UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-KSB


[X]      Annual  Report  Pursuant  to Section 13 or 15(d) of the  Securities
         Exchange  Act of 1934 for the fiscal year ended December 26, 1997

[   ]    Transition Report Under  Section 13 or 15(d) of the Securities Exchange
         Act of 1934 for the transition period from _________to__________

Commission File Number :  0-28426

                            ZOMAX OPTICAL MEDIA, INC.
                 (Name of small business issuer in its charter)

        Minnesota                                            No. 41-1833089
(State or Other Jurisdiction of                             (IRS Employer
Incorporation or Organization)                              Identification No.)

                      5353 Nathan Lane, Plymouth, MN 55442
                    (Address of Principal Executive Offices)

                    Issuer's telephone number (612) 553-9300

       Securities registered under Section 12(b) of the Exchange Act: None

         Securities registered under Section 12(g) of the Exchange Act:
                           Common Stock, no par value

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. YES[x] NO[ ]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-K. [ X ]

Issuer's revenues for its most recent fiscal year.   $37,906,853.

The  aggregate  market  value of the  voting  stock held by  non-affiliates  was
$59,777,610  based on the closing  sale price of the  Company's  Common Stock as
reported on the Nasdaq National Market on March 18, 1998.

The number of shares outstanding of the registrant's common stock as of 
March 18, 1998:  5,273,327 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy  Statement for the Annual  Meeting of  Shareholders  to be
held May 14, 1998, are incorporated by reference into Part III of this report.

Transitional Small Business Disclosure Format (check one)  Yes ___  No  X


<PAGE>



                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS

General

     Zomax Optical Media,  Inc. is a leading  full-service  turnkey  provider of
CDs, diskettes, cassettes and related value-added services. The Company services
the multimedia needs of a wide variety of customers by offering what it believes
to be the most comprehensive range of manufacturing services.  Zomax focuses its
marketing efforts primarily on software  distributors,  computer  manufacturers,
book publishers,  independent  record labels,  and other producers of multimedia
products for retail  distribution  who require  high quality  product in a short
turnaround time, a high level of customer service and competitive prices.

     In addition to  actually  replicating  information  on CDs,  diskettes  and
cassettes,  Zomax offers its customers  "one-stop  shopping" by providing a full
complement  of  related  services  such as  graphic  design,  print  management,
mastering,   replication,   printing,   packaging,   warehousing  and  inventory
management,  fulfillment and distribution,  and returned merchandise  processing
services.

Recent Acquisitions

     Within the last year, the Company has made the following acquisitions:

          Benchmark  Media  Services,  Inc., a software  media  replicator  with
          operations in Plymouth, Minnesota and Indianapolis,  Indiana; acquired
          in March 1997;

          Trotter  Technologies,  Inc.,  an  RMA  processing,   warehousing  and
          distribution  company based in San Jose,  California;  acquired in May
          1997;

          Primary Marketing Group, a manufacturers'  representative group, based
          in San Jose,  California  servicing the needs of computer hardware and
          software  publishers;  primary sales group for Kao Infosystems Company
          in California; acquired in February 1998;

          Next  Generation  Services,  LLC, an RMA processor with  facilities in
          Hayward,  California and Boston,  Massachusetts;  acquired in February
          1998;

          Primary  Marketing  Group  Ltd.,  an RMA  processor  and  provider  of
          manufacturers'   representative  services  in  Ireland;   acquired  in
          February 1998; and

          Certain  assets and  contractual  rights of Kao  Infosystems  Company,
          including an agreement  regarding the manufacture and  distribution of
          products for Novell, Inc.; acquired in February 1998.

<PAGE>

Industry

     CD  technology  was  introduced in 1982 as a means for digital audio signal
delivery and quickly  became the standard  audio media format.  In 1985,  CD-ROM
computer software  products first became  available,  but for several years this
format was limited to institutional users such as libraries,  schools, and large
corporations.  Standardization  in  multimedia  technology  and  the  subsequent
introduction of multimedia PCs for consumers in 1992 led to a boom in the market
for CD-ROM products. The worldwide installed base of CD-ROM readers doubled each
year from 1992 to 1995, when the installed base approached 70 million.  
     
     The  installed  base of CD and DVD drives is a significant  factor  driving
demand for the services  provided by Zomax and other  multimedia  manufacturers.
Currently,  multimedia  manufacturers can be divided into three  categories:  1)
major  international  music company CD manufacturers  who are primarily  captive
providers to their affiliated music companies,  2) independent CD manufacturers,
and 3) small localized  manufacturers.  Affiliates of major  international music
companies and independent manufacturers  collectively produced a majority of the
1997 worldwide output of CD-ROM and CD-Audio.  Most OEMs and software publishers
in the computer industry utilize  independent  manufacturers  like Zomax to take
advantage of their manufacturing expertise and capital investment,  enabling the
OEMs and publishers to concentrate on their own core competencies. This reliance
enables the OEMs and software  publishers  to reduce costs,  accelerate  time to
market, access advanced manufacturing and design capabilities,  focus resources,
reduce capital  investment,  improve inventory  management and purchasing power,
and  access  manufacturing,  warehousing,  and  distribution  capabilities  in a
variety of geographic regions.

CD-ROM and Diskette Market

     CD-ROM  (compact  disc-read  only  memory)  technology  offers  the  memory
capacity necessary to fully integrate sound,  graphics and text. A single CD-ROM
can store  approximately 630 megabytes of information (the equivalent of 200,000
pages of text) and supply high definition images,  data, stereo sound, video and
text.  CD-ROM is  ideally  suited  for the  storage  of large  amounts of stable
information  for  distribution  to diverse  user  populations.  Although  CD-ROM
products were initially  limited to business and professional  applications such
as library  references,  the  widespread  presence of CD-ROM  drives in personal
computers  has  created  an  enormous  retail  market  for   entertainment   and
"edutainment" CD-ROM products. 

     Some  software  publishers  continue  to require  output in both CD-ROM and
diskette  formats.  Despite a declining  trend in  diskette  sales as CD-ROM and
DVD-ROM sales grow,  diskette  sales are expected to continue to be a meaningful
source of revenue in the near future.

DVD Market

     As multimedia  applications  have expanded and become more complex,  so has
the demand for improvement in the storage  capacity of CD-ROM units. The new DVD
(digital  versatile  disc)  technology  is the next  step  after  CD-ROM  in the
evolution of digital information storage.  DVD technology  incorporates two CDs,
each one-half the thickness of standard CDs, bonded together to form one DVD. As
a result,  depending  on the  configuration  DVD-ROMs  can store  from 4.7 to 17
gigabytes of information,  approximately  seven to 27 times the storage capacity
of CD-ROMs.  DVD-Video  products  can hold a  full-length  motion  picture  (135
minutes) on a standard-sized CD with video and audio quality superior to current
videocassette quality.  Beginning late in 1997 and continuing in 1998, equipment
manufacturers  are  incorporating DVD technology into console players (used only
to play movies), as well as in personal computers as a means for reading DVD-ROM
format  software.   DVD-Video  equipment   manufacturers  and  movie  production
companies have not yet agreed on a standard  DVD-Video  delivery  system format,
and at present at least two competing and  incompatible  delivery systems exist.

CD-Audio and Cassette Market

     The first major  application of CD technology was in the prerecorded  music
market.  Consumer  acceptance  of CD-Audio  has been driven by its  demonstrated
advantages over other formats in sound quality, random accessing and indexing of
data and by the  market  penetration  of CD  players.  CD-Audio  has  become the
standard for home audio systems,  with an installed base of 171 million in North
and South  America  and 455 million  worldwide.  Additional  significant  market
expansion has resulted from increased sales of in-car and portable CD players.

     The audio  cassette is expected to continue to be a  significant  format in
the market, particularly in the audio book and spoken word market. The Recording
Industry  Association  of America  estimated  that 172.6 million audio  cassette
units were  distributed  in the U.S. in 1997,  down from 225.3  million units in
1996.  Although a high level of  hardware  penetration  indicates  a  continuing
demand for audio  cassettes for several  years,  there can be no assurance  that
audio cassettes will continue to be in demand in the future.

<PAGE>

RMA Processing

     Software publishers and computer hardware  manufacturers require receiving,
disassembly, sorting, recycling, repackaging, and redistribution capabilities to
effectively process returned merchandise.  Although many software publishers and
computer  hardware  OEMs still  dedicate  in-house  resources  to RMA  services,
significant and increasing  demand exists for outsource  services from providers
who can reliably process  returned  software.  Such  outsourcing  frees software
publishers  and  OEMs  from  high  costs  associated  with  dedicating  internal
facilities  and  personnel to processing  returned  products and enables them to
benefit from the  outsource  provider's  efficiencies  due to higher  volume and
greater expertise.

Services

     The  Company  believes  that it  offers  the  most  comprehensive  range of
multimedia  manufacturing services. These value-added services cover each aspect
of a software  product's life cycle. Zomax provides its customers with a turnkey
solution to managing the logistics of the manufacturing  process.  Customers can
engage Zomax on a service-by-service basis, depending on their needs.

     Graphic Design. The Company works directly with its customers in developing
product and packaging designs.

     Print  Management.  The  Company  receives  print  specifications  from its
customers,  facilitates  printing  purchases and implements  quality controls to
ensure  on-time  delivery of the end product.  Additionally,  Zomax  manages the
print inventory of its customers to assist them in order fulfillment.

     Mastering.  Through  mastering  process,  metal  stampers are created which
contain  the bytes of data in a digital  format.  The  metal  stampers  are then
mounted in the  plastic  injection  molding  equipment  to create the disc.  The
mastering  process forms the master image of the CD from which the polycarbonate
replicas are molded.  A laser beam recorder  transfers  the digital  information
onto a  photo-sensitive  coating  applied to a glass mastering  substrate.  This
process creates the "glass master" with the characteristic CD pits etched in the
photo-sensitive  coating.  The mastering  process is critical to product quality
and is  therefore  conducted  in a clean-room  environment  free of  microscopic
contaminants  which can  obscure  large  amounts of data.  The  Company's  newly
acquired mastering system has the capability of creating DVD masters.

<PAGE>

     Replication.  The  Company  has  the  capabilities  to  replicate  CD-ROMs,
CD-Audio,  cassettes  and  diskettes.  With  the  completion  of  certain  plant
reconfigurations,  the  Company  expects  to have the  capability  to  replicate
DVD-ROM and  DVD-Video  in  mid-1998.  The  replication  of CDs utilizes a fully
integrated  robotic line process which  incorporates a plastic injection molding
press  and  metalizing,  lacquering  and  inspection  equipment.  High  quality,
CD-grade  polycarbonate is injected into the mold cavity where the metal stamper
has been mounted.  The clear  polycarbonate disc containing all of the digitized
data is then covered with a metallic  coating to provide for  reflection  of the
reading  laser beam in the player.  A thin layer of lacquer is then applied over
the  metal  to  protect  it and to serve as a base  for  printing  on the  disc.
Unacceptable  CDs are  detected  and  discarded  through  the inline  inspection
process.  The Company has currently 11 CD production  lines at its facilities in
Minnesota and California.

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

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

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

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

     Warehousing (Inventory  Management).  By offering warehousing and inventory
management  services  to its  customers,  Zomax can aid its  customers  in their
efforts to reduce  costs as well as the time it takes to get products to market.
The Company is in the process of enhancing its management information systems to
allow it to coordinate its customers' inventory,  replication and RMA processing
needs.

<PAGE>

     Fulfillment  and  Distribution  Services.  The Company offers its customers
flexible,  just-in-time  delivery  programs  allowing  product  shipments  to be
closely coordinated with customers'  inventory  requirements.  Zomax can receive
and fulfill orders on a daily basis.  The Company's  warehousing  services offer
customers the  opportunity  to have their products  shipped  directly into their
distribution channels, enabling them to be more responsive to market demand.

     RMA  Processing.  Zomax recently  expanded its array of services to include
software  and  hardware  returned  merchandise  processing  services.  With  the
addition of this service,  the Company can offer its customers a solution to the
difficult problem of handling  returned,  obsolete and excess inventory.  At the
Company's  facilities  in  California,   Indiana,  Ireland,   Massachusetts  and
Minnesota,  Zomax employees receive, sort, count, recycle,  re-price,  repackage
and redistribute returned software merchandise into the market. The Company also
receives,  tests and redistributes hardware at one of its California facilities.
The  Company  believes  that  it is  the  largest  independent  provider  of RMA
processing services.

Marketing and Sales

     The  Company  markets and sells its  multimedia  products  and  services to
software publishers,  such as Novell, Inc., and computer manufacturers,  such as
Gateway 2000, book publishers,  independent recording studios,  marketing groups
and data base suppliers.  Zomax  currently  services over 300 customers in these
industry segments.

     Zomax's marketing strategy is to focus on a niche of various media markets,
such as multimedia  software  publishers and  independent  record  labels,  that
require  personal  service,  flexibility,  fast turn-around time and the turnkey
services the Company  offers.  The Company has  successfully  marketed itself to
these target market groups by emphasizing its ability to take the information to
be duplicated and perform,  or arrange for the  performance of, all of the steps
in the process from replication to packaging to delivery.

     The  Company  has  obtained  select   authorized   replicator  status  with
Microsoft,  Inc. that allows the Company to replicate  Microsoft(R) products for
Gateway  2000,  a licensee of  Microsoft(R)  products.  As the  Company  pursues
diversification  of its customer base, the Company intends to seek authorization
to replicate  Microsoft(R)  products for additional  OEMs and licensees of these
products.  In addition,  the Company has passed the rigorous testing required to
become an Apple(R)-approved  vendor;  however, no significant sales to date have
resulted from attaining this status.

     One of the  Company's  primary  customers  has  been,  and is  expected  to
continue  to be,  Gateway,  a  major  manufacturer  of  IBM-compatible  personal
computers.  In 1996 and  1997,  Gateway  accounted  for  26.1%  and 48.4% of the
Company's total revenues,  respectively.  Zomax is a primary  supplier of CDs to
Gateway and was named Gateway's 1997 Supplier of the Year in North America.

     The Company  employs a direct  sales staff  force that is  responsible  for
maintaining  relationships  with existing  customers and developing new business
relationships.  The sales staff is supported by a customer service staff that is

<PAGE>

responsible  for ensuring that each order is processed on a timely  basis,  that
all  required  support  materials  are in place  and  that  quality  levels  are
achieved.

Competition

     The  multimedia  product  manufacturing  and  service  industry  is  highly
competitive  and  experiencing a trend of  consolidation.  Participants  in this
industry are divided into three distinct  categories,  each  consisting of niche
producers that service a defined set of customer needs:

          Affiliates  of major  international  music  companies.  This  category
          consists  of  large   manufacturers  who  are  affiliated  with  major
          international music companies such as Sony Music Entertainment,  Inc.,
          PolyGram Holdings,  Inc., Warner Music, BMG Music and EMI Music. These
          manufacturers  dedicate  most of their  production  to the  affiliated
          record  labels and  typically  offer a very limited  amount of turnkey
          services.

          Independent  manufacturers.  Participants  in  this  category  include
          companies such as Zomax, Disctronics,  Inc., Denon Electronics,  Inc.,
          Kao  Infosystems   Company,   Cinram  International  Inc.,  Nimbus  CD
          International, Inc. and Metatec Corporation. Independent manufacturers
          generally  have the ability to handle  large volume  requirements  and
          have varying degrees of service capability.  However, most independent
          manufacturers  do not  typically  offer  as  comprehensive  a range of
          outsource services as Zomax.

          Small  localized  manufacturers.  Manufacturers  in this  category are
          quite small,  with one or two  production  lines,  and offer a limited
          range of related services. The complexity of the manufacturing process
          and the large capital investment required to maintain and upgrade this
          process are likely to severely  limit these small  manufacturers,  and
          potential  entrants into the market,  from pursuing a large segment of
          the market.

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

     Electronic  on-line  delivery of digital  information,  such as through the
Internet, is a potential future competitor of CD and DVD technology. The Company
believes  that  current and  projected  transmission  speeds and  infrastructure
limitations of on- line delivery systems will prevent them from replacing CD and
DVD technology in the foreseeable future. In addition, future advances in CD and
DVD technology, such as higher speed drives and greater data compression,  could
increase the advantages of these  technologies over electronic  on-line delivery
and other potential competitive technologies.

<PAGE>

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

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

     The Company  believes that it competes  favorably with its competitors with
respect to quality,  service,  reliability,  price,  manufacturing  capacity and
timely delivery of product, the principal  competitive factors in this industry.
The Company also believes that customers are willing to incur  additional  costs
for extra services.  As such, to enhance its competitive  position,  the Company
offers a full range of  value-added  services  to  customers  including  design,
preparation and printing of artwork and packaging,  warehousing and shipping and
RMA processing.

Proprietary Rights

     Zomax, like most other CD manufacturers, uses patented technology primarily
under nonexclusive licenses. These licenses generally provide for the payment of
royalties based upon the number,  size and use of CDs sold and terminate  either
upon the expiration of the patent being licensed or on a date certain.

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

     The Company will also be required to obtain licenses from the owners of DVD
technology  to  manufacture  DVDs.  Although the Company  expects to obtain such
licenses,  no assurances can be made that such licenses will be obtained and the
Company  cannot predict the amount of the royalty that will be payable under any
such license.

Employees

     The Company has approximately 435 full-time  employees and hires additional
employees  on a  temporary,  full-time  basis to  perform  manufacturing-related
services as the need arises.  The Company  currently  operates  its  Minneapolis
facility  24 hours a day,  seven  days a week.  The  Company  believes  that its
relations  with its  employees  are good.  None of the  Company's  employees  is
covered by a collective bargaining agreement.

<PAGE>

Cautionary Statements

     Certain of the  statements  contained  herein and in the Annual  Report are
forward looking, based on current expectations and are made pursuant to the safe
harbor  provisions  of the  Private  Securities  Reform  Act of 1995.  As stated
therein,  there are certain important factors that could cause results to differ
materially from those anticipated by those  statements.  Investors are cautioned
that all forward-looking statements involve risk and uncertainty.

ITEM 2.  DESCRIPTION OF PROPERTY

     The Company leases several  facilities  throughout the U.S. and one site in
Europe.   The  following  table  sets  forth  information  about  the  Company's
facilities.  All of the facilities  listed below, with the exception of the main
headquarters  in  Minnesota,  were  acquired by the  Company  during the last 12
months.  Management believes its facilities are adequate for the Company for the
foreseeable future.

              Approximate Square     Lease 
 Location          Feet            Expiration  Services
---------     ------------------   ----------  --------
Billerica, 
Massachusetts      25,000            1999      RMA processing

Dublin, 
Ireland            10,000            2002      RMA processing

Hayward, 
California         64,000            2002      RMA processing and hardware 
                                               return testing and processing

Indianapolis,
Indiana            16,000            2002(1)   Diskette replication, packaging,
                                               fulfillment and distribution

Minneapolis, 
Minnesota          92,000            2000(2)   Graphic design, print management,
                                               mastering, replication, printing,
                                               packaging, warehousing, 
                                               fulfillment, distribution and 
                                               RMA processing

San Jose, 
California        250,000            2002(3)   Includes new facility completed
                                               in 1998 to provide graphic 
                                               design, print management, 
                                               mastering, replication, printing,
                                               packaging, warehousing, 
                                               fulfillment, distribution and RMA
                                               processing

<PAGE>

--------------------
(1)  Option to extend for an additional five years.
(2)  Lease with Nathan Lane  Partnership,  LLP (described below) expires in 2000
     but has an option to extend two additional terms of three years each. Lease
     for additional  facility expires in 2000 but has an option to extend for an
     additional three years.
(3)  Includes leases for three different  sites, two of which expire in 2002 but
     have  options to extend for an  additional  five  years.  The third  lease,
     covering the Berryessa facility (described below), expires in 1999.

     The Company  leases a majority of its  manufacturing,  office and warehouse
space  in  Minneapolis,  Minnesota  from  Nathan  Lane  Limited  Partnership,  a
Minnesota limited liability  partnership of which Mr. Phillip T. Levin, Chairman
of the Board of Zomax,  owns a one-third  interest.  Pursuant to this lease,  as
amended,  the Company leases approximately 64,000 square feet at an average base
rent of $4.57 per net  rentable  square  foot per  annum.  The  Company  is also
obligated to pay its proportionate share of taxes and operating expenses.

     Pursuant to the Company's  lease of its primary  manufacturing  facility in
San Jose,  the Company  leases  approximately  108,000 square feet at an average
base rent of $3.06 per square foot per annum for the first year of the lease and
increasing  by 3.0% each  year  thereafter.  This  lease  commenced  in 1997 and
expires in 2002,  but the Company may, at its option,  extend the lease term for
an additional five years.

     The Company leases its Berryessa Road facility in San Jose under a sublease
from Novell,  Inc. At this facility,  the Company provides services primarily to
Novell under the terms of an Agreement for Manufacturing Turnkey Products.

ITEM 3.  LEGAL PROCEEDINGS

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

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were  submitted to a vote of security  holders during the fourth
quarter of 1997.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's  Common Stock is quoted on the Nasdaq  National  Market under
the symbol "ZOMX." The following  table sets forth,  for the periods  indicated,
the high and low bid  prices  per  share  since  May 10,  1996,  the date of the
Company's  initial  public  offering  of  Common  Stock.  These  bid  quotations
represent inter-dealer prices and do not include retail mark-ups,  mark-downs or
commissions and may not necessarily represent actual transactions.

<PAGE>

<TABLE>
<CAPTION>

                
        Fiscal Year Ended December 27, 1996:                                         High                Low
        <S>                                                                         <C>                 <C>   
        Second Quarter (from May 10, 1996)...................................       $7.57               $6.75
        Third Quarter........................................................        8.63                6.75
        Fourth Quarter.......................................................        7.88                5.00

        Fiscal Year Ended December 26, 1997:

        First Quarter........................................................       $7.38               $4.75
        Second Quarter.......................................................        7.63                4.13
        Third Quarter........................................................       10.38                7.75
        Fourth Quarter.......................................................       15.00               10.50


</TABLE>


     The Company has never  declared or paid cash dividends on its capital stock
and  does  not  anticipate  declaring  or  paying  any  cash  dividends  in  the
foreseeable  future.  The  Company  intends to retain  future  earnings  for the
development of its business.

     As of March 18, 1998,  there were  approximately  110 record holders of the
Company's  Common Stock,  excluding  stockholders  whose stock is held either in
nominee name and/or street name brokerage  accounts.  Based on information which
the Company has obtained from its transfer agent, there are approximately  2,700
stockholders of the Company's Common Stock whose stock is held either in nominee
name and/or street name brokerage accounts.

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

General

     The  Company  is  a  full-service,  turnkey  provider  of  CDs,  cassettes,
diskettes and related  services.  The Company services the multimedia needs of a
wide  variety  of   customers,   including   software   distributors,   computer
manufacturers,  book publishers,  independent record labels, and other producers
of  multimedia  products  for  retail  distribution.  In  addition  to  actually
replicating information on CDs, cassettes, and diskettes, the Company offers its
customers  a  "one-stop  shop"  with a full range of  related  services  such as
package design, graphics design, printing,  mastering,  packaging,  warehousing,
distribution and returns processing.

     The Company was incorporated on February 22, 1996 and completed the initial
public  offering of its common stock on May 10,  1996.  Upon  completion  of the
initial  public  offering,  the Company  acquired all of the  operating  assets,
liabilities,  and debt of Zomax Optical Media Limited Partnership  (Partnership)
in a tax-free  exchange for 2,800,000 shares of its common stock.  This transfer
was accounted for at historical cost with no change in the book and tax bases of
the assets contributed and liabilities and debts assumed, except for tax effects
resulting from converting from a partnership to a corporation.

<PAGE>

     On March 31, 1997, the Company acquired the outstanding shares of Benchmark
Media Services,  Inc.  ("Benchmark").  Benchmark is a software media  replicator
with  operations in Plymouth,  Minnesota and  Indianapolis,  Indiana.  On May 1,
1997, the Company acquired the outstanding shares of Trotter Technologies,  Inc.
("Trotter").  Trotter  is a returned  merchandise  processing,  warehousing  and
distribution  company  based in San  Jose,  California  servicing  the  software
publishing  market.  These  acquisitions  were  accounted for using the purchase
method of accounting.

     On February 4, 1998,  Primary  Marketing  Group ("PMG") and Next Generation
Services  LLC  ("NGS")  were  merged  with and into Zomax  Services,  Inc.  (the
"Subsidiary"),  a  wholly-owned  subsidiary of the Company  pursuant to a Merger
Agreement dated February 3, 1998 (the "Merger").  In the Merger,  all issued and
outstanding  shares of PMG Common  Stock and  membership  interests  in NGS were
converted  into the right to  receive  795,860  shares of the  Company's  Common
Stock. Prior to the Merger, PMG and NGS provided  manufacturer's  representative
services and returned  merchandise  processing services in the computer hardware
and software  publishing  industries from  facilities  located in and around San
Jose,  California  and Boston,  Massachusetts.  The  Company  intends to provide
substantially  the same products and services that PMG and NGS provided prior to
the merger.

     As a result of the Merger, the Subsidiary  succeeded to PMG's 78% ownership
stake in the capital stock of Primary Marketing Group Limited ("PMG Limited"), a
company incorporated under the laws of Ireland.  Simultaneous to the Merger, the
Subsidiary  acquired the remaining 22% of the  outstanding  capital stock of PMG
Limited in exchange  for 4,142 of the  Company's  Common  Stock  pursuant to the
terms of a Stock Purchase Agreement dated February 3, 1998 (the  "Acquisition").
PMG Limited's business consists of providing returned merchandise processing and
manufacturer's  representative  services in the  computer  hardware and software
publishing industries from facilities located in Dublin, Ireland. The Merger and
Acquisition  will be  accounted  for using the  pooling of  interests  method of
accounting.

Results of Operations

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

<TABLE>
<CAPTION>

                                                                                         (Predecessor 
                                            Year Ended              Year Ended           Partnership) Year
                                           Dec. 26, 1997           Dec. 27, 1996         Ended Dec. 31, 1995
                                           ----------------        ---------------       -------------------
<S>                                            <C>                    <C>                       <C>   
Sales                                          100.0  %               100.0  %                  100.0  %
Cost of goods sold                              74.0  %                71.5  %                   75.9  %
                                               -------                -------                   -------
Gross profit                                    26.0  %                28.5  %                   24.1  %
Selling, general & administrative               15.5  %                16.4  %                   15.5  %
                                               -------                -------                   -------
Operating income                                10.5  %                12.1  %                    8.6  %
Interest expense                                (1.1) %                (1.9)  %                  (2.4) %
Interest income                                   .6  %                 1.5  %                     .5  %
                                               -------                -------                   -------
Income before income taxes                      10.0  %                11.7  %                    6.7  %
                                               -------                -------                   -------

</TABLE>

<PAGE>

Sales

     Sales increased 104% to $37.9 million in 1997 from $18.5 million in 1996 as
compared to $13.2 million in 1995. The 1997 sales increase was attributable to a
69%  increase  related to new and existing  customers  with the  remaining  from
companies  acquired during the year. The 1997 sales increase resulted from a 70%
increase in CD sales and a 1200%  increase in  diskette  sales to $7.4  million,
partially  offset by a 12% decline in audio cassette sales.  The higher sales in
1996 over 1995  resulted  principally  from a 46%  increase  in CD sales and the
addition  of  diskette  duplicating  services,  offset by a 16% decline in audio
cassette sales.  Substantially  all of the increase in CD sales in 1997 and 1996
was due to an  increase in the number of units sold.  The Company  believes  the
growth in CD sales resulted from increased  production capacity in both 1997 and
1996,  increased  marketing  efforts and the  strategy  of being a full  service
provider of multimedia products and related services.

Cost of goods sold

     Cost of goods sold as a percentage of sales was 74.0%,  71.5% and 75.9% for
1997, 1996 and 1995, respectively.  One significant reason for the change in the
cost of goods sold  percentage is the amount of CD  outsourcing  required by the
Company.  The Company  outsources its CD production  when customer orders exceed
its production  capabilities.  The Company  outsourced 9% of its CD sales during
1997 as  compared  to 3% in 1996 and 35% in 1995.  The cost for such  outsourced
production is significantly higher than the cost of CDs produced by the Company.
The Company was able to reduce its  outsourcing  from 1995 levels by  increasing
its CD  manufacturing  capacity  in 1997 and 1996  through  the  purchase of new
machinery.

Selling, general and administrative expense

     Selling,  general and  administrative  expense as a percentage of sales was
15.5% in 1997,  16.4% in 1996 and  15.5% in 1995.  From  1996 to 1997,  selling,
general and  administrative  expense  decreased  as a percentage  of sales,  but
increased in absolute  dollars by $2.8  million.  The dollar  increase  resulted
primarily from general increases in sales volumes and growth of the Company. The
increase  in 1996 from 1995  levels  resulted  principally  from an  increase in
salary expense,  due to hiring  additional  corporate  staff in sales,  customer
service,  accounting and other  administrative  functions.  In 1996, the Company
also  increased  its  reserve  for  doubtful  accounts,  principally  due to the
uncertainty  regarding  the  collection  of certain  receivable  balances and an
overall increase in accounts receivable balances.  In 1996 and 1997, the Company
also incurred additional costs associated with being a public company.

Interest income (expense)

     Interest income was $222,120, $284,624 and $70,956, for 1997, 1996 and 1995
respectively.  Interest  income  increased  in 1996 with the  investment  of the
proceeds  from the  Company's  initial  public  offering  in May 1996.  Interest
expense  was  $408,415,   $357,166,  and  $318,087  for  1997,  1996  and  1995,
respectively. Interest expense increased with borrowings to finance purchases of
additional CD manufacturing equipment in 1997 and 1996.

<PAGE>

Income tax provision

     The Company's  effective  income tax rate for 1997 was 39.7% as compared to
40.4% for the period from May 11, 1996 through  December 27, 1996.  Prior to May
11, 1996, the Company operated as a partnership for income tax purposes.

Liquidity and Capital Resources

     As of December  26,  1997,  the Company had cash  totaling  $5,018,903  and
working  capital of  $4,021,175.  The decrease in cash and working  capital from
1996 levels of $6,914,899 and $7,810,373,  respectively, resulted primarily from
cash used in  purchases  of property  and  equipment  and general  growth of the
Company.  The Company has  committed  to the  purchase of equipment at a cost of
$5.1  million  in  1998.  The  majority  of this  equipment  is  related  to the
construction of a new CD facility in San Jose, California.  The Company plans to
finance these  purchases  with long term  financing and cash.  The Company has a
revolving line of credit facility for up to $5 million of borrowings  limited to
an amount based on a formula using eligible accounts receivable and inventories.
There were no borrowings outstanding under the revolving line of credit facility
at December 26, 1997. In addition,  the Company has $4.6 million available under
a capital  term loan  facility.  The  Company  believes  that it has  sufficient
liquidity  and  capital  resources  to meet  its  operating  needs  and  capital
expenditure requirements for the foreseeable future.

     In 1997,  the Company  generated  $5.0 million of cash from  operations  as
compared  to $2.1  million in 1996 and used $.2  million in 1995.  In 1997,  the
Company  purchased $5.7 million of equipment as compared to $4.0 million in 1996
and $2.4 million in 1995. During 1997, the Company financed equipment  purchases
totaling  $3,650,000 with long term debt compared to $791,000 financed with long
term debt in 1996 and $2.0 million in 1995.

Seasonality

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

Inflation

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

Outlook

     The  statements  contained  in this Outlook  section and  elsewhere in this
Annual Report are based on current  expectations.  These  statements are forward
looking  and are made  pursuant  to the safe  harbor  provisions  of the Private

<PAGE>

Securities  Reform Act of 1995. There are certain  important  factors that could
cause  results  to  differ  materially  from  those  anticipated  by some of the
statements  made  herein.  Investors  are  cautioned  that  all  forward-looking
statements involve risk and uncertainty.

     The Company  believes the total number of CDs sold  worldwide will continue
to grow in 1998. 1998 unit prices are expected to remain somewhat  consistent as
the  number  of  CD   manufacturers   and   production   capacity  for  existing
manufacturers has not grown  significantly.  Further,  the Company believes that
its recent  acquisitions  will make  significant  contributions  to its sales in
1998.  The  Company  believes it has the  personnel,  strategies  and  financial
strength  in place to support  the  expected  increase  in sales  growth  with a
minimum  increase in salaried  personnel.  However,  increases in the  Company's
sales and its ability to be a leader in the  industry  depends on its ability to
manage industry  changes as well as its own growth and  organizational  changes,
particularly with respect to the integration of recent acquisitions.

     The  Company   plans  to  expand  its   manufacturing   capacity  with  the
construction  of a new  facility  in San Jose in the first  quarter  of 1998 and
additional  molding equipment in the second half of 1998. Also in the first half
of 1998, the Company expects to complete upgrades to its facilities, enabling it
to manufacture DVDs, which the Company believes may have a significant impact on
the  software  publishing  industry,  and thus,  on many of its  customers.  The
Company  believes  that  these  advancements  will  allow it to pursue a broader
customer  base and improve the quality of its products.  The Company  intends to
finance  these   purchases   with  long  term   financing  and  existing   cash.
Additionally,  the  Company  intends  to expand  its  operations  nationally  by
increasing  its  presence  on the East and West  coasts  as well  through  plant
start-ups or acquisitions.  There can be no guarantee, however, that the Company
will be able to  secure  the  necessary  financing  or find  suitable  expansion
opportunities.  Its inability to do so will result in the delay or  cancellation
of planned equipment  purchases and the need to forego other growth plans, which
may  adversely  impact the  Company's  ability to meet  market  demand or expand
operations.  Further,  there can be no assurance that market demand will support
these changes or that any acquisitions,  plant start-ups or equipment  purchases
will be successfully integrated into the Company's operations.

     If CD market demand does not continue to grow as expected,  revenue  growth
would be adversely  impacted and the  manufacturing  capacity  installed  may be
underutilized.  Pricing  strategies of competitors and general economic factors,
such as consumer confidence and inflation, all impact the Company.



<PAGE>


ITEM 7.  FINANCIAL STATEMENTS

     The following financial  statements of the Company are included immediately
following the signature page of this report on the pages indicated:

                                                                         Page
 Report of Independent  Public Accountants dated February 21, 1998        F-1 
 Consolidated  Balance  Sheets as of  December  26,  1997 and
    December 27, 1996                                                     F-2
 Consolidated  Statements of Operations for
    Years Ended December 26, 1997, December 27, 1996 
    and December 31, 1995                                                 F-3
 Consolidated  Statements of Partners' Capital and Shareholders'
    Equity for Years Ended December 26, 1997, December 27,
    1996 and December 31, 1995                                            F-4
  Consolidated  Statements of Cash Flows for Years Ended  December
     26, 1997,  December 27, 1996 and December 31, 1995                   F-5
  Notes to Consolidated Financial Statements                              F-6


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

         Not applicable.


                                    PART III

ITEM 9.  DIRECTORS,  EXECUTIVE  OFFICERS,  PROMOTERS AND CONTROL  PERSONS;  
         COMPLIANCE WITH SECTION 16A OF THE EXCHANGE ACT

     The information  concerning the Company's  directors and executive officers
and  compliance  with  Section  16(a)  required by this item is contained in the
sections entitled "Election of Directors,"  "Executive  Officers of the Company"
and  "Compliance  with  Section  16(a) of the  Exchange  Act,"  appearing in the
Company's Proxy Statement to be delivered to stockholders in connection with the
Annual Meeting of Stockholders  to be held on May 14, 1998. Such  information is
incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION

     The information  required by this item is contained in the section entitled
"Executive  Compensation"  appearing  in the  Company's  Proxy  Statement  to be
delivered to  stockholders in connection with the Annual Meeting of Stockholders
to be  held  on May  14,  1998.  Such  information  is  incorporated  herein  by
reference.

<PAGE>

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is contained in the sections entitled
"Principal Shareholders and Management Shareholdings" appearing in the Company's
Proxy  Statement to be delivered to  stockholders  in connection with the Annual
Meeting  of  Stockholders  to be held  on May  14,  1998.  Such  information  is
incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information  required by this item is contained in the section entitled
"Certain  Transactions"  appearing  in  the  Company's  Proxy  Statement  to  be
delivered to  stockholders in connection with the Annual Meeting of Stockholders
to be  held  on May  14,  1998.  Such  information  is  incorporated  herein  by
reference.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         (a)   Exhibits

         The following exhibits are included in this report: See "Exhibit Index"
immediately following financial statements following the signature page of this
Form 10-KSB.

         (b)   Reports on Form 8-K.

         No reports on Form 8-K were  filed  during the fourth  quarter of 1997.
Subsequently,  the Company filed a Form 8-K dated February 4, 1998 to report the
acquisition of Next Generation Services, LLC and Primary Marketing Group.



<PAGE>



                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                       ZOMAX OPTICAL MEDIA, INC.

Date:  March 25, 1998

                                        By /s/ James T. Anderson
                                           James T. Anderson
                                           President and Chief Executive Officer

In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated below.

Each person whose  signature  appears below  constitutes  and appoints  James T.
Anderson and James E. Flaherty as the undersigned's true and lawful attorneys-in
fact and  agents,  each  acting  alone,  with  full  power of  substitution  and
resubstitution,  for the undersigned and in the  undersigned's  name,  place and
stead,  in any and all  amendments  to this Annual  Report on Form 10-KSB and to
file the same,  with all exhibits  thereto,  and other  documents in  connection
therewith,  with the  Securities  and  Exchange  Commission,  granted  unto said
attorneys-in-fact  and agents, each acting alone, full power and authority to do
and perform each and every act and thing  requisite  and necessary to be done in
and about the premises,  as fully to all intents and purposes as the undersigned
might  or  could  do  in  person,  hereby  ratifying  and  confirming  all  said
attorneys-in-fact   and  agents,   each  acting  alone,  or  his  substitute  or
substitutes, may lawfully do or cause to be done by virtue thereof.

Name                         Title                                Date

/s/ James T. Anderson        President, Chief Executive Officer   March 25, 1998
James T. Anderson            and Director (principal executive
                             officer)

/s/James E. Flaherty         Chief Financial Officer              March 25, 1998
James E. Flaherty            and Secretary (principal financial
                             and accounting officer)

/s/Phillip T. Levin          Chairman of the Board                March 25, 1998
Phillip T. Levin

                             Director
Robert Ezrilov

/s/Howard P. Liszt           Director                             March 25, 1998
Howard P. Liszt

/s/Janice Ozzello Wilcox     Director                             March 25, 1998
Janice Ozzello Wilcox


<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Zomax Optical Media, Inc.:

We have audited the  accompanying  consolidated  balance sheets of Zomax Optical
Media,  Inc. (a Minnesota  corporation  which  operated as Zomax  Optical  Media
Limited  Partnership  through May 10, 1996) and  Subsidiaries as of December 26,
1997  and  December  27,  1996,  and  the  related  consolidated  statements  of
operations,  partners' capital and shareholders'  equity and cash flows for each
of the three fiscal years in the period ended December 26, 1997. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

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



                                                  /S/ ARTHUR ANDERSEN LLP



Minneapolis, Minnesota,
February 21, 1998



<PAGE>



                   ZOMAX OPTICAL MEDIA, INC. AND SUBSIDIARIES
             (Successor to Zomax Optical Media Limited Partnership)

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                      December 26,       December 27,
                                                                                          1997              1996
                                                                                     -------------      ------------
                                    ASSETS
<S>                                                                                   <C>                <C>    
CURRENT ASSETS:
   Cash and cash equivalents                                                          $ 5,018,903        $ 6,914,899
   Accounts receivable, net of allowance for doubtful accounts
      of $781,000 and $531,000                                                          6,105,574          3,944,929
   Inventories                                                                          1,465,911          1,262,665
   Deferred income taxes                                                                  897,000            494,000
   Prepaid expenses and other                                                             781,265            110,443
                                                                                     ------------       ------------
               Total current assets                                                    14,268,653         12,726,936

PROPERTY AND EQUIPMENT, net                                                            13,560,563          7,574,501

GOODWILL, net                                                                           1,228,023                  -

OTHER ASSETS, net                                                                          27,572            138,416
                                                                                     ------------       ------------
                                                                                      $29,084,811        $20,439,853
                                                                                     ============       ============
                     LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Current portion of notes payable                                                   $ 2,153,950        $ 1,508,607
   Accounts payable                                                                     2,835,069          1,590,088
   Accrued expenses:
      Accrued royalties                                                                 2,994,768            793,468
      Accrued compensation                                                                939,387            466,896
      Other                                                                               328,422            249,685
   Income taxes payable                                                                   240,882            513,819
                                                                                     ------------       ------------
               Total current liabilities                                                9,492,478          5,122,563

LONG-TERM NOTES PAYABLE, net of current portion                                         3,040,642          1,714,374

DEFERRED INCOME TAX LIABILITY                                                             755,000            485,000

COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)

SHAREHOLDERS' EQUITY:
   Common stock, no par value, 15,000,000 shares authorized; 4,450,815 and
      4,385,000 shares issued and outstanding                                          12,504,982         12,133,585
   Retained earnings                                                                    3,291,709            984,331
                                                                                     ------------       ------------
               Total shareholders' equity                                              15,796,691         13,117,916
                                                                                     ------------       ------------
                                                                                      $29,084,811        $20,439,853
                                                                                     ============       ============
</TABLE>
              The accompanying notes are an integral part of these
                          consolidated balance sheets.

<PAGE>


                   ZOMAX OPTICAL MEDIA, INC. AND SUBSIDIARIES
             (Successor to Zomax Optical Media Limited Partnership)

                      Consolidated Statements of Operations
<TABLE>
<CAPTION>


                                                                                   For the Years Ended
                                                                   ---------------------------------------------------
                                                                   December 26,       December 27,        December 31,
                                                                       1997               1996               1995
                                                                   ------------       -----------        -----------
<S>                                                                <C>                <C>                <C>    
SALES                                                              $37,906,853        $18,547,796        $13,217,539

COST OF SALES                                                       28,033,354         13,270,046         10,036,991
                                                                   ------------       -----------        -----------
               Gross profit                                          9,873,499          5,277,750          3,180,548

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
                                                                     5,859,326          3,050,980          2,053,443
                                                                   ------------       -----------         ----------
               Operating income                                      4,014,173          2,226,770          1,127,105

INTEREST EXPENSE                                                       408,915            357,166            318,087

INTEREST INCOME                                                       (222,120)          (284,624)           (70,956)
                                                                   ------------       -----------         ----------
               Income before income taxes                            3,827,378          2,154,228        $   879,974

PROVISION FOR INCOME TAXES                                           1,520,000            668,000                  -
                                                                   ------------       -----------         ---------- 
NET INCOME                                                         $ 2,307,378        $ 1,486,228        $   879,974
                                                                   ===========        ===========         ==========
PRO FORMA (Notes 1 and 8):
   Income before income taxes                                                         $ 2,154,228        $   879,974
   Provision for income taxes                                                             863,000            340,000
                                                                                      -----------         ----------
   Net income                                                                         $ 1,291,228        $   539,974
                                                                                      ===========         ==========
EARNINGS PER SHARE (Pro forma for 1996 and 1995--Note 6):
         Basic                                                     $      0.52        $      0.34        $      0.19
                                                                   ===========        ===========         ==========
         Diluted                                                   $      0.51        $      0.34        $      0.19
                                                                   ===========        ===========         ==========
   Weighted average number of shares outstanding-
         Basic                                                       4,424,166          3,789,875          2,800,000
                                                                   ===========        ===========         ==========
         Diluted                                                     4,557,509          3,801,444          2,800,000
                                                                   ===========        ===========         ==========

</TABLE>

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


<PAGE>

                   ZOMAX OPTICAL MEDIA, INC. AND SUBSIDIARIES
             (Successor to Zomax Optical Media Limited Partnership)

      Consolidated Statements of Partners' Capital and Shareholders' Equity


<TABLE>
<CAPTION>

                                                                                             Shareholders' Equity
                                                                                     -------------------------------
                                                                         Partners'     Common Stock         Retained
                                                                          Capital    Shares     Amount      Earnings     Total
                                                                         --------    ------     ------      --------     -----
                                                                                                            
<S>                                                                     <C>         <C>          <C>          <C>       <C>    
BALANCE, December 31, 1994                                              $1,634,632           -    $       -   $      -  $ 1,634,632
   Partner capital contributions, net of issuance costs                  1,527,735           -            -          -    1,527,735
   Repurchase of limited interests                                        (300,000)          -            -          -     (300,000)
   Net income                                                              879,974           -            -          -      879,974
   Distributions to partners                                              (253,084)          -            -          -     (253,084)
                                                                        ----------  ----------   ----------  ---------   ----------
BALANCE, December 31, 1995                                               3,489,257           -            -          -    3,489,257
   Net income                                                              501,897           -            -    984,331    1,486,228
   Distribution to partners                                             (1,109,419)          -            -          -   (1,109,419)
   Exchange of partnership interests for common stock in the Company    (2,881,735)  2,800,000    2,881,735          -            -
   Sale of common stock at $6.75 per share, net of offering costs
     of $1,446,900
                                                                                 -   1,585,000    9,251,850          -    9,251,850
                                                                        ----------  ----------   ----------  ---------   ----------
BALANCE, December 27, 1996                                                       -   4,385,000   12,133,585    984,331   13,117,916
   Common stock issued under Employee Stock Purchase Plan                        -       6,547       30,606          -       30,606
   Common  stock  issued  in  connection   with  the   
     acquisition   of  Trotter
Technologies, Inc. on May 1, 1997                                                -      59,268      340,791          -      340,791
   Net income                                                                    -           -            -  2,307,378    2,307,378
                                                                        ----------  ----------   ----------  ---------   ----------
BALANCE, December 26, 1997                                              $        -   4,450,815  $12,504,982 $3,291,709  $15,796,691
                                                                        ==========  ==========   ==========  =========   ==========

</TABLE>


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


<PAGE>



                   ZOMAX OPTICAL MEDIA, INC. AND SUBSIDIARIES
             (Successor to Zomax Optical Media Limited Partnership)

                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                                           For the Years Ended
                                                                           -----------------------------------------------
                                                                            December 26,       December 27,   December 31,
                                                                                1997               1996            1995
                                                                            -----------        -----------    -----------
<S>                                                                         <C>                <C>            <C>   
OPERATING ACTIVITIES:
   Net income                                                               $2,307,378         $1,486,228     $  879,974
   Adjustments to reconcile net income to net cash provided by (used in)
      operating activities-
         Depreciation and amortization                                       2,156,256          1,046,952        542,122
         Deferred income taxes                                                (133,000)            (9,000)             -
         Changes in operating assets and liabilities:
            Accounts receivable                                               (342,019)          (925,596)    (2,527,001)
            Inventories                                                        (44,025)          (475,467)      (375,488)
            Prepaid expenses and other                                        (605,920)            (8,209)       (99,397)
            Accounts payable                                                   131,158           (177,174)     1,062,782
            Accrued expenses                                                 1,817,887            667,755        335,354
            Income taxes payable                                              (272,937)           513,819              -
                                                                            ----------         ----------     ----------
               Net cash provided by (used in) operating activities           5,014,778          2,119,308       (181,654)
                                                                            ----------         ----------     ----------
INVESTING ACTIVITIES:
   Purchase of property and equipment, net                                  (5,692,030)        (3,957,047)    (2,361,683)
   Acquisitions, net of cash acquired                                         (775,094)                 -              -
   Change in other assets                                                      203,457                  -              -
   Sale of financial instruments                                                     -            515,157        519,275
   Purchase of financial instruments                                                 -           (259,000)      (391,406)
                                                                            ----------         ----------     ----------
               Net cash used in investing activities                        (6,263,667)        (3,700,890)    (2,233,814)
                                                                            ----------         ----------     ----------
FINANCING ACTIVITIES:
   Capital contributions, net of issuance costs                                      -                  -      1,527,735
   Proceeds from notes payable-
      Affiliate                                                                      -                  -        207,341
      Other                                                                  3,650,000            790,500      1,845,171
   Repayment of notes payable-
      Affiliate                                                                      -            (78,175)      (129,167)
      Other                                                                 (3,612,467)        (1,294,937)      (685,782)
   Short-term borrowings (repayments)                                         (715,246)                 -              -
   Repurchase of limited interests                                                   -                  -       (300,000)
   Distribution to partners                                                          -         (1,109,419)      (229,855)
   Issuance of common stock, net of offering costs                              30,606          9,251,850              -
                                                                            ----------         ----------     ----------
               Net cash provided by (used in) financing activities            (647,107)         7,559,819      2,235,443
                                                                            ----------         ----------     ----------
               Net increase (decrease) in cash                              (1,895,996)         5,978,237       (180,025)

CASH AND CASH EQUIVALENTS:
   Beginning of year                                                         6,914,899            936,662      1,116,687
                                                                            ----------         ----------     ----------
   End of year                                                              $5,018,903         $6,914,899     $  936,662
                                                                            ==========         ==========     ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
   Cash paid for interest                                                   $  427,224         $  357,055     $  296,524
                                                                            ==========         ==========     ==========
   Cash paid for income taxes                                               $1,953,937         $  162,000     $        -
                                                                            ==========         ==========     ==========
   Common  shares  issued  in  connection   with  the   acquisition  of  
     Trotter Technologies, Inc.
                                                                            $  340,791         $        -     $        -
                                                                            ==========         ==========     ==========
</TABLE>
 
                The accompanying notes are an integral part of
                         these consolidated statements.


<PAGE>
                   ZOMAX OPTICAL MEDIA, INC. AND SUBSIDIARIES
             (Successor to Zomax Optical Media Limited Partnership)

                   Notes to Consolidated Financial Statements

                     December 26, 1997 and December 27, 1996


1.   Business Description:

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

The  Company is a  full-service  provider  of compact  discs  (CDs),  cassettes,
diskettes and related services to a variety of customers  operating primarily in
North  America.  The  Company  markets  and sells its  multimedia  products  and
services  through its own sales force to a wide variety of customers,  including
recording  studios and other  producers for retail  distribution,  distributors,
software developers, publishers, marketing groups and database suppliers.

For the year ended  December 26, 1997,  one customer  accounted for 48.4% of the
Company's  sales.  For the years ended  December 27, 1996 and December 31, 1995,
two customers  accounted for 26.1% and 11.8% and 19.1% and 15.9%,  respectively,
of the Company's sales. At December 26, 1997, two customers  accounted for 41.1%
and 13.2% of accounts receivable.

2.   Summary of Significant Accounting Policies:

Principles of Consolidation

The consolidated  financial  statements  include the accounts of the Company and
its wholly owned subsidiaries,  Benchmark Media Services,  Inc.  (Benchmark),  a
Minnesota  corporation,  and Trotter Technologies,  Inc. (Trotter), a California
corporation.  All intercompany accounts and transactions have been eliminated in
consolidation.

Fiscal Year-End

The Company's fiscal year ends on the last Friday of the calendar year.

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  at the date of the
financial  statements and the reported  amounts of revenues and expenses  during
the reporting period.  Ultimate results could differ from those estimates.

<PAGE>

Revenue Recognition

The Company  records  sales  revenue at the time  merchandise  is  shipped.  For
certain  customers,  merchandise  is  invoiced  upon  completion  of orders with
shipment occurring based on written customer instructions.

Cash and Cash Equivalents

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

Inventories

Inventories, consisting of material, labor and overhead, are stated at the lower
of first-in, first-out cost or market.

Inventories were as follows:

                               December 26,      December 27, 
                                   1997              1996
                               -----------       -----------
Raw materials                  $1,069,822         $1,132,083
Finished goods                    360,747            126,316
Work in process                    35,342              4,266
                               ----------        -----------
                               $1,465,911         $1,262,665
                               ==========        ===========


Property and Equipment

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

Property and equipment consisted of the following:

                                  December 26,   December 27,
                                      1997           1996           Lives
                                  -----------    -----------      --------

Manufacturing equipment          $16,162,792      $8,782,310       7 years
Office equipment                   1,239,432         630,742      5-7 years
Building improvements                431,496         116,406     Lease term
Vehicles                              54,914          28,918       5 years
                                 -----------      ----------
                                  17,888,634       9,558,376
Less- Accumulated depreciation    (4,328,071)     (1,983,875)
                                 -----------      ----------
Property and equipment, net      $13,560,563      $7,574,501
                                 ===========      ==========

<PAGE>


Goodwill

The Company has  classified  as goodwill cost in excess of fair value of the net
assets  acquired  in  connection  with  the  acquisitions  described  in Note 3.
Goodwill is being amortized on a straight-line basis over 15 years.
Amortization expense in 1997 totaled $49,587.

Other Assets

Other assets consist mainly of organization costs, which are amortized over five
years. At December 26, 1997 and December 27, 1996, accumulated  amortization was
$8,833 and $6,833, respectively.

Income Taxes

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

Fair Value of Financial Instruments

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

Recently Issued Accounting Pronouncements

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

In addition,  SFAS No. 131,  "Disclosures About  Segments of an  Enterprise  and
Related Information,"  effective in 1998,  establishes new standards for segment
reporting. Management has not yet determined the impact of SFAS No.
131 on the Company's financial position or results of operations.

3.   Acquisitions:

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

<PAGE>

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

Pro forma  consolidated  results of operations as if the  acquisitions had taken
place at the beginning of 1996 are as follows:

                                               For the Years Ended
                                           --------------------------
                                           December 26    December 27
                                               1997            1996
                                           -----------    -----------
              Net sales                    $40,092,000    $26,400,000
              Net income                     2,181,000      1,125,000
      
              Earnings per share:
                 Basic                     $      0.49    $      0.30
                                           ===========    ===========
                 Diluted                   $      0.48    $      0.30
                                           ===========    ===========
      
These  pro forma  amounts  are not  necessarily  indicative  of what the  actual
results of operations  might have been if the acquisitions had been effective at
the beginning of 1996.

4.   Bank Credit Facilities and Long-Term Notes Payable:

As of December 26,  1997,  the Company had a revolving  line-of-credit  facility
with a lender  for up to  $5,000,000,  which  expires  on April  30,  1999.  The
interest rate is at prime (8.25% at December 26, 1997).  Maximum  borrowings are
limited to an amount based on a formula using eligible  accounts  receivable and
inventories  ($5,000,000 at December 26, 1997).  During 1997 maximum  borrowings
outstanding  were $3,000,000.  There were no borrowings  outstanding at December
26, 1997.

In addition,  the Company has a capital  expenditure term loan facility with the
lender for up to $8,000,000.  Borrowings under the capital expenditure term loan
may be for up to 60 months,  and interest rates will vary based on the length of
the term loan and the  interest  rate  structure  selected.  The  interest  rate
structure  that can be selected by the  Company  varies from a variable  rate of
prime plus 1/4% or a fixed rate equal to the three-year U.S.  Treasury rate plus
3%. At December 26, 1997, amounts available under the term loan facility totaled
$4,350,000.

The Company  also has  several  installment  notes,  with  monthly  installments
payable through November 2001, at interest rates ranging from 8.4% to 10.5%. The
notes are collateralized by certain equipment.

<PAGE>


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

              1998                                         $2,153,950
              1999                                          1,294,237
              2000                                            966,930
              2001                                            779,475
                                                           ----------
                             Total                          5,194,592

                 Less current portion                      (2,153,950)
                                                           ----------
                       Long-term notes payable, net
                         of current portion
                                                           $3,040,642
                                                           ==========

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

5.   Shareholders' Equity:

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

6.   Earnings per Share:

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

<PAGE>


The components of basic EPS,  diluted EPS and EPS as previously  reported are as
follows:

<TABLE>
<CAPTION>
                                                                                       Weighted Average
                                                                                            Shares         Per Share
                                                                        Net Income        Outstanding        Amount
                                                                       ------------    ----------------    ---------
<S>                                                                     <C>                <C>             <C>    

                               1997
Basic EPS                                                                $2,307,378         4,424,166       $0.52
Dilutive effect of stock options and warrants                                     -           133,343       (0.01)
                                                                         ----------         ---------       -----
               Diluted EPS                                               $2,307,378         4,557,509       $0.51
                                                                         ==========         =========       =====

                         1996 (Pro Forma)
Basic EPS                                                                $1,291,228         3,789,875       $0.34
Dilutive effect of stock options and warrants                                     -            11,569           -
                                                                         ----------         ---------       -----
               Diluted EPS                                               $1,291,228         3,801,444       $0.34
                                                                         ==========         =========       =====
EPS as previously reported                                                                                  $0.34
                                                                                                            =====

                         1995 (Pro Forma)
Basic EPS                                                                $  539,974         2,800,000       $0.19
Dilutive effect of stock options and warrants                                     -                 -        -
                                                                         ----------         ---------       -----
               Diluted EPS                                               $  539,974         2,800,000       $0.19
                                                                         ==========         =========       =====

EPS as previously reported                                                                                  $0.19

</TABLE>


7.   Stock Plans:

Employee Stock Purchase Plan

In March 1996,  the board of directors of the Company  adopted an Employee Stock
Purchase  Plan (the Employee  Plan)  effective  July 1, 1996.  The Employee Plan
enables  employees  to  contribute  up to 10% of their  compensation  toward the
purchase of the  Company's  common  stock at a price equal to 85% of fair market
value.  A total of 250,000  shares have been  reserved for  issuance  under this
plan.  In 1997,  6,547 shares were issued  under this plan.  None were issued in
1996.

Stock Option Plan

In March 1996,  the board of  directors  of the  Company  adopted the 1996 Stock
Option Plan (the Plan) in order to provide for the granting of stock  options to
employees,  officers,  directors and  independent  consultants of the Company at
exercise  prices not less than 100% of the fair  market  value of the  Company's
common stock on the date of grant. In April 1997, the  shareholders  approved an
increase in the number of shares  reserved for issuance upon exercise of options
granted  under the Plan from  600,000 to 850,000.  These  options,  which can be
either  incentive stock options or nonqualified  options,  vest over a three- to
five-year schedule and expire ten years after the grant date.

<PAGE>


Information regarding the Company's stock option plan is summarized below:

<TABLE>
<CAPTION>

                                                              1997                               1996
                                                 -----------------------------------------------------------------
                                                                   Weighted                           Weighted 
                                                                    Average                            Average
                                                  Shares        Exercise Price        Shares       Exercise Price
                                                  ------        --------------        ------       --------------
<S>                                               <C>               <C>             <C>              <C>          
Options outstanding, beginning of year
                                                  360,000           $6.79                  -          $   -
   Granted                                        295,000            5.74            395,000            6.79
   Canceled                                             -            -               (35,000)           6.75
                                                  -------           -----            -------           -----                
Options outstanding, end of year                  655,000           $6.44            360,000           $6.79
                                                  =======           =====            =======           =====
Options exercisable, end of year                  151,000           $6.72             62,500           $6.75
                                                  =======           =====            =======           =====

</TABLE>

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

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

                                                                  1996
                                                1997          (Pro Forma)
                                             --------         -----------
              Net income:
                 As reported                $2,307,378         $1,291,228
                                            ==========         ==========
                 Pro forma                  $1,794,378         $  921,228
                                            ==========         ==========
              Earnings per share:
                 Basic                      $     0.52         $     0.34
                                            ==========         ==========
                 Diluted                    $     0.51         $     0.34
                                            ==========         ==========
              Pro forma:
                 Basic                      $     0.41         $     0.24
                                            ==========         ==========
                 Diluted                    $     0.39         $     0.24
                                            ==========         ==========


<PAGE>

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

                                                           1997          1996
                                                       ---------       -------
    Risk-free interest rate                               6.72%         6.97%
    Expected life of options granted                   10 years        10 years
    Expected volatility of options granted               50.23%        76.45%
    Weighted average fair value of options granted       $4.47         $5.95


8.   Income Taxes:

The provision for income taxes for the Company was as follows:

<TABLE>
<CAPTION>

                                                               For the Years Ended
                                                 -----------------------------------------------
                                                                   December 27,    December 31,
                                                  December 26,         1996             1995
                                                      1997         (Pro Forma)     (Pro Forma)
                                                 -------------    -------------    ------------
              <S>                                <C>                 <C>             <C>   
                                                    
              Current                            $1,653,000          $940,000         $224,500
              Deferred                             (133,000)          (77,000)         115,500
                                                 ----------          --------         --------
                       Total provision           $1,520,000          $863,000         $340,000
                                                 ==========          ========         ========
              
</TABLE>

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

<TABLE>
<CAPTION>

                                                                For the Years Ended
                                                   ---------------------------------------------
                                                                      December 27,  December 31,
                                                   December 26,          1996          1995
                                                      1997            (Pro Forma)   (Pro Forma)
                                                   ------------       -----------   -----------
              <S>                                     <C>                <C>             <C>   
              Statutory federal income tax
                 rate                                 34.0%              34.0%           34.0%
              State income taxes, net of
                 federal income tax benefit
                                                       4.7                4.1             4.0
              Other                                    1.0                2.0             0.6
                                                     -----               ----            ----   
              Effective income tax rate               39.7%              40.1%           38.6%
                                                     =====               ====            ====
</TABLE>


<PAGE>

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

<TABLE>
<CAPTION>


                                                              December 26,            December 27, 
                                                                 1997                     1996
                                                              -----------             -----------
<S>                                                             <C>                     <C>    
Current:
   Accounts receivable reserves                                 $297,000                $202,000
   Inventories reserves                                          115,000                       -
   Accrued liabilities                                           485,000                 292,000
                                                              ----------              ----------
               Total current deferred tax asset                 $897,000                $494,000
                                                              ==========              ==========

Long-term:
   Long-lived assets                                           ($755,000)              ($485,000)
                                                              ----------              ----------
               Total long-term deferred tax liability          ($755,000)              ($485,000)
                                                              ==========              ==========
</TABLE>


9.   Related-Party Transactions:

A significant  shareholder of the Company,  Metacom,  Inc. ( Metacom),  provides
certain administrative  functions,  including costs of occupancy, to the Company
for a monthly fee. Charges for these services were as follows:

                                             For the Years Ended
                                       -------------------------------
                                       December 26,       December 27,
                                           1997               1996

Administrative support                  $ 32,323             $ 88,194
Occupancy                                599,576              460,218
                                        --------             --------
                                        $631,899             $548,412
                                        ========             ========


In addition,  the Company  reimbursed  Metacom  $117,407 and $56,622 in 1996 and
1995, respectively, for certain expenditures for the Company.

Metacom Manufacturing Assets--Manufacturing Agreement

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

In  connection  with this  transaction,  Metacom and the Company  entered into a
manufacturing  agreement (the Agreement)  whereby Metacom must purchase  minimum
quantities of audio cassettes and CDs from the Company under normal trade terms.
In 1997 and 1996 Metacom did not fulfill its purchase  commitments.  As a result
of the 1996  shortfall,  the Company and Metacom agreed to allow Metacom to make

<PAGE>

up the shortfall during 1997 in exchange for a contract extension until the year
2000. This contract  extension  specifies that Metacom is to purchase all of its
supply of CDs and audio  cassettes  exclusively  from the Company  under  normal
trade terms. No minimum quantities have been established. No final agreement has
been reached regarding remediation of the 1997 shortfall.

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

10.  Commitments and Contingencies:

Litigation

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

Operating Leases

The Company is  committed  under  operating  leases with  related and  unrelated
parties for the rental of manufacturing, warehouse and office facilities. Future
minimum lease obligations are as follows as of December 26, 1997:

              1998                                $1,465,680
              1999                                 1,721,440
              2000                                 1,721,440
              2001                                   800,900
              2002 and thereafter                    528,067


Royalty Payments

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

Purchase Commitments

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

Employment Agreement

The  Company  has in place an  employment  agreement  with its  chief  executive
officer  which  provides  for base  compensation,  bonus  payments  of 5% of the
Company's  earnings  before taxes,  as defined,  and a severance  payout in case
employment  is  terminated  under  conditions  specified in the  agreement.  The
agreement expires on December 31, 1998.

<PAGE>

11.  Acquisition Subsequent to December 26, 1997:

On  February 4, 1998,  the Company  acquired  all of the  outstanding  shares of
Primary  Marketing  Group,  Inc.,  Next  Generation  Services,  LLC, and Primary
Marketing Group Limited, (collectively,  the Acquired Companies) in exchange for
800,002  shares of the Company's  common stock.  Prior to the  acquisition,  the
Acquired   Companies'    business   consisted   of   providing    manufacturer's
representative  services and returned  merchandise  processing  services for the
computer industry.  The Acquired  Companies intend to provide  substantially the
same  products  and  services  they  provided  prior  to  this  transaction.  In
connection  with this  transaction,  the  Company  acquired  certain  assets and
assumed certain liabilities, including a lease obligation from a third party for
consideration totaling $1,124,000.

This  acquisition  will be  accounted  for as a pooling of  interests.  Expenses
associated  with the  acquisition of  approximately  $300,000 will be charged to
expense  in  the  first  quarter  of  1998.   Supplemental   unaudited  earnings
information assuming the merger had occurred on January 1, 1995, is as follows:

<TABLE>
<CAPTION>


                                                         For the Years Ended
                                            -----------------------------------------------
                                            December 26,      December 27,     December 31, 
                                               1997               1996             1995
                                            ------------      ------------     ------------
              <S>                           <C>                <C>              <C>   
              Revenues                      $47,877,000        $26,867,000      $16,858,000
              Net income                      3,128,000          2,152,000        2,141,000
              EPS
                 Basic                          $  0.60            $  0.47          $  0.59
                 Diluted                           0.58               0.47             0.59
      
</TABLE>

12.  Supplementary Data (Unaudited):

The Company's  results of operations for each of the quarters in the years ended
December 26, 1997 and December 27, 1996 are as follows:

<TABLE>
<CAPTION>


                                                                   Quarters Ended (Unaudited)
                                                -----------------------------------------------------------------
                                                March 28          June 27         September 26        December 26
                                                --------          -------         ------------        -----------
                   1997
<S>                                           <C>              <C>                 <C>                <C>   
Sales                                         $5,435,571       $9,540,079          $10,518,754        $12,412,449

Gross profit                                   1,349,319        2,193,696            2,700,873          3,629,611

Net income                                       278,350          402,396              589,188          1,037,444

Basic EPS                                           0.06             0.09                 0.13               0.23

Diluted EPS                                         0.06             0.09                 0.13               0.22

</TABLE>

<PAGE>

<TABLE>
<CAPTION>


                                                              For the Quarters Ended (Unaudited)
                                               ------------------------------------------------------------------
                                               (Pro Forma)      (Pro Forma)
                                                March 29          June 30         September 27        December 27
                                               ----------       ----------        ------------        -----------
                   1996
<S>                                            <C>              <C>                 <C>                <C>    
Sales                                          $3,768,134       $3,797,608          $4,768,914         $6,213,140

Gross profit                                    1,067,363        1,018,737           1,400,340          1,791,310

Net income                                        186,854          210,362             387,888            506,124

Basic EPS                                            0.07             0.06                0.09               0.12

Diluted EPS                                          0.07             0.06                0.09               0.12


</TABLE>





<PAGE>


                            ZOMAX OPTICAL MEDIA, INC.
                          EXHIBIT INDEX TO FORM 10-KSB

For the fiscal year ended:                                  Commission File No.
December 26, 1997                                                  0-28426

Exhibit
Number   Description

2.1      Form of Stock Purchase Agreement (1)
2.2      Stock  Purchase   Agreement   dated  March  31,  1997  between  the  
         Company  and  Jesse  Arveida (Incorporated by reference to Exhibit 2.1
         to Current Report on Form 8-K dated March 31, 1997)
2.3      Stock Purchase Agreement dated February 3, 1998 by and among the 
         Company,  Zomax Services,  Inc., Primary  Marketing  Group Limited 
         ("PMG Limited") and  shareholders of PMG Limited  (Incorporated  by 
         reference to Exhibit 2.1 to Current Report on Form 8K dated
         February 4, 1998)
2.4      Merger  Agreement  dated  February  3,  1998 by and  among the
         Company,  Zomax Services,  Inc., Next Generation Services, LLC
         ("NGS"),  Primary  Marketing  Group ("PMG") and holders of all
         membership interests of NGS and shares of PMG (Incorporated by
         reference  to Exhibit 2.2 to Current  Report on Form 8-K dated
         February 4, 1998)
2.5      Asset  Purchase  Agreement  dated  February 3, 1998 by and among the 
         Company and Kao  Infosystems Company  (Incorporated  by reference to 
         Exhibit 2.3 to Current  Report on Form 8-K dated February 4, 1998)
3.1      Articles of Incorporation (1)
3.2      Bylaws (1)
4.1      Form of Stock Certificate (1)
4.2      Articles of Incorporation (1)
4.3      Bylaws (1)
4.4      Form of  Representative Warrant (1)
10.1     Forms of Incentive and Non-qualified Stock Option Agreements (1)**
10.2     1996 Employee Stock Purchase Plan (1)**
10.3     Manufacturing Agreement between the Company and Metacom, Inc. dated 
         January 1, 1995 (1)
10.4     Services Agreement between the Company and Metacom, Inc. dated 
         January 1, 1995 (1)
10.5     Lease between the Company and Metacom, Inc. dated January 1, 1995 (1)
10.6     Employment Agreement with James T. Anderson dated March 1, 1996 (1)**
10.7     License Agreement with U.S. Phillips Corporation effective January 1, 
         1996 (1)
10.8     License Agreement with Discovision Associates dated January 1, 1994 (1)
10.9     Loan and Security Agreement with Phoenixcor, Inc. dated May 24, 1993(1)
10.10    Loan and Security Agreement with Phoenixcor, Inc. dated July 22, 
         1993 (1)
10.11    Loan and Security Agreement with Phoenixcor, Inc. dated February 10, 
         1994 (1)
10.12    Loan and Security Agreement with Phoenixcor, Inc. dated July 5, 1995(1)

<PAGE>

10.13    Promissory Note issued by the Company to Norwest Equipment Finance, 
         Inc. dated May 22, 1996 and related documents (1)
10.14    Revolving Credit and Term Loan Agreement between the Company and 
         Marquette Capital Bank dated December 31, 1995 (1)
10.15    Amendment to Manufacturing Agreement between the Company and Metacom 
         Inc. dated January 31, 1997 (Incorporated by reference to Exhibit 10.15
         to the Company's Annual Report on Form 10-KSB for the year ended 
         December 27, 1996)
10.16    First Amendment to Revolving Credit and Term Loan Agreement and Basic 
         Documents dated April 30, 1997 with Marquette Capital Bank, N.A. 
         (Incorporated by reference to Exhibit 10.16 to the Company's Quarterly
         Report on Form 10-QSB for the quarter ended March 28, 1997)
10.17 *  1996 Stock Option Plan, as amended through March 7, 1997**
10.18 *  Amendment to Lease between the Company and Metacom, Inc. dated October
         28, 1997 
10.19 *  Lease  between the Company and Chaboya Ranch dated June 5, 1997
21.1 *   Subsidiaries  of the  Company 
23 *     Consent of Arthur  Andersen  LLP 
24 *     Power of Attorney  (included  on  signature  page of this report) 
27 *     Financial Data Schedule (included in electronic version only)
----------------------
*        Filed herewith
**       Management agreement or compensatory plan or arrangement.
(1)      Incorporated by reference to the corresponding exhibit  numbers to
         S-1 Registration Statement, SEC File No. 333-2430.