, if we lose a significant client of a particular site or open a site
with the expectation of business that does not materialize, our operations at
that site could become uneconomical or significantly less efficient. Any of
these events could have a material adverse effect on our client relationships,
expenses and revenues.

A decline in the technology sector could reduce our revenue

A large portion of our revenue comes from clients in the technology sector
which is intensely competitive and highly volatile. A decline in the overall
performance of the technology sector could adversely affect the demand for our
services and reduce our revenues. Additionally, if our clients' products do not
gain or do not sustain market acceptance, if PC market demand declines, or if
the market share of our technology clients declines or fails to grow at
historical levels, demand for our services may decline and we may earn lower
than expected revenue.

If the market for extended supply chain management services does not continue
to grow, demand for our services would decline and our financial results would
suffer

We derive a substantial portion of our revenue from providing extended
supply chain management services. Our business and future growth will depend in
large part on the continued growth of the industry trend towards outsourcing
extended supply chain management and other business processes. If this trend
does not continue, or does not continue at historical levels, demand for our
services would decline and our financial results would suffer.

An inability to attract and retain qualified personnel could limit our growth,
reduce our operating efficiency and productivity, and increase expenses

We believe that our success depends largely on our ability to attract and
retain highly skilled technical, consulting, managerial, sales and marketing
personnel. If we are unable to attract such personnel, we may be unable to meet
production schedules and/or complete customer deliveries on time. Our industry
is very labor-intensive and has experienced high personnel turnover. If our
employee turnover rate increases significantly, our recruiting and training
costs could rise and our operating efficiency and productivity could decline.
We may not be able to hire or retain the necessary personnel to implement our
business strategy. In addition, we may need

9
<PAGE>

to pay higher compensation for employees than we currently expect. Individuals
with the significant experience and technical skills that we generally require
are in very short supply and competition to hire from this limited pool is
intense.

Failure to employ a sufficient number of qualified temporary employees during
peak demand periods could result in the loss of clients or damage our
reputation in the industry

Our clients often experience both expected and unexpected surges in demand,
such as upon the introduction of a new product release, following a special
advertising campaign or as a result of seasonal high demand in anticipation of
year end holidays. In order to respond to these surges in demand, we employ a
large number of skilled temporary employees. There is a very limited supply of
temporary workers with the skills required to respond to our customers' needs
and requests. If we were unable to obtain the services of such temporary
employees, on short notice and in adequate numbers, we might fail to meet the
production and distribution requirements of our clients on a timely basis. Any
such failure could result in the loss of one or more key clients or could
damage our reputation in the industry, which could have an adverse effect on
our business.

Our growth could be limited if we are unable to manage and expand our
international operations

Our success depends on our ability to manage and expand our international
operations. We currently expect international revenue to account for a
significant percentage of our total revenue in the future. Failure to expand
our international sales and fulfillment activities could limit our ability to
grow.

We currently conduct business in Taiwan, Singapore, Ireland, the United
Kingdom, the Netherlands and other foreign locations, in addition to our North
American operations. Sales outside North America accounted for 54%, 55% and 54%
of our total revenue for 1997, 1998 and 1999. There are certain risks inherent
in conducting international operations, including:

. added fulfillment complexities in operations, including multiple
languages, currencies, bills of materials and stock keeping units;

. exposure to currency fluctuations;

. longer payment cycles;

. greater difficulties in accounts receivable collections;

. the complexity of ensuring compliance with multiple U.S. and foreign
laws, particularly differing laws on intellectual property rights and
export control; and

. labor practices, difficulties in staffing and managing foreign
operations, political instability and potentially adverse tax
consequences.

If we are unable to manage these risks, our international sales may decline
and our total revenue could decrease below expectations.

Failure to introduce new e-fulfillment solutions or enhancements to existing
solutions would impair our future growth

To be competitive, we must continue to develop and introduce on a timely
basis new services, solutions and enhancements for companies with supply chain
management and e-fulfillment solution needs. Specifically, we are seeking to
expand our e-fulfillment offerings to existing and new clients in areas such as
on-line merchandising, electronic order fulfillment and customer relationship
management. If we fail to expand oure-fulfillment service offerings to keep
pace with our competitors we may lose clients and be unable to obtain new
business.

10
<PAGE>

The long and variable sales cycles for our services may cause revenues and
operating results to vary significantly from quarter to quarter which could
adversely affect our stock price

Our sales cycle is subject to a number of significant risks, including
internal acceptance reviews and the size, scope and timing of the client's
needs. Consequently, if sales expected from a specific client in a particular
quarter are not realized in that quarter, we are unlikely to be able to
generate revenue from alternate sources in time to compensate for the
shortfall. As a result, due to the relatively large size of particular
projects, a lost or delayed sale could result in revenues that are lower than
expected. Many of our clients evaluate our services in a deliberative and time-
consuming manner, depending on the specific technical capabilities of the
client, the size of the engagement and the complexity of the client's network
environment. We cannot accurately predict the length of a potential client's
pre-purchase evaluation, or whether our investment in pre-purchase time and
resources will result in a sale. Our inability to make such predictions may
adversely affect our operating results. If our operating results fall below the
expectations of securities analysts or investors in some future quarter or
quarters, the market price of our common stock is likely to decline.

We may incur substantial inventory expenses if we fail to manage inventory or
accumulate the inventory of clients with unsuccessful businesses

We frequently purchase components of our clients' products based on
contracts, purchase orders and, in some cases, our clients' forecasts. At
times, we purchase inventory based on internal forecasts in advance of client
commitments. We also bear inventory and working capital risk associated with
the financial strength of our clients. If we fail to accurately gauge and
manage our inventory, or if our clients do not perform as expected, we may
accumulate a substantial amount of products or materials that cannot be
profitably disposed of, and our operating results may suffer.

Our acquisition strategy could have an adverse effect on our growth rate,
operating results and client satisfaction

A component of our business strategy is the acquisition of, or investment
in, complementary businesses, technologies, services or products. An inability
to identify, acquire or make investments in promising acquisition candidates on
acceptable terms could slow our growth. Competition for these acquisitions or
investment targets could also result in increased cost of acquisitions which
could adversely affect our results of operations.

Acquisitions involve a number of risks, including:

. adverse effects on our reported operating results due to accounting
changes associated with the acquisitions;

. difficulties in management and integration of the acquired business;

. increased expenses, including compensation expense resulting from newly
hired employees;

. diversion of management resources and attention; and

. potential disputes with sellers of acquired businesses, technologies,
services or products.

Client dissatisfaction or performance problems with an acquired business,
technology, service or product could also have a material adverse impact on our
reputation as a whole. In addition, any acquired business, technology, service
or product could significantly underperform relative to our expectations, which
could cause an unanticipated decrease in revenue or earnings.

11
<PAGE>

Our lack of written contracts with some of our clients reduces the
predictability of our revenues and inventory expenses because client projects
and/or orders could be cancelled or modified on short notice and without
penalty

We do not have written contracts with many of our clients. We frequently
operate only on the basis of product orders with no minimum requirements.
Accordingly, we may be subject to client cancellation of projects, changes in
specifications or requirements or other client modifications for which no
written agreement exists. These types of cancellations or changes could result
in loss of revenue and/or significant expenditures of resources and funding
that we may be unable to recover. In addition, we may be subject to client
claims relating to our services that are inconsistent with the original scope
and understanding of the parties. When our understanding is not embodied in a
written contract, resolution of these claims tends to be more costly and could
adversely affect our operating results.

Our existing client contracts allocate a significant amount of the risk from
our business arrangements to us which reduces the predictability of our
financial results

Although we work to sign multi-year contracts with our clients, our
contracts generally:

. permit termination upon relatively short notice by the client;

. contain no minimum purchase requirements;

. do not designate us as the client's exclusive outsource service
provider;

. do not penalize the client for early termination; and

. hold us responsible for products which fail to meet the client's
specifications.

As a result, our ability to predict our revenue and inventory expenses may
be adversely affected.

We rely upon contractual provisions and trademark laws to protect our
proprietary rights, which may not be sufficient to protect our intellectual
property

We rely on a combination of laws, such as copyright, trademark and trade
secret laws, and contractual restrictions, such as confidentiality agreements
and licenses, to establish and protect our proprietary rights. We currently
have pending trademark registration applications for our name and logo in the
United States and several foreign countries. Moreover, despite any precautions
that we have taken:

. laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;

. current federal laws that prohibit software copying provide only limited
protection from software piracy, and effective trademark, copyright and
trade secret protection may be unavailable or limited in foreign
countries;

. other companies may claim common law trademark rights based upon state
or foreign laws that precede the federal registration of our marks; and

. policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the
extent of this unauthorized use.

Also, the laws of the countries in which we market our services and
solutions may offer little or no effective protection of our proprietary
technology. Reverse engineering, unauthorized copying or other misappropriation
of our proprietary technology could enable third parties to benefit from our
technology without paying us for it, which would significantly harm our
business.

12
<PAGE>

If our clients' intellectual property is misappropriated or stolen while in our
possession, we may become involved in litigation over proprietary rights that
could be costly and time consuming

Many of our agreements require us to indemnify our clients for losses from
any claim of misappropriation or theft of their intellectual property while in
our possession. Any litigation, brought by us or others, even if without merit,
can be time consuming and result in the expenditure of significant financial
resources and the diversion of management's time and efforts.

Failure of computer systems and software to be year 2000 compliant could
increase our costs, disrupt our services and reduce demand from our clients

Year 2000 issues may adversely affect our business and our clients'
businesses. Many currently installed computer systems and software products
were coded to accept or recognize only two digit entries in the date code
field. These systems and software products must be able to accept four digit
entries in the date code field to distinguish 21st century dates from 20th
century dates. As a result, computer systems and/or software used by many
companies and governmental agencies that were not upgraded to be year 2000
compliant risk system failure or miscalculations causing disruptions of normal
business activities.

If a year 2000 problem is discovered with respect to a solution provided by
us, it may be difficult to determine whether the problem relates to services
which we have performed or is due to the software or technology of our clients
or the services of other providers. Any failure of our material systems or our
clients' or vendors' material systems to be year 2000 compliant could have
material adverse consequences for us. In addition, we have contractual
obligations to some of our clients which contain year 2000 warranties and
provide for damages upon any breach of such warranty. If we breach these
warranties, and are sued, the damages we might be required to pay could
negatively impact our business, financial condition and results of operations.
Moreover, we may be subject to other year 2000-related lawsuits, whether or not
the services that we have performed are year 2000 compliant. We cannot predict
the outcomes of these types of lawsuits.

International laws and regulations may result in unanticipated costs and
litigation

Our plans to expand international operations will increase our exposure to
international laws and regulations. If we cannot comply with foreign laws and
regulations, which are often complex and subject to variation and unexpected
changes, we could incur unexpected costs and potential litigation. For example,
the governments of foreign countries might attempt to regulate our products and
services or levy sales or other taxes relating to our activities. In addition,
foreign countries may impose tariffs, duties, price controls or other
restrictions on foreign currencies or trade barriers, any of which could make
it more difficult to conduct our business. The European Union recently enacted
its own privacy regulations that may result in limits on the collection and use
of certain user information, which, if applied to the sale of our services,
could negatively impact our results of operations.

Our international operations expose us to currency fluctuations in foreign
markets, which may result in a loss of revenue or increase in expenses

Our revenues, materials and labor costs in countries outside the U.S. are
denominated in local currency. Therefore, a strengthening of other currencies
versus the U.S. dollar may give us potential exposure for currency fluctuations
in foreign markets which could result in a loss of overall revenue or increase
in expenses. We do not currently engage in currency hedging activities. We have
not yet but may in the future experience foreign exchange rate losses,
especially to the extent that we do not engage in hedging.

13
<PAGE>

Risks Related to this Offering

Our executive officers and directors could delay or prevent a change in
control, which could deprive our stockholders of a premium or adversely affect
the price of our stock

After this offering, our executive officers and directors and their
affiliates will together control approximately % of our outstanding common
stock. As a result, these stockholders, if they act together, will be able to
control all matters requiring approval of a majority of our stockholders,
including the election and removal of directors and any merger, sale of assets
and other significant corporate transactions. This control could have the
effect of delaying or preventing a change in control of Modus Media, could
deprive our stockholders of an opportunity to receive a premium for their
common stock as part of a sale of Modus Media or its assets and might affect
the market price of our common stock.

We have anti-takeover defenses that could delay or prevent an acquisition and
could adversely affect the price of our common stock

After this offering, the board of directors will have the authority to issue
up to million shares of preferred stock and, without any further vote or
action on the part of the stockholders, will have the authority to determine
the price, rights, preferences, privileges and restrictions of the preferred
stock. This preferred stock, if issued, might have preference over the rights
of the holders of common stock and could adversely affect the price of our
common stock. This issuance may make it more difficult for a third party to
acquire us or to acquire a majority of our outstanding voting stock even if
doing so would be beneficial to our stockholders. We currently have no plans to
issue preferred stock.

Also, our certificate of incorporation, bylaws and equity compensation plans
include provisions that may deter an unsolicited offer to purchase Modus Media.
These provisions, coupled with the provisions of the Delaware General
Corporation Law, may delay or impede a merger, tender offer or proxy contest
involving Modus Media. For example, our board of directors will be divided into
three classes, only one of which will be elected at each annual meeting.
Directors will only be removable by the affirmative vote of at least 66 2/3% of
all classes of voting stock. These factors may further delay or prevent a
change of control of Modus Media and could result in a decline of the market
price of our common stock.

Our stock price may be highly volatile which could result in substantial losses
for investors purchasing shares in this offering

The trading price of our common stock is likely to be volatile. The stock
market in general, and the market for technology and Internet-related companies
in particular, has experienced extreme volatility. As a result, investors in
our common stock may experience a decrease in the value of their common stock
regardless of our operating performance or prospects. We cannot be sure that an
active public market for our common stock will develop or continue after this
offering. Investors may not be able to sell their common stock at or above our
initial public offering price. Prices for the common stock will be determined
in the marketplace and may be influenced by many factors, including variations
in our financial results, changes in earnings estimates by industry research
analysts, investors' perceptions of us and general economic, industry and
market conditions.

14
<PAGE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. In some cases you can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will," and "would" or similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, contain projections of our future results of
operations or of our financial position or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or control. The factors listed above in
the section captioned "Risk Factors," as well as any cautionary language in
this prospectus, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. Before you invest in our common stock, you
should be aware that the occurrence of the events described in these risk
factors and elsewhere in this prospectus could have an adverse effect on our
business, results of operations and financial position.

USE OF PROCEEDS

We expect the net proceeds from our sale of 8,000,000 shares of common stock
will be approximately $109.8 million at an assumed initial public offering
price of $15.00 per share and after deducting estimated underwriting discounts
and our estimated offering expenses. If the underwriters' over-allotment option
is exercised in full, we estimate that our net proceeds will be approximately
$126.5 million.

We expect to use a portion of the proceeds to repay a $12.7 million note,
bearing interest at a rate of 9.5% and maturing upon the closing of this
offering, which was issued to R.R. Donnelley in connection with our repurchase
of shares of preferred stock on October 14, 1999. We also expect to use a
portion of the proceeds to repay the outstanding balance on our revolving line
of credit, which was $35.0 million at December 31, 1999. We expect to use the
balance of the proceeds for general corporate purposes, including working
capital and capital expenditures. We may also use portion of the net proceeds
to acquire businesses, products or technologies that are complementary to ours,
although no specific acquisitions are currently planned and no portion of the
net proceeds has been allocated for any acquisition. Pending such uses of the
net proceeds, we intend to invest these proceeds in investment grade, interest-
bearing securities.

DIVIDEND POLICY

We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all of our future earnings, if any, for
use in the operation of our business. In addition, the terms of our credit
facility restrict our ability to pay dividends.

15
<PAGE>

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 1999.
This information is presented:

. on an actual basis; and

. on an as adjusted basis to give effect to our receipt of the estimated
proceeds from the sale of 8,000,000 shares of common stock we are
selling in this offering at an assumed public offering price of $15.00
per share, after deducting estimated underwriting discounts and
commissions and offering expenses.

<TABLE>
<CAPTION>
December 31, 1999
-------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Debt:
Revolving line of credit............................. $35,000 $ --
Loan payable......................................... 12,700 --
Mortgage payable..................................... 4,127 4,127
Capital leases payable............................... 3,406 3,406
Long term debt....................................... 1,070 1,070
------- --------
Total debt......................................... 56,303 8,603
Shareholders equity:
Preferred stock, $.01 par value, with a liquidation
value of $1,000 per share;
Authorized--120,000
Issued and outstanding--none actual; none as
adjusted.......................................... -- --
Common stock, $.01 par value
Authorized--66,000,000 actual; 66,000,000 as
adjusted
Issued and outstanding--26,006,116 actual;
34,006,116 as adjusted............................ 260 340
Additional paid-in capital........................... 14,466 124,186
Retained earnings.................................... 27,911 27,911
Other comprehensive income (loss).................... 732 732
------- --------
Total shareholders' equity......................... 43,369 153,169
------- --------
Total capitalization............................. $99,672 $161,772
======= ========
</TABLE>

The number of shares of common stock is based on the number of shares
outstanding as of December 31, 1999 and does not include 1,673,506 shares that
could be issued upon the exercise of options outstanding as of December 31,
1999 at a weighted average exercise price of $0.39 per share.

16
<PAGE>

DILUTION

Our net tangible book value as of December 31, 1999, was approximately $40.0
million or approximately $1.54 per share of common stock. "Net tangible book
value" per share represents the amount of our total tangible assets less total
liabilities, divided by 26,006,116 shares of common stock outstanding. After
giving effect to our issuance and sale of the common stock in this offering (at
an assumed initial public offering price of $15.00 per share and after
deducting the estimated underwriting discounts and commissions and our offering
expenses), our net tangible book value as of December 31, 1999 would have been
$149.8 million, or $4.41 per share of common stock. This represents an
immediate increase in net tangible book value of $2.87 per share to existing
stockholders and an immediate dilution of $10.59 per share to new investors.
The following table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $15.00
Net tangible book value per share before this offering...... $1.54
Increase in net tangible book value per share attributable
to new investors........................................... 2.87
-----
Net tangible book value per share after this offering......... 4.41
------
Dilution per share to new investors........................... $10.59
======
</TABLE>

The following table summarizes the difference between the number of shares
of common stock purchased from us, the total consideration paid to us, and the
average price per share for shares held by existing stockholders and by new
investors (at an assumed initial public offering price of $15.00 per share
before deduction of estimated underwriting discounts and commissions and our
offering expenses):

<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 26,006,116 76% $ 14,726,000 11% $ 0.57
New investors........... 8,000,000 24 120,000,000 89 15.00
---------- --- ------------ ---
Total................. 34,006,116 100% 134,726,000 100%
========== === ============ ===
</TABLE>
- --------

The table above assumes no exercise of stock options outstanding at December
31, 1999. As of December 31, 1999, there were options outstanding to purchase
6,310,616 shares of common stock at a weighted average exercise price of $1.87
per share and 266,250 shares reserved for future grants under our stock
incentive plan. To the extent any of these options are exercised, there will be
further dilution to new investors. To the extent all of such outstanding
options had been exercised as of December 31, 1999, net tangible book value per
share after this offering would be $4.01 and total dilution per share to new
investors would be $10.99.

17
<PAGE>

SELECTED FINANCIAL DATA

The consolidated statement of operations data for the fiscal years ended
December 31, 1997, 1998 and 1999, and the consolidated balance sheet data at
December 31, 1998 and 1999, are derived from our consolidated financial
statements, which have been audited by Arthur Andersen LLP, our independent
public accountants. These statements are included elsewhere in this prospectus.
The consolidated statement of operations data and consolidated balance sheet
data as of and for the year ended December 31, 1996 and the consolidated
balance sheet data at December 31, 1997 are derived from our audited
consolidated financial statements, which are not included in this prospectus.
The consolidated statement of operations data and consolidated balance sheet
data as of and for the year ended December 31, 1995 are derived from our
unaudited consolidated financial statements, which are not included elsewhere
in this prospectus. Our unaudited consolidated financial statements have been
prepared on a basis consistent with our audited consolidated financial
statements, and in the opinion of our management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the consolidated results of operations for these periods. Please be advised
that historical results are not necessarily indicative of the results to be
expected in the future, and results of interim periods are not necessarily
indicative of results of the entire year.

The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and our consolidated financial statements and related notes,
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- ----------- -----------
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue................. $ 911,500 $ 811,905 $ 684,523 $ 630,082 $ 697,468
Cost of revenue
(excluding depreciation
and amortization)...... 721,500 687,789 564,788 496,180 549,681
--------- --------- --------- ----------- -----------
Gross profit............ 190,000 124,116 119,735 133,902 147,787
Selling, general and
administrative
expenses............... 114,000 102,708 110,378 97,999 101,826
Depreciation and
amortization........... 36,200 28,200 26,371 18,731 17,407
Restructuring charges... -- 100,883 -- -- --
Operating income
(loss)................. 39,800 (107,675) (17,014) 17,172 28,554
Interest expense........ 8,686 9,534 16,478 3,882 3,452
Other expense (income),
net.................... 1,600 4,898 (3,649) (1,722) (408)
--------- --------- --------- ----------- -----------
Income (loss) before
income taxes........... 29,514 (122,107) (29,843) 15,012 25,510
Provision (benefit) for
income taxes........... 13,491 (11,011) 2,824 4,265 7,550
--------- --------- --------- ----------- -----------
Net income (loss)....... 16,023 (111,096) (32,667) 10,747 17,960
Preferred stock
dividends, net ........ -- -- 172 5,922 (6,659)
--------- ----------- -----------
Net income (loss)
available to common
shareholders........... $ (32,839) $ 4,825 $ 24,619
========= =========== ===========
Net income (loss) per
share (1):
Basic.................. $ 0.19 $ 0.98
=========== ===========
Diluted................ $ 0.18 $ 0.84
=========== ===========
Number of shares used in
per share
calculations (1):
Basic.................. -- -- -- 25,497,466 25,227,672
Diluted................ -- -- -- 26,144,234 29,428,426
Selected Operating Data:
EBITDA (2) ............. $ 76,000 $ (79,475) $ 9,357 $ 35,903 $ 45,961
Capital expenditures.... 29,200 15,800 34,032 12,307 17,168
</TABLE>

18
<PAGE>

<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....... $ 2,386 $ 7,857 $ 29,900 $ 8,447 $ 29,759
Working capital (deficit)....... 87,733 (1,993) 23,493 43,602 29,589
Total assets.................... 394,977 298,071 256,589 291,210 286,610
Long-term debt, net of current
portion........................ 41,770 24,363 21,978 21,641 55,744
Total shareholders' equity...... 196,133 82,300 80,989 93,052 43,369
</TABLE>
- --------

19
<PAGE>

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

The following discussion and analysis should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this
prospectus.

Overview

Background

We are a leading global provider of extended supply chain management
solutions to the technology industry. In 1982, we began as the Documentation
Services Division of R.R. Donnelley & Sons Company, printing and binding
software manuals in the United States. The division's service offerings evolved
to include software manufacturing and the assembly and packaging of diskettes,
manuals and related hardware accessories into kits. Reflecting its
international expansion, the division was renamed Global Software Services in
1993. In April 1995, the division was merged with Corporate Software, Inc., a
reseller of software products, to create Stream International Holdings, Inc.

In late 1996, we restructured our business to become a global provider of
supply chain management solutions to the technology industry and, at the same
time, we began to reduce our offset printing business by closing or selling
certain of our printing facilities. In December 1997, Stream recapitalized and
contributed the assets related to our business to a separate company called
Modus Media International Holdings, Inc. In January 1998, Stream distributed
all of the capital stock of Modus Media to its stockholders and Modus Media
became an independent company.

Revenue

Revenue is recognized for our services when we ship our client's product or
when the service is performed under contracts or purchase orders from our
clients. We derive our revenue primarily from:

. content manufacturing solutions; and

. e-fulfillment solutions.

Our content manufacturing solutions consist of supply chain management
services provided to original equipment manufacturers (OEMs) and independent
software vendors (ISVs). These services include management of intellectual
property or content, procurement, inventory and materials management,
manufacturing, kitting, assembly and fulfillment. Our service fee revenue for
our content manufacturing solutions consist primarily of per transaction fees
and incremental fees added to the cost of the materials we use in manufacturing
and assembly. For example, we procure the components and print and assemble
shrink-wrapped software for software vendors and ship the product into the
retail channel as directed by the software vendor. For this, we charge a fee
for each package we assemble and a markup for the material, CDs, diskettes,
hardware shipkits, documentation and packaging that we procure for our clients.

Our e-fulfillment solutions extend our content manufacturing solutions by
combining them with additional services that support direct interaction with
our clients' customers. Orders for products that we provide through these
solutions come directly from our clients' customers or end users rather than
from our OEM and ISV clients. Our e-fulfillment fee revenue consists
principally of billings to clients, which may be on the basis of development
fees or per transaction fees, including design of website, storefronts, and
connection of websites to fulfilment operations. For example, for our clients,
we have developed web site storefronts and fulfilled orders placed on the
storefront. For this service, we received a flat development fee and a fee for
each transaction conducted over the storefront. While a majority of the orders
that we fill through our e-fulfillment solutions currently are received by
telephone or facsimile, we expect that orders will increasingly be placed over
the web as we develop more e-commerce storefronts for our clients and the
Internet becomes a more prevalent medium for commerce.

20
<PAGE>

Components of Costs and Expenses

Cost of revenue primarily includes salaries and benefits for personnel in
our operations groups, costs of billable third-party contractors, materials and
freight charges, and other occupancy and operating costs. Materials and freight
charges are variable and consist primarily of CDs, instruction manuals and
computer peripherals such as keyboards and mice. We expect materials, printing,
CD duplication, packaging and labor costs to continue to be a key component of
our cost of revenue and expenses.

All operating expenses, including expenses attributable to technology
support, human resource management and other administrative functions that are
not allocable to specific client services, are recorded as selling, general and
administrative expenses.

Inventory

We typically purchase components of our clients' products based on contracts
with, or purchase orders from, our clients and, in some cases, on our clients'
forecasts. At times, we purchase inventory in advance of providing product
assembly, package and fulfillment based on our internal forecasts. We generally
have the right to be reimbursed by our client for unused inventory if purchased
for a contract or a client purchase order. We also warehouse and manage
inventory owned by our clients which are not reflected on our consolidated
balance sheet.

Results of Operations

The following table sets forth for the years ended December 31, 1997, 1998
and 1999, the percentage of consolidated revenue represented by selected items
in our consolidated statements of operations:

<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Revenue................................................. 100.0% 100.0% 100.0%
Cost of revenue (excluding depreciation and
amortization).......................................... 82.5 78.7 78.8
----- ----- -----
Gross profit.......................................... 17.5 21.3 21.2
Operating expenses:
Selling, general and administrative expenses.......... 16.1 15.6 14.6
Depreciation and amortization......................... 3.9 3.0 2.5
----- ----- -----
Operating income (loss)............................. (2.5) 2.7 4.1
Other expense (income):
Interest expense...................................... 2.4 0.6 0.5
Other expense (income), net........................... (0.5) (0.3) (0.1)
----- ----- -----
Income (loss) before income taxes................... (4.4) 2.4 3.7
Provision for income taxes.............................. 0.4 0.7 1.1
----- ----- -----
Net income (loss)..................................... (4.8)% 1.7% 2.6%
===== ===== =====
</TABLE>

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

Revenue

Revenue increased $67.4 million, or 10.7%, to $697.5 million for 1999 from
$630.1 million for 1998. This increase was comprised primarily of a 16.0%
increase in revenue from content manufacturing solutions, and a 6.6% increase
in revenue from e-fulfillment solutions offset by a 53.9% decrease in revenue
from offset printing and a deconsolidation of our Japanese and Korean
subsidiaries. As a percentage of revenue during these periods, revenue from
content manufacturing solutions increased from 73.2% to 76.8%, e-fulfillment
solutions revenue 21
<PAGE>

decreased from 22.2% to 21.3% and revenue from print services decreased from
4.6% to 1.9%. Growth in revenue came primarily from new clients and from a
general increase in the demand for our services as a result of continued strong
PC demand and, to a lesser extent, expanding business with existing clients.

In December 1998, we sold all of the assets at book value of our wholly
owned Korean subsidiary to Modus Media Korea Ltd. for a 20% equity interest.
Additionally, in December 1998, we sold certain assets at book value from our
wholly owned Japanese subsidiary, Modus Media International Kabushiki Kaisha,
to Sasatoku Donnelley KK and reduced our equity interest in Sasatoku Donnelley
from 60% to 40%. In 1998, we consolidated the results of operations of our
Korean and Japanese subsidiaries and, in 1999, we accounted for these entities
under the equity method as minority owned investments. In the year ended
December 31, 1998, our Japanese and Korean subsidiaries contributed $41.0
million to our revenue and had a net loss of $5.0 million. As a result of the
transactions described above, these joint ventures did not contribute to
revenues and contributed only $200,000 to our net income in 1999.

Cost of Revenue

Cost of revenue increased $53.5 million, or 10.8%, to $549.7 million for
1999 from $496.2 million for 1998. This increase in costs is comprised of a
9.1% increase in salaries and benefits, a 12.0% increase in materials and a
7.1% increase in other costs directly related to the increase in services
provided to our clients. As a percentage of revenue, cost of revenue was
relatively unchanged at 78.8% 1999 as compared to 78.7% in 1998.

Gross Profit

As a result of the foregoing factors, gross profit increased $13.9 million,
or 10.4%, to $147.8 million in 1999 from $133.9 million for 1998. As a
percentage of revenue, gross profit remained relatively unchanged at 21.2% as
compared to 21.3% for 1998.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $3.8 million, or
3.9%, to $101.8 million for 1999 from $98.0 million for 1998. This increase was
primarily attributable to increased staffing and investments in marketing and
information technology to support the continued development of business
solutions for our clients, as well as expenses related to human resources,
including the initiation of our corporate training program, called MMI
University. As a percentage of revenue, selling, general and administrative
expenses decreased to 14.6% for 1999, as compared to 15.6% during 1998. The
decline of these expenses as a percentage of revenue primarily reflects the
spreading of these costs over a larger revenue base.

Depreciation and Amortization

Depreciation and amortization decreased $1.3 million, or 7.0%, to $17.4
million for 1999 from $18.7 million for 1998. This decrease primarily reflects
the deconsolidation of our Japanese and Korean subsidiaries in December 1998.

Interest Expense

Interest expense decreased $0.4 million to $3.5 million for 1999 from $3.9
million for 1998, reflecting lower average outstanding debt balances, including
capital leases during most of 1999 as compared to 1998.

Other Income, Net

Other expense was $0.4 million for 1999 versus other income of $1.7 million
in 1998. This change is primarily related to a $2.1 million gain on the sale of
an investment in a CD replication company recorded in 1998.

22
<PAGE>

Income Taxes

The effective tax rate for 1999 was 29.6% versus 28.4% for 1998. The change
in the effective tax rates resulted primarily from changes in the geographical
distribution of income and losses. The effective tax rates for 1999 and 1998
were lower than the federal statutory rate primarily due to our continued
expansion into markets with lower tax rates.

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

Revenue

Revenue decreased $54.4 million, or 7.9%, to $630.1 million for 1998 from
$684.5 million for 1997. This decrease was comprised primarily of a 7.3%
decrease in revenue from content manufacturing solutions, a 2.0% decrease in
revenue from e-fulfillment solutions and a 34.5% decrease in revenue from
offset printing. The decrease in revenue is primarily related to severe
economic conditions and resulting weaker currencies in Asia as well as the
elimination of unprofitable offset print businesses in North America. As a
percentage of revenue, revenue from content manufacturing solutions increased
from 72.7% in 1997 to 73.3% in 1998, revenue from e-fulfillment solutions
increased from 20.8% in 1997 to 22.2% in 1998 and revenue from offset printing
decreased from 6.5% in 1997 to 4.5% in 1998.

Cost of Revenue

Cost of revenue decreased $68.6 million, or 12.1%, to $496.2 million in 1998
from $564.8 million in 1997. This decrease in cost is comprised of a 10.4%
decrease in salaries and benefits, a 14.9% decrease in materials and a 4.1%
decrease in other costs directly related to the decrease in service revenue to
our clients. As a percentage of revenue, cost of revenue decreased to 78.7% in
1998 from 82.5% in 1997. The lower cost as a percentage of revenue primarily
reflects the 34.5% decrease in revenue in the offset print business, which has
higher costs as a percentage of revenue. In addition, cost of revenue was
decreased by our productivity initiatives, such as increased automation, and
programs to reduce fixed operating costs.

Gross Profit

As a result of the foregoing factors, gross profit increased by $14.2
million, or 11.9%, to $133.9 in 1998 from $119.7 million in 1997. Gross profit
as a percentage of revenue increased to 21.3% as compared to 17.5% during these
periods.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $12.4 million, or
11.2%, to $98.0 million for 1998 from $110.4 million for 1997. This decrease
reflects the elimination of costs associated with the discontinuation of offset
printing operations in North America. The decrease also reflects the impact of
an $8.0 million charge for the write-off of accounts receivable in 1997 which
was associated with discontinuing the relationship with a former client in
1996. As a percentage of consolidated revenue, selling, general and
administrative expenses decreased to 15.6% in 1998 as compared to 16.1% in
1997.

Depreciation and Amortization

Depreciation and amortization decreased $7.7 million, or 29.2%, to $18.7
million for 1998 from $26.4 million for 1997. This decrease reflects the write-
down of certain equipment, intangibles and other long-lived assets in 1997 in
connection with our restructuring activities.

Interest Expense

Interest expense decreased $12.6 million to $3.9 million for 1998 from $16.5
million for 1997. The decrease in interest expense was primarily attributable
to a reduction in indebtedness arising from exchanging

23
<PAGE>

our debt to our former parent company, R.R. Donnelley & Sons Company, for
preferred stock. In connection with this exchange, we established a new credit
facility and discontinued our practice of factoring accounts receivable in
North America. During 1997, interest expense included $9.4 million on
indebtedness to R.R. Donnelley and $3.5 million on the factoring of
receivables.

Other Income, Net

Other income decreased $1.9 million to $1.7 million for 1998 from $3.6
million for 1997. This decrease reflects foreign currency losses recorded in
1998, primarily in Asia, in contrast to the foreign currency gains recorded in
1997. In 1998, the foreign currency losses were partially offset by a $2.1
million gain on the sale of an investment.

Income Taxes

The effective tax rate for 1998 was 28.4% versus 9.5% for 1997. The increase
in the effective tax rates resulted primarily from changes in the geographical
distribution of income and losses. The effective tax rates for 1998 and 1997
were lower than the federal statutory rate primarily due to our continued
expansion into markets with lower tax rates.

Quarterly Results of Operations

The following table sets forth selected unaudited statement of operations
data for our most recent eight quarterly periods. The lower table presents this
data as a percentage of revenue. The unaudited quarterly information has been
prepared on the same basis as the annual information and, in the opinion of our
management, includes all adjustments necessary to present fairly the
information for the quarters presented.

<TABLE>
<CAPTION>
1998 Quarters Ended 1999 Quarters Ended
---------------------------------------- --------------------------------------
March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 Dec 31
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $139,377 $135,892 $143,015 $211,798 $157,492 $172,674 $176,069 $191,233
Cost of revenue
(excluding depreciation
and amortization)...... 112,762 107,972 109,682 165,764 125,617 138,343 137,870 147,851
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 26,615 27,920 33,333 46,034 31,875 34,331 38,199 43,382
SG&A expenses........... 21,902 22,200 24,700 29,197 25,200 24,774 26,573 25,279
Depreciation and
amortization........... 4,529 4,824 4,626 4,752 4,389 4,442 4,440 4,136
-------- -------- -------- -------- -------- -------- -------- --------
Operating income........ 184 896 4,007 12,085 2,286 5,115 7,186 13,967
Other expense (income),
net.................... 1,347 1,309 (1,092) 596 691 1,041 191 1,121
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
taxes.................. (1,163) (413) 5,099 11,489 1,595 4,074 6,995 12,846
Provision for income
taxes.................. (329) (117) 1,448 3,263 408 1,138 1,728 4,276
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)..... $ (834) $ (296) $ 3,651 $ 8,226 $ 1,187 $ 2,936 $ 5,267 $ 8,570
======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
1998 Quarters Ended 1999 Quarters Ended
---------------------------------------- --------------------------------------
March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 Dec 31
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. 100.0 % 100.0 % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue
(excluding depreciation
and amortization)...... 80.9 79.5 76.7 78.3 79.8 80.1 78.3 77.3
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 19.1 20.5 23.3 21.7 20.2 19.9 21.7 22.7
SG&A expenses........... 15.7 16.3 17.3 13.8 16.0 14.3 15.1 13.2
Depreciation and
amortization........... 3.3 3.6 3.2 2.2 2.8 2.6 2.5 2.2
-------- -------- -------- -------- -------- -------- -------- --------
Operating income........ 0.1 0.6 2.8 5.7 1.4 3.0 4.1 7.3
Other expense (income),
net.................... 0.9 0.9 (0.8) 0.3 0.4 0.6 0.1 0.6
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
taxes.................. (0.8) (0.3) 3.6 5.4 1.0 2.4 4.0 6.7
Provision for income
taxes.................. (0.2) (0.1) 1.0 1.5 0.3 0.7 1.0 2.2
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)..... (0.6)% (0.2)% 2.6% 3.9% 0.7% 1.7% 3.0% 4.5%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>

24
<PAGE>

We have historically experienced stronger revenue and earnings in the fourth
quarter. This is largely the result of strong fourth quarter personal computer
hardware and software sales associated with our client's new product launches
and holiday season purchase activity. In addition, we typically experience
better operating efficiencies and gross profit in the third and fourth quarters
resulting from spreading increased revenue over fixed costs. Other factors that
may affect the quarterly results include the following:

. the demand for our services;

. the level of price competition;

. timing of new product introductions, software releases and product
enhancements by our clients or their competitors; and

. our ability to attract, train and retain qualified personnel in all
areas of our business.

Liquidity and Capital Resources

We have funded our operations and capital expenditures primarily through
cash flows from operations, borrowings under various lines of credit and
capital lease arrangements. Currently, we have available an asset-backed
revolving line of credit of up to $130 million. This credit facility is
collateralized by substantially all of the Company's assets, including shares
of its subsidiaries, and the amount available for borrowings is limited to the
borrowing base, which is calculated based on eligible receivables, inventory
and fixed assets. This credit line expires on December 17, 2001. Borrowings
under the line of credit bear interest at rates based on either LIBOR, the
lenders' prime rate or the federal funds rate, plus an applicable margin, with
commitment fees on the unused portion. At December 31, 1999, the borrowing base
was $88.9 million and our outstanding indebtedness on this line of credit was
$35.0 million. We are required to meet certain financial covenants and, as of
December 31, 1999, we were in compliance with all of these covenants.

On October 13, 1999, we repurchased all of our outstanding preferred stock,
which had an aggregate redemption value of $71.7 million, for $60.2 million. We
funded the repurchase with $10.0 million in cash, a loan for $12.7 million and
a borrowing of $37.5 million under our existing credit line. In November 1999,
we repurchased 1,899,624 outstanding shares of our common stock for a total of
$9.9 million. We funded this repurchase primarily with existing cash.

We have entered into several capital leases that are payable under various
terms through 2008. At December 31, 1999, the outstanding lease obligations
were $3.4 million.

Cash provided by operating activities increased by $81.7 million to $75.2
million for 1999 from $6.5 million used in operations for 1998. This increase
is mainly attributable to a decrease in receivables resulting from improved
collection efforts and improved working capital management. Cash used in
operating activities decreased $59.4 million to $6.5 million in 1998 from $52.9
million provided by operations for the same period of 1997. The decrease was
attributable to higher working capital requirements resulting from an increase
in receivables caused by the discontinuation of our factoring arrangement with
R.R. Donnelley, offset by an increase in net income.

Cash used in investing activities increased $8.9 million to $17.8 million
for 1999 from $8.9 million used in investing activities for 1998. This increase
is attributable to the increased level of investment in capital improvements
such as factory automation, facility expansion, upgraded computer system and
the acquisition of a small CD-ROM manufacturing company in Taiwan. In addition,
1998's activity reflected $3.3 million in proceeds from the sale of our
investment in a CD-ROM manufacturing company. Cash used in investing activities
decreased $13.5 million to $8.9 million in 1998 from $22.4 million in 1997. The
higher 1997 investment in capital reflects the expansion of facilities in
Ireland and investments in on-demand print equipment in Europe and Asia.

25
<PAGE>

Cash used in financing activities increased $31.3 million to $37.1 million
for 1999 from $5.8 million for 1998. The increase in usage of cash reflects the
repurchase of preferred and common stock. Cash used in financing activities
during 1998 decreased $5.7 million to $5.8 million in 1998 from $11.5 million
in 1997. The usage of cash primarily reflects the pay down of bank debt and
capital lease obligations.

We believe our current cash and cash equivalents, net proceeds from this
offering, anticipated cash flows from future operations and existing credit
facilities will be sufficient to support our operations, capital expenditures
and various repayment obligations under our debt and lease agreements for the
next 12 months. However, if funds generated from these sources are insufficient
to satisfy our liquidity requirements, we will be required to raise additional
funds through public or private offerings. Such financing may not be available
in amounts or on terms acceptable to us, if at all. Proceeds from this offering
will be used, in part, to repay the outstanding indebtedness under our
revolving line of credit and our loan payable to R.R. Donnelley.

Year 2000 Readiness Disclosure

The year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any systems
that have date sensitive applications may recognize a date using "00" as the
year 1900 rather than the year 2000, which could result in system problems or
failures. Possible year 2000 worst case scenarios include interruption of
significant parts of our business from failures of our and/or third parties'
computer systems. Any such failures may have a material adverse impact on
future results.

Our approach to year 2000 readiness included three main areas:

. Focus on large systems (ERP, finance, email, front-end order entry)
followed by a review of hardware, software, and non-information
technology systems

. Assess vendor and supplier year 2000 readiness

. Engage an independent firm to review our year 2000 readiness plan

As of the end of 1999, we completed an inventory of our internal IT and non-
IT systems, assessed the extent to which these systems would be affected,
determined whether the affected systems should be repaired, replaced or retired
and developed contingency plans. Our plan was reviewed by an independent firm.
We implemented our remediations and performed comprehensive tests and refined
contingency plans.

As of the end of 1999, we completed an inventory of our vendors of goods and
services. We mailed surveys to these vendors, evaluated their responses and
sent follow-up letters, as necessary. Further, we performed year 2000 readiness
audits of selected key vendors. We also developed mitigation and contingency
plans for those vendors that were considered critical to our business
operations.

During 1999, we completed installing enterprise resource planning systems in
each of our solution centers in order to facilitate year 2000 readiness.

Currently, we have not encountered any significant business interruption
from the year 2000 issue on our internal IT and non-IT systems. We will
continue to monitor our systems and vendors to ensure that issues do not
manifest themselves over next few months. Although we do not anticipate any
future significant business interruption, we can give no assurance that such
interruption will not occur.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. We are required
to adopt SFAS No. 133, as amended by SFAS No. 137, no later than fiscal year
2001. This statement establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or a liability measured at its fair value. SFAS No. 133 requires that
changes in

26
<PAGE>

the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. We plan to adopt this statement in fiscal year 2001. Our management
does not believe that the adoption of SFAS No. 133 will have a material effect
on our financial position or results of operations.

Quantitative and Qualitative Disclosure About Market Risk

We are subject to market risk associated with changes in interest rates. Our
interest rate exposure is primarily related to borrowings under our line of
credit under which the interest rate floats with the market. At December 31,
1999, we had $35.0 million of borrowings under the line.

We are subject to market risk associated with changes in foreign currency
exchange rates. Over 50% of our revenues are derived from international
operations. We currently do not act to mitigate our foreign currency rate risk
although we are considering entering into contracts to do so.

27
<PAGE>

BUSINESS

We are a leading, global provider of extended supply chain management
services for the technology industry. Manufacturers of hardware and software
and Internet companies engage us to manage and perform the multiple processes
that must occur between the acquisition of materials for their products and the
manufacture or assembly, packaging and delivery of those products to their
customers. These many discrete processes are traditionally referred to as the
supply chain. In addition, we perform services that are at the front end of the
supply chain, such as management of orders that customers submit via phone,
fax, email and over the web. We also provide post-sale, or back end, services
such as tracking of order status and management of product returns. We refer to
the traditional supply chain, together with these additional front end and back
end processes, as the extended supply chain. We have been in operation since
1982 and have built a worldwide infrastructure in 12 countries, consisting of
20 centers and over 4,500 people.

Industry Overview

Companies have increasingly sought to outsource critical non-core business
processes so that they can focus on their core competencies. In the early phase
of outsourcing, companies contracted with third-party manufacturers to perform
basic production and fulfillment processes. More recently, market demands for
increased productivity have led companies to outsource additional business
processes to external providers whose core competencies include those
processes. Technology companies, in particular, have increasingly sought to
outsource the business processes involved in their extended supply chains. The
supply chain consists of the many steps that must occur between the acquisition
of materials for a product to the delivery of that product. These steps include
forecasting, procurement, management of inventory and materials, manufacturing
and assembly, order fulfillment and distribution. The extended supply chain
also includes e-commerce support services and order management as well as
customer care, financial transaction management and reporting.

The goal of extended supply chain management is to supply products
consistent with demand in order to reduce costs, minimize financial risk and
better meet client expectations for performance and quality. By outsourcing one
or more business processes in the extended supply chain, companies seek not
merely to improve their productivity and efficiency, but also to use the
outsourced business processes as a critical part of their overall competitive
strategy. In performing multiple steps of the extended supply chain for its
clients, the outsource provider can expand its role from that of a contractor
merely supplying products to that of a business partner whose services help the
client achieve its strategic objectives.

Outsourcing Trends

According to G2R, Inc., a subsidiary of Gartner Group, the market for supply
chain management outsourcing is estimated to grow from $17.0 billion in 1998 to
$42.2 billion in 2003, representing a compound annual growth rate of 20%.
Demand for extended supply chain management services is increasing due to the
following market trends:

. Increased Focus On Core Competencies. The rapid pace of technological
change is resulting in more frequent product introductions, which
require companies to devote more resources to product innovation and
development. By taking advantage of the expertise and technology of
outsource providers, companies can focus their own resources on their
core competencies such as product development and marketing activities
and significantly improve their new product introduction and delivery
cycles.

. Increasing Competitive Pressures. As competitive pressures drive down
prices and require improved product performance, companies must improve
their operating efficiencies to maintain or increase profitability.
Companies can reduce their costs by relying on outsource providers, who
can provide services more effectively because of their multiple products
and clients. In addition, outsource providers can sell directly to
retailers and end users, bypassing the traditional model of selling to
distributors. Direct sales eliminate the costs of a middleman and
provide a manufacturer with valuable information about its customers.

28
<PAGE>

. Need for Global Capabilities. As companies seek to expand into new
markets, and as the Internet offers the opportunity to reach clients
cost-effectively throughout the world, there is increasing demand for
experienced outsource providers who can offer production and fulfillment
capabilities on a global basis. Companies having or seeking a global
presence need outsource partners who can support their product offerings
and coordinate supply with demand across all geographic markets.

. Need to Improve Customer Satisfaction. To satisfy customer demand for
higher levels of service, companies are providing faster and more
accurate delivery and better assistance to customers. Because many
companies are unable to efficiently provide customer care on a global
basis, they are increasingly relying on outsource providers for customer
relationship management.

. Mass Customization. Customers can now order both hardware and software
products that are custom-configured to meet their particular
requirements. For example, customers typically order personal computers
with different keyboard, storage device and memory options and with
different combinations of installed software. Companies selling these
products are thus faced with the challenge of supplying customized
products both quickly and in large or small quantities. To meet this
challenge, companies are increasingly relying on outsource providers
that have the capability to manage the product inventories and software
content necessary to satisfy these complex requirements.

e-Commerce Trends

The growth of e-commerce is also contributing to increased demand for
outsourcing of business processes. While e-commerce companies typically have
core competencies in on-line merchandising and brand marketing, they often do
not have the capability to provide e-commerce solutions that extend to business
processes such as order processing, procurement, management of inventory and
materials, manufacturing and assembly, fulfillment and customer care. For
example, Jupiter Communications estimates that 46% of e-commerce web sites lack
immediate, or real-time, integration with an inventory management system, 44%
lack real-time integration with call center support and 41% lack real-time
integration with a fulfillment system.

Unlike in the traditional distribution model in which the outsource provider
receives orders from the vendor, in the e-commerce model the outsource provider
receives orders directly from retailers or end users. The fulfillment of orders
placed over the Internet is particularly complex because e-commerce businesses
typically facilitate and encourage end users to customize their orders. Adding
to this complexity, end users purchasing products through web sites expect that
order processing and product delivery will occur with speed and accuracy. The
complexity of commerce on the Internet creates an opportunity for outsource
providers to manage the extended supply chain for the e-commerce merchant and
solidify the merchant's relationships with its customers. The outsource
provider can thus provide an entire solution and play a critical role in the e-
commerce merchant's competitive strategy.

Outsource Services

In order to meet the needs of both traditional vendors and emerging e-
commerce vendors for the outsourcing of extended supply chain management
processes, an outsource provider must be able to offer services in one or more
of the following areas:

. e-Commerce Support Services, which include the design of web sites for
e-commerce transactions, commonly referred to as web site storefronts,
the management of commercial transactions conducted on the web and
connection to fulfillment operations on an immediate, or real-time,
basis;

. Procurement and Inventory Management, which includes procuring materials
at low cost on a just-in-time basis and optimizing levels of inventory
so that a client's production requirements can be met without running
out of stock and with minimal inventory risk;

. Manufacturing, which includes setting production levels to meet planned
and unplanned changes in demand and producing the ordered products
quickly and accurately;

29
<PAGE>

. Fulfillment, which includes all of the steps necessary to execute a
transaction, ranging from taking orders to arranging for delivery of the
ordered products quickly and to the correct destination; and

. Customer Relationship Management, which includes providing reliable and
timely information regarding the shipment and status of ordered products
and answering customer questions regarding orders, shipping, billing,
returns and product information.

While many outsource providers offer one or more of these services, there
are few providers that can offer all of these services on a globally integrated
basis. Companies seeking to outsource a significant portion of their business
processes require a provider that has the technology and expertise to
seamlessly integrate these complex business processes with their own
operations. The outsource provider is often a direct link between two of the
most valuable assets of a company, namely its products and its customers. As a
result, the outsource provider must have the experience and expertise necessary
to earn and maintain the trust of the company as a reliable and integral part
of its supply chain.

The Modus Media Solution

We offer a broad range of extended supply chain management services that
enable our clients to focus on their core competencies, improve their
productivity and tailor their supply chain processes to achieve a competitive
advantage. The Modus Media solution includes the following:

. Integrated Services. We establish strategic relationships with our
clients by providing a full range of integrated services that satisfy
our clients' supply chain management requirements. Our broad portfolio
of services provide a "one-stop shop" to which the client can outsource
part or all of its business processes, including e-commerce support
services, management of intellectual property and other content related
information, procurement, management of inventory and materials,
manufacturing and assembly, fulfillment and customer relationship
management. By providing an integrated end-to-end solution, we are able
to help clients link supply and demand in real time and thus reduce
costs and improve performance throughout their supply chain.

. Global Presence. We have built worldwide operations in 12 countries,
consisting of 20 solution centers, which enables us to offer production
and fulfillment capabilities on a global basis. These centers are
connected by a wide area network and use common technology to store
clients' software content and other intellectual property. As a result,
we can support simultaneous product launches in multiple languages and
in multiple geographic markets.

. Management of Complex Business Processes. Our experience in designing
and re-engineering supply chain processes provides us with a significant
knowledge base that we use to optimize these processes for our clients.
Our supply chain processes are supplemented by sophisticated information
technologies. Our information technology is built upon an enterprise
resource planning system that has been designed to be flexible so that
we can easily modify our supply chain processes to meet the evolving
requirements of our clients. This also enables us to provide the complex
business processes required to produce and deliver customized build-to-
order hardware and software products for e-commerce businesses.

. Flexible Production Capacity. Leading OEMs and ISVs increasingly seek to
outsource large-scale manufacturing and assembly programs. These
companies often experience both expected and unexpected surges in
demand, such as upon the introduction of a new product release or
following a special advertising campaign. Our worldwide facilities
enable us to meet our clients' time-to-market and volume requirements
during periods of varying demand. In addition, by shortening production
cycles, we can reduce our clients' inventory requirements and overall
production costs. We also use internal forecasts to anticipate client
demand and employ a skilled temporary labor force to provide quick ramp-
ups and ramp-downs in production.

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. Proven Supply Chain Partner. We have substantial experience in supply
chain management and believe that we have established a reputation as a
trusted part of our clients' supply chain operations. To maintain our
long-term relationships, we must consistently meet our clients'
stringent performance requirements in areas such as inventory turnover,
order fill rates and product quality. To strengthen our client
relationships, we have organized our 550 business managers by client and
solution center, with groups of managers representing the same client in
multiple centers. The length of our relationships with our five leading
clients, based on 1999 revenue, has averaged over ten years.

. Management of Content Across Multiple Media. We have implemented a
content management and production system that enables us to store
electronically millions of data files and images that we use to produce
products on demand. This print on demand capability allows us to print
materials in such quantities, and at such times, as our clients require,
enhancing the client's ability to customize products for specific
customers. We also have the capability to manage and supply intellectual
property content such as software on multiple types of media, such as
diskettes and CDs. In addition, we can manage complex software licensing
programs, including electronic licensing programs in which we provide
passwords and registration over the Internet to enable licensed users to
gain access to installed software.

Strategy

Our objective is to increase revenues and earnings by maintaining and
enhancing our position as a leading, global provider of extended supply chain
management solutions for the technology industry. We believe that we can take
advantage of the market trends towards more frequent product introductions,
mass customization and growth of e-commerce by implementing the following
strategies:

Grow e-Fulfillment Solutions Business. We believe that we have significant
opportunities to expand our e-fulfillment solutions business. E-fulfillment
solutions allow us to expand upon our content manufacturing solutions and to
take on the role of designing, implementing and executing a wider array of
services. These services include designing web sites for e-commerce, operating
response centers, managing electronic license distribution and providing
customer relationship management.

Expand Services to Existing Clients. We have long-standing relationships
with many leading OEMs and ISVs and we believe that they will continue to seek
a more efficient supply chain. We believe that we can take advantage of the
trend toward increasing outsourcing and that we can provide services across a
larger part of our clients' extended supply chain. We plan to continue to
develop and market new offerings and solutions and to provide additional
content manufacturing and e-fulfillment services to our existing clients.

Capitalize on Our Global Operations and Information Technology
Capabilities. We offer significant global capabilities to service the needs of
multinational companies who seek reduced time to market, integrated product
introductions, localized customization and efficient management of inventory
and materials such as delivery and order tracking. We believe that applying our
processes consistently and using just-in-time manufacturing across our global
network of solution centers will provide important strategic and competitive
advantages in the market for globally integrated, outsourced services.

Continue to Achieve High Ratings in Outsourcing Industry Performance
Measurements. We have built our corporate culture on operational efficiency and
excellence. The outsourcing industry has typically evaluated the performance of
outsource providers using recognized performance measures, such as total supply
chain management cost, upside production flexibility and delivery performance.
We believe that we have performed favorably when measured against these
industry standards and, as a result, that we have established a reputation as a
trusted part of our clients' supply chain. We believe clients in this industry
will continue to place significant importance on these measurements and we seek
to continue to achieve high ratings in performance measurements for the
outsourcing industry.

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<PAGE>

Improve Our Financial Returns from Higher Productivity Operations That Can
Be Expanded Efficiently. By continuing to invest in technology and factory
automation and by managing our service offering mix, we seek to reduce our
costs, promote operating efficiencies and improve financial returns. In
particular, we seek to provide our clients with high value-added e-fulfillment
services, which generally provide us with improved operating margins. In
addition, we intend to leverage increased revenue over our fixed costs through
the use of temporary employees during peak periods. We seek to use our
operations knowledge and supplier relationships across all of our solutions
centers to achieve improved operating margins and financial results.

Pursue Select, High-Growth Markets and Expand Client Base. We intend to
pursue clients in high-growth market segments, such as e-commerce and
telecommunications, that are outsourcing their critical non-core activities. We
intend to capitalize on our full range of integrated supply chain management
services to attract clients in these high growth markets and expand and
diversify our client base.

Pursue Strategic Acquisitions. We intend to pursue strategic acquisitions
that will provide us with additional industry expertise, enhance our range of
service offerings, expand our capacity, broaden our client base and expand our
geographical presence. As outsourcing trends require more significant global
and technological capabilities, outsource providers who do not offer a full
range of services are seeking strategic partners. We believe that we can take
advantage of the trend toward consolidation through strategic acquisitions.

Modus Media Services

We offer our clients a diversified range of services to address their
extended supply chain management needs. Our services can be used either to
address specific needs within the extended supply chain or as an end-to-end
integrated solution to manage the entire extended supply chain. For all of our
services, we acquire materials and fulfill orders on behalf of our clients to
their customers. Our solutions are depicted in the diagram below.

[GRAPH OF EXTENDED SUPPLY CHAIN MANAGEMENT APPEARS HERE]

Content Manufacturing Solutions

Our content manufacturing solutions consist of the following services:

Content Management. We maintain systems that enable us to respond quickly to
frequent changes in our clients' bills of material and their order requirements
that dictate the specific hardware components and software to be included in
the completed packages, known as shipkits, for different product
configurations. We also manage the large amount of data files and images used
to produce our clients' software and documentation in multiple versions. In
addition, we track for our clients the different customized product
configurations that are shipped to our clients' customers.

Procurement. We manage the purchase of raw materials and subassemblies from
vendors selected either by our clients or by us. Our management of these
procurement services includes vendor evaluation and selection, product price
negotiation, forecasting product quantities and managing the timing of
purchases.

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<PAGE>

Inventory Management. By integrating our enterprise resource planning system
with client forecasts, we can provide automated inventory management to assure
immediate, or real-time, inventory levels of a client's products. We also
provide to our clients web-based management information, including pricing
information, reorder levels and inventory values, that supports consistent and
timely stock balances. We also warehouse and manage inventory owned by our
clients.

Manufacturing. We convert data files and images into various media formats
that can be distributed to our clients or directly to the distributor or
retailer. This content is often intellectual property, such as licensed
software products that are distributed to end users in the form of a diskette,
CD or manual. Our manufacturing services handle the conversion of multiple
releases or versions of software content in various media from a broad variety
of input formats.

Assembly. We use a streamlined assembly process to incorporate various
components and parts into a finished product or subassembly, referred to as
kitting. For some products, such as a shipkit for personal computers, we
assemble as many as 100 distinct parts and components into a package, referred
to as a kit. We are increasingly employing automation to realize efficiency, to
better manage our variable costs and to increase production capacity.

Fulfillment and Distribution. Our fulfillment services include order
processing, picking, packing, warehousing and shipping. We use several semi-
automated packaging and labeling lines for our pick and pack operation. We also
streamline and customize the fulfillment procedures based upon each client's
requirements. In addition, our 20 solution centers facilitate compliance with
export regulations and provide regional shipping efficiencies. We provide
detailed reports to our clients on our supply chain activities in multiple
currencies and languages.

Microsoft Authorized Replicator. We have authorized replicator status with
Microsoft, which licenses us to replicate its software products for authorized
Microsoft business partners, primarily OEMs. We have been among a limited
number of authorized replicators of Microsoft products since 1991. We have
historically entered into annual contracts with Microsoft, and our current
contract expires in August 2000.

We offer our content manufacturing services to OEMs and ISVs as follows:

OEM Applications. We provide OEMs with a single source for sub- and final-
assembly, packaging and shipping of hardware shipkits. These kits contain many
components, such as a mouse, a keyboard, a network interface card and other
accessories. In addition, shipkits contain intellectual property content such
as software, documentation and other printed material. We manufacture or
purchase all components of the kit and assemble and package them for
distribution. For sub-assembly services, we send the shipkits directly to the
OEM's production line on a just-in-time basis as one part number to simplify
the client's production process.

OEM Case Study. Our client, a leading OEM, had experienced
significant growth and was challenged to manage the flow of
accessories, software and documentation required by its production
lines. The client found that it had incurred significant excess
inventory of many items and that it had shut down its production line
on numerous occasions due to parts shortages of other components.
These problems led to decreased customer satisfaction and decreased
profitability. We proposed redesigning the OEM's supply chain and
production process. We took over procurement, production and assembly
of all activities associated with the client's shipkit and implemented
a just-in-time manufacturing model. As a result, the OEM's production
line shutdowns have significantly decreased and its cash collections
have improved.

ISV Applications. We provide ISVs with flexible, just-in-time delivery
programs allowing software shipments to be closely coordinated with our
clients' inventory and distribution requirements. The content of packaged
software products is typically comprised of software replicated on CD or
diskette, printed documentation, registration, licensing and marketing
materials. We coordinate the production of packaged software products and the
on-time supply of bulk orders either to distributors or direct to retail
stores. Our ISV

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solutions provide large scale customization and content management as well as
adherence to local specifications and languages in different geographic
locations. Our ISV solutions allow our clients to continue to support a large
number of concurrent software versions and configurations.

ISV Case Study. Our client, a leading ISV focused on the desktop,
graphic and Internet design marketplace, had accumulated high levels
of obsolete CDs and related inventory due to forecasting volatility,
inefficient distribution management and excessive lead times in the
manufacturing cycle. The client requested that we provide a solution
to reduce inventory levels, shorten manufacturing lead times and
increase inventory turns. We proposed the implementation of an on-
demand manufacturing model, which eliminated a distribution step and
enabled the ISV to ship directly to retail stores. As a result, the
client's lead-time was reduced, inventory levels decreased, inventory
turns increased, the time necessary to fulfill orders decreased and
retailers had more flexibility in merchandising.

e-Fulfillment Applications

Our e-fulfillment solutions consist of an additional set of services that we
combine with our content manufacturing solutions. These services typically
support direct interaction with our clients' customers, who may be either end
users or retailers. We integrate our content manufacturing solutions with
front-end services, such as e-commerce and response center order processing,
and back-end services, such as financial management, reporting and customer
care. This allows us to provide an end-to-end extended supply chain management
solution. Orders for products that we provide through e-fulfillment solutions
come directly from end users or retailers rather than from our OEM and ISV
clients. While a majority of the orders fulfilled through our e-fulfillment
solutions are currently being received by us via telephone or facsimile, we
expect that orders will increasingly be placed over the web as we develop more
e-commerce web sites for our clients and the Internet becomes a more prevalent
medium for the transaction of commerce. To date, we have built more than 40 e-
commerce sites for our clients, ranging from e-commerce web sites to online
order tracking and order information sites. In some cases, we have built
multiple sites for the same client.

Our e-fulfillment solutions include the following services, which we
typically offer in combination with one or more content manufacturing
solutions:

. Design of web site storefronts and connection of web sites to
fulfillment operations;

. Operating response centers, which process orders received by telephone,
fax, email and web;

. Processing online payments in multiple currencies;

. Handling of product inquiries from our clients' customers;

. Processing product returns, refunds and rebates;

. Reporting on the ordering activities of our clients' customers; and

. Providing passwords and registration as part of our electronic license
distribution services.

Orders for products that we fulfill through our e-fulfillment solutions are
handled in one of six response centers located worldwide. As of December 31,
1999, these centers employed approximately 760 response center representatives,
a portion of whom were part-time employees. Through these response centers we
also handle individual end-user questions or requests, and billing or credit
card transactions. Related services provided for our clients generally include
collection activities, management of data files containing customer information
and transaction-based reporting.

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<PAGE>

Our electronic license administration services are offered through our Open
Channel Solutions division. This division manages complex software licensing
programs, including electronic licensing programs in which we electronically
deliver passwords and registrations over the Internet to enable licensed users
to gain access to installed software.

E-Fulfillment Case Study. Our client, a developer of personal
digital assistants, required a business process outsourcing partner
that offered kitting and assembly combined with call center and web-
based ordering capabilities and a distribution infrastructure in
North America. The client also needed a partner with the flexibility
to handle unforeseen increases in demand. Within four weeks, we
developed a web site storefront for the client and, within five
weeks, began accepting orders in our response centers. Using a
secured link, we transmit data across our wide area network so that
order management and fulfillment centers in North America can
process nearly 20,000 orders per month.

Clients

We provide solutions to a broad array of original equipment manufacturers,
independent software vendors and e-commerce companies. The following chart
alphabetically lists a representative sample of our clients and the solutions
that we provide to them.

<TABLE>
<CAPTION>
Client Content Manufacturing Solutions e-Fulfillment Solutions
- ------ ------------------------------- -----------------------
<S> <C> <C>
3Com.................... X
ABN-AMRO................ X
Acer.................... X
AT&T.................... X
Beyond.com.............. X
Dell.................... X X
E-Stamp................. X
Gateway................. X
Hewlett-Packard......... X X
IBM..................... X X
Intuit.................. X
Macromedia.............. X
Micron.................. X
Microsoft............... X X
Network Associates...... X X
Novell.................. X X
Packard Bell............ X
Palm Computing.......... X
Sony.................... X X
Sun Microsystems........ X X
</TABLE>

Technology

We believe that automation of internal processes and automated links to our
suppliers, clients and their customers are critical to our business. To provide
a competitive advantage in meeting our clients' demands, we use advanced
technologies enhanced with proprietary applications and the knowledge and
experience of our management and personnel. Our technology capabilities allow
us to support and automate most supply chain management processes, including
on-demand manufacturing capabilities, electronic license distribution,
integrated product introductions and efficient management of inventory and
materials. In addition, we use a communications network consisting of digitally
linked data centers, which are capable of supporting various messaging
standards and protocols to ensure secure and effective communication among our
solution centers, our clients and their customers, and our suppliers.

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<PAGE>

Our technology infrastructure includes software applications that allow our
solution centers worldwide to consistently manage inventory, order processing,
shipping, accounting and other operations. We refer to this software
application as our enterprise resource planning, or ERP, system. We enhance our
ERP system with proprietary applications to customize processes for our
clients' specific needs and to provide comprehensive information on all
functions and services. In 1999, we upgraded our ERP system to standardize our
manufacturing, finance and distribution platforms. In addition, this system has
been integrated with other applications and technologies, such as customer
relationship management software and content management servers.

We maintain a computer network that enables our clients to deliver bills of
materials and other related work orders by means of a secure network link. This
allows our clients to transfer content over the Internet or via private
connections to us, enabling an orderly workflow for materials within our
internal network. Our clients can transmit content and work orders to a single
network location, which processes and retransmits this data to the appropriate
solution center for production and distribution. We enable the movement of
content, such as master files of data and digital images, for printing on
demand around the world.

As of December 31, 1999 we employed 191 information technology professionals
in a range of activities, including network management, web development,
internal support and design.

Sales and Marketing

Our services are sold through a worldwide direct sales force, comprised of
approximately 50 full-time, professional sales executives. We recently
initiated a Global Client Sales group within our direct sales force that is
designed to provide full-time account teams to service our leading global
clients. This Global Client Sales organization is complemented by regional
sales teams that provide geographic sales leadership and account management
services to our clients.

We also formed product marketing, product development and supply chain
design organizations in order to create, support and advance our selling
effort. Our marketing organization assists in the selling and development of
new offerings and is responsible for identifying potential clients, marketing
our services, developing sales tools and consulting services. Our marketing
organization is currently focused on promoting the integration of clients'
Internet technologies with our e-fulfillment capabilities, as well as the
packaging, positioning and enhancement of our extended supply chain management
solutions.

Competition

We participate in a competitive marketplace. However, we believe that no
single competitor presently offers the same full range of technology-enabled,
global and integrated supply chain management services. We compete against
companies engaged in teleservices, CD and diskette replication, hardware
assembly and printing. Recent competitors have emerged such as StarTek and
Sykes that primarily provide call center services. CD and diskette replicators,
such as Zomax, Bertelsmann, and Technicolor/Nimbus, provide media-based
solutions. Hardware assembly companies such as Logistix also provide solutions
to the same base of clients we serve. Turnkey printing companies such as Banta,
Quebecor and Printech provide document-intensive supply chain solutions to the
same base of clients we presently serve.

In addition to these large regional and global competitors, we face
competition from numerous local producers and from internal departments of our
clients and prospective clients. Additionally, we expect competition to emerge
from companies engaged in electronic manufacturing services and logistics
services as they attempt to deliver a broader range of services. We compete on
the basis of quality, performance, service levels, global capabilities,
technology, operational efficiency and price.

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<PAGE>

Operations and Solution Centers

Our operations are organized as a "hub and spoke" structure within each
geographic region. The "hubs" are large solution centers in centralized
locations worldwide that have significant economies of scale and offer a full
range of our services. The "spokes" are satellite solution centers that perform
services, other than large scale manufacturing, such as on-demand manufacturing
and fulfillment on a just-in-time basis to clients located nearby. We typically
start a solution center with a large initial client and then diversify the
client base to spread risk.

We operate 20 solution centers worldwide with an aggregate square footage of
approximately 2.0 million. All of our solution centers are leased, other than
Singapore and Kildare, Ireland, which are owned. Set forth below is the
location and size for each of our largest solution centers. Each of these
solution centers provides content manufacturing and e-fulfillment solutions.

<TABLE>
<CAPTION>
Facility Location Area (sq. ft.)
----------------- --------------
<S> <C>
North America:
Fremont, CA................................................ 160,000
Raleigh, NC................................................ 140,400
Lindon, UT................................................. 392,500
Salt Lake City, UT......................................... 126,000
Europe:
Dublin, Ireland............................................ 110,000
Kildare, Ireland........................................... 135,000
Apeldoorn, Netherlands..................................... 217,300
Cumbernauld, Scotland...................................... 140,000
Asia:
Singapore.................................................. 129,000
</TABLE>

We also maintain solution centers in Boise, Idaho; Preston, Washington;
Angers, France; Orleans, France; Limerick, Ireland; Willsborough, Ireland;
Sydney, Australia; Shenzhen, China; Ochiai, Japan; and Taipei, Taiwan. In
addition, we are party to two minority owned joint ventures located in Ebina,
Japan and KeyHeung, Korea. In addition, we maintain response centers within six
of these solution centers for the resolution of questions regarding shipping,
billing and technical support as well as a variety of other questions. We have
implemented the Customer Operations Performance Center (COPC) standards in our
North American solution centers in 1999. All of our major solution centers are
ISO 9002 certified.

Employees

Our success in recruiting, hiring, and training large numbers of full-time,
skilled employees and obtaining large numbers of temporary employees during
peak client demand periods is critical to our ability to provide high quality
outsourced services.As of December 31, 1999 we employed over 4,500 employees.
The number of temporary employees varies significantly during the year due to
the seasonal variations of our business. We believe that the demographics
surrounding our solution centers, and our reputation and compensation package,
should allow us to continue to attract and retain qualified employees. We
believe that we maintain good employee relations.

We are committed to training our employees, and we benchmark our training
investment versus the Fortune 500 on a quarterly basis. In 1999, we initiated a
corporate program, MMI University, in which selected employees receive broad
training in a wide variety of functional areas. We provide in-house training
for client care employees on the features of our clients' products and service
offerings as well as our internal systems.

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Intellectual Property

Our operations frequently incorporate proprietary and confidential
information. We rely upon a combination of copyright and trademark laws and
non-disclosure and other intellectual property contractual arrangements to
protect our proprietary rights. We have pending trademark registrations on the
name Modus Media International and our logo in the United States, the United
Kingdom, Benelux, Ireland, France, Australia, China, Malaysia, Singapore,
Taiwan, Japan and Korea. In addition, we have pending registrations as to
certain other marks in the United States and abroad. We seek to limit
disclosure of our intellectual property by requiring employees and consultants
with access to our proprietary information and the proprietary information of
our clients to execute confidentiality agreements with us and by restricting
access to our source code. Due to rapid technological change, we believe that
factors such as the technological and creative skills of our personnel, new
product developments and enhancements to existing products are more important
than the various legal protections of our technology to establishing and
maintaining a technology leadership position.

Legal Proceedings

We are not a party to any material legal proceeding. We are, from time to
time, a party to litigation arising in the normal course of our business.
Management believes that none of these actions, individually or in the
aggregate, will have a material adverse effect on our financial position or
results of operations.

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MANAGEMENT

Executive Officers and Directors

Our executive officers and directors, and their ages and positions as of
December 31, 1999, are as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Terence M. Leahy.............. 45 Chairman of the Board of Directors, Chief
Executive Officer and Director

Richard M. Darer.............. 46 Executive Vice President and Chief Financial
Officer

Patrick G. Donnellan.......... 49 Executive Vice President and Chief Operating
Officer

Ronald Leitch................. 40 Executive Vice President and Chief Process
and Technology Officer

Edward D. Rose................ 37 President, Open Channel Solutions Division

W. Kendale Southerland........ 37 Executive Vice President,
Sales/Marketing/Product Development

Mary L. Wilson................ 48 Senior Vice President, General Counsel and
Secretary
Michael J. Dudich............. 42 Senior Vice President, Human Resources

Linwood A. Lacy, Jr........... 54 Director

Jonathan S. Lavine............ 33 Director

Mark E. Nunnelly.............. 41 Director

Robert F. White............... 48 Director
</TABLE>

Terence M. Leahy has served as our Chairman of the Board and Chief
Executive Officer since December 1997. Mr. Leahy also served as Co-President
of Stream International, Inc. from April 1995 to May 1996 and Chief Executive
Officer of Stream International Inc. from 1996 to 1997. Mr. Leahy oversaw the
restructuring of Stream into three different companies in 1997. From January
1994 to March 1995, Mr. Leahy served as business unit president of R.R.
Donnelley's Global Software Services division, which merged with Corporate
Software Inc. to create Stream International Holdings, Inc. in 1995. From 1982
to 1994, Mr. Leahy held various positions at R.R. Donnelley, including
positions at the Global Software Services division since 1993. Mr. Leahy is a
graduate of New York University Journalism School.

Richard M. Darer has served as our Executive Vice President Chief Financial
Officer since September 1998. Prior to joining Modus Media, Mr. Darer served
as Senior Vice President of Finance and Administration and Chief Financial
Officer of Gensym Corporation, an ERP software and services supplier, from
April 1997 to August 1998. From June 1996 to March 1997, Mr. Darer served as
Chief Financial Officer and Vice President of Administration at White Pine
Software, an Internet content software developer. From July 1994 to June 1996,
Mr. Darer served as Corporate Controller of Sequoia Systems and then as its
Vice President, Treasurer and Controller after its merger with Texas
Microsystems. Mr. Darer holds a Bachelor of Science in mathematics from
Polytechnic Institute of Brooklyn, a Master of Science in industrial
engineering from Northeastern University, and a Master of Business
Administration from Harvard Business School.

Patrick G. Donnellan has served as our Executive Vice President and Chief
Operating Officer since May 1999. Previously, Mr. Donnellan served as
President of Modus Media/North America from September 1997 to April 1999. From
July 1995 to August 1997, Mr. Donnellan served as Vice President of Operations
at Stream International/Europe. From December 1994 to June 1995, Mr. Donnellan
served as Director of Business Development for Stream International. Mr.
Donnellan holds a Bachelor of Arts in mathematics and politics from University
College, Galway, Ireland.

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<PAGE>

Ronald Leitch has served as Executive Vice President, Chief Technology and
Process Officer since May 1999. From September 1997 to April 1999, Mr. Leitch
served as President of Modus Media/Europe. From April 1996 to August 1997, Mr.
Leitch served as Vice President and General Manager of Stream
International/Northern Europe. From March 1994 to April 1996, Mr. Leitch served
as Managing Director of the Dutch Operations at R.R. Donnelley's Global
Software Services business unit. Mr. Leitch holds a Post Graduate Diploma in
engineering management from the London School of Business and has a Bachelor of
Science in electronics and computing.

Edward D. Rose has served as President of Open Channel Solutions, a division
of Modus Media, since January 1999. From March 1997 to January 1999, Mr. Rose
served in various other capacities for Modus Media including Chief Technology
Officer and Senior Vice President of Marketing and Product Development.
Previously, Mr. Rose served as Vice President of Electronic Commerce for Stream
International from August 1996 to March 1997. From June 1994 to August 1996,
Mr. Rose served as Vice President of Publishing Technology in R.R. Donnelley's
Financial and Information Services Group. Mr. Rose completed his Bachelor of
Fine Arts with honors at Alfred University and attended the Rochester Institute
of Technology for graduate work in electronic imaging.

W. Kendale Southerland has been Executive Vice President, Sales, Marketing
and Product Development since May 1999. From December 1997 to April 1999, Mr.
Southerland served as President of Modus Media/Asia. From June 1997 to December
1997, Mr. Southerland served as Senior Vice President for Modus Media/South
Asia. From August 1995 to June 1997, Mr. Southerland served as Managing
Director for our Singapore operations. From 1990 to 1995, Mr. Southerland held
various positions within the Modus Media organization. Mr. Southerland holds a
Bachelor of Science in industrial management from Georgia Institute of
Technology.

Mary L. Wilson has served as our Senior Vice President and General Counsel
since March 1998. Prior to joining Modus Media, Ms. Wilson served as General
Counsel at PictureTel Corporation, a video conferencing solutions developer,
from October 1995 to June 1997. From September 1992 to October 1995, Ms. Wilson
was an attorney in private practice. Ms. Wilson received her Bachelor of Arts
in psychology from Michigan State University and her Juris Doctor from
University of Virginia Law School.

Michael J. Dudich joined Modus Media as Senior Vice President, Human
Resources in November 1999. From September 1998 to October 1999 Mr. Dudich was
Senior Vice President, Human Resources for Cookson Electronics, a leading
provider of assembly materials, equipment and technology solutions to the
printed circuit board industry. From June 1986 to September 1998, Mr. Dudich
served in various human resource capacities for divisions of General Electric
Company. Mr. Dudich received his Bachelor of Science in industrial management
from the University of Akron.

Linwood A. Lacy, Jr. has been a director of Modus Media since August 1998.
In November 1997, Mr. Lacy retired from Micro Warehouse Incorporated where he
had served as President and Chief Executive Officer since October 1996. From
1985 to May 1996, Mr. Lacy served as the Co-Chairman and Chief Executive
Officer of Ingram Micro, Inc., a computer distributor and a subsidiary of
Ingram Industries, Inc. Mr. Lacy holds a Bachelor of Science in chemical
engineering from the University of Virginia and a Master of Business
Administration from the Darden Graduate School of Business Administration at
the University of Virginia. Mr. Lacy also serves as a director of pcOrder.com,
Entex Information Services, Inc. and Earthlink Networks, Inc.

Jonathan S. Lavine has served as a Director of Modus Media since December
1997. Mr. Lavine joined Bain Capital as an investment executive in 1993 and has
been a Managing Director since 1997. He also has been Chief Investment Officer
of Sankaty Advisors, a fixed income affiliate of Bain Capital since 1997. Prior
to joining Bain Capital, Mr. Lavine worked as a consultant at McKinsey &
Company. Previously, Mr. Lavine worked in the Mergers and Acquisitions
Department of Drexel Burnham Lambert. Mr. Lavine received an Master of Business
Administration from Harvard Business School and a B.A. from Columbia College.

40
<PAGE>

Mark E. Nunnelly has served as a Director of Modus Media since December
1997. Mr. Nunnelly joined Bain Capital as a General Partner in 1990 and has
served as Managing Director since April 1993. Mr. Nunnelly received a Master of
Business Administration, from Harvard Business School and received a Bachelor
of Arts from Centre College. Mr. Nunnelly is also a member of the board of
directors of Dominos, DoubleClick Inc. and Dade International.

Robert F. White has served as a Director of Modus Media since January 1998.
He has been a Managing Director of Bain Capital since its inception in 1984.
Mr. White received his Master of Business Administration from Harvard Business
School, and a Bachelor of Arts in mathematics and economics from Bowdoin
College. He is also a director of Brookstone, Inc.

Executive Officers

Each officer serves at the discretion of our Board of Directors and holds
office until his successor is elected and qualified or until his earlier
resignation or removal. There are no family relationships among any of our
directors or executive officers.

Election of Directors

Following this offering, the board of directors will be divided into three
classes, each of whose members will serve for a staggered three-year term.
Messrs. Nunnelly and Lavine will serve in the class whose term expires in 2001;
Messrs. Lacy and White will serve in the class whose term expires in 2002; and
Mr. Leahy will serve in the class whose term expires in 2003. Upon the
expiration of the term of a class of directors, directors in such class will be
elected for three-year terms at the annual meeting of stockholders in the year
in which such term expires.

Compensation of Directors

We reimburse non-employee directors for reasonable out-of-pocket expenses
incurred in attending meetings of the board of directors. Mr. Lacy received
stock options totalling 40,000 shares of common stock in each of July and
December 1998 at an exercise price of $.29 per share.

Board Committees

The board of directors has established a Compensation Committee and an Audit
Committee. The Compensation Committee, which consists of and , reviews
executive salaries, administers any bonus, incentive compensation and stock
option plans, and approves the salaries and other benefits of our executive
officers. In addition, the Compensation Committee consults with our management
regarding pension and other benefit plans and our compensation policies and
practices. The Audit Committee, which consists of and , reviews the
professional services provided by our independent accountants, the independence
of such accountants from our management, our annual financial statements and
our system of internal accounting controls. The Audit Committee also reviews
such other matters with respect to our accounting, auditing and financial
reporting practices and procedures as it may find appropriate or may be brought
to its attention.

Executive Compensation

The following table sets forth, for the year ended December 31, 1999, the
cash compensation paid and shares underlying options granted to our:

. Chief Executive Officer; and

. four other most highly compensated executive officers who received
annual compensation in excess of $100,000, referred to collectively as
the Named Executive Officers.

41
<PAGE>

Summary Compensation Table

<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation(1) Awards
----------------------------- --------------
Other Annual Shares All Other
Name and Salary Bonus Compensation Underlying Compensation
Principal Position ($) ($)(2) ($) Options (#)(3) ($)
------------------ -------- ------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Terence M. Leahy........ $425,000 $45,900 $ 0 200,000 $211,260(4)
Chairman of the Board
of Directors and Chief
Executive Officer
Richard M. Darer........ 241,346 21,500 0 100,000 5,121(5)
Executive Vice
President and Chief
Financial Officer
Patrick G. Donnellan.... 291,504 26,235 75,983(6) 100,000 130,167(7)
Executive Vice
President and Chief
Operating Officer
Ronald Leitch........... 230,575 19,006 0 100,000 156,554(8)
Executive Vice
President and Chief
Process and Technology
Officer
W. Kendale Southerland.. 238,248 21,105 35,425(9) 100,000 174,971(10)
Executive Vice
President,
Sales/Marketing/Product
Development
</TABLE>
- --------
(1) In accordance with the rules of the Securities and Exchange Commission,
the compensation set forth in the table does not include medical, group
life or other benefits which are available to all of our salaried
employees, and certain perquisites and other benefits, securities or
property which do not exceed the lesser of $50,000 or 10% of the person's
salary and bonus shown in the table.

(2) Each of the amounts in this column includes the aggregate amount of bonus
awards for the first, second and third quarters of fiscal 1999. Annual
bonus awards for fiscal 1999 have not yet been determined and are not
included.

(3) We did not make any restricted stock awards, grant any stock appreciation
rights or make any long-term incentive payments during fiscal 1999 to our
executive officers. Options granted to the Named Executive Officers were
granted at fair market value as determined by the board of directors
based on all factors available to them on the grant date.

(4) Comprised of $2,400 of employee retirement plan matching payments made by
us, $8,860 of insurance premiums paid by us and $200,000 in debt
forgiveness.

(5) Comprised of $1,121 in life insurance premiums paid by us and $4,000 of
employee retirement plan matching payments.
(6) Comprised of reimbursements for foreign tax liabilities.

(7) Comprised of a $83,349 payment for foreign service and related expenses,
$500 for tax return preparation services, $45,000 in pension plan
contributions and $1,318 of life insurance premiums paid by us.

(8) Comprised of $55,984 in reimbursements for expenses related to foreign
service, $38,220 in pension contributions, $62,170 in relocation expenses
and $180 in life insurance premiums paid by us.
(9) Comprised of reimbursements for foreign tax liabilities.

(10) Comprised of a $77,489 payment for foreign service and related expenses,
$2,400 of employee retirement plan matching payments made by us, $1,012
of life insurance premiums paid by us, $93,570 in relocation expenses and
$500 for tax return preparation services.

42
<PAGE>

Stock Options

The following table contains information concerning the grant of options to
purchase shares of our common stock to each of our Named Executive Officers
during the fiscal year ended December 31, 1999:

Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock
Appreciation for Option
Individual Grants Term(3)
----------------------------------------------- -----------------------
Number of Percent of
Securities Total Options
Underlying Granted To Exercise
Options Employees in Price Expiration
Name Granted (#) Fiscal Year(1) ($/Sh)(2) Date(4) 5% ($) 10% ($)
---- ----------- -------------- --------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Terence M. Leahy........ 200,000 8.7% $5.175 9/29/09 $ 650,906 $ 1,651,598

Richard M. Darer........ 100,000 4.4% 5.175 9/29/09 323,453 825,799

Patrick G. Donnellan.... 100,000 4.4% 5.175 9/29/09 323,453 825,799

Ronald Leitch........... 100,000 4.4% 5.175 9/29/09 323,453 825,799

W. Kendale Southerland.. 100,000 4.4% 5.175 9/29/09 323,453 825,799
</TABLE>
- --------

(1) Based on an aggregate of 2,290,500 shares subject to options granted to our
employees in 1999.

(2) All options were granted at or above fair market value as determined by the
board of directors on the date of grant.

(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on our
common stock over the term of the options. The potential realizable values
set forth above do not take into account applicable tax and expense
payments that may be associated with such option exercises. Actual
realizable value, if any, will be dependent on the future price of the
common stock on the actual date of exercise, which may be earlier than the
stated expiration date. The 5% and 10% assumed annualized rates of stock
price appreciation over the exercise period of the options used in the
table above are mandated by the rules of the Commission and do not
represent our estimate or projection of the future price of the common
stock on any date. There is no representation either express or implied
that the stock price appreciation rates for the common stock assumed for
purposes of this table will actually be achieved.

(4) These options typically vest over four years. They become exercisable as
they vest.

43
<PAGE>

Fiscal Year-End Option Values

The following table sets forth information for each of the Named Executive
Officers with respect to the value of options outstanding as of December 31,
1999.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Value

<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised In-The-
Acquired Underlying Unexercised Money Options at
on Value Options at Fiscal Year-End (#) Fiscal Year-End ($)(1)
Exercise Realized ------------------------------ ----------------------------
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- -------- ------------------------------ ----------------------------
<S> <C> <C> <C> <C>
Terence M. Leahy........ 0 0 768,000/560,000 8,448,000/6,160,000
Richard M. Darer........ 15,000 73,275 65,000/220,000 715,000/2,420,000
Patrick G. Donnellan.... 0 0 103,750/230,250 1,141,250/2,532,750
Ronald Leitch........... 0 0 95,000/225,000 1,045,000/2,475,000
W. Kendale Southerland.. 0 0 91,748/214,748 1,009,228/2,362,228
</TABLE>
- --------

(1) There was no public trading market for the common stock as of December 31,
1999. Accordingly, as permitted by the rules of the Commission, these
values have been calculated on the basis of the fair market value of our
common stock as of December 31, 1999, of $11.00 per share, as determined by
the board of directors, less the aggregate exercise price.

Employment Agreements

We have an employment agreement with Terence Leahy, dated January 1, 1998.
The initial term of this agreement expires on December 31, 2000. The agreement
provides that Mr. Leahy will receive a minimum base salary of $340,000 per year
subject to increase by annual review of the board, plus certain performance-
based bonuses. The agreement also provides that if Mr. Leahy is terminated
without cause, or resigns for good reason, he will receive monthly severance
payments, each in an amount equal to his monthly base compensation at the time
of his termination or resignation, until 18 months after such termination or
resignation. In addition, in such circumstances Mr. Leahy will receive a pro-
rated bonus for the number of days employed with us during the year of the
termination or resignation as well as any unpaid portion of any bonus for the
year preceding the year of the termination or resignation.

Benefit Plans

1997 Stock Incentive Plan. Our 1997 Stock Incentive Plan was adopted by our
board of directors and approved by our stockholders in December 1997. Up to
5,600,000 shares of our common stock (subject to adjustment in the event of
stock splits and other similar events) may be issued pursuant to awards granted
under the 1997 plan.

The 1997 plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options, restricted stock awards and other stock-based awards.

Our officers, employees, directors, consultants and advisors are eligible to
receive awards under the 1997 plan. Under present law, however, incentive stock
options may be granted only to employees. No participant may receive any award
for more than 1,800,000 shares in any calendar year.

Optionees receive the right to purchase a specified number of shares of our
common stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. We may grant
options at an exercise price less than, equal to or greater than the fair
market value of our common stock on the date of grant. Under present law,
incentive stock options and options intended to qualify as performance-based
compensation under Section 162(m) of the Internal Revenue Code may not be
granted at an exercise price less than the fair market value of the common
stock on the date of grant or less than 110% of

44
<PAGE>

the fair market value in the case of incentive stock options granted to
optionees holding more than 10% of the voting power of Modus Media. The 1997
plan permits our board of directors to determine how optionees may pay the
exercise price of their options, including by cash, check or in connection with
a "cashless exercise" through a broker, by surrender to us of shares of common
stock, by delivery to us of a promissory note, or by any combination of the
permitted forms of payments.

As of December 31, 1999 approximately 200 persons would have been eligible
to receive awards under the 1997 plan, including eight executive officers and
one non-employee director. The granting of awards under the 1997 plan is
discretionary.

Our board of directors administers the 1997 plan. Our board of directors has
the authority to adopt, amend and repeal the administrative rules, guidelines
and practices relating to the plan and to interpret its provisions. It may
delegate authority under the 1997 plan to one or more committees of the board
of directors and, subject to certain limitations, to one or more of our
executive officers. Subject to any applicable limitations contained in the 1997
plan, our board of directors or a committee of the board of directors or
executive officer to whom our board of directors delegates authority, as the
case may be, selects the recipients of awards and determines:

. The number of shares of common stock covered by options and the dates
upon which such options become exercisable;

. The exercise price of options;

. The duration of options; and

. The number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of such awards,
including the conditions for repurchase, issue price and repurchase
price.

In the event of a merger, liquidation or other acquisition event, our board
of directors may (i) provide that all outstanding options or other stock-based
awards will be assumed or substituted for by the successor corporation on such
terms the board determines to be appropriate, (ii) provide that any outstanding
options or awards will terminate, to the extent unexercised, immediately prior
to consummation of the event, (iii) in the event of a cash transaction, provide
that cash consideration in the amount of the acquisition price less the
exercise price be exchanged for termination of options or awards, (iv) provide
that all restricted stock awards outstanding shall become immediately free of
all restrictions upon consummation of the event, or (v) provide for a cash
payment to participants in the event of a transaction in which stockholders
receive cash in exchange for stock.

No award may be granted under the 1997 plan after December 15, 2007, but the
vesting and effectiveness of awards previously granted may extend beyond that
date. Our board of directors may at any time amend, suspend or terminate the
1997 plan, except that no award granted after an amendment of the 1997 plan and
designated as subject to Section 162(m) of the Internal Revenue Code by our
board of directors shall become exercisable, realizable or vested, to the
extent the amendment was required to grant the award, unless and until the
amendment is approved by our stockholders.

1997 Class A and Class B Replacement Stock Option Plans

In connection with the Stream reorganization, in December 1997, we adopted
the Modus Media 1997 Class A Replacement Stock Option Plan and the Modus Media
1997 Class B Replacement Stock Option Plan (collectively, the "Replacement
Plans"). Subsequent to the spin-off of Modus Media on January 9, 1998, options
for a total of 5,661,756 shares of Common Stock were outstanding under the
Replacement Plans. Pursuant to the terms of the Replacement Plans, no further
options were available or were granted. The Replacement Plans provided for the
grant of substitute options in Modus Media to those of our employees, officers
and directors, and those of

45
<PAGE>

Stream and Corporate Software & Technology (CST) who held Class A and Class B
Stream options at the time of the Stream reorganization. All such options are
non-statutory options, and payment of the exercise price may be made in cash,
shares of Common Stock, a combination of the two or any other method approved
by our board of directors. All substitute options in Modus Media held by Stream
and CST employees accelerated and expired, to the extent not exercised, in
November 1999, upon the acquisition of Stream and the merger and change of
control of CST. On or about November 21, 1999, we purchased from employees of
Stream and CST an aggregate of 1,899,624 shares of Common Stock issuable on
exercise of options under the Replacement Plans at $5.18 per share.

The 1999 Management Incentive Plan

Our 1999 Management Incentive Plan was adopted by our board of directors in
January 1999. The objective of the 1999 Management Incentive Plan is to
recognize and reward the achievement of financial and business goals by
management and certain other key employees. The program, in conjunction with
base salary, is designed to offer total cash compensation opportunities that
are competitive with market levels. Eligible employees are assigned a target
payout for the 1999 Management Incentive Plan, expressed as a percentage of
total, regular base earnings, including paid time off and holiday hours. This
percentage represents the potential dollar award that will be earned at 100%
achievement of goals for all three components of the 1999 Management Incentive
Plan. The participant is assigned a target payout for each component, expressed
as a percentage of regular base salary. The first component relates to
performance by an organizational unit, such as global, regional or Solution
Center (or a combination thereof) against budgeted performance. The second
component is similar to the first, but measured and recorded quarterly. The
third component is tied to individual performance against goals established by
the participant and his/her manager. A participant must be actively employed by
Modus Media or a subsidiary of Modus Media through December 31, 1999 to receive
any payout on annual components. There are no annual payouts under the plan
unless we meet certain financial performance measures.

2000 Director Stock Option Plan

Our 2000 Director Stock Option Plan was adopted by our board of directors
and approved by our stockholders in , 2000. Under the plan, our directors
who are not employees of Modus Media or a subsidiary of Modus Media receive
non-statutory options to purchase shares of common stock. A total of 250,000
shares of common stock may be issued upon the exercise of options granted under
the plan.

Pursuant to the plan, each non-employee director who first becomes a non-
employee director after the closing of this offering will be granted an option
to purchase 20,000 shares of common stock on the date of his or her initial
election to our board of directors and upon the first anniversary of his or her
such election, which will vest ratably over four years on each anniversary of
the date of grant. In addition, each non-employee director will receive an
option to purchase 10,000 shares of common stock on the date of each annual
meeting of stockholders commencing with the 2001 Annual Meeting of Stockholders
(other than a director who was initially elected to the board of directors at
any such annual meeting or, if previously, at any time after the prior year's
annual meeting). The options granted annually vest upon the earlier of one year
from the date of grant or the date immediately preceding the next annual
meeting of stockholders, so long as the optionee remains our director. The
exercise price per share of all such options will be the fair market value of a
share of common stock on the date of grant.

1999 Employee Stock Purchase Plan

Our 1999 Employee Stock Purchase Plan was adopted by the board of directors
in , 2000. The purchase plan authorizes the issuance of up to a total of
shares of common stock to participating employees. Subject to local laws
and regulations, we intend to broaden participation in this plan to our
employees worldwide.

46
<PAGE>

All of our employees, who are customarily employed by us for more than 20
hours a week and have been employed by us for more than six months are eligible
to participate in the purchase plan. Employees who would immediately after the
grant own 5% or more of the total combined voting power or value of our stock
or any subsidiary are not eligible to participate.

The purchase plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 10% of an employee's
compensation, subject to certain limitations. On the first day of a designated
payroll deduction period, referred to as the offering period, we will grant to
each eligible employee who has elected to participate in the purchase plan an
option to purchase shares of common stock. On the last day of the offering
period, the employee is deemed to have exercised the option, at the option
exercise price, to the extent of accumulated payroll deductions. Under the
terms of the purchase plan, the option price is an amount equal to 85% of the
fair market value per share of the common stock on either the first day or the
last day of the offering period, whichever is lower. The Compensation Committee
may, in its discretion, choose an offering period of 12 months or less for each
of the offerings and choose a different offering period for each offering.

If an employee is not a participant on the last day of the offering period,
the employee is not entitled to exercise any option, and the amount of the
employee's accumulated payroll deductions will be refunded. An employee's
rights under the purchase plan terminate upon voluntary withdrawal from the
purchase plan at any time, or when such employee ceases employment for any
reason, except that upon termination of employment because of death, the
employee's beneficiary has certain rights to elect to exercise the option to
purchase the shares which the accumulated payroll deductions in the
participant's account would purchase at the date of death.

47
<PAGE>

CERTAIN TRANSACTIONS

Loans to Officers

In January 1998, in connection with the execution of an employment
agreement, Terence Leahy, our Chief Executive Officer, executed an Amended and
Restated 7.75% Unsecured Promissory Note for the principal sum of $1,000,000
payable to us. This note restated a note to Stream International Inc. which was
assigned to us in connection with the reorganization of Stream International in
1997. The entire principal amount of this note becomes due upon the earlier of
(a) a merger or a sale of Modus Media in which Mr. Leahy receives at least
$3 million for his stock and options, or (b) the termination of Mr. Leahy's
employment by us for cause or by Mr. Leahy without good reason. If we terminate
Mr. Leahy's employment with us for any reason other than for cause, or if Mr.
Leahy resigns for good reason, or if his employment is terminated due to death
or disability, the principal and interest payable under this note will be
forgiven. As of November 30, 1999, the amount outstanding under this loan was
approximately $1.2 million.

In connection with the reorganization of Stream International in 1997, we
assumed a 7.34% Secured Non-Recourse Note to Mr. Leahy for the principal sum of
$400,000. Fifty percent of the principal amount of this loan was forgiven on
January 1, 1999. The remaining fifty percent of this loan and accrued interest
was forgiven on January 1, 2000. As of December 31, 1999, the amount
outstanding under this loan was approximately $311,000, which amount was
forgiven in its entirety on January 1, 2000.

On July 20, 1999, in connection with his relocation from Singapore to the
United States, W. Kendale Southerland executed an Amended and Restated 7.25%
Unsecured Promissory Note payable to us in the principal amount sum of $70,000.
The entire principal amount of the loan becomes due upon the first to occur of
(a) a merger or sale of Modus Media in which Mr. Southerland receives at least
$300,000 for his shares and options, (b) the termination of Mr. Southerland's
employment by us for cause, or by Mr. Southerland, or (c) July 20, 2004. If we
terminate Mr. Southerland's employment with us for any reason other than for
cause, all principal and interest payable under this note will be forgiven. As
of November 30, 1999, the amount outstanding under this loan was approximately
$72,000.

On August 10, 1999, in connection with his relocation from Ireland to the
United States Ronald Leitch executed an Amended and Restated 7.25% Unsecured
Promissory Note payable to us in the principal amount of $62,500. Interest on
the loan accrues at a rate of 7.25% per year. The entire principal amount
becomes due upon (a) a merger or sale of Modus Media in which Mr. Leitch
receives at least 300,000 for his shares and options, (b) the termination of
Mr. Leitch's employment with us for cause, or (iii) August 10, 2004, whichever
event or date occurs first. If we terminate Mr. Leitch for any reason other
than for cause, all principal and interest payable under this note will be
forgiven. As of November 30, 1999, the amount outstanding under this loan was
approximately $64,000.

In connection with the Stream reorganization, in December 1997, we assumed a
7.34% Secured Non-Recourse Promissory Note dated September 15, 1995 for the
principal sum of $2,000,000 to Rory J. Cowan, the former Chairman of the Board
of Stream. The note, which is due April 21, 2000, is secured by a pledge of
1,000,000 of our shares and shares of Corporate Software & Technology, and
Stream. As of December 31, 1999, the amount outstanding under this loan
including accrued interest was $2,631,000.

Contribution Agreement

In December, 1997, Stream International, Inc. effected a reorganization and
contributed the assets and liabilities related to our business to its
subsidiary, Modus Media, in exchange for our common and preferred stock. In
January 1998, Stream distributed all of the capital stock of Modus Media to its
stockholders, and we became an independent company. Stream International
concurrently spun-off another subsidiary, Corporate Software and Technology,
Inc. In connection with the reorganization, R.R. Donnelley & Sons Company,
which was the principal shareholder of Stream International, received shares of
preferred stock of Modus Media, with

48
<PAGE>

a redemption value of $40.6 million, in cancellation of indebtedness owed to
it. R.R. Donnelley then exchanged our common stock for additional shares of
preferred stock, valued at approximately $21.7 million. In October 1999, we
repurchased all shares of preferred stock from R.R. Donnelley, including
additional shares issued as dividends thereon, for a total purchase price of
$60.2 million, of which $10.0 million was paid in cash, $37.5 million was
borrowings under our existing credit line and $12.7 million was paid by a loan
that will become due and payable upon the closing of this offering.

Tax Sharing Agreement

In connection with the reorganization, Modus Media, Stream and an affiliate
of Stream entered into a tax sharing agreement under which we will indemnify
Stream, and Stream will indemnify us, in respect of any taxes relating to our
respective businesses prior to the consummation of the reorganization, after
taking into account the net operating loss carryforwards and other tax
attributes of Stream immediately prior to consummation of the reorganization.
The tax sharing agreement provides rules for determining whether certain items
relate to a particular business and also defines the parties' obligations with
respect to filing tax returns and their rights and obligations with respect to
claims made by the Internal Revenue Service or other taxing authority with
respect to periods prior to the date of the reorganization. As of December 31,
1999, there were no material claims pending under this agreement.

Management Agreement

In connection with the Stream reorganization in 1997, Modus Media paid to
Bain Capital, Inc., for prior services, the sum of $1.7 million, of which
$710,000 was paid in cash and $1.0 million was paid by issuance of 3,445,028
shares of our common stock. Also in 1997 we entered into a management agreement
with an affiliate of Bain which required us to pay a fee of $1.5 million in
each of 1998 and 1999 in exchange for certain financial and managerial
services. This agreement terminates upon the closing of this offering. Bain
Capital is an affiliate of the Bain Capital Funds, which hold approximately 39%
of our common stock. Three of our directors, Jonathan Lavine, Mark Nunnelly and
Robert White, are Managing Directors of Bain Capital.

Services Agreement

In August 1999 we entered into an agreement with Synchronicity Mastering
Services, LLC pursuant to which Synchronicity Mastering Services provides us
with CD stampers. In September 1999, we issued a prepayment of $100,000 for
mastering services that were provided in 1999. Edward Rose, an executive
officer of Modus Media, owns 11.29% of Synchronicity Mastering Services.

49
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of our common stock as of December 31, 1999 and as adjusted to
reflect the sale of the shares in this offering by:

. each person who is known by us to own beneficially more than 5% of the
outstanding shares of common stock;

. each of our directors and Named Executive Officers; and

. all our directors and executive officers as a group.

<TABLE>
<CAPTION>
Shares of Common Stock Shares Beneficially
Beneficially Owned Prior Owned After the
to the Offering(1) Offering(1)
Name and Address of -------------------------------- ---------------------------
Beneficial Owner Number Percent Number Percent
------------------- --------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Bain Capital Funds(2)... 10,048,804 38.6% 10,048,804 29.5%
c/o Bain Capital, Inc
Two Copley Place
Boston, Massachusetts
02116
Morton H. Rosenthal..... 2,781,532 10.7 2,781,532 8.2
97 Lake View Avenue
Cambridge,
Massachusetts 02138
Chemical Equity 2,686,054 10.3 2,686,054 7.9
Associates.............
c/o Chase Capital
Partners
380 Madison Avenue
New York, New York
10017
BankAmerica Investment 1,798,976(3) 6.9 1,798,976(3) 5.3
Corporation............
c/o Bank of America
Illinois
231 South LaSalle
Street
Chicago, Illinois 60697
Rory J. Cowan........... 1,761,874 6.8 1,761,874 5.2
281 Fairhaven Hill
Concord, Massachusetts
01742
Directors and Executive
Officers
Terence M. Leahy........ 1,206,660(4) 4.5 1,206,660(4) 3.7
Mark E. Nunnelly........ 2,500,138(5) 9.6 2,500,138(5) 7.4
Robert F. White......... 0 0 0 0
Jonathan S. Lavine...... 0 0 0 0
Linwood A. Lacy, Jr..... 32,000 * 32,000 *
Richard M. Darer........ 80,000(6) * 80,000(6) *
Patrick Donnellan....... 230,750(7) * 230,750(7) *
W. Kendale Southerland.. 150,252(8) * 150,252(8) *
Ronald Leitch........... 95,000(9) * 95,000(9) *
All executive officers
and directors as a
group (12 persons)..... 4,417,300(10) 16.2% 4,667,800(11) 13.2%
</TABLE>
- --------
* Less than 1% of the outstanding common stock.

(1) The number of shares of common stock deemed outstanding prior to this
offering includes 26,006,116 shares of common stock outstanding as of
December 31, 1999, and with respect to each beneficial owner, shares
issuable pursuant to options held by the such owner which may be
exercised within 60 days after December 31, 1999 as set forth in
footnotes (2) and (10). The number of shares of common stock deemed
outstanding after this offering includes the 8,000,000 shares that we are
offering for sale in this offering. Beneficial ownership is determined in
accordance with the rules of the Commission, and

50
<PAGE>

includes voting and investment power with respect to shares. Unless
otherwise indicated below, to our knowledge, all persons named in the
table have sole voting and investment power with respect to their shares
of common stock, except to the extent authority is shared by spouses under
applicable law. Unless otherwise indicated, the address of each person
listed is c/o Modus Media International, 690 Canton Street, Westwood, MA.

(2) Includes 1,913,652 shares held by Bain Capital Fund IV, L.P., 2,189,986
shares held by Bain Capital Fund IV-B, L.P., 287,028 shares held by BCIP
Associates, 170,440 shares held by BCIP Trust Associates, 2,042,670
shares held by Information Partners Capital Fund, L.P., and 3,445,028
shares of non-voting common stock held by Bain Capital Fund V, L.P.
(3) Consists of shares of non-voting common stock.

(4) Includes 768,000 shares subject to outstanding stock options that are
exercisable within the 60 day period following December 31, 1999.

(5) Consists of 2,042,670 shares held by Information Partners Capital Fund,
L.P., whose general partner is Information Partners, a Massachusetts
general partnership, of which Mr. Nunnelly is a general partner, 287,028
shares held by BCIP Associates, a Delaware general partnership of which
Mr. Nunnelly is a general partner, and 170,440 shares held by BCIP Trust
Associates, LP, a Delaware limited partnership of which Mr. Nunnelly is
a general partner. Mr. Nunnelly disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.

(6) Includes 65,000 shares subject to outstanding stock options that are
exercisable within the 60 day period following December 31, 1999.

(7) Includes 103,750 shares subject to outstanding stock options that are
exercisable within the 60 day period following December 31, 1999.

(8) Includes 91,748 shares subject to outstanding stock options that are
exercisable within the 60 day period following December 31, 1999.

(9) Consists of shares subject to outstanding stock options that are
exercisable within the 60 day period following December 31, 1999.

(10) Includes 1,222,248 shares of common stock issuable upon the exercise of
stock options that vest within 60 days after December 31, 1999.

(11) Includes 1,222,248 shares of common stock issuable upon the exercise of
stock options that vest within 60 days after December 31, 1999 and
250,500 shares of common stock issuable upon the exercise of stock
options that vest upon the closing of this offering.

51
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Effective upon the closing of this offering, our authorized capital stock
will consist of 100,000,000 shares of common stock, $.01 par value per share,
6,000,000 shares of non-voting common stock, and 5,000,000 shares of preferred
stock, $.01 par value per share.

The following summary description of our capital stock is not intended to be
complete and is qualified in its entirety by reference to the provisions of
applicable law and to our restated certificate of incorporation and restated
by-laws, filed as exhibits to the registration statement of which this
prospectus is a part.

Common Stock

As of December 31, 1999, there were 20,762,112 shares of common stock
outstanding held by 141 stockholders of record and 5,244,004 shares of non-
voting common stock outstanding held by two stockholders of record. Based upon
the number of shares outstanding as of that date, and giving effect to the
issuance of the 8,000,000 shares of common stock offered by us in this
offering, there will be 28,762,112 shares of common stock and 5,244,004 shares
of non-voting common stock outstanding upon the closing of this offering.

Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Holders of non-voting common stock are not entitled to any votes,
except as required by law. Directors are elected by a plurality of the votes of
the shares present in person or by proxy at the meeting and entitled to vote in
such election. Holders of common stock and non-voting common stock are entitled
to receive ratably such dividends, if any, as may be declared by the board of
directors out of funds legally available therefor, subject to any preferential
dividend rights of outstanding preferred stock. If the board of directors
declares or pays a dividend on common stock, it must declare or pay the same
dividend for the non-voting common stock. If the board of directors declares or
pays a dividend on the non-voting common stock, it must declare or pay the same
dividend on the common stock. Upon the liquidation, dissolution or winding up
of Modus Media, the holders of common stock and non-voting common stock are
entitled to receive ratably our net assets available after the payment of all
our debts and other liabilities, subject to the prior rights of any outstanding
preferred stock. Each share of non-voting common stock is convertible into a
share of common stock, except to the extent the holder is prohibited from
holding shares of voting common stock under the Bank Holding Company Act of
1956. Holders of our common stock have no preemptive, subscription or
redemption rights, nor are they entitled to the benefit of any sinking fund.
The outstanding shares of common stock are, and the shares offered by us in
this offering will be, when issued and paid for, validly issued, fully paid and
nonassessable. The rights, powers, preferences and privileges of holders of
common stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of preferred stock which our board of
directors may designate and issue in the future.

Preferred Stock

Our board of directors will be authorized, subject to any limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 5,000,000 shares of preferred stock, in one or more
series. Each such series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special or
relative rights or privileges as shall be determined by our board of directors,
which may include, among others, dividend rights, voting rights, redemption
provisions, liquidation preferences, conversion rights and preemptive rights.
There were no shares of preferred stock outstanding as of December 31, 1999.

Our stockholders have granted the board of directors authority to issue the
preferred stock and to determine its rights and preferences in order to
eliminate delays associated with a stockholder vote on specific issuances. The
rights of the holders of common stock will be subject to the rights of holders
of any preferred stock issued in the future. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could adversely affect the voting power or other
rights of the holders of common stock, and could make it more difficult for a
third party to acquire, or discourage a third party from attempting to acquire,
a majority of our outstanding voting stock.

52
<PAGE>

Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover Effects

We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three
years did own, 15% or more of the corporation's voting stock.

Our restated certificate of incorporation and restated by-laws provide for
the division of the board of directors into three classes, as nearly equal in
size as possible, with staggered three-year terms. See "Management--Election of
Directors." In addition, our restated certificate of incorporation and restated
by-laws provide that directors may be removed only for cause by the affirmative
vote of the holders of at least 75% of the shares of our capital stock entitled
to vote. Under our restated certificate of incorporation and restated by-laws
any vacancy on the board of directors, however occurring, including a vacancy
resulting from an enlargement of the board, may only be filled by vote of a
majority of the directors then in office. The classification of the board of
directors and the limitations on the removal of directors and filling of
vacancies could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, control of Modus
Media.

Our restated certificate of incorporation and restated by-laws also provide
that, after the closing of this offering, any action required or permitted to
be taken by our stockholders at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting
and may not be taken by written action in lieu of a meeting. Our restated
certificate of incorporation and restated by-laws further provide that special
meetings of the stockholders may only be called by the Chairman of the board of
directors, our President, or by the board of directors. Under the restated by-
laws, in order for any matter to be considered "properly brought" before a
meeting, a stockholder must comply with certain requirements regarding advance
notice to us. The foregoing provisions could have the effect of delaying until
the next stockholders' meeting stockholder actions which are favored by the
holders of a majority of our outstanding voting securities. These provisions
may also discourage another person or entity from making a tender offer for our
common stock, because such person or entity, even if it acquired a majority of
our outstanding voting securities, would be able to take action as a
stockholder (such as electing new directors or approving a merger) only at a
duly called stockholders meeting, and not by written consent.

Limitation of Liability and Indemnification

Our restated certificate of incorporation provides that our directors and
officers shall be indemnified by us to the fullest extent authorized by
Delaware law, as it now exists or may in the future be amended, against all
expenses and liabilities reasonably incurred in connection with the service for
or on our behalf. In addition, our restated certificate of incorporation
provides that our directors will not be personally liable for monetary damages
to us for breaches of their fiduciary duty as directors, unless they violated
their duty of loyalty to us or our stockholders, acted in bad faith, knowingly
or intentionally violated the law, authorized illegal dividends or redemptions
or derived an improper personal benefit from their action as directors.

Transfer Agent and Registrar

The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.

53
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have 34,006,116 shares of common
stock outstanding (assuming no exercise of outstanding options). Of these
shares, the 8,000,000 shares (9,200,000 shares if the over-allotment option is
exercised in full) to be sold in this offering will be freely tradable without
restriction or further registration under the Securities Act of 1933, as
amended, except that any shares purchased by our affiliates, as that term is
defined in Rule 144 under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 described below.

Sales of Restricted Shares

The remaining 15,684,700 shares of common stock outstanding upon completion
of this offering are deemed "restricted shares" under Rule 144 or Rule 701
under the Securities Act. Approximately 4,432,186 shares of restricted shares
will be eligible for sale in the public market without any limitation on the
date of this prospectus. Upon expiration of the lock-up agreements described
below, 180 days after the date of this prospectus, an additional 20,894,366
shares of common stock will be eligible for sale in the public market pursuant
to Rule 144.

In general, under Rule 144, a stockholder who has beneficially owned his or
her restricted shares for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:

. one percent of the then outstanding shares of common stock
(approximately 340,061 shares immediately after this offering); or

. the average weekly trading volume in the common stock in the over-the-
counter market during the four calendar weeks preceding the date on
which notice of such sale is filed, provided certain requirements
concerning availability of public information, manner of sale and notice
of sale are satisfied.

In addition, our affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement,
in order to publicly sell shares of common stock which are not restricted
securities. A stockholder who is not one of our affiliates and has not been our
affiliate for at least three months prior to the sale and who has beneficially
owned restricted shares for at least two years may resell the shares without
limitation. In meeting the one- and two-year holding periods described above, a
holder of restricted shares can include the holding periods of a prior owner
who was not our affiliate. The one- and two-year holding periods described
above do not begin to run until the full purchase price or other consideration
is paid by the person acquiring the restricted shares from the issuer or one or
our affiliates. Rule 701 provides that currently outstanding shares of common
stock acquired under our employee compensation plans may be resold beginning 90
days after the date of this prospectus by:

. persons, other than our affiliates, subject only to the manner of sale
provisions of Rule 144; and

. our affiliates under Rule 144 without compliance with its one-year
minimum holding period, subject to certain limitations.

Options

Rule 701 also provides that the shares of common stock acquired upon the
exercise of currently outstanding options or pursuant to other rights granted
under our 1997 Stock Incentive Plan may be resold beginning 90 days after the
date of this prospectus by:

. persons, other than our affiliates, subject only to the manner of sale
provisions of Rule 144; and

. our affiliates under Rule 144, without compliance with its one-year
minimum holding period, subject to certain limitations.

54
<PAGE>

At December 31, 1999, approximately 1,673,506 shares of common stock were
issued or issuable pursuant to vested options or pursuant to other rights
granted under our 1997 Class A and Class B Replacement Stock Option Plans and
our 1997 Stock Incentive Plan of which approximately 92,750 shares are not
subject to lock-up agreements with the underwriters and will be eligible for
sale in the public market in accordance with Rule 701 under the Securities Act
beginning 90 days after the date of this prospectus.

Following the date of this prospectus, we intend to file one or more
registration statements on Form S-8 under the Securities Act to register up to
shares of common stock issuable under our 1997 Stock Incentive Plan. These
registration statements would become effective upon filing.

Lock-up Agreements

Subject to limited exceptions, we and our executive officers, directors and
stockholders, who collectively own approximately shares of our common stock,
have agreed that, without the prior written consent of Salomon Smith Barney
Inc., during the period ending 180 days after the date of this prospectus, we
will not

. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, or otherwise transfer or dispose of
any shares of our common stock, whether now owned or later acquired by
the person executing the agreement or with respect to which the person
executing the agreement later acquires the power of disposition, or file
any registration statement under the Securities Act relating to any
shares of our common stock for a period of 180 days after the date of
this prospectus, or

. make any demand for or exercise any right with respect to the
registration of any shares of common stock or any security convertible
into or exercisable or exchangeable for common stock,

regardless of whether any such transactions described in the above two clauses
of this paragraph are to be settled by delivery of such common stock or such
other securities, in cash or otherwise. In addition, for a period of 180 days
from the date of this prospectus, except as required by law, we have agreed
that our board of directors will not consent to any offer for sale, sale or
other disposition, or any transaction which is designed or could be expected,
to result in, the disposition by any person, directly or indirectly, of any
shares of common stock without the prior written consent of Salomon Smith
Barney Inc. See "Underwriting."

55
<PAGE>

UNDERWRITING

Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus, each underwriter named below has severally
agreed to purchase, and we have agreed to sell to each underwriter, the number
of shares of our common stock set forth opposite its name below:

<TABLE>
<CAPTION>
Number
Name of shares
---- ----------
<S> <C>
Salomon Smith Barney Inc.......................................
Donaldson, Lufkin & Jenrette Securities Corporation............
FleetBoston Robertson Stephens Inc.............................
Thomas Weisel Partners LLC.....................................
---------
Total........................................................ 8,000,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the shares, other than those covered by the over-
allotment option described below, if they purchase any of the shares.

The underwriters, for whom Salomon Smith Barney Inc., FleetBoston Robertson
Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Thomas
Weisel Partners, LLC are acting as representatives, propose to offer some of
the shares directly to the public at the public offering price set forth on the
cover page of this prospectus and some of the shares to dealers at the public
offering price less a concession not in excess of $ per share. The
underwriters may allow, and these dealers may reallow, a concession of not in
excess of $ per share on sales to other dealers. If all of the shares are not
sold at the initial offering price, the representatives may change the public
offering price and the other selling terms. The representatives have advised us
that the underwriters do not intend to confirm any sales to any accounts over
which they exercise discretionary authority.

We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 1,200,000 additional shares of
our common stock at the public offering price less the underwriting discount.
The underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent this
option is exercised, each underwriter will be obligated, subject to various
conditions, to purchase a number of additional shares approximately
proportionate to its initial commitment.

We, our officers and directors and substantially all of our existing
shareholders have agreed that, for a period of 180 days from the date of this
prospectus, we and they will not, without the prior written consent of Salomon
Smith Barney Inc., dispose of or hedge any shares of our common stock or
securities convertible or exchangeable for our common stock. Salomon Smith
Barney Inc. in its sole discretion may release any of the securities subject to
these lock-up agreements at any time without notice.

Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the shares will be
determined by negotiations between us and the representatives. Among the
factors to be considered in determining the initial public offering price were
our record of operations, our current financial condition, our future
prospects, our markets, the economic conditions in and future prospects for the
industry in which we compete, our management, and currently prevailing general
conditions in the equity securities markets, including current market
valuations of publicly traded companies considered comparable to us. We cannot
assure you, however, that the prices at which the shares will sell in the
public market after this offering will not be lower than the price at which
they are sold by the underwriters or than an active trading market in our
common stock will develop and continue after this offering.

56
<PAGE>

We have applied to have the common stock included for quotation on the
Nasdaq National Market under the symbol "EMMI".

The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock.

<TABLE>
<CAPTION>
Paid by Us
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share........................................ $ $
Total............................................ $ $
</TABLE>

In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may purchase and sell shares of our common stock in the open
market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of our common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of our common stock made for the purpose of preventing or retarding a
decline in the market price of our common stock while this offering is in
progress.

The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.

Any of these activities may cause the price of our common stock to be higher
than the price that otherwise would exist in the open market in the absence of
such transactions. These transactions may be effected on the Nasdaq National
Market or in the over-the-counter market, or otherwise and, if commenced, may
be discontinued at any time.

We will pay the offering expenses, including registration fees, costs of
printing and engraving and legal and accounting fees, estimated to be
approximately $1.8 million, excluding underwriting discounts and commissions.

We have agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.

At our request, the underwriters have reserved up to five percent of the
common stock offered in this prospectus for sale to our employees and their
family members and to our business associates at the initial public offering
price set forth on the cover page of this prospectus. These persons must commit
to purchase shares no later than the close of business on the day following the
date of this prospectus. The number of shares available for sale to the general
public will be reduced to the extent these persons purchase the reserved
shares.

Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-managing
underwriter in 91 filed public offerings of equity securities, of which 73 have
been completed, and has acted as a syndicate member in an additional 48 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.

57
<PAGE>

VALIDITY OF COMMON STOCK

The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts. Legal matters for the
underwriters will be passed upon by Ropes & Gray, Boston, Massachusetts.

EXPERTS

Our consolidated financial statements and financial statement schedule as of
December 31, 1998 and 1999 and for the years ended December 31, 1997, 1998 and
1999 included in this prospectus and elsewhere in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 to register the shares of our common stock described in
this prospectus. This prospectus is part of that registration statement, and
provides you with a general description of the common stock being registered,
but does not include all of the information you can find in the registration
statement or the exhibits. You should refer to the registration statement and
its exhibits for more information about Modus Media and the shares of common
stock being registered.

You may read and copy all or any portion of the registration statement or
any reports, statements or other information we file with the Commission at the
Commission's public reference room at 450 Fifth Street, N.W., Judiciary Plaza,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can also be obtained at prescribed rates by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Commission maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission.

58
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Shareholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>

F-1
<PAGE>

After the two-for-one stock split discussed in Note 3(h) to Modus Media
International Holdings, Inc. consolidated financial statements is effected, we
expect to be in a position to render the following audit report.

/s/ Arthur Andersen LLP

Boston, Massachusetts

January 18, 2000

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of
Modus Media International Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of Modus Media
International Holdings, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1997, 1998 and 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Modus Media
International Holdings, Inc. as of December 31, 1998 and 1999 and the results
of its operations and its cash flows for the years ended December 31, 1997,
1998 and 1999, in conformity with generally accepted accounting principles.

Arthur Andersen LLP
Boston, Massachusetts

January , 2000

F-2
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)

<TABLE>
<CAPTION>
As of December
31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,447 $ 29,759
Receivables, less allowance for doubtful accounts of
$4,402 in 1998 and $5,179 in 1999........................ 135,582 117,801
Inventories, net.......................................... 49,030 46,813
Prepaid expenses and other current assets................. 17,795 14,164
-------- --------
Total current assets.................................... 210,854 208,537
Property, plant and equipment, net of accumulated
depreciation............................................. 70,752 68,271
Other noncurrent assets................................... 9,604 9,802
-------- --------
Total assets............................................ $291,210 $286,610
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 2,021 $ 559
Accounts payable.......................................... 107,203 121,208
Accrued liabilities....................................... 58,028 57,181
-------- --------
Total current liabilities............................... 167,252 178,948
Long-term debt, net of current portion.................... 21,641 55,744
Deferred income taxes..................................... 2,482 1,727
Other noncurrent liabilities.............................. 6,783 6,822
-------- --------
Total liabilities....................................... 198,158 243,241

SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, with a liquidation value
of $1,000 per share
Authorized--120,000 in 1998 and 1999
Issued and outstanding--66,959 in 1998 and none in 1999.. 66,959 --
Common stock, $.01 par value
Authorized--66,000,000 in 1998 and 1999
Issued and outstanding--24,370,556 in 1998 and 26,006,116
in 1999................................................. 244 260
Additional paid-in capital................................ 22,831 14,466
Retained earnings......................................... 3,292 27,911
Other comprehensive income (loss)......................... (274) 732
-------- --------
Total shareholders' equity.............................. 93,052 43,369
-------- --------
Total liabilities and shareholders' equity.............. $291,210 $286,610
======== ========
</TABLE>

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

F-3
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue......................................... $684,523 $630,082 $697,468
Cost of Revenue (excluding depreciation and
amortization).................................. 564,788 496,180 549,681
-------- -------- --------
Gross profit.................................. 119,735 133,902 147,787
Operating Expenses:
Selling, general and administrative expenses... 110,378 97,999 101,826
Depreciation and amortization.................. 26,371 18,731 17,407
-------- -------- --------
Operating income (loss)....................... (17,014) 17,172 28,554
Other Expense (Income):
Interest expense............................... 16,478 3,882 3,452
Other expense (income), net.................... (3,649) (1,722) (408)
-------- -------- --------
Income (loss) before income taxes............. (29,843) 15,012 25,510
Provision for Income Taxes...................... 2,824 4,265 7,550
-------- -------- --------
Net income (loss)............................. (32,667) 10,747 17,960
Preferred Stock Dividends....................... 172 5,922 4,885
Net benefit on repurchase of preferred stock.. -- -- (11,544)
-------- -------- --------
Net income (loss) available to common
shareholders................................. $(32,839) $ 4,825 $ 24,619
======== ======== ========
Net income per share:
Basic....................................... $ 0.19 $ 0.98
======== ========
Diluted..................................... $ 0.18 $ 0.84
======== ========
</TABLE>

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

F-4
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Amounts)

<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------- ---------------------
Net Parent $1,000 Additional Other
Company Number of Liquidation Number of $.01 Paid-In Retained Comprehensive
Investment Shares Value Shares Par Value Capital Earnings Income (Loss) Total
---------- --------- ----------- ---------- --------- ---------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996.................. $131,703 -- $ -- -- $ -- $ -- $ -- $ -- $131,703
-------- ------- ------- ---------- ----- -------- ------- ----- --------
Comprehensive
income--
Net loss............. (31,306) (31,306)
Translation
adjustment (including
taxes of $287)....... 3,020 -- -- -- -- -- -- -- 3,020
-------- ------- ------- ---------- ----- -------- ------- ----- --------
Total comprehensive
loss................. (28,286) -- -- -- -- -- -- -- (28,286)
Net transfers from
the Parent Company... (20,895) -- -- -- -- -- -- -- (20,895)
Dividend to the
Parent Company....... (40,646) -- -- -- -- -- -- -- (40,646)
Conversion of Parent
Company debt to
equity............... 40,646 -- -- -- -- -- -- -- 40,646
Capitalization of the
Company--
Common stock issued.. (41,876) -- -- 96,517,474 966 40,910 -- -- --
Preferred stock
issued............... (40,646) 40,646 40,646 -- -- -- -- -- --
-------- ------- ------- ---------- ----- -------- ------- ----- --------
Balance, December 15,
1997.................. -- 40,646 40,646 96,517,474 966 40,910 -- -- 82,522
Net loss............. -- -- -- -- -- -- (1,361) -- (1,361)
9.5% cumulative
dividends on
preferred stock...... -- -- -- -- -- -- (172) -- (172)
-------- ------- ------- ---------- ----- -------- ------- ----- --------
Balance, December 31,
1997.................. $ -- 40,646 $40,646 96,517,474 $ 966 $ 40,910 $(1,533) $ -- $ 80,989
Comprehensive
income--
Net income........... -- -- -- -- -- -- 10,747 -- 10,747
Translation
adjustment (including
tax benefits of
$73)................. -- -- -- -- -- -- -- (274) (274)
-------- ------- ------- ---------- ----- -------- ------- ----- --------
Total comprehensive
income............... -- -- -- -- -- -- 10,747 (274) 10,473
Conversion of common
stock to preferred
stock................ -- 21,132 21,132 72,774,932 (728) (20,404) -- -- --
Redemption of
preferred stock...... -- (913) (913) -- -- 913 -- -- --
Contribution of
capital.............. -- -- -- -- -- 1,231 -- -- 1,231
Issuance of common
stock under stock
option plans......... -- -- -- 628,014 6 181 -- -- 187
9.5% cumulative
dividends on
preferred stock...... -- 6,094 6,094 -- -- -- (5,922) -- 172
-------- ------- ------- ---------- ----- -------- ------- ----- --------
Balance, December 31,
1998.................. $ -- 66,959 $66,959 24,370,556 $ 244 $ 22,831 $ 3,292 $(274) $ 93,052
Comprehensive
income--
Net income........... -- -- -- -- -- -- 17,960 -- 17,960
Translation
adjustment (including
taxes of $298)....... -- -- -- -- -- -- -- 1,006 1,006
-------- ------- ------- ---------- ----- -------- ------- ----- --------
Total comprehensive
income............... -- -- -- -- -- -- 17,960 1,006 18,966
Issuance of common
stock under stock
option plans......... -- -- -- 3,602,184 36 1,435 -- -- 1,471
Purchase and
retirement of common
stock................ -- -- -- (1,966,624) (20) (9,900) -- -- (9,920)
Redemption of
preferred stock...... -- (100) (100) -- -- 100 -- -- --
9.5% cumulative
dividends on
preferred stock...... -- 4,885 4,885 -- -- -- (4,885) -- --
Repurchase of
preferred stock...... -- (71,744) (71,744) -- -- -- -- -- (71,744)
Net benefit on
repurchase of
preferred stock...... -- -- -- -- -- -- 11,544 -- 11,544
-------- ------- ------- ---------- ----- -------- ------- ----- --------
Balance, December 31,
1999.................. $ -- -- $ -- 26,006,116 $ 260 $ 14,466 $27,911 $732 $ 43,369
======== ======= ======= ========== ===== ======== ======= ===== ========
</TABLE>

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

F-5
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ (32,667) $ 10,747 $ 17,960
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization.................. 26,371 18,731 17,407
Amortization of deferred financing costs....... -- 1,361 1,286
Loss on disposal of fixed assets............... -- -- 718
Deferred income taxes.......................... 2,824 (342) (755)
Gain on sale of investment..................... -- (2,088) --
Changes in assets and liabilities--
Receivables, net.............................. 17,814 (59,591) 17,811
Inventories................................... 29,503 (3,133) 2,217
Prepaid expenses and other current assets..... (11,935) (2,507) 3,631
Accounts payable.............................. (11,395) 22,501 14,005
Accrued liabilities........................... 844 15,872 1,756
Noncurrent assets and liabilities............. (1,025) (562) (341)
Intercompany receivable from Stream........... 49,403 -- --
Restructuring reserve......................... (16,837) (7,457) (481)
--------- -------- --------
Net cash provided by (used in) operating
activities.................................. 52,900 (6,468) 75,214
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (34,032) (12,307) (17,123)
Proceeds from sale of investment............... -- 3,288 --
Payment of business acquisition, net of cash
acquired...................................... -- -- (1,545)
Net proceeds from disposal of fixed assets..... 11,682 119 887
--------- -------- --------
Net cash used in investing activities........ (22,350) (8,900) (17,781)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) third-party debt.. (18,028) (1,988) 41,824
Cash paid to secure third-party financing...... (3,369) (1,907) --
Net transfers from Parent Company.............. 7,799 -- --
Increase (decrease) of capital lease
obligations................................... 2,071 (3,334) (10,302)
Purchase and retirement of common stock........ -- -- (9,910)
Cash proceeds related to pre-Reorganization tax
receivable.................................... -- 1,231 --
Repurchase of preferred stock.................. -- -- (60,200)
Exercise of stock options...................... -- 187 1,461
--------- -------- --------
Net cash used in financing activities........ (11,527) (5,811) (37,127)
--------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS.................................... 3,020 (274) 1,006
--------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 22,043 (21,453) 21,312
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.... 7,857 29,900 8,447
--------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR.......... $ 29,900 $ 8,447 $ 29,759
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Assets acquired through capital lease.......... $ 3,738 $ 1,748 $ 46
========= ======== ========
Dividend to the Parent Company................. $ 40,646 $ -- $ --
========= ======== ========
Conversion of Parent Company debt to preferred
stock......................................... $ 40,646 $ -- $ --
========= ======== ========
Conversion of Parent Company Investment to
common stock.................................. $ 41,876 $ -- $ --
========= ======== ========
Conversion of common stock to preferred stock.. $ -- $ 21,132 $ --
========= ======== ========
Conversion of cash dividends to preferred
stock......................................... $ -- $ 172 $ --
========= ======== ========
Dividends on preferred stock................... $ 172 $ 5,922 $ 4,885
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest......................... $ 16,448 $ 2,354 $ 1,182
========= ======== ========
Cash paid for income taxes..................... $ 79 $ 4,607 $ 4,894
========= ======== ========
Detail of acquisition:
Fair value of assets acquired.................. -- -- $ 2,615
Liabilities assumed............................ -- -- 1,070
--------- -------- --------
Net cash paid for acquisition................ -- -- 1,545
========= ======== ========
</TABLE>

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

F-6
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1999

(1) Nature of Business

Modus Media International Holdings, Inc. (the Company or MMI) is a global
provider of extended supply chain management services to the technology
industry. The Company offers a full range of outsource services including e-
commerce support services, content management, procurement, management of
inventory and materials, manufacturing, fulfillment and customer relationship
management. The principal North American operations are located in California,
Utah, Washington, Idaho and North Carolina. Principal European subsidiaries
include operations in Ireland, the United Kingdom, the Netherlands and France.
Principal Asian subsidiaries include operations in Singapore, Taiwan, Australia
and China. In addition, the Company holds minority interests in joint ventures
in Korea and Japan.

(2) The Reorganization

The Company began as a division of R.R. Donnelley & Sons Company (R.R.
Donnelley or the Parent Company). Pursuant to an April 21, 1995 contribution
agreement (the Contribution Agreement), R.R. Donnelley purchased approximately
80% of Corporate Software, Inc. (now known as Corporate Software & Technology
or CS&T) and merged it with the division (now known as Modus Media
International Holdings, Inc., or the Company) to create Stream International
Holdings, Inc. (Stream).

From April 21, 1995 to December 15, 1997, the Company conducted its business
as a unit of Stream. On December 15, 1997, Stream effected a reorganization
(the Reorganization), pursuant to which Stream contributed certain assets and
liabilities to two wholly-owned subsidiaries, the Company and CS&T. Because the
Reorganization occurred between entities under common control the book basis of
assets and liabilities were not adjusted and have been accounted for on a
carryover basis. Effective with the Reorganization, Stream allocated to the
Company approximately $40.6 million of its (intercompany) indebtedness to R.R.
Donnelley or 22.2% of the total Stream debt at September 30, 1997. The
allocation percentage of 22.2% was determined based on the relative fair value
of the three business units based on an independent appraisal. The debt to R.R.
Donnelley was then exchanged for 40,646 shares of the Company's preferred
stock.

On January 9, 1998, Stream distributed to its stockholders all of the
outstanding voting stock, held by Stream, of the Company and CS&T. In addition,
R.R. Donnelley exchanged its equity interest in the Company of approximately
36.4 million shares of the Company's common stock for 21,132 shares of
preferred stock valued at $21.1 million.

Prior to the Reorganization, certain shared expenses among the Stream
business units were allocated based on specific or proportional allocation
methods which management believed were reasonable. See Note 5(d) for further
information on these shared services.

(3) Summary of Significant Accounting Policies

(a) Basis of Presentation and Consolidation

The accompanying financial statements include the accounts of the Company
and its foreign operations. The accounts of the Company's foreign operations
have been translated into United States dollars in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. All
significant intercompany balances and transactions have been eliminated in
consolidation.

Net operating results through December 15, 1997, the date of the
Reorganization, were recorded as a return of capital to or contributions from
the Parent Company.

F-7
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

(b) Cash and Cash Equivalents
Cash and cash equivalents include all cash and investments with maturity
dates of three months or less.

Accounts receivable include outstanding trade accounts receivable as well
as certain unbilled amounts owed to the Company by clients in accordance with
contracts. The amounts of unbilled receivables at December 31, 1998 and 1999
was approximately $6.9 million and $11.2 million, respectively.

(d) Inventories

Inventories include material, labor and overhead and are valued at the
lower of cost or market. Materials include, but are not limited to compact
discs, instruction manuals and computer peripherals such as keyboards and
mice. Substantially all of the Company's domestic inventories are valued using
the first-in, first-out method. The cost of the remaining inventories is
principally determined using a specific identification method.

The components of inventories, net were as follows (in thousands):

<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Raw materials..................................... $ 27,223 $ 29,587
Work-in-process................................... 4,356 3,371
Finished goods and completed components........... 17,451 13,855
-------- --------
$ 49,030 $ 46,813
======== ========
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Capitalized computer
software is included in machinery and equipment. The Company provides for
depreciation and amortization using the straight-line method over estimated
useful lives of 33 to 40 years for buildings and 2 to 12 years for machinery
and equipment. Leasehold improvements are depreciated using the straight-line
method over the remaining lease terms or estimated useful lives, whichever is
shorter. Maintenance and repair costs are charged to operating expenses as
incurred. When properties are retired or otherwise disposed of, the asset cost
and accumulated depreciation are eliminated and the resulting gain or loss, if
any, is included in the consolidated statements of income. Effective in fiscal
1999 costs of computer software developed or obtained for internal use have
been either expensed or capitalized in accordance with Statement of Position
98-1.

Property, plant and equipment consisted of the following (in thousands):

<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Leasehold improvements............................ $ 10,716 $ 12,133
Buildings (including assets under capital lease of
$10,954 in 1998, and $3,339 in 1999)............. 26,034 25,978
Machinery and equipment (including assets under
capital lease of $14,196 in 1998 and $11,796 in
1999)............................................ 140,094 145,174
-------- --------
Total property, plant and equipment............. 176,844 183,285
Less--Accumulated depreciation and amortization... 106,092 115,014
-------- --------
Net property, plant and equipment............... $ 70,752 $ 68,271
======== ========
</TABLE>

F-8
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

(f) Investments in Joint Ventures

As of December 31, 1999, the Company has investments in two joint ventures
accounted for under the equity method. The affiliates provide a full range of
integrated services including software manufacturing, hardware assembly, on-
demand manufacturing and response management. At December 31, 1999, these
investments with a value of $0.7 million were included in other noncurrent
assets on the balance sheet. The Company's equity in earnings from these
affiliates are included in other expense (income) in the statements of
operations and totaled $0, $0 and $0.2 million for the years ended December 31,
1997, 1998 and 1999, respectively.

(g) Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Accrued compensation and other benefits............ $24,026 $23,384
Accrued taxes...................................... 6,622 9,106
Accrued customer rebates and advances.............. 7,299 9,451
Accrued occupancy expenses......................... 7,452 3,853
Other accrued liabilities.......................... 12,629 11,387
------- -------
$58,028 $57,181
======= =======
</TABLE>

(h) Common Stock Split

On January 18, 2000, the Company's Board of Directors approved a 2-for-1
stock split effected as a stock dividend to shareholders. All per share and
share outstanding data in the Consolidated Financial Statements and Notes to
Consolidated Financial Statements have been retroactively restated to reflect
the stock split.

(i) Income Taxes

The provision for income taxes is based on income before taxes as reported
in the accompanying consolidated statements of income. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount that is realizable, based upon the realization criteria defined in SFAS
No. 109, Accounting for Income Taxes.

United States federal income taxes are not provided on the unremitted
accumulated earnings of foreign subsidiaries, as such earnings are considered
to be permanently reinvested abroad.

(j) Foreign Currency Translation

Foreign currencies are translated in accordance with SFAS No. 52, Foreign
Currency Translation. Under this standard, assets and liabilities of the
Company's international subsidiaries are translated into United States dollars
at current exchange rates. Income and expense items are translated at average
exchange rates prevailing during the year.

F-9
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

Gains and losses arising from the translation of the Company's international
subsidiaries' financial statements are accounted for in shareholders' equity.
Gains and losses from foreign currency transactions are included in other
expense (income) in the statements of operations. The Company recorded a
foreign currency transaction loss of $2.5 million in 1997, a gain of $0.7
million in 1998 and a loss of $0.7 million in 1999.

(k) Revenue Recognition

The Company offers a full range of outsource services. Billings for these
services consist of per transaction fees, incremental fees added to the cost of
the materials used in manufacturing and assembly, and other billings to
clients, which may be on the basis of project or development fees or per
transaction fees for outsource services, including e-commerce storefront
development, response center transactions such as calls or emails and customer
relationship management. Revenue is recognized for these services when a
service arrangement exists, the service has been rendered, fees are fixed or
determinable, and collectibility is reasonably assured. Provisions for returns,
rebates and bad debts are recorded when revenue is recognized.

(l) Fair Value of Financial Instruments

The fair value of cash and cash equivalents, accounts receivable, short-term
debt and accounts payable approximate their carrying value due to the immediate
or short-term maturity of these financial instruments. The fair value of long-
term debt is based on the current rates offered to the Company for debt
instruments of similar risks and maturities and approximates its carrying
value.

(m) Use of Estimates

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

(n) Reclassification and Presentation

Certain reclassifications have been made to prior period amounts to conform
with the current year presentation.

(o) New Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as
amended by SFAS No. 137, is required to be adopted by the Company no later than
fiscal year 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or a liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. The Company plans to adopt this statement in fiscal
year 2001. Management does not believe that the adoption of SFAS No. 133 will
have a material effect on the Company's financial position or results of
operations.

Effective January 1, 1999, the Company adopted the provisions of the
American Institute of Certified Public Accountants' SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for

F-10
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

Internal Use." SOP 98-1 requires that entities capitalize certain costs related
to internal use software once certain criteria have been met. There was no
material impact of adoption on the Company's financial position or results of
operations.

(4) Business Acquisition

On December 31, 1999, the Company acquired substantially all the assets of
CTS Company, LTD (CTS) for a cash purchase price of $1.5 million. CTS is a
Taiwanese manufacturer of compact discs. Because the acquisition was completed
on December 31, 1999, no results of operations have been included in the
accompanying Statement of Operations. The acquisition has been accounted for
under the purchase method of accounting. Accordingly, the purchase price has
been allocated to the assets acquired and the liabilities assumed based on
their estimated fair values. The purchase price was financed through available
cash. The purchase price in excess of the net assets is $0.5 million and is
being amortized on a straight-line basis over 5 years.

The pro forma results for 1999, assuming the acquisition had been made at
the beginning of the year, would not be materially different from reported
results.

(5) Related Party Transactions

(a) Accounts Receivable Sold With Recourse

During 1997, pursuant to an agreement with R.R. Donnelley, the Company sold
certain accounts receivable, with recourse, to R.R. Donnelley Receivables, Inc.
(DRI), a wholly owned subsidiary of R.R. Donnelley. The agreement required that
DRI pay the Company weekly amounts based on estimated monthly billings for
eligible domestic receivables, as defined. During the eleven and a half months
ended December 15, 1997, the Company factored $286.4 million of receivables to
DRI and the related factoring charge amounted to $3.5 million. The agreement
was terminated on December 15, 1997, in connection with the Reorganization. The
Company agreed to a final settlement with DRI during 1998 on disputed
receivables, which was not material to the Company's financial position or
results of operations.

(b) Sales and Purchases with R.R. Donnelley

Prior to the Reorganization, R.R. Donnelley sales representatives sold
products that were produced in the Company's facilities. Such sales amounted to
$13.9 million for the year ended December 31, 1997 and have been included in
revenue in the accompanying statement of income. The Company also purchased, at
arm's- length, approximately $7.3 million of print related materials from
entities affiliated with R.R. Donnelley during the year ended December 31,
1997.

The Company has extended nonrecourse loans to certain officers and former
officers of the Company. The loans, which totaled $3.5 million, $3.7 million
and $3.3 million at December 31, 1997, 1998, and 1999, bear interest at rates
ranging from 7.25% to 7.75% and mature at the earlier of a defined maturity
date between 2000 and 2004, or a liquidity event, such as a sale or other
change in control. Interest on the loans is due at maturity. The loans and
accrued interest receivable are classified as other noncurrent assets in the
accompanying consolidated balance sheets.

F-11
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

(d) Transactions with Other Related Parties

Effective December 15, 1997, the Company entered into a management agreement
with a current shareholder, which requires the shareholder to provide
managerial, financial and transactional advice and services to the Company. For
each of the years ended December 31, 1998 and 1999, the management fee for this
agreement was $1.5 million and is included in the Company's selling, general,
and administrative expenses.

As part of the Reorganization, the Company entered into agreements
(collectively, the Transitional Service Agreements) with Stream and CS&T for
certain services formerly shared among such entities. Pursuant to the
Transitional Service Agreements, the Company received certain legal,
information technology and other services and provided certain tax, employee
benefit and financial reporting services. Expenses related to purchased
services were approximately $1.0 million and $0.2 million in 1997 and 1998,
respectively. These expenses were offset by approximately $4.3 million and $0.2
million of charges in 1997 and 1998, respectively, for services performed by
the Company. No such services were provided nor were expenses incurred during
the year ended December 31, 1999.

The Company has entered into a tax sharing agreement with Stream and CS&T
under which they will indemnify the Company, and the Company will indemnify
Stream and CS&T, with respect to any taxes relating to their businesses prior
to the Reorganization, after taking into account, under rules set forth in the
tax sharing agreement, the net operating loss carryforwards and other tax
attributes of Stream immediately prior to the Reorganization (and in limited
circumstances losses and other tax attributes of the Company carried back to
periods prior to the Reorganization). The tax sharing agreement also defines
the parties' obligations for filing tax returns, and their rights and
obligations for claims made by the Internal Revenue Service or other taxing
authorities for periods prior to the Reorganization.

In 1998, the Company received a $1.2 million tax refund, arising from its
business operations prior to the April 21, 1995 Contribution Agreement. This
amount was recorded as a contribution of capital in the consolidated statement
of shareholders' equity.

(6) Debt Financing

Borrowings during the first eleven and a half months of 1997 were in the
form of an intercompany loan with R.R. Donnelley with interest based on LIBOR
plus 35 basis points. Interest expense on this facility was approximately $9.4
million for the period ended December 15, 1997. Effective with the
Reorganization, the Company discontinued all intercompany loan activity with
R.R. Donnelley.

On December 15, 1997, the Company and certain of its international
subsidiaries entered into a credit agreement with a group of banks for a
revolving line of credit of $130 million, expiring on December 17, 2001. The
credit facility is collateralized by substantially all of the Company's assets,
including shares of its subsidiaries, and the amount available for borrowings
is limited to the borrowing base, which is calculated based on eligible
receivables, inventories and fixed assets. The credit agreement also contains
certain covenants, of which the most restrictive relates to tangible net worth.
As of December 31, 1999 the Company was in compliance with all debt covenants.
Borrowings under the agreement bear interest at rates based on either LIBOR,
the banks' prime rate or the Federal Funds rate, plus an applicable margin. The
applicable interest rate at December 31, 1999 was 8.47%. As of December 31,
1998 and December 31, 1999, the borrowing base was $81.9 million and
$88.9 million, respectively.

Borrowings under the line of credit have been classified as long-term since
the Company has the ability and intent to maintain such debt on a long-term
basis. Commitment fees are 37.5 basis points on the unused portion of the line
of credit.

F-12
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

Certain of the Company's foreign subsidiaries have additional lines of
credit available to fund local working capital requirements. The lines of
credit are collateralized by certain assets of the local entities.
Approximately $13.6 million and $13.4 million of these facilities were unused
at December 31, 1998, and December 31, 1999, respectively.

The Company's debt was as follows (in thousands):

<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Revolving line of credit.......................... $ 10,000 $ 35,000
Loan payable for repurchase of preferred stock due
in 2002 at an interest rate of 9.5%.............. -- 12,700
Bank debt assumed in business acquisition due in
2007 at an interest rate of 7.0%................. -- 1,070
Mortgage payable due in 2004 at an interest rate
of 5.14%......................................... -- 4,127
Capital leases payable in varying amounts through
2008 at a weighted average interest rate of
7.16%............................................ 13,662 3,406
-------- --------
23,662 56,303
Less--Current portion............................. 2,021 559
-------- --------
Long-term portion............................... $ 21,641 $ 55,744
======== ========
</TABLE>

(7) Commitments and Contingencies

(a) Lease Commitments

The Company leases certain offices, facilities and equipment under
noncancellable leases, which expire at various dates through 2008. Rent expense
for operating leases was $12.4 million, $16.3 million and $17.5 million for the
years ended December 31, 1997, 1998 and 1999, respectively. At December 31,
1999, future minimum lease payments for noncancellable leases were payable as
follows (in thousands):

<TABLE>
<CAPTION>
Year Operating Capital
---- --------- -------
<S> <C> <C>
2000...................................................... 16,269 1,588
2001...................................................... 12,303 386
2002...................................................... 10,579 332
2003...................................................... 8,426 324
2004...................................................... 6,209 323
Thereafter................................................ 18,504 1,300
------- -------
Total minimum payments.................................. $72,290 4,253
=======
Less--Amounts representing interest..................... (847)
-------
Present value of minimum lease payments................. $ 3,406
=======
</TABLE>

F-13
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

(b) Commitments and Contingencies

Certain key executives are covered by employment agreements, which establish
salaries, certain benefits and incentive compensation and separation terms.
Some key executives in foreign countries are also covered by agreements, which
contain provisions that are typical in those countries.

In connection with the Reorganization, the Company, Stream and CS&T entered
into agreements, which contain general indemnities between the companies. Under
the agreements, each of the companies indemnifies the others for any losses,
liabilities or damages in connection with any liability, claim or action
assumed by such company in the Reorganization.

The Company is a party to certain litigation arising in the ordinary course
of business, which, in the opinion of management, will not have a material
adverse effect on the Company's financial position or results of operations.

For the year ended December 31, 1997, two customers accounted for
approximately 17% and 14% of total Company revenue. For the year ended December
31, 1998, two customers accounted for approximately 23% and 12% of total
Company revenue. For the year ended December 31, 1999, one customer accounted
for approximately 26% of total Company revenue. No other customers accounted
for greater than 10% of total Company revenue for the years ended December 31,
1997, 1998, or 1999.

Financial instruments that subject the Company to concentrations of credit
risk consist primarily of trade receivables with customers in the technology
industry. The large number of customers comprising the Company's customer base
and their geographic dispersion mitigates this credit risk. To reduce credit
risk, the Company performs ongoing credit evaluations of its customers'
financial condition and maintains allowances for potentially uncollectible
accounts.

(8) Income Taxes

The provision for income taxes was comprised of the following (in
thousands):

<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Current:
Domestic............................................ $ -- $ -- $ --
Foreign............................................. -- 4,607 8,305
Deferred.............................................. 2,824 (342) (755)
------ ------ ------
$2,824 $4,265 $7,550
====== ====== ======
</TABLE>

Income before income taxes included approximately $6.6 million, $28.0
million and $26.6 million related to foreign operations for the years ended
December 31, 1997, 1998 and 1999, respectively.

F-14
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

The Company's effective tax rate differed from the statutory United States
federal income tax rate as follows:

<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate................................. (35.0)% 35.0% 35.0%
Foreign tax effect, net................................ (10.0) (40.1) (17.4)
Valuation allowance items.............................. 54.5 31.6 11.5
Other.................................................. -- 1.9 0.5
----- ----- -----
9.5% 28.4% 29.6%
===== ===== =====
</TABLE>

The components of the Company's deferred income tax assets and liabilities
were as follows (in thousands):

<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets--
Receivable allowances.......................... $ 921 $ 1,412
Inventory adjustments.......................... 1,680 2,473
Property, plant and equipment.................. 1,397 742
Accrued liabilities............................ 670 1,521
Tax loss carryforwards......................... 7,865 11,581
------- -------
Total deferred tax assets.................... 12,533 17,729
Less--Valuation allowance........................ (12,533) (17,729)
------- -------
Deferred tax assets, net of valuation
allowance................................... $ -- $ --
======= =======
Deferred tax liabilities--
Property, plant and equipment.................. $ 2,482 $ 1,727
------- -------
Total deferred tax liabilities............... 2,482 1,727
------- -------
Net deferred tax liabilities..................... $ 2,482 $ 1,727
======= =======
</TABLE>

Undistributed earnings and profits of foreign subsidiaries subject to U.S.
tax upon repatriation amounted to approximately $62.2 million at December 31,
1999. U.S. federal income taxes are not provided on the unremitted accumulated
earnings of foreign subsidiaries, as such earnings are considered to be
permanently reinvested abroad.

A valuation allowance has been established to fully reserve the tax benefits
associated with certain temporary differences and the net operating loss
carryforwards as it cannot be determined, given the history of cumulative tax
losses in certain tax jurisdictions, that it is more likely than not these
deferred tax assets will be realized. These tax loss carryforwards of $29.0
million at December 31, 1999 will generally expire between 2000 and 2019. A tax
benefit of approximately $4.3 million associated with the exercise of stock
options will be allocated to equity when realized.

F-15
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

(9) Employee Benefit Plans

(a) Defined Contribution Plans

The Company has a defined contribution 401(k) plan covering substantially
all domestic employees who meet certain eligibility requirements. Participants
may make contributions to the 401(k) plan from 1% to 15% of their compensation,
as defined in the plan. The Company also contributes a certain percentage of
the employee's annual compensation to the 401(k) plan, subject to certain
limitations. Company contributions are fully vested after two years of service.
Contributions and costs attributable to the 401(k) plan amounted to $0.6
million, $0.6 million, and $0.8 million for the years ended December 31, 1997,
1998, and 1999, respectively.

Certain of the Company's foreign subsidiaries also have defined contribution
plans covering those employees who meet certain eligibility requirements.
Participants may make contributions to the plans from 1% to 20% of their
compensation, as defined. The Company also contributes a certain percentage of
the employee's annual compensation to the plans, subject to certain
limitations. Contributions attributable to the plans amounted to $1.3 million,
$1.4 million and $1.7 million for the years ended December 31, 1997, 1998 and
1999, respectively.

(b) Defined Benefit Pension Plans

Certain of the Company's foreign subsidiaries have defined benefit pension
plans for long-term employees. The plans are based on an employee's years of
service and earnings. The retirement plan liabilities and their related costs
are computed in accordance with the laws and appropriate actuarial practices of
the individual countries. The change in benefit obligation and plan assets
consisted of the following (in thousands):

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of period.......... $ 4,168 $ 4,629 $ 5,716
Service cost....................................... (108) (95) (87)
Plan participants' contributions................... 547 622 629
Amendments......................................... -- 1,176 981
Benefits paid...................................... 22 (616) (246)
------- ------- -------
Benefit obligation at end of period................ $ 4,629 $ 5,716 $ 6,993
======= ======= =======
Change in Plan Assets:
Fair value of plan assets at beginning of period... $ 2,015 $ 3,782 $ 4,886
Actual return on plan assets....................... 694 586 1,094
Acquisition........................................ 79 0 13
Employer contribution.............................. 425 512 524
Plan participants' contributions................... 547 622 629
Benefits paid...................................... 22 (616) (246)
------- ------- -------
Fair value of plan assets at end of period......... $ 3,782 $ 4,886 $ 6,990
======= ======= =======
Funded status...................................... $ (847) $ (830) $ (3)
Unamortized prior service cost..................... -- -- --
Unrecognized actuarial gain........................ 960 825 194
------- ------- -------
Net amount of asset (liability) reflected in
consolidated balance sheet........................ $ 113 $ (5) $ 191
======= ======= =======
</TABLE>

The net periodic benefit costs were $0.1 million, $0.2 million and $0.3
million for the years ended December 31, 1997, 1998 and 1999, respectively.

F-16
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

The average rate of compensation increase and the expected return on plan
assets used to account for the plans were 6% and 8%, respectively, for each of
the years ended December 31, 1997, 1998 and 1999.

(10) Shareholders' Equity

(a) Common Stock

The Company has authorized common stock and nonvoting common stock. The
holders of common stock are entitled to one vote for each share held, and the
holders of nonvoting common stock have no voting rights. In late November,
1999, the Company repurchased 1,899,624 shares of common stock from non-
employees at $5.18 per share for an aggregate purchase price of $9.8 million.

Common stock consisted of the following:

<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Common stock, authorized--60,000,000 shares;
shares issued and outstanding................. 19,126,552 20,762,112
Nonvoting common stock, authorized--6,000,000
shares; shares issued and outstanding......... 5,244,004 5,244,004
---------- ----------
Total shares outstanding....................... 24,370,556 26,006,116
========== ==========
</TABLE>

(b) Preferred Stock

The Company has authorized 120,000 shares of 9.50% series senior cumulative
preferred stock. Preferred stock shares issued and outstanding at December 31,
1998 were 66,959. Preferred dividends accrue at the rate of $95 per annum per
share and are payable in cash, additional shares, or any combination of the
two. At December 31, 1998, cumulative preferred dividends in arrears were
approximately $526,000. On October 13, 1999, the Company repurchased all of its
outstanding preferred stock, 71,744 shares, valued at $71.7 million, for $60.2
million, comprised of cash and a note for $12.7 million. The note accrues
interest at a rate of 9.5% per annum and interest is to be paid quarterly. The
note matures on the earliest of October 13, 2002, a change in control of the
Company or a public offering of the Company's shares. At December 31, 1999,
there were no preferred stock shares issued and outstanding nor were there any
cumulative preferred dividends in arrears. The preferred stock value in excess
of the repurchase amount of $11.5 million was added to net earnings to arrive
at net earnings available to common shareholders.

In connection with the Reorganization, outstanding awards under Stream's
stock option plans were replaced by substitute awards under the Company's Class
A and Class B Replacement Option Plans. The Company also established the 1997
Stock Incentive Plan (the Plan), which is administered by the Board of
Directors of the Company. The Plan, as amended, provides for the issuance of up
to 5.7 million options to purchase shares of common stock, at exercise prices
and vesting periods determined by the Board and defined in the applicable
option agreements. Options may be granted to employees, officers, directors,
consultants and advisors of the Company under the Plan.

F-17
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

Option grants generally vest over four or five years. For the options which
vest over five years, exercisability is partially subject to the attainment of
certain liquidity thresholds. Options can not be issued under the Plan after
December 15, 2007; however, options previously granted under the Plan may still
be exercised beyond that date. The Plan also contains certain provisions for
the option holders in the event of an acquisition, as defined in the Plan.
Options granted under the plan were granted at the estimated fair values at the
grant dates and, consequently, no compensation expense was recognized in any of
the reported periods.

During 1995, the FASB issued SFAS No. 123, Accounting for Stock Based
Compensation, which defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
cost for those plans using the method of accounting prescribed by the
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees. Entities electing to remain with the accounting in APB No. 25
must make pro forma disclosures of net income and earnings per share, as if the
fair value based method of accounting defined in SFAS No. 123 had been applied.

The Company has elected to account for its stock-based employee compensation
plans under APB No. 25. However, for pro forma disclosure purposes, the Company
has computed the compensation expense in 1997, 1998 and 1999 for all options
granted, using the Black-Scholes option pricing model as prescribed by SFAS No.
123. The fair value of the 1997, 1998 and 1999 options granted is estimated on
the date of grant using the following assumptions: a dividend yield of 0%, an
expected volatility of 18% and an expected life of 5 years for each year, and a
risk-free interest rate of 6.22%, 5.71% and 5.81%, respectively for 1997, 1998
and 1999.

The method prescribed by SFAS No. 123 has not been applied to the options
granted prior to January 1, 1995, and as a result, the resulting pro forma
compensation expense may not be representative of the amount to be expected in
future years. The Company's compensation expense is attributable to options in
the Company that Stream and CS&T granted to the Company's employees and does
not reflect any compensation attributable to employees of Stream or CS&T.

If the Company had accounted for these plans in accordance with SFAS No.
123, the Company's net income would have been reduced and net loss would have
been increased to the following pro forma amounts (in thousands except per
share data):

<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------
1997 1998 1999
-------- ------ -------
<S> <C> <C> <C>
Net income (loss) available to common
shareholders:
As reported.................................... $(32,839) $4,825 $24,619
Pro forma...................................... (33,470) 4,341 23,974
Earnings per share:
Basic earings per share, pro forma for the
effect of
SFAS No. 123.................................. $ 0.17 $ 0.95
Diluted earnings per share, pro forma for the
effect of
SFAS No. 123.................................. 0.17 0.81
</TABLE>

F-18
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

On January 9, 1998, the outstanding awards under Stream's stock option plans
were replaced by substitute awards such that for each option then held, the
option holder received an option in the Company, Stream and CS&T. The
substitute awards have the same ratio of the exercise price per option to the
market value per share, the same aggregate difference between market value and
exercise price and the same vesting provisions, option periods and other terms
and conditions of the options that they replaced.

The following table summarizes the status of the Company's stock option
plans and changes to the plans during the periods indicated:

<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
---------- --------------
<S> <C> <C>
Outstanding at December 31, 1996.................. 8,946,324 $0.41
Granted........................................... 383,000 0.48
Exercised......................................... (221,904) 0.06
Forfeited/cancelled............................... (1,445,664) 0.36
----------
Outstanding at December 31, 1997.................. 7,661,756 0.43
Granted........................................... 3,400,000 0.29
Exercised......................................... (680,316) 0.30
Forfeited/cancelled............................... (2,560,560) 0.41
----------
Outstanding at December 31, 1998.................. 7,820,880 0.35
Granted........................................... 2,715,378 6.11
Exercised......................................... (3,602,184) 0.36
Forfeited/cancelled............................... (623,458) 0.61
----------
Outstanding at December 31, 1999.................. 6,310,616 $1.87
==========
Options exercisable at:
December 31, 1997............................... 4,969,428 $0.42
December 31, 1998............................... 3,395,464 0.40
December 31, 1999............................... 1,673,506 0.39
</TABLE>

Options available for grant at December 31, 1997, 1998 and 1999 were
1,007,512, 200,000 and 266,500, respectively. The following table summarizes
information about stock options outstanding and exercisable at December 31,
1999:

<TABLE>
<CAPTION>
Weighted Average
Remaining
Range of Outstanding at Contractual Exercisable at
Exercise Prices December 31, 1999 Life (Years) December 31, 1999
--------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
$ 0.06 182,748 5.07 182,748
0.29-0.36 3,368,368 8.12 1,010,758
0.60-0.87 480,000 5.30 480,000
1.15 430,000 9.45 --
5.18 1,789,500 9.78 --
11.00 60,000 9.96 --
------------ --------- ---- ---------
$0.06-$11.00 6,310,616 8.40 1,673,506
============ ========= ==== =========
</TABLE>

F-19
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

(11) Earnings Per Share

The following table sets forth the computation of basic and diluted income
per share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1998 1999
------- ------------
<S> <C> <C> <C>
Basic:
Net income available to common shareholders........... $ 4,825 $ 24,619
======= ========
Weighted average shares outstanding................... 25,497 25,228
======= ========
Net income per share.................................. $ 0.19 $ 0.98
======= ========

Diluted:
Net income available to common shareholders........... $ 4,825 $ 24,619
======= ========
Weighted average shares outstanding................... 25,497 25,228
Effect of dilutive common stock options............... 647 4,200
------- --------
Total............................................... 26,144 29,428
======= ========
Net income per share.................................. $ 0.18 $ 0.84
======= ========
</TABLE>

Prior to the Reorganization, no common shares were outstanding; therefore,
income per share data prior to 1998 is not meaningful and has been excluded.

(12) Segment Information

The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information in fiscal 1999. The Company has three
reportable business segments based on geographic regions: the Americas, Europe
and Asia-Pacific. The Company identifies such segments based upon geographical
regions of operations because each operating segment offers a full range of
outsource services including e-commerce support services, content management,
procurement, materials management, manufacturing, fulfillment and customer
relationship management, but serves strategically different markets.

The accounting policies of the geographic segments are the same as those
described in the summary of significant accounting policies as described in
Note 3. In each geographical region the chief operating decision maker
evaluates the performance of the geographic segments based on segment earnings
before interest and taxes. Revenue for each segment is based on the location of
the subsidiary providing the service. Inter-segment revenue and transfers
between geographic regions are accounted for at prices that approximate arm's-
length transactions. The table below presents information about the Company's
reportable segments (in thousands). Corporate information is included to
reconcile segment data to the consolidated financial statements.

F-20
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue from unaffiliated customers:
Americas................................... $312,918 $282,934 $319,286
Europe..................................... 225,140 237,702 268,633
Asia-Pacific............................... 146,465 109,446 109,549
-------- -------- --------
$684,523 $630,082 $697,468
======== ======== ========
Intersegment revenue:
Americas................................... $ 24,915 $ 3,640 $ 3,142
Europe..................................... 1,088 1,268 262
Asia-Pacific............................... 660 435 2,264
-------- -------- --------
26,663 5,343 5,668
-------- -------- --------
Total revenue................................ 711,186 635,425 703,136
Intersegment eliminations.................... (26,663) (5,343) (5,668)
-------- -------- --------
$684,523 $630,082 $697,468
======== ======== ========
EBIT:
Americas................................... $ (4,237) $ 20,828 $ 18,495
Europe..................................... 13,942 18,834 14,827
Asia-Pacific............................... 1,720 1,396 14,855
Corporate.................................. (24,790) (22,164) (19,215)
-------- -------- --------
Total EBIT............................... (13,365) 18,894 28,962
Interest expense........................... (16,478) (3,882) (3,452)
-------- -------- --------
Income (loss) before income taxes........ $(29,843) $ 15,012 $ 25,510
======== ======== ========
Total property, plant and equipment, net:
Americas................................... $ 16,546 $ 16,024
Europe..................................... 30,600 25,911
Asia-Pacific............................... 22,177 24,708
Corporate.................................. 1,429 1,628
-------- --------
$ 70,752 $ 68,271
======== ========
Total assets (excluding intersegment
balances):
Americas................................... $105,381 $107,277
Europe..................................... 125,147 114,560
Asia-Pacific............................... 57,635 61,902
Corporate.................................. 3,047 2,871
-------- --------
Total assets............................. $291,210 $286,610
Intersegment balances:
Americas................................... $ 2,037 $ 1,290
Europe..................................... 933 1,807
Asia-Pacific............................... 889 6,992
Corporate.................................. 9,480 898
-------- --------
13,339 10,987
-------- --------
Total assets................................. 304,549 297,597
Intersegment eliminations.................... (13,339) (10,987)
-------- --------
$291,210 $286,610
======== ========
</TABLE>

F-21
<PAGE>

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1999

(13) Restructuring Charge

In 1996, management undertook a restructuring of its worldwide manufacturing
operations by exiting its offset printing business and focusing on becoming a
provider of global supply chain management solutions. The Company recorded a
pretax charge of $100.9 million, which included the restructuring of its
operations and the write-down of certain equipment, intangibles and other long-
lived assets. The restructuring charge included approximately $28.3 million for
severance and termination benefits and $7.5 million for the remaining lease
obligations related to the closure of four facilities: two in North America,
one in Europe, and one in Asia. The remaining charge related primarily to
impairment losses on long-lived assets, which were calculated based on the
excess carrying amounts of the assets over the assets' fair values. The fair
value of a long-lived asset was generally determined using undiscounted
estimates of the future cash flows generated by that asset.

At December 31, 1998 and 1999, the remaining accrual relating to the above-
mentioned charges totaled $0.5 million and $0, respectively. Cash expenditures
and non-cash expenditures were $16.8 million and $11.2 million, respectively,
for 1997, $7.5 million and $3.7 million, respectively, for 1998, and $0.5
million and $0, respectively, for 1999.

F-22
<PAGE>

[Inside Back Cover]

Apeldoorn, The Netherlands

[Circular photograph of exterior of Apeldoorn center]

Cumbernauld, Scotland Fremont, California
[circular photograph of [circular photograph
exterior of Cumbernauld of exterior of
center] Fremont center]

[Modus Media Logo]
Global . Integrated . Trusted.

[circular photograph of [circular photograph
exterior of Kildare center] of exterior of Salt
Lake City center]
Kildare, Ireland
[circular photograph of Salt Lake City, Utah
exterior of Singapore center]

Singapore

20 Solution Centers Worldwide

<PAGE>

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

8,000,000 Shares

Modus Media International Holdings, Inc.

Common Stock

[Logo of Modus Media International appears here]

--------

PROSPECTUS
, 2000

--------

Salomon Smith Barney
Donaldson, Lufkin & Jenrette
Robertson Stephens
Thomas Weisel Partners LLC

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.

<TABLE>
<S> <C>
SEC registration fee........................................... $ 39,600
NASD filing fee................................................ 15,500
Nasdaq National Market listing fee............................. 95,000
Printing and engraving expenses................................ 400,000
Legal fees and expenses........................................ 600,000
Accounting fees and expenses................................... 350,000
Blue Sky fees and expenses (including legal fees).............. 15,000
Transfer agent and registrar fees and expenses................. 10,000
Miscellaneous.................................................. 274,900
----------
Total........................................................ $1,800,000
==========
</TABLE>

The Company will bear all expenses shown above.

Item 14. Indemnification of Directors and Officers.

The Registrant's Amended and Restated Certificate of Incorporation (the
"Restated Certificate") provides that, except to the extent prohibited by the
Delaware General Corporation Law (the "DGCL"), the Registrant's directors shall
not be personally liable to the Registrant or its stockholders for monetary
damages for any breach of fiduciary duty as directors of the Registrant. Under
the DGCL, the directors have a fiduciary duty to the Registrant which is not
eliminated by this provision of the Restated Certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the Registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by the DGCL.
This provision also does not affect the directors' responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws. The Registrant has obtained liability insurance for its
officers and directors.

Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL including for an unlawful payment of dividend or
unlawful stock purchase or redemption, or (iv) for any transaction from which
the director derived an improper personal benefit. The DGCL provides further
that the indemnification permitted thereunder shall not be deemed exclusive of
any other rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, a vote of stockholders or otherwise. The
Restated Certificate eliminates the personal liability of directors to the
fullest extent permitted by the DGCL and, together with the Registrant's
Amended and Restated By-Laws (the "Restated By-Laws"), provides that the
Registrant shall fully indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative)
by reason of the fact that such person is or was a director or officer of the
Registrant, or is or was

II-1
<PAGE>

serving at the request of the Registrant as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding. Reference is made to the
Registrant's Form of Amended and Restated Certificate of Incorporation and Form
of Amended and Restated By-Laws filed as Exhibits 3.2 and 3.4 hereto,
respectively.

The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Act"). Reference is made to the
form of Underwriting Agreement to be filed as Exhibit 1.1 hereto.

At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Restated Certificate. The Registrant is not
aware of any threatened litigation or proceeding that may result in a claim for
such indemnification.

Item 15. Recent Sales of Unregistered Securities.

Since its incorporation as an independent company in December 1997, the
Company has issued the following securities that were not registered under the
Securities Act as summarized below:

(a) Issuances of Capital Stock. On December 10, 1997, we issued
3,445,028 shares of our non-voting common stock to Bain Capital, Inc. as
partial payment for services rendered to us. On December 15, 1997, we
issued 40,646 shares of our preferred stock to R.R. Donnelley in exchange
for the cancellation of certain inter-company debt assigned to us pursuant
to the reorganization of Stream International Inc. On January 9, 1998, we
were spun off from Stream and, pursuant to that spin-off, our shares were
distributed to the shareholders of Stream. Following the spin-off, R.R.
Donnelley exchanged its shares of our common stock for 21,132 additional
shares of our preferred stock. Dividends on our preferred stock were
accrued and were paid in kind by the issuance of 6,094 additional shares of
our preferred stock in December 1998, less an offset of 913 shares. Our
Board of Directors authorized additional dividends on our preferred stock
during 1999 and such dividends accrued on our books. On October 13, 1999,
we repurchased in full all of the issued and outstanding shares of our
preferred stock. On April 21, 1998, we exchanged 1,798,976 shares of our
common stock, which were owned by BankAmerica Investment Corporation, for
1,798,976 shares of our non-voting common stock.

(b) Certain Grants and Exercises of Stock Options. The Company's 1997
Class A and Class B Replacement Stock Option Plan and 1997 Stock Incentive
Plans were adopted by the Board of Directors and sole stockholder of the
Company on December 15, 1997. As of December 31, 1999, options to purchase
4,256,224 shares of common stock had been exercised for a consideration of
$1.6 million under the Company's 1997 Stock Incentive Plan and options to
purchase 6,310,616 shares of common stock were outstanding under the
Company's 1997 stock option plans.

No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase common stock, Rule 701 of
the Securities Act. All of the foregoing securities are deemed restricted
securities for the purposes of the Securities Act.

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits:

<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
*1.1 --Form of Underwriting Agreement

**3.1 --Amended and Restated Certificate of Incorporation of the
Registrant, as amended

*3.2 --Form of Second Amended and Restated Certificate of
Incorporation of the Registrant, to be filed prior to the
closing of this offering
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
**3.3 --Amended and Restated By-Laws of the Registrant

*3.4 --Form of Second Amended and Restated By-Laws of the Registrant,
to be effective upon the closing of this offering

*4.1 --Specimen common stock certificate

4.2 --See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Second Amended and Restated Certificate of Incorporation and
Amended and Restated By-Laws of the Registrant defining the
rights of holders of common stock of the Registrant

*5.1 --Opinion of Hale and Dorr LLP

**10.1 --Contribution Agreement, dated as of December 15, 1997, among
Stream International Inc. (f/k/a Stream International Holdings,
Inc.), the Registrant and Modus Media International, Inc.

**10.2 --Tax Sharing Agreement, dated as of December 15, 1997, among
Stream International Inc., the Registrant, Modus Media
International, Inc., Corporate Software & Technology Holdings,
Inc. and Corporate Software & Technology, Inc.

**10.3 --The Registrant's 1997 Stock Incentive Plan, as amended

**10.4 --Forms of Option Grants under the Registrant's 1997 Stock
Incentive Plan

**10.5 --The Registrant's 1999 Management Incentive Plan

*10.6 --The Registrant's 1999 Employee Stock Purchase Plan

**10.7 --Sublease, dated June 18, 1997, by and between The Travelers
Indemnity Company and Stream International Inc., as amended

**10.8 --Lease, dated December 19, 1994, between Lieboch Limited, R.R.
Donnelley Ireland Turnkey Services Kildare and Allied Irish
Banks, p.l.c.

**10.9 --Lease, dated December 2, 1996, by and between Housing &
Development Board and Stream International Pte Ltd., as amended

**10.10 --Lease, dated December 3, 1994, by and between Novell, Inc. and
R.R. Donnelley & Sons Company, as assigned by Assignment and
Assumption of Lease, dated April 21, 1995, by and between R.R.
Donnelley & Sons Company and Stream International Holdings,
Inc., as amended

**10.11 --Amended and Restated 7 3/4 Unsecured Promissory Note, dated
March 7, 1997, by and between Terence M. Leahy, as the
Borrower, and the Registrant
**10.12 --Amended and Restated 7.25% Unsecured Promissory Note, dated
July 20, 1999, by and between W. Kendale Southerland, as the
Borrower, and the Registrant

**10.13 --Amended and Restated 7.25% Unsecured Promissory Note by and
between Ronald Leitch, as the Borrower, and the Registrant

**10.14 --Employment Agreement, as amended, by and between the
Registrant and Terence M. Leahy dated January 1, 1998

**10.15 --Credit Agreement dated as of December 15, 1997, among Modus
Media International, Inc. and Modus Media International
Kabushiki Kaisha, as Borrowers, and the Banks named therein, as
Lenders, as amended
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
**10.16 --Agreement dated January 20, 1999 between the Industrial
Development Agency (Ireland), Modus Media International
Kildcare and Modus Media International Holdings, Inc.

**10.17 --Business Transfer Agreement dated December 28, 1998 by and
between Modus Media International Kabushiki Kaisha and Sasatoku
Donnelley Kabushiki Kaisha

**10.18 --Amended and Restated Joint Venture Agreement dated January
1999 by and between Modus Media International, Inc. and
Sasatoku Printing Co. Ltd.

**10.19 --Master Agreement dated November 11, 1998 by and among Modus
Media International, Inc., the Korean management team of Modus
Media International Korea, Ltd. ("MMIK") and MMIK

+10.20 --Replication Agreement, dated September 1, 1999, by and between
Microsoft Licensing, Inc. and Modus Media International, Inc.
10.21 --7.34% Secured Non-Recourse Promissory Note dated September 15,
1995 by and between Rory J. Cowan, as borrower, and Stream
International, Inc.

10.22 --1997 Class A Replacement Option Plan

10.23 --1997 Class B Replacement Option Plan

*11.1 --Statement re Computation of Earnings per Share

**21.1 --Subsidiaries of the Registrant

23.1 --Consent of Arthur Andersen LLP

*23.2 --Consent of Hale and Dorr LLP (included in Exhibit 5.1)

**24.1 --Powers of Attorney (see page II-5)

27.1 --Financial Data Schedule
</TABLE>

- --------
*To be filed by amendment.

**Previously filed.

+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act, which portions are
omitted and filed separately with the Securities and Exchange Commission.

II-4
<PAGE>

(b) Financial Statement:

Schedule II--Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
Additions Balance
Balance at Charged to at End
Beginning Costs and of
Description of Period Expenses Deductions Period
- ----------------------------------- ---------- ---------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended December 31, 1997...... $ 4,909 $9,003 $ (6,799)(a) $ 7,113
Year ended December 31, 1998...... $ 7,113 $2,776 $ (5,487)(a) $ 4,402
Year ended December 31, 1999...... $ 4,402 $2,157 $ (1,300)(a) $ 5,179

Restructuring Reserve:
Year ended December 31, 1997...... $39,744 $ -- $(28,076)(b) $11,668
Year ended December 31, 1998...... $11,668 $ -- $(11,187)(b) $ 481
Year ended December 31, 1999...... $ 481 $ -- $ (481)(b) $ --
</TABLE>

(a) Uncollectible accounts receivable written off against the allowance, net of
recoveries.
(b) Payments and other write-offs for restructuring costs.

All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.

Item 17. Undertakings.

The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the registrant pursuant to the Delaware General
Corporation Law, the Restated Certificate of the registrant, the Underwriting
Agreement, 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 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
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.

The undersigned registrant hereby undertakes that:

(1) For purpose of determining any liability under the 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 Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(2) For purpose of determining any liability under the 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 of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Westwood,
Massachusetts, on this 18th day of January, 2000.

MODUS MEDIA INTERNATIONAL HOLDINGS,
INC.

/s/ Terence M. Leahy
By: _________________________________
Terence M. Leahy
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Terence M. Leahy Chairman of the Board of January 18, 2000
______________________________________ Directors, and Chief
Terence M. Leahy Executive Officer
(Principal Executive
Officer)

/s/ Richard M. Darer Chief Financial Officer January 18, 2000
______________________________________ (Principal Financial
Richard M. Darer Officer)

* Director January 18, 2000
______________________________________
Linwood A. Lacy, Jr.

* Director January 18, 2000
______________________________________
Jonathan S. Lavine

* Director January 18, 2000
______________________________________
Mark E. Nunnelly
</TABLE>

<TABLE>
<S> <C> <C>
* Director January 18, 2000
______________________________________
Robert F. White

*By: /s/ Terence M. Leahy
______________________________________
Terence M. Leahy
Attorney-in-fact
</TABLE>

II-6
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
*1.1 --Form of Underwriting Agreement

**3.1 --Amended and Restated Certificate of Incorporation of the
Registrant, as amended

*3.2 --Form of Second Amended and Restated Certificate of
Incorporation of the Registrant, to be filed prior to the
closing of this offering

**3.3 --Amended and Restated By-Laws of the Registrant

*3.4 --Form of Second Amended and Restated By-Laws of the Registrant,
to be effective upon the closing of this offering

*4.1 --Specimen common stock certificate

*5.1 --Opinion of Hale and Dorr LLP

**10.1 --Contribution Agreement, dated as of December 15, 1997, among
Stream International Inc. (f/k/a Stream International Holdings,
Inc.), the Registrant and Modus Media International, Inc.

**10.3 --The Registrant's 1997 Stock Incentive Plan, as amended

**10.4 --Forms of Option Grants under the Registrant's 1997 Stock
Incentive Plan

**10.5 --The Registrant's 1999 Management Incentive Plan

*10.6 --The Registrant's 1999 Employee Stock Purchase Plan

**10.7 --Sublease, dated June 18, 1997, by and between The Travelers
Indemnity Company and Stream International Inc., as amended

**10.8 --Lease, dated December 19, 1994, between Lieboch Limited, R.R.
Donnelley Ireland Turnkey Services Kildare and Allied Irish
Banks, p.l.c.

**10.9 --Lease, dated December 2, 1996, by and between Housing &
Development Board and Stream International Pte Ltd., as amended

**10.13 --Amended and Restated 7.25% Unsecured Promissory Note by and
between Ronald Leitch, as the Borrower, and the Registrant
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
**10.14 --Employment Agreement, as amended, by and between the
Registrant and Terence M. Leahy dated January 1, 1998

**10.16 --Agreement dated January 20, 1999 between the Industrial
Development Agency (Ireland), Modus Media International
Kildcare and Modus Media International Holdings, Inc.

**10.17 --Business Transfer Agreement dated December 28, 1998 by and
between Modus Media International Kabushiki Kaisha and Sasatoku
Donnelley Kabushiki Kaisha

**10.18 --Amended and Restated Joint Venture Agreement dated January
1999 by and between Modus Media International, Inc. and
Sasatoku Printing Co. Ltd.

**10.19 --Master Agreement dated November 11, 1998 by and among Modus
Media International, Inc., the Korean management team of Modus
Media International Korea, Ltd. ("MMIK") and MMIK

10.22 --1997 Class A Replacement Option Plan

10.23 --1997 Class B Replacement Option Plan

*11.1 --Statement re Computation of Earnings per Share

**21.1 --Subsidiaries of the Registrant

23.1 --Consent of Arthur Andersen LLP

*23.2 --Consent of Hale and Dorr LLP (included in Exhibit 5.1)

**24.1 --Powers of Attorney (see page II-5)

27.1 --Financial Data Schedule
</TABLE>
- --------
*To be filed by amendment.

**Previously filed.

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

Exhibit 10.21

REPLICATION AGREEMENT

between

MICROSOFT LICENSING, INC.
a Nevada, U. S. A. Corporation,

and

Modus Media International, Inc.

a Corporation of Delaware

(Microsoft Licensing, Inc. Contract # 5475-5000021694)

1
<PAGE>

This Replication Agreement ("Agreement") is made and entered into this 1st
day of September, 1999 ("Effective Date"), by and between MICROSOFT LICENSING,
INC., a Nevada, U.S.A. corporation ("MSLI"), and Modus Media International, Inc.
a Corporation of Delaware ("COMPANY").

INTRODUCTION
------------

The parties recognize that Customers license Microsoft Corporation Products from
MSLI, that such Products are updated from time to time by MSLI, and that COMPANY
has facilities to reproduce such Products. This Agreement grants COMPANY such
rights as needed to perform Replication Services for Customers.

AGREEMENT
---------

The parties agree as follows:

1. DEFINITIONS. For purposes of this Agreement, the following terms shall have
-----------
the following meanings:

(a) "APM" shall mean the associated product material Components included in
Product as provided by MSLI to COMPANY from time to time which may include, but
not be limited to, a Microsoft registration card, a Microsoft certificate of
authenticity, and a Microsoft end user license agreement and warranty card.

(b) "ARK(s)" shall mean the authorized replication kit supplied only by MSLI
or its authorized mastering site(s) which contains Product Software Components
which are necessary for the replication of Product.

(c) "BOM" shall mean the bill of materials document provided to COMPANY by
MSLI via MSLI's ORION system, which shall identify all Components comprising
each Product(s) including, but not limited to, the specific APM to be included
with each Product(s). The BOM may be modified from time to time by MSLI at its
sole discretion.

(d) "COMPANY" shall include any subsidiary of COMPANY, provided that COMPANY
hereby guarantees its subsidiary's performance under this Agreement, the
subsidiary agrees in writing with COMPANY to be bound by the terms of this
Agreement, and that COMPANY provides written notice to MSLI of the name and
address of each subsidiary before the subsidiary exercises any rights under this
Agreement. A "subsidiary" is a company in which, on a class by class basis, more
than fifty percent (50%) of the stock entitled to vote for the election of
directors is owned or controlled by COMPANY, but only so long as such ownership
or control exists.

(e) "Components" shall mean those parts listed on the BOM and included in the
manufacture and/or assembly of a Product. Components are designated as such in
ORION.

(f) "Customer" shall mean OEM(s), DSP(s), other Authorized Replicators
("AR(s)"), Authorized Replicators who perform Fulfillment services ("AFC(s)"),
and/or MSLI.

(g) "Customer Agreement(s)" shall mean the MSLI/OEM Agreement for purposes of
the OEMs and the MSLI/DSP Agreement for purposes of the DSPs.

(h) "DSP(s)" shall mean the delivery service partner which holds a current
and valid license agreement with MSLI for one or more Products pursuant to the
MSLI/DSP Agreement and is located in the Territory.

(i) "FDR(s)" shall mean the final documentation release which contains the
machine-readable format of Product Documentation.

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

(j) "Fulfillment" shall mean the performance of fulfilling Product Component
coupons on behalf of Customers.

(k) "Kit(s)" shall mean the various kits provided to COMPANY by MSLI for
purposes of replicating the Product(s) in accordance with the Specifications,
including, but not limited to, the disk label kit which contains the CD-ROM
and/or disk labels. COMPANY shall be required to place on the Product(s), the
registration card kit, the end user license agreement kit, the warranty kit,
and/or the DSP pre-installation kit. Additional kits may be added and the
existing kit(s) may be modified from time to time by MSLI at its sole
discretion.

(l) "Microsoft" shall mean Microsoft Corporation, a Washington corporation
that is a supplier of and holds certain rights in and to the Products identified
in this Agreement.

(m) "MSLI/DSP Agreement" shall mean a valid license agreement between a DSP
and MSLI.

(n) "MSLI/OEM Agreement" shall mean a valid license agreement between an OEM
and MSLI.

(o) "MSLI/OEM Authorized Replicator Policies and Procedures Manual" shall
mean the electronic or hard copy manual which provides Authorized Replicators
with instructions regarding how to manufacture Microsoft Product(s) and
implement policies, procedures and specifications associated with the Authorized
Replicator program.

(p) "OEM(s)" shall mean the original equipment manufacturer which holds a
current and valid license agreement with MSLI for one or more Products pursuant
to the MSLI/OEM Agreement and is located in the Territory.

(q) "ORION" shall mean the MSLI software program that provides COMPANY with
information regarding (a) the MSLI/OEM Agreement status, (b) the BOM system, and
(c) shipment records reporting. MSLI may, from time to time and at its sole
discretion, modify, add to or delete from the information residing on the ORION
software program.

(r) "Product(s)" shall mean the copyrighted and/or patented Microsoft
software products described in the ORION BOM viewer, including, where
applicable, the specified user documentation Components of Product. "Product
Software" or "Product Documentation" shall mean the software or documentation
Components of Product.

(s) "Product Release" shall mean a release of Product which is designated by
MSLI in its sole discretion as a change in the digit(s) to the left of the
decimal point in Product version number [(x).xx].

(t) "Product Shipment Reconciliation Reports" shall mean the reconciliation
of the reports of Product shipments as submitted according to the instructions
identified on Exhibit A.

(u) "Products of Authenticity ("POA(s)")" shall mean all anti-piracy
initiatives including but not limited to the [**]

(v) "Replication Services" shall mean the services performed by COMPANY under
the rights granted to COMPANY by MSLI hereunder and such other value-added
services as provided by COMPANY.

(w) "Specification(s)" shall mean the method by which the Components
comprising each Product identified in the BOM are assembled in accordance with
MSLI's requirements, as is more specifically described in the MSLI/OEM
Authorized Replicator Policy and Procedures Manual.

(x) "Territory" shall mean those countries listed on Exhibit B.

3
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

(y) "Unaccounted Products" and "Unaccounted POAs" shall mean the [**] and/or
[**] by COMPANY, COMPANY subsidiary, and/or Sub-contractor, but (i) [**] in
accordance with the terms of this Agreement, (ii) [**] of the [**], (iii) [**]
(iv) [**] COMPANY's [**], and/or (v) [**].

(z) "Update Release" shall mean a release of Product which is designated by
MSLI in its sole discretion as a change in the digit(s) to the right of the
tenths digit in Product version number [x.x(x)].

(aa) "Version Release" shall mean a release of Product which is designated by
MSLI in its sole discretion as a change in the tenths digit in Product version
number [x.(x)x].

2. LICENSE GRANT.
-------------

(a) MSLI grants COMPANY the following nonexclusive license rights:

(i) to use ARKs, FDRs, and the applicable Kits internally for the purpose
of reproducing Product(s) in document and object code form and in accordance
with the ORION BOM(s) and Specifications for distribution to Customers in the
Territory;

(ii) to assemble Product(s) in accordance with BOM(s) for distribution to
Customers in the Territory; and

(iii) to use the ORION software in object code form for internal purposes
only in the performance of Replication Services and distribution of
Product(s). COMPANY shall not subcontract the operation of, or sublicense the
ORION software to any other entity.

(b) The license grant of Section 2(a), above, shall also apply, where
applicable, to MSLI- or OEM-requested adaptations to Product(s) authorized by
MSLI or in accordance with the MSLI/OEM Agreement, provided that MSLI has given
COMPANY advance written approval for such Product adaptation.

(d) COMPANY's license shall extend to, and each Product shall be deemed to
include, only Product(s) listed in the ORION BOM viewer which have "released"
status.

(e) COMPANY shall replicate, assemble and distribute for OEMs only those
Product(s) in the ORION BOM viewer. COMPANY shall replicate, assemble and
distribute for DSPs only those Product(s) listed in the ORION BOM viewer, but
only in accordance with the MSLI-provided DSP Product BOM.

(f) All rights not expressly granted, without limitation, are reserved by
MSLI, including, but not limited to, Product Software and/or Product
Documentation.

3. FEE.
---

(a) COMPANY agrees to pay MSLI a fee in the amount specified on Exhibit C
(the "Fee") for the rights granted herein. COMPANY shall pay the Fee upon
COMPANY's signing this Agreement. COMPANY shall not provide any Replication
Services until COMPANY has paid the Fee to MSLI. All amounts paid are not
refundable. MSLI will assess a finance charge of one and one-half percent (1-
1/2%) per month on all amounts that are past due.

4
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

(b) In the event income taxes are required to be withheld by any non-U.S.A.
government on payments to MSLI required hereunder, provided that COMPANY
promptly delivers to MSLI an official receipt for any such taxes withheld or
other documents necessary to enable MSLI to claim a U.S.A. Foreign Tax Credit,
COMPANY may deduct such taxes from the amount owed MSLI and shall pay them to
the appropriate tax authority. COMPANY will make certain that any taxes withheld
are minimized to the extent permitted under applicable law.

(c) All amounts paid by COMPANY hereunder shall not be recoupable against any
amounts owed by COMPANY to MSLI under any other agreement with MSLI.

(d) COMPANY agrees to make such payments by wire transfer to:

Microsoft Licensing, Inc.
c/o NationsBank of Texas, N.A.
1401 Elm Street
Dallas, Texas
U.S.A.
ABA #[**]
Account #[**]

Regarding:
[**] Program
Account #[**]

or to such other address or account as MSLI may specify from time to time.
COMPANY agrees to specify the MSLI contract number and invoice number, if any,
with respect to which payment is made.

4. REPORTING, AUDITS AND INSPECTIONS.
---------------------------------

(a) COMPANY shall become a certified user of the ORION application per the
requirement set forth by MSLI. Certification shall include, but may not be
limited to, at least [**] fully trained ORION users per COMPANY reporting site.
Such ORION users must demonstrate a full understanding of all ORION modules
pertaining to the MSLI Authorized Replicator program and all business rules
associated with the program. ORION certification shall also require stable and
reliable Internet access to the ORION web site. COMPANY shall be responsible for
all Internet access support issues and must demonstrate Internet capabilities.
COMPANY shall report all Product shipments via ORION to MSLI in an accurate and
timely manner, and in any case, no later than [**] calendar days of actual
shipment. COMPANY shall also submit a Product Shipment Reconciliation Report to
MSLI on a [**] basis in accordance with the instructions identified in Exhibit
A. The Product Shipment Reconciliation Report shall include all shipments made
to Customers together with such other detailed information as is included in the
audit tool found in ORION. The Product Shipment Reconciliation Report shall be
generated from the ORION audit tool and must be reconciled against the COMPANY's
internal information systems using COMPANY's prior [**] records such that it can
and will be reconciled against the ORION shipment report. COMPANY must report
all non-reconcilable items to MSLI, and upon notification, MSLI will adjust the
applicable ORION records. Such reports to MSLI shall be submitted by [**]
Pacific Time on a [**] in either hard copy or in an Excel spreadsheet format as
supplied by MSLI, which must be signed and certified as being true and correct
by a duly authorized representative of COMPANY. The Product shipment reporting
and Product Shipment Reconciliation Report reporting method, format, frequency,
and information requested in this Section 4 may be modified from time to time at
the sole discretion of MSLI.

(b) COMPANY shall provide MSLI with an additional [**] report with
information relating to all Microsoft Products, other than those reported to
MSLI pursuant to Section 4(a) above, that COMPANY has replicated, assembled,
and/or shipped to any third party. The method, information requested, and format
for such report shall be more specifically described in the MSLI/OEM Authorized
Replicator

5
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

Policies and Procedures Manual. This report method, format, frequency (e.g.
monthly, weekly, daily), and information requested may be modified from time to
time at the sole discretion of MSLI.

(c) COMPANY shall provide MSLI, upon request, with a manually produced report
summarizing and identifying all information associated with the Customer
purchase order and corresponding COMPANY sales order relating to each shipment
of Microsoft Product to or from Customer. COMPANY is required to accept purchase
orders from OEMs and DSPs in written form. This includes written purchase
orders, faxed purchase orders, or EDI purchase orders. Purchase orders over the
phone are not allowed unless followed up with a written purchase order. All
purchase orders must contain at least the Customer name, the issue date, part
numbers, quantities, and a purchase order number. COMPANY is required to issue a
delivery note with each shipment. The delivery note must contain at least the
COMPANY name, the delivery date, the part numbers, quantities, and purchase
order number(s) from the OEM/DSP. The delivery note is required to be signed by
the Customer and one (1) copy returned to COMPANY (with one (1) copy remaining
with the Customer). COMPANY must keep this delivery note on file for a minimum
of [**] years. Additionally, COMPANY shall provide MSLI, upon request, with a
manually produced report identifying the Customer purchase order information
associated with each return of Microsoft Product from Customer.

(d) COMPANY shall provide MSLI, upon request, with a manually produced report
identifying the [**] during the month [**] each Product, quantity of
shipment and date of shipment. The [**] shipment reporting method, format,
frequency (e.g., monthly, weekly, daily), and information requested in this
Section may be modified from time to time at the sole discretion of MSLI.

(e) COMPANY shall maintain records of the quantity of [**] ordered by
COMPANY, the [**] received by COMPANY, the inventory of [**], and all scrapped,
defective and returned [**]. In the event that MSLI requests information on a
[**] number that has not yet been sent as part of the [**] report, COMPANY shall
provide the information on specific [**] within [**] of such request. For record
retention purposes described in sub-section (h) below, [**] records shall be
deemed to become active on the date such [**] is shipped from COMPANY to
Customer.

(f) COMPANY shall provide MSLI with a [**] reconciliation report via
electronic mail or facsimile on or before the [**] calendar day of [**] for the
preceding [**]. COMPANY shall submit the [**] reconciliation report to MSLI in
accordance with the report format and in the manner as set forth in the attached
Exhibit G. A separate report must be submitted for each type of [**] shipped by
COMPANY.

(g) COMPANY shall maintain reports and other detailed records referenced in
this Section 4 (the "Reports and Records"). COMPANY shall provide MSLI with
immediate access to Reports and Records for a minimum period of [**] years from
the date of such Reports and Records. COMPANY shall provide MSLI with a maximum
of [**] access to archived Reports and Records for an additional minimum period
of [**] years thereafter. All archived Reports and Records shall be retained in
an electronic format.

(h) COMPANY shall maintain a computerized system of records to enable COMPANY
to identify the Customer receiving any copy of Product by the [**] appearing on
each copy of Product. COMPANY shall make such records information available to
MSLI within [**] of such request. COMPANY shall cooperate with MSLI to identify
Customers based on [**] provided by MSLI.

(i) MSLI may cause an audit and/or inspection to be made of the Reports and
Records and any other applicable COMPANY, COMPANY subsidiary, and Sub-contractor
records replication, assembly, and distribution locations (identified on Exhibit
D) in order to verify COMPANY's compliance with the terms of this Agreement and
to verify statements issued by COMPANY. Any such audit shall be made by an
independent certified public accountant selected by MSLI (other than on a
contingent fee basis). Any

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Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

such inspection shall be made by MSLI or a third party designated by MSLI. Any
audit and/or inspection shall be conducted during regular business hours at
COMPANY's offices with or without notice. COMPANY agrees to provide MSLI's
designated audit or inspection team access to relevant COMPANY records and all
replication and/or assembly locations. Any such audit shall be paid for by MSLI
unless material discrepancies are disclosed. "Material" shall mean the [**] by
COMPANY to Customers as reported by COMPANY to MSLI within the audit period. If
material discrepancies are disclosed, COMPANY agrees to pay MSLI for the costs
associated with the audit.

(j) COMPANY shall be [**] (a) the [**] (b) the [**]. COMPANY shall be liable
for any [**] (a) [**] (b) the [**]. COMPANY shall also be liable for Unaccounted
Products and/or Unaccounted [**] of its COMPANY subsidiary and Sub-contractor.
COMPANY's obligation to pay MSLI for Unaccounted Product(s) and/or [**] shall
not be MSLI's exclusive remedy and is in addition to any other rights and
remedies MSLI may have as provided by law or this Agreement.

(k) In addition to the provisions of this Section 4, MSLI may, without
notice, inspect COMPANY's procedures at COMPANY's premises in order to verify
COMPANY's compliance with any terms of this Agreement, including, but not
limited to, Sections 6(a) and 8(a). Any such inspection shall be conducted
during regular business hours at COMPANY's offices.

5. DELIVERY AND SUPPORT.
--------------------

(a) Neither MSLI nor its suppliers shall have any liability for failure to
deliver Product(s) by any particular date.

(b) COMPANY may request Product FDR(s), ARK(s), and Kit(s) listed in the
ORION BOM viewer. COMPANY's request must be in writing and include the
applicable FDR, ARK, and Kit Product name and part number. MSLI shall provide
[**] the Product FDR, ARK, and Kit to COMPANY's "Ship To" address specified in
Section 16.

(c) This Agreement does not include the provision by MSLI of technical
support in COMPANY's performance of Replication Services. COMPANY will report to
MSLI in writing any deviations from specifications of an FDR, ARK or Kit. MSLI
agrees to use reasonable efforts to correct such deviations in subsequent
releases of Product; however, MSLI is under no obligation to do so.

(d) MSLI will use reasonable efforts to supply COMPANY with Product
Specifications referencing page and media counts which are defined in the ORION
BOM viewer at the time of Product release.

6. LICENSE RESTRICTIONS.
--------------------

(a) COMPANY shall distribute Product(s) only to Customers located in the
Territory, as defined in Exhibit B. COMPANY may add to its existing Territory
only at the discretion of MSLI. COMPANY shall distribute to a Customer in the
Territory only those Product(s) which such Customer has licensed pursuant to the
Customer Agreements. COMPANY shall confirm that all Customers to which COMPANY
distributes Product have a valid Customer Agreement for Product ordered by such
Customer by referencing, on the date of Product shipment, the ORION system or
other MSLI electronically produced daily report, as determined by MSLI. COMPANY
shall download, [**], the above-referenced MSLI ORION system or other MSLI
electronically produced daily report, as determined by MSLI. COMPANY shall not
ship Product to any Customer that MSLI has put on shipment hold as identified in
the ORION system, or on the daily report identified in this Section 6(a). MSLI
may require that COMPANY refuse to fill a Customer's orders for Product due to
such Customer's failure to comply with any terms of

7
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

the Customer Agreements. COMPANY shall only provide Fulfillment services for
Customers if it is authorized to do so by MSLI. COMPANY shall not otherwise
distribute Product.

(b) COMPANY shall have the license rights granted in Section 2 of this
Agreement only with respect to Products on the ORION system provided by MSLI
from time to time. COMPANY shall check the then current ORION system [**].
COMPANY must ship the most current version of any Product within [**] days of
the Product's release as defined in the ORION system and COMPANY shall not ship
such Product's previous version(s) after the [**] day exhaust period. MSLI
reserves the right, in its sole discretion, to immediately recall any specific
Product(s) Release, Version(s) Release and/or Update(s) Release, and COMPANY
shall immediately cease any specific Product(s) Release, Version(s) Release
and/or Update(s) Release replication, assembly, and/or distribution. If MSLI
removes a Product, from the ORION system, MSLI may, at its sole discretion,
require that COMPANY return all documentation and information required by
COMPANY to replicate and assemble the Product(s), including, but not limited to
the ARK(s), FDR(s), and Kit(s). MSLI reserves the right to change BOM Components
prior to the point that a Product achieves "active" status in ORION and MSLI
shall not be held liable to COMPANY for any expenses incurred by COMPANY based
upon COMPANY's reliance on any BOM or BOM Component before such BOM or BOM
Component achieves such "active" status.

(d) COMPANY shall not in any way modify the content of BOM(s), disks, Product
Documentation and/or Product Software without the express written permission
of MSLI.

(e) COMPANY must ship a Microsoft [**] to Customers with each Product packet,
unless otherwise specified in the ORION BOM viewer or with written authorization
from COMPANY's OEM Operations Account Manager. [**]. All [**] ordering and
receiving, scanning, security, tracking and tracing accountability must be
performed by COMPANY and may not be subcontracted to any entity.

(f) COMPANY shall perform Replication Services, (including, but not limited
to the reproduction, duplication, copying or otherwise permitting the assembly
of Product), only at the locations identified on Exhibit D. All replication
and/or assembly locations approved by MSLI are shown on Exhibit D. Additional
COMPANY and/or COMPANY subsidiary locations may be added to Exhibit D, but the
addition of such locations is subject to MSLI's prior written approval and, in
the case of a COMPANY subsidiary, the full execution of the COMPANY subsidiary
agreement between MSLI and such COMPANY subsidiary as shown on Exhibit E.
COMPANY guarantees its subsidiary's fulfillment of the applicable obligations
imposed on COMPANY by this Agreement. COMPANY agrees to indemnify MSLI and its
suppliers for all damages and/or costs of any kind, without limitation, incurred
by MSLI, its suppliers, or any third party and caused by a breach of its
subsidiary's fulfillment of the applicable obligations imposed on COMPANY by
this Agreement, including, but not limited to, COMPANY's payment of any costs,
fees and/or monetary judgments awarded in favor of MSLI or its suppliers by a
court of competent jurisdiction, resulting from COMPANY subsidiary's
unauthorized replication and/or distribution of Product(s).

(g) COMPANY may use a sub-contractor for the replication, assembly and
distribution of Product ("Sub-contractor") only if all of the following required
conditions are met:

(i) Prior to Sub-contractor performing such services, COMPANY and its Sub-
contractor enter into a written agreement ("Sub-contractor Agreement") that
expressly provides that MSLI is a third party beneficiary of the
Sub-contractor Agreement with rights to enforce such agreement; that MSLI, at
its sole discretion, reserves the right to evaluate the Sub-contractor,
either in person or in written form; and further requires Sub-contractor to:

a) comply with obligations identical to those imposed on COMPANY by
Sections 4, 6, 7, 8, 9, 13(a), and 15, and

8
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

b) halt reproduction of Product as required under Section 6(a) of this
Agreement or upon notice from COMPANY or MSLI of the termination or
expiration of this Agreement, and

c) send [**] records to COMPANY at least [**] as required under Section
4(d) of this Agreement; and

d) pay MSLI or COMPANY's attorneys' fees if COMPANY or MSLI employs
attorneys to enforce any rights arising out of the Sub-contractor
Agreement; and

(ii) COMPANY guarantees its Sub-contractor's fulfillment of the applicable
obligations imposed on COMPANY by this Agreement; and

(iii) COMPANY indemnifies MSLI and its suppliers for all damages and/or
costs of any kind, without limitation, incurred by MSLI, its suppliers, or
any third party and caused by a breach of the Sub-contractor Agreement by a
Sub-contractor and/or Sub-contractor's fulfillment of the applicable
obligations imposed on COMPANY by this Agreement, including, but not limited
to, COMPANY's payment of any monetary judgments awarded to MSLI or its
suppliers by a court of competent jurisdiction and any costs and fees
relating thereto, not paid by Sub-contractor, resulting from Subcontractor's
unauthorized replication, assembly and/or distribution of Product(s) in
accordance with the Sub-contractor Agreement; and

(iv) Prior to Sub-contractor performing such services, COMPANY provides
MSLI with a written certification, signed by a COMPANY officer, representing
and warranting that COMPANY is in compliance with the provisions of Sections
6(f) and 6(g) of this Agreement; and

(v) Prior to Sub-contractor performing such services, Sub-contractor
completes an MSLI Capabilities Assessment Profile; and

(vi) MSLI, in its sole discretion, approves such Sub-contractor prior to
Sub-contractor performing such services.

(h) COMPANY will not use any MSLI or Microsoft stationery, forms, or printed
material of any kind.

(i) COMPANY shall not copy or use the ORION software except as otherwise
specified in this Agreement. COMPANY agrees not to cause or permit the reverse
engineering, disassembly or decompilation of the ORION software. MSLI shall
retain all title, copyright and other proprietary rights in the ORION software.
COMPANY does not acquire any rights, express or implied in the ORION software,
other than those specified in this Agreement.

(j) COMPANY may not fulfill aftermarket OEM end user requests for manuals
and/or media without the prior written authorization of MSLI.

(k) Pursuant to this Agreement, COMPANY shall be authorized to order Product
masters only from MSLI or such mastering site(s) as are authorized by MSLI from
time to time at its sole discretion.

7. SPECIFIC DUTIES OF COMPANY.
--------------------------

(a) COMPANY will maintain a dedicated business group to manage Replication
Services for Customers and provide administrative support to MSLI.

9
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

(b) COMPANY shall produce Product and Product packaging in accordance with
the Specification provided with the BOM, ARK, FDR, and Kit or as otherwise
provided by MSLI. MSLI reserves the right to change such Specifications upon
notice to COMPANY.

(c) COMPANY shall maintain [**] at each [**] location sufficient to [**] of
any materials [**] or in any way [**]. In addition, COMPANY shall [**] that are
[**], including, but not limited to, [**] used by COMPANY [**].

(d) COMPANY shall perform its obligations pursuant to this Agreement in
accordance with the MSLI/OEM Authorized Replicator Policies and Procedures
Manual. The MSLI/OEM Authorized Replicator Policies and Procedures Manual may be
modified by MSLI from time to time in its sole discretion and shall be effective
upon ten (10) calendar days' prior notice to COMPANY.

(e) COMPANY shall purchase POAs, as determined by MSLI, from MSLI or an MSLI
approved vendor or its agent. COMPANY shall maintain in its inventory sufficient
quantities of POAs as are required to fulfill Product orders pursuant to the
terms of this Agreement.

(f) COMPANY will not enter into any agreement, contract, or arrangement with
any government or government representative or with any person, firm,
corporation, partnership or other enterprise imposing legal obligations or
liability of any kind whatsoever on MSLI. Without limiting the generality of the
foregoing, COMPANY agrees that it will not sign MSLI's name or the name of any
of its suppliers to any commercial paper, contract, or other instrument, and
will not contract any debt or enter into any agreement, either express or
implied, binding MSLI or any of its suppliers to the payment of money and/or in
any other
regard.

(g) COMPANY shall have no right to make any representations or warranties or
otherwise cause its Customers to believe that any warranty is applicable to any
Product, except as is provided in writing by MSLI. COMPANY hereby agrees to
indemnify and hold MSLI and its suppliers harmless from any expenses which MSLI
or its suppliers may incur arising out of or resulting from any warranty or
representation by COMPANY other than a warranty in conformity with MSLI's then
current express written warranty. Unless COMPANY obtains the prior written
consent of MSLI, COMPANY shall not, in connection with the sale of Products, use
any advertising, promotional material or other literature other than those
contained in such materials and literature as MSLI may provide.

(h) COMPANY shall not pledge the credit of MSLI or its suppliers, execute or
vary the terms of any agreement on behalf of MSLI or any of its suppliers,
commit any unlawful act in connection with this Agreement, or represent that
COMPANY has the authority to do any of the foregoing.

(i) COMPANY shall install and use the MSLI ORION system in accordance with
the instruction provided by MSLI from time to time. COMPANY shall have [**]
people trained and certified on the proper use of ORION at all times.

(j) As of the Effective Date and at each CD-ROM and DVD-ROM Mastering and
Replication site identified on Exhibit D, Company shall include on all product
CD-ROM and DVD-ROM media, Source Identification ("SID") codes in accordance with
the specifications, requirements, and procedures of the International
Federation of the Phonographic Industry ("IFPI"). The IFPI SID codes shall
appear on every Product CD-ROM and DVD-ROM media produced, which consists of a
set of codes representing (a) the mastering site and (b) the replication site.
Each replicated Product CD-ROM and DVD-ROM shall have the two codes visible on
the disc. In accordance with the requirements of the MSLI/OEM Authorized
Replicator Policy and Procedures Manual, COMPANY agrees to provide MSLI with a
report identifying

10
<PAGE>

the IFPI Mastering and Replication SID codes allotted to each Mastering and
Replication site identified on Exhibit D.

(k) Prior to adding DVD Mastering and/or Replication sites to Exhibit D,
COMPANY, COMPANY subsidiary and/or Sub-Contractor shall be specifically approved
and certified by MSLI to perform Replication Services for any Microsoft Product
using DVD format and technology.

(1) Prior to COMPANY, COMPANY subsidiary or Sub-contractor performing any
services (including, but not limited to, replication, assembly or distribution)
for a third party that in any way involves Microsoft Product(s), COMPANY agrees
to determine whether the executable file names found on the deliverables
provided to COMPANY from such third party include any Microsoft Product
executable file names as found on a list provided by MSLI in the attached
Exhibit H which may be updated by MSLI from time to time. In the event such
Microsoft Product executable file names are found on the deliverables provided
to COMPANY from such third party, COMPANY shall (i) require that such third
party represent and warrant that it has a valid license right from MSLI to
perform such services and (ii) notify MSLI of such request and indicate the name
of such third party. The obligations of this Section 7(1) shall not apply to
such requests from (i) MSLI, (ii) OEMs with valid MSLI licenses for such
Product(s) as reflected in the ORION system, or (iii) another MSLI Authorized
Replicator confirmed by MSLI to have a current and valid license agreement.

(m) COMPANY must add its printer identification code supplied by MSLI to the
copyright page of all Microsoft Product manuals and CD-ROM and DVD-ROM booklets.
For such purpose only, COMPANY is granted the right to alter the copyright page
of the manual contained in the FDR supplied by MSLI. COMPANY must add the
appropriate authorized stamper provider hologram codes and CD site codes as
supplied by MSLI to applicable CD-ROM media or DVD-ROM media. These procedures
and specifications are described in detail in the MSLI/OEM Authorized Replicator
Policies and Procedures Manual.

(n) COMPANY must represent and warrant that the software, hardware, and
firmware used by it and all of its subcontractors, agents, and/or third parties,
in such parties' business and/or in their relationships with MSLI will be Year
2000 Compliant. The term "Year 2000 Compliant", as used in the preceding
sentence, shall mean that no operational, financial, data transmission,
communication or process is affected or interrupted by dates prior to, during or
after the Year 2000, and in particular, but without prejudice to the generality
of the foregoing that:

(i) No value for current date will cause any interruption in operation;

(ii) All manipulations of time related data will produce the required
results for all valid data values prior to, during and after the Year 2000;

(iii) If the date elements in interfaces and data storage specify the
century, they will permit specifying the correct century either explicitly or
by unambiguous algorithms or inferencing rules; and where any date element is
represented without a century, the correct century shall be unambiguous for
all manipulations involving that element;

(iv) Year 2000 must be recognized as a leap year.

8. QUALITY.
-------

(a) COMPANY shall maintain Product quality standards that meet or exceed
those applicable quality standards which MSLL defines for media replication,
printed materials, packaging, and assembly as set forth in the MSLI/OEM
Authorized Replicator Policies and Procedures Manual. At any time, MSLI may
rescind authorization for a particular COMPANY replication and/or assembly
location or particular Product if MSLI determines, in its sole discretion, that
Product reproduced and/or assembled at such location does not meet MSLI's
standards.

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<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

(b) Prior to shipment of Product, COMPANY shall submit for approval [**]
copies of Product in final finished goods form based upon the BOM and
Specifications (including Product Software, Product diskette and/or CD-ROM and
DVD-ROM label(s), Product Documentation and Product packaging) to their
respective MSLI OEM Operations Account Manager for each new and/or custom
Product replicated, assembled, and/or distributed at each of the sites
identified on Exhibit D pursuant to the license grant in Sections 2(a) and 2(b)
of this Agreement. COMPANY shall, upon request, provide MSLI samples of all
COMPANY literature which uses Product name(s).

(c) COMPANY agrees to indemnify (including associated costs of legal fees and
expenses of defense), defend and hold MSLI and its suppliers harmless from and
against (a) any claim by a Customer attributable to COMPANY's performance of
Replication Services for a Customer pursuant to the rights granted under this
Agreement including, but not limited to, COMPANY's replication, assembly, and/or
distribution processes or (b) any claim by any third party that COMPANY's
performance of all or any portion of the Replication Services, pursuant to the
rights granted under this Agreement, infringes such third party's patent,
copyright, trade secret and/or any other intellectual property right with
respect to COMPANY's replication, assembly, and/or distribution processes.

9. INTELLECTUAL PROPERTY NOTICES.
-----------------------------

(a) COMPANY will not remove any copyright, trademark or patent notices that
appear on Product as delivered to COMPANY. COMPANY shall cause to appear on the
title page of each volume of OEM's supplemental documentation, if any, and at
any other location where any copyright, patent or trademark notice appears, the
Microsoft and, if applicable, third party copyright, patent or trademark notices
that appear in the release of the corresponding Product Documentation provided
by MSLI.

(b) COMPANY shall use the appropriate trademark, Product descriptor and
trademark symbol (either "(TM)" or "(R)"in a superscript), and clearly indicate
Microsoft's or applicable third party's ownership of its trademark(s) whenever
Product name is first mentioned in any advertisement, brochure or in any other
manner in connection with COMPANY's Replication Services. COMPANY shall not, at
any time, use any name or trademark confusingly similar to a Microsoft or
licensed third party trademark, trade name and/or product name or in connection
with Product and agrees that its use of such trademark(s), trade name(s) and/or
product name(s) shall not directly or indirectly create in or for COMPANY any
right, title or interest therein. COMPANY shall undertake no action that will
interfere with or diminish Microsoft's right, title and/or interest in
Microsoft's or licensed third party's trademark(s), trade name(s) or Product
name(s). COMPANY shall, upon request, provide MSLI with samples of all COMPANY
literature which uses Microsoft's, MSLI's or Product name(s).

10. PROHIBITION AGAINST ASSIGNMENT AND SUBLICENSE. COMPANY shall not assign or
---------------------------------------------
sublicense this Agreement and/or any rights or obligations hereunder (by actual
assignment or by operation of law, including without limitation through a
merger, consolidation, exchange of shares, or sale or other disposition of
assets, including disposition on dissolution), except as is otherwise provided
pursuant to Sections 6(f) and 6(g) of this Agreement.

11. TERM OF AGREEMENT. The term of this Agreement shall begin on the Effective
-----------------
Date and end August 31, 2000.

12. DEFAULT AND TERMINATION.
------- --- -----------

(a) The non-defaulting party may terminate this Agreement if any of the
following events of default occur: (i) if either party materially fails to
perform or comply with this Agreement or any provision hereof, or (ii) if either
party fails to strictly comply with the provisions of Section 15 or makes an
assignment in

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Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

violation of Section 10. MSLI may, at its sole discretion, immediately terminate
this Agreement if MSLI determines that COMPANY, COMPANY subsidiary and/or
COMPANY Sub-contractor is or has been involved in the unauthorized replication
and/or distribution of Product(s). MSLI may, at its sole discretion, immediately
terminate COMPANY's right to subcontract the replication and/or assembly of
Product(s), in accordance with Sections 6(f) and 6(g) of this Agreement, to
COMPANY subsidiary and/or Sub-contractor if MSLI determines that COMPANY
subsidiary and/or COMPANY Sub-contractor, as the case may be, is or has been
involved in the unauthorized replication and/or distribution of Product(s) or
any third party products.

(b) Termination due to a breach of Sections 4, 6(e), 6(f), 6(g), 10 and 15
shall be effective upon notice. In all other cases, termination shall be
effective [**] after notice of termination to the defaulting party if the
default(s) has not been cured within such [**] period. The rights and remedies
of the parties provided herein shall not be exclusive and are in addition to any
other rights and remedies provided by law or this Agreement.

(c) In addition to and without waiving all other termination rights, MSLI may
immediately and temporarily suspend the rights granted to COMPANY in the event
COMPANY fails to perform Replication Services in accordance with the BOM, the
Specifications, and the MSLI/OEM Authorized Replicator Policy and Procedures
Manual. In such case, MSLI shall, within [**] from the date of MSLI's temporary
suspension notice to COMPANY, send an MSLI manager to COMPANY's manufacturing
location(s) to inspect and review COMPANY's Replication Services processes in
accordance with Sections 4(i) and 4(j) of this Agreement. Within [**] from the
conclusion of such review/inspection MSLI shall provide COMPANY with a
corrective action plan. Upon the successful completion of the corrective action
plan in accordance with the schedule identified therein, as determined solely by
MSLI, the rights granted to COMPANY under this Agreement shall be reinstated.

(d) In the event of COMPANY's default, MSLI may terminate this Agreement in
its entirety, or as to any individual Product(s), and/or as to any COMPANY
replication, assembly, and/or distribution location(s). Termination of this
Agreement as to any particular Product(s) or as to any COMPANY replication,
assembly, and/or distribution location(s) will not affect the terms and
conditions of this Agreement as they apply to other Product(s), or as to any
other COMPANY replication, assembly, and/or distribution location(s).

13. OBLIGATIONS UPON TERMINATION.
----------------------------

(a) Within [**] after termination or expiration of this Agreement, COMPANY
shall, at MSLI's option, either return to MSLI all Microsoft and MSLI [**] in
Company's possession or under its control supplied by MSLI to COMPANY under this
Agreement, [**] attached hereto as Exhibit F signed by an officer of the COMPANY
indicating such destruction.

(b) Sections 4, 14, 15, and 19(a), and the indemnification and liability
provisions of Sections 6(f), 6(g), 7(g), and 8(c) shall survive termination or
expiration of this Agreement.

14. LIMITATION OF LIABILITY AND REMEDY.
----------------------------------

(a) MSLI's liability to COMPANY under any provision of this Agreement shall
be limited to [**]. MSLI's limitation of liability is cumulative with all MSLI's
expenditures being aggregated to determine satisfaction of the limit. The
existence of claims or suits against more than one Product licensed under this
Agreement will not enlarge or extend the limit. COMPANY releases MSLI from all
obligations, liability, claims or demands in excess of the limitation. The
parties acknowledge that other parts of this Agreement rely upon the inclusion
of this Section 14.

13
<PAGE>

(b) MSLI shall not be liable to COMPANY for costs or losses which COMPANY
incurs due to the failure by a Customer to pay for Product, nor due to Product
inventory held by COMPANY for any Customer to which COMPANY is unable to deliver
such Product inventory due to termination of the respective Customer Agreement,
expiration of the respective Customer Agreement, removal of Product(s) from the
ORION system, or as a result of Customer's placement on shipment hold.

(c) In no event shall MSLI be liable for any indirect, incidental, special
or consequential damages, or damages for loss of profits, revenue, data or use,
incurred by COMPANY or any third party in connection with use of the ORION
software, whether in action in contract or tort, even if the other party has
been advised of the possibility of such damages.

ANY AND ALL MSLI OR MICROSOFT WARRANTIES OF ANY KIND WHATSOEVER, INCLUDING THOSE
FOR MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT
OF INTELLECTUAL PROPERTY, ARE EXPRESSLY EXCLUDED. COMPANY AGREES NEITHER MSLI
NOR MICROSOFT SHALL BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT,
ECONOMIC OR PUNITIVE DAMAGES, EVEN IF MSLI OR MICROSOFT HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.

15. NONDISCLOSURE AGREEMENT. COMPANY shall keep confidential any information
-----------------------
provided by MSLI or its suppliers to COMPANY (including, but not limited to the
Specifications, BOMs, ARKs, FDRs, Kits and all information made available to
COMPANY through the MSLI ORION system), the terms and conditions of this
Agreement, any disclosures made by MSLI or its suppliers to COMPANY which by the
nature of the disclosure ought to be treated as confidential, and other
nonpublic information and know-how disclosed to COMPANY by MSLI, Microsoft or
any of its subsidiaries. However, COMPANY may disclose the terms and conditions
of this Agreement in confidence to its immediate legal and financial consultants
as required in the ordinary course of COMPANY's business.

16. NOTICES AND REQUESTS. All notices, authorizations, and requests in
--------------------
connection with this Agreement shall be deemed given on the day they are (i)
deposited in the U.S. mails, postage prepaid, certified or registered, return
receipt requested; or (ii) sent by air express courier, charges prepaid; and
addressed as follows:

COMPANY: Modus Media International
40 Burris Ct.
Palos Heights, Illinois 60463
Attention: Dan Dunne
Telephone: 708-371-7639
Fax: 708-371-8145

With Copy To:
COMPANY: Modus Media International
40 Burris CT.
Palos Heights, Illinois 60463
Attention: Dan Dunne
Telephone: 708-371-7639
Fax: 708-371-8145

BILL TO:
COMPANY: Modus Media International
40 Burris CT.
Palos Heights, Illinois 60463
Attention: Dan Dunne
Telephone: 708-371-7639

14
<PAGE>

Fax: 708-371-8145

SHIP TO:
COMPANY: Modus Media International
40 Burris Ct.
Palos Heights, Illinois 60463
Attention: Dan Dunne
Telephone: 708-371-7639
Fax: 708-371-8145

MSLI: MICROSOFT LICENSING, INC.
6100 Neil Road, Suite 100
Reno, NV 89511-1137 U.S.A.
Attention: Director, OEM Replication Group
Fax: +1-775-826-0506

With Copy To: MICROSOFT CORPORATION
One Microsoft Way
Redmond, WA 98052-6399, U.S.A.
Attention: Law & Corporate Affairs
OEM Operations Attorney
Fax: +1-425-936-7329

SHIPMENT
REPORTS: MICROSOFT LICENSING, INC.
6100 Neil Road, Suite 100
Reno, NV 89511-1137 U.S.A.
Attention: [COMPANY Name] Account Manager, OEM Replication Group
Phone: +1-775-823-5635
Fax: +1-775-826-0506

or to such other address as the party to receive the notice or request so
designates by written notice to the other.

17. CONTROLLING LAW; NO FRANCHISE.
-----------------------------

(a) This Agreement and all matters relating to this Agreement shall be
construed and controlled by the laws of the State of Washington, and COMPANY
consents to jurisdiction and venue in the state and federal courts sitting in
the State of Washington. Process may be served on either party in the manner set
Forth in Section 16 for the delivery of notices or by such other method as is
authorized by applicable law or court rule.

(b) Neither this Agreement, nor any terms and conditions contained herein,
shall be construed as creating a partnership, joint venture or agency
relationship or as granting a franchise as defined under the laws of the State
of Washington. The Fee described in Section 3 of this Agreement shall be
construed as a license fee for the rights granted in Section 2 of this Agreement
and not as a franchise fee.

18. ATTORNEYS' FEES. If either MSLI, its suppliers or COMPANY employs attorneys
---------------
to enforce any rights arising out of or relating to this Agreement, the
prevailing party shall be entitled to recover its reasonable attorneys' fees,
costs and other expenses.

15
<PAGE>

19. GENERAL.
-------

(a) Any Product delivered to the U.S. Government pursuant to solicitations
issued on or after December 1, 1995 is provided with commercial license rights
and restrictions. Any Product delivered to the U.S. Government pursuant to
solicitations issued prior to December 1, 1995 is provided with "Restricted
Rights" as provided for in FAR, 48 CFR 52.227-14 (JUNE 1987) or DFAR, 48 CFR
252.227-7013 (OCT 1988), as applicable. COMPANY is responsible for ensuring the
Product is marked with the "Restricted Rights Notice" or "Restricted Rights
Legend," as required. All rights not expressly granted are reserved.

(b) COMPANY acknowledges that Products, user manuals, and services acquired
hereunder are subject to the export control laws and regulations of the U.S.,
and any amendments thereof. COMPANY confirms that with respect to these
Products, user manuals, or services it will not export or re-export them,
directly or indirectly, either to (i) any countries that are subject to U.S.
export restrictions (currently including, but not necessarily limited to, Cuba,
Federal Republic of Yugoslavia (Serbia and Montenegro), Iran, Iraq, Libya, North
Korea, Sudan and Syria); (ii) any end user who COMPANY knows or has reason to
know will utilize them in the design, development or production of nuclear,
chemical or biological weapons; or (iii) any end user who has been prohibited
from participating in the U.S. export transactions by any federal agency of the
U.S. government. COMPANY warrants and represents that neither the U.S.A. Bureau
of Export Administration nor any other federal agency has suspended, revoked or
denied COMPANY's export privileges.

COMPANY further acknowledges that Product may include technical data subject to
export and re-export restrictions imposed by U.S. law and will comply with those
restrictions.

(c) This Agreement does not constitute an offer by MSLI and shall not be
effective until signed by both parties. Upon execution by both parties, all
prior Replication Agreement(s), including amendments thereto, between MSLI and
COMPANY shall terminate and this Agreement shall constitute the entire agreement
between the parties with respect to the subject matter hereof and merges all
prior and contemporaneous communications. It shall not be modified except by a
written agreement signed on behalf of COMPANY and MSLI by their respective duly
authorized representatives. Unless agreed to in a separate writing signed by
both parties, any statement appearing as a restrictive endorsement on a check or
other document which purports to modify a right, obligation or liability of
either party shall be of no force and effect.

(d) If any provision of this Agreement or license of any particular Product
shall be held by a court of competent jurisdiction to be illegal, invalid or
unenforceable, the remaining provisions and license for remaining Products, as
applicable, shall remain in full force and effect.

(e) No waiver of any breach of any provision of this Agreement shall
constitute a waiver of any prior, concurrent or subsequent breach of the same or
any other provisions hereof, and no waiver shall be effective unless made in
writing and signed by an authorized representative of the waiving party.

(f) The section headings used in this Agreement and the attached Exhibits are
intended for convenience only and shall not be deemed to supersede or modify any
provisions.

20. COMPANY'S GOVERNMENTAL APPROVAL OBLIGATIONS.
-------------------------------------------

(a) COMPANY shall, at its own expense, obtain and arrange for the maintenance
in full force and effect of all governmental approvals, consents, licenses,
authorizations, declarations, filings, and registrations as may be necessary or
advisable for the performance of all terms and conditions of this Agreement,
including, but not limited to, foreign exchange approvals, import and offer
agent licenses, fair trade approvals and all approvals which may be required to
realize the purposes of the Agreement. COMPANY warrants and represents that
Product(s) is importable into the country where the shipping address for COMPANY
(Section 16) is located and to the country to which Product may be distributed.

16
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

(b) If any necessary approvals are not or cannot be obtained within a
reasonable time in form and substance satisfactory to MSLI, or MSLI determines
that the Bureau of Export Administration or any other U.S. government agency
with jurisdiction over export controls has suspended, revoked, or denied
COMPANY's export privileges, MSLI may immediately terminate this Agreement, and
upon receipt of such notice by COMPANY, this Agreement shall be null, void and
of no effect.

21. EXHIBITS.
--------

The following exhibits, as amended from time to time, are incorporated into this
Agreement by this reference ("Exhibits"):

Exhibit A, Weekly Product Shipment Reconciliation Report Process
Exhibit B, Territory
Exhibit C, Fees
Exhibit D, Replication, Assembly and/or Distribution Sites
Exhibit E, COMPANY Subsidiary Agreement
Exhibit F, Certificate of Microsoft and MSLI [**]
Exhibit G, POA Reconciliation Report
Exhibit H, File Listing

17
<PAGE>

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set
forth above. All signed copies of this Agreement shall be deemed originals.

MICROSOFT LICENSING, INC. COMPANY

/s/ Mark Roenigk /s/ Terence M. Leahy
- ------------------------------- ------------------------------------
By (Sign) By (Sign)

Terence M. Leahy
- ------------------------------- ------------------------------------
Mark Roenigk (Print) Name (Print)

Director - OEM Operations Chairman and Chief Executive Officer
- ------------------------------- ------------------------------------
Title Title

November 22, 1999 November 12, 1999
- ------------------------------- ------------------------------------
Date Date

18
<PAGE>

Confidential Material omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

EXHIBIT A - WEEKLY PRODUCT SHIPMENT RECONCILIATION REPORT PROCESS
-----------------------------------------------------------------

[**] Audit Procedure:
1) [**] COMPANY will use the [**] to
generate a report of all the [**] during the
previous [**].
. To run this report COMPANY should:
. Enter the [**] and select the [**]
--------------------
link
. Select [**] from the [**] drop down menu
. Enter the previous [**] into the (Start) fields
. Enter the previous [**] into the (End) fields

2) COMPANY will use the Report generated [**] against a similar report from the
COMPANY's internal system.

. COMPANY's internal data should [**]

3) [**] Procedure: if COMPANY finds a [**], COMPANY should [**] that need to
be [**] on the Fax cover sheet or the Email itself. These [**] on the [**]
containing the [**]. At a minimum the [**] request should contain the
following information:

. [**]
. [**]
. [**]
. [**]
. [**]

4) A copy of the [**] Submitted Report must be [**] evening (Pacific Time).
. Once the [**] has been [**], COMPANY should [**].
. A signed report should be [**].
. [**]
. The Fax Cover Sheet, or the email, should contain the following
information:
. From: [**]
. To: [**]
. AR: [**]
. Certified By: [**]
. Start/End: Dates Covered by the SUBMITTED Report
(mm/dd/yy - mm/dd/yy)

Email Transmission of the [**]:
These reports will be considered [**] and MSLI will consider them as having been
validated against the [**].
. COMPANY should [**]
. COMPANY should [**]
. COMPANY should [**]

Exhibit to the Replication Agreement dated September 1, 1999, between Microsoft
Licensing, Inc. and Modus Media International, Inc.

19
<PAGE>

EXHIBIT B - TERRITORY
---------------------

COMPANY's territory shall be worldwide*

*Excludes Turkey

Exhibit to the Replication Agreement dated September 1, 1999, between Microsoft
Licensing, Inc. and Modus Media International, Inc.

20
<PAGE>

Confidential material omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

EXHIBIT C - FEES
----------------
Regional Market(s) Annual Fee
- ------------------ ----------

COMPANY's territory shall be worldwide* [**]

* Excludes Turkey

Exhibit to the Replication Agreement dated September 1, 1999, between Microsoft
Licensing, Inc. and Modus Media International, Inc.

21
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

EXHIBIT D - REPLICATION, ASSEMBLY AND/OR DISTRIBUTION SITES
-----------------------------------------------------------

The locations listed on this Exhibit represent the only authorized location(s)
for the replication, assembly and/or distribution of Product(s) pursuant to this
Agreement. Each location listed below shall be limited only to the performance
of the "Site Functions" so indicated.

COMPANY NAME: Modus Media International_____________________________________
ADDRESS: 40 Burris Ct._________________________________________________
Palos Heights, Illinois 60463 ________________________________
______________________________________________________________
CONTACT NAME: Dan Dunne_____________________________________________________
TELEPHONE: 708-371-7639

<TABLE>
<S> <C>
SITE FUNCTION: [_] PRINTING/BINDING [_] DISK-DUPE [_] CD-ROM Mastering [X] Central AR Contact at

[_] CD-ROM Replication [_] Assembly [_] Distribution [_] Firm Output House
</TABLE>

Modus Media - NORTH AMERICA

COMPANY NAME: Modus Media International Fremont.____________________________
ADDRESS: 44250 Osgood Rd_______________________________________________
Fremont, CA 94539_____________________________________________
______________________________________________________________
CONTACT NAME: John Noon_____________________________________________________
TELEPHONE: 510 438-6945

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>

COMPANY NAME: Modus Media International_____________________________________
ADDRESS: 1545 South 4800 West__________________________________________
Salt Lake City, Utah__________________________________________
______________________________________________________________
CONTACT NAME: Joe Ardovino__________________________________________________
TELEPHONE: 801-43 1-2113

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>

Exhibit to the Replication Agreement dated September 1, 1998, between Microsoft
Licensing, Inc. and Modus Media International, Inc.

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

COMPANY NAME: Modus Media International Nampa_______________________________
ADDRESS: 1823 N. Elder_________________________________________________
Nampa, Idaho__________________________________________________
______________________________________________________________
CONTACT NAME: Todd Marrot___________________________________________________
TELEPHONE: 208-465-0317

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>

COMPANY NAME: Modus Media International.____________________________________
ADDRESS: 500 South 500 West____________________________________________
Lindon, UT. 84042_____________________________________________
______________________________________________________________
CONTACT NAME: Ken Rees______________________________________________________
TELEPHONE: 801-431-4196

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>

COMPANY NAME: Modus Media International Raleigh.____________________________
ADDRESS: 501 Innovation Avenue_________________________________________
Morrisville, NC 27560_________________________________________
______________________________________________________________
CONTACT NAME: Adrienne Jeffreys/Damon Crumb_________________________________
TELEPHONE: 919 405 4475

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>

Modus Media -ASIA/PACIFIC

COMPANY NAME: Modus Media International Australia Pty Ltd___________________
ADDRESS: 165-175 Mitchell Road_________________________________________
Alexandria NSW 2015, Australia________________________________
______________________________________________________________
CONTACT NAME: Leanne Amezdroz_______________________________________________
TELEPHONE: 612 9565-6027_________________________________________________

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>

COMPANY NAME: Modus Media Japan K.K.________________________________________
______________________________________________________________
ADDRESS: 1031 Kawaraguchi; Ebina-shi; Kenagawa, Japan__________________
CONTACT NAME: Shigeo Takeuchi_______________________________________________
TELEPHONE: 81 462 34 5086________________________________________________

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

COMPANY NAME: Modus Media International Pte Ltd_____________________________
ADDRESS: 51 Ubi Avenue 3_______________________________________________
Singapore 408858______________________________________________
______________________________________________________________
CONTACT NAME: Terry Goy_____________________________________________________
TELEPHONE: 65 740 4614___________________________________________________

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>

COMPANY NAME: Modus Media International Pte Ltd. Taiwan Branch______________
ADDRESS: Suite 408, No. 351 Chungshan Road, Section 2__________________
Chung Ho, Taipei Hsien, Taiwan________________________________
______________________________________________________________
CONTACT NAME: Dai-En Yu_____________________________________________________
TELEPHONE: 886 2 323 49588 ext. 363______________________________________

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>

COMPANY NAME: Modus Media International c/o Shenzhen Donnelley Bright Sun
Printing Co., Ltd.____________________________________________
ADDRESS: Wu He Da Dao Bantian Industrial Zone__________________________
Shenzhen 518129 Peoples Republic of China_____________________
CONTACT NAME: Fostor Foong__________________________________________________
TELEPHONE: 86-755-889-3655_______________________________________________

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>

EUROPE

COMPANY NAME: Modus Media International France______________________________
ADDRESS: 11, Avenue Buffon_____________________________________________
BP 6509_______________________________________________________
45065 Orleans Cedex 2, France_________________________________
CONTACT NAME: Christine Bidaou______________________________________________
TELEPHONE: +33 2 38 494158_______________________________________________

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

COMPANY NAME: Modus Media International Dublin______________________________
ADDRESS: Clonshaugh Industrial Estate__________________________________
Dublin 17_____________________________________________________
Ireland_______________________________________________________
CONTACT NAME: Keith Higgins
TELEPHONE: 011 353 1 8879722_____________________________________________

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>

COMPANY NAME: Modus Media International Kildare_____________________________
ADDRESS: Monasterevin Road_____________________________________________
Kildare Town, Co. Kildare_____________________________________
Ireland_______________________________________________________
CONTACT NAME: Mary Armstrong________________________________________________
TELEPHONE: +353 455 27214________________________________________________

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>

COMPANY NAME: Modus Media International Netherland__________________________
ADDRESS: Landdrostlaan 51______________________________________________
7327 GM Apeldoorn_____________________________________________
The Netherlands_______________________________________________
CONTACT NAME: Edward McEwan_________________________________________________
TELEPHONE: +31 555 434667________________________________________________

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>

COMPANY NAME: Modus Media International Ltd. Cumbemauld UK__________________
ADDRESS: 6 Grayshill Road______________________________________________
Westfield Industrial Estate, Westfield
Cumbernauld G68 9HQ, UK_______________________________________
CONTACT NAME: Sharon Mandeville_____________________________________________
TELEPHONE: +44 1 236 456124______________________________________________

<TABLE>
<S> <C>
SITE FUNCTION: [**]
</TABLE>
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

<TABLE>
<S> <C>
COMPANY NAME: Modus Media International Limerick____________________________________________
ADDRESS: McLaughlin Road_______________________________________________________________
Plessey Technology Pk
Castletroy, Limerick__________________________________________________________
Ireland_______________________________________________________________________
CONTACT NAME: Paddy Mulreid_________________________________________________________________
TELEPHONE: +353 61 485500________________________________________________________________

SITE FUNCTION: [**]

COMPANY NAME: Modus Media International France______________________________________________
ADDRESS: Rue de la Nouette
ZI Angers Beaucouze
49070 BEAUCOUZE
France

CONTACT NAME: Stephane Couratier____________________________________________________________
TELEPHONE: 0033241220400_________________________________________________________________

SITE FUNCTION: [**]

SUBCONTRACTORS - NORTH AMERICA

COMPANY NAME: [**]
ADDRESS: [**]
CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]
</TABLE>
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

<TABLE>
<S> <C>
COMPANY NAME: [**]
ADDRESS: [**]
CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

</TABLE>

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

<TABLE>
<S> <C>
COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

</TABLE>

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

<TABLE>
<S> <C>
COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

</TABLE>

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS:

CONTACT NAME: [**]

SITE FUNCTION: [**]

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

SUBCONTRACTORS - ASIA

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

[**]

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE:

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

SUBCONTRACTORS - EUROPE

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

COMPANY NAME: [**]
ADDRESS: [**]

CONTACT NAME: [**]
TELEPHONE: [**]

SITE FUNCTION: [**]

Exhibit to the Replacement Agreement dated September 1, 1998, between Microsoft
Licensing, Inc. and Modus Media International, Inc.
<PAGE>

EXHIBIT E
---------
COMPANY SUBSIDIARY AGREEMENT
------------------ ---------

For good and valuable consideration, __________________, a corporation of
____________________ ("COMPANY Subsidiary") hereby covenants and agrees with
Microsoft Licensing, Inc., a Nevada, U.S.A. corporation ("MSLI"), that COMPANY
Subsidiary will comply with all obligations of __________________,a corporation
of ____________________ ("COMPANY") pursuant to that certain Replication
Agreement (License #___________) between MSLI and COMPANY dated
__________________ (the "Agreement").

COMPANY Subsidiary acknowledges that its agreement herein is a condition
for COMPANY Subsidiary to exercise any of the rights sub-licensed by COMPANY to
COMPANY Subsidiary pursuant to the terms of the Agreement.

Capitalized terms used herein and not otherwise defined shall have the same
meaning as in the Agreement.

IN WITNESS WHEREOF, COMPANY Subsidiary has executed this agreement as of the
date set forth below. All signed copies of this Agreement shall be deemed
originals.

________________________________
(COMPANY Subsidiary)

________________________________
Signature

________________________________
Name (Print)

________________________________
Title

________________________________
Date

Exhibit to the Replication Agreement dated September 1, 1999, between Microsoft
Licensing, Inc. and Modus Media International, Inc.

<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

EXHIBIT F
---------
CERTIFICATE OF MICROSOFT AND MSLI [**]
----------------------------------------

By signatory exercise of this Exhibit F, COMPANY asserts that it has fulfilled
its obligations under Section 13(a) of the Agreement (Obligations Upon
Termination) [**] by an MSLI authorized COMPANY Sub-contractor, all Microsoft
and MSLI [**].

COMPANY asserts that the Microsoft and MSLI [**]:

Site _________________________________________
Address _________________________________________
_________________________________________
[**] _________________________________________

[**], list part number and number range.

IF Microsoft or MSLI [**], including all quantities.

If Microsoft Product, list Product Category, Language, Dialect, and Item/Number,
including all quantities.

COMPANY Officer's authorized signature:

________________________________
By (Sign)

________________________________
Name (Print)

________________________________
Title

________________________________
Date

Exhibit to the Replication Agreement dated September 1, 1999, between Microsoft
Licensing, Inc. and Modus Media International, Inc.

41
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

EXHIBIT G
---------
POA RECONCILIATION REPORT
-------------------------

Please note: An individual Reconciliation Report must be completed for each type
of [**] that is used in the manufacture of Microsoft Products. Types of [**]
shall include, but may not be limited to, [**].

Name of Authorized Replicator and site location if appropriate:

___________________________________________________________________________

For the period of _______________________ through _________________________
(month/day/year) (month/day/year)

<TABLE>
<S> <C>
Number of [**] (*) in inventory on first date of month _____________________
Number of [**] (*) purchased from [**] Supplier this month
Number of [**] (*) purchased from another AR this month _____________________
Number of [**] (*) received from another COMPANY site this month
Number of [**] (*) this month (_____________________)
Number of [**] (*) transferred to another COMPANY site this month (_____________________)
Number [**] (*) transferred or sold to other ARs this month (_____________________)
Number of [**] (*) reported with OEM Product Shipments (_____________________)
Number of remaining [**] (*) in inventory on last day of month _____________________
</TABLE>

* = Type of [**]

NOTE: Exhibit G is required for each of the AR's manufacturing sites

Exhibit to the Replication Agreement dated September 1, 1999, between Microsoft
Licensing, Inc. and Modus Media International, Inc.

42
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

EXHIBIT H - FILE LISTING
------------------------

[**]

Exhibit to the Replication Agreement dated September 1, 1999, between Microsoft
Licensing, Inc. and Modus Media International, Inc.

43
<PAGE>

EXHIBIT I - REPLICATION SERVICES FOR MICROSOFT SIMPLIFIED CHINESE
-----------------------------------------------------------------
PRODUCTS
--------

1. COMPANY shall have the right to perform OEM Product Replication Services for
Customer(s) in the Territory with the limitations and responsibilities
identified in this Exhibit I.

2. For purposes of this Exhibit I only, the following Definitions shall have the
following meanings:

(a) "OEM Product", for the purposes of this Exhibit, shall mean only
simplified Chinese products.

(b) "Territory", for the purposes of this Exhibit, shall mean the
People's Republic of China.

3. COMPANY shall pay all applicable taxes in connection with the Product
Replication Services performed pursuant to this Agreement.

4. Notwithstanding any other provisions of the Agreement, MSLI and COMPANY
recognize that China's intellectual property legislation is of recent origin.
Local, Provincial, and National laws/regulations may impact the ability of
COMPANY to protect intellectual property policies of MSLI. MSLI agrees that
COMPANY will not have breached the security and intellectual property provisions
of the Agreement if COMPANY has taken the maximum reasonable recourse that is
available to COMPANY under Chinese law and practice. Management of COMPANY
and/or management of any of its affiliates shall immediately inform MSLI in
writing as soon as it becomes aware of a breach of this Agreement."
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

Amendment No. 1 to the Replication Agreement
between
MICROSOFT CORPORATION
and
MODUS MEDIA INTERNATIONAL, INC.

Microsoft Contract No.5475-5000021694

This Amendment No. I amends that certain Replication Agreement between Microsoft
Licensing, Inc. ("MSLI") and Modus Media International, Inc. ("COMPANY") dated
September 1, 1999 ("Agreement").

The parties agree to amend the Agreement as follows:

1. Section 1(d) is hereby amended and restated in its entirety as follows:

"(d) "COMPANY" shall include any subsidiary of COMPANY, provided that COMPANY
hereby guarantees its subsidiary's performance under this Agreement, the
subsidiary agrees in writing with COMPANY to be bound by the terms of this
Agreement, and that COMPANY provides written notice to MSLI of the name and
address of each subsidiary before the subsidiary exercises any rights under this
Agreement. A "subsidiary" is a company in which, on a class by class basis, more
than fifty percent (50%) of the stock entitled to vote for the election of
directors is owned or controlled by COMPANY, but only so long as such ownership
or control exists; EXCEPT THAT, FOR THE PURPOSES OF THIS AGREEMENT, MMI JAPAN
[CURRENTLY FORTY PERCENT (40%) OWNED BY MMI] CONSTITUTES A LEGITIMATE SUBSIDIARY
OF THE COMPANY AND ENJOYS ALL THE RIGHTS, RESPONSIBILITIES AND PRIVILEGES
ATTENDANT THERETO."

2. Section 1(y) is hereby amended and restated in its entirety as follows:

"(y) "Unaccounted Product(s)" shall be defined as [**] (A) [**] COMPANY,
COMPANY subsidiary, and/or Subcontractor, and (B) [**] (i) [**] COMPANY
COMPANY's Customers, (ii) the [**] COMPANY's inventory, and (iii) the [**]
COMPANY can [**] under this Agreement."

3. Section 2(a)(iii) of the Agreement is hereby amended and restated in its
entirety as follows:

"(iii) to use the ORION Software in object code form for internal purposes
only in the performance of Replication Services and distribution of Product(s).
COMPANY shall not subcontract the operation of, or sublicense the ORION Software
to any other entity. MSLI will make the ORION data download available to COMPANY
via Internet."

4. Section 3(a) of the Agreement is hereby amended by adding the following
language to the end of the Section:

"If MSLI and COMPANY mutually agree to terminate this Agreement without cause,
MSLI will work with COMPANY to facilitate a smooth transition from the program."

5. Section 4(b) of the Agreement is hereby deleted. Other subsections of
Section 4 will not be renumbered.

6. Section 4(c) of the Agreement is hereby amended and restated in its entirety
as follows:
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

"(c) COMPANY shall provide MSLI, upon request, with a manually-produced
report summarizing and identifying all information associated with the Customer
purchase order and corresponding COMPANY sales order relating to each shipment
of Microsoft Product to or from Customer. COMPANY is required to accept purchase
orders from OEMs and DSPs in written form. This includes written purchase
orders, faxed purchase orders, or EDI purchase orders. Purchase orders over the
phone are not allowed unless followed up with a written purchase order. All
purchase orders must contain at least the Customer name, the issue date, part
numbers, quantities, and a purchase order number. COMPANY is required to issue a
delivery note with each shipment. The delivery note must contain at least the
COMPANY name, the delivery date, the part numbers, quantities, and purchase
order number(s) from the OEM/DSP. Additionally, COMPANY shall provide MSLI, upon
request, with a manually produced report identifying the Customer purchase order
information associated with each return of Microsoft Product from Customer."

7. Section 4(d) of the Agreement is hereby amended and restated in its entirety
as follows:

"(d) COMPANY shall provide MSLI, upon request and within a time frame to be
mutually agreed to by the parties, with a manually produced report identifying
the [**] shipped during the month by Customer name, Customer license number,
Product(s) shipped, [**] associated with each Product, quantity of
shipment and date of shipment. The [**] reporting method, format, frequency
(e.g., monthly, weekly, daily), and information requested in this Section may be
modified from time to time at the sole discretion of MSLI."

8. Section 4(h) shall be deleted in its entirety and shall be replaced with the
following:

"(h) COMPANY shall maintain a computerized system of records to enable
COMPANY to identify the Customer receiving any copy of Product by the [**]
appearing on each copy of Product. For [**] records that are less than [**]
COMPANY shall make [**] records information available to MSLI within [**] hours
of such request. For [**] records that are more than [**],COMPANY shall make
[**] records information available to MSLI within [**] of such request. COMPANY
shall cooperate with MSLI to identify Customers based on [**] provided by MSLI."

9. Section 4(i) shall be deleted in its entirety and shall be replaced with the
following:

"(i) MSLI may cause an audit and/or inspection to be made of the Reports
and Records and any other applicable COMPANY, COMPANY subsidiary, and Sub-
contractor records replication, assembly, and distribution locations (identified
on Exhibit D) in order to verify COMPANY's compliance with the terms of this
Agreement and to verify statements issued by COMPANY. Any such audit shall be
made by an independent certified public accountant selected by MSLI (other than
on a contingent fee basis). Any such inspection shall be made by MSLI or a third
party designated by MSLI. Any audit and/or inspection shall be conducted during
regular business hours at COMPANY's offices with or without notice. COMPANY
agrees to provide MSLI's designated audit or inspection team access to relevant
COMPANY records and all replication and/or assembly locations. Any such audit
shall be paid for by MSLI unless material discrepancies are disclosed.
"Material" shall mean [**] of the actual units of Product shipped by
COMPANY to Customers as reported by COMPANY to MSLI within the audit period. If
material discrepancies are disclosed, COMPANY agrees to pay MSLI for the costs
associated with the audit."

10. Section 4(j) of the Agreement is hereby amended and restated in its entirety
as follows:

"(j) COMPANY shall be [**] (a) of the [**] (b) the number of [**] COMPANY
shall be [**] (a) [**] (b) the number of [**] COMPANY shall also be [**] COMPANY
subsidiary and Subcontractor. However, COMPANY shall be [**]
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

[**] in subsection 4(i) above or Products which [**]. COMPANY's [**] and is [**]
as provided by law or this Agreement."

11. Section 6(e) of the Agreement is hereby amended and restated in its
entirety as follows:

"(e) COMPANY must ship a Microsoft [**] to Customers with each Product
packet, unless otherwise specified in the ORION BOM viewer or with written
authorization from COMPANY's OEM Operations Account Manager. [**]. All [**]
ordering and receiving, scanning, security, tracking and tracing accountability
must be performed by COMPANY and may not be subcontracted to any entity without
MSLI's prior written approval."

12. Section 6(g) is hereby amended and restated in its entirety as follows:

"(g) COMPANY may use a sub-contractor for the replication, assembly and
distribution of Product ("Sub-contractor") only if all of the following
conditions are met:

(i) Prior to Sub-contractor performing such services, COMPANY and
its Sub-contractor enter into a written agreement ("Sub-contractor
Agreement") that expressly provides that MSLI is a third party beneficiary of
the Sub-contractor Agreement with rights to enforce such agreement; that
MSLI, at its sole discretion, reserves the right to evaluate the Sub-
contractor, either in person or in written form; and further requires Sub-
contractor to:

a) comply with obligations identical to those imposed on COMPANY
by Sections 4, 6, 7, 8, 9, 13(a), and 15, and

b) halt reproduction of Product as required under Section 6(a)
of this Agreement or upon notice from COMPANY or MSLI of the
termination or expiration of this Agreement, and

c) pay MSLI or COMPANY's attorneys' fees if COMPANY or MSLI
employs attorneys to enforce any rights arising out of the Sub-
contractor Agreement; and

(ii) COMPANY guarantees its Sub-contractor's fulfillment of the
applicable obligations imposed on COMPANY by this Agreement; and

(iii) COMPANY indemnifies MSLI and its suppliers for all damages
and/or costs of any kind, without limitation, incurred by MSLI, its
suppliers, or any third party and caused by a breach of the Sub-contractor
Agreement by a Sub-contractor and/or Sub-contractor's fulfillment of the
applicable obligations imposed on COMPANY by this Agreement, including, but
not limited to, COMPANY's payment of any monetary judgments awarded to MSLI
or its suppliers by a court of competent jurisdiction and any costs and fees
relating thereto, not paid by Sub-contractor, resulting from Subcontractor's
unauthorized replication, assembly and/or distribution of Product(s) in
accordance with the Sub-contractor Agreement; and

(iv) Prior to Sub-contractor performing such services, COMPANY
provides MSLI with a written certification, signed by a COMPANY officer,
representing and warranting that COMPANY is in compliance with the provisions
of Sections 6(f) and 6(g) of this Agreement; and

(v) Prior to Sub-contractor performing such services, Sub-contractor
completes an MSLI Capabilities Assessment Profile; and

(vi) MSLI, in its sole discretion, approves such Sub-contractor prior
to Sub-contractor performing such services.
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

In lieu of or in addition to the Sub-contractor Agreement, MSLI may, in its sole
discretion, require that the Sub-contractor execute a separate agreement with
MSLI that includes the same or similar provisions required in the Sub-contractor
Agreement. The foregoing conditions shall not apply to and COMPANY shall not be
responsible for acts or omissions of any sub-contractor which is an MSLI
Authorized Replicator."

13. Section 6(j) of the Agreement is hereby amended and restated in its entirety
as follows:

"(j) COMPANY may not distribute manuals and/or media on behalf of any OEM in
response to an end user request without the prior written approval of MSLI."

14. Section 7(a) of the Agreement is hereby amended and restated in its entirety
as follows:

"(a) COMPANY will provide a COMPANY contact to manage Replication Services
for OEMs and provide administrative support to MSLI."

15. Section 7(c) shall be deleted in its entirety and shall be replaced with the
following:

"(c) COMPANY shall maintain the [**] at each [**] location sufficient to [**]
of any materials [**] or in any way [**]. In addition, COMPANY shall [**] that
are [**]."

16. Section 7(d) of the Agreement is hereby amended by adding the following
language to the end of Section 7(d):

"MSLI will use commercially reasonable efforts to work with COMPANY when new
procedures involving Replication Services are requested. MSLI acknowledges that
changes to Replication Services procedures are made from time to time, which
require COMPANY to make such changes as quickly as possible. MSLI will work
closely with COMPANY to implement such required changes."

17. Section 7(e) shall be deleted in its entirety and shall be replaced with
the following:

"(e) COMPANY shall purchase [**], as determined by MSLI, from MSLI or an MSLI
approved vendor or its agent."

18. Section 7(f) of the Agreement is hereby amended and restated in its
entirety as follows:

"(f) COMPANY will not enter into any agreement, contract, or arrangement with
any government or government representative or with any person, firm,
corporation, partnership or other enterprise where such agreement, contract or
arrangement imposes legal obligations or liabilities of any kind whatsoever on
MSLI. Without limiting the generality of the foregoing, COMPANY agrees that it
will not sign MSLI's name to any commercial paper, contract, or other
instrument, and will not contract any debt or enter into any agreement, either
express or implied, binding MSLI to the payment of money and/or in any other
regard."

19. Section 7(1) of the Agreement is hereby amended and restated in its
entirety as follows:

"(l) Prior to COMPANY, COMPANY subsidiary or Sub-contractor performing any
services (including, but not limited to, replication, assembly or distribution)
for a third party that in any way involves Microsoft Product(s), COMPANY agrees
to determine whether the executable file names found on the deliverables
containing software code provided to COMPANY from such third party include any
Microsoft Product executable file names as found on a list provided by MSLI in
the attached Exhibit H
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

which may be updated by MSLI from time to time. In the event such Microsoft
Product executable file names are found on the deliverables provided to COMPANY
from such third party, COMPANY shall (i) require that such third party
represent and warrant that it has a valid license right from MSLI to perform
such services and (ii) notify MSLI of such request and indicate the name of such
third party. MSLI will make reasonable effort to inform COMPANY within twenty-
four (24) hours of receipt of such notification if such third party does not
have a valid license. The obligations of this Section 7(1) shall not apply to
such requests from (i) MSLI, (ii) OEMs with valid MSLI licenses for such
Product(s) as reflected in the ORION system, or (iii) another MSLI Authorized
Replicator confirmed by MSLI to have a current and valid license agreement."

20. Section 7(n) of the Agreement is hereby amended and restated in its entirety
as follows:

"(n) COMPANY must represent and warrant that the software, hardware, and
firmware used by it will be Year 2000 Compliant. The term "Year 2000 Compliant",
as used in the preceding sentence, shall mean that no operational, financial,
data transmission, communication or process is affected or interrupted by dates
prior to, during or after the Year 2000, and in particular, but without
prejudice to the generality of the foregoing that:

(i) No value for current date will cause any interruption in operation;

(ii) All manipulations of time related data will produce the required
results for all valid data values prior to, during and after the Year 2000;

(iv) Year 2000 must be recognized as a leap year."

21. Section 8(b) of the Agreement is hereby amended and restated in its
entirety as follows:

"(b) Prior to shipment of Product, COMPANY shall submit, for approval, [**]
copies of Product in final finished goods form based upon the BOM and
Specifications (including Product Software, Product diskette and/or CD-ROM and
DVD-ROM label(s), Product Documentation and Product packaging) to their
respective MSLI OEM Operations Account Manager for each new and/or custom
Product replicated, assembled, and/or distributed at each of the sites
identified on Exhibit D pursuant to the license grant in Sections 2(a) and 2(b)
of this Agreement. For purposes of this Section 8(b), "first-off" shall mean the
first time Product is produced in conformity with a particular combination of
BOM and Specifications. Any replication, assembly or distribution following a
change in BOM or Specifications shall give rise to first-off copy obligations
under this Section 8(b). COMPANY shall, upon request, provide MSLI samples of
all COMPANY literature which uses Product name(s)."

22. Section 8 of the Agreement is hereby amended by adding the following new
Section 8(d):

"(d) MSLI agrees to indemnify COMPANY against all costs, damages and expense
(including associated costs of reasonable legal fees and expenses of defense,
and defend and hold COMPANY harmless from and against any claim that a Product
infringes a patent, copyright or trademark of a third party in the United
States, European Common Market, Australia, New Zealand, Singapore, Japan, Taiwan
or South Korea, provided: (i) COMPANY promptly notifies MSLI upon receipt of
any claim or demand; and (ii) COMPANY permits MSLI, at its option, to assume
sole control of the defense of any action and all negotiations for settlement
and compromise, and fully assists MSLI to the extent reasonably required for
such defense, compromise or settlement."
<PAGE>

Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.

23. Section 10 of this Agreement is hereby amended and restated in its entirety
as follows:

"10. Prohibition Against Assignment and Sublicense. COMPANY shall not assign or
---------------------------------------------
sublicense this Agreement and/or any rights or obligations hereunder (by actual
assignment or by operation of law, including without limitation through a
merger, consolidation, exchange of shares, or sale or other disposition of
assets, including disposition on dissolution), except as is otherwise provided
pursuant to Sections 6(f) and 6(g) of this Agreement, or unless COMPANY receives
MSLI's prior written consent."

24. Section 13(b) of this Agreement is hereby amended and restated in its
entirety as follows:

"(b) Sections 4, 14, 15, and 19(a), and the indemnification and liability
provisions of Sections 6(f), 6(g), 7(g), 8(c) and 8(d) shall survive termination
or expiration of this Agreement."

25. The final paragraph (unnumbered and all in caps) in Section 14 of this
Agreement is hereby amended and restated in its entirety as follows:

"WITHOUT LIMITING SECTION 8(d) ABOVE, ANY AND ALL MSLI OR MICROSOFT
WARRANTIES OF ANY KIND WHATSOEVER, INCLUDING THOSE FOR MERCHANTABILITY
AND/OR FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT OF
INTELLECTUAL PROPERTY, ARE EXPRESSLY EXCLUDED. COMPANY AGREES THAT
NEITHER MSLI NOR MICROSOFT SHALL BE LIABLE FOR ANY CONSEQUENTIAL,
INCIDENTAL, INDIRECT, ECONOMIC OR PUNITIVE DAMAGES, EVEN IF MSLI OR
MICROSOFT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES."

26. Section 14 of this Agreement is hereby amended by adding the following new
Section 14(d):

"(d) COMPANY'S TOTAL LIABILITY AS TO MATTERS ARISING UNDER THIS
AGREEMENT SHALL BE LIMITED TO THE GREATER OF [**] PURSUANT TO THIS AGREEMENT.
MSLI AGREES THAT COMPANY SHALL NOT BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL,
INDIRECT, ECONOMIC OR PUNITIVE DAMAGES, EVEN IF MSLI HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES."

27. Section 15 of this Agreement is hereby amended and restated in its entirety
as follows:

"15. Nondisclosure Agreement. Each party shall keep confidential all information
-----------------------
provided to it by the other party (including, but not limited to the
Specifications, BOMs, ARKs, FDRs, Kits and all information made available to
COMPANY through the MSLI ORION System), the terms and conditions of this
Agreement, any disclosures made by one party to the other which by the nature of
the disclosure ought to be treated as confidential, and other nonpublic
information and know-how disclosed by one party to the other. However, either
party may disclose the terms and conditions of this Agreement in confidence to
its immediate legal and financial consultants as required in the ordinary course
of its business."

28. The attached Exhibit I shall be added to the list of Exhibits in
Section 21.

This Amendment shall be attached to and incorporated into the Agreement and is
subject to all the terms and conditions of the Agreement.

Except as provided herein, all other provisions of the Agreement shall remain in
full force and effect, and the parties hereby ratify the terms and conditions of
the Agreement as amended hereby.

All capitalized terms shall have the same meaning as in the Agreement.
<PAGE>

IN WITNESS WHEREOF, the parties have executed this Amendment which shall be
effective as of this 1st day of September, 1999. All signed copies of this
Amendment shall be deemed originals.

MICROSOFT LICENSING, INC. MODUS MEDIA INTERNATIONAL, INC.

/s/ M. Roenigk /s/ Terence M. Leahy
- ---------------------------- -------------------------------------
By (Sign) By (Sign)

/s/ Terence M. Leahy
- ---------------------------- -------------------------------------
Mark Roenigk (Print) Name (Print)

Director - OEM Operations Chairman and Chief Executive Officer
- ---------------------------- -------------------------------------
Title Title

November 22, 1999 November 12, 1999
- --------------------------- -------------------------------------
Date Date

<PAGE>

EXHIBIT 10.22

7.34% SECURED NON-RECOURSE PROMISSORY NOTE
("Secured Non-Recourse Note")
-------------------------

(September __, 1995)

FOR VALUE RECEIVED, the undersigned, Rory J. Cowan (the "Borrower"), hereby
--------
promises to pay to Corporate Software Incorporated, a Delaware corporation (the
"Company"), or to the legal holder of this Secured Non-Recourse Note at the time
-------
of payment, the principal sum of two million dollars ($2,000,000.) in lawful
money of the United States of America, and to pay simple interest (computed on
the basis of a 365 or 366 day year, as the case may be) on the principal amount
hereof from and after the date of this Secured Non-Recourse Note until the
entire principal amount hereof has been paid in full, at the rate of 7.34% per
annum. The entire principal amount of indebtedness evidenced by this note, to
the extent not theretofore prepaid as provided herein, shall be repaid on the
Maturity Date. Each payment of principal shall be accompanied by payment of any
accrued and unpaid interest thereon.

If the date set for any payment or prepayment of principal or interest
hereunder is a Saturday, Sunday or legal holiday, then such payment or
prepayment shall be made on the next preceding business day.

This Secured Non-Recourse Note has been delivered to evidence indebtedness
of the Borrower to the Company arising out of a loan made to the Borrower in
connection with his purchase of shares of Class A Common Stock, par value $.01
per Share, of Stream International Inc., a Delaware corporation and the parent
of the Company (the "Parent") in accordance with the terms of the Employment
------
Agreement, dated as of April 21, 1995 (the "Employment Agreement"), between
--------------------
Stream International Inc. and the Borrower, and this Secured Non-Recourse Note
is the "Note" of the Borrower referred to in Section 4 of the Employment
----
Agreement. Capitalized terms used herein and not otherwise defined shall have
the meanings ascribed to them in the Employment Agreement. Payment of the
principal of and interest on this Secured Non-Recourse Note is secured pursuant
to the terms of a Stock Pledge Agreement, dated as of April 21, 1995, between
the Borrower and the Company (the "Pledge Agreement"), reference to which is
----------------
made for a description of the collateral provided thereby and the rights of the
Company and any subsequent holder of this Secured Non-Recourse Note in respect
of such collateral.
<PAGE>

Recourse of the holder of this Note for payment of the principal of and
interest on this Note or any claim based thereon shall be limited solely to the
collateral held pursuant to the Pledge Agreement, and the holder of this Note
shall have no recourse to any other assets of the Borrower for such payment,
whether before or after an Event of Default.

As used in this Note:

(a) the term "Maturity Date" means the earliest of (i) April 21,
-------------
2000 or, at the election of the Parent's Board of Directors and as a result of
the completion of any public offering of shares of the Parent registered under
the Securities Act of 1933, as amended, in connection with which the Borrower is
given an opportunity to sell shares having a value equal to or greater than the
amount of borrowings evidenced by this Secured Non-Recourse Note outstanding at
the time of such offering, provided, that, such offering is completed prior to
-------- ----
April 21, 2000, and (ii) the first date on which a Liquidity Event (as defined
below) shall occur, and

(b) the term "Liquidity Event" means any of the following: (i)
---------------
any sale of a majority of the capital stock or assets of the Parent (including
without limitation a sale of a majority of the capital stock resulting from a
Disposition (as defined in the Parent's Restated Certificate of Incorporation)
or Total Disposition (as defined in the Parent's Restated Certificate of
Incorporation) by R.R. Donnelley & Sons which triggers certain Tag Along (as
defined in the Parent's Restated Certificate of Incorporation) and Drag Along
Rights (as defined in the Parent's Restated Certificate of Incorporation), the
exercise by any stockholder of the Put Right (as defined in the Parent's
Restated Certificate of Incorporation) or the exercise by the Parent of its Call
Right (as defined in the Parent's Restated Certificate of Incorporation) all in
accordance with the provisions of Article Fifth of the Parent's Restated
Certificate of Incorporation), (ii) any liquidation or winding-up of the Parent
or distribution of a majority of the Parent's assets, other than to an Affiliate
of the Parent or (iii) any merger, consolidation or similar business combination
with or into any entity other than an entity controlled by Bain Capital Fund IV,
L.P., Bain Capital Fund IV-B, L.P. and Information Partners Capital Fund, L.P.
(collectively, the "Funds") or by R.R. Donnelley & Sons Company.
-----

-2-
<PAGE>

Interest on the principal amount hereof outstanding from time to time shall
be payable quarterly on the last business day of March, June, September and
December of each year commencing June 30, 1995 and on the Maturity Date;
provided, however, that, so long as the Borrower remains an employee of the
- -------- -------
Parent and no Event of Default (as hereinafter defined) has occurred, interest
shall continue to accrue but shall not be payable until the Maturity Date.

This Secured Non-Recourse Note is subject to the following further terms
and conditions:

1. Mandatory Prepayments. If at any time the Borrower receives any
---------------------
proceeds from the sale by the Borrower of Shares to anyone (including the
Company), the proceeds from such sale of Shares shall be applied to the
prepayment first, of the prepayment of the accrued and unpaid interest on the
Tax Loan Note and then to the unpaid principal thereof and second, to the
prepayment of the accrued and unpaid interest hereon and then to the unpaid
principal hereof. For purposes of this Section 1, the term "sale" in the context
of a sale of Shares shall include, in addition to any direct sale of Shares, any
transaction (including, without limitation, a merger, consolidation or
recapitalization) pursuant to which Shares are converted into a right to
receive, in whole or partial exchange or substitution of Shares, cash or cash
equivalents.

In addition, until such time as the entire principal amount of this Secured
Non-Recourse Note is paid in full, together with all accrued and unpaid
interest, the Borrower shall pay to the Company, for application against such
principal and interest, 30% of any and all Bonus amounts that become payable to
the Borrower under the Employment Agreement.

The right of the Borrower to receive proceeds upon the sale of Shares is
subject to the prior right of the Company (or other holder of this Secured Non-
Recourse Note) (i) in the case of a sale of Shares to the Company (or other
holder of this Secured Non-Recourse Note), in lieu of the Company (or such other
holder) paying the proceeds from such sale to the Borrower or his heirs,
successors or permitted assigns to set off against this Secured Non-Recourse
Note an amount equal to the Net Proceeds of such sale, or (ii) in the case of a
sale of Shares to any other person or entity (collectively, the "Transfer
--------
Parties"), in lieu of any of such Transfer Parties paying the purchase price
- -------
therefor to the Borrower or his heirs, successors or permitted assigns, to
direct such

-3-
<PAGE>

Transfer Parties to pay an amount equal to the Net Proceeds of such sale to the
Company (or other holder of this Secured Non-Recourse Note) which shall set off
such amount against this Secured Non-Recourse Note.

Concurrently with any prepayment (including by set-off) of any portion of
the principal amount of this Secured Non-Recourse Note pursuant to this Section
1 or Section 2 hereof, the Company (or other holder of this Secured Non-Recourse
Note) shall make a notation of such payment hereon. If full payment of the
principal of and accrued and unpaid interest on this Secured Non-Recourse Note
is made, this Secured Non-Recourse Note shall be cancelled. Any partial
prepayment (including by reason of set-off) shall be applied first to accrued
and unpaid interest hereon and then to the unpaid principal hereof.

If at any time, or from time to time, after the date hereof and following
the occurrence and during the continuance of an Event of Default (as hereinafter
defined), the Borrower shall receive or shall otherwise become entitled to
receive from the Company (or other holder of this Secured Non-Recourse Note) any
cash payments, cash dividends or other cash distributions in respect of any
Shares, then and in each case, the Borrower or any of his heirs, successors or
permitted assigns to whom such distribution may be made shall, upon the receipt
thereof, return to the Company (or other holder of this Secured Non-Recourse
Note) such payments, dividends and distributions, and the Company (or other
holder of this Secured Non-Recourse Note) shall apply such amount to the
prepayment of the accrued and unpaid interest on and unpaid principal of this
Secured Non-Recourse Note in the manner set forth in the first paragraph of this
Section 1, and the Company (or other holder of this Secured Non-Recourse Note)
shall not be obligated to make any such cash payment, cash dividend or other
cash distribution not theretofore made to which the Borrower or any of his
heirs, successor or permitted assigns are otherwise entitled in respect of their
Shares any may, in lieu of paying such amount to the Borrower, set off the
amount of such cash payment, cash dividend or other cash distribution against
the accrued and unpaid interest on and unpaid principal of this Secured Non-
Recourse Note in the manner set forth in the third paragraph of this Section 1.

2. Payment and Prepayment. All payments and prepayments of principal of and
----------------------
interest on this Secured Non-Recourse Note shall be made to the Company or its
order, or to the legal holder of this Secured Non-Recourse Note or such holder's
order,

-4-
<PAGE>

in lawful money of the United States of America at the principal offices of the
Company (or at such other place as the holder hereof shall notify the Borrower
in writing). The Borrower may, at his option, prepay this Secured Non-Recourse
Note in whole or in part at any time or from time to time without penalty or
premium. Any prepayments of any portion of the principal amount of this Secured
Non-Recourse Note shall be accompanied by payment of all interest accrued but
unpaid hereunder. Upon final payment of principal of the interest on this
Secured Non-Recourse Note it shall be surrendered for cancellation. The Pledge
Agreement requires payment or prepayment of all obligations under this Secured
Promissory Note as a condition precedent to the release of, or transfer of the
Borrower's interests in, the collateral subject to the Pledge Agreement, all as
described more fully in the Pledge Agreement.

3. Events of Default. Upon the occurrence of any of the following events
-----------------
("Events of Default"):
-----------------

(a) Failure to pay the principal of this Secured Non-Recourse Note,
including any prepayments required hereunder or under the Pledge Agreement which
shall remain unremedied for ten days following the date when such principal
payment was originally due hereunder;

(b) Failure to pay any interest installment due under this Secured
Non-Recourse Note which shall remain unremedied for ten days following the date
when such installment was originally due hereunder; or

(c) Failure of the Borrower to perform the Borrower's obligations (i)
under the Employment Agreement which shall remain unremedied for ten days
following notice from the Company or the Parent or (ii) under the Pledge
Agreement;

then, and in any such event, the holder of this Secured Non-Recourse Note may
declare, by notice of default given to the Borrower, the entire principal amount
of this Secured Non-Recourse Note to be forthwith due and payable, whereupon the
entire principal amount of this Secured Non-Recourse Note outstanding and any
accrued and unpaid interest hereunder shall become due and payable without
presentment, demand, protest, notice of dishonor and all other demands and
notices of any kind, all of which are hereby expressly waived. Upon the
occurrence of an Event of Default, the

-5-
<PAGE>

accrued and unpaid interest hereunder shall thereafter bear the same rate of
interest as on the principal hereunder, but in no event shall such interest be
charged which would violate any applicable usury law. If an Event of Default
shall occur hereunder, the Borrower shall pay costs of collection, including
reasonable attorneys' fees, incurred by the holder in the enforcement hereof.

No delay or failure by the holder of this Secured Non-Recourse Note in the
exercise of any right or remedy shall constitute a waiver thereof, and no single
or partial exercise by the holder hereof of any right or remedy shall preclude
other or future exercise thereof or the exercise of any other right or remedy.

4. Miscellaneous.
-------------

(a) The provisions of this Secured Non-Recourse Note shall be
governed by and construed in accordance with the laws of the Commonwealth of
Massachusetts, without regard to the conflicts of law rules thereof.

(b) All notices and other communications hereunder shall be in
writing and will be deemed to have been duly given if delivered or mailed in
accordance with the Employment Agreement.

(c) The headings contained in this Secured Non-Recourse Note are
for reference purposes only and shall not affect in any way the meaning or
interpretation of the provisions hereof.

-6-
<PAGE>

IN WITNESS WHEREOF, this Secured Non-Recourse Note has been duly executed
and delivered by the Borrower on the date first above written.

/s/ Rory J. Cowan
------------------------------
(Signature of Borrower)

Witness

__________________________

-7-
<PAGE>

STOCK PLEDGE AGREEMENT

STOCK PLEDGE AGREEMENT dated as of September __, 1995 (this "Stock Pledge
Agreement"), between Rory J. Cowan (the "Pledgor") both personally and in his
capacity as trustee under a Declaration of Trust dated as of April 21, 1995 and
known as the Cowan Stream Trust (the "Trust") and Corporate Software
Incorporated, a Delaware corporation (the "Company").

WITNESSETH
----------

WHEREAS, Stream International Inc., a Delaware corporation and the parent
of the Company (the "Parent"), has entered into an agreement, dated as of April
21, 1995 (the "Employment Agreement"), between the Parent and the Pledgor
pursuant to which the Parent has agreed to sell shares of Class A Common Stock,
par value $.01 per share, of the Parent (the "Purchased Shares") to the Pledgor
and has further agreed that the Pledgor may assign his right to purchase the
Purchased Shares to the Trust. Capitalized terms used and not otherwise defined
herein shall have the meanings ascribed to them in the Employment Agreement, and
the Pledgor hereunder is the "Executive" as such term is defined in the
Employment Agreement;

WHEREAS, in connection with the sale of the Purchased Shares to the
Pledgor, the Company has lent to the Pledgor $2,000,000. on a non-recourse basis
and, as evidence of the indebtedness created by such loan, the Pledgor is
delivering to the Company a duly executed 7.34% Secured Promissory Note (the
"Note") of the Pledgor in the principal amount of $2,000,000. dated as of the
date hereof;

WHEREAS, pursuant to the Employment Agreement, the Company has agreed to
make additional advances to the Pledgor to cover certain future tax obligations
of the Pledgor and the Pledgor has agreed to deliver to the Company a duly
executed 7.34% Secured Promissory Note (the "Tax Loan Note") on the date the
first installment of the Tax Loan is advanced;

WHEREAS, the Pledgor wishes to grant further security and assurance to the
Company in order to secure the payment of the principal of and interest on the
Note and the Tax Loan Note (hereinafter collectively referred to as the "Note
Obligations") and to pledge to the Company the Purchased Shares to be acquired
by such Pledgor (or at such Pledgor's election, by the Trust)

<PAGE>

pursuant to the Employment Agreement, the New Options to be granted to Pledgor
pursuant to the Employment Agreement, certain additional shares of and/or
options to purchase additional shares of the Parent's capital stock and certain
Publicly Traded Securities described as to issuer, type and number of shares on
Exhibit A hereto, all as more particularly described herein;

NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:

1. Pledge. As collateral security for the full and timely payment of the
------
principal of and interest on the Note Obligations and all other amounts payable
by the Pledgor thereunder or under this Stock Pledge Agreement (including,
without limitation, any and all reasonable fees and expenses, including
reasonable legal fees and expenses, incurred by the Company in connection with
any exercise of its rights under the Note Obligations or hereunder), the Pledgor
hereby delivers, deposits, pledges, transfers and assigns to the Company, in
form transferable for delivery, and creates in the Company a security interest
in:

(a) all Purchased Shares and all certificates evidencing the
Purchased Shares and other instruments or documents evidencing the same now
owned by the Pledgor and all dividends, cash, instruments and other property
from time to time received, receivable or otherwise distributed in respect of or
in exchange for any or all of the Purchased Shares;

(b) Zero shares of Class B Common Stock of the Parent (collectively,
the "Owned Shares") and all certificates evidencing the Owned Shares and other
instruments or documents evidencing the same and all dividends, cash,
instruments and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of the Owned
Shares;

(c) options to purchase Zero shares of Class A Common Stock and
options to purchase Zero shares of Class B Common Stock of the Parent
(collectively, the "Options") and all certificates evidencing the Options and
other instruments or documents evidencing the same and all dividends, cash,
instruments and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of the Options
including without limitation any shares of Class A Common Stock and Class B
Common Stock received upon the exercise of any Option; and
<PAGE>

(d) The Publicly Traded Securities described on Exhibit A hereto (the
"Additional Securities") and all certificates evidencing the Additional
---------------------
Securities and other instruments or documents evidencing the same and all
dividends, cash, instruments and other property from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or all
of the Additional Securities.

The Purchased Shares, Owned Shares, Additional Securities and Options (together
with any securities or property delivered to the Pledgor pursuant to Section
2(b) hereof) are hereinafter collectively referred to as the "Pledged
Securities".

The Pledgor hereby delivers to the Company appropriate undated security
transfer powers duly executed in blank for the Pledged Securities set forth
above and will deliver appropriate undated security transfer powers duly
executed in blank for the Pledged Securities to be pledged hereunder from time
to time hereafter. The Pledgor agrees that all certificates evidencing the
Pledged Securities shall be marked with the following legend:

THE SHARES/OPTION TO PURCHASE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO THE PROVISIONS OF A STOCK PLEDGE AGREEMENT DATED AS OF APRIL 21, 1995
BY AND BETWEEN CORPORATE SOFTWARE INCORPORATED, A DELAWARE CORPORATION AND A
WHOLLY-OWNED SUBSIDIARY OF STREAM INTERNATIONAL INC., A DELAWARE CORPORATION
(THE "CORPORATION"), AND THE BORROWER NAMED THEREIN, A COPY OF WHICH IS ON FILE
AT THE OFFICES OF THE CORPORATION.

The Pledgor agrees to deliver to the Company all Pledged Securities currently
held by him in order that such legend may be placed thereon. The Pledgor further
agrees, with respect to the Additional Securities, to deliver written notice to
each issuer of an Additional Security of the pledge of such security to the
Company.

2. Administration of Security. The following provisions shall govern the
--------------------------
administration of the Pledged Securities:

(a) So long as no Event of Default has occurred and is continuing (as
used herein, "Event of Default" shall mean the occurrence of any Event of
Default as defined in the Note Obligations), the Pledgor shall be entitled to
act with respect to the Pledged Securities in any manner not inconsistent with
this Stock Pledge Agreement, the Employment Agreement, the
<PAGE>

Note Obligations or any document or instrument delivered or to be delivered
pursuant to or in connection with the Employment Agreement, including
transferring the Pledged Securities to a nominee for purposes of exercising the
Options, and/or voting the Pledged Securities and receiving all cash
distributions thereon and giving consents, waivers and ratifications in respect
thereof.

(b) If while this Stock Pledge Agreement is in effect, the Pledgor
shall become entitled to receive or shall receive any debt or equity security
certificate (including, without limitation, any certificates representing shares
of stock received in connection with the exercise of any Option, any certificate
representing a stock dividend or a distribution in connection with any
reclassification, increase or reduction of capital, or issued in connection with
any reorganization), option or right, whether as a dividend or distribution in
respect of, in substitution of, or in exchange for any Pledged Securities, the
Pledgor agrees to accept the same as the Company agent and to hold the same in
trust on behalf of and for the benefit of the Company and to deliver the same
forthwith to the Company in the exact form received, with the endorsement of the
Pledgor when necessary and/or appropriate undated security transfer powers duly
executed in blank, to be held by the Company, subject to the terms of this Stock
Pledge Agreement, as additional collateral security for the Note Obligations.
Notwithstanding the foregoing, it is agreed that the Pledgor may exercise any
option or right received as contemplated in the preceding sentence, and the
Company will exercise any such option or right upon receipt of written
instructions to that effect and any required payments or documents from the
Pledgor, and the securities received upon such exercise of any such option or
right shall thereafter be held by the Pledgor or the Company as contemplated by
the preceding sentence.

(c) The Pledgor shall immediately upon request by the Company and in
confirmation of the security interests hereby created, execute and deliver to
the Company such further instruments, deeds, transfers, assurances and
agreements, in form and substance as the Company shall request, including any
financing statements and amendments thereto, or any other documents, as required
under Massachusetts law and any other applicable law to protect the security
interests created hereunder.

(d) Subject to any sale by the Company or other disposition by the
Company of the Pledged Securities or other property pursuant to this Stock
Pledge Agreement and subject to Sections 5 and 6 below, the Pledged Securities
shall be returned to the Pledgor upon payment in full of the principal of and
accrued and unpaid interest on the Note Obligations.
<PAGE>

3. Remedies in Case of an Event of Default.
---------------------------------------

(a) In case an Event of Default shall have occurred and be
continuing, the Company shall have in each case all of the remedies of a secured
party under the Massachusetts Uniform Commercial Code, and, without limiting the
foregoing, shall have the right, in its sole discretion, to sell, resell, assign
and deliver all or, from time to time, any part of the Pledged Securities, or
any interest in or option or right to purchase any part thereof, on any
securities exchange on which the Pledge Securities or any of them may be listed,
at any private sale or at public auction, with or without demand of performance
or other demand, advertisement or notice of the time or place of sale or
adjournment thereof or otherwise (except that the Company shall give ten days'
notice to the Pledgor of the time and place of any sale pursuant to this Section
3), for cash, on credit or for other property, for immediate or future delivery,
and for such price or prices and on such terms as the Company shall, in its sole
discretion, determine, the Pledgor hereby waiving and releasing any and all
right or equity of redemption whether before or after sale hereunder. At any
such sale the Company may bid for and purchase the whole or any part of the
Pledged Securities so sold free from any such right or equity of redemption. The
Company shall apply the proceeds of any such sale first to the payment of
-----
all costs and expenses, including reasonable attorneys' fees, incurred by the
Company in enforcing its rights under this Stock Pledge Agreement, second to
------
the payment of accrued and unpaid interest on (i) the Tax Loan Note and (ii) the
Note and third to the payment of unpaid principal of the (i) the Tax Loan Note
-----
and (ii) the Note.

(b) The Pledgor recognizes that the Company may be unable to effect
a public sale of all or a part of the Pledged Securities by reason of certain
prohibitions contained in the Securities Act of 1933, as amended (the
"Securities Act"), or in the rules and regulations promulgated thereunder or in
applicable state securities or "blue sky" laws, but may be compelled to resort
to one or more private sales to a restricted group of purchasers who will be
obliged to agree, among other things, to acquire the Pledged Securities for
their own account, for investment and not with a view to the distribution or
resale thereof. The Pledgor understands that private sales so made may be at
prices and on other terms less favorable to the seller than if the Pledged
Securities were sold at public sale, and agrees that the Company has no
obligation to delay the sale of the Pledged Securities for the period of time
necessary to permit the registration of the Pledged Securities for public sale
under the Securities Act and under applicable state securities or "blue sky"
laws. The Pledgor agrees that a private sale or sales made under the foregoing
circumstances shall be deemed to have been made in a commercially reasonable
manner.

<PAGE>

(c) If any consent, approval or authorization of any state, municipal
or other governmental department, agency or authority should be necessary to
effectuate any sale or disposition by the Company pursuant to this Section 3 of
the Pledged Securities, the Pledgor will execute all such applications and other
instruments as may be required in connection with securing any such consent,
approval or authorization, and will otherwise use his or her best efforts to
secure the same.

(d) Neither failure nor delay on the part of the Company to exercise
any right, remedy, power or privilege provided for herein or by statute or at
law or in equity shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, remedy, power or privilege preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege.

4. Pledgor's Obligations Not Affected. The obligations of the Pledgor
----------------------------------
under this Stock Pledge Agreement shall remain in full force and effect without
regard to, and shall not be impaired or affected by: (a) any subordination,
amendment or modification of or addition or supplement to the Employment
Agreement or the Note Obligations, or any assignment or transfer of any thereof;
(b) any exercise or non-exercise by the Company of any right, remedy, power or
privilege under or in respect of this Stock Pledge Agreement, the Employment
Agreement or the Note Obligations, or any waiver of any such right, remedy,
power or privilege; (c) any waiver, consent, extension, indulgence or other
action or inaction in respect of this Stock Pledge Agreement, the Employment
Agreement or the Note Obligations, or any assignment or transfer of any thereof;
or (d) any bankruptcy, insolvency, reorganization, arrangement, readjustment,
composition, liquidation or the like, of the Company, whether or not the Pledgor
shall have notice or knowledge of any of the foregoing.

5. Transfer by Pledgor. The Pledgor will not sell, assign, transfer or
-------------------
otherwise dispose of, grant any option with respect to, or mortgage, pledge or
otherwise encumber (collectively, a "Disposition") the Pledged Securities or any
interest therein except as permitted by the Company's Restated Certificate of
Incorporation (the "Charter"), the Employment Agreement and any Stockholders
-------
Agreement to which Pledgor and the Company or its stockholders may be or become
bound. In the event of any Disposition of Pledged Securities pursuant to and in
accordance with the terms and conditions of the Charter, the Employment
Agreement and any such Stockholders Agreement, the Company shall release such
Pledged Securities from the pledge hereunder to permit consummation of such
transaction solely to the extent that, after such release, the sum (the
"Coverage Amount") of (i) the product of the number of shares of Class A Common
<PAGE>

Stock owned by the Pledgor and subject to this Stock Pledge Agreement multiplied
by $30 (the "Class A Calculated Value") plus (ii) the product of the number of
shares of Class B Common Stock owned by the Pledgor and subject to this Stock
Pledge Agreement multiplied by $30 (the "Class B Calculated Value") exceeds 150%
of the aggregate principal amount of the Note Obligations of the Pledgor then
outstanding (the "Note Amount") is greater than zero. Notwithstanding the
foregoing, (i) upon the written request of the Pledgor, the Company shall
release Additional Securities from the pledge hereunder to permit consummation
of a Disposition solely to the extent that, after such release, the Value (as
defined below) of the Additional Securities subject to this Stock Pledge
Agreement exceeds 125% of the difference between the Note Amount and a fraction,
the numerator of which is the Coverage Amount and the denominator of which is
1.5, and (ii) in the case of any Disposition in connection with the occurrence
of a Trigger Event (as such term is defined in the Employment Agreement), the
Company shall release such Pledged Securities regardless of whether the Coverage
Amount is greater than zero, provided, that any proceeds received upon such
Disposition are either pledged to the Company as additional collateral and/or
used to reduce the Note Amount so that the foregoing collateral coverage test
continues to be satisfied after giving effect to such Disposition.

For purposes of this Section 5, (i) fully vested Options shall be treated
as exercised in determining whether any Pledged Securities shall be released,
provided, however, that the Calculated Value applicable to each share of stock
for which the Option may be exercised shall be reduced by the per share exercise
price of such Option and (ii) the Value of the Additional Securities shall be
the market value of such securities determined by reference to the per share
closing price on the date prior to the requested release of such securities as
reported by the New York Stock Exchange, American Stock Exchange or the National
Association of Securities Dealers Automatic Quotation National Market System, as
the case may be.

6. Adjustments to Calculated Value. In the event of any stock dividend,
-------------------------------
stock split, stock issuance, reverse stock split, subdivision, combination,
recapitalization, reclassification, merger, consolidation or other change in any
class of common stock of the Company, the dollar value used to determine the
Calculated Value applicable to such class of common stock shall be appropriately
adjusted to reflect such dividend, split, issuance, subdivision, combination,
recapitalization, reclassification, merger, consolidation or other change.

7. Attorney-in-Fact. The Company is hereby appointed the
----------------
attorney-in-fact of the Pledgor and the Pledgor's transferees for the purpose of
carrying out the provisions of this Stock Pledge Agreement and taking any action
and executing any instrument which the Company
<PAGE>

reasonably may deem necessary or advisable to accomplish the purposes hereof,
including without limitation, the execution of the applications and other
instruments described in Section 3(c) hereof, which appointment as
attorney-in-fact is irrevocable as one coupled with an interest.

8. Termination. Upon payment in full of the principal of and accrued and
-----------
unpaid interest on the Note Obligations and upon the due performance of and
compliance with all the provisions of the Note Obligations, this Stock Pledge
Agreement shall terminate and the Pledgor shall be entitled to the return of
such of the Pledged Securities as have not theretofore been sold, released
pursuant to Sections 5 and 6 hereof or otherwise applied pursuant to the
provisions of this Stock Pledge Agreement.

10. Notices. All notices or other communications required or permitted to
-------
be given hereunder shall be delivered as provided in the Employment Agreement.

11. Binding Effect, Successors and Assigns. This Stock Pledge Agreement
--------------------------------------
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns and nothing herein is intended or shall be
construed to give any other person any right, remedy or claim under, to or in
respect of this Stock Pledge Agreement.

12. Miscellaneous. The Company and its assigns shall have no obligation in
-------------
respect of the Pledged Securities, except to hold and dispose of the same in
accordance with the terms of this Stock Pledge Agreement. Neither this Stock
Pledge Agreement nor any provision hereof may be amended, modified, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the amendment, modification, waiver,
discharge or termination is sought. The provisions of this Stock Pledge
Agreement shall be binding upon the heirs, representatives, successors and
permitted assigns of the Pledgor. The captions in this Stock Pledge Agreement
are for convenience of reference only and shall not define or limit the
provisions hereof. This Stock Pledge Agreement shall be governed by and
construed and enforced in accordance with the laws of the Commonwealth of
Massachusetts, without regard to the conflicts of law rules thereof. This Stock
Pledge Agreement may be executed simultaneously in several counterparts, each of
which is an original, but all of which together shall constitute one instrument.
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Stock Pledge
Agreement to be executed and delivered as of the date first above written.

CORPORATE SOFTWARE INCORPORATED

By /s/ Morton Rosenthal
------------------------------
Morton Rosenthal
Title: Chief Executive Officer

PLEDGOR

/s/ Rory J. Cowan
------------------------------
Rory J. Cowan

<PAGE>

EXHIBIT 10.23

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

1997 CLASS A REPLACEMENT OPTION PLAN
------------------------------------

1. PURPOSE
-------

The purpose of this 1997 Class A Replacement Option Plan (the "Plan") is to
enable Modus Media International Holdings, Inc., a Delaware corporation (the
"Company"), to grant options to purchase Common Stock of the Company, $.01 par
value per share ("Common Stock") to certain individuals who hold options to
purchase Class A Common Stock, $.01 par value per share, previously granted to
each such individual by Stream International Inc., a Delaware corporation
(formerly known as "Stream International Holdings Inc.") ("Stream") under its
1995 Stock Option Plan and 1995 California Stock Option Plan (collectively, the
"1995 Plans"). Any participant in the Plan is referred to herein as a
"Participant."

Options granted pursuant to the Plan are not intended to qualify as
incentive options. Options shall be granted in the form of Exhibit A hereto (as
it may be amended or modified from time to time by the Board of Directors).

2. ADMINISTRATION
--------------

The Plan shall be administered by the Company's Board of Directors (the
"Board"). The Board shall have authority, not inconsistent with the express
provisions of the Plan, (a) to grant options to persons who hold options
previously granted by Stream under the 1995 Plans; (b) to determine the terms
and conditions of each option; (c) to prescribe the form or forms of any
instruments evidencing options and any other instruments necessary or advisable
under the Plan and if necessary to change such forms from time to time; (d) to
adopt, amend and rescind rules and regulations for the administration of the
Plan; and (e) to interpret the Plan and to decide any questions and settle all
controversies and disputes that may arise in connection with the Plan. Such
determinations of the Board shall be conclusive and shall bind all parties.
Subject to Section 9, the Board shall also have the authority, both generally
and in particular instances, to waive compliance by a Participant with any
obligation to be performed by him or her under an option, to waive any condition
or provision of an option, and to amend or cancel any option except that the
Board may not take any action with respect to an outstanding option that would
adversely affect the rights of the Participant under such option without such
Participant's consent. Nothing in the preceding sentence shall be construed as
limiting the power of the Board to make adjustments required by Section 4(a) and
Section 4(c) hereof.
<PAGE>

The Board may, in its discretion, delegate some or all of its powers with
respect to the Plan to a committee (the "Committee"), in which event all
references (as appropriate) to the Board hereunder shall be deemed to refer to
the Committee. The Committee, if one is appointed, shall consist of at least two
members of the Board. A majority of the members on the Committee shall
constitute a quorum, and all determinations of the Committee shall be made by a
majority of the Board. Any determination of the Committee under the Plan may be
made without notice or meeting of the Committee by a writing signed by a
majority of the members of the Board on the Committee.

3. EFFECTIVE DATE AND TERM OF PLAN
-------------------------------

The Plan shall become effective on January 9, 1998.

No options shall be granted under the Plan other than to holders of Stream
Options as set forth in Section 6(a) below. This Plan shall terminate on January
31, 1998, but options previously granted may extend beyond that date.

4. SHARES OF COMMON STOCK SUBJECT TO THE PLAN
------------------------------------------

(a) Number of Shares. Subject to adjustment as provided in Section 4(c), an
----------------
aggregate of 3,500,000 shares of Common Stock may be delivered upon the exercise
of options granted under the Plan.

(b) Shares of Common Stock to be Delivered. Common Stock delivered under
--------------------------------------
the Plan shall be authorized but unissued shares or, if the Board so decides in
its sole discretion, previously issued shares acquired by the Company and held
in its treasury. No fractional shares of Common Stock shall be delivered under
the Plan.

(c) Changes in Common Stock. In the event of a dividend, split or
-----------------------
combination of Common Stock, recapitalization or other change in the Company's
capital structure, the number and kind of shares of the Company subject to
options then outstanding, the exercise price of such options, the maximum number
of shares that may be delivered under the Plan, and other relevant provisions
shall be appropriately adjusted by the Board, whose determination shall be
binding on all persons.

The Board may also adjust the number of shares of Common Stock subject to
outstanding options, the exercise price of outstanding options and the terms of
outstanding options, to take into consideration material changes in accounting
practices or principles, extraordinary dividends, consolidations or mergers,
acquisitions or dispositions of Common Stock or property or any other event if
it is

2
<PAGE>

determined by the Board that such adjustment is appropriate to avoid distortion
in the operation of the Plan.

5. ELIGIBILITY FOR OPTIONS
-----------------------

Persons eligible to receive options under the Plan shall be limited to
holders of options granted by Stream under the 1995 Plans.

6. TERMS AND CONDITIONS OF OPTIONS
-------------------------------

(b) Duration of Replacement Options. Except as otherwise agreed between the
-------------------------------
Company and a Participant, each Replacement Option granted to such Participant
under the Plan shall be exercisable during the same period or periods during
which the Stream Option was exercisable.

(1) Except as otherwise agreed between the Company and any
Participant, each Replacement Option granted under the Plan shall
be exercisable at such time or times and upon such terms and
conditions as specified in the Replacement Option. In the case of
a Replacement Option not immediately exercisable in full, the
Board may at any time accelerate the time at which all or any part
of the Replacement Option may be exercised.

(2) Any exercise of a Replacement Option shall be in writing, signed
by the proper person and furnished to the Company, accompanied by
(i) such documents as may be required by the Company and (ii)
payment in full as specified below in Section 6(d) for the number
of whole shares of Common Stock for which the Replacement Option
is exercised.

3
<PAGE>

payable to the order of the Company sufficient to satisfy any federal,
state or local withholding tax requirements arising in connection with the
exercise of the Replacement Option (the date such obligation arises being
referred to as the "Tax Date") (or make other arrangements satisfactory to
the Company with regard to such taxes). If specified in the instrument
evidencing a Replacement Option or permitted by the Board, either at the
time of the grant of the Replacement Option or the time of exercise, the
Participant may elect, at such time and in such manner as the Board may
prescribe, to satisfy such withholding obligation by (i) delivery of an
unconditional and irrevocable undertaking by a broker to deliver promptly
to the Company sufficient funds to pay such withholding obligation, (ii)
delivering to the Company whole shares of Common Stock (which the
Participant has held for at least six months prior to the delivery of such
shares or acquired on the open market and for which the Participant has
good title, free and clear of all liens and encumbrances) having a fair
market value, determined as of the Tax Date, equal to such withholding
obligation, or (iii) requesting that the Company withhold from the shares
of Common Stock to be delivered upon exercise of the Replacement Option a
number of whole shares of Common Stock having a fair market value equal,
determined as of the Tax Date, to such withholding obligation; provided,
however, that the Company shall have sole discretion to disapprove of an
election pursuant to any of clauses (i), (ii) or (iii), and that in the
case of a Participant who is subject to Section 16 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Company may
require that the method of satisfying such an obligation be in compliance
with Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder. Shares of Common Stock may be delivered or withheld
having an aggregate fair market value in excess of the minimum amount
required to be withheld, but not in excess of the amount determined by
applying the Participant's maximum marginal tax rate. Any fractional share
of a Common Stock which would be required to satisfy such an obligation
shall be disregarded and the remaining amount due shall be paid in cash by
the Participant.

4
<PAGE>

procedures established by the Company, the Company shall be under
no obligation to deliver shares of Common Stock pursuant to such
exercise until the Company is satisfied as to the authority of
the person or persons exercising the Replacement Option.

(d) Payment for Shares. Shares of Common Stock purchased upon exercise of a
------------------
Replacement Option under the Plan shall be paid for as follows: (i) in cash or
by personal check, certified check, bank draft or money order payable to the
order of the Company or (ii) if specified in the instrument evidencing the
Replacement Option or permitted by the Board, (A) through the delivery of whole
shares of Common Stock (which the Participant has held for at least six months
prior to the delivery of such shares or acquired on the open market and for
which the Participant has good title, free and dear of all liens and
encumbrances) having a fair market value on the last business day preceding the
date of exercise equal to the purchase price or (B) by delivery of a full
recourse promissory note of the Participant to the Company, such note to be
payable on such terms as are specified by the Company, or (C) by delivery of an
unconditional and irrevocable undertaking by a broker to deliver promptly to the
Company sufficient funds to pay the exercise price or (D) by any combination of
the permissible forms of payment. The Company shall have sole discretion to
disapprove of an election pursuant of Common Stock to any of clauses (A)-(D),
and in the case of a Participant who is subject to Section 16 of the Exchange
Act, the Company may require that the method of making such payment be in
compliance with Section 16 and the rules and regulations promulgated thereunder.
Any fractional share of Common Stock which would be required to pay such
purchase price shall be disregarded and the remaining amount due shall be paid
in cash by the Participant. No instrument representing shares of Common Stock
shall be delivered until the full purchase price therefor has been paid.

(e) Delivery of Shares. A Participant shall not have the rights of a holder
------------------
of shares of Common Stock of the Company with regard to Replacement Options
under the Plan except as to shares actually received by him or her under the
Plan.

The Company shall not be obligated to deliver any shares (i) until, in the
opinion of the Company's counsel, all applicable federal and state laws and
regulations have been complied with, and (ii) if the outstanding shares of
Common Stock are at the time listed on any stock exchange, until the shares of
Common Stock to be delivered have been listed or authorized to be listed on such
exchange upon official notice of issuance, and (iii) until all other legal
matters in connection with the issuance and delivery of such shares have been
approved by the Company's counsel. If the sale of shares of Common Stock has not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), the Company may require, as a condition to exercise of the Replacement
Option, such representations or agreements as counsel for the Company may
consider appropriate to avoid violation of the

5
<PAGE>

Securities Act and may require that the instruments evidencing such shares of
Common Stock bear an appropriate legend restricting transfer.

(f) Nontransferability of Options. No Replacement Options may be
-----------------------------
transferred other than by will or by the laws of descent and distribution or
pursuant to beneficiary designation procedures approved by the Company. Except
as permitted by the foregoing sentence, during a Participant's lifetime a
Replacement Option may be exercised only by him or her. Except as permitted by
the second preceding sentence, no Replacement Options may be sold, transferred,
assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by
operation of law or otherwise) or be subject to execution, attachment or similar
process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate,
encumber or otherwise dispose of any Replacement Options, such Replacement
Options and all rights thereunder shall immediately become null and void.

(g) Death. If a Participant dies, each Replacement Option held by the
-----
Participant immediately prior to death may be exercised, to the extent it was
exercisable immediately prior to death, by his or her executor or administrator,
or by the person or persons to whom the option is transferred by will or
applicable laws of descent and distribution or pursuant to beneficiary
designation procedures established by the Company, at any time within the period
ending with the first anniversary of the Participant's death but in no event
beyond the "Final Exercise Date" (as specified in the option). All Replacement
Options held by a Participant immediately prior to death that are not then
exercisable shall terminate on the date of death.

(h) Other Termination of Service. If an employee's employment with the
----------------------------
Company and its subsidiaries terminates for any reason, other than death, all
Replacement Options held by the employee that are not then exercisable shall
terminate; provided, that the Board in its sole discretion may provide (either
prior to or following termination) that any or all of such portion of a
Replacement Option which is not exercisable immediately prior to termination
shall be treated as having become exercisable immediately prior to termination.
Replacement Options that are exercisable on the date employment terminates for
any reason other than death shall continue to be exercisable for a period of
three months (or such longer period as the Company may determine, but in no
event beyond the Final Exercise Date) unless the employee was terminated for
cause which in the opinion of the Board casts such discredit on him or her as to
justify termination of his or her Replacement Options. Subject to Section 6(g),
after completion of that three-month period, such Replacement Options shall
terminate to the extent not previously exercised, expired or terminated. For
purposes of this Section 6(h), employment shall not be considered terminated (i)
in the case of sick leave or other bona fide leave of absence approved for
purposes of the Plan by the Company or (ii) in the case of a transfer of
employment between the Company and a subsidiary or between subsidiaries, or to
the employment of a

6
<PAGE>

corporation (or a parent or subsidiary corporation of such corporation) issuing
or assuming a Replacement Option in a transaction to which Section 424(a) of the
Internal Revenue Code of 1986, as amended from time to time (the "Code")
applies.

In the case of a Participant who is not an employee, all Replacement
Options held by such Participant that are not exercisable immediately prior to
termination of service for any reason other than death shall terminate upon such
termination of service. Replacement Options that are exercisable immediately
prior to termination of service as a consultant, director or adviser for any
reason other than death shall continue to be exercisable for period of three
months (or such longer period as the Company may determine, but in no event
beyond the Final Exercise Date) unless the Participant was terminated for cause
which in the opinion of the Board casts such discredit on him or her as to
justify termination of his or her Replacement Options. Subject to Section 6(g),
after completion of that three-month period such Replacement Options shall
terminate to the extent not previously exercised, expired or terminated.

If a Participant is employed by Stream or Corporate Software & Technology
Holdings, Inc. ("CST"), including a subsidiary of any of the foregoing, at the
time that Replacement Options are granted hereunder, then, solely for purposes
of Sections 6(h) and 7 hereof, such Participant shall be deemed to be employed
by the Company for so long as such Participant is employed by such either CST or
Stream (or a subsidiary thereof), as applicable. For purposes of this paragraph,
"employment" shall include service for the applicable company as contemplated by
the preceding paragraph.

(i) Acquisition Events. An "Acquisition Event" shall mean any of the
------------------
following events following the effective date hereof: (a) any merger or
consolidation which results in the voting securities of the Company, CST or
Stream outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving or acquiring entity or its parent) less than 50% of the combined
voting power of the voting securities of such company or such surviving or
acquiring entity or its parent outstanding immediately after such merger or
consolidation; (b) any sale of all or substantially all of the assets of the
Company, CST or Stream; or (c) the complete liquidation of the Company, CST or
Stream.

All Replacement Options outstanding hereunder (x) be assumed or an
equivalent option shall be substituted by the successor corporation or a parent
or subsidiary of the successor corporation (unless the successor corporation
refuses to assume or substitute for the option), and (y) shall become
immediately exercisable in full immediately prior to the effectiveness of an
Acquisition Event and, unless assumed or substituted by the successor
corporation, will terminate, to the extent unexercised, upon the consummation of
an Acquisition Event, (i) if a Participant is employed by the Company, CST or
Stream (or a subsidiary thereof) at the time of the

7
<PAGE>

occurrence of an Acquisition Event with respect to the Company, (ii) a
Participant is employed by CST (or a subsidiary thereof) at the time of an
occurrence of an Acquisition Event with respect to CST or (iii) a Participant is
employed by Stream (or a subsidiary thereof) at the time of an occurrence of an
Acquisition Event with respect to Stream. This paragraph shall also apply to a
Participant whose employment with the Company, CST or Stream, as applicable, is
terminated prior to the consummation of an Acquisition Event to the extent such
Participant's Replacement Options remain exercisable upon the consummation of
such Acquisition Event. For purposes of this paragraph, "employment" shall
include service for the applicable company as contemplated by the second
paragraph of Section 6(h) above.

7. REPURCHASE RIGHTS
-----------------

(a) Upon any termination of employment or service of a Participant with
the Company, CST or Stream (or a subsidiary thereof), as applicable, the Company
shall have the right to purchase, for cash, shares of Common Stock issued or
issuable upon exercise of Replacement Options granted hereunder to the extent
such Replacement Options were previously exercised or are exercisable at the
time of termination ("Vested Shares"), upon the terms set forth below:

(i) Termination for Any Reason Other Than Cause. If the termination
-------------------------------------------
of employment or service of the Participant is for any reason
other than Cause (as defined below), the Company shall have the
right to purchase: (A) from any holder of a Replacement Option
granted hereunder and covering less than 2,000 shares of Common
Stock (as adjusted for stock splits, stock dividends and similar
events), all then Vested Shares, and (B) from any other holder of
a Replacement Option granted hereunder: no Vested Shares if
termination occurs on or prior to the second anniversary of the
date of grant of the Replacement Option; up to 45% of the Vested
Shares if termination occurs after the second anniversary and
prior to or on the third anniversary of the date of grant of the
Replacement Option; up to 35% of the Vested Shares if termination
occurs after third anniversary of the date of grant of the
Replacement Option and prior to or on the fourth anniversary of
the date of grant of the Replacement Option; and up to 25% of the
Vested Shares if termination occurs thereafter. The purchase
price for the Vested Shares purchased by the Company shall equal
the Fair Value (as defined below) thereof at the time of
termination.

(ii) Termination for Cause. If the termination of employment or
---------------------
service of the Participant is for Cause (as defined below), the
Company shall have the right to purchase all of the then Vested

8
<PAGE>

Shares at a price equal to the amount paid by the optionee for
the Vested Shares (less, in the case of unexercised Replacement
Options, the exercise price).

(b) The repurchase rights of the Company set forth in Section 7(a) shall
terminate upon the earlier of (i) the registration of any class of equity
securities of the Company under the Exchange Act or (ii) the closing of the
initial public offering of equity securities of the Company under the Securities
Act.

(c) The Company must exercise its purchase rights under this Section 7, by
written notice to the Participant, within 90 days after the termination of
employment or service. The closing of any purchase pursuant to this Section 7
shall take place as soon as reasonably practicable at the principal office of
the Company, or at such other time and location as the parties to such purchase
may mutually determine. At the closing, the holder of the Vested Shares, to be
sold shall deliver to the Company an instrument representing such Vested Shares,
duly endorsed for transfer, and the Company shall pay the purchase price
therefor, by check or wire transfer.

(d) As used in this Section 7, the following terms shall have the
following meanings:

(i) "Cause" shall mean: (i) fraud, embezzlement or other act of
-------
dishonesty by the Participant with respect to the Company, CST or
Stream, as applicable, that causes material injury to such
company, or (ii) conviction of, or a plea of nolo contendre to,
any felony involving dishonesty or moral turpitude.

(ii) "Fair Value" shall mean the fair value of the shares of Common
------------
Stock as of the applicable date on the basis of a sale of such
shares of Common Stock in an arms-length private sale between a
willing buyer and a willing seller, neither acting under
compulsion, without any discount for any lack of liquidity of
such shares or the fact that such shares may represent a minority
interest or that there may be restrictions on the voting rights
of such shares, as determined in good faith by the Board of the
Company; provided, however that in the event of a repurchase by
-------- -------
the Company of Vested Shares from any holder of a Replacement
Option granted hereunder and initially covering 2,000 or more
shares of Common Stock (as adjusted for stock splits, stock
dividends and similar events) (a "Major Holder"), the
determination of Fair Value shall be subject to mutual agreement
of the Company and such Major Holder. Absent such an agreement,
Fair Value shall be determined by calculating the average of the
sum of the determinations of Fair Value made by

9
<PAGE>

two independent nationally recognized investment banking firms,
one of which shall be retained by the Company and one of which
shall be retained by the Major Holder. However, if the
determinations of Fair Value of such two firms differ from one
another by more than 15%, the Company and such Major Holder shall
mutually select a third independent investment banking firm to
make a final determination of Fair Value with respect to the
Vested Shares then being repurchased by the Company.

(e) The Company may require that each certificate representing shares of
Common Stock subject to the repurchase rights set forth in this Section 7 shall
bear a legend referencing such repurchase rights.

8. NO EMPLOYMENT RIGHTS
--------------------

Neither the adoption of the Plan nor the grant of a Replacement Option
shall confer upon any Participant any right to continue as an employee or
director of, or consultant or adviser to, the Company, CST or Stream or any
parent or subsidiary or affect in any way the right of the Company, CST, or
Stream or any parent or subsidiary to terminate such Participant at any time.
Except as specifically provided by the applicable board in any particular case,
the loss of existing or potential profit in Replacement Options granted under
this Plan shall not constitute an element of damages in the event of termination
of the relationship of a Participant even if the termination is in violation of
an obligation of the Company, CST, or Stream to the Participant by contract or
otherwise.

9. AMENDMENT
---------

With the consent of the Participant, the Board may at any time cancel an
existing Replacement Option in whole or in part and grant another option for
such number and class of shares as the Board specifies. The Board may at any
time or times amend the Plan or any outstanding Replacement Option for any
purpose that may at the time be permitted by law, provided that, except to the
extent expressly permitted by the Plan, no such amendment shall, without the
approval of the stockholders of the Company, effectuate a change for which
approval of the stockholders is required in order for the Plan to continue to
qualify under Rule 16b-3 (if applicable). No such amendment shall adversely
affect the rights of any Participant, without his or her consent, under any
Replacement Option previously granted.

<PAGE>

EXHIBIT 10.24

MODUS MEDIA INTERNATIONAL HOLDINGS, INC.

1997 CLASS B REPLACEMENT OPTION PLAN
------------------------------------

1. PURPOSE
-------

The purpose of this 1997 Class B Replacement Option Plan (the "Plan") is to
enable Modus Media International Holdings, Inc., a Delaware corporation (the
"Company"), to grant options to purchase Common Stock of the Company, $.O1 par
value per share ("Common Stock") to certain individuals who hold options to
purchase Class B Common Stock, $.O1 par value per share, previously granted to
each such individual by Stream International Inc., a Delaware corporation
(formerly known as "Stream International Holdings Inc.") ("Stream") under its
1995 Replacement Stock Option Plan (the "1995 Plan"). Any participant in the
Plan is referred to herein as a "Participant."

2. ADMINISTRATION
--------------

The Plan shall be administered by the Company's Board of Directors (the
"Board"). The Board shall have authority, not inconsistent with the express
provisions of the Plan, (a) to grant options to persons who hold options
previously granted by Stream under the 1995 Plan; (b) to determine the terms and
conditions of each option; (c) to prescribe the form or forms of any instruments
evidencing options and any other instruments necessary or advisable under the
Plan and if necessary to change such forms from time to time; (d) to adopt,
amend and rescind rules and regulations for the administration of the Plan; and
(e) to interpret the Plan and to decide any questions and settle all
controversies and disputes that may arise in connection with the Plan. Such
determinations of the Board shall be conclusive and shall bind all parties.
Subject to Section 9, the Board shall also have the authority, both generally
and in particular instances, to waive compliance by a Participant with any
obligation to be performed by him or her under an option, to waive any condition
or provision of an option, and to amend or cancel any option except that the
Board may not take any action with respect to an outstanding option that would
adversely affect the rights of the Participant under such option without such
Participant's consent. Nothing in the preceding sentence shall be construed as
limiting the power of the Board to make adjustments required by Section 4(a) and
Section 4(c) hereof.
<PAGE>

3. EFFECTIVE DATE AND TERM OF PLAN
-------------------------------

The Plan shall become effective on January 9, 1998.

4. SHARES OF COMMON STOCK SUBJECT TO THE PLAN
------------------------------------------

(a) Number of Shares. Subject to adjustment as provided in Section 4(c), an
----------------
aggregate of 550,000 shares of Common Stock may be delivered upon the exercise
of options granted under the Plan.

2
<PAGE>

determined by the Board that such adjustment is appropriate to avoid distortion
in the operation of the Plan.

5. ELIGIBILITY FOR OPTIONS
-----------------------

Persons eligible to receive options under the Plan shall be limited to
holders of options granted by Stream under the 1995 Plan.

6. TERMS AND CONDITIONS OF OPTIONS
-------------------------------

(a) Exercise Price; Number of Shares. The exercise price of each option
--------------------------------
granted under the Plan (the "Replacement Option") shall be equal to the exercise
price of the option granted by Stream with respect to which the Replacement
Option is granted (the "Stream Option") multiplied by 0.119. The number of
shares of Common Stock covered by each such Replacement Option shall equal the
number of shares of Class B Common Stock of Stream covered by the Stream Option;
provided that the number of shares of Common Stock covered by each Replacement
Option granted under the Plan shall be proportionately adjusted to reflect the
proposed conversion of all shares of Class B Common Stock of Stream into shares
of Class A Common Stock.

3
<PAGE>

(3) The Company shall have the right to require, prior to the delivery of any
shares of Common Stock pursuant to the exercise of the Replacement Option,
that the Participant exercising the Replacement Option remit to the Company
an amount in cash or by personal check, certified check, bank draft or
money order payable to the order of the Company sufficient to satisfy any
federal, state or local withholding tax requirements arising in connection
with the exercise of the Replacement Option (the date such obligation
arises being referred to as the "Tax Date") (or make other arrangements
satisfactory to the Company with regard to such taxes). If specified in the
instrument evidencing a Replacement Option or permitted by the Board,
either at the time of the grant of the Replacement Option or the time of
exercise, the Participant may elect, at such time and in such manner as the
Board may prescribe, to satisfy such withholding obligation by (i) delivery
of an unconditional and irrevocable undertaking by a broker to deliver
promptly to the Company sufficient funds to pay such withholding
obligation, (ii) delivering to the Company whole shares of Common Stock
(which the Participant has held for at least six months prior to the
delivery of such shares or acquired on the open market and for which the
Participant has good title, free and clear of all liens and encumbrances)
having a fair market value, determined as of the Tax Date, equal to such
withholding obligation, or (iii) requesting that the Company withhold from
the shares of Common Stock to be delivered upon exercise of the Replacement
Option a number of whole shares of Common Stock having a fair market value
equal, determined as of the Tax Date, to such withholding obligation;
provided, however, that the Company shall have sole discretion to
disapprove of an election pursuant to any of clauses (i), (ii) or (iii),
and that in the case of a Participant who is subject to Section 16 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company may require that the method of satisfying such an obligation be in
compliance with Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder. Shares of Common Stock may be delivered
or withheld having an aggregate fair market value in excess of the minimum
amount required to be withheld, but not in excess of the amount determined
by applying the Participant's maximum marginal tax rate. Any fractional
share of a Common Stock which would be required to satisfy such an
obligation shall be disregarded and the remaining amount due shall be paid
in cash by the Participant.

4
<PAGE>

(4) If a Replacement Option is exercised by the executor or
administrator of a deceased Participant, or by the person or
persons to whom the Replacement Option has been transferred by
the Participant's will or applicable laws of descent and
distribution or pursuant to any beneficiary designation
procedures established by the Company, the Company shall be under
no obligation to deliver shares of Common Stock pursuant to such
exercise until the Company is satisfied as to the authority of
the person or persons exercising the Replacement Option.

(d) Payment for Shares. Shares of Common Stock purchased upon exercise of
------------------
a Replacement Option under the Plan shall be paid for as follows: (i) in cash or
by personal check, certified check, bank draft or money order payable to the
order of the Company or (ii) if specified in the instrument evidencing the
Replacement Option or permitted by the Board, (A) through the delivery of whole
shares of Common Stock (which the Participant has held for at least six months
prior to the delivery of such shares or acquired on the open market and for
which the Participant has good title, free and clear of all liens and
encumbrances) having a fair market value on the last business day preceding the
date of exercise equal to the purchase price or (B) by delivery of a full
recourse promissory note of the Participant to the Company, such note to be
payable on such terms as are specified by the Company, or (C) by delivery of an
unconditional and irrevocable undertaking by a broker to deliver promptly to the
Company sufficient funds to pay the exercise price or (D) by any combination of
the permissible forms of payment. The Company shall have sole discretion to
disapprove of an election pursuant of Common Stock to any of clauses (A)-(D),
and in the case of a Participant who is subject to Section 16 of the Exchange
Act, the Company may require that the method of making such payment be in
compliance with Section 16 and the rules and regulations promulgated thereunder.
Any fractional share of Common Stock which would be required to pay such
purchase price shall be disregarded and the remaining amount due shall be paid
in cash by the Participant. No instrument representing shares of Common Stock
shall be delivered until the full purchase price therefor has been paid.

(e) Delivery of Shares. A Participant shall not have the rights of a
------------------
holder of shares of Common Stock of the Company with regard to Replacement
Options under the Plan except as to shares actually received by him or her under
the Plan.

5
<PAGE>

If the sale of shares of Common Stock has not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), the Company may
require, as a condition to exercise of the Replacement Option, such
representations or agreements as counsel for the Company may consider
appropriate to avoid violation of the Securities Act and may require that the
instruments evidencing such shares of Common Stock bear an appropriate legend
restricting transfer.

6
<PAGE>

For purposes of this Section 6(h), employment shall not be considered terminated
(i) in the case of sick leave or other bona fide leave of absence approved for
purposes of the Plan by the Company or (ii) in the case of a transfer of
employment between the Company and a subsidiary or between subsidiaries, or to
the employment of a corporation (or a parent or subsidiary corporation of such
corporation) issuing or assuming a Replacement Option in a transaction to which
Section 424(a) of the Internal Revenue Code of 1986, as amended from time to
time (the "Code") applies.

7
<PAGE>

full immediately prior to the effectiveness of an Acquisition Event and, unless
assumed or substituted by the successor corporation, will terminate, to the
extent unexercised, upon the consummation of an Acquisition Event, (i) if a
Participant is employed by the Company, CST or Stream (or a subsidiary thereof)
at the time of the occurrence of an Acquisition Event with respect to the
Company, (ii) a Participant is employed by CST (or a subsidiary thereof) at the
time of an occurrence of an Acquisition Event with respect to CST or (iii) a
Participant is employed by Stream (or a subsidiary thereof) at the time of an
occurrence of an Acquisition Event with respect to Stream. This paragraph shall
also apply to a Participant whose employment with the Company, CST or Stream, as
applicable, is terminated prior to the consummation of an Acquisition Event to
the extent such Participant's Replacement Options remain exercisable upon the
consummation of such Acquisition Event. For purposes of this paragraph,
"employment" shall include service for the applicable company as contemplated by
the second paragraph of Section 6(h) above.

7. NO EMPLOYMENT RIGHTS
--------------------

8. AMENDMENT
---------

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.

Arthur Andersen LLP

Boston, MA

January 18, 2000

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MODUS MEDIA
INTERNATIONAL HOLDINGS, INC. FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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0
0
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</TABLE>